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Allen v. FamilyCare Inc.

United States District Court, D. Oregon, Portland Division

June 1, 2018

PATRICK ALLEN, in his official capacity as director of, OREGON HEALTH AUTHORITY, an agency of the State of Oregon, Plaintiff,
FAMILYCARE, INC., an Oregon nonprofit corporation, Defendant. FAMILYCARE, INC., an Oregon nonprofit corporation, Plaintiff,
OREGON HEALTH AUTHORITY, an agency of the State of Oregon, and PATRICK ALLEN, both individually and in his official capacity as director of the Oregon Health Authority, Defendants.



         This matter comes before me on Oregon Health Authority's Motions to Dismiss [24], [79] and FamilyCare Inc.'s Motion to Dismiss [27].[1]


         Medicaid is a national medical assistance program that provides medical care for low-income and disabled individuals. See Douglas v. Indep. Living Ctr. of S. Cat., Inc., 565 U.S. 606, 610 (2012). It is administered at the federal level by the Department of Health and Human Services' Centers for Medicare & Medicaid Services ("CMS"). Id. Under the program, the CMS provides financial assistance to participating states to reimburse the cost of providing medical care to the states' Medicaid-eligible citizens. Id. To qualify for federal funds, a state must submit to CMS "a state Medicaid plan that details the nature and scope of the state's Medicaid program, " and CMS must approve the plan. Id.; see also 42 U.S.C. § 1396a(a), (b); 42 C.F.R. § 430.10. Participation is voluntary, but once a state chooses to participate, it must comply with the Medicaid Act and its implementing regulations. Wilder v. Va. Hosp. Ass'n, 496 U.S. 498, 502 (1990).

         Oregon's Medicaid Program, known as the Oregon Health Plan, is administered by the Oregon Health Authority ("OHA") and operates with federal approval as a "demonstration project" under Section 1115 of the Social Security Act. ORS 413.032; Compl., Case 3:18-cv-00212 [1] [hereinafter "OHA Complaint"] ¶ 13-14; see 42 U.S.C. § 1315. Section 1115 gives CMS the authority to approve experimental state plans and in turn gives states additional flexibility to design and improve their Medicaid programs for the benefit of their citizens. 42 U.S.C. § 1315; OHA Complaint ¶ 13.

         OHA has implemented one such plan in which it contracts with Coordinated Care Organizations ("CCOs"), which in turn contract with health care providers to provide care. OHA Complaint ¶¶ 11-12. Federal law and regulations require OHA to submit its contracts with CCOs to CMS for approval each year. 42 U.S.C. § 1396b(m)(2)(A)(iii); 42 C.F.R. § 438.4(b). If the contracts are not approved, CMS will withhold federal funding. See 42 U.S.C. § 1396b(m)(2)(A)(iii). Among other requirements, the contract rates must be actuarially sound. Id. State law incorporates these requirements. See ORS 413.071 ("Notwithstanding any other provision of law, federal laws shall govern the administration of federally granted funds."); see also OAR 410-141-3010(14) ("The Authority shall interpret and apply this rule to satisfy federal procurement and contracting requirements in addition to state requirements applicable to contracts with CCOs. The Authority must seek and receive federal approval of CCO contracts.").

         FamilyCare, Inc. is one such CCO. Third Am. Compl., Case 3:18-cv-00296 [1] Ex. 1 at 501-53 [hereinafter "FamilyCare Complaint"] ¶ 11. Operating since 1985, it was the second-largest CCO in Oregon before it shut down early this year. Id. ¶¶ 1, 4.

         In 2014, FamilyCare signed a five-year contract ("the Contract") with OHA to operate as a CCO. Id. ¶ 20. Since at least 2015, FamilyCare has battled with OHA over the per person ("capitation") rates OHA set for FamilyCare. See Id. ¶ 21. Generally, FamilyCare alleges that OHA made actuarial errors that resulted in too-low rates for FamilyCare and other CCOs. Id. ¶¶ 20-23. FamilyCare first filed suit against OHA in May 2015. Id. ¶ 23. There, it alleged that its 2015 rates, which had decreased FamilyCare's capitation by over 10%, were not actuarially sound. Id. ¶¶ 21-25; id, Ex. 2. FamilyCare sued again in 2016. Id. ¶ 28. The parties reached a settlement agreement ("the Settlement Agreement") to resolve both suits. Id. ¶¶ 30-33. Among other provisions, FamilyCare agreed to the lower rates, and OHA gave FamilyCare a $24.8 million settlement credit. Id. ¶ 31.

