Free Reply to Response to Motion - District Court of Arizona - Arizona

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ELLEN SUE KATZ, AZ Bar. No. 012214 WILLIAM E. MORRIS INSTITUTE FOR JUSTICE 202 E. McDowell Rd., Suite 257 Phoenix, AZ 85004 (602) 252-3432 [email protected] JENNIFER L. NYE, AZ Bar No. 019230 ARIZONA CENTER FOR DISABILITY LAW 100 N. Stone Ave., Suite 305 Tucson, AZ 85701 (520) 327-9547 [email protected] JANE PERKINS NATIONAL HEALTHnd LAW PROGRAM 211 N. Columbia St., 2 Floor Chapel Hill, NC 27514 (919) 968-6308 [email protected] Attorneys for Plaintiffs UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA ) Sharon Newton-Nations; Manuela ) Gonzalez; Cheryl Bilbrey; Donald ) McCants; Hector Martinez; Anne Garrison;) Dawn House; Dana Franklin; Edward ) Bonner; D.H.; Jack Baumhardt; Manuel ) Esparza; and Patricia Jones, on behalf of ) ) themselves and all others similarly ) situated, ) ) ) Plaintiffs, ) ) v. ) ) Anthony Rodgers, Director of the Arizona ) ) Health Care Cost Containment System; and Michael O. Leavitt, Secretary of the ) ) United States Department of Health and ) Human Services, in their official ) ) capacities, ) ) Defendants. ) )
Document 154 1

No. CIV 03-2506 PHX EHC

PLAINTIFFS' UNIFIED REPLY MEMORANDUM IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT AND RESPONSE TO DEFENDANTS RODGERS' AND LEAVITT'S MOTIONS FOR SUMMARY JUDGMENT

(Assigned to Hon. Earl H. Carroll)

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INTRODUCTION This case concerns the amount of copayments that can be imposed on very low income individuals and families when they need to go to the doctor or obtain the prescriptions and follow-up treatment that their doctors prescribe. In 2001, the state defendant implemented Proposition 204 and expanded the Arizona Health Care Cost Containment System (AHCCCS), Arizona's Medicaid program, to single adults and childless couples whose incomes are at or below 100% of the federal poverty level ($10,400 for an individual; $14,000 for a couple) and to medically needy individuals and families who become extremely indigent because they have incurred medical debts sufficient to reduce their monthly incomes to below 40% of the federal poverty level ($4,160 for an individual; $7,040 for a family of three).1 The federal Medicaid Act authorizes the use of nominal copayments for these populations, 42 U.S.C. §§ 1396o, 1396o-1, and, at the start, AHCCCS used nominal copayments. On October 1, 2003, however, the state defendant decided to implement Arizona Administrative Code (A.A.C.), Amended Rule, R9-22-7(E). The Amended Rule dramatically increased the copayments, for example quintupling the amount that a patient had pay for each visit to the doctor (from $1.00 to $5.00). Significant copayments were also imposed on other services, including prescriptions for generic drugs ($4.00/Rx) and some brand names ($10.00/Rx). For the first time, health care could be denied outright to a person unable to pay the copayment.2 The federal defendant approved the copayment policy after AHCCCS had already implemented it. Plaintiffs' motion for summary

judgment asks the Court to find that A.A.C. R9-22-7(E) is inconsistent with provisions of the Social Security Act that govern copayments, 42 U.S.C. § 1396o, 1396o-1; Income eligibility limits stated in this brief apply for 2008. See 73 Fed. Reg. 3971 (Jan. 23, 2008). 2 The impact of the heightened copayments was not, as the federal defendant implies, "small." Leavitt Memo. at 1. Ms. Newton-Nations' copayments for medications and medical specialists were at least $80.00 per month--about half of her $173.00 per month General Assistance. Appendix I (Docket No. 15), Ex. I, Newton-Nations Dec. ¶¶ 1, 2. Ms. House fell ill after she was unable to come up with the $44.00 needed to cover her prescription copayments. Appendix I, Ex. 7, House Dec. at ¶¶ 4-5, 7.
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experimental/demonstration projects, id. at § 1315a; and human experimentation, id. at § 3515b. Defendant Leavitt, with Defendant Rodgers in agreement, has filed a CrossMotion for Summary Judgment and Response to Plaintiffs' Motion for Summary Judgment (Leavitt Memo.). He argues that states need to comply with the Medicaid Act only with respect to populations that Congress has designated as mandatory categorically needy. For all other populations, a state can extend coverage through a section 1115 expenditure project, use federal Medicaid dollars to pay for the coverage, and none of the provisions and protections of the Medicaid Act will apply unless Secretary Leavitt says so. Defendant Rodgers, however, was not authorized to proceed under the section 1115 expenditure authority. Even if he had been, the federal defendant's radical argument is inconsistent with the Medicaid Act and Ninth Circuit precedent. See Spry v. Thompson, 487 F.3d 1272 (9th Cir. 2007); Portland Adventist Med. Ctr. v. Thompson, 399 F.3d 1091 (9th Cir. 2005). The federal defendant also argues that the copayments are permissible because they are a cost saving measure to help fund the larger demonstration project. He says Plaintiffs' concerns about human experimentation were accounted for as part and parcel of the Secretary's review of the state's request to expand the demonstration project to additional populations. These arguments are at odds with the evidence in this case, the requirements of the Social Security Act, and Ninth Circuit precedent, Beno v. Shalala, 30 F.3d 1057 (9th Cir. 1994). Secretary Leavitt says the Plaintiffs should welcome whatever coverage they are getting because AHCCCS did not have to include them. And, he expresses concern that if forced to comply with the Medicaid Act, the state might decide to terminate its program. However, "[s]tates choose whether to participate in Medicaid. Once a state enters the program, the state must comply with the Medicaid Act and its implementing regulations." Katie A. ex rel. Ludin v. Los Angeles County, 481 F.3d 1150, 1154 (9th Cir. 2007). Congress has intentionally attached strings to the federal funding that is available

