County of Santa Cruz v. Kathleen Sebelius

* This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
COUNTY OF SANTA CRUZ; COUNTY
OF SONOMA; COUNTY OF SAN
DIEGO; COUNTY OF MARIN;
COUNTY OF SANTA BARBARA;
COUNTY OF SAN LUIS OBISPO;
COUNTY OF MONTEREY, on behalf of
themselves and all others similarly
situated,
Plaintiffs - Appellants,
v.
KATHLEEN SEBELIUS,
Defendant - Appellee.
No. 08-16389
D.C. No. 3:07-cv-02888-JSW
MEMORANDUM*
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.
FILED
SEP 29 2010
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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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.

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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

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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.

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County of Santa Cruz v Sebelius, No. 08-16389
Reinhardt, Circuit Judge, concurring in part and dissenting in part
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
FILED
SEP 29 2010
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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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

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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

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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.

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County of Santa Cruz v. Sebelius, No. 08-16389
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
FILED
SEP 29 2010
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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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.

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