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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

DARTMOUTH-HITCHCOCK CLINIC AND : MARY HITCHCOCK MEMORIAL HOSPITAL, : D/B/A DARTMOUTH-HITCHCOCK, et al., : : Plaintiffs, : : v. : : NICHOLAS A. TOUMPAS, in his official : capacity as Commissioner of the New Hampshire : Department of Health and Human Services, : : Defendant. :

CIVIL ACTION No.

PLAINTIFFS MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR PRELIMINARY INJUNCTION The plaintiffs, through their attorneys, respectfully submit this memorandum of law in support of their motion for preliminary injunction. I. PRELIMINARY STATEMENT

Over the coming weeks, some of New Hampshires neediest citizens will no longer be able to access basic healthcare services. Those citizens are recipients under the States Medicaid program, the federal-state partnership designed to assure that the poor, elderly, and disabled have adequate access to medical care and services. Since the onset of the economic recession in 2008, the State has made a series of purely budget-driven decisions with manifest disregard for applicable federal law that have dramatically reduced the rates hospitals are paid for caring for these patients. Those reductions were made to rates that were already the lowest in the country, and that reimbursed hospitals for less than half their actual costs incurred in caring for patients. The States recently enacted budget rendered an already tenuous situation completely

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unsustainable. Not only will the previously enacted reimbursement rate reductions remain in place, but the State has eliminated the hold-harmless feature of a two-decades-old tax on hospitals that has been used to leverage $1.8 billion in federal Medicaid dollars for diversion to the States general fund. The 5.5% tax on hospital services, one of the highest Medicaid provider taxes in the country, will remain in place; half of the revenue will go to the general fund, and the other half will be used to sustain the States Medicaid program. This old tax as currently administered is having new and financially devastating impacts on Provider Plaintiffs and ruinous effects on the Medicaid-related programs they provide. The Medicaid program was not intended to bring financial harm to institutions that deliver medical care and services to those in need. The net effect of these decisions is forcing hospitals to cut services and reduce staff. These decisions place patients at risk, and threaten access to medical care and services for New Hampshires poor, elderly and disabled. Ultimately, these decisions will irrevocably alter the landscape of New Hampshires entire health care community. The Medicaid Act is, by design, flexible and Congress has given the states latitude in implementing the program. That latitude, however, is not without limits. In general terms, the Medicaid Act requires that states adhere to basic procedural requirements including notice and an opportunity to be heard in setting reimbursement rates. The Act also requires that state actions are consistent with Congresss substantive objective: ensuring Medicaid beneficiaries have access to healthcare. These standards are subject to judicial enforcement. The plaintiffs in this case ten entities comprising New Hampshires largest providers of hospital-based and related Medicaid

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services and a Medicaid patient seek injunctive relief to prevent the prospective enforcement by the Commission of the New Hampshire Department of Health and Human Services of enactments that violate the Medicaid Acts procedural and substantive requirements. As argued in detail below, because the record is irrefutable that the State failed to follow well-established procedural norms and because the evidence is overwhelming that these actions will subvert the Medicaid Acts substantive requirements, the plaintiffs are likely to succeed on the merits of their claim. The threat of irreparable harm to the plaintiffs and the public is real and immediate, and the balance of the equities cannot favor enforcement of unlawful rate decisions. Moreover, the public has a strong interest in a financially stable hospital system. Accordingly, and for the reasons set forth in detail below, the Court should grant the plaintiffs motion for preliminary injunction. II. STATEMENT OF FACTS AND STATUTORY BACKGROUND

The plaintiff hospitals, healthcare systems, and components (Provider Plaintiffs) provide inpatient and outpatient care and related healthcare services to Medicaid-eligible beneficiaries. See Declaration of Kevin OLeary (OLeary Declaration) 6-9; Declaration of Robin F. Kilfeather-Mackey (Kilfeather-Mackey Declaration) 6-17; Declaration of Michael Rose (Rose Declaration) 7-16; Declaration of Peter E. Walcek (Walcek Declaration) 613; Declaration of Richard J. Plamondon (Plamondon Declaration) 7-13; Declaration of Edward L. Dudley (Dudley Declaration) 6-11; Declaration of John A. Marzinzik (Marzinzik Declaration) 7-14; Declaration of Richard A. Elwell (Elwell Declaration) 7-17; Declaration of Jill I. Batty (Batty Declaration) 6-12; Declaration of Henry Lipman

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(Lipman Declaration) 7-20.1 They are integrated healthcare delivery systems with acutecare hospitals providing inpatient and outpatient services as well as healthcare services through employed physicians in multi-specialty practices. See id. John Doe (Patient Plaintiff) is a Medicaid-eligible beneficiary who requires ongoing Medicaid care and services. See Declaration of John Doe filed under seal (Doe Declaration) at 6, 14. Defendant Nicholas A. Toumpas is the Commissioner of the New Hampshire Department of Health and Human Services (DHHS), the state agency charged with administering the States Medicaid program. See Complaint at 54; 42 U.S.C. 1396a(a)(5). Commissioner Toumpas is responsible for implementing and enforcing legislation and regulation relating to the States Medicaid program, including the legislation and regulation at issue in this case. See Complaint at 54; 42 U.S.C. 1396a(a)(5). A. The Medicaid Program

Congress created the Medicaid program in 1965 by adding Title XIX to the Social Security Act. Pharm. Research & Mfrs. of Am. v. Walsh, 538 U.S. 644, 650 (2003). Medicaid is a cooperative federal-state program, under which the Federal Government provides financial assistance to States so that they may furnish medical care to needy individuals. Wilder v. Virginia Hosp. Assn, 496 U.S. 498, 502 (1990). Although participation in the program is voluntary, participating States must comply with certain requirements imposed by the Medicaid Act . . . and regulations promulgated by the Secretary of Health and Human Services . . . . Id.

The OLeary Declaration, Kilfeather-Mackey Declaration, Rose Declaration, Walcek Declaration, Plamondon Declaration, Dudley Declaration, Marzinzik Declaration, Elwell Declaration, Batty Declaration, and the Lipman Declaration are incorporated herein by reference. In the interests of judicial economy and brevity, this Memorandum shall generally cite to the OLeary Declaration as representative of the Provider Plaintiffs Declarations, unless citation to a specific declaration is necessary. Plaintiffs are moving to seal portions of the Walcek, Plamondon, and Marzinzik Declarations. Redacted versions of the Walcek, Plamondon, and Marzinzik Declarations are submitted herewith.
1

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The primary purpose of the Medicaid Act is to assist the poor, elderly, and disabled in obtaining medical care. Long Term Care Pharm. Alliance v. Ferguson, 362 F.3d 50, 75 (1st Cir. 2004); see also Schweiker v. Hogan, 457 U.S. 569, 590 (1982) (recognizing that Congress enacted the Mediciaid Act to assist the most needy in the country); Pharm. Research & Mfrs. of Am. v. Walsh, 249 F.3d 66, 75 (1st Cir. 2001) (The primary purpose of Medicaid is to enable states to provide medical services to those whose income and resources are insufficient to meet the costs of necessary medical services.) (internal quotations omitted), affd 538 U.S. 644 (2003). To effectuate this purpose, each state must create a state plan for medical assistance and submit it to the Centers for Medicare & Medicaid Services (CMS), a subdivision of the United States Department of Health and Human Services (HHS), for approval. See Wilder, 496 U.S. at 502; Alaska Dept of Health & Social Servs., 424 F.3d 931, 934 (9th Cir. 2005) (indicating that the Secretary of HHS has delegated the authority to review and approve Medicaid state plans to CMS). The state plan is required to establish, among other things, a scheme for reimbursing health care providers for the medical services provided to needy individuals. Wilder, 496 U.S. at 502. CMS reviews the state plan for compliance with the Medicaid Act and its implementing regulations. 42 C.F.R. 430.10. The state plan must be amended to reflect changes in federal law or policy or material changes in state law, organization, policy, or operation of the state Medicaid program, and the amendments also must be submitted for [CMS] approval. Oregon Assn of Homes for Aging, Inc. v. Oregon by & through Dept of Human Resources, 5 F.3d 1239, 1241 (9th Cir. 1993) (citing 42 C.F.R. 430.12(c)). A law that effects a change in payment methods or standards without [CMS] approval is invalid. Id.