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to states that choose to participate. These statutory provisions are there to be complied with--even if it means that federal and state executive officials cannot use federal funds to do things exactly as they would like or cannot do them at all. Finally, Defendant Rodgers' separate Response argues that the copayment notices are adequate. As shown below, Defendant Rodgers' arguments lack any merit. I. The Medicaid Act and Section 1115 A review of first principles may help with understanding just what it is that the federal defendant is arguing. State plans and section 1115. Medicaid is a voluntary program. States that

choose to participate in Medicaid must submit a state Medicaid plan. The purpose of the plan is to describe the populations and services that are covered. See 42 U.S.C. § 1396a; A.R.S. § 36-2931(13). States submit state plan amendments to make changes in their state plans. See 42 C.F.R. § 430.12(c). State Medicaid programs can also implement demonstration projects pursuant to section 1115 of the Social Security Act. See 42 U.S.C. § 1315. Section 1115 authorizes the Secretary to approve "experimental, pilot or demonstration" projects that are likely to assist in promoting the objectives of the Medicaid Act. Id. Citing section 1115, the Secretary will authorize three types of demonstration projects: (1) a section 1115 waiver, whereby the Secretary waives compliance with certain requirements of the Medicaid Act found in 42 U.S.C. § 1396a, see § 1115(a)(1), 42 U.S.C. § 1315(a)(1) (a "section 1115 waiver"); (2) a section 1115 expenditure, whereby the Secretary does not grant a waiver but rather allows the state to use federal Medicaid funds to extend coverage to individuals who are not eligible for Medicaid; see § 1115(a)(2)(A), 42 U.S.C. § 1315(a)(2)(A) (a "section 1115 expenditure"); or (3) a combination of a section 1115 waiver and a section 1115 expenditure. See, e.g. AR0001, 00086.

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Mandatory and optional populations groups. States participating in Medicaid must cover some populations groups and may cover others. 42 U.S.C. § 1396a(a)(10). Mandatory categorically needy. States that choose to operate Medicaid programs must cover the mandatory categorically needy populations described in 42 U.S.C. § 1396a(a)(10)(A)(i). Mandatory populations include children under age six and pregnant women whose incomes are at or below 133% of the federal poverty level, older children who live in families with incomes below the federal poverty level, and parents whose incomes are at or below the states' Aid to Families with Dependent Children (AFDC) limits.3 Most individuals who are disabled or elderly and receiving assistance through the Supplemental Security Income (SSI) program ($7,644 for an individual) are also mandatory categorically needy. The Secretary does not dispute that mandatory populations are entitled to the protections of the Medicaid Act, which include limits on cost sharing; a designated, mandatory package of benefits; prompt eligibility determinations and provision of medical assistance; and due process if services are denied. See 42 U.S.C. §§ 1396-1396v. Optional categorically needy and medically needy. States that choose to

participate in Medicaid have the option to cover the optional categorically needy populations described in 42 U.S.C. § 1396a(a)(10)(A)(ii).4 The optional categorically needy include children and parents whose incomes exceed the mandatory limits, elderly and disabled persons with incomes up to 100% of the federal poverty level, and people residing in nursing facilities with incomes less than 300% of the SSI standard ($1,911 a month for an individual). States also have the option to cover the Medicaid medically needy--individuals and families whose incomes exceed the categorical eligibility limits who incur medical expenses sufficient to bring their incomes below a state-set medically

States must cover parents and children who meet the requirements of the nowrepealed AFDC program. See 42 U.S.C. §§ 1396a(a)(10)(A)(i)(I), 1396u-1(a). 4 "It is important to note the term `optional' is a statutory term ... Some of the sickest and poorest Medicaid beneficiaries are considered `optional.'" Kaiser Family Foundation, Medicaid's Optional Population Groups at 2.
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needy income level (such as 40% of the federal poverty level). Id. at § 1396a(a)(10)(C). Approximately 29% of Medicaid recipients, nationwide, qualify because they fall into an optional coverage group. See Kaiser Family Foundation, Medicaid's Optional Population Groups: Coverage and Benefit (Feb. 2005), available at http://www.kff.org/ medicaid/upload/Medicaid-s-Optional-Populations-Coverage-and-Benefits-IssueBrief.pdf. The importance of optional coverage varies by population. For example, over half (56%) of elderly people and about a quarter (22%) of people with disabilities qualify for Medicaid through an optional coverage group. Id. As discussed below, the Secretary would allow states to decide whether to cover these optional populations through their Medicaid state plan programs, a section 1115 waiver, or a section 1115 expenditure. If the later option is chosen, according to the Secretary, none of the provisions of the Medicaid Act and regulations will apply unless the Secretary himself says so. Expansion populations. group, "expansion populations." Spry v. Thompson also recognized a third population 487 F.3d at 1275. "[T]hey are 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." Id. II. Defendant Rodgers was not Authorized to Impose the Copayments through a Section 1115 Expenditure, and Defendant Leavitt Abused his Discretion when Approving the Copayments Pursuant to that Authority. Defendant Leavitt approved the heightened copayments as part of a section 1115

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expenditure demonstration pursuant to section 1115(a)(2)(A), 42 U.S.C. § 1315(a)(2)(A).
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See AR00064. Because he was using his expenditure authority, the federal defendant
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told the state that it did not need to obtain a section 1115 waiver, and it did not need to
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comply with the Medicaid Act's cost sharing provisions.
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See AR0001.