         But when OHA released its 2017 rates, FamilyCare again disputed the numbers. Id. ¶¶ 38-41. In December 2016, the parties entered into a dispute resolution agreement ("the Dispute Resolution Agreement"), in which FamilyCare accepted the 2017 rates but reserved its right to challenge them. Id. ¶ 39. OHA agreed to openly discuss the actuarial soundness of the rates. Id. ¶ 41. But, according to FamilyCare, OHA did not comply with the Dispute Resolution Agreement. Id. ¶¶ 47-59. FamilyCare alleges that over the course of the next few months, OHA, among other things, instituted a smear campaign ("the Communications Plan") against FamilyCare, in order to portray FamilyCare negatively in the press. Id. ¶ 47. The then-Director of OHA resigned after internal emails that discussed the Communications Plan were published in the news. Id. ¶ 59.

         When she resigned, and Director Patrick Allen took over, OHA was in the process of setting 2018 rates. Id. ¶ 60. FamilyCare and others continued to identify suspected errors to OHA. Id. ¶¶ 61-70. On December 8, 2017, OHA agreed that the errors FamilyCare identified necessitated a redetermination of the rates. Id. ¶ 70. OHA committed to give FamilyCare a preliminary analysis of the necessary redetermination on December 29, the last business day of that year, and the last day FamilyCare could agree the 2018 rates. Id. ¶¶ 70-71. But on December 20, OHA told FamilyCare that it had 24 hours to decide whether to accept or reject the 2018 rates, before OHA had provided the preliminary analysis. Id. ¶¶ 12-15. FamilyCare decided to reject the rates, since it could not afford to accept them as they were. Id. ¶ 74. FamilyCare shut down. Id. ¶ 77.

         FamilyCare sued OHA in Oregon state court. OHA removed the case to federal court. In its Third Amended Complaint (filed before the case was removed), FamilyCare asserts numerous claims against OHA associated with OHA's 2017 and 2018 rate setting process. Claim 1 of the Third Amended Complaint alleges violation under §§ 1983 and 1985. Id. ¶¶ 82-90. Claims 2, 3, 5, and 6 allege breach of the Settlement Agreement. Id. ¶¶ 91-111, 119-128. Claims 4 and 11 asserts violations of the Oregon Administrative Procedure Act and request judicial review of the 2017 and 2018 rates. Id. ¶¶ 112-118, 152-57. Claims 7 and 8 allege violations of the Dispute Resolution Agreement. Id. ¶¶ 129-38. Claim 9 asserts intentional interference with business relations. Id. ¶¶ 139-45. Claim 10 asserts violations of the five-year Contract. Id. ¶¶ 146-51.

         Before FamilyCare's case was removed, OHA moved to dismiss Claims 6, 7, 8, and 9 on state law contract grounds. See Mot. to Dismiss [79]. The motion was fully briefed below, but I asked the parties to revise the briefs to reflect the federal standard for motions to dismiss. Minutes of Proceedings [77]. After the case was removed, OHA moved to dismiss all of FamilyCare's claims on grounds that FamilyCare had no right to actuarially-sound rates; that FamilyCare's state APA claims are preempted; and that qualified immunity bars FamilyCare's claim for damages against Director Allen in his individual capacity. Mot. to Dismiss [24].

         Before it removed FamilyCare's suit, OHA filed its own declaratory judgment action. I granted the parties' motion to consolidate. Order [11]. OHA seeks a declaratory judgment that federal law provides no basis for FamilyCare to privately challenge, under the Oregon APA or otherwise, whether its rates comply with federal Medicare laws. OHA Complaint ¶¶ 31-37.

         FamilyCare moved to dismiss OHA's one claim for relief. Mot. to Dismiss [27].


         When evaluating a motion to dismiss under Rule 12(b)(6), courts are to accept the well-pleaded factual allegations of a complaint as true and construe all inferences in favor of the nonmoving party. Ariz. Students' Ass'n v. Ariz. Bd. of Regents, 824 F.3d 858, 864 (9th Cir. 2016). Dismissal under Rule 12(b)(6) is warranted if a complaint fails "to state a claim to relief that is plausible on its face." BellAtl. Corp. v. Twombly, 550 U.S. 544, 570, (2007). "Conclusory allegations of law ... are insufficient to defeat a motion to dismiss." Lee v. City of Los Angeles, 250 F.3d 668, 679 (9th Cir. 2001), overruled on other grounds by Galbraith v. Cty. Of Santa Clara, 307 F.3d 1119 (9th Cir. 2002).

