Aachc v. Ahcccs

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ARIZONA ALLIANCE FOR No. 21-16262

COMMUNITY HEALTH CENTERS;

CANYONLANDS HEALTHCARE; D.C. No.

CHIRICAHUA COMMUNITY HEALTH 4:19-cv-00517-

CENTERS; DESERT SENITA JGZ

COMMUNITY HEALTH CENTER;

MARIPOSA COMMUNITY HEALTH

CENTER; MARANA HEALTH CENTER; OPINION

MOUNTAIN PARK HEALTH CENTER;

NATIVE HEALTH; NORTH COUNTRY

HEALTHCARE; SUN LIFE FAMILY

HEALTH CENTER; SUNSET

COMMUNITY HEALTH CENTER;

UNITED COMMUNITY HEALTH

CENTER-MARIA AUXILIADORA,

Plaintiffs-Appellants,

v.

ARIZONA HEALTH CARE COST

CONTAINMENT SYSTEM; JAMI

SNYDER, Director, Arizona Health

Care Cost Containment System, in

her official capacity,

Defendants-Appellees.

2 AACHC V. AHCCCS

Appeal from the United States District Court

for the District of Arizona

Jennifer G. Zipps, District Judge, Presiding

Argued and Submitted March 10, 2022

Phoenix, Arizona

Filed September 2, 2022

Before: Richard A. Paez, Richard R. Clifton, and

Paul J. Watford, Circuit Judges.

Opinion by Judge Clifton

AACHC V. AHCCCS 3

SUMMARY *

Civil Rights/Medicaid

The panel reversed in part and vacated in part the district

court’s grant of defendants’ motion to dismiss, and

remanded for further proceedings, in an action in which

federally-qualified health centers operating in Arizona and

their membership organization alleged that the Arizona

Health Care Cost Containment System, which administers

Arizona’s Medicaid program, and its director violated 42

U.S.C. § 1396a(bb) and binding Ninth Circuit precedent by

failing or refusing to reimburse plaintiffs for the services of

dentists, podiatrists, optometrists, and chiropractors.

Federally-qualified health centers treat medically

underserved areas or populations and may seek mandatory

reimbursement from state Medicaid plans under § 1396a(bb)

for providing Medicaid recipients with services under the

Medicaid Act. Section 1396d(a)(2)(C) requires state

Medicaid plans to “cover [FQHC] services (as defined in

subsection (l)(2)) and any other ambulatory services offered

by a [FQHC] and which are otherwise included in the [state

Medicaid] plan.”

First, the panel held that this court’s precedent in

California Ass’n of Rural Health Clinics v. Douglas

(“Douglas”), 738 F.3d 1007 (9th Cir. 2013), established that

FQHC services are a mandatory benefit under

§ 1396d(a)(2)(C) for which plaintiffs have a right to

reimbursement under § 1396a(bb) that is enforceable under

*

This summary constitutes no part of the opinion of the court. It

has been prepared by court staff for the convenience of the reader.

4 AACHC V. AHCCCS

42 U.S.C. § 1983. The panel rejected defendants’

interpretation of § 1396d(a)(2)(C)’s phrase “which are

otherwise included in the plan” as applying to both the

phrases “FQHC services” and “other ambulatory services

offered by a [FQHC.]” The panel therefore rejected

defendants’ assertion that § 1396d(a)(2)(C) only required

states to cover FQHC services that are included in the state

Medicaid plan. The panel agreed with the district court that

defendants could not rely on § 1396d(a)(2)(C) as a basis for

excluding mandatory coverage of FQHC services because

the phrase “which are otherwise included in the plan,”

modified only the immediately preceding phrase, “and any

other ambulatory services offered by a [FQHC.]”

Second, the panel recognized that Douglas held that the

mandatory benefit of “FQHC services” under

§ 1396d(a)(2)(C) includes “services furnished by . . .

dentists, podiatrists, optometrists, and chiropractors” as well

as doctors of medicine and osteopathy. Although Arizona

may impose limitations on the mandatory benefit of FQHC

services, it may not impose a categorical exclusion of adult

chiropractic services.

Third, the panel held that Arizona’s categorical

exclusion of adult chiropractic services violated the

unambiguous text of the Medicaid Act as interpreted in

Douglas. The panel reversed the district court’s grant of

defendants’ Rule 12(b)(6) motion to dismiss in that regard

and remanded for further proceedings.

Fourth, the panel concluded that the record did not

establish that Chevron deference applied to Arizona’s

limitations on adult dental, optometry, and podiatry services,

which are components of the mandatory benefit of FQHC

services. The record lacked any evidence about the

AACHC V. AHCCCS 5

reasoning for approving Arizona’s plan and consideration of

the potential impact of Arizona’s limited coverage of adult

dental, optometry, and podiatry services even when provided

by FQHCs. Thus, the panel vacated the district court’s grant

of defendants’ motion to dismiss in that regard and

remanded for the parties to further develop the record and

for the district court to rule in the first instance on whether

Arizona’s limitations on adult dental, optometry, and

podiatry services, which are components of the mandatory

benefit of FQHC services, were entitled to Chevron

deference.

COUNSEL

Matthew Sidney Freedus (argued) and Rose Dawn Griffin,

Feldesman Tucker Leifer Fidell LLP, Washington, D.C., for

Plaintiffs-Appellants.

Logan T. Johnston (argued), Johnston Law Offices PLC,

Phoenix, Arizona, for Defendants-Appellees.