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Two provisions of the Medicaid Act are principally at issue in this case: 42 U.S.C. 1396a(a)(13)(A) (Section 13(A)) and 1396a(a)(30)(A) (Section 30(A)). Section 13(A) requires a state plan to provide: for a public process for determination of rates of payment under the plan for hospital services, nursing facility services, and services of intermediate care facilities for the mentally retarded under which (i) proposed rates, the methodologies underlying the establishment of such rates, and justifications for the proposed rates are published, (ii) providers, beneficiaries and their representatives, and other concerned State residents are given a reasonable opportunity for review and comment on the proposed rates, methodologies, and justifications, (iii) final rates, the methodologies underlying the establishment of such rates, and justifications for such final rates are published, and (iv) in the case of hospitals, such rates take into account (in a manner consistent with section 1396r-4 of this title) the situation of hospitals which serve a disproportionate number of low-income patients with special needs . . . . In order to comply with this section, a state must also comply with 42 C.F.R. 447.205, which requires public notice of any significant proposed change in the methods and standards for setting payment rates for Medicaid services. The content of the notice must: (1) [d]escribe the proposed change in methods and standards; (2) [g]ive an estimate of any expected increase or decrease in annual aggregate expenditures; (3) [e]xplain why the agency is changing its methods and standards; (4) [i]dentify a local agency in each county (such as the social services agency or health department) where copies of the proposed changes are available for public review; (5) [g]ive an address where written comments may be sent and reviewed by the public; and

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(6) [i]f there are public hearings, give the location, date and time for hearings or tell how this information may be obtained. 42 C.F.R. 447.205(c). The notice must then: (1) [b]e published before the proposed effective date of the change; and (2) [a]ppear as a public announcement in one of the following publications: (i) [a] State register similar to the Federal Register; (ii) [t]he newspaper of widest circulation in each city with a population of 50,000 or more; or (iii) [t]he newspaper of widest circulation in the State, if there is no city with a population of 50,000 or more. 42 C.F.R. 447.205(d). Section 30(A) is also implicated in this case. It provides, in relevant part, that: A State plan for medical assistance must . . . provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan (including but not limited to utilization review plans as provided for in section 1396b(i)(4) of this title) as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments are consistent with efficiency, economy, and quality of care and are 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 in the geographic area; . . . . Significantly, CMS has proposed to amend 42 C.F.R. 447.203-.204, the regulations implementing Section 30(A), to require states to consider the following before changing their rate-setting methodology: (1) the extent to which enrollee needs are met; (2) the availability of care and providers; (3) changes in beneficiary utilization of covered services; and (4) input from beneficiaries and affected stakeholders in determining the extent of beneficiary

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access to the affected services and the impact the proposed rate change will have, if any, on continued service access.2 Under the Medicaid Act, states are also encouraged to make upper payment limit (UPL) payments to help them comply with the requirements of Section 30(A). UPL payments allow states to reimburse hospitals in an amount equal to the payment the Medicare Program would have paid for the same service. United States ex rel. Black v. Health Hosp. Corp. of Marion County, RDB-08-0390, slip op. at 4 (D. Md. March 28, 2011); see Alaska Dept of Health & Social Servs. v. Ctrs. for Medicare & Medicaid Servs., 424 F.3d 931, 935-36 (9th Cir. 2005). The UPL concept has not always been part of the Medicaid program. Ashley Cty. Med. Ctr. v. Thompson, 205 F. Supp. 2d 1026, 1032 n.7 (E.D. Ark. 2002). Prior to 1981, Medicaid employed a reasonable cost methodology of reimbursing hospitals for their costs of serving Medicaid beneficiaries. Id. In 1980 and 1981, however, Congress amended the Medicaid statute to allow States greater flexibility in establishing reimbursement methodologies. Id. (citing Omnibus Budget Reconciliation Act of 1980, Pub.L. 96-499 94 Stat. 2599; Omnibus Budget Reconciliation Act of 1981, Pub.L. 97-35, 2173, 95 Stat. 357). In recognition of this greater flexibility, [HHS] enacted regulations setting upper payment limits on reimbursement in 1981. Id. (citing Medicaid Program: Payment for Long-Term Care Facility Services and Inpatient Hospital Services, 46 Fed. Reg. 47964 (Sept. 30, 1981); 48 Fed.Reg. 56046 (Dec. 19, 1983)). The purpose of the UPLs is to ensure that payments are consistent with efficiency, economy, and quality of care, as mandated by 42 U.S.C. 1396a(a)(30)(A). Id. In other words, UPL payments are designed to help states set reimbursement rates that meet the

A copy of CMSs proposed rules appears as Exhibit A to the Declaration of Emily P. Feyrer, Esquire (Feyrer Declaration).

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requirements of Section 30(A) and to fill in the gap between the price Medicaid would pay for a given service and the price Medicare would pay. B. Medicaids Disproportionate Share Hospital Program

The Omnibus Budget Reconciliation Act of 1981 (OBRA) established the disproportionate share hospital (DSH) program. Ashley Cty. Med. Ctr., 205 F. Supp. at 1031. In passing the OBRA, the United States House of Representatives Committee on the Budget recognized the economic hardships the states faced in 1981. The Committee further recognized that states required flexibility to improve Medicaid reimbursement mechanisms. On the other hand, the Committee did not want such policies to result in arbitrary and unduly low reimbursement levels for hospital services. H.R. Rep. No. 97-158, at 294. For example, the Committee did not intend that the only facility providing a specific type of treatment, such as treatment for spinal cord injury, not be available to Medicaid beneficiaries because the States payment level is inadequate to meet the basic cost of care in that facility. Id. The Committee stated: In several States, a significant differential exists between the Medicaid payment level for physician services. As a result, many physicians now refuse to treat Medicaid patients. The Committee is very concerned that a similar situation not develop with respect to hospital care. Id. Moreover, the Committee was concerned about the impact of the States[] payment practices on facilities that treat a large volume of Medicaid patients and patients who are not covered by other third party payors. The Committee intends that payment for inpatient services take into account the special costs of hospitals whose patient populations are disproportionately composed of such individuals. Id. The Committee directed that it intends States to take into account continuity of care for Medicaid patients and recognize the need to assure access to inpatient services in those facilities where a patients physician has admitting privileges. The Committee is also concerned that

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hospitals with large outpatient departments be reimbursed at levels for inpatient care that permit active participation in the treatment of Medicaid beneficiaries. Id. at 295. Consequently, the OBRA directed states to set Medicaid payment rates that take into account the situation of hospitals which serve a disproportionate number of low-income patients with special needs. Ashley Cty. Med. Ctr., 205 F. Supp. at 1031 (quoting 42 U.S.C. 1396a(a)(13)(A)(iv)). The legislation also created so-called DSH payments. DSH payments are designed to assist hospitals [that serve a large number of low-income Medicaid and uninsured patients] in making up for high levels of uncompensated care and draw federal matching dollars. Id. In this way, the OBRA and the DSH program operate to preserve access to quality health care and services for low-income patients and to improve the financial stability of disproportionate share hospitals. Because the states are responsible for funding a share of DSH payments, Congress assumed their generosity to DSH hospitals would be tempered by fiscal realities. Id. Thus, DSH payments originally had no ceiling and were not subject to the upper payment limits that applied to other Medicaid payments. Id. (citing 42 C.F.R. 447.272(c)(2)). This flexibility, however, resulted in what has been referred to as a loophole in the DSH Program that allowed states to increase their receipt of federal matching funds without a corresponding increase in state expenditures. The loophole typically operated as follows. A state would pay an excessively high DSH payment to a hospital. This would fix the amount of the federal matching contribution. But the hospital would then transfer back a portion of the DSH payment to the state through donations, taxes, or some type of intergovernmental transfer. The result was that the state could draw additional federal matching funds without having to contribute additional state money towards the DSH payments. Thus, states could make virtually unlimited DSH payments and, in the process, earn [federal matching] dollars while requiring DSH hospitals to transfer back to the states most of the DSH payments that the state had provided.