In his

memorandum in this case, Defendant Leavitt cited A.R.S. § 36-2919 to support an argument that AHCCCS might be suspended if the Court holds the heightened copayments are illegal. Leavitt Memo. at 26-27.
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A review of A.R.S. § 36-2919, however, reveals that Defendant Rodgers did not have the authority to impose the heightened copayments pursuant to a section 1115 expenditure. A.R.S. § 36-2919 refers to § 36-2903.01, subsection B, paragraph 5, which provides: The director shall ... 5. Apply for and accept federal funds available under title XIX of the social security act ... (citation omitted) ... in support of the system... Such funds shall be used only for the support of persons defined as eligible pursuant to title XIX of the social security act or the approved section 1115 waiver. A.R.S. § 36-2903.01.B.5 (emphasis added). Specifically with respect to the copayments for class members in this case, § 36-2903.01, subsection D, paragraph 4, provides: The director may adopt rules or procedures to ... require persons ... to be financially responsible for any cost sharing requirements established in a state plan or a section 1115 waiver and approved by the centers for medicare and medicaid services. Cost sharing requirements may include copayments.... A.R.S. § 36-2903.01.D.4 (emphasis added). Thus, Defendant Rodgers was specifically authorized to proceed only through a state plan provision or a section 1115 waiver.5 He was not authorized to proceed through a section 1115 expenditure. The statute that Defendant Leavitt relied upon in his brief, A.R.S. § 36-2919, refers to § 36-2903.01, so the Secretary was obviously aware of it and aware that the state did not have the authority

As Plaintiffs have pointed out all along, 42 U.S.C. § 1396a(a)(10), which lists the populations that a state Medicaid program must and can cover, can be waived by the Secretary should he conclude that such coverage furthers the objectives of the Medicaid Act. That is because the demonstration project statute allows the Secretary to waive provisions of the Medicaid Act found in 42 U.S.C. § 1396a, and § 1396a(a)(10)(A) is a subsection of § 1396a.. See section 1115(a)(1), 42 U.S.C. § 1315(a)(1). This approach offers coverage for the desired expansion populations (who are nothing more than members of additional optional categorically needy groups), but it would also mean that the state would have to comply with the provisions of the Medicaid Act that have not been or cannot be waived, such as the cost sharing requirements of § 1396o.
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to request copayments for the type of demonstration project that the Secretary envisioned. Therefore, approval of that request was a clear abuse of discretion. III. Medicaid Medically Needy Individuals and Families are Subject to Illegal Copayments and the Denial of Care. The AHCCCS expansion includes very low income individuals and

families/households from the previously state-funded Medical Expense Deduction (MED) program. See A.R.S. § 36-2901.04. Some of the MED population are individuals and families who meet the Medicaid Act's definition of the medically needy (the "Medicaid medically needy"), See 42 U.S.C. § 1396a(a)(10)(C). Specifically, these individuals and families/households meet the non-financial eligibility requirements for inclusion as mandatory categorically needy recipients (they are families with children or aged, blind and disabled persons), but their incomes or resources exceed the financial eligibility requirements for categorical eligibility. Id. With respect to these Medicaid medically needy individuals and households, the defendants must adhere to the Medicaid Act, 42 U.S.C. §§ 1306o(b) and o(e), by imposing only nominal copayments and prohibiting health care providers from denying care to persons who are unable to pay the copayment. If they want to escape these requirements, state and federal officials must follow the Congressionally-authorized pathways by implementing heightened copayments pursuant to an experimental waiver under 42 U.S.C. § 1396o(f) or through the newly-authorized options under 42 U.S.C. § 1396o-1. The state has selected neither of these pathways and, thus, must adhere to § 1396o(b). Defendants briefly respond that the Plaintiffs have not shown that the Medicaid medically needy are affected by the challenged rule.6 In their Memorandum in Support of Plaintiffs' Motion for Summary Judgment (Pl. Memo.), Plaintiffs detailed the evidence in the record that the MED program includes persons who are Medicaid medically needy.

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Defendant Leavitt hints that Plaintiffs must quantify how many class members are affected, Leavitt Memo at 22 n.8, but there is no such requirement.
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See Pl. Memo. at 25-29 and exhibits cited therein. To recap: The plain words of the statute extend coverage to individuals and families who are Medicaid medically needy. See A.R.S. § 36-2901.04 (stating that allowable medical expenses include the "applicant's family unit" and instructing AHCCCS to deduct "family" income). All of the written policies issued by AHCCCS to implement the statute clearly subject Medicaid medically needy individuals and families to the heightened copayment policies. Plaintiff Dawn House illustrates the plight of a Medicaid medically needy household.7 AHCCCS and federal agency employees have also acknowledged that the some Medicaid medically needy populations are included in the expansion. See Katz Dec. Ex. 4; Katz Supp. Dec., Ex. 22. Defendants argue that Plaintiffs have misinterpreted the e-mails but have not produced any evidence to support the claim. Rather, they argue about the meaning of the e-mails. Plaintiffs' interpretation, however, is consistent with AHCCCS's numerous published documents that show the MED program includes individuals and families who meet the Medicaid Act's description of the medically needy. See Katz Supp. Dec., Exs. 17, 18, 19, and 21. Defendants fail to refute this substantial evidence; thus, their