6 AACHC V. AHCCCS

OPINION

CLIFTON, Circuit Judge:

This appeal arises from the District Court’s dismissal of

a complaint brought by federally-qualified health centers

(“FQHCs”) operating in Arizona and the Arizona Alliance

for Community Health Centers, the “nonprofit membership

organization representing Arizona FQHCs” (“Plaintiffs”).

They filed suit against the Arizona Health Care Cost

Containment System (“AHCCCS”), which administers

Arizona’s Medicaid program, and Jami Snyder, AHCCCS’s

Director (“Defendants”). Plaintiffs’ complaint alleged that

Defendants violated 42 U.S.C. Ҥ 1396a(bb) and binding

Ninth Circuit precedent by failing or refusing to reimburse

FQHCs for the services of dentists, podiatrists, optometrists,

and chiropractors.” It cited California Ass’n of Rural Health

Clinics v. Douglas (“Douglas”), 738 F.3d 1007 (9th Cir.

2013), for its “holding that § 1396a(bb) affords each FQHC

an enforceable federal right to reimbursement for FQHC

services, which include the services of its dentists,

podiatrists, optometrists, and chiropractors (among others).”

Defendants brought a Rule 12(b)(6) motion to dismiss.

The District Court granted the motion. It concluded that

“Defendants cannot rely on [42 U.S.C. §] 1396d(a)(2)(C) as

a basis for excluding mandatory coverage of FQHC

Services,” which is a separate mandatory benefit for which

Defendants must reimburse Plaintiffs serving Medicaid

recipients under § 1396a(bb). However, the court ruled that

“Plaintiffs fail to state a claim for relief” because “Arizona

may cover [FQHC] Services with limits” and rejected

Plaintiffs’ contention that “Arizona impermissibly

categorically excludes FQHC Services in violation of the

Medicaid Act and Douglas[.]” Plaintiffs timely filed a notice

AACHC V. AHCCCS 7

of appeal challenging the court’s grant of Defendants’

motion to dismiss.

We commend the District Court and counsel for both

sides for their skillful handling of the uncommonly complex

issues presented by this case. We summarize our resolution

of those issues as follows.

First, we consider the District Court’s ruling that

“Defendants cannot rely on § 1396d(a)(2)(C) as a basis for

excluding mandatory coverage of FQHC services” because

“the phrase ‘which are otherwise included in the plan,’

modifies only the immediately preceding phrase, ‘and any

other ambulatory services offered by a [FQHC.]’” We agree.

Our precedent in Douglas established that “FQHC services”

are a mandatory benefit under § 1396d(a)(2)(C). Douglas,

738 F.3d at 1014–15.

Second, we recognize that Douglas held that the

mandatory benefit of “FQHC services” under

§ 1396d(a)(2)(C) includes “services furnished by . . .

dentists, podiatrists, optometrists, and chiropractors” as well

as doctors of medicine and osteopathy. Id. at 1016.

Third, we hold that Arizona’s categorical exclusion of

adult chiropractic services violates the unambiguous text of

the Medicaid Act as interpreted in Douglas. Therefore, we

reverse the District Court’s grant of Defendants’ Rule

12(b)(6) motion to dismiss in that regard.

Fourth, we conclude that the record before us does not

establish that Chevron deference applies to Arizona’s

limitations on adult dental, optometry, and podiatry services,

which are components of the mandatory benefit of “FQHC

services.” Thus, we vacate the District Court’s grant of

Defendants’ motion to dismiss in that regard and remand for

8 AACHC V. AHCCCS

the parties to further develop the record and for the District

Court to rule in the first instance on whether Arizona’s

limitations on adult dental, optometry, and podiatry services

are entitled to Chevron deference.

I. Background

The Medicaid program was established in 1965 via Title

XIX of the Social Security Act, now codified at 42 U.S.C.

§ 1396 et seq., and is “a cooperative federal-state program

through which the federal government provides financial

assistance to states so that they can furnish medical care to

low-income individuals.” Douglas, 738 F.3d at 1010. A state

receiving Medicaid funds has discretion to develop its

Medicaid program in a manner that is responsive to the needs

of its citizens, as long as these programs are consistent with

federal requirements, in a system that the Supreme Court has

described as “designed to advance cooperative federalism.”

Wis. Dep’t of Health and Family Svcs. v. Blumer, 534 U.S.

473, 497 (2002). “Medicaid is jointly financed by the federal

and state governments and is administered by state

governments through state ‘plans,’ which are approved by

the federal Secretary of Health and Human Services”

(“HHS”). B.K. ex rel. Tinsley v. Snyder, 922 F.3d 957, 963

(9th Cir. 2019) (citing Douglas, 738 F.3d at 1010); see also

42 U.S.C. § 1396a(b).

The HHS Secretary delegated “the responsibility and the

authority to administer the Medicaid program and to review

state Medicaid plans and plan amendments for compliance

with federal law” to the regional administrator for Centers

for Medicaid and Medicare Services (“CMS”), who “must

review and approve or reject” any proposed state plan

amendments (“SPAs”). Managed Pharmacy Care v.

Sebelius, 716 F.3d 1235, 1241–42 (9th Cir. 2013) (citing

42 U.S.C. § 1396a(b) and 42 C.F.R. § 430.15(b)). CMS has

AACHC V. AHCCCS 9

long approved Arizona’s plan and SPAs, including a 2017

SPA establishing a $1,000 cap on adult emergency dental

benefits. See Ariz. Rev. Stat. § 36-2907(A)(11) (2017).

