Free Reply in Support of Motion - District Court of Arizona - Arizona

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GREGORY G. KATSAS Acting Assistant Attorney General DIANE J. HUMETEWA United States Attorney District of Arizona RONALD R. GALLEGOS Assistant U.S. Attorney Civil Chief Arizona State Bar No. 013227 Two Renaissance Square 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004-4408 Telephone: (602) 514-7500 Facsimile: (602) 514-7760 SHEILA LIEBER VESPER MEI Department of Justice, Civil Division Federal Programs Branch 20 Massachusetts Ave. N.W., Rm. 7316 Washington, D.C. 20001 Telephone: (202) 514-4686 Fax: (202) 616-8470 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA SHARON NEWTON-NATIONS, et al. CIV-03-2506-PHX-EHC Plaintiffs, v. ANTHONY RODGERS, et al. Defendants. INTRODUCTION In Plaintiffs' Unified Reply Memorandum in Support of Motion for Summary Judgment and Response to Defendants Rodgers' and Leavitt's Motions for Summary Judgment ("Pls' Reply"), plaintiffs attempt to cloud the issues in this case. Spry v. Thompson, 487 F.3d 1272 (9th Cir. 2007) unquestionably disposes of most of plaintiffs' claims, but in trying to keep their claims alive, plaintiffs obfuscate the import of Spry. Plaintiffs do not dispute that the plaintiffs, while low income and in need of medical care, are not "categorically needy" and thus are not entitled to mandatory Medicaid coverage. They also do not dispute that most of the plaintiff class would not be eligible for Medicaid coverage under any definition of "medically needy," a population that a state can, at its REPLY IN FURTHER SUPPORT OF DEFENDANT LEAVITT'S MOTION FOR SUMMARY JUDGMENT

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option (though Arizona has not) decide to cover in its Medicaid State plan. Spry conclusively determines the claims of these plaintiffs plaintiff class who make up the vast majority of the

in the Secretary's favor, holding that for such individuals, a state is not

bound by Medicaid premium and copayment requirements, even in the absence of a waiver of Medicaid requirements by the Secretary. Spry, 487 F.3d at 1274. Instead of addressing Spry, plaintiffs focus their energy on a small, hypothetical portion of the plaintiff class within the Medical Expense Deduction program who might theoretically be eligible for Medicaid coverage should Arizona decide to change its Medicaid program to include an optional medically needy population. But plaintiffs have not shown that any such individuals actually exist, and, if they do, that they would actually be subject to the increased copayments about which they complain. Moreover, to the extent that such individuals may exist, because they are not eligible for Medicaid coverage under Arizona's Medicaid State plan, charging them increased copayments is consistent with both Spry and the Medicaid Act itself. In addition, plaintiffs simply fail to appreciate the reality of the situation the

plaintiffs receive medical coverage only as a result of the demonstration project. In the absence of this project, there is nothing that requires them to receive any federally-funded coverage at all. In this vein, in approving Arizona's request to charge the increased copayments for the plaintiffs at issue in this case, the Secretary made the judgment that approval of this request was likely to assist in promoting the objectives of the Medicaid program by providing coverage for individuals who would otherwise lack coverage. Plaintiffs, however, disagree with this judgment, and seek to substitute their all or nothing approach for the judgment of the Secretary, contending that a state must treat these nonMedicaid patients just like Medicaid beneficiaries. This contention, however, could well have an effect unintended by the plaintiffs that a state, faced with the option of providing

no coverage to certain populations, or having to apply all of Medicaid's rules and regulations to these non-Medicaid populations, would choose the former option, and those populations -2-

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would be left with no coverage at all. At bottom, then, plaintiffs ask the Court to secondguess the judgment of the Secretary, and to substitute the plaintiffs' judgment on copayments for that of the Secretary, whose experience in interpreting the Medicaid statute and administering the Medicaid program is due deference under the law. Such a substitution of judgment would be unwarranted, and plaintiffs' motion for summary judgment should be denied. The remainder of plaintiffs' arguments are also without merit. Plaintiffs argue that because the relevant Arizona statutes mention only waiver, and not expenditure, authority under section 1115 (42 U.S.C. § 1315), Secretary Leavitt could not approve the heightened copayments under a federal section 1115 expenditure (as opposed to waiver) authority. But the Administrative Record shows that the meaning of Arizona's statute is not so narrow. In addition, and contrary to plaintiffs' arguments, the Secretary's actions in approving Arizona's demonstration project were lawful and appropriate and promote the objectives of the Medicaid Act, and Arizona's demonstration project does not present a "danger to the physical, mental, or emotional well-being" of its participants. Summary judgment should be granted to the Secretary and denied to the plaintiffs. ARGUMENT I. SPRY V. THOMPSON DISPOSES OF PLAINTIFFS' CLAIMS THAT AMENDED RULE R9-22-711(E) VIOLATES THE COPAYMENT LIMITATIONS OF 42 U.S.C. §§ 1396o AND 1396o-1. In their Reply, plaintiffs once again fail even to address Spry as it relates to the majority of their class members those individuals who could be in neither a mandatory nor

an optional Medicaid population, and are not eligible for Medicaid coverage under the Arizona State plan. For such individuals, Spry disposes of plaintiffs' contention that the Secretary acted outside his statutory authority by permitting the imposition of copayments in violation of § 1396o and in excess of the limits established by 42 C.F.R. §§ 447.52 and 447.54. See Memorandum in Support of Defendant Leavitt's Motion for Summary Judgment and in Opposition to Plaintiffs' Motion for Summary Judgment ("Def. Leavitt's Mem.") 18-3-

