NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS FILED

FOR THE NINTH CIRCUIT SEP 29 2010

MOLLY C. DWYER, CLERK

U.S. COURT OF APPEALS

COUNTY OF SANTA CRUZ; COUNTY No. 08-16389

OF SONOMA; COUNTY OF SAN

DIEGO; COUNTY OF MARIN; D.C. No. 3:07-cv-02888-JSW

COUNTY OF SANTA BARBARA;

COUNTY OF SAN LUIS OBISPO;

COUNTY OF MONTEREY, on behalf of MEMORANDUM* themselves and all others similarly situated,

Plaintiffs - Appellants,

v.

KATHLEEN SEBELIUS,

Defendant - Appellee.

Appeal from the United States District Court for the Northern District of California Jeffrey S. White, District Judge, Presiding

Argued and Submitted April 13, 2009 San Francisco, California

Before: REINHARDT, NOONAN and McKEOWN, Circuit Judges.

* This disposition is not appropriate for publication and is not precedent except as provided by 9th Cir. R. 36-3. Various counties of the state of California (“the Counties”) brought this

action against the Secretary of the Department of Health and Human Services (“the

Secretary”) raising constitutional and statutory claims in connection with

reimbursement under Medicare. The Counties’ constitutional claims asserted that

Secretary’s failure to revise the “fee schedule areas” that determine the fees paid to

the Counties for providing Medicare services violated the Counties’ equal

protection and due process rights, and that 42 U.S.C. § 1395 w-4(1)(2) (the “Fee

Schedule” statute) and the regulation implementing this statute, 42 C.F.R. § 414.4,

are unconstitutional as applied to the Counties because they deprived them of

property and equal protection. The Counties’ statutory claims asserted that the

Secretary’s failure to revise the fee schedule areas violated various provisions of

the Administrative Procedure Act and the Medicare Act.

The district court dismissed the Counties’ constitutional claims on the

ground that the Counties did not qualify as persons under the Fifth Amendment,

and thus lacked standing. The court dismissed the Counties’ statutory claims on

the ground that they are barred by statute. We affirm the district court’s dismissal

of the Counties’ statutory and due process claims, and remand the Equal Protection

claims.

2 We affirm the district court’s dismissal of the Counties’ statutory claims.

The Medicare statute bars judicial review of the “establishment of geographic

adjustment factors under subsection (e).” 42 U.S.C. § 1395w-4(i)(1)(d). The

challenge to the Fee Schedule necessarily involves a challenge to the geographic

adjustment factors. The district court appropriately concluded that it lacked

jurisdiction over the statutory claims related to the fee schedule areas.

We also affirm the district court’s dismissal of the Counties’ due process

claims. We conclude that, at least for purposes of the claim before us, the counties

are persons. Nonetheless, the Counties’ due process claims fail because the

Counties do not have a property right to any particular payment by Medicare. See

Erickson v. U.S. ex rel. Dept. of Health and Human Services, 67 F.3d 858, 862

(9th Cir. 1995).

Finally, we remand the Counties’ Equal Protection claims. Because we

conclude, at least for purposes of this claim, that the Counties are persons, we

move to considering whether the Secretary’s decision not to revise the fee schedule

areas is supported by a rational basis. The district court did not reach this issue. In

response to our request for supplemental briefing on rational basis, the Secretary

relied on the rationality of the 1996 revision of the fee schedule, while the Counties

pointed to demographic changes that made the 1996 schedule irrational. We

3 cannot decide this issue on the complaint and the briefs alone. Accordingly, we

remand the Equal Protection claims to the district court for further proceedings.

For the forgoing reasons, the judgment of the district court is AFFIRMED in

part, REVERSED in part, and REMANDED. The parties shall bear their own

costs on appeal.

4

FILED

County of Santa Cruz v Sebelius, No. 08-16389 SEP 29 2010

MOLLY C. DWYER, CLERK

Reinhardt, Circuit Judge, concurring in part and dissenting in part U.S. COURT OF APPEALS

I concur in the remand of the Equal Protection claim and agree that Counties

are persons for purposes of the Counties’ constitutional claims.

I dissent from the majority’s affirmance of the district court’s dismissal of

the Counties’ statutory claims because, in my view, 42 U.S.C. § 1395w-4(i)(1)(D)

does not bar judicial review of fee schedule areas. The statute does not explicitly

bar such review. The majority does not dispute this fact, but decides instead that it

implicitly bars review of fee schedule areas because it bars review of geographic

adjustment factors (GAFs) subcomponents, and fee schedule areas constitute GAF

subcomponents.

The statute’s plain language, legislative history, and purpose show the error

in the majority’s reasoning. Congress explicitly enumerated several areas of

Medicare for which judicial review is prohibited (including conversion factors,

adjusted historical payment basis, and more important to the case before us, the

establishment of GAFs), but it did not include fee schedule areas in this list.