FQHCs treat medically underserved areas or populations

and are required to meet various eligibility criteria under the

Medicaid Act. One criterion is that they must be “receiving

a [federal] grant under [the Public Health Service Act,

42 U.S.C.] section 254b[.]” 42 U.S.C. § 1396d(l)(2)(B)

(defining the term “Federally-qualified health center”).

FQHCs may also seek mandatory reimbursement from state

Medicaid plans under § 1396a(bb) for providing Medicaid

recipients with services under the Medicaid Act. Section

1396a(bb) provides that “the State plan shall provide for

payment for services described in section 1396d(a)(2)(C) of

this title furnished by a Federally-qualified health center[.]”

Section 1396d(a)(2)(C) requires state Medicaid plans to

cover “[FQHC] services (as defined in subsection (l)(2)) and

any other ambulatory services offered by a [FQHC] and

which are otherwise included in the plan.” The cross-

referenced subsection—§ 1396d(l)(2) of the Medicaid

Act—defines the term “[FQHC] services” by reference to

[42 U.S.C.] § 1395x(aa)(1) of the Medicare Act, which

refers to, inter alia, “physicians’ services[.]”

When CMS approves an SPA, we have held that CMS

“implicitly approve[s the state’s] interpretation of the

Medicaid Act.” Douglas, 738 F.3d at 1014. Under most

circumstances, the HHS “Secretary’s exercise of discretion

in the ‘form and context’ of a SPA approval deserves

Chevron deference.” Managed Pharmacy Care, 716 F.3d at

1248 (quoting Price v. Stevedoring Servs. of Am., Inc.,

697 F.3d 820, 826 (9th Cir. 2012) (en banc)).

10 AACHC V. AHCCCS

In this case, as the District Court noted, “[t]he parties

agree that this action presents legal issues with no material

dispute of fact.” As outlined by the District Court, it is

undisputed that:

Arizona’s Medicaid plan covers the

following dental, podiatry, optometry, and

chiropractic services:

• Dental services for children under 21 and

limited emergency and non-emergency

dental services for elderly and

developmentally disabled beneficiaries in

long-term care facilities. Emergency

dental services for adults (such as

medically necessary extraction or

treatment for an acute infection) up to

$1,000 per year.

• Adult podiatry services if those services

are ordered by a primary care provider

and the authorization is documented in

the medical record.

• Optometry services for “[r]outine and

medically necessary vision services,

including examinations and the provision

of prescriptive lenses” for beneficiaries

under the age of 21. For adults,

examination and treatment of medical

conditions of the eye, and prescriptive

lenses only when used as the sole

prosthetic device following cataract

surgery.

AACHC V. AHCCCS 11

• Chiropractic services for children under

21 years of age.

II. Procedural History

Plaintiffs are a group of FQHCs operating in Arizona and

the nonprofit membership organization representing Arizona

FQHCs. Defendant Jami Snyder is the Director of Defendant

Arizona Health Care Cost Containment System (AHCCCS),

which administers Arizona’s Medicaid program.

Plaintiffs initially filed this action in the District Court in

2019. The operative amended complaint sought declaratory

and injunctive relief, as well as costs and attorneys’ fees. It

alleged that Defendants were liable under 42 U.S.C. § 1983

for “violating § 1396a(bb) and binding Ninth Circuit

precedent by failing or refusing to reimburse FQHCs for the

services of dentists, podiatrists, optometrists, and

chiropractors.” The complaint cited Douglas for the

proposition “that § 1396a(bb) affords each FQHC an

enforceable federal right to reimbursement for FQHC

services, which include the services of its dentists,

podiatrists, optometrists, and chiropractors (among others).”

Plaintiffs also filed a motion for a preliminary injunction,

“request[ing] that the Court enter ‘an order compelling

AHCCCS to cover all (dental, podiatric, optometric, and

chiropractic) services provided’ by plaintiffs and non-

plaintiff FQHCs to Medicaid beneficiaries.”

Defendants filed a motion to dismiss Plaintiffs’

complaint for failure to state a claim under Federal Rule of

Civil Procedure 12(b)(6). Defendants argued that

§ 1396d(a)(2)(C) “does not unambiguously require states to

reimburse FQHCs for 100% of the [FQHC] Services” but

rather only obligates states “to cover FQHC services that are

included in the state Medicaid plan.” Defendants asserted

12 AACHC V. AHCCCS

that § 1396d(a)(2)(C)’s requirement that states cover FQHC

Services “and any other ambulatory services offered by a

[FQHC] and which are otherwise included in the [state

Medicaid] plan” only requires states to cover FQHC services

that are included in the plan, interpreting the phrase

“otherwise included in the plan” as applying to both the

phrases “FQHC services” and “other ambulatory services

offered by a [FQHC.]” Defendants contended that Douglas

was not dispositive because “Arizona does not, as Plaintiffs

claim, ‘categorically exclude’ any dental, podiatry,

optometry or chiropractic services provided by FQHCs” but

rather “covers these services [] with limitations.”

After hearing oral argument, the District Court granted

in part Defendants’ motion to dismiss and denied Plaintiffs’

motion for preliminary injunction. The court rejected

“Defendants’ interpretation of § 1396d(a)(2)(C)” and

instead “conclude[d] that the phrase ‘which are otherwise

included in the plan,’ modifies only the immediately

preceding phrase, ‘and any other ambulatory services

offered by a Federally-qualified health center.’” As a result,

it held that “Defendants cannot rely on [§] 1396d(a)(2)(C) as

a basis for excluding mandatory coverage of FQHC

Services.” Nonetheless, the court concluded that “Arizona

may cover [FQHC] Services with limits without violating

the Medicaid Act or Douglas.” It rejected Plaintiffs’

contention that “Arizona impermissibly categorically

excludes FQHC Services in violation of the Medicaid Act

and Douglas.” The court did not address Defendants’

alternative arguments that Medicaid’s comparability

requirement and the approval of Arizona’s Medicaid plan by

CMS supported dismissal of Count I.