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19. Plaintiffs have failed to respond to this argument for such individuals, who make up the vast majority of the plaintiff class. See Memorandum in Support of Plaintiffs' Motion for Summary Judgment ("Pls' Mem.") 26 (contending that medically needy state plan populations are included within the MED program, but nowhere else). Instead of responding to the Secretary's argument under Spry, plaintiffs focus their attention on arguing that 42 U.S.C. § 1396o-1 "has changed the rules of engagement," because it "does not distinguish between populations who are coverable as state plan populations under the Medicaid Act and those receiving coverage in some other way." Pls' Reply 13, 14. But this argument ignores the plain language of the statute, which states: "a State, at its option and through a State plan amendment, may impose premiums and cost sharing for any group of individuals . . ." 42 U.S.C. § 1396o-1(a)(1). In other words, in order for § 1396o-1(a)(1) to apply, the individuals must be included within the State plan. Contrary to plaintiffs' implication, there is nothing in § 1396o-1 that prohibits the Secretary from approving higher copayments for individuals who are not eligible for Medicaid coverage under a State plan. Nor is there any prohibition against any state opting to cover such individuals through a demonstration project, rather than choosing to amend its State plan to cover an optional "medically needy" population.1 The only question relevant to this case that Spry does not definitively answer is whether individuals who could hypothetically be included within a State plan should the State choose to include an optional medically needy population must be included within a State plan in order to receive any federal matching funds at all. Plaintiffs' argument would require a state to amend its state plan to include such populations, thus affording them full Medicaid coverage, any time it wished to extend to them any federally-funded coverage at

In reality, § 1396o-1 has given states more flexibility than they previously had. Under § 1396o-1, a state may subject a population eligible under the State plan to higher copayments than previously permitted. A population that is not otherwise eligible for Medicaid coverage under a state plan is not made eligible under § 1396o-1 because that would effectively change the rules for Medicaid eligibility. -4-

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all. But there is nothing, either in the language of § 1396o-1 (or any other statute), or in Spry itself, that requires that result. And, there is nothing in the statutory language that precludes the Secretary's approval of a demonstration project for individuals that provides coverage for individuals whom the state has not elected to include under the Medicaid State plan.2 Further, even if this Court were to find the statutory language somehow ambiguous in this regard, the Secretary's reading is reasonable, and should be accorded deference. See, e.g., Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984) (if statute is silent or ambiguous, "the question for the court is whether the agency's answer is based on a permissible construction of the statute."). The Secretary's interpretation "need not be the best or most natural one by grammatical or other standards. . . . Rather [it] need be only reasonable to warrant deference." Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 702 (1991). Indeed, because of the Secretary's expertise with respect to Medicaid, a "complex and highly technical regulatory program," courts have long recognized the Secretary's "exceptionally broad authority" under the Medicaid statute as a result. Wisconsin Dep't of Health and Family Servs. v. Blumer, 534 U.S. 473, 497 (2002) (citing Schweiker v. Gray Panthers, 453 U.S. 34, 43-44 (1981)). Here, the Secretary has reasonably determined that under the relevant statutes, regulations, and case law, the expansion populations at issue in this case, who are not eligible for coverage under Arizona's Medicaid State plan, may be included within a demonstration project with increased copayments under the Secretary's expenditure authority.3 Summary judgment should be granted to Defendant Leavitt on these

In his opening brief, the Secretary argued that because Arizona could well decide not to provide coverage to these individuals at all, or to impose exactly the same or even higher copayments were the Secretary's approval of the copayments determined to be unlawful by the Court, it is merely speculative that plaintiffs' alleged injury having to pay copayments greater than those allowed under the Medicaid statute would be redressed by a favorable decision, and plaintiffs lack standing to pursue their claims. Def. Leavitt's Mem. 24 n.11. Plaintiffs have utterly failed to address this argument, and should be deemed to have waived any opposition to it.
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Contrary to plaintiffs' argument, Spry did not define "expansion population" as (continued...) -5-

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grounds. II. SECTION 1396o DOES NOT APPLY TO INDIVIDUALS INCLUDED IN THE MED PROGRAM. A. Plaintiffs Have Not Shown that Any Individuals in the MED Program Could Qualify for Coverage Under a Medicaid Optional Medically Needy Population and Would be Subject to Copayments.

