1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 EASTERN DISTRICT OF CALIFORNIA 9 10 NORTHEAST MEDICAL SERVICES, No. 2:19-cv-01489

INC.,

11 Plaintiff, 12 ORDER GRANTING IN PART v. DEFENDANTS’ MOTION TO DISMISS 13 AND STAYING PLAINTIFF’S CLAIMS

CALIFORNIA DEPARTMENT OF FOR DECLARATORY RELIEF

14 HEALTH CARE SERVICES, HEALTH

AND HUMAN SERVICES AGENCY;

15 JENNIFER KENT, DIRECTOR OF

THE DEPARTMENT OF HEALTH CARE

16 SERVICES, and STATE OF

CALIFORNIA,

17 Defendants. 18 19 In August 2019, North East Medical Services, Inc. filed its 20 complaint against the California Department of Health Care 21 Services, the Department director in her official capacity, and 22 the State of California (collectively “Defendants”). Compl., ECF 23 No. 1. Defendants filed a motion to dismiss each of Plaintiff’s 24 four causes of action. Mot. to Dismiss, ECF No. 15; see also 25 Memorandum in support of Mot. to Dismiss (“Mot.”), ECF No. 16. 26 Defendants argue the failure to exhaust administrative remedies 27 makes dismissing the case prudent and that Eleventh Amendment 28 sovereign immunity makes it necessary. Mot. at 9-14. Plaintiff 1 opposes Defendants’ motion, contending neither exhaustion nor 2 sovereign immunity applies here. Opp’n at 3-15, ECF No. 23. 3 The Court finds the Eleventh Amendment bars Plaintiff’s 4 claims for injunctive relief. Moreover, the Court finds that 5 imposing an exhaustion requirement is warranted and would promote 6 the most efficient use of judicial resources. The Court 7 therefore DISMISSES Plaintiff’s claims for injunctive relief and 8 STAYS its claims for declaratory relief pending resolution of the 9 state administrative proceedings.1 10 11 I. BACKGROUND 12 Plaintiff is a federally-qualified health center (“FQHC”). 13 Compl. ¶ 1. As an FQHC, Plaintiff provides primary care services 14 to poor and medically-underserved populations in the San 15 Francisco area. Compl. ¶ 13. FQHCs are entitled to recover the 16 reasonable cost of ambulatory services that they provide to 17 Medicaid beneficiaries. Compl. ¶ 22. State Medicaid programs 18 approximate this cost and compensate FQHCs through fixed, per- 19 visit fees. Id. 20 Federal and state law also allow FQHCs to be compensated for 21 the reasonable cost of their services through subcontracts with 22 Medicaid managed care organizations (“MCO’s”). Compl. ¶3. 23 Pursuant to this allowance, Plaintiff entered a subcontract with 24 an MCO called the San Francisco Health Plan (“SFHP”). Id. Under 25 this subcontract, Plaintiff agreed to provide services covered by 26