After entry of final judgment, Plaintiffs timely filed a

notice of appeal. Plaintiffs challenge the dismissal of their

AACHC V. AHCCCS 13

complaint and do not appeal the denial of their motion for a

preliminary injunction.

III. Discussion

We have jurisdiction to review a district court’s final

judgment, including a grant of a Rule 12(b)(6) motion to

dismiss, under 28 U.S.C. §§ 1291 and 1294(1). We review

de novo a district court’s grant of a Rule 12(b)(6) motion to

dismiss for failure to state a claim. See Benavidez v. County

of San Diego, 993 F.3d 1134, 1141 (9th Cir. 2021). We

review de novo legal questions, such as a “court’s

interpretation of the Medicaid Act.” Douglas, 738 F.3d

at 1011. Our review of a grant of a Rule 12(b)(6) motion to

dismiss is generally limited to the contents of the complaint,

and we must construe the factual allegations in the complaint

in the light most favorable to the plaintiffs. See Pirani v.

Slack Techs., Inc., 13 F.4th 940, 946 (9th Cir. 2021); Depot,

Inc. v. Caring for Montanans, Inc., 915 F.3d 643, 653 (9th

Cir. 2019). 1

A. Section 1396d(a)(2)(C) of the Medicaid Act

establishes that “FQHC Services” are a mandatory

benefit that Defendants must cover.

First, we evaluate the District Court’s ruling that

“Defendants cannot rely on § 1396d(a)(2)(C) of the

Defendants argue that Plaintiffs raise “new theories that are

1

improper and should be disregarded,” but Plaintiffs disclaim doing so.

We agree with Defendants’ statement, unchallenged by Plaintiffs, that

the “complaint does not allege the AHCCCS limitations are arbitrary and

capricious” under the APA, nor does it allege “any violation of

§ 1396a(a)(30)(A),” including a challenge on the basis that “a study was

necessary to support AHCCCS’s limitations” under § 1396a(a)(30)(A).

Plaintiffs also do not allege “a violation of 42 C.F.R. § 440.230(b).”

14 AACHC V. AHCCCS

Medicaid Act as a basis for excluding mandatory coverage

of FQHC services” because “the phrase ‘which are otherwise

included in the plan,’ modifies only the immediately

preceding phrase, ‘and any other ambulatory services

offered by a [FQHC.]” We agree with the District Court’s

interpretation of the Medicaid Act as establishing that

“FQHC services” are a mandatory benefit that Defendants

must cover and for which Plaintiffs have a right to

reimbursement under § 1396a(bb) that is enforceable under

§ 1983. See Douglas, 738 F.3d at 1013. 2

Section 1396d(a)(2)(C) requires state Medicaid plans to

include “[FQHC] services (as defined in subsection (l)(2))

and any other ambulatory services offered by a [FQHC] and

which are otherwise included in the plan.” Defendants

argued before the District Court that “the phrase ‘otherwise

included in the plan’ requires states to cover only those

FQHC services that the state chooses to include in the state

Medicaid plan.” The District Court disagreed with

Defendants’ interpretation of § 1396d(a)(2)(C). We share

the District Court’s view that the Defendants’ interpretation

“would enable a state to categorically exclude all coverage

for all FQHC services” and “is contrary to the plain language

and purpose of the statute.” The District Court held that

2

Plaintiffs’ reply brief argues that Defendants “did not cross-appeal

the district court’s decision” on FQHC services being a separate

mandatory benefit. Nevertheless, our de novo review may address that

issue due to the inherent “interrelatedness of the issues on appeal and

cross-appeal” and our holding that “the requirement of a notice of cross-

appeal is a rule of practice, which can be waived at the court’s discretion,

rather than a jurisdictional requirement[.]” Mendocino Environ. Ctr. v.

Mendocino County, 192 F.3d 1283, 1298, 1299 (9th Cir. 1999). We

discuss the issue here to resolve any remaining uncertainty about

whether FQHC services are a mandatory benefit.

AACHC V. AHCCCS 15

FQHC services are a mandatory benefit for three reasons.

We agree with all three of those reasons.

First, the court stated that the Medicaid Act lists

mandatory services that states must cover “in paragraphs

(1) through (5) . . . of [§] 1396d(a).” This includes

§ 1396d(a)(2)(C), which refers to “[FQHC] services . . . and

any other ambulatory services offered by a [FQHC] and

which are otherwise included in the plan[.]” The court

reasoned that “[i]f the phrase ‘which are otherwise included

in the plan’ modified both services listed in

[§] 1396d(a)(2)(C),” as Defendants argue, “neither service

would be mandated for state coverage[,]” which “would

render meaningless the specific listing of [§] 1396d(a)(2)(C)

under the list of services a state must provide in its plan

pursuant to 42 U.S.C. § 1396a(a)(10)(A).” We agree that the

logical reading of the phrase “which are otherwise included

in the plan,” is that it modifies only the immediately

preceding phrase, “and any other ambulatory services

offered by a [FQHC].”