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As set forth in the Secretary's opening brief, although plaintiffs assert that there are 6 individuals within the MED population "who meet the Medicaid Act's definition of the 7 medically needy," Pls' Reply 8, plaintiffs have not pointed to any evidence within the 8 certified Administrative Record that shows that this is, in fact, the case, which is their 9 burden. Indeed, this very assertion reflects a misunderstanding of the Medicaid Act, since 10 the Act does not itself define medically needy individuals. The Medicaid Act instead permits 11 states, at their option, to elect under their State plan to extend Medicaid eligibility to 12 individuals within certain broad categories who meet state-determined financial standards. 13 See 42 U.S.C. § 1396a(a)(10)(C). In other words, there is no federally-defined medically 14 needy population, and, since Arizona has not elected to make any individual eligible pursuant 15 to 42 U.S.C. § 1396a(a)(10)(C), there is no State medically needy population with respect to 16 Arizona. 17 While plaintiffs now identify plaintiff Dawn House, whom they contend "illustrates 18 the plight of a Medicaid medically needy household," they provide no evidence that she 19 would, in fact, fall into an optional medically needy population within the meaning of the 20 Medicaid Act. See Pls' Reply 9. Plaintiffs have alleged that Ms. House is a mother with a 21 22 23 24 25 26 27 28 (...continued) narrowly as plaintiffs represent. Pls' Reply 6 (contending that according to Spry, an expansion population is one that is "not eligible for Medicaid, either as a `mandatory' population (the `categorically needy') or as an `optional' population (the `medically needy'). They are childless, non-disabled adults."). All Spry said in the way of defining "expansion population," however, was that they were "those people not eligible for Medicaid." Spry, 487 F. 3d at 1275. This language is consistent with the Secretary's understanding of an "expansion population," i.e., individuals who are not eligible for Medicaid coverage under a State plan but receive benefits under a section 1115 expansion demonstration. -63

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dependent child, and has low income and significant medical expenses; however, this is not sufficient information even to determine whether she would be eligible under the State plan. Compl. ¶¶ 86-88. While we may presume that she is not eligible under the State plan, because she is receiving demonstration benefits and has not availed herself of her right to a fair hearing to contest denial of eligibility under the State plan (see 42 U.S.C. § 1396a(a)(3); 42 C.F.R. § 431.200 et seq.), whether she might be eligible if Arizona elected to extend eligibility under the State plan to medically needy individuals is entirely speculative, because it would depend on the financial standards that Arizona would specify in that case. Similarly, while it is hypothetically possible that there might be a few individuals within the MED population who could be covered if Arizona chose to include an optional medically needy population within their State plan, plaintiffs have not, in fact, shown that is the case. See Def. Leavitt's Mem. 24-25. And further, even if the submissions to which plaintiffs point were admissible, were appropriately before the Court for consideration, and were interpreted to agree that there were some number of individuals within the MED population who could qualify under an optional medically needy population Secretary disputes, see id. 25 n.12 which the

plaintiffs have not shown that even those individuals

could be subject to the increased copayments or denied services as a result of failing to pay those copayments. In this regard, the Arizona statute setting forth the increased copayments specifies eleven specific categories of individuals who would be exempt from all AHCCCS copayments, and a further nine categories of individuals who are subject to the copayments but who may not be denied services as a result of their inability to pay those copayments. See Arizona Administrative Code R9-22-711(B) (exempting from the copayment requirements, for example, individuals determined to be "Seriously Mentally Ill by the Arizona Department of Health Services," pregnant women eligible for any AHCCCS program, and institutionalized persons under R9-22-216) and (D). Plaintiffs have not even attempted to meet their burden of identifying who in their class would be eligible for the MED program, would also qualify if Arizona were to include an optional medically needy -7-

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population within its Medicaid State plan, and do not fall within any of the categories of individuals listed as being exempt from the increased copayment requirement of R9-22-711. B. Because Arizona's Medicaid State Plan Does Not Include a Medically Needy Program, the Limit on Copayments Under the Medicaid Statute Does not Apply.

