The Supreme Court has just heard oral argument in a case that raises the issue of whether Medicaid providers and recipients can challenge state decisions to cut Medicaid rates. The courts have nearly unanimously held that the federal Medicaid statute itself creates no right for private parties to bring lawsuits about Medicaid rates. Maxwell-Jolly v. Independent Living Center of Southern California, Inc., argued before the Supreme Court on October 3, concerns the question of whether such plaintiffs may nonetheless enter the court through a back door, by filing a suit directly under the Supremacy Clause of the federal constitution, and arguing that the Medicaid rate cuts are “preempted” by federal law because they are inconsistent with the Medicaid statute.

One result of the California state fiscal crisis was a state statute imposing an across-the-board 10% reduction in Medicaid reimbursement rates for certain services. That reduction went into effect on July 1, 2008 (and was repealed as of Feb. 28, 2009).

Shortly after its enactment, Medicaid providers, recipients and advocates filed the Maxwell-Jolly lawsuit. They contended that the state statute reducing Medicaid rates violated a provision in the federal Medicaid statute, 42 U.S.C. sec. 1396a(a)(30)(A), that requires states participating in Medicaid to establish Medicaid reimbursement rates “sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population …” The Maxwell-Jolly plaintiffs argued that this statute required California, before enacting a rate reduction, to study the effect of the reduction on the availability of services, among other things.

The federal district court refused to enjoin the new Medicaid rates, ruling that the federal Medicaid statute could not be enforced by private litigation. (A Massachusetts state court judge made similar rulings in December 2010 in two cases in which hospitals challenged state Medicaid reimbursement rates.) But the Ninth Circuit Court of Appeals reversed, ruling that the Medicaid recipients and providers could assert a direct constitutional claim that California had violated the Supremacy Clause.

California sought review by the Supreme Court, which asked the federal government for its view about whether the Court should take the case. In response, the United States Department of Justice opined that the Court should not, because the Department of Health and Human Services is considering issuing more detailed rules about how a state must go about setting Medicaid rates. Eventually the Supreme Court accepted the case for review, but said that it will consider only the following question: “Whether Medicaid recipients and providers may maintain a cause of action under the Supremacy Clause to enforce sec. 1396(a)(30)(A) by asserting that the provision preempts a state law reduction reimbursement rates?”

This legal issue is complicated by earlier Supreme Court rulings. While the Supreme Court has never directly stated that a plaintiff can bring a direct claim under the Supremacy Clause that any state law is preempted by a federal law, it has occasionally reached the merits of such Supremacy Clause claims, thereby implicitly suggesting that a plaintiff can bring the type of suit brought by the Medicaid providers and recipients in Maxwell-Jolly. But if the Court says that out loud, the result might be an avalanche of private litigation challenging Medicaid rate reductions. Indeed, in seeking Supreme Court review in Maxwell-Jolly, California pointed the Supreme Court to 30 similar lawsuits around the country inspired by the Ninth Circuit’s ruling allowing the Maxwell-Jolly suit to go forward. And such a decision would likely be felt far beyond Medicaid rate-setting, as plaintiffs unhappy with any state decision begin searching for a federal statute that conflicts with, and therefore “preempts,” what the state has done.