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Id. at 1032. Congress addressed this problem in the Medicaid Voluntary Contribution and ProviderSpecific Tax Amendments of 1991. Protestant Meml Med. Ctr. v. Maram, 471 F.3d 724, 726 (7th Cir. 2006). Through this legislation, Congress instructed the Secretary to reduce federal matching funds to a state by the amount of any revenue received from a health care related tax that hold[s] harmless the health care provider upon whom the tax falls. Id. (quoting 42 U.S.C. 1396b(w)(1)(A)(iii)). States still may fund their share of Medicaid expenses by assessing taxes on health care related items, services or providers, as long as the tax is uniform, i.e., broad-based, and the tax contains no hold harmless provision. Id. (quoting 42 U.S.C. 1396b(w)(1)(A)(ii)(iii) & (4)). The Medicaid Act requires that each state include in its state plan a description of the criteria the state will use to designate hospitals as DSH hospitals, as well as a definition of the formulas used to calculate DSH payments to those hospitals. The Medicaid Act further requires that a states definition of a qualifying DSH hospital include all hospitals that meet the following statutory criteria: (i) a Medicaid inpatient utilization rate in excess of one standard deviation or more above the mean for all hospitals in the state; or (ii) a low-income utilization rate exceeding 25%. 42 U.S.C. 1396r-4(b)(1). Moreover, all designated DSH hospitals must have a Medicaid utilization rate of at least 1%. 42 U.S.C. 1396r-4(d)(3). C. New Hampshires Medicaid Program

New Hampshire participates in the Medicaid program and has designated the New Hampshire Department of Health and Human Services (DHHS) as the single State agency

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responsible for administering it. Complaint at 88; 42 U.S.C. 1396a(a)(5). In order to participate in New Hampshires Medicaid program, providers must complete an enrollment application and sign a provider agreement with DHHS. See Complaint at 91. Under the current state plan, DHHS represents that it has in place a public process which complies with the requirements of Section [1396a](a)(13)(A) of the Social Security Act, but fails to describe the process in any detail. See Feyrer Declaration at Exhibit B (State Plan, Attachment 4.19 A, Page 6, Inpatient Hosp. Servs., Public Process for Determination of Rates). D. New Hampshire Hospital Reimbursement Rate Reductions

In 2005, the New Hampshire legislature amended RSA 126-A:3, VII(a), to allow DHHS to reduce Medicaid reimbursement rates for hospital outpatient services solely for budgetary reasons. RSA 126-A:3, VII(a), provides, in relevant part: If expenditures are projected to exceed the annual appropriation, the department may recommend rate reduction for providers to offset the amount of any such deficit. The department of health and human services shall submit to the legislative fiscal committee and to the finance committees of the house and the senate, the rates that it proposes to pay for hospital outpatient services. The rates shall be subject to the prior approval of the legislative fiscal committee.3 (emphasis added). Notably, by its terms, RSA 126-A:3, VII(a) does not afford hospitals or recipients a public notice and comment process as required by Section 13(A), 42 C.F.R. 447.205, and the state plan before the State alters its reimbursement rates or changes its reimbursement

The Fiscal Committee of the General Court, also known as the legislative fiscal committee, is an administrative committee [comprised of legislators and] charged with administrative duties in connection with the fiscal policies of the state. Opinion of the Justices, 110 N.H. 359, 364-65 (1970).

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methodology.4 In the face of significant budget difficulties, the State invoked this procedure in the fall of 2008 to reduce the outpatient reimbursement rate by 33.48%. Specifically, in a letter dated October 30, 2008, DHHS wrote to the legislative fiscal committee seeking to revise the [Medicaid] reimbursement rate paid to non-critical access hospitals for outpatient services from 81.24 percent of Medicare allowable costs to 54.04 percent of Medicare allowable costs effective retroactive to July 1, 2008. See Feyrer Declaration at Exhibit C (October 30, 2008 letter from Nicholas A. Toumpas to Representative Marjorie K. Smith (October 30, 2008 Letter)). This rate reduction was subsequently approved by the legislative fiscal committee on November 21, 2008. See Feyrer Declaration at Exhibit D (Minutes, Fiscal Committee of the General Court, November 21, 2008, (November 21, 2008 Minutes) at 4). The reason for the rate cut was solely budgetary. DHHS needed to bring expected expenditures in line with appropriations for SFY 2009.5 See Feyrer Declaration at Exhibit C (October 30, 2008 Letter at 2). DHHS stated that the budget [was] not adequate to meet projected outpatient hospital expenditures for three primary reasons. Id. First, Medicaid enrollment and utilization was higher than was assumed when the budget had been developed. See id. Second, expenditures had grown due to an increase in the number of Medicaid patients
4

Every two years, DHHS must review the States Medicaid reimbursement rates based on: (a) certain benchmarks; (b) information and testimony gathered from a biennial public hearing, at which providers, beneficiaries, and their representatives, and other concerned citizens are given a reasonable opportunity to review and comment on the rates, rate setting methodologies, and justifications; and (c) applicable state and federal law and regulations relative to specific Medicaid services. RSA 126-A:18-B. This biennial benchmark review is insufficient to satisfy the States obligation under Section 13(A)(ii) to give providers, beneficiaries and their representatives, and other concerned State residents a reasonable opportunity for review and comment on . . . proposed rates, methodologies, and justifications. Instead, RSA 126-A:18-B codifies a shoot-first-ask-questionslater approach that allows the State to enact reimbursement rate reductions and methodology changes without notice or a reasonable opportunity to comment on the proposed changes. Such a process is inconsistent and in conflict with the plain language of Section 13(A), which necessarily preempts any conflicting state law. See Pharm. Research & Mfrs. of Am. v. Concannon, 249 F.3d 66, 74-75 (1st Cir. 2001); Mission Hosp. Regional Med. Ctr. v. Shewry, 168 Cal. App. 4th 460, 488-89 (Cal. App. Ct. 3d Dist. 2008) (holding that Section 13(A) has preemptive force).
5

New Hampshires state fiscal year (SFY) begins on July 1.

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using outpatient services. See id. Finally, cost settlement payments were $4.5 million higher than those made in SFY 2008. See id. In testimony before the legislative fiscal committee, Kathleen A. Dunn, DHHSs Medicaid Director, explained that DHHSs methodology behind the rate reduction was purely budget driven: How [DHHS] arrived at the [54.4 percent of Medicare allowable costs figure] was looking at what [DHHS] current outpatient reimbursement is which is based on cost based reimbursement and at the time it was 81.24 percent. And [DHHS] projected out utilization, our growing caseload, and predicted to the end of the year what it was [DHHS] was expecting to have to expend. And based upon that, in order to stay within the budget appropriated to [DHHS], [DHHS] needed to reduce the reimbursement down to 54 percent. See Feyrer Declaration at Exhibit E (Transcript, November 21, 2008 Hearing, Joint Fiscal Committee (November 21, 2008 Transcript) at 38). During testimony on DHHSs proposal, the following exchange occurred: SEN. KELLY: . . . you made a decision on that particular amount, that percentage, so that you would balance the budget on that line item. MS. DUNN: That is correct. Id. Ms. Dunn further testified: So when you are looking at the need to balance your budget based on what youre appropriated by the legislature, the tool that I have before me at the moment is to reduce rates in order to come into compliance with state law. Id. at 40. The legislative fiscal committee subsequently approved the rate change for budgetary reasons without providing notice and a reasonable opportunity for hospitals and Medicaid recipients to comment on the rate reduction, as required under Section 13(A)(ii), 42 C.F.R. 447.205, and the state plan. See, e.g., OLeary Declaration 16.