Plaintiffs do not dispute the fact that Arizona has not chosen to include an optional medically needy population within its State plan. Instead, they simply argue that Arizona should not be permitted, and the Secretary should not be allowed to approve, any type of demonstration project that would include within its confines any individuals who might be able to qualify for Medicaid coverage if a state were to include an optional medically needy population within its Medicaid State plan. Should plaintiffs' argument succeed, it could lower a state's incentive to provide additional coverage, through a demonstration project, to any individuals who might fall under the auspices of an optional medically needy population, resulting in lower coverage by states of such populations. More to the point, however, plaintiffs' argument is without merit. First, Spry is consistent with the Secretary's position. Plaintiffs contend that "according to Spry, states need not comply with the restrictions of § 1396o when implementing demonstration projects that extend coverage to `expansion' populations because they are `statutorily ineligible for Medicaid under federal law." Pls' Reply 10 (emphasis in plaintiffs' brief). The language of Spry was not so broad, however. In fact, all Spry said was that the particular plaintiffs at issue ("these individuals") were statutorily ineligible for Medicaid under federal law, which, as childless, non-disabled adults, they were. Spry, 487 F.3d at 1274, 1275. Spry did not conclude that only individuals who could not qualify for Medicaid in a mandatory or optional capacity could be included as an expansion population in a demonstration project for which a waiver is not required. Plaintiffs also contend that under Spry, if a population is described within the list of covered populations of 42 U.S.C. § 1396a(a)(10), "it is protected by § 1396o." Pls' Reply 10. But this argument misconstrues Spry. Nothing in Spry requires this result, and, in fact, -8-

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the argument prevents the language of § 1396a(a)(10) and § 1396o from being read together, and consistently with one another. See, e.g., Morton v. Mancari, 417 U.S. 535, 551 (1974) (stating that where "two statutes are capable of coexistence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective."). Spry quotes the language of § 1396o(b) (which covers optional, medically needy populations), stating: "a `State plan shall provide that in the case of individuals other than those described in subparagraph (A) or (E) of section 1396a(a)(10) of this title who are eligible under the plan,' income-related premium and nominal cost sharing may be imposed." Spry, 487 F.3d at 1276 (emphasis added). This language clearly provides that the costsharing limits of § 1396o(b) apply only to individuals who are both eligible under the State plan and included within the State plan. If this were not the case, there would be no reason for the initial phrase "a `State plan'" the statute would read only "in the case of individuals

other than those described in subparagraph (A) or (E) of section 1396a(a)(10) who are eligible under the plan" only nominal cost sharing could be imposed. In order to give meaning to the phrase "a `State plan,'" therefore, individuals subject to § 1396o(b) must be both eligible and included within the State plan. By contrast, plaintiffs' argument, that any individual who could be included within the language of § 1396a(a)(10) must be protected by § 1396o reads the language "a `State plan shall provide'" out of the statute. Thus, an understanding of this language to require that the nominal copayment requirement applies only to those individuals who are both statutorily eligible for Medicaid coverage (as plaintiffs define it) and included in the State plan is mandated by § 1396o(b). It is also consistent with Spry, which goes on to explain: "Subsection (b) permits a state plan to impose income-related premiums and nominal cost sharing on non-mandatory populations who are Medicaid eligible, i.e., optional, medically needy populations." Id. (emphasis added). Nothing in this language prohibits a state from imposing higher copayments on nonmandatory populations through a demonstration project under the Secretary's expenditure authority. -9-

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Plaintiffs make a number of arguments why the Secretary should not be permitted to approve demonstration projects such as this one, essentially contending that such projects allow a state to circumvent the requirements of the Medicaid Act. But plaintiffs themselves contend that the populations covered through optional coverage categories "currently comprise nearly 30% of the Medicaid-covered groups, and 56% of covered elderly groups." Pls' Reply 12. These numbers undercut plaintiffs' argument: the Secretary's policy of approving demonstration projects like this one in which individuals potentially coverable

under a Medicaid State plan, and in an optional medically needy population, may be included in a demonstration project approved under the Secretary's expenditure authority is not new,

and a number of states have nonetheless decided to provide coverage under their Medicaid State plans for optional medically needy populations. Plaintiffs can offer nothing except speculation that allowing the Secretary to continue to approve such demonstration projects would effectively do away with the optional categories of the Medicaid program. In addition, plaintiffs overlook an important point, that the Secretary will not approve demonstration projects that are not "likely to assist in promoting the objectives" of the Medicaid program. 42 U.S.C. § 1315(a)(1). And, although plaintiffs attempt to downplay the benefit of this type of demonstration project, the reality is that if the Secretary were not permitted to approve any demonstration project that conceivably contained individuals who could be included within an optional medically needy population if the state so chose, those individuals could well not receive any coverage whatsoever. It is not, as plaintiffs frame it, a choice between a demonstration project that provides some Medicaid benefits and otherwise full Medicaid coverage for the individuals who are included within that demonstration project, but a starker choice between a demonstration project that provides some Medicaid benefits and no coverage at all. Plaintiffs fail to acknowledge this reality. See Pls' Reply 2021. Moreover, while plaintiffs' contention that "[c]omplying with the federal law, in addition to contributing its state share, is the price a state agrees to pay when it decides to -10-