Second, the court reasoned that because “Congress did

provide a list of optional services that States could cover . . .

at [§] 1396d(a)(6)–(16), (18)–(20), (22)–(27)” and chose not

to include FQHC services in that list, the Medicaid Act

should be interpreted as establishing that FQHC services are

not an optional benefit, but rather a mandatory benefit. We

agree.

Third, the court concluded that “reading the phrase

‘which are otherwise included in the plan’ to modify only

the phrase ‘and any other ambulatory services’ gives effect

to the phrase” because “there are a number of optional

services that may be provided by a FQHC that fall outside

the scope of mandatory FQHC services defined in

§ 1396d(l)(2)” and “‘ambulatory services’ covers a broad

16 AACHC V. AHCCCS

category of outpatient services[,]” many of which fall

outside the scope of the “mandatory FQHC services defined

in § 1396d(l)(2).” Under the canons of statutory

interpretation, including the rule against surplusage, we

agree with the District Court that courts must “interpret [a]

statut[e] as a whole, giving effect to each word and making

every effort not to interpret a provision in a manner that

renders other provisions of the same statute inconsistent,

meaningless or superfluous” and that “[p]articular phrases

must be construed in light of the overall purpose and

structure of the whole statutory scheme.” United States v.

Neal, 776 F.3d 645, 652 (9th Cir. 2015) (quotation marks

and citations omitted).

Moreover, we conclude that our precedent in Douglas

established that FQHC services are a mandatory benefit

under the Medicaid Act. In that case, we addressed “whether

California legislation that eliminate[d] coverage for certain

healthcare services . . . conflict[ed] with the Medicaid

Act[.]” Douglas, 738 F.3d at 1010–11. The California “state

legislature passed California Welfare and Institutions Code

§ 14131.10 (“§ 14131.10”), which eliminated certain

[Medicaid] benefits that the state deemed optional, including

adult dental, podiatry, optometry and chiropractic services.”

Id. at 1010. California amended its state plan accordingly

and submitted the SPA to CMS for approval. Id. The

plaintiffs in Douglas—an association of rural health clinics

and one FQHC—challenged the implementation of

§ 14131.10 and argued that the Medicaid Act prohibited

California’s elimination of coverage for these services. See

id. at 1010–11. We agreed, holding that FQHC services are

a mandatory benefit under § 1396d(a)(2)(C) for which

[FQHCs] must be reimbursed. As we explained:

AACHC V. AHCCCS 17

The Medicaid Act requires participating

states to cover certain services in their state

plans. 42 U.S.C. § 1396a(a)(10) (referring to

42 U.S.C. § 1396d(a)(1)–(5), (17), (21),

(28)). These mandatory services include . . .

FQHC services. Id. § 1396d(a)(2)(B)–(C).

Specifically, Medicaid requires payment for

. . . “Federally-qualified health center

services (as defined in subsection (l)(2) of

this section) and any other ambulatory

services offered by a Federally-qualified

health center and which are otherwise

included in the plan.” Id. § 1396d(a)(2).

Douglas, 738 F.3d at 1015.

Accordingly, we conclude that FQHC services are a

mandatory benefit under § 1396d(a)(2)(C).

B. Douglas held that the mandatory benefit of “FQHC

services” under § 1396d(a)(2)(C) includes services

furnished by chiropractors, dentists, optometrists,

and podiatrists.

We turn to the question of which services are included in

the definition of FQHC services under § 1396d(a)(2)(C), for

which Douglas is also instructive. We review de novo legal

questions, such as a “court’s interpretation of the Medicaid

Act.” Douglas, 738 F.3d at 1011. Section 1396d(a)(2)(C) of

the Medicaid Act requires coverage for the mandatory

benefit of “[FQHC] services (as defined in subsection

[1396d](l)(2) [of the Medicaid Act,])” which defines FQHC

services as “services of the type described in subparagraphs

(A) through (C) of section 1395x(aa)(1)” of the Medicare

Act. “[P]hysicians’ services” are included among those

services described. Douglas, 738 F.3d at 1016. Douglas

18 AACHC V. AHCCCS

concluded that the “FQHC services that Medicaid requires

states to cover are coequal to those services as they are

defined in § 1395x(aa) of the Medicare statute” because

§ 1396d(l)(2) of the Medicaid Act references

§ 1395x(aa)(1)(A–C) of the Medicare Act and, thus,

“Medicaid imports the Medicare definitions wholesale.” Id.

Douglas ruled that “physicians’ services” as used in

§ 1395x(aa)(1) of the Medicare Act “include[s] not only the

services furnished by doctors of medicine and osteopathy,

but also the services furnished by dentists, podiatrists,

optometrists and chiropractors.” Id.

Douglas’s interpretation of FQHC services as including

“physicians’ services” defined broadly is not disturbed by

the fact that an entirely different section of the Medicaid

Act—§ 1396d(a)(5)(A)—“separately [] requires state plans

to cover ‘physicians’ services furnished by a physician’”

defined narrowly to include only doctors of medicine and

osteopathy. Id. Neither the term “physicians’ services

furnished by a physician” under § 1396d(a)(5)(A) nor that

provision’s parenthetical reference to § 1395x(r)(1) apply to

our inquiries in Douglas or this appeal, which both involve

“physicians’ services” as used in § 1395x(aa)(1).

C. Although Arizona may impose limitations on the

mandatory benefit of “FQHC services,” Arizona

may not impose a categorical exclusion of adult

chiropractic services.