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The State effected another rate reduction that failed to comply with federal law on November 21, 2008, when Governor John Lynch issued Executive Order 2008-10.6 See Feyrer Declaration at Exhibit F (Executive Order 2008-10). Executive Order 2008-10 effected, among other things, a 10% rate reduction in Medicaid inpatient hospital reimbursement rates for noncritical access hospitals by reducing the price point for diagnostic-related groups (DRGs) from $3,147.61 to $2,832.85, effective December 1, 2008. Complaint at 114-115; see also Feyrer Declaration at Exhibit F (Executive Order 2008-10 at 2, 9-10). Under the state plan, the price point is the building block to determine reimbursement rates for a particular inpatient service. See Complaint at 116. This 10% rate reduction was presented to the legislative fiscal committee on November 21, 2008, the same day the Governor issued it. See Feyrer Declaration at Exhibit D (November 21, 2008 Minutes at 1). At the hearing, Governor Lynch stated: We are proposing reducing certain provider rates on December 1st and reducing inpatient hospital rates, except for critical access hospitals. These are not easy decisions and I recognize that, but they are necessary to protect other important services and to ensure that we end the year with a balanced budget. Complaint at 120; see also Feyrer Declaration at Exhibit E (November 21, 2008 Transcript at 3). At the committees hearing, the following colloquy took place between Representative Neal Kurk and Kathleen Dunn: REP. KURK: . . . This statutory requirement in the budget that if there isnt enough money to pay the bill you cutback on the rate, its whats another version of what we call budget neutrality. Is
6

By its terms, Executive Order 2008-10 was issued pursuant to RSA 9:16-b. That statute provides: Notwithstanding any other provision of law, the governor may, with the prior approval of the fiscal committee, order reductions in any or all expenditure classes within any or all departments . . . if he determines at any time during the fiscal year that . . . (a) Projected state revenues will be insufficient to maintain a balanced budget and the likelihood of a serious deficit exists . . . . This authoritywhen exercised to reduce Medicaid reimbursement without the federally proscribed process and procedureis also in conflict with the requirements of Section 13(A) and preempted.

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that something that requires modification to the State Plan and if so, has that been obtained? MS. DUNN: It does not require State Plan amendment.7 Id. (November 21, 2008 Transcript at 47). In implementing the 10% inpatient rate reduction, the State failed to provide hospitals and Medicaid recipients with notice and a reasonable opportunity to comment on the proposed rate reduction as required by Section 13(A)(ii), 42 C.F.R. 447.205, and the state plan. See, e.g., OLeary Declaration 16. The legislature assumed and carried forward the 10% inpatient and 33.48% outpatient rate reductions in 2009, covering SFY 2010-2011, and in 2011, covering SFY 2012-2013. See, e.g., OLeary Declaration 21.8 Interim payments reflecting the reduced outpatient rates were made to hospitals, subject to a final settlement process. Most hospitals have not yet received final settlements for SFY 2009 or 2010. See id.; see also Complaint at 126. Additionally, in 2010, DHHS suspended all outpatient settlement payments for SFY 2010-2011 and extended this policy into SFY 2012-2013. See, e.g., OLeary Declaration at 18, 21. These suspensions constitute further rate reductions for Provider Plaintiffs. See id. at 21; see also Rose
7

Ms. Dunns statement is at odds with holdings by numerous courts and would provide a State with no federal oversight and accountability. Specifically, courts have concluded that a reduction in the reimbursement rate can constitute a significant or material change to the reimbursement methodology that requires a state to amend its state plan. See, e.g., Wis. Hosp. Assn v. Reivitz, 820 F.2d 863 (7th Cir. 1987) (equating the terms significant and material and finding 1.8% reduction in reimbursements for Medicaid services to be significant and material under the circumstances requiring a state plan amendment); Exeter Meml Hosp. Assn v. Belshe, 943 F. Supp. 1239, 1243 (E.D. Cal. 1996) (observing that allowing the state to change the reimbursement rate prior to receiving CMSs approval would be inconsistent with the function of the State Plan, the approval process of State plans and amendments, and the directive that the States must pay reimbursement according to the methods specified in an approved State Plan.); Mission Hosp. Regional Med. Ctr., 168 Cal. App. 4th at 488-89 (finding a 5% rate reduction invalid because it was passed by the legislature without any effort by the state to comply with the notice provisions of part 447.205 and without amending the state plan to reflect a material change in state law.); see also Visiting Nurse Assn of N. Shore, Inc. v. Bullen, 93 F.3d 997, 1000 (1st Cir. 1996) overruled on other grounds by Long Term Care Pharm. Alliance, 362 F.3d at 59 (observing that the State must meet two conditions before instituting material or significant changes in its Medicaid program including submitting a state plan amendment to HCFA, CMSs predecessor, for approval).
8

Legislative actions affecting reimbursement rates for SFY 2012-2013 are discussed in II.F., infra.

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Declaration 29; Plamondon Declaration 25; Dudley Declaration 25; Elwell Declaration 31; Batty Declaration 26; Lipman Declaration 31. These suspensions have been implemented solely for budgetary reasons and, in implementing them, DHHS did not provide Plaintiffs with notice or a reasonable opportunity to comment as required under Section 13(A)(ii), 42 C.F.R. 447.205, or the state plan. See, e.g., OLeary Declaration 18. In SFY 2010-2011, DHHS also implemented policies eliminating enhanced reimbursement for certain catastrophic cases, reducing outpatient radiology reimbursements, and denying hospitals the ability to charge technical component fees (e.g., hospital facility costs) for hospital-owned physician practices. See, e.g., OLeary Declaration 17-19. These rate reductions were implemented solely for budgetary reasons and, in implementing them, DHHS did not provide notice and a reasonable opportunity to comment under Section 13(A)(ii), 42 C.F.R. 447.205, or the state plan. See, e.g., id. The State has maintained these rate reductions through SFY 2012-2013 while eliminating UPL payments to hospitals, effecting another rate reduction from the previous fiscal year without providing Plaintiffs with notice and a reasonable opportunity to comment on the proposed reduction as required by Section 13(A)(ii), 42 C.F.R. 447.205, and the state plan. See, e.g., id. at 20-21. E. New Hampshires DSH Program

In 1991, New Hampshire began exploiting the loophole created in the federal DSH program.9 Complaint at 137. The State would make a large DSH payment to hospitals to fix the amount of federal matching contribution. Id. at 138; see, e.g., OLeary Declaration 2224. The State would then recoup the DSH payment through a Medicaid Enhancement Tax (MET) levied on the hospitals participating in the Medicaid program and place the recouped
9

The DSH loophole is described in II.B., supra.

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money back into the general fund. Complaint at 138-139; see, e.g., OLeary Declaration 2224. At the outset of this plan, the State assured the hospitals that they would have no net tax liability and would only be a conduit for receiving federal funds. In a February 25, 1993 letter to the then-president of the New Hampshire Hospital Association, the then-DHHS Commissioner, Dr. Harry H. Bird, and the then-Commissioner of Revenue Administration, Stanley Arnold, said, [w]e appreciate the fact that the hospitals would prefer not to be subject to taxation but we all know that ongoing cooperation is essential for maintenance of this critical State revenue source. Complaint at 140; see also Feyrer Declaration at Exhibit G (February 25, 1993 letter from Dr. Harry H. Bird and Stanley Arnold to Gene Carter). The Commissioners also stated that, [i]t is our intent that, should Federal Disproportionate Share funds become unavailable, we would no longer require the State revenue and would recommend that the rate of taxation drop to zero. Complaint at 141; see also Feyrer Declaration at Exhibit G (February 25, 1993 letter from Dr. Harry H. Bird and Stanley Arnold to Gary Carter). New Hampshire secured approximately $1.8 billion in federal matching funds from 1991 through 2009. Complaint at 142; see also Feyrer Declaration at Exhibit H (DHHS presentation to House Finance Committee, Division III, dated February 7, 2011, at 19). In 2007, the United States Department of Health and Human Services, Office of the Inspector General (OIG) audited New Hampshire and released a report regarding New Hampshires DSH payment program for Federal Fiscal Year 2004. See Feyrer Declaration at Exhibit I (July 2007 OIG Report). The OIG concluded that New Hampshire did not comply with federal guidelines in imposing the MET and distributing DSH payments to hospitals. See id. Accordingly, OIG deemed $35,325,426 in federal matching funds unallowable and subject to recoupment by the