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participate in Medicaid and obtain federal funds," Pls' Reply 20-21, is technically true, when a state chooses to participate in Medicaid, that choice comes with the option of covering medically needy populations or not. If a state chooses to cover medically needy

populations, and thus "participate in Medicaid" with respect to those populations, obviously it will have to abide by Medicaid's rules for doing so. If it does not, however, as Arizona did not, it can simply decline to offer those populations any coverage at all, or it can offer limited coverage to those populations outside of Medicaid. And, to the extent that a state determines that offering Medicaid coverage to these populations would for some reason be less beneficial to the state than offering no coverage at all, neither the plaintiffs nor the Secretary could force a state to offer any coverage. While plaintiffs contend that "copayments will not produce significant cost savings, but . . . the savings that may occur will be generated only [by] denying care outright to people who cannot pay the copayment," plaintiffs' attempt to substitute their "evidence" at the time of his decision not contained in the administrative record before the Secretary should be rejected. See Pls' Reply 20. In fact, the Secretary has

determined that his reasonable interpretation of the statute allows states the flexibility to offer coverage to a broader range of individuals than would otherwise be possible under the confines of the Medicaid Act. That judgment is entitled to deference, and the Secretary is entitled to summary judgment as a result. See, e.g., Barnhart v. Walton, 535 U.S. 212, 217-18 (2002) ("[T]he legal question . . . is whether the Agency's interpretation of the statute is lawful. This Court has previously said that, if the statute speaks clearly `to the precise question at issue,' we `must give effect to the unambiguously expressed intent of Congress.' If, however, the statute `is silent or ambiguous with respect to the specific issue,' we must sustain the Agency's interpretation if it is `based on a permissible construction' of the Act.") (quoting Chevron, 467 U.S. at 842-43). III. DEFENDANT LEAVITT DID NOT ABUSE HIS AUTHORITY BY APPROVING ARIZONA'S COPAYMENTS. Plaintiffs contend that Secretary Leavitt lacked the authority to approve the heightened

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copayments pursuant to a section 1115 expenditure (as opposed to a waiver). Pls' Reply 6-8. Plaintiffs base this argument on a reading of A.R.S. § 36-2919 and A.R.S. § 36-2903.01. A.R.S. § 36-2919 provides: "If at any time federal monies as described in § 36-2903.01, subsection B, paragraph 5, are denied, not renewed or become unavailable for any reasons, the provisions of this article relating to the operation of the system are suspended and the director shall notify each provider of that fact." A.R.S. § 36-2903.01 states that the AHCCCS Director shall: Apply for and accept federal funds available under title XIX of the social security act . . . in support of the system. . . . Such funds may be used only for support of persons defined as eligible pursuant to title XIX of the social security act or the approved § 1115 waiver. A.R.S. § 36-2903.01(B)(5). Plaintiffs contend that this language precludes Director Rodgers

11 from applying for, and Secretary Leavitt from approving, funds under § 1115 expenditure, 12 rather than waiver, authority. Pls' Reply 7-8. As the administrative record shows, however, 13 Arizona has consistently used the term "§ 1115 waiver" broadly, to cover both waiver and 14 expenditure authority, and the plaintiffs' argument is without merit. 15 In early 2001, Arizona received permission from CMS to amend its § 1115 16 demonstration project to include the two populations at issue in this case: 1) certain non17 Medicaid eligible individuals with incomes up to 100% of the federal poverty level; and 2) 18 certain non-Medicaid eligible persons who incur medical expenses such that their income is 19 reduced to 40% of the federal poverty level. AR 00086-00103. The second category of 20 individuals is part of the State's Medical Expense Deduction ("MED") program. See A.R.S. 21 § 36-2901.04. In its January 18, 2001 approval letter, CMS invoked its "expenditure 22 authority" under 42 U.S.C. § 1315(a)(2) in allowing Arizona to offer this expanded coverage. 23 See AR 0086. 24 Thereafter, in its May 2, 2003, letter to CMS describing a number of changes it was 25 proposing to its demonstration program, including imposition of increased co-payments on 26 AHCCCS expansion populations, Arizona described the populations at issue as "the 27 28 -12-

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expansion added by the January 2001 amendment to the 1115 waiver." AR 00058. It again described the relevant groups of individuals ("childless adults with income up to 100% of the FPL, the Medical Expense Deduction Group who have incurred medical bills that reduce net family income to 40% or less of the FPL. and [sic] individuals with income above the income levels for traditional Medicaid categories but at or below 100% FPL") as "individuals added by the January 2001 amendment to the 1115 waiver." AR 00059. In its Operational Protocol, the State also subsequently (and consistently) described these populations, for whom they sought to apply the increased copayments, as "individuals[] approved as part of the 1115 waiver" or individuals "added by the 1115 expansion waiver." AR 0004, 00025, 00049. Thus, it is clear that Arizona uses the term "1115 waiver" broadly, to encompass its entire § 1115 demonstration project, and simply as shorthand to refer to those individuals who are not eligible for Medicaid pursuant to the Arizona State plan, but whose costs are subject to some federal Medicaid matching funds as part of a demonstration project's expansion population approved under the Secretary's expenditure authority. This understanding of the term "1115 waiver" is consistent with Defendant Rodgers' answers to plaintiffs' interrogatories as well. Interrogatory Number 6 asks: Please describe what parts of Arizona's Medicaid program, if any, do not operate under Section 1115 waiver authority. Identify all documents that support Defendant's response. Katz Decl. Ex. 1. Defendant Rodgers responded: "The entire AHCCCS' program operates under 1115 waiver authority. AHCCCS waiver letter." In sum, Arizona has consistently used the term "1115 waiver" broadly, and to mean the demonstration project approved under the Secretary's § 1115 authority not just waiver, but also expenditure, authority. Plaintiffs'