argument that the record does not show that the class includes Medicaid medically needy individuals and families must be rejected. Defendant Leavitt, with Defendant Rodgers in agreement, focuses his energy on arguing that the Medicaid medically needy are not protected by the Medicaid Act's cost sharing provisions "because Arizona has not opted to include a `medically needy' program as part of its State plan." Leavitt Memo. at 25. This argument, if accepted by the court, would work a radical change on the Medicaid program. As is currently the law, Arizona and any other state would be free to decide whether to cover an optional population group. However, under the Secretary's scheme, the state could designate whether it is covering the optional population through its state Medicaid plan or as a Defendant Rodgers' Response claims that he has not found a medically needy person in the MED program. Rodgers Memo. at 3. He provides no evidence of this assertion, and it must be rejected.
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Section 1115 expenditure. If the state plan option were selected, then the state would have to comply with the provisions and recipient protections of the Medicaid Act that condition federal funding on, among other things, limits on cost sharing; access to a designated, mandatory package of benefits; prompt eligibility determinations and provision of medical assistance; and due process when services are denied or delayed. See 42 U.S.C. § 1396a. On the other hand, if the optional population is covered as a section 1115 expenditure, then the state would not have to comply with any of the Medicaid Act or regulations unless the Secretary provides otherwise. As authority for this executive power, they rely upon Spry v. Thompson. There are a number of reasons that this argument must be rejected by the Court. First, the argument is inconsistent with Spry, which concerned the interplay between the demonstration project statute, 42 U.S.C. § 1315, and the cost sharing provision, 42 U.S.C. § 1396o. Spry held that the § 1396o cost sharing restrictions apply to the "mandatory populations `described' under section 1396o(a) or the optional populations addressed by 1396o(b) [the optional categorically needy and the medically needy]." Id. at 1275. On the other hand, 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." Spry, 487 F.3d at 1274 (emphasis in original). The "expansion" populations are defined: "They are childless, non-disabled adults." Id. at 1275. In other words, in the view of the Court, they cannot be covered by the state Medicaid plan. In reaching its conclusions, Spry looks only to the text of the Medicaid Act, specifically the listing of covered populations found at 42 U.S.C. § 1396a(a)(10). If a population group is "described" there, then, according to Spry, it is protected by § 1396o. Because the Medicaid medically needy are described in § 1396a(a)(10)(C), they are protected by the cost sharing restrictions set forth in § 1396o(b). Id. at 1275. The proper analysis under Spry asks whether the population group at issue is described in 42 U.S.C. § 1396a(a)(10) of the Medicaid Act and thus coverable under the

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state Medicaid plan. If it is, then it is protected by the Medicaid Act, including the cost sharing provisions. That is the end of the analysis. Spry held the statutes to speak unambiguously, so there was no need to defer to the Secretary's position. Spry, 487 F.3d at 1276 (citing Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)). The federal Defendant's argument should be rejected because it is inconsistent with Spry. Second, the defendants' reading would effectively render numerous provisions of the Social Security Act meaningless. The Medicaid Act gives states the option to extend their state Medicaid plans to optional categorically needy and medically needy populations. See 42 U.S.C. §§ 1396a(a)(10)(A)(ii), (C). The Social Security Act

provides that "in the case of any experimental, pilot, or demonstration project which, in the judgment of the Secretary, is likely to assist in promoting the objectives" of the Medicaid Act, the Secretary may waive compliance with the requirements section § 1396a of the Medicaid Act, 42 U.S.C. § 1315(a)(1), and the costs of such project which would not otherwise be included as Medicaid expenditures may be regarded as state plan expenditures during the demonstration period. Id. at § 1315(a)(2)(A). Under the

Secretary's argument, there would be no reason for a state to cover optional populations under their state Medicaid plan or to cover them under a § 1315(a)(1) waiver. In contrast to the state plan and waiver options, both of which come with congressionally-designated strings attached, the Secretary's purported section 1115 expenditure authority allows the state to cover optional populations without complying with any federal Medicaid Act or regulation, unless the Secretary says so. The Court should not accept a reading of the Social Security Act that would render large sections of it "inoperative or superfluous." NORMAN J. SINGER, SUTHERLAND STATUTES AND STATUTORY CONSTRUCTION, § 46.06 (6th ed. 2005). It is simply not reasonable to assume that Congress would "delegate a policy decision of such economic and political magnitude to an administrative agency" with virtually no constraint on its exercise. FDA v. Brown & Williamson, 529 U.S. 120, 133 (2000); see also, e.g. Beno, 30 F.3d at 1068-69 (expressing "doubt that Congress would enact such comprehensive [Social Security Act] regulations, frame them in

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mandatory language, require the Secretary to enforce them, and then enact a statute [42 U.S.C. § 1315] allowing states to evade these requirements with little or no federal agency review"). Finally, when assessed against the reality of Medicaid coverage, the argument simply cannot be correct. If accepted, it would allow federal and state Medicaid officials to redefine Medicaid for all individuals who can be covered through these optional coverage categories. These populations, which currently comprise nearly 30% of the Medicaid-covered groups, and 56% of covered elderly groups, could be consigned to an unregulated, parallel program of state and federal officials choosing. The section 1115 expenditure provision cannot be read to contain such broad authority. "Congress ... does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions--it does not, one might say, hide elephants in mouseholes." Whitman v. Am. Trucking Ass'n, 531 U.S. 457, 468 (2001); id. at 485 (holding federal agency "may not construe the statute in a way that completely nullifies textually applicable provisions meant to limit its discretion"). In this case, the federal defendant is claiming not just the silent alteration, but rather the complete undermining of the entire Medicaid regulatory scheme as it applies to optional coverage groups. Cf. U.S. Const. Art. 1, § 1 ("All legislative Powers herein granted shall be vested in a Congress."); Whitman, 531 U.S. at 487 (Thomas, J., concurring) (citing U.S. Constitution and questioning whether "our delegation jurisprudence has strayed too far from our Founders' understanding of separation of powers"). In sum, the defendants' argument would allow the Secretary to create Medicaidfunded programs for populations described in the Medicaid Act outside the context of the Medicaid Act. It would permit the Secretary and a complicit state to establish a separate flow of Medicaid funds, at state and federal taxpayer expense, and build the rules for spending those funds without regard to otherwise applicable Medicaid law, with no regulations in place to govern the review process for spending such funds, and without being subjected to prior public scrutiny. Their motion should be rejected. The class