Because Congress omitted fee schedule areas from the factors enumerated in the

statutory bar, it is reasonable to infer from its action that Congress intended to

permit rather than to prohibit courts from reviewing challenges to the determination of fee schedule areas. Congress also explicitly enumerated several

subcomponents of the GAFs, (including procedure codes for physicians’ services

and relative value unites), but it did not include fee schedule areas as a

subcomponent. Nor can fee schedule areas simply be assumed to be

subcomponents of GAFs, as the majority believes. Whereas GAFs are tools that

the HHS secretary uses to adjust payments for Medicare services, fee schedule

areas are geographic entities that GAFs measure. See 42 U.S.C. § 1395w-4(j)(2)

(defining a fee schedule area as “a locality used . . . for purposes of computing

payment amounts for physicians’ services”).

Legislative history also supports the proposition that Congress did not intend

that § 1395w-4(i)(1)(D) bar judicial review of fee schedule areas. The Senate

deleted a prohibition against judicial review of fee schedule areas from the earlier

House version of the statute that became the 1989 Omnibus Budget Reconciliation

Act. Compare 135 Cong. Rec. H5984-05 at H6023 with 135 Cong. Rec. S13911-

04 at S13928-29. The Supreme Court has held that in comparing earlier versions

of a statute with the final version, courts may infer that Congress intentionally

omitted items that were included in the earlier versions but omitted from the final

version. See Russello v. United States, 464 U.S. 16, 23-24 (1983).

Finally, analysis of statutory purpose supports judicial review of fee service

2 areas. Because GAFs are overhauled frequently, but fee service areas are not, a bar

to judicial review helps to ensure efficient administrative handling of GAF

changes, but provides no such help with respect to fee service areas. The statute

requires that the HHS Secretary review GAF indices every three years and update

the fee schedule annually, but imposes no such requirement for regular review or

designation of fee schedule areas. 42 U.S.C. § 1395w-4(b)(1) & (e)(1)(c). In the

absence of a congressional mandate, the HHS Secretary has in fact updated the fee

schedule areas just once, over eleven years ago. A bar on judicial review could

hardly be said to promote efficiency or timeliness with respect to a matter that is so

infrequently the subject of review or change. In fact, should the setting of fee

schedules on the basis of such unmodified area determinations have the disparate

and unfair effect alleged by the plaintiffs on the compensation received by

physicians and hospitals, it would seem to demonstrate that Congress could not

have intended that the failure of HHS to establish fair and reasonable boundaries

for fee schedule areas should go permanently unreviewed by the courts.

For the foregoing reasons, I dissent from the majority’s conclusion that

Congress intended that 42 U.S.C. § 1395w-4(i)(1)(D) bar judicial review of fee

schedule areas.

I also dissent from the court’s failure to remand the Due Process claim on

3 the ground that the Counties do not have a “property right” to Medicare payments.

This issue is a close and important one that was not adequately briefed or argued

by the parties, nor decided by the district court. Rather than decide that issue here,

without adequate consideration, I would remand it to the district court for an initial

and thorough review.

4

FILED

SEP 29 2010

County of Santa Cruz v. Sebelius, No. 08-16389

MOLLY C. DWYER, CLERK

U.S. COURT OF APPEALS

McKEOWN, Circuit Judge, concurring in part and dissenting in part:

I join in affirming dismissal of the Counties’ statutory claims. I concur in

the judgment dismissing the due process claims. I do not concur in the conclusion

that the counties are persons for purposes of this suit. This novel question requires

more nuanced consideration and, in my view, it is unnecessary to decide the issue

in this case. I write separately to respectfully dissent from remand of the Equal

Protection claim.

There is a fundamental reason why we do not need to address the “Counties

as persons” argument. The Complaint identifies no cognizable Equal Protection

claim as the government offers a viable rationale for its approach to the Fee

Schedule Areas. The Counties certainly have well-documented reasons to object to

the lag between their payment levels under the current Fee Schedule Areas and

their real costs to provide care. But the Secretary’s stated reasons for maintaining

the current Fee Schedule Areas, based on the 1996 revision, pass the “highly

deferential” review applicable under the Equal Protection Clause. See

Kahawaiolaa v. Norton, 386 F.3d 1271, 1279-80 (9th Cir. 2004). The Secretary

stated that the Fee Schedule Areas established in the 1996 revision best met the

goal of the revision process, which was to simplify payment areas and reduce

disparities among geographic areas, while maintaining accuracy in tracking price differences across areas. The Secretary further declared that a solution has not yet

been found that would better remedy the issue of geographic variations in costs

without creating negative redistributive impacts and an increased administrative

burden. The Secretary’s rationale for not revising the 1996 Fee Schedule Areas is

sufficient to pass our review. “In the end, we must commit this question to

Congress to apply its wisdom in deciding” whether to alter the requirements for

updating the Fee Schedule Areas. Id. at 1283.

For these reasons, I dissent from remand of the Equal Protection claim, and

would affirm the district court’s dismissal of that claim.

2