State of California by and through Attorney General Xavier Becerra v. Azar

Background

States participating in Medicaid may arrange for home care workers to care for Medicaid patients in their homes. California and other states used payroll systems that deducted taxes and voluntary amounts—such as health-insurance premiums and union dues—from workers’ paychecks before distributing the remaining wages or reimbursement.

The dispute concerned the Medicaid statute’s anti-reassignment provision, 42 U.S.C. § 1396a(a)(32). That provision generally addresses payments made to third parties under an assignment, power of attorney, or similar arrangement. The court explained that Congress adopted the provision to address “factoring,” in which health care providers transferred reimbursement claims to companies that submitted the claims and collected the payments.

The federal Centers for Medicare and Medicaid Services (CMS) had adopted a 2014 regulation stating that the anti-reassignment provision did not prohibit certain payments to third parties for benefits such as health insurance and skills training. In 2018, CMS repealed that provision, asserting that the Medicaid statute clearly prohibited the payroll practices and that CMS therefore lacked authority to allow them.

California and other states sued under the Administrative Procedure Act. Individual home care workers and unions intervened as plaintiffs. The intervenors also asserted equal protection and First Amendment claims, alleging that the policy was motivated by hostility toward unions and intended to suppress the labor movement’s political activities.

Standing and Statutory Interpretation

CMS moved to dismiss on the ground that the plaintiffs lacked standing, meaning a legally sufficient injury giving them the right to sue. The court rejected that argument. It found that the states showed they would face costs from changing their payroll systems and harm to their Medicaid programs if forced to end the practices. The court also found that the individual workers faced time and financial injuries from enforcement of the policy. It concluded that the unions did not need to establish separate standing because they sought relief identical to that sought by parties who had standing.

The court held that the anti-reassignment provision did not clearly prohibit the payroll practices. The phrase “under an assignment or power of attorney or otherwise” could reasonably be read as referring to payment arrangements similar to assignments or powers of attorney, rather than every payment involving a third party. The court found that voluntary payroll deductions were materially different from arrangements in which a third party acquired or pursued Medicaid reimbursement claims.

The statutory exceptions also supported the plaintiffs’ interpretation because they generally concerned third parties submitting reimbursement claims directly to the state. The legislative history likewise showed that Congress was primarily addressing factoring and attempts to use powers of attorney to evade the ban on factoring. The court further reasoned that the plaintiffs’ interpretation better fit Medicaid’s purpose of helping people obtain necessary medical care and maintain independence or self-care.

Administrative Procedure Act Ruling and Remedy

The Administrative Procedure Act requires a court to set aside agency action that is arbitrary, capricious, an abuse of discretion, or otherwise contrary to law. The court determined that CMS had adopted the ban on an erroneous legal premise: CMS believed the statute unequivocally required the ban, but the statute was at least ambiguous and might reasonably allow the payroll practices.

The court granted summary judgment to the states and intervenors on their Administrative Procedure Act claim. It vacated CMS’s 2018 rule and remanded the issue to CMS for further consideration. The court explained that CMS should have the first opportunity to interpret the complicated Medicaid statute and decide whether to maintain its position after considering the statutory ambiguity and competing interests.

The court rejected CMS’s request to limit the vacatur to the parties in the case and rejected its request to remand without vacating the rule. It found that CMS’s error was serious and that vacatur would preserve the longstanding status quo because CMS had not yet enforced the new policy against states that continued the payroll practices.

Other Motions and Claims

The court denied CMS’s motion to dismiss its Administrative Procedure Act claim and denied CMS’s motion for summary judgment. It denied as moot CMS’s motion to dismiss the intervenors’ equal protection and First Amendment claims, meaning the court did not need to decide those claims at that stage. The court also denied as moot the intervenors’ motion to compel, denied CMS’s motion to strike, and granted the motions to file amicus curiae, or friend-of-the-court, briefs.