         A pleading should be dismissed with prejudice if "the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency." Schreiber Distrib. Co. v. Serv-WellFurniture Co., 806F.2d 1393, 1401 (9th Cir. 1986).

         DISCUSSION I. OHA's Motion to Dismiss Claims 1-6, 8, and 10-11.

         In its Motion to Dismiss [24], OHA advances four related arguments. It argues first that I should dismiss FamilyCare's claims 1-6, 8, and 10-11 on the basis that FamilyCare does not have a right to actuarially sound rates. Second, OHA argues that FamilyCare's § 1983 and § 1985 claim (claim 1) against Director Allen in his individual capacity fail because FamilyCare lacks a constitutionally protected interest in goodwill and actuarially sound rates and because any violation was not clearly established. Third, OHA contends that FamilyCare's state APA claims (4 and 11) are preempted. Fourth, OHA contends that FamilyCare's contract claims (claims 2-3, 5-6, 8, and 10) fail because FamilyCare lacks a right to actuarially-sound rates.

         A. Whether FamilyCare lacks a right to actuarially sound rates (claims 1-6, 8, 10-11)

         The claims OHA moves to dismiss under this theory can be grouped into three categories: (a) a claim under § 1983 and § 1985 for due process violations (claim 1); (b) claims under the state APA for violation of state law (claims 4 and 11); and (c) claims under its contracts with OHA, for alleged violations of various contractual provisions (claims 2-3, 5-8, and 10). OHA contends that all of these claims fail because FamilyCare lacks a right to actuarially sound rates.

         But OHA is wrong to suggest that each of these claims necessarily depends on a right to actuarially sound rates. OHA's reliance on Armstrong v. Exceptional Child Center, Inc., 135 S.Ct. 1378 (2015) is misplaced, in part because Armstrong address rights of action, not rights. In Armstrong, plaintiffs were providers of habilitation services to persons covered by Idaho's Medicaid plan. 135 S.Ct. at 1382. They sued two officials in Idaho's Department of Health and Welfare in federal district court, claiming that Idaho violated Medicaid § 30(A) by reimbursing providers of habilitation services at lower rates than § 30(A) permits. Id. The providers asked the court to order the state officers to increase these rates. Affirming the district court, the Ninth Circuit said that the providers had an implied right of action under the Supremacy Clause to seek injunctive relief against the enforcement of or implementation of state legislation. Id. at 1382-83. The Supreme Court disagreed. It held that neither the Supremacy Clause, nor the equitable power of federal courts provided an implied right of action. Id. at 1384-86.

         In its analysis of the second question-whether the suit could proceed in equity-the Court noted that the "power of federal courts of equity to enjoin unlawful executive action is subject to express and implied statutory limitations." Id. at 1385. Accordingly, the Court turned to the statute to determine whether Congress had expressly or impliedly limited the power of federal courts to enjoin noncompliance with the Act. Here, the Court noted two aspects of § 30(A). First, it considered that the "sole remedy Congress provided for a State's failure to comply with Medicaid's requirements ... is the withholding of Medicaid funds by the Secretary of Health and Human Services." Id. The Court explained that this provision "might not, by itself, preclude the availability of equitable relief." Id. So the Court turned to the second aspect, which was the "judicially unadministrable nature of § 30(A)." Id. Section 30(A) required that state plans provide for payments that are "consistent with efficiency, economy, and quality of care." Since Congress "explicitly confer[ed] enforcement of this judgment-laden standard upon the Secretary, " the Court reasoned, it is clear that "Congress wanted to make the agency remedy that it provided exclusive." Id. (internal quotations and citations omitted). A plurality in Armstrong further determined that Medicaid itself did not imply a right of action for plaintiffs to sue for violations of Medicaid section 30(A). Id. at 1387-88.

         Thus, Armstrong is a right-of-action case: it asked whether the Supremacy Clause, the federal court's equitable powers, or the Medicaid Act provided the providers a vehicle to challenge the state officers' failure to comply with the Medicaid Act. Here, there is no question that FamilyCare has a right of action. In fact, it has three: FamilyCare has sued under § 1983, the Oregon APA, and state law contract remedies.

         Importantly, the rights that FamilyCare seeks to enforce through those rights of action are not rights to actuarially-sound rates. Instead, FamilyCare asserts its due process rights, its right to judicial review of illegal agency action, and its contractual rights. Thus, at the initial stages of analysis, none of FamilyCare's claims depends on a right to actuarially sound rates. It would therefore be improper to dismiss the claims at the outset on that basis, even though FamilyCare's claims may ultimately implicate whether FamilyCare has a right to actuarially-sound rates.