27 1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was 28 scheduled for November 19, 2019. 1 California’s Medicaid program to SFHP’s Medicaid beneficiaries. 2 See Compl. ¶ 2. In turn, SFHP agreed to pay Plaintiff “not less 3 than” what it would pay non-FQHC providers for the same services. 4 Compl. ¶¶ 2, 33. Plaintiff also alleges this subcontract 5 included a “physician incentive plan,” in which SFHP agreed to 6 make “special payments” to Plaintiff for the “physician/provider 7 risks” it incurred under the subcontract. Compl. ¶¶ 35-37. 8 When an FQHC’s reasonable cost of care exceeds the amount 9 paid by an MCO, federal law requires the state’s Medicaid program 10 to make up the difference. Id. This supplemental payment is 11 known as a “wraparound payment.” Id. Plaintiff received 12 wraparound payments from the Department of Health Care Services 13 for the FQHC services it rendered from 2008-2016. See Compl. 14 ¶ 4. In 2013, however, the Audits and Investigative Branch of 15 the Department began to investigate the propriety of those 16 payments. Compl. ¶ 45. The Department ultimately concluded that 17 Plaintiff failed to adequately show it “properly allocated the 18 income received from SFHP between FQHC and non FQHC services.” 19 Compl. ¶ 51. Viewing all of Plaintiff’s SFHP-derived income as 20 compensation for the reasonable cost of its FQHC services, the 21 Department found SFHP had, in fact, fully compensated Plaintiff. 22 Compl. ¶¶ 51, 53. It notified Plaintiff that the Department 23 would have to “recoup” the “FYE 2015 Supplemental wrap payments” 24 Plaintiff previously received. Id. When the Department overpays 25 a FQHC, it recoups past payments by offsetting or withholding 26 funds from current and future reimbursements. Compl. ¶ 8. 27 /// 28 /// 1 II. OPINION 2 A. Judicial Notice 3 Under Federal Rule of Evidence 201, a district court may 4 take judicial notice of a fact that is “not subject to 5 reasonable dispute because it can be accurately and readily 6 determined from sources whose accuracy cannot reasonably be 7 questioned.” Fed. R. Evid. 201(b)(2). It is well-established 8 that “a court may take judicial notice of matters of public 9 record.” Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th 10 Cir. 2001). “Matters of public record” include records from 11 administrative proceedings. United States v. 14.02 Acres of 12 Land More or Less in Fresno County, 547 F.3d 943, 955 (9th Cir. 13 2008). 14 Defendants request the Court judicially notice five 15 documents: 16 1. North East Medical Services’ Complaint in this case; 17 2. North East Medical Services’ Request for 18 Administrative Hearing; 19 3. Notice of Formal Hearing issued by the Office of 20 Administrative hearings and Appeals; 21 4. North East Medical Services’ discovery request to the 22 Department of Health Care Services in its 23 administrative appeal; and 24 5. North East Medical Services’ response to the 25 Department of Health Care Services’ discovery request 26 in its administrative appeal. 27 Request for Judicial Notice, ECF No. 17; Additional Request for 28 Judicial Notice, ECF No. 25. Plaintiff does not oppose these 1 requests. 2 The Court need not and will not take judicial notice of 3 Plaintiff’s complaint. Defendants’ request for judicial notice 4 of this document is DENIED. The Court does, however, find that 5 documents 2-5 are proper subjects of judicial notice. With 6 respect to these four documents, Defendants’ request is GRANTED. 7 B. Sovereign Immunity 8 1. Legal Standard 9 The Eleventh Amendment bars plaintiffs from filing suit 10 against unconsenting states to recover past damages. U.S. CONST. 11 XI amend.; see also Edelman v. Jordan, 415 U.S. 651, 667-78 12 (1980). This immunity likewise protects state officials acting 13 in their official capacity. Edelman, 415 U.S. at 661. Even so, 14 a judicially-crafted exception to the Eleventh Amendment permits 15 federal actions against states and state officials when a 16 plaintiff seeks to compel a prospective compliance with her 17 federal rights. Ex parte Young, 209 U.S. 123, 157 (1908). 18 To claim the Ex parte Young exception, a plaintiff must do 19 more than simply allege her requested relief is forward-looking. 20 See Indep. Living Ctr. of S. Cal., Inc. v. Maxwell-Jolly, 572 21 F.3d 644, 659-60 (9th Cir. 2009), vacated and remanded on other 22 grounds sub nom. Douglas v. Indep. Living Ctr. Of S. Cal., Inc., 23 132 S. Ct. 1204 (2012). Indeed, a suit that requests 24 prospective injunctive relief in theory, but retrospective 25 damages in fact, will not elude a state’s immunity. See id. at 26 660. For example, the Ninth Circuit found that when a plaintiff 27 requests an order requiring the state “to perform [its] legal 28 duty to dispurse[] funds,” she “essentially seeks an injunction 1 directing the state to pay damages.” Id. (internal quotations 2 omitted). This, the Ninth Circuit explained, is “precisely the 3 type of retroactive [sic] relief that the Supreme Court 4 refuse[s] to allow.” Id. (citing Native Village of Noatak v. 5 Blatchford, 38 F.3d 1505, 1512 (9th Cir. 1994) overruled on 6 other grounds Board of Trustees of Glazing Health and Welfare 7 Trust v. Chambers, 941 F.3d 1195 (9th Cir. 2019). 8 2. Analysis 9 Plaintiff contends the Ex parte Young exception applies 10 here because Plaintiff’s prayer for relief does not seek 11 backward-looking compensation. Opp’n at 13-15. Plaintiff 12 argues it already owns the money Defendants are withholding 13 because the funds consist of payments Plaintiff is “indisputably 14 owed.” Id. To that end, Plaintiff maintains injunctive relief 15 would not pull money out of the state treasury; it would simply 16 keep Defendants’ hands out of Plaintiff’s pockets. Id. This 17 position rests upon the theory that preventing a state from 18 withholding reimbursement payments amounts to prospective relief 19 so long as the payments have not yet been withheld. See Opp’n 20 at 13-15. 