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includes individuals and families who are Medicaid medically needy as described in the Medicaid Act. The federal and state government cannot ignore the provisions of the Medicaid At that are included in that Act to protect them. IV. The Secretary has Failed to Appreciate the Import of § 1396o-1. Plaintiffs have raised arguments about the importance of 42 U.S.C. § 1396o-1, Congress' most recent amendment to the Medicaid cost sharing provisions. Pl. Memo. at 13-16. The Secretary argues, at some length, that the enactment of § 1396o-1 should be seen as having no impact on this case. The reasons proffered in support of his conclusion are numerous, but all fundamentally rely on the same premise, i.e., that the Plaintiffs receive coverage under a demonstration project, not under Arizona's state plan, and therefore are not entitled to any of the protections of the Medicaid Act. The problem with the Secretary's arguments regarding § 1396o-1 is that they flounder on their very premise. Unlike § 1396o, as interpreted by the court in Spry, § 1396o-1 does not distinguish between populations who are coverable as state plan populations under the Medicaid Act and those receiving coverage in some other way. It does not, for example, include the phrase "the State plan shall provide . . . " Rather, § 1396o-1 provides the rules for imposing cost sharing on "any group of individuals" without regard to whether those individuals are described in the Medicaid Act or pursuant to a demonstration project.8 See 42 U.S.C. § 1396o-1(a)(1). Having encompassed within its ambit all groups of individuals receiving medical assistance reimbursed under title XIX, § 1396o-1 then divides those individuals into Although, in reaching its result, the Spry court attempted to distinguish the decision in Portland Adventist Hosp. v. Thompson, 399 F.3d 1091 (2005), it did not purport to overrule that case. Thus, courts in this circuit are left with two conflicting statements regarding whether people receiving services under a demonstration project receive those services "under a State plan." The Spry panel found that they do not. The Portland Adventist court, however, specifically held that they do, as follows: "Plaintiffs in turn argue, and the district court held, that the statutory scheme is unambiguous and supports only the conclusion that expansion populations eligible under § 1115 receive medical assistance `under a State plan.' We agree." Id. at 1096. But this Court need not try to reconcile these two conflicting opinions, for § 1396o-1 applies to individuals regardless of whether they are receiving benefits "under a State plan."
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several subgroups for purposes of determining how much flexibility a state, or the Secretary, will have with regard to the imposition of cost sharing. For individuals whose incomes are below 100% of the federal poverty level, regardless of the mechanism through which they may be receiving coverage, § 1396o-1 requires a state to abide by the cost sharing provisions that reside in § 1396o, while for individuals with higher incomes, states are afforded much more flexibility. (b)(1), (2) and (5); and (d). Thus, the enactment of § 1396o-1, far from having no impact on this case, has instead changed the rules of engagement, even assuming the Secretary was ever right with regard to his claims of unlimited discretion to ignore the Medicaid Act. With the passage of § 1396o-1, the Secretary's entire rationale for denying needy beneficiaries the protections Congress promised them has been has been stripped away. The mandates of § 1396o-1 are not tied to participation in a state plan, and one of those mandates is that people with incomes under 100% of poverty be afforded the cost sharing protections found in § 1396o.9 Id. at § 1396o-1(a)(2). When Congress added § 1396o-1 to the Medicaid Act in February of 2006, it articulated cost sharing standards that apply regardless of how a person gets services that are reimbursed under title XIX, and in doing so reiterated its determination that the very poor only be subject to the nominal cost sharing described in § 1396o. For this reason, See, e.g., Id. at §§ 1396o-1(a)(1) and (2);

The Secretary argues that people with incomes under 100% of poverty are "exempted" from the requirements of § 1396o-1, so that it can have no impact on them or this case. Leavitt Memo. at 20. However, in stating that "paragraph (1) . . . shall not apply" to people with incomes under 100% of the federal poverty level, it is clear that § 1396o-1(a)(2) is referring only to the more expansive cost sharing rules found in that paragraph, and is not thereby exempting people from the other provisions of the section. This is demonstrated by the fact that (a)(2) also says that the very poor are not subject to "subsection (d)" of § 1396o-1, which allows providers to deny treatment if a beneficiary does not have enough money to meet the required copayment. This reference would be totally unnecessary if the intent of § 1396o-1(a)(2) were to bounce the very poor back to § 1396o for all purposes, since subsection (d) could not apply to those under 100% of poverty if they were not subject to § 1396o-1 at all.
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the Secretary's efforts to dismiss the impact of § 1396o-1 are unavailing, and the strength of Plaintiffs' claims, as set forth in their main brief, is undiminished. V. There is Nothing Experimental about the Project. In their opening brief, Plaintiffs' established that there is nothing of an experimental, demonstration or pilot nature about the copayments that were imposed on the Plaintiff class. Pl. Memo. at 17-25. Copayments are the most heavily-studied aspect of the Medicaid program. Research over the span of 35 years has consistently concluded that non-nominal copayments are harmful and cause low-income individuals to forego medically necessary care. See Second Declaration of Leighton Ku, ¶¶ 10, 16-17, 24 (describing the research). The federal defendant does not attempt to rebut the redundant findings of the research. Rather, he argues that the use of the heightened copayments should be ignored because the copayments are "simply a cost sharing measure that, from the perspective of state financing, enables the larger demonstration project," Leavitt Memo. at 28, which is to "demonstrate whether expanding eligibility ... will improve overall health of the community, and reduce overall rates of uninsurance," id. at 10. There are insurmountable problems with this argument. First, it cannot be squared with the actual sequencing of events. The heightened copayments were imposed over two years after the "larger demonstration project" was expanded to include poverty level childless, non-disabled adults and medically needy populations. This Court has already noted this discrepancy. When issuing the