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federal government. Id. at 7. The State has requested that the federal government reconsider its decision. See Feyrer Declaration at Exhibit J (DHHS press release dated July 19, 2011). In the wake of the OIG report, New Hampshire modified its DSH program. Specifically, the legislature amended former RSA 167:64 in 2009. Complaint at 144-145. From 2009 to 2011, the state levied a 5.5% MET on general hospitals and special hospitals for rehabilitation required to be licensed under RSA 151 and receiving medicaid diagnosis related group (DRG) payments. Former RSA 84-A:1, III. Once raised, the State would deposit the MET into the uncompensated care (UCC) fund. RSA 167:64, I (There is hereby established in the state treasury an uncompensated care fund which shall consist of the moneys collected pursuant to RSA 84-A.). Under former RSA 167:64, I(a), [n]o less than 50 percent of the moneys paid into the [UCC] fund could be used to support uncompensated care in hospitals in accordance with rules adopted by the commissioner, pursuant to RSA 541-A. Former RSA 167:64, I(b) authorized and directed the commissioner to develop and implement a schedule of payments of reimbursement of [UCC] costs of those hospitals that are subject to [the MET] and that participate in the state Medicaid program. The statute required the UCC fund to be: structured in a manner that: (i) reduces to the greatest extent practicable the disproportionate impact among hospitals of uncompensated care costs; (ii) permits maximum available federal financial participation for these payments in accordance with Title XIX of the Social Security Act; and (iii) is consistent with all federal laws and regulations governing Title XIX disproportionate share hospital payment adjustments and permissible sources of state financial participation as provided for under 42 C.F.R. part 433. Id. Former RSA 167:64, I(d) also required the commissioner to distribute UCC funds in the following order of priority: (1) to reimburse critical access hospitals and rehabilitation hospitals for their UCC costs at a rate of 100% of the DSH payment limit as determined by the commissioner consistent with 42 U.S.C. 1396r-4(g); and (2) to reimburse non-critical access

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hospitals at the highest uniform percentage of each hospital limit as the funds made available under [RSA 167:64] permit. The current state plan details the rate-setting methodology DHHS uses to make DSH payments. Specifically, the state plan provides that two types of payment adjustments for hospitals qualifying as disproportionate share hospitals exist: (1) governmental psychiatric hospitals; and (2) in-state, non-public general hospitals and special rehabilitation hospitals which qualify for disproportionate share payments. See Feyrer Declaration at Exhibit K (State Plan, Attachment 4.19-A Page 5e, Disproportionate Share Payment Adjustment). Provider Plaintiffs fall into the second category: they are in-state, non-public general hospitals. The state plan further provides that: Effective November 15, 2010, and on an annual basis thereafter in the time period beginning October 1, 2011, until such time as these provisions of this state plan may be amended, each in-state, nonpublic general hospital and special rehabilitation hospital that . . . [qualifies for disproportionate share payments] . . . shall receive a Disproportionate Share Hospital (DSH) payment adjustment, under one of the following two DSH categories, in an annual amount specified by the described methodology for that category: 1. Critical Access Hospitals and Rehabilitation Hospitals: Each Critical Access Hospital and Rehabilitation Hospital shall receive a DSH payment equal to one hundred percent (100%) of the otherwise uncompensated portion, if any, of the costs of services provided to Medicaid patients and to all patients who have no source of insurance or third party payment for the services provided, where uncompensated care costs are calculated in accordance with and not in excess of the federal requirements of 42 U.S.C. 1396r-4(g); . . . . , 2. Other DSH Qualifying Private, Non-Public General Hospitals: The remaining DHS qualifying hospitals; i.e., general hospitals that are not public, critical access or special rehabilitation hospitals, shall receive a DSH payment adjustment in an amount equal to the uniform percentage (%) of each such hospitals total uncompensated care costs as defined under 42 U.S.C. 1396r-4(g). . . . . Said uniform percentage shall be set at the highest percentage feasible in consideration of the total amount of funds made

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available in each year for reimbursement of said uncompensated care costs.10 Id. Under this scheme, Commissioner Toumpas sent a letter to the legislative fiscal committee recommending a schedule of payments for reimbursement of UCC costs for SFY 2011, ending June 30, 2011. See Feyrer Declaration at Exhibit L (November 9, 2010 Letter from Commissioner Nicholas A. Toumpas to Representative Marjorie K. Smith (November 9, 2010 Letter)). The legislative fiscal committee subsequently approved the recommendation. See Feyrer Declaration at Exhibit M (Minutes, Fiscal Committee of the General Court, November 15, 2010, at 6-7). Under the approved schedule, the DHHS Commissioner estimated that the MET would generate $186,972,752. See Feyrer Declaration at Exhibit L (November 9, 2010 Letter at 5). The Commissioner recommended that the State deposit half of the MET (or $93,486,376) into the unrestricted revenue account of the States general fund. Under the approved schedule, the Commissioner also recommended directing the remaining $93,486,376 into the UCC fund. See id. (November 9, 2010 Letter at 5). Of that, the Commissioner recommended using $59,045,903 to secure federal DSH matching funds and combining the remaining $34,417,967 with $10,385,428 in one-time federal stimulus funds to secure $44,803,401 in regular Medicaid matching funds. Id. Thus, the total funds available in the UCC fund for distribution for SFY 2011 was $207,698,609. The approved schedule distributed a total of $207,698,609 for SYF 2011. Id. Significantly, it included $55,933,731 in UPL payments for inpatient care and $31,812,294 in UPL payments for outpatient care. Id. at 6. These UPL payments supplemented the reduced

10

This rate-setting methodology also appeared in former RSA 167:64, I(d).

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rates that went into effect in 2008 and were carried forward in the SFY 2010-2011 biennium.11 The state also made $37,217,162 in DSH payments to thirteen critical access hospitals and $80,874,645 in DSH payments to the remaining thirteen non-critical access hospitals.12 Id. According to DHHS, New Hampshire hospitals incurred uncompensated care costs in the amount of $299,144,830 for SFY 2011. Id. at Attachment A. Of that amount, $148,992,266 constituted losses from Medicaid services and $150,698,609 constituted losses from services delivered to individuals without insurance. Id. Thus, even after receiving these payments, New Hampshire hospitals still lost $91,446,231 in SFY 2011 for providing uncompensated care. Additionally, for the first time since the creation of the UCC fund, nine hospitals paid more in MET than they received in UCC payments. See, e.g., OLeary Declaration 23; KilfeatherMackey Declaration 37; Walcek Declaration 27; Plamondon Declaration 27; Dudley Declaration 27; Marzinzik Declaration 26; Batty Declaration 28. F. Actions Affecting Reimbursement Rates for SFY 2012-2013

Despite New Hampshire hospitals suffering a near $100 million loss in SFY 2011 from uncompensated care, the State proposed to further reduce funding to hospitals participating in the States Medicaid program for SFY 2012-2013. In his budget address, dated February 15, 2011, Governor Lynch stated the following: As we worked to reduce general fund costs, we considered eliminating Medicaid optional services for adults, seniors and people with disabilities. But at the end of the day, I don't believe there is anything really optional about prescription drugs for seniors, nursing services, or wheelchairs. Cutting Medicaid optional services would hurt more than 40,000 people. It would result in sicker people, and even, potentially, deaths. It would drive
11 12

The reduced rates are outlined in II.D., supra.

The approved schedule also included $1,860,777 in supplemental payment to Upper Connecticut Valley Hospital and the HealthSouth Rehabilitation Hospital. Id.

