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K.C. v. Shipman, No. 12-1575

Decided: May 10, 2013

The Fourth Circuit dismissed an appeal of a preliminary injunction granted by the United States District Court for the Eastern District of North Carolina against the Piedmont Behavioral Healthcare (“PBH”) and the director of PBH.  The preliminary injunction ordered the defendants to reinstate plaintiffs’ Medicaid services and provide the plaintiffs’ with notice and an opportunity for a hearing.  The Fourth Circuit dismissed the appeal primarily because the Secretary of the North Carolina Department of Health and Human Services (“the Secretary” or “the NCDHHS”), a co-defendant in the case decided by the district court, had failed to join in the appeal.

The class plaintiffs in the case were North Carolina Medicaid recipients who suffered from chronic disabilities that could qualify for institutional placement, but the plaintiffs were able to live in certain community environments with the help of certain services.  Plaintiffs received these services through a type of Medicaid known as “managed care Medicaid.”  Under this Medicaid program, the state contracts with a managed care organization (“MCO”) that supervises the delivery of medical services to the beneficiaries.  For this case, the PBH was the MCO for the plaintiffs’ services and had contracted with the NCDHHS to provide such services.  As part of the process, PBH set annual budgets for each beneficiary.  However, due to budget shortfalls and increased demand, PBH designed a new system to develop the annual budgets.  This new system resulted in significant reductions in annual budget amounts for certain Medicaid beneficiaries.  The plaintiffs in this case all received letters from PBH indicating that their annual budget for services would be reduced in graduated steps.   In July 2011, plaintiffs filed a class action against the NCDHHS and PBH.  The plaintiffs sought preliminary and permanent injunctions to restore their services to previous levels and enjoin the defendants from reducing these services without providing notice and hearing as required by the Medicaid statute and the Fourteenth Amendment.  The district court ruled in favor of the plaintiffs on the motion for a preliminary injunction because it found that the defendants had taken “action,” as defined by the Medicaid regulations thus entitling plaintiffs to notice and an appeal.  Defendant PBH and its director filed a timely notice of an interlocutory appeal of the district court’s order.  Critically, NCDHHS and its Secretary did not join in this notice.

The Fourth Circuit rejected PBH’s initial argument that the question before the court was whether the budget letters sent to the plaintiffs constituted agency action as defined by the applicable regulations.  Rather, before reaching that decision, the court addressed whether PBH could even litigate the appeal given that NCDHHS had not decided to appeal.  The Fourth Circuit explained that the relevant provisions of the Medicaid statute and regulations establish that each state must ‘provide for the establishment or designation of a single State agency to administer or supervise the administration’ of its program.  The court identified this principle as the ‘single state agency requirement.’  The requirement, in turn, creates two important values espoused by the rules and regulations:  “an efficiency rationale and an accountability rationale.”  The efficiency rationale ensures that the final decision making authority rests with a single agency and avoids confusion.  The accountability rationale guards against states attempting to evade federal requirements by “passing the buck” to other agencies.  The court generally held that because North Carolina had decided to vest all the administration of its Medicaid program within NCDHHS, then PBH was bound by its decision not to appeal.  The court’s decision was based on two main reasons.  First, the court held that because NCDHHS had contracted with and delegated certain authority to PBH, as it is authorized to do, then PBH became a de facto agent of NCDHHS with respect to the administration of the State’s Medicaid program.  Therefore, pursuant to Federal Rules of Civil Procedure (FRCP) 65(d)(2), an injunction is binding not only on NCDHHS, but also on its ‘agents’ and any one who is in ‘active concert or participation’ with it.  PBH argued that the decision to appeal does not seek to change an “administrative decision” by NCDHHS and therefore the agency relationship did not exist in the litigation context.  The court disagreed and held that litigation decisions are not “categorically precluded” as an “administrative decision” and a decision not to appeal an injunction order is tantamount to a policy decision.  The court also ruled against PBH because, even if PBH was successful on the merits of the case, it would still not receive the redress it sought because it would still be bound by the NCDHHS decision not to appeal.  The court rejected PBH’s argument that a favorable decision on the merits would automatically release NCDHHS from the injunction. Rather, the court held that that basic appellate practice requires a party to actually seek an appeal in order for a judgment against them to be altered in their favor and NCDHHS’s decision not to appeal left the court with no option but to uphold the preliminary injunction against the state agency

Finally, the Fourth Circuit took up a separate issue dealing with NCDHHS’s motion after oral argument seeking leave to file a ‘Memorandum in Response to Questions Raised at Oral Argument.’  The Secretary of NCDHHS requested the court’s consent to clarify its position with respect to its decision not to appeal.  The motion was filed under Rule 2 of the Federal Rules of Appellate Procedure, which allows a court to ‘suspend any provision of the Rules for good cause.’  The court held that no “good cause” existed because NCDHHS did nothing in its motion to show good cause.  The court asserted that NCDHHS’s failure, as a sophisticated state agency, to simply sign a joint notice with PBH before the deadline was inexcusable and it would not grant the leave that NCDHHS requested.

Full Opinion

– John G. Tamasitis