preliminary injunction, the Court found the federal defendant's argument that the copayments were needed as a financing mechanism to be "unpersuasive because Defendant Rodgers implemented AAC R9-22-711(E) on October 1, 2003, after providing medical services to Plaintiffs at the lower copayments since January 2001." NewtonNations v. Rodgers, 316 F. Supp. 2d, 883, 888 (D. Ariz. 2004). Noting that the State, through Defendant Rodgers, "is the entity arguably most familiar with its own finances," the Court pointed out that Defendant Rodgers had not argued that it would face a

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financial burden if the Court enjoined the copayment regulation. Id. at 888 n. 4. And, while in his pending Motion for Summary Judgment and Response, Defendant Rodgers says the State was looking for ways to cut costs, he has not argued that the State would face a financial burden if the Court continued to enjoin the copayment regulation. Rodgers Memo. at 2. Second, the Secretary has argued that the copayments themselves do not need to be experimental if they are used as financial support for an overall

experimental/demonstration project. However, Congress has already spoken directly to this issue and has expressed its clear intent that federal and state Medicaid officials cannot simply employ copayments as a cost saving device in a large demonstration. Rather, the imposition of copayments must test a "unique and previously untested use of copayments." See 42 U.S.C. § 1396o(f)(1)(emphasis added). To put it another way, the copayments themselves need to be experimental. The specific task before this Court is to discern the intent of Congress with regard to the Secretary's authority to impose non-experimental, statutorily unrecognized copayments on very low income Medicaid beneficiaries. Section 1396o(f)(1) could not more clearly express that intent, even if it were the case that its protections do not otherwise apply to the plaintiffs in this case. Whether Congress intended that heightened copayments imposed upon the very poor must themselves be experimental in nature is a very different question from whether a particular section of a statute applies in a given case. Section 1396o(f)(1) answers that question, and thus the point here is that the Secretary's approval of the imposition of heightened copayments for the admitted purpose of funding a project, not for the permissible purpose of testing a "unique and previously untested use of copayments," violates the experimental/demonstration project statute, 42 U.S.C. § 1315, as opposed to § 1396o(f). The latter section merely answers in the affirmative the question of whether the copayments themselves must be experimental. Because they must be, and because they admittedly are not in this case, their use violates section 1315 itself.

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Third, even if copayments could legally be used to fund a larger demonstration, it was unreasonable for the Secretary to conclude that these copayments were being implemented to do this. The state's own analyses conclude that the copayments will not produce significant cost savings. The AHCCCS Director assessed cost sharing options and concluded, among other things, that increased copayments would not increase revenue, and the state could generate revenue only by denying health care outright to persons unable to pay the copayments. AHCCCS, Cost Sharing Options at 2, 3, 5, Ex. 2 to Katz Dec.; see Pl. Memo. at 11-12.10 Defendant Rodgers stated, further, that when it implemented the heightened copayments, AHCCCS assumed lower utilization rates for the services to which copays applied, and increased the assumed utilization of inpatient hospital and emergency room services. The Kaiser Commission study, as well as several others, showed that when cost sharing is applied to a population like the TWG [Title XIX Waiver Group, people living at or below the poverty level], people will tend to forgo seeing their physician and having their prescriptions filled. Use of the hospital and emergency room services will increase because the use of preventative services has decreased. Def. Rodgers' Answers to Plaintiffs' Interrogatories, Interrogatory No. 3, at 4 (quoting from the report prepared by their budget consultant, Mercer Government Health Services Consulting), Ex.1 to Katz Dec. In light of this evidence, it is remarkable that the federal defendant'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.11

A guiding principle of the Report was that "[l]ower income populations will have lower cost sharing amounts." Cost Sharing Options at 1. Yet, the populations ultimately subjected to the heightened copayments, medically indigent individuals and families whose incomes are below 40 percent of the federal poverty level and childless, nondisabled adults living below the federal poverty level, are among the poorest of the poor. 11 As Plaintiffs have explained, the challenged provision actually requires some class members who need prescription drugs to subsidize the program. Cost calculations by
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Finally, the argument ignores the purpose of 42 U.S.C. § 1315. "The statue was not enacted to enable states to save money or to evade federal requirements but to test out new ideas.... A simple benefit cut, which might save money, but has no research or experimental goal" does not satisfy the requirement. Beno, 30 F.3d at 1069 (internal quotation marks omitted). VI. The Defendants Ignored the Human Experimentation Requirement. The Social Security Act prohibits the federal Secretary from using federal funds to pay for any experimental program, which is determined by the Secretary or a court of competent jurisdiction, to present a danger to the physical, mental, or emotional wellbeing of a participant, without the written informed consent of each participant. 42 U.S.C. §3515b; see Pl. Memo. at 23-25. The Secretary admits that the copayments were not reviewed under the section 3515b. According to the Secretary, the review was "part and parcel" of his section 1115 expenditure approval. Leavitt Memo. at 34. However, this was chronologically impossible, because the heightened copayment policies were approved after the demonstration expenditure for the expanded program was approved. Moreover, the federal defendant is using the wrong standard. The defendant relies on a Third Circuit Court of Appeals case, C.K. v. New Jersey, 92 F.3d 171, 190 (3d Cir. 1996), for the "part and parcel" standard. Leavitt Memo. at 31-32. However, in the Ninth Circuit, the evidence in the record must reflect consideration of the proposal's potential danger to participants' "physical, mental and emotional well-being." Beno, 30 F.3d at 1070. An inquiry into the ethical problems raised by research includes some evaluation of the risks the experiment poses, a review of alternative designs, and some effort to reduce risks "to those necessary to achieve the research objective." The Belmont Report, 44 Fed. Reg. 23196 (1979). While the Secretary may defer to the state's judgment about many aspects of the proposed experiment and exercises AHCCCS that show that in one-fifth of generic drug transactions, the individual's copayment ($4.00) will exceed the cost of the generic drug ($3.50). See Pl. Memo at 22, Ex. 11 to Katz Dec.
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considerable discretion over what risks are necessary, she must make some determination that a project does not pose unnecessary risks to human subjects. Id. at 1071. The agency's reasoning will not be inferred from silence, and the record must be sufficient to show that the agency considered the relevant factors. Id. at 1073-74 (citing Motor Vehicles Mrf. Ass'n v. State Farm Ins., 463 U.S. 29, 57 (1983)). The Beno standards have not been met in this case. The federal defendant