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up our health care costs. Without access to prescription drugs or other so-called optional services, people would end up using more expensive health care ambulances, emergency rooms and longterm hospital stays. Feyrer Declaration at Exhibit N at 4 (emphases added). The Governors proposed budget estimated that the MET would generate approximately $180,795,738 and recommended depositing $100,500,000 (or 55.59%) of the total MET into the general fund. See Feyrer Declaration at Exhibit O (Excerpts from Governors Operating Budget for Fiscal Years Ending June 30, 2012-2013). The Governor also recommended placing the remaining $80,285,736 into the UCC fund, which the federal government would match at $80,366,022. See id. Thus, as proposed by the Governor, the UCC fund would have received $160,651,758 for SFY 2012, a 23% reduction from SFY 2011. See id. Additionally, the Governors budget did not propose any UPL payments to hospitals, as had been paid in the previous year to augment the reduced reimbursement rates. See id. Thus, the Governors proposed budget constituted a year-over-year reduction in Medicaid reimbursement rates to hospitals. See id. As the legislature considered the budget, the House Finance Committee requested options from DHHS to effect $300,000,000 in savings. DHHS submitted its list of budget options, which included eliminating uncompensated care funding altogether. See Feyrer Declaration at Exhibit P. With respect to this option, DHHS stated as follows: Uncompensated care payments are made to hospitals to provide some compensation for inpatient and outpatient services provided to our States uninsured. Last year the hospitals provided $299M of uncompensated care and were reimbursed $207M leaving $92M worth of care uncompensated. Elimination of this funding will have a significant fiscal impact on hospitals in that it will downshift the financial responsibility to the hospitals. Presumably the hospitals will pass some of these costs onto the privately insured through their contracts negotiated with the insurance companies thus resulting in a cost shift and increase in commercial health insurance premiums. However, not all

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hospitals have the capability to shift costs to the commercially insured due to the population that utilizes their services. There is a strong possibility that this reduction could result in a hospitals inability to sustain operations and therefore closure. Should this budget reduction be included in the House budget, $80,285M of federal DSH funds will be lost in SFY 2012 and $86,708 [sic] in SFY 2013. There is no ability to bring these federal funds into the state for any other purpose other than DSH payments. In essence, the MET becomes a state tax on the hospitals with all proceeds going to the general fund and presumably appropriate to DHHS to reduce the need for general funds. See Feyrer Declaration at Exhibit P at 7-8 (emphases added). In materials presented to the Senate on April 7, 2011, DHHS addressed Medicaid reimbursement rates in New Hampshire and described New Hampshires biennial benchmark report for SFY 2012-2013.13 DHHS described the results as follows: (1) [i]n almost every case Medicaid [is] significantly lower than Medicare, NH insurance and other Medicaid programs; (2) [c]ompared with other reports (for SFY 10 and 11): the difference between NH Medicaid rates and other payers has grown; and (3) [g]rowing potential that if trends continue, patient access and services will become increasingly more difficult. See Feyrer Declaration at Exhibit Q (DHHS presentation to Senate, dated April 7, 2011 at 15). On June 29, 2011, the State budget, enacted in New Hampshire Laws of 2011, Chapter 223 (or House Bill 1-A) and Chapter 224 (or House Bill 2), became law. Complaint at 169170. Chapter 223 is the state budget; Chapter 224 is the rider or trailer to the state budget. Chapter 223 significantly underfunds the States Medicaid program. Chapter 224 amends RSA 167:64, the UCC statute, in ways that allow the State to underfund the Medicaid and DSH programs. First, RSA 167:64, as amended, eliminates the

13

The statute requiring DHHS to perform a benchmark report is described in n.4 supra.

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requirement that no less than 50 percent of the moneys paid into the fund . . . be utilized to support uncompensated care in hospitals . . . . RSA 167:64, I(a). Second, RSA 167:64, as amended, eliminates the requirements that the commissioner structure UCC payments in a manner that . . . reduces to the greatest extent practicable the disproportionate impact among hospitals of uncompensated care costs . . . [and] . . . permits maximum available federal financial participation for these payments in accordance with Title XIX of the Social Security Act. RSA 167:64: I(b)(i-ii). Third, RSA 167:64, I(a), as amended, requires the commissioner to spend UCC funds in the following order: (1) To support medical provider payments as budgeted in each year of the biennium; (2) To ensure that critical access hospitals received reimbursement for reported uncompensated care costs at a rate of 100 percent of the individual hospital limit or at the highest uniform percentage that available funding would permit should funds be inadequate to cover 100 percent of the hospital limit for disproportionate share payments as determined by the commissioner consistent with the provisions of 42 U.S.C. section 1396r-4(g) and any relevant federal regulations promulgated thereunder; (3) To support the states Medicaid enhancement tax unrestricted revenue account as budgeted in each year of the biennium; and (4) If authorized, to reimburse non-critical access hospitals at the highest uniform percentage of each hospitals disproportionate share hospital payment limit as the funds made available under this section permit and are consistent with the requirements of 42 U.S.C. section 1396r-4(g) and any relevant federal regulations promulgated thereunder. N.H. Laws of 2011, Chapter 224. The above changes will allow the State to generate a net flow of funds into the general fund from the Medicaid program for SFY 2012 while leaving the Provider Plaintiffs with inadequate Medicaid reimbursement rates and no DSH funding.

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According to N.H. Laws of 2011, Chapter 223, the MET will generate $197,000,000 for SFY 2012.14 The State will place the total MET revenue into the UCC fund and distribute it as follows. Under RSA 167:64, I(a)(1), as amended, the legislature has budgeted $75,896,942 of the MET, instead of general fund obligations as has historically been done, to support regular medical provider payments. The State will combine this amount with $81,175,788 from the general fund and $157,260,746 in federal matching funds. See Feyrer Declaration at Exhibit S (excerpts from N.H. Laws of 2011, Chapter 223). These funds will be used to make fee-forservice payments to a broad category of Medicaid providers generally and not just hospitals. See id. Under RSA 167:64, I(a)(3), the legislature has budgeted $97,000,000 of the total MET for the general fund. The State will place the remaining $24,617,736 into the States DSH program and receive federal matching funds in the amount of $24,642,354 for a total $49,260,090 in DSH program funds. Id. The $49,260,090 will be distributed to critical access DSH hospitals leaving non-critical access DSH hospitals with no funding. See, e.g., RSA 167:64, I(a)(2); see, also, Feyrer Declaration at Exhibit T (Worksheet dated March 11, 2011 prepared by DHHS setting forth formula for DSH funding for critical access hospitals). As a result, the Provider Plaintiffs will receive inadequate reimbursement rates and no DSH funding in SFY 2012. See, e.g., OLeary Declaration 25-26. This amounts to an $80,874,645 decrease in funding from the previous year.

14

This estimate is in doubt. CMS has recently suggested that New Hampshires definition of certain MET components maybe overbroad and not in accordance with federal law. See Feyrer Declaration at Exhibit R (letter from Stephen M. Ahnen to Dianne Heffron dated May 24, 2011; letter from Dianne Heffron to Steven M. Ahnen dated June 17, 2011; Commissioner Toumpas responded to the June 17, 2011 CMS letter and that response, dated June 30, 2011, is also included in Exhibit R.). Accordingly, the MET is likely to generate substantially less than the $197,000,000 the State has estimated for SFY 2012.

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New Hampshire hospitals received a total of $207,698,608 in UCC funding in SFY 2011 and still suffered losses resulting from uncompensated care of nearly $100 million because all hospitals provided nearly $300 million in uncompensated care. See, e.g., OLeary Declaration 12-15; Kilfeather-Mackey Declaration 20-25; Rose Declaration 19-23; Walcek Declaration 16-19; Plamondon Declaration 16-19; Dudley Declaration 14-19; Marzinzik Declaration 17-20; Elwell Declaration 20-24; Batty Declaration 15-20; Lipman Declaration 23-25. Assuming UCC costs remain the same for SFY 2012 as they did for SFY 2011 (approximately $299,144,830), New Hampshires hospital system can expect to lose approximately $249,884,740 treating uninsured and Medicaid patients for SFY 2012.15 G. The Effect of the States Actions on Access

The actions of the State will have a devastating effect on the Provider Plaintiffs and the patients they serve. As a direct result of the States reductions in Medicaid reimbursement rates and changes to its reimbursement methodologies and as set forth fully in the Provider Plaintiffs Declarations, they have been forced to evaluate and identify patient services that must be curtailed, restricted, or eliminated. More specifically, several Provider Plaintiffs intend to close or are considering closing their affiliated physician practices to new Medicaid patients. See, e.g., Rose Declaration 37; Lipman Declaration 39. Other Provider Plaintiffs are considering terminating their physician practices Medicaid contract with the State altogether. See, e.g.,

15

Indeed, the States action has already detrimentally impacted the credit ratings and ratings outlook for some of the Provider Plaintiffs. See Feyrer Declaration at Exhibit U (Standard & Poors RatingsDirect on the Global Credit Portal, New Hampshire Provider Tax Changes Create Negative Implications For Some Health Care Providers, Uncertainty For Others, dated July 20, 2011). In June 2011, after evaluating the States new provider tax rules included in the biennial budgets and assess[ing] the potential credit implications, Standard & Poors lowered its rating on Cheshire Medicaid Center, and revised its outlook to negative for Dartmouth-Hitchcock Medical Center. See id. Lowered credit ratings make it more expensive for Plaintiff Providers to access capital necessary in order to grow to meet the needs of the communities they serve. See, e.g, Rose Declaration 41 (discussing potential impact to Southern New Hampshire Health System of lowered bond rating).