         B. Whether qualified immunity bars FamilyCare's § 1983 claim (claim 1)

         FamilyCare's first claim for relief alleges civil rights violations and conspiracy to commit civil rights violations on the theory that OHA deprived and conspired to deprive FamilyCare of its constitutionally-protected property interests without due process. The parties agree that FamilyCare cannot bring a claim for money damages against OHA and Director Allen in his official capacity. Accordingly, FamilyCare seeks equitable relief against Director Allen in his official capacity and $50 million in damages against Director Allen in his individual capacity.

         A § 1983 claim based on procedural due process has three elements: (1) a liberty or property interested protected by the Constitution; (2) a deprivation of the interest by the government; (3) lack of process. Portman v. Cty. of Santa Clara, 995 F.2d 898, 904 (9th Cir. 1993). FamilyCare alleges (1) that it had a constitutionally-protected property interest in its business goodwill and in actuarially sound rates; (2) that Director Allen's decision to give FamilyCare only twenty-four hours to decide whether to agree to the 2018 rates, without telling FamilyCare what those rates would be, and knowing that FamilyCare could not accept the proposed rates, deprived FamilyCare of those rights; and (3) that because FamilyCare was forced to immediately shut down, any post-deprivation process was inadequate.

         Asserting qualified immunity, OHA moves to dismiss only the claim for monetary damages against Director Allen in his individual capacity.

         "Qualified immunity attaches when an official's conduct does not violate clearly established statutory or constitutional rights of which a reasonable person would have known." White v. Pauly, 137 S.Ct. 548, 551 (2017) (per curiam) (alterations and internal quotation marks omitted). Under a two-step process, courts assess whether the state actor's conduct violated a constitutional right when viewed in the light most favorable to the party asserting the injury. Saucier v. Katz, 533 U.S. 194, 201 (2001). If such a violation exists, courts then must determine whether the right violated was clearly established. Id.; see Pearson v. Callahan, 555 U.S. 223, 226 (2009) (noting that courts may address these steps in either order).

         1. Step one: whether Director Allen's conduct violated a constitutional right

         At the first step, OHA argues that FamilyCare's § 1983 claim against Director Allen fails on two independent grounds: (a) because FamilyCare failed to allege a constitutionally-protected property interest and (b) because FamilyCare received all process due.

         a) Whether business goodwill and actuarially sound rates constitute constitutionally-protected property interests

         In order to demonstrate a due process claim, a plaintiff must show that it has a liberty or property interest protected by the Constitution. Board of Regents v. Roth, 408 U.S. 564, 569 (1972). A protected property interest is present where an individual has a reasonable expectation of entitlement deriving from "existing rules or understandings that stem from an independent source such as state law." Id. at 577. "A reasonable expectation of entitlement is determined largely by the language of the statute and the extent to which the entitlement is couched in mandatory terms. "Ass'n of Orange Co. Deputy Sheriffs v. Gates, 716 F.2d 733, 734 (9th Cir.1983).

         i. Goodwill

         The Ninth Circuit has held that reputation is not a constitutionally-protected property interest; thus, to state a protected property interest in goodwill, a plaintiff must allege that it has an interest (stemming from an independent source such as state law) that goes beyond mere injury to business reputation. See WMX Techs., Inc. v. Miller, 197 F.3d 367, 376 (9th Cir. 1999) (en banc). Depending on the contours of state law, then, goodwill can be a protected property interest. See Soranno 's Gasco, Inc. v. Morgan, 874 F.2d 1310, 1315-16 (9th Cir. 1989) (recognizing protected property interest in goodwill as defined by California law).

         FamilyCare does not point to an Oregon statute defining an interest in goodwill, but Oregon cases do discuss the concept. In the context of dividing marital assets, courts in Oregon have defined "goodwill" as the value of a business "over and above the value of its assets, " including the "favor or advantage in the way of custom that a business has acquired beyond the mere value of what it sells." See, e.g., In re Marriage of McDuffy,56 P.3d 449, 453 (Or. Ct. App. 2002). Citing those cases, this Court has held that Oregon law recognizes goodwill as a property interest protected by due process. Speeds Auto Servs. Grp., Inc. v. City of Portland, No. 3:12-CV-738-AC, 2014 WL 2809825, at *9 (D. Or. June 20, 2014); Westwood v. City of Hermiston, 787 F.Supp.2d 1174, 1197 (D. Or. 2011). Affirming Westwood, the Ninth Circuit "agree[d] with the district court that Plaintiffs' procedural due process claim based on the deprivation of their property interest in goodwill failed because the record contains no evidence of Nookie's goodwill." Westwood ...

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