argument to the contrary is without merit. IV. THE SECRETARY'S ACTIONS IN APPROVING ARIZONA'S DEMONSTRATION PROJECT WERE LAWFUL AND APPROPRIATE AND PROMOTE THE OBJECTIVES OF THE MEDICAID ACT. As set forth in the Secretary's opening brief, the copayments at issue in this case are not a simple benefit cut, as plaintiffs contend, but a cost-saving measure to enable a larger -13-

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demonstration project. They were approved by CMS after consideration of the relevant factors, applied "only to expansion populations not included in the State plan," see AR 0001, and determined to further the purposes of the Medicaid statute. As such, they are valid, and their approval should be upheld by the Court. Plaintiffs contend that even if copayments are used as a cost-saving measure to enable a larger demonstration project (i.e., one that covers more individuals who are not eligible for Medicaid under a State plan), the use of the copayments must test a "unique and previously untested use of copayments." Pls' Reply 16 (citing 42 U.S.C. § 1396o(f)(1)). That provision, however, is irrelevant here. As set forth in the statute itself, § 1396o(f)(1) applies only to "[c]harges imposed under waiver authority of Secretary." 42 U.S.C. § 1396o(f). The copayments, as set forth at length in Defendant Leavitt's opening brief, see Def. Leavitt's Mem. 9, were approved under the Secretary's expenditure authority, and thus, the standards set forth in § 1396o(f)(1) do not apply. This distinction makes sense: where a population would be eligible for Medicaid coverage under a State plan and would actually be included within the State plan absent the demonstration project, but the state is seeking an exception from certain Medicaid requirements (and approval under the Secretary's waiver authority), the Secretary would want additional safeguards in place to ensure that the population that would otherwise be included within the Medicaid program would not be disadvantaged by being part of the demonstration. For expansion populations, however, who are gaining a benefit they would not otherwise receive but for inclusion within a demonstration project, and for whom approval is received under the Secretary's expenditure authority, the standard is less strict. While the Secretary must make the determination whether the project "is likely to assist in promoting the objectives" of the Medicaid program in deciding whether to approve that project, 42 U.S.C. § 1315(a), the requirements of § 1396o(f), as well as the requirement that "the copayments themselves need to be experimental," do not apply. See Pls' Reply 16. Plaintiffs also contend that it was "unreasonable" for the Secretary to conclude that -14-

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the copayments at issue in this case were being used to fund a larger demonstration.4

Pls'

Reply 17. In support of this argument, plaintiffs cite to several documents that are not in the administrative record and were not before the Secretary in an effort to convince the Court to substitute plaintiffs' judgment on the alleged lack of benefits of copayments for that of the Secretary. Pls' Reply 17. There is, however, no basis for this argument, and plaintiffs ignore the deference due to the Secretary. As set forth in the Secretary's opening brief, the Secretary has sweeping authority to approve demonstration projects. Def. Leavitt's Mem. 16, 30. It is not the Court's (or the plaintiffs') role to assess whether Arizona could or should have undertaken a broader or different demonstration project, as the Court has "no jurisdiction to review the wisdom of [its] undertaking," see Beno v. Shalala, 30 F.3d 1057, 1073 (9th Cir. 1994), and has no power "to substitute its judgment for that of the agency," see Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971). Moreover, section 1115 does not hold the Secretary to "standards of scientific precision" in the scope of demonstration projects, but instead affords him substantial flexibility in this regard. See California Welfare Rights Organization (CWRO) v. Richardson, 348 F. Supp. 491, 498 (N.D. Cal. 1972). This flexibility permits him to approve a demonstration project such as this one, which allows a state to expand its health care coverage to poor and otherwise uninsured individuals who do not meet Medicaid eligibility standards even two years after the

expansion of the larger demonstration project.5 See Pls' Reply 15.