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OLeary Declaration 29. Effectively, the closure of these hospital-affiliated physician practices to Medicaid patients means that Medicaid patient access to physicians will be severely curtailed. Additionally, certain Plaintiff Providers are considering closing or suspending operations for unique care facilities and patient services, among them the neonatal intensive care unit at Dartmouth-Hitchcocks Childrens Hospital; the helicopter rescue program at DartmouthHitchcock; and Exeter Health Resources, Inc.s Exeter Healthcare center, New Hampshires only sub-acute rehabilitative care facility that accepts long-term ventilator-dependent patients. See Kilfeather-Mackey Declaration 43 (also discussing reduction or elimination of other pediatric subspecialty services, which would put Dartmouth-Hitchcocks Level I trauma center and NACHRI designation at risk, and the reduction or elimination of Mary Hitchcock Memorial Hospitals inpatient psychiatric services); OLeary Declaration 29. These programs provide considerable services to Medicaid patients. See id. Reductions to these programs will necessarily reduce access to Medicaid patients. Certain Plaintiff Providers intend to eliminate or are considering eliminating their provision of funding for community-based programs. See, e.g., Elwell Declaration 39; OLeary Declaration 29; Dudley Declaration 34. Several of these community-based programs provide health and wellness services to predominantly Medicaid and Medicaid-eligible patients. See id. The elimination of this financial support will curtail services to Medicaid and Medicaid-eligible patients. Finally, several Plaintiff Providers intend to reduce or are considering reducing staffing levels. See, e.g., OLeary Declaration 29; Rose Declaration 40; Batty Declaration 38. Staffing reductions will result in decreased access to care for Medicaid patients, as these reductions will ultimately result in fewer hospital services and programs for Medicaid patients.

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The negative effects of these proposed changes which will not only deny Medicaid recipients equal access to necessary health care services, but will detrimentally impact the health care system for the entire state of New Hampshire cannot be overstated. III. ARGUMENT

As set forth in detail above, see II.D-F, supra, over recent years, the State has taken a series of budget-driven actions which have resulted in devastating cuts to Medicaid hospital reimbursement rates and gross distortions to reimbursement methodologies. In summary, they are: The enactment of RSA 126-A:3, VII(a), which sets forth a procedure for cuts to outpatient reimbursement rates for purely budgetary considerations; The enactment of various rate reductions, including the October 30, 2008 outpatient rate reduction and the November 21, 2008 inpatient rate reduction effected by Executive Order 2008-10; the continuation of those rate reductions into SFY 2010-2011 and SFY 2012-2013; the suspension of outpatient settlement payments in SFY 2010-2011 and SFY 2012-2013; eliminating enhanced reimbursement for certain catastrophic cases in SFY 2010-2011 and SFY 20122013; reducing outpatient radiology reimbursements in SFY 2010-2011 and SFY 2012-2013; and denying hospitals the ability to charge technical component fees for hospital-owned physician practices in SFY 2010-2011 and SFY 2012-2013 (collectively Rate Reduction Enactments); The enactment of the SFY 2012-2013 budget, N.H. Laws of 2011, Chapters 223 and 224, which underfunds the Medicaid Program, eliminates UPL funding, and eliminates DSH funding to non-critical access hospitals; and The amendments to RSA 167:64, enacted in N.H. Laws of 2011, Chapter 224, which establishes a methodology that allows the State to underfund the Medicaid program and the DSH program while generating a net flow of funds for the general fund from MET taxes on hospitals.

These changes, and the manner in which they were enacted, violate Sections 13(A) and 30(A) of the Medicaid Act. The two Medicaid Act provisions give rise to distinct legal theories. Cases in this Circuit strongly support the proposition that Section 13(A) contains rights which are enforceable under 42 U.S.C. 1983. Because the record is irrefutable that the State failed to

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comply with Section 13(A)s requirements, the Plaintiffs will succeed on the merits of these claims. While the law in this Circuit is clear that Section 30(A) does not create rights enforceable through Section 1983, this Court should adopt the reasoning of those courts that have ruled that Section 30(A)s procedural requirements preempt the enactments at issue in this case under the Supremacy Clause of the United States Constitution. Again, the record is irrefutable that the State did not consider efficiency, economy, and quality of care, and equal access to care and services when making these rate reductions and methodology changes. Further, there is overwhelming evidence before this Court that the States actions violate Section 30(A)s substantive requirements of assuring reimbursement rates consistent with efficiency, economy, and quality of care, and equal access to care and services. Thus, the plaintiffs are likely to succeed on the merits of their Section 30(A) claims. The risk of irreparable harm is real and immediate, and the balance of equities cannot sustain the enforcement of unlawfully enacted rates. For these reasons, the Court should grant the plaintiffs motion for preliminary injunction. A. Standard Of Review

The standard governing this motion is familiar and well-established: In considering a motion for a preliminary injunction, a district court must consider: (1) the [P]laintiff[s] likelihood of success on the merits; (2) the potential for irreparable harm in the absence of an injunction; (3) whether issuing an injunction will burden the defendants less than denying an injunction would burden the plaintiffs; and (4) the effect, if any, on the public interest. Gonzalez-Droz v. Gonzalez-Colon, 573 F.3d 75, 79 (1st Cir. 2009) (citing Boston Duck Tours, LP v. Super Duck Tours, LLC, 531 F.3d 1, 11 (1st Cir. 2008)). As discussed below, the plaintiffs amply meet their burden with respect to each of these requirements.

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B.

Plaintiffs Are Entitled To Preliminary Injunctive Relief On Their Supremacy Clause Claims.

The States enactments are preempted by Section 30(A)s procedural and substantive requirements. Under the Supremacy Clause of the United States Constitution, Congress has the power to preempt state law and may do so either explicitly or implicitly. In re Pharmaceutical Indus. Average Wholesale Price Litigation, 582 F.3d 156, 173 (1st Cir. 2009). Congress might show that it intends to preempt state law by explicitly withdrawing the power of states to regulate within certain fields. Or, Congress might implicitly withdraw the states power to regulate by creating a regulatory system so pervasive and complex that it leaves no room for the states to regulate. Congress might also enact a law such that compliance with both federal and state regulations is a physical impossibility, in which case the state statute must yield. Finally, . . . even in the absence of a direct conflict, a state law violates the supremacy clause when it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Id. at 173-74 (quoting Mass. Med. Soc. v. Dukakis, 815 F.2d 790, 791 (1st Cir. 1987)). However Congress states or implies its intent to preempt, [the Courts] preemption analysis invariably [turns on] two cornerstones: Congresss purpose, and where it legislates in a field which the States have traditionally occupied, Congresss clear and manifest intent to preempt state law. Id. at 174 (citing Wyeth v. Levine, 555 U.S. 555, 129 S. Ct. 1187, 1194 (2009)). This case involves the last two forms of implied preemption: direct conflict and obstacle preemption. 1. Plaintiffs are likely to succeed on the merits of their Supremacy Clause claims because RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, directly conflict with, and stand as an obstacle, to the Medicaid Act. Courts have concluded that the Medicaid Act, generally, and Section 30(A), specifically, have preemptive force. See, e.g., Indep. Living Ctr. Of S. Cal., Inc. v. Shewry, 543 F.3d 1050, 1065 (9th Cir. 2008), cert. granted (U.S. Jan. 2011) (Independent Living I) (finding that Medicaid providers could challenge Californias ten percent reimbursement rate cut under the