approved the copayments, retroactively, after Plaintiffs had filed their Motions for Preliminary Injunction and Class Certification and supporting documents. Thus, when the defendant made his decision, he was on notice of Plaintiffs' claims and was obligated to consider them. See Beno, 30 F.3d at 1074. However, the administrative record contains no evidence that the Secretary made any ethical inquiry at all into whether the heightened copayments and the denial of care to persons unable to pay them would present a danger to the physical, mental, or emotional well-being of the program participants. And, as the declarations of the named Plaintiffs show, none of them were asked to provide written consent for the experiment. Thus, the decision did not consider the "relevant factors," and there was a "clear error of judgment." Id. at 1073.

17

The human experimentation protections were not a part of the federal Secretary's
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review. This is particularly problematic, given that Congress has expressed specific
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concern about copayment experimentation.
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In 42 U.S.C. § 1396o(f)(5), Congress

expressed its intent that experiments involving copayments be "voluntary, or make[] provision for assumption of liability for preventable damage to the health of recipients of
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medical assistance resulting from involuntary participation." Congress clearly intends for
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participants in experimental/demonstration projects to be protected from harmful
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copayments. This Court has already found that the copayments at issue here place
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Plaintiffs at risk of irreparable harm. Newton-Nations, 316 F. Supp. 2d at 888. The
26

human experimentation statute provides for this Court, as a court of competent
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jurisdiction, to independently review the copayments for their danger to participants. Plaintiffs intend to file a request asking the court to exercise this independent authority.
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VII.

The Court should Ignore Defendant Leavitt's Unsubstantiated and Incorrect Claims that Nominal Copayments Threaten the Demonstration Project. The Court should not be persuaded by the federal scare tactics which argue that

Arizona might abandon the demonstration altogether if it has to comply with the Medicaid Act and limit copayments to nominal amounts. 12 Leavitt Memo. at 2, 31. The evidence in the case in no way supports this fear but rather shows that the heightened copayments will not produce significant cost savings, but that the savings that may occur will be generated only denying care outright to people who cannot pay the copayment. See supra. at 18. Moreover, a hallmark of Arizona's demonstration project is its use of managed care organizations (MCOs) to deliver care to recipients. According to

Defendant Rodgers, "Cost sharing works against the notion of managed care.... If you are going to put co-payments and co-insurance on AHCCCS MCO members it will work against the health plans medical management programs... Cost sharing is for States that don't have Medicaid managed care." Ex. 23 to Katz Supp. Dec.; see Pl. Memo. at 20-21. It is inconceivable how these heightened copayments could cause the state to terminate its 25-year-old demonstration project, as the federal defendant postulates. The State itself

17

has never made such a claim. Given the degree to which the state, the health care
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provider industry, and recipient populations depend on the Medicaid program, it is hardly
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likely that the program will be terminated. Rather, the State--as have other states--
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could simply adhere to the provisions of the Medicaid Act. The federal defendant's scare
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tactics cannot provide the excuse for ignoring what the federal law requires. Complying
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Arizona constitution, Article IV, Part I, Section I, Subsections 6(A) and (B), provides that the governor cannot veto or the legislature repeal an initiative approved by a majority of the votes cast. Proposition 204 provided that the legislature could only change financial eligibility Ato a percentage of the federal poverty guidelines that is even more inclusive.@ A.R.S. ' 36-2901.01(A). The initiative also required the state to use funding from the AArizona tobacco litigation settlement fund established by section 362901.02 and . . . other available sources including . . . federal monies,@ to provide benefits for persons covered by the voter initiative. A.R.S. ' 36-2901.01(B).