In light of Douglas, we hold that Arizona’s categorical

exclusion of all adult chiropractic services violates the

unambiguous text of § 1396d(a)(2) of the Medicaid Act,

which Douglas interpreted as including “services furnished

by . . . chiropractors.” Douglas, 738 F.3d at 1015–17 (ruling

that the Medicaid Act “imports the Medicare definitions

wholesale” by “statutory commandments [that] are

AACHC V. AHCCCS 19

unambiguous” (emphasis added)). Douglas emphatically

declared that “[a]ny alternate reading of the statute would do

violence to Medicaid’s command that the term . . . ‘[FQHC]

services’ shall have the meaning[] given [it] in Medicare.”

Id. at 1016–17 (citing 42 U.S.C. § 1396d(l)(2)) (other

citation omitted). Although Defendants assert that “Arizona

does not, as Plaintiffs claim, ‘categorically exclude’ any

dental, podiatry, optometry or chiropractic services provided

by FQHCs” but rather “covers [them] with limitations,” the

District Court recognized that “[t]he only category of

physicians’ service which Arizona does not cover is adult

chiropractic.” Nevertheless, the District Court ruled that

“Arizona’s lack of coverage of one of the four types of

covered physicians’ services” is permissible under Douglas

because “Arizona provides for some coverage of [FQHC]

Services”—limited coverage for dental, optometry, and

podiatry services—and “[b]ecause Plaintiffs agree that

mandatory Services can be limited [and so] the Court cannot

conclude that Arizona impermissibly categorically excludes

FQHC Services in violation of the Medicaid Act and

Douglas, as alleged by Plaintiffs in their Complaint.” We

disagree.

Whether Arizona’s categorical exclusion of adult

chiropractic services violates the Medicaid Act is a legal

question that we review de novo. The District Court’s

statement about Arizona’s motivation for that categorical

exclusion—“there is no indication that Arizona, like

California in Douglas, excludes coverage of adult

chiropractic services solely because Arizona does not

consider chiropractic services to be covered FQHC

physicians’ services”—is immaterial to that legal question.

Once again, we turn to Douglas.

20 AACHC V. AHCCCS

Douglas held that the unambiguous text of

§ 1396d(a)(2)(C) requires that services by chiropractors be

included in the applicable definition of “physicians’

services” as a component of FQHC services, given that

§ 1396d(a)(2)(C)’s “statutory text does not use vague and

amorphous words” but rather “outlines specifically the types

of services provided by RHCs and FQHCs that a state plan

must cover.” Douglas, 738 F.3d at 1014.

Douglas’s holding is not unsettled by states’ discretion

to impose limitations to eligibility for and the extent of

medical services. Arizona’s categorical exclusion of all adult

chiropractic services does not limit the eligibility for or the

extent of those services, but rather excludes them altogether.

See id. at 1010. Defendants contend that because Arizona

covers some chiropractic services for those under 21 years

of age, Arizona is merely limiting eligibility for those

services, which is often permissible under the Medicaid Act.

However, that exact argument could have been made in

Douglas, because under the California statute at issue in that

case, some dental, podiatry, optometry, and chiropractic

services for non-adults would have been covered.

Nevertheless, Douglas held that California’s statute

“eliminat[ing] . . . adult dental, podiatry, optometry and

chiropractic services” violated the Medicaid Act’s “statutory

commandments[, which] are unambiguous.” Id. at 1010,

1016. In other words, Douglas directly supports the

conclusion that a statute precluding coverage of dental,

podiatry, optometry, and chiropractic services, even if only

for adults, is more akin to impermissible categorical

exclusions than mere limitations.

The most significant factual distinction between

Douglas and this case is that the California statute in

Douglas would have categorically excluded the four

AACHC V. AHCCCS 21

categories of dental, podiatry, optometry, and chiropractic

services, while, in this case, Arizona only categorically

excludes chiropractic services. However, this distinction

does not change our conclusion that Arizona’s categorical

exclusion of adult chiropractic services violates the

Medicaid Act. Here, the District Court erroneously allowed

Defendants to nullify the unambiguous statutory text

establishing “services furnished by . . . chiropractors” as

included in the mandatory benefit of “physicians’ services.”

Redefining an unambiguously defined mandatory benefit by

categorically excluding one of its primary components rises

to the level of an “alternate reading of the statute” that

Douglas warned “would do violence to [the] Medicaid

[Act].” Douglas, 738 F.3d at 1017 (citing 42 U.S.C.

§ 1396d(l)(2)).

Finally, Douglas’s express holding on “services

furnished by . . . chiropractors” renders the District Court’s

analogy of chiropractic services to preventive services inapt,

because we have never held that the latter are included in the

unambiguous statutory definition of “physicians’ services.”

Therefore, we hold that Arizona’s categorical exclusion

of adult chiropractic services violates § 1396d(a)(2) of the

Medicaid Act. We reverse the District Court’s grant of

Defendants’ motion to dismiss on this issue and remand for

further proceedings. 3

3

The District Court “d[id] not address Defendants’ alternative

argument that . . . the approval of Arizona’s Medicaid plan by [CMS]

support[s] dismissal” under Chevron. Because our analysis flows from

the Act’s unambiguous text, however, it is not afforded Chevron

deference. See Managed Pharmacy Care v. Sebelius, 716 F.3d 1235,

1245–46 (9th Cir. 2013). Similarly, the District Court declined to address

Defendants’ “comparability” argument. We have ruled that the

22 AACHC V. AHCCCS

D. The record before us does not establish that

Arizona’s limitations on adult dental, optometry, and

podiatry services are entitled to Chevron deference,

so we vacate and remand for the parties to further

develop the record and for the district court to

consider this issue in the first instance.