Even while now arguing that it is "remarkable" that the Secretary's brief "would argue that the copayments were approved by the Secretary because the state needed to implement them as a `cost saving measure' for a project to demonstrate whether health in the community would be improved and rates of uninsurance reduced," Pls' Reply 17, in their opening brief, plaintiffs conceded that "the record shows that AHCCCS implemented the higher copayments for budgetary reasons." Pls' Mem. 20. Plaintiffs appear to argue that all parts of a demonstration project must be approved at once in order for one part to be of assistance to the larger whole. Pls' Reply 15. But this argument fails to account for changed circumstances state budget issues, for example, that could require additional cost saving measures. It is possible, for example, that a state, after implementing broader coverage for additional groups, as Arizona did here, could find that the (continued...) -155

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Finally, plaintiffs continue to view the increased copayments as separate from the larger demonstration project that makes up Arizona's Medicaid program. But, as the Secretary has shown, the copayments are part of the larger demonstration project, a part that the Secretary has determined enables the larger demonstration project to go forward, and they cannot be carved out from the rest of the demonstration project in the way that plaintiffs suggest. While plaintiffs contend that "it is inconceivable how these heightened copayments could cause the state to terminate its 25-year old demonstration project," Pls' Reply 20, this misconstrues the Secretary's argument. First, in their opening brief, plaintiffs contended that the "very duration of the Arizona project" was "inconsistent with it being an experiment." Pls' Mem. 18. To the extent that argument has any weight, it can just as easily be applied to strike down the entire 26-year old Arizona demonstration project. Second, to the extent that plaintiffs are wrong in contending that "the heightened copayments will not produce significant cost savings," Pls' Reply 20, and Arizona determines that without the copayments other parts of the program may fail, Arizona could well decide to terminate other portions or all V. of its demonstration project. Plaintiffs' argument to the contrary should be rejected. ARIZONA'S DEMONSTRATION PROJECT DOES NOT PRESENT A "DANGER TO THE PHYSICAL, MENTAL, OR EMOTIONAL WELLBEING" OF ITS PARTICIPANTS. Plaintiffs contend that the Secretary did not properly consider whether the increased copayments "present a danger to the physical, mental, or emotional well-being of a participant or subject of such program" under 42 U.S.C. § 3515b. Pls' Reply 18-19. As the Secretary pointed out in his opening brief, however, the required determination as to whether there is or is not such danger in a particular case is part and parcel of the broader inquiry under 42 U.S.C. § 1315, i.e., whether the demonstration program will serve the policies of the Medicaid program. See Beno, 30 F.3d at 1070 ("§ 1315(a) review includes an

(...continued) new coverage was stretching its budget in previously unanticipated ways, or that realities of changing state funding priorities made the new coverage more difficult. -16-

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examination of the proposed project's potential danger to participants' physical, mental and emotional well-being"); C.K, 92 F.3d at 190 ("[I]n the case of waivers under section 1315, the Secretary intended that her review for danger be subsumed within her more general review of the programs at issue."). That the Secretary approved the increased copayments as part of AHCCCS's demonstration project shows that the Secretary considered the project to serve the policies of the Medicaid program, and thus met the requirements of both § 1315 and § 3515.6 See also Spry, 2003 WL 23411996, *26, *28 (D. Or. Dec. 8, 2003) rev'd on other grounds, 487 F.3d 1272 (finding that the Secretary's analysis of the potential dangers was sufficient under section 3515b even though the Secretary had not engaged in a waiver analysis in that case, stating: "[p]laintiffs are wrong to presume that without [the challenged program] a system would be put in place that would cover them without premiums and copayments, . . . or to cover them at all"). Plaintiffs argue that Beno requires consideration of § 3515, and that the Secretary should specifically have considered plaintiffs' concerns because the copayments were approved after plaintiffs had filed their motions for preliminary injunction and class certification. Pls' Reply 19. But a copy of plaintiffs' preliminary injunction motion was not received by counsel for the Secretary until February 17, 2004, three days prior to approval of the cost sharing requirements. See February 18, 2004 Motion for Extension of Time by Federal Defendant (Docket #26). In addition, Beno required specific consideration of the concerns of the plaintiffs in that case because plaintiffs' counsel had included those concerns in two letters written directly to HHS prior to the Secretary's approval of the project at

issue. Beno, 30 F.3d at 1062. While plaintiffs' counsel in this case did submit a letter dated

Plaintiffs contend that it was "chronologically impossible" that the Secretary could have included the copayments within his section 1115 expenditure approval because the copayments "were approved after the demonstration expenditure for the expanded program was approved." Pls' Reply 18. But the review of the copayments was done in the context of the rest of AHCCCS's demonstration project, and was also done under section 1115 expenditure authority. There is no reason that it would be "impossible" for the Secretary to consider the copayments within his section 1115 expenditure approval. -17-