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with the federal law, in addition to contributing its state share, is the price a state agrees to pay when it decides to participate in Medicaid and obtain federal funds.13 VIII. The Plaintiffs are being Harmed. Defendant Leavitt repeatedly asks the court to rule in his favor because Plaintiffs should feel lucky: Their coverage is not required and, without it, Plaintiffs would have recourse to no medical coverage whatsoever. According to the defendant, the Plaintiffs are not being harmed. Leavitt Memo. at 2, 27, 34. Defendants made this argument when they opposed the preliminary injunction. The Court rejected it then, and it should do so now. Newton-Nations, 316 F. Supp. 2d at 887-88 (finding injury "because the plaintiffs may be denied medical care"); See also Pl. Memo. at 5-16 (describing the harm being experienced by named plaintiffs and class members before the preliminary injunction issued). The entire premise of the federal Secretary's no-harm argument is incorrect. No state has to participate in Medicaid. If a state does not participate, it will not receive federal Medicaid funding for medical assistance provided to low income residents. By opting in, a state decides to obtain significant federal funding to cover this assistance. Congress has placed strings on the federal funding, however. "Once a state enters the program, the state must comply with the Medicaid Act and its implementing regulations." Katie A. ex rel. Ludin v. Los Angeles County, 481 F.3d at 1154 (9th Cir. 2007). IX. Defendant Rodgers' Notices Violated the Medicaid Act. Defendant Rodgers claims he was not required to comply with the notice requirements because there was no reduction in service when the mandatory heightened copayments were imposed. Defendant Rodgers' argument rests on his misstatement of the holding and facts in Becker v. Blum, 464 F. Supp. 152 (S.D.N.Y. 1978). Inexplicably, The Defendant alludes to an argument that a decision in favor of Plaintiffs "could well have the unfortunate effect" of discouraging demonstration projects in other states. Leavitt Memo. at 24. The argument should be ignored altogether because it has absolutely no evidentiary support. Moreover, the argument should also be rejected for its conclusion, namely that the reason that states might be discouraged is because they would have to adhere to the requirements of the federal Medicaid Act. Id.
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Defendant Rodgers claims Becker did not concern copayments under the Medicaid Act, but rather adjustments to cash assistance under the now-repealed AFDC program. Defendant Rodgers is wrong. The statute challenged in Becker "mandates that recipients of medical assistance payments co-pay a portion of the cost of medical appliances and prescription drugs." Id. at 154. Adding to Defendant Rodgers' misunderstanding of the Becker case is his reference to the regulation cited in the case, 45 C.F.R. § 205.10. Defendant Rodgers claims this regulation applies to non-medical assistance hearings. He apparently looked at the current 45 C.F.R. § 205.10 and noted it is not a Medicaid regulation. That is correct. But in 1978, when Becker was decided, that regulation pertained to Medicaid as well as other public assistance programs.14 Finally, Defendant Rodgers compounds his errors by claiming the regulation at issue in Becker did not provide for the situation where the sole issue is a change in law. That also is incorrect. The court specifically rejected the contention that a notice was not required for the imposition of the new copayments. Id. at 157. Defendants' Rodgers' argument is based on a misreading of Becker, and his argument must be rejected. The Becker case is on point and provides the appropriate analysis. Defendant Rodgers failed to mention, let alone distinguish, the other cases Plaintiffs cited. Rather, he cites Lacey v. Cohen, 596 F. Supp. 1010 (E.D. Pa. 1984). In Lacey, the issue was whether a preliminary injunction should issue. Significantly, the copayments at issue in that case were capped at a specific level, and services could not be denied if the copayment was not paid. Id. at 1017. Based on the latter fact, the Lacey court distinguished its decision from Becker v. Toia, 439 F. Supp. 324 (S.D.N.Y. 1977), and did not issue a preliminary injunction. The court went on to address other issues noting "the following discussion is, strictly speaking, unnecessary." Id. at 1022. In this "unnecessary" discussion, the court provided its thoughts on what information was The Becker case is 30 years old, and the regulations were reorganized in 1979. The Medicaid regulations were transferred from 45 C.F.R. § 205.10 et seq. to 42 C.F.R. § 431.10 et seq. See 44 Fed. Reg. 17926 (1979).
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required to be in the notice and whether a hearing was required. The court ultimately decided to "defer resolution of this issue until final hearing." Id. at 1026. Thus, Lacey did not reach the issue of what notice was required and whether a hearing was required and is not relevant. Defendant Rodgers alternatively claims that the challenged copayment notices complied with 42 C.F.R. § 201 et seq. Plaintiffs have already explained why Defendant Rodgers is incorrect. See Pl. Memo. at 29-35. Finally, Defendant Rodgers argues that the constitutionality of the notices has been "rendered moot by the intervening injunction and the changes to the copayment laws found in the DRA." Rodgers Memo. at 6. Then Defendant Rodgers self-servingly states he will follow the law once the court makes its decision. There is no legal authority for Defendant Rodgers' proposition. This Court should determine the legality of the notices provided to the class in this case. CONCLUSION Based upon the foregoing and the pleadings submitted to the Court in this case, the Plaintiffs ask the Court to grant Plaintiffs' Motion for Summary Judgment and to deny in their entirety the Motions for Summary Judgment filed by the Defendants. Respectfully submitted this 23d day of May 2008. ARIZONA CENTER FOR DISABILITY LAW WILLIAM E. MORRIS INSTITUTE FOR JUSTICE NATIONAL HEALTH LAW PROGRAM

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By /s/Ellen Sue Katz Ellen Sue Katz William E. Morris Institute for Justice 202 East McDowell, Suite 257 Phoenix, Arizona 85004

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By /s/Jane Perkins Jane Perkins National Health Law Program 211 North Columbia Street Chapel Hill, North Carolina 27514 Attorneys for Plaintiffs ORIGINAL of the foregoing electronically filed with the Clerk of the Court this 23rd day of May 2008. COPY of the foregoing emailed via Electronic Case Filing System this 23rd day of May 2008 to: Logan Johnston Johnston Law Office PLC One North First Street, Suite 250 Phoenix, Arizona 85004-2359 Attorney for Defendant Rodgers Vesper Mei U. S. Department of Justice Federal Programs Branch Civil Division ­ Room 7316 20 Massachusetts Avenue, N.W. Washington, D.C. 20001 Attorney for Defendant Leavitt COPY of the foregoing mailed this 23rd day of May 2008, to: Honorable Earl H. Carroll United States Senior District Judge United States District Court District of Arizona Sandra Day O'Connor U. S. Courthouse 401 West Washington Street, SPC 56, Suite 621 Phoenix, Arizona 85003-2156

By /s/Ellen Katz
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