We now turn to whether Arizona’s limitations on adult

dental, optometry, and podiatry services violate the

provisions of the Medicaid Act that Plaintiffs’ complaint

addresses. We must consider whether those limitations are

entitled to Chevron deference in light of CMS’s approval of

Arizona’s plan and SPAs. In Douglas, we held that CMS’s

approval of a state plan may qualify for Chevron deference.

See 738 F.3d at 1014. Although the California statute at issue

in Douglas did not involve statutory ambiguity and thus did

not fulfill Chevron “Step One,” we noted that when CMS

approved California’s SPA “eliminat[ing] certain

[Medicaid] benefits that the state deemed optional, including

“comparability” rule is only violated if some “recipients” are denied or

given “services that are ‘less in amount, duration, or scope than the

medical assistance made available to’ other recipients” for an improper

reason. Arc of California v. Douglas, 757 F.3d 975, 985 (9th Cir. 2014)

(emphasis added) (quoting 42 U.S.C. § 1396a(a)(10)(B)). Because

“comparability” must exist among recipients of medical services, not

among providers with reimbursement rights under § 1396a(bb)—which

Defendants acknowledge—our holding that Arizona’s categorical

exclusion of adult chiropractic services violates the Medicaid Act does

not, as Defendants allege, “effectively end a state’s discretion to limit

[chiropractic] services in any setting because comparability would

require these services to be available without limitation in all outpatient

settings.” Cf. Douglas, 738 F.3d at 1010 (“Each state has discretion to

create reasonable standards for determining eligibility for medical

services and the extent of those services, provided those standards

comply with federal law.” (citing Schweiker v. Gray Panthers, 453 U.S.

34, 36–37 (1981))).

AACHC V. AHCCCS 23

adult dental, podiatry, optometry and chiropractic

services[,]” CMS “implicitly approved California’s

interpretation of the Medicaid Act[.]” Id. at 1010, 1014.

Douglas’s conclusion that CMS’s approval of

California’s SPA entitled California’s interpretation of the

Medicaid Act to Chevron deference was based on our

opinion in Managed Pharmacy Care, in which we held that

CMS’s approval of the SPA at issue in that case was entitled

to Chevron deference. See Douglas, 738 F.3d at 1014;

Managed Pharmacy Care, 716 F.3d at 1248 (“[T]he

Secretary’s exercise of discretion in the ‘form and context’

of a SPA approval deserves Chevron deference.” (quoting

Price v. Stevedoring Servs. of Am., Inc., 697 F.3d 820, 826

(9th Cir. 2012) (en banc))). We determined that the language

in 42 U.S.C. § 1396a(b) requiring the HHS Secretary to

approve state plans was a clear delegation of authority. See

Managed Pharmacy Care, 716 F.3d at 1249. Although the

Secretary’s approval lacked formal procedures, we

concluded that “[d]etermining a plan’s compliance with [the

Medicaid Act], as well as its compliance with a host of other

federal laws, is central to the program because a State cannot

participate in Medicaid without a plan approved by the

Secretary as consistent with those laws” and “the agency is

the expert in all things Medicaid.” Id. at 1248. We noted that

CMS had issued approval letters for the SPAs at issue in the

case, which articulated the Secretary’s reasoning for

concluding that the SPAs complied with the Medicaid Act.

See id. at 1243. Thus, applying the two-step “familiar

standard” of Chevron, “[w]e defer[red] to the Secretary’s

decision that [the] SPAs . . . compl[ied] with” the Medicaid

Act. Id. at 1246 (citing Chevron, U.S.A., Inc. v. Nat. Res.

Def. Council, Inc., 467 U.S. 837, 842–43 (1984)), 1250.

24 AACHC V. AHCCCS

Even assuming that Chevron Step One is met (i.e., that

statutory ambiguity existed regarding whether Arizona’s

limitations on adult dental, optometry, and podiatry services

violate the Medicaid Act), the record does not contain

sufficient evidence for Arizona’s interpretation of the Act as

allowing those limitations to fulfill Chevron Step Two,

which requires that the interpretation be “based on a

permissible construction of the statute.” Chevron, 467 U.S.

at 843; see Judulang v. Holder, 565 U.S. 42, 53 n.7 (2011)

(“[U]nder Chevron step two, we ask whether an agency

interpretation is arbitrary or capricious in substance.”

(citations and quotation marks omitted)); Schneider v.

Chertoff, 450 F.3d 944, 960 (9th Cir. 2006) (“[At Chevron

Step Two, w]e must defer to the regulation unless the

Secretary’s interpretation . . . frustrates the policy Congress

sought to implement.”).

We recognize that the Supreme Court has long held that

“[n]othing in the [Medicaid] statute suggests that

participating States are required to fund every medical

procedure that falls within the delineated [mandatory]

categories of medical care.” Beal v. Doe, 432 U.S. 438, 441

(1977). Critically, however, at Chevron Step Two, we must

consider the full scope of the agency’s decision-making

process, including the reasoning offered for its decision. See,

e.g., Friends of Animals v. Haaland, 997 F.3d 1010, 1017

(9th Cir. 2021) (holding that a rule was not entitled to

Chevron deference at Step Two because the agency relied

“on an unreasonable justification” that did not “accord with

the aims” of the relevant statute); see also Holder v.