21 But, as Defendants argue, this theory of prospective relief 22 is barred by law. Mot. at 13-14 (citing Indep. Living Ctr. Of 23 S. Cal., 572 F.3d at 661 n.19). In Indep. Living Ctr., the 24 Ninth Circuit found that the question of “whether relief is 25 prospective or retrospective in the Medicaid payment context 26 turns on the date of service, not the date of payment.” 572 27 F.3d at 661 n.19. Plaintiff alleges the decision to withhold 28 FHQC payments results in inadequate reimbursement for services 1 it rendered from 2008 to 2016. Compl. ¶¶ 4, 61. Under the date 2 of service test, Plaintiff’s attempt to compel additional 3 reimbursement for these services is plainly retrospective. 4 Citing to North East Med. Servs, Inc. v. State of Cal. 5 Dep’t of Health, 670 Fed.Appx. 615, 616 (9th Cir. 2016), 6 Plaintiff argues the date of service test does not apply here. 7 There, the Ninth Circuit found the Northern District of 8 California “erred by applying the date of service test to hold 9 that North East was seeking retrospective monetary relief.” Id. 10 at 615. But this finding did not categorically do away with the 11 date of service test in the Medicaid context; indeed, it did not 12 purport to modify the test’s application at all. See id. at 13 615-16. In North East Med. Servs., North East sought to “enjoin 14 the director of California’s health services from requiring it 15 to disclose its Part D money when settling up for the 2008 16 fiscal year.” Id. at 616. The Ninth Circuit expressly stated 17 that it did not use the date of service test to determine 18 whether the injunction sought was retrospective “because North 19 East [was] not asking for additional reimbursement from 20 California for medical services that it provided in 2008.” Id. 21 Rather, North East sought to prevent the state from requiring it 22 to disclose certain information. Id. Here, however, additional 23 reimbursement is precisely what Plaintiff requests. The date of 24 service test therefore applies. 25 Under the date of service test, Plaintiff’s proposed 26 injunction seeks retrospective relief from nonconsenting state 27 defendants. Accordingly, the Eleventh Amendment bars 28 Plaintiff’s request for injunctive relief. The Court GRANTS 1 Defendants’ motion to dismiss with respect to this remedy. 2 C. Exhaustion 3 1. Legal Standard 4 The exhaustion doctrine precludes judicial review of 5 issues, both legal and factual, until a plaintiff completes all 6 available avenues of administrative review. See Patsy v. Bd. of 7 Regents of State of Fla., 457 U.S. 496, 498-502 (1982). An 8 exhaustion requirement may arise from either an act of Congress 9 or judicial decree. United States v. Cal. Care Corp., 709 F.2d 10 1241, 1248 (9th Cir. 1983). When a statute requires exhaustion, 11 federal district courts lack jurisdiction over the dispute until 12 the administrative proceedings conclude. Id. When exhaustion 13 is not required by codified law, courts retain discretion to 14 conduct parallel proceedings with a federal or state agency. 15 Id. Before doing so, however, a court must consider three 16 questions: (1) whether agency expertise makes agency 17 consideration necessary to generate a proper record and reach a 18 proper decision; (2) whether relaxation of the requirement would 19 encourage the deliberate bypass of the administrative scheme; 20 and (3) whether administrative review is likely to allow the 21 agency to correct its own mistakes and to preclude the need for 22 judicial review. Id. A court will impose a judicially-crafted 23 exhaustion requirement if these factors weigh in favor of doing 24 so. Id. 25 2. Analysis 26 Neither party contends exhaustion is statutorily mandated. 27 Rather, the only question is whether the three factors discussed 28 above favor requiring exhaustion in this case. The Court finds 1 that each of the three factors weigh in favor of imposing an 2 exhaustion requirement here. First, agency expertise makes 3 agency consideration necessary to generate a proper record and 4 reach a proper decision here. While Plaintiff’s complaint 5 raises claims under federal law, adjudication of those claims 6 necessarily implicates questions about how the state of 7 California administers its Medicaid program. As Defendants 8 argue, this Court will benefit from a full development of the 9 factual record by a state agency with expertise in that area. 10 Reply at 2-3. 11 The second and third factors likewise weigh in favor of an 12 exhaustion requirement. The Court adopts the reasoning set forth 13 in Defendants’ motion—and reiterated in their reply brief—for 14 each of these two factors. See Mot. at 11-12; Reply at 3-4. 15 Plaintiff contends that requiring exhaustion is not only 16 futile, but also likely to cause it to suffer greater harm. 17 Opp’n at 10-11. The Court disagrees. As Defendants argue, it is 18 conceivable that the administrative review process may moot the 19 instant matter. Reply at 3-4. Moreover, the Court does not find 20 that imposition of an exhaustion requirement portends irreparable 21 harm for Plaintiff. This is particularly true given this Court’s 22 finding that Plaintiff cannot use this Court to enjoin Defendants 23 from continuing to offset its reimbursement payments. And if this 24 Court or an administrative law judge were to eventually find that 25 Plaintiff was not over-reimbursed, then Defendants would be 26 required to repay the amount collected, together with the payment 27 of interest. Reply at 4, n.4.. 28 Accordingly, the Court finds the three California Care Corp 1 factors weigh in favor of imposing an exhaustion requirement. 2 The Court does not however agree with Defendants that requiring 3 | exhaustion also requires dismissing a case when the plaintiff has 4 not yet exhausted its administrative remedies. Rather, the Court 5 | STAYS Plaintiff’s remaining claims for declaratory relief pending 6 | completion of the state proceedings. 7 8 Til. ORDER 9 For the reasons set forth above, the Court GRANTS IN PART 10 Defendants’ motion to dismiss. The Court DISMISSES Plaintiff's 11 claims for injunctive relief and STAYS Plaintiff’s claims for 12 declaratory relief pending resolution of the state administrative 13 | proceedings 14 IT IS SO ORDERED. 15 Dated: December 19, 2019 16 kA eaten 18 19 20 21 22 23 24 25 26 27 28 10