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November 4, 2003 to Defendant Rodgers expressing concerns about the rule increasing copayments, the letter did not raise any concerns about a potential violation of § 3515(b), see AR 0005-0007, and plaintiffs submitted nothing directly to CMS prior to filing this lawsuit. The fact that plaintiffs' counsel did write the letter to Defendant Rodgers shows that plaintiffs were aware of what they alleged were the problems with the increased copayments in advance of this lawsuit, and they certainly could have raised them directly with CMS did the plaintiffs in Beno prior to the filing of their preliminary injunction papers. That as

would have been the appropriate vehicle for plaintiffs to raise their concerns with the agency. Plaintiffs' argument, on the other hand, would require an agency to take notice of, and to specifically address, every objection every litigant makes in each court filing prior to making a final administrative decision; such a rule would effectively do away with the administrative process, and is unwarranted. See, e.g., United States v. L.A. Tucker Truck Lines, 344 U.S. 33, 37 (1952) ("[s]imple fairness to those who are engaged in the tasks of administration, and to litigants, requires as a general rule that courts should not topple over administrative decisions unless the administrative body not only has erred but has erred against objection made at the time appropriate under its practice."). Thus, because plaintiffs' concerns regarding § 3515b were not properly and timely before the agency prior to its approval of the increased copayments at issue in this case, the agency was justified to consider § 3515b as part and parcel of its review of the copayment issue as a whole, and without specifically addressing the plaintiffs' concerns. Finally, plaintiffs again cite to 42 U.S.C. § 1396o(f), this time to argue that "experiments" involving copayments must be "voluntary, or make[] provision for assumption of liability for preventable damage to the health of recipients of medical assistance resulting from involuntary participation." Pls' Reply 19 (citing 42 U.S.C. § 1396o(f)(5)). As discussed above, however, this provision applies only to the Secretary's waiver, and not expenditure authority, and is inapplicable here.

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VI.

HARM TO THE PLAINTIFFS In contending that the increased copayments harm the plaintiffs because they may be

denied medical care due to inability to pay the copayment amounts, the plaintiffs rely on their argument that if a state decides to participate in Medicaid, it must "comply with the Medicaid Act and its implementing regulations." Pls' Reply 21. They do not address the Secretary's argument that if coverage of a population is optional, and thus not required at all,7 the Secretary does not require that a state be bound by all of Medicaid's rules should it choose to provide coverage under a demonstration project to individuals who are not eligible for Medicaid coverage under a State plan.8 See supra at 10-11. Indeed, plaintiffs only receive health care services because Arizona has chosen to operate a demonstration project that includes them. Arizona does not have an obligation to provide such expanded coverage, and it could decide not to do so. Plaintiffs cannot demonstrate the existence of irreparable harm from the increased co-payments in Amended Rule 9-22-711(E), when they are not entitled to health care services in the first place. Moreover, it is difficult to fathom how the well-being of beneficiaries who receive healthcare coverage solely by virtue of a demonstration is harmed by allowing the state to impose copayments when the alternatives are either reductions in covered services or elimination of coverage for some or all participants. CONCLUSION The Secretary submits that for the foregoing reasons, his motion for summary

In their harm argument, plaintiffs again ignore the many members of their class who would not be eligible for Medicaid coverage under a State plan because they are not members of a mandatory population, and could not qualify for inclusion in an optional medically needy population. For those individuals, under Spry and the relevant statutes, a state is simply not bound by Medicaid's premium and copayment requirements even in the absence of the Secretary's waiver. Spry, 487 F.3d at 1274. To the extent that the Court relied on Beltran v. Myers, 677 F.2d 1317 (9th Cir. 1982) to find irreparable injury, see Newton-Nations v. Rogers, 316 F. Supp. 2d 883, 888 (D. Ariz. 2004), the Secretary respectfully submits that case is inapposite here. Plaintiffs' lack of a statutory entitlement to Medicaid services in this case distinguishes them from the plaintiffs in Beltran, which involved a "class of aged, blind, and disabled individuals." Beltran, 677 F.2d at 1318. -198

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judgment should be granted.

Dated: June 23, 2008 Respectfully submitted, GREGORY G. KATSAS Acting Assistant Attorney General DIANE J. HUMETEWA United States Attorney RONALD R. GALLEGOS Civil Chief /s/ Vesper Mei SHEILA LIEBER VESPER MEI U.S. Department of Justice, Civil Division Tel: (202) 514-4686 Fax: (202) 616-8470 Courier Address: 20 Massachusetts Avenue, N.W. Room 7316 Washington, D.C. 20001 Attorneys for Defendant Secretary Michael O. Leavitt

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CERTIFICATE OF SERVICE I, Vesper Mei, an attorney, hereby certify that on June 23, 2008, I electronically transmitted the foregoing Reply in Further Support of Defendant Leavitt's Motion for Summary Judgment to the Clerk's Office using the ECF System for filing and transmittal of a Notice of Electronic filing and to ECF registrants. I further certify that a copy of the foregoing was sent via federal express this 23rd day of June, 2008, to the following: HONORABLE EARL H. CARROLL UNITED STATES DISTRICT COURT SANDRA DAY O'CONNOR U.S. COURTHOUSE, SUITE 521 401 WEST WASHINGTON STREET, SPC 48 PHOENIX, AZ 85003-2151 MARTHA JANE PERKINS NATIONAL HEALTH LAW PROGRAM 211 N. COLUMBIA ST. 2ND FLOOR CHAPEL HILL, NC 27516

/s/ Vesper Mei VESPER MEI

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