Martinez Gutierrez, 566 U.S. 583, 597 (2012) (looking to an

agency’s justification for its decision to determine whether

the interpretation actually “expresses the [agency’s] view,

based on its experience implementing the [statute], the

statutory text, administrative practice, and regulatory

AACHC V. AHCCCS 25

policy,” about how the statute should be read). Chevron Step

Two requires that the record contain at least some

information about how the agency developed its

interpretation because, as we have ruled when determining

whether an agency action survives Chevron Step Two, “an

agency’s action must be upheld, if at all, on the basis

articulated by the agency itself.” Friends of Animals,

997 F.3d at 1016 (citation and quotation marks omitted); see

also Perez-Guzman v. Lynch, 835 F.3d 1066, 1079 n.8 (9th

Cir. 2016) (“[A]gency action rises or falls on the agency’s

own contemporaneous reasoning[.]”). The Supreme Court

has specified that where an agency “has failed to provide

even [a] minimal level of analysis” so that “its path may

reasonably be discerned . . . its action is arbitrary and

capricious and so cannot carry the force of law.” Encino

Motorcars, LLC v. Navarro, 579 U.S. 211, 221 (2016)

(citation and quotation marks omitted); see also Grand

Canyon Tr. v. Provencio, 26 F.4th 815, 824 (9th Cir. 2022)

(stating that if an agency fails to provide “the minimal level

of analysis required,” Chevron deference may not apply to

the agency’s interpretation at all).

The record in this case does not contain sufficient

evidence for Arizona’s interpretation to fulfill Chevron Step

Two. The record lacks any evidence about CMS’s reasoning

for approving Arizona’s plan and SPAs. We distinguish the

facts here from those in Managed Pharmacy Care, in which

CMS issued approval letters for the relevant SPAs that

clearly outlined the Secretary’s interpretation of the

Medicaid Act and her reasoning for concluding that

California’s SPAs complied with the Act’s requirements.

716 F.3d at 1243, 1245; see also Arc of Cal. v. Douglas,

757 F.3d 975, 988 (9th Cir. 2014) (contrasting the record in

Managed Pharmacy Care, which included “formal approval

of two SPAs, communicated in letters expressly stating that

26 AACHC V. AHCCCS

the SPAs in those instances were consistent with Section

30(A),” with the record before it, which contained no

evidence that CMS concluded that the state’s limitations on

services for the developmentally-disabled complied with the

Medicaid Act).

In contrast to the record in Managed Pharmacy Care, the

record before us contains no evidence regarding CMS’s

reasoning for approving Arizona’s plan and SPAs or CMS’s

consideration of the potential impact of Arizona’s

limitations on adult dental, optometry, and podiatry services.

Nothing in the record explains CMS’s interpretation of

§ 1396a(bb) or contains any evidence that CMS considered

Arizona to be in compliance with that provision despite the

State’s limited coverage of adult dental, optometry, and

podiatry services even when provided by FQHCs. Indeed,

Arizona conceded at oral argument that CMS offered no

explanation of its decision to approve Arizona’s plan and

SPAs. Instead, Arizona claimed that CMS’s reasoning was

“implicit in the approval,” which consisted solely of a date

stamped on a line labeled “Approval Date.”

We decline to read into the sparse record before us the

reasoned decision-making that is required for an agency’s

interpretation to fulfill Chevron Step Two and, in turn, be

entitled to deference. See Gila River Indian Cmty. v. United

States, 729 F.3d 1139, 1150 (9th Cir. 2013) (citing

approvingly the holding in Vill. of Barrington v. Surface

Transp. Bd., 636 F.3d 650, 660 (D.C. Cir. 2011), that “an

agency warrants deference at Chevron step two only if the

agency has offered a reasoned explanation for why it chose

that interpretation judged according to only the rationales the

agency actually offered in its decision” (quotation marks and

brackets omitted)), as amended (July 9, 2013). There is

simply not enough evidence in the record to establish that

AACHC V. AHCCCS 27

CMS gave any consideration to whether Arizona was in

compliance with the requirements of the Medicaid Act at

issue. 4 Therefore, we vacate the District Court’s grant of

Defendants’ motion to dismiss in that regard and remand for

the parties to further develop the record before the District

Court—the proper forum for such fact-finding—and for the

District Court to rule in the first instance on whether

Arizona’s limitations on adult dental, optometry, and

podiatry services, which are components of the mandatory

benefit of “FQHC services,” are entitled to Chevron

deference. 5

IV. Conclusion

We reverse in part and vacate in part the District Court’s

grant of Defendants’ motion to dismiss, and remand for

further proceedings consistent with this opinion.

4

Plaintiffs argue that the “sole limitation” on FQHC services in

Arizona’s plan is that they require “authorization by appropriate entity.”

Defendants dispute this characterization, arguing that the cited language

refers to limitations on an individual’s ability to access services through

an FQHC and that limitations on the type and scope of services

available—for example, the limitation on dental coverage to only

emergency care—are included elsewhere in plan amendments that were

approved by CMS. Because we lack sufficient evidence to support a

Chevron analysis regardless of which limitations apply to FQHCs, we

leave this issue to the District Court to resolve in the first instance.

5

In this appeal of a motion to dismiss, we need not address

Plaintiffs’ contention that Arizona may only impose limitations on

“FQHC services” based on medical necessity and CMS-approved

utilization limits, citing various statutory provisions and regulations not

raised in Plaintiffs’ complaint.

28 AACHC V. AHCCCS

Each party shall bear its own costs.

REVERSED IN PART, VACATED IN PART, AND

REMANDED.