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Supremacy Clause as inconsistent with Section 30(A))16; Catholic Med. Ctr. Of Brooklyn & Queens, Inc. v. Rockefeller, 430 F.2d 1297, 1298 (2d Cir. 1970) (per curiam); Community Pharms. of Indiana, Inc. v. Indiana Family & Social Servs. Administration, Case No. 1:11-cv0893-TWP-DKL, slip op. at 5-7 (S.D. Ind. July 8, 2011). Moreover, the First Circuit has indicated that if a state law directly conflicts with, or stands as an obstacle to the accomplishment and execution of, the provisions of the Medicaid Act, the state law is preempted. See Pharm. Research & Mfrs. Of Am., 249 F.3d 66, 73 (1st Cir. 2001) (Thus, regardless of whether the Medicaid statutes relevant provisions were designed to benefit [the plaintiff], [the plaintiff] can invoke the statutes preemptive force.), affd, 538 U.S. 644 (2003). a. Section 30(A) contains both procedural and substantive requirements and forbids States from enacting rate reductions or altering reimbursement methodologies solely for budgetary reasons. Section 30(A) sets forth both procedural and substantive requirements. Procedurally, the statute requires states to consider efficiency,17 economy, and quality of care, and equal access to care and services when deciding whether to change their reimbursement rates or methodologies. See Indep. Living Ctr. Of S. Cal., Inc. v. Maxwell-Jolly, 572 F.3d 644, 651 (9th Cir. 2009) (Independent Living II); Minn. Homecare Assn, Inc. v. Gomez, 108 F.3d 917, 918 (8th Cir. 1997) (The Medicaid Act mandates consideration of the equal access factors of efficiency, economy, quality of care and access to services in the process of setting or changing payment rates, . . . .). It further mandates that states set [Medicaid] reimbursement rates that bear a
16

The United States Supreme Court has consolidated Independent Living I with California Pharmacists Association v. Maxwell-Jolly, 596 F.3d 1098 (9th Cir. 2010) and Independent Living Center Of Southern California., Inc. v. Maxwell-Jolly, 572 F.3d 644, 651 (9th Cir. 2009) to determine [w]hether Medicaid recipients and providers may maintain a cause of action under the Supremacy Clause to enforce 1396a(a)(30)(A) by asserting that the provision preempts a state law that may reduce reimbursement rates.
17

The DHHS defines the term efficiently in its Rules for Hospitals as the ability to perform advertised services within a timeframe, which minimizes the delay in patient care. Chapter He-P Residential Care and Health Facility Rules, Part He-P 802 Rules for Hospitals, He-P 802.03(z).

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reasonable relationship to efficient and economical [providers] costs of providing quality services, unless the [State] shows some justification for rates that substantially deviate from such costs. Independent Living II, 572 F. 3d at 651 (quoting Orthopaedic Hosp. v. Belshe, 103 F.3d 1491, 1496 (9th Cir. 1997)). While some courts have interpreted Section 30(A) as not containing procedural requirements, see, e.g., Rite Aid of Penn., Inc. v. Houston, 171 F.3d 842, 851 (3d Cir. 1999); Methodist Hosp. v. Sullivan, 91 F.3d 1026, 1030 (7th Cir. 1996); Conn. Assn of Health Care Facilities, Inc. v. Rell, 2010 U.S. Dist. LEXIS 54649, at *30 (D. Conn. June 3, 2010), CMS, the agency charged with interpreting and implementing the Medicaid Act, has indicated otherwise. Specifically, CMS has proposed to amend 42 C.F.R. 447.203-.204, the regulations interpreting Section 30(A), to require States to consider, prior to reducing or restructuring Medicaid service payment rates, at a minimum, the extent to which enrollee needs are met, the availability of care and providers, and changes in beneficiary utilization of covered services. 42 C.F.R. 447.203(b)(1)(i-iii) (proposed rule 2011). The regulations would also require the State to consider input from the beneficiaries and affected stakeholders regarding the extent of beneficiary access to the affected services and the impact the proposed rate change will have, if any, on continued service access. 42 C.F.R. 447.204(a)(2) (proposed rule 2011).18 The regulations proposed by CMS are strong indicia that Section 30(A) requires states to consider the impact that any proposed reimbursement rate change will have upon Medicaid recipients access to necessary health care services prior to the implementation of any reimbursement rate change.

18

A copy of the proposed regulations appear at Exhibit A to the Feyrer Declaration. The comment period on the proposed regulations closed on July 5, 2011.

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Substantively, Section 30(A) requires States to realize the goals of efficiency, economy, quality of care, and equal access to care and services. See Methodist Hosp., 91 F.3d at 1030 (Under 1396a(a)(30), however, states may behave like other buyers of goods and services in the marketplace: they may say what they are willing to pay and see whether this brings forth an adequate supply. If not, the state may (and under 1396a(a)(30), must) raise the price until the market clears.); Conn. Assn of Health Care Facilities, Inc., 2010 U.S. Dist. LEXIS 54649, at *31 (noting that [c]ourts agree that the equal access provision [i.e., Section 30(A)] contains a substantive requirement). Section 30(A) further requires States to set payment rates sufficient to enlist enough providers so that care and services are available under the [State] plan at least to the extent that such care and services are available to the general population in the geographic area. 42 U.S.C. 1396a(a)(30)(A). Thus, to the extent a state law makes it impossible for the State to meet these goals, or stands as an obstacle to the realization of these goals, such a law would be void under the Supremacy Clause. See Conn. Assn of Health Care Facilities, Inc., 2010 U.S. Dist. LEXIS 54649, at *31 (To any extent that [a state legislative provision] is an obstacle to the realization of efficiency, economy and quality of care or is insufficient to enlist enough providers . . . it would be void.) (quoting 42 U.S.C. 1396a(a)(30)(A)). Additionally, several courts of appeal have recognized that a state violates Section 30(A) when it significantly alters its reimbursement rates or methodologies solely for budgetary reasons. See, e.g., Independent Living II, 572 F.3d at 656 (holding that the States decision to pass legislation reducing Medi-Cal reimbursement rates for purely budgetary concerns violated federal law); Rite Aid of Penn., Inc., 171 F.3d at 856 (holding that budgetary considerations may not be the sole basis for a rate revision); Tallahassee Meml Regl Med. Ctr. v. Cook, 109 F.3d 693, 704 (11th Cir. 1997) ([B]udgetary constraints alone can never be [a] sufficient basis

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for setting Medicaid rates because, [i]f a state could evade the requirements of the [Medicaid] Act simply by failing to appropriate sufficient funds to meet them, it could rewrite the Congressionally imposed standards at will.); Ark. Med. Socy v. Reynolds, 6 F.3d 519, 531 (8th Cir. 1993) (observing that [a]bundant persuasive precedent supports the proposition that budgetary considerations cannot be the conclusive factor in decisions regarding Medicaid and citing cases). i. RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, directly conflict with, and stand as an obstacle to, Section 30(A)s procedural requirements.

In order to ensure that the procedural requirements of Section (30)(A) are met, a state must consider the effect of the proposed legislation or regulation upon a providers ability to efficiently and economically provide quality care to Medicaid recipients, and the impact of the proposed legislation or regulation upon Medicaid recipients having equal access to care and services. Independent Living II, 572 at 651. Illustrative is California Pharmacists Association v. Maxwell-Jolly. There, the California legislature passed a 5% reimbursement rate reduction to adult day health care centers. Cal. Pharms. Assn, 596 F.3d at 1103. The California Pharmacists Association challenged the reimbursement rate reduction and sought to enjoin the law arguing that the legislature did not consider the impact such a reduction would have on efficiency, economy, quality of care, and equal access to care and services. Id. The district court granted the preliminary injunction, finding that the California Pharmacists Association was likely to succeed on the merits because the legislative history showed no indication that the legislature considered 30(A) prior to passage of [the law]. Id. The defendant appealed, arguing that the legislature was not required to consider the Section 30(A) factors, only the Department of Health Care Services. Id. at 1104. In affirming the district court, the Ninth Circuit held that the final

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body responsible for setting Medicaid reimbursement rates must study the impact of the contemplated rate reduction on the statutory factors of efficiency, economy, quality of care, and access to care prior to setting or adjusting payment rates. Id. at 1107. In this case, the plaintiffs are likely to succeed on their claims that RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, directly conflict with, and stand as an obstacle to, the procedural requirements of Section 30(A). In each instance, the State did not consider efficiency, economy, and quality of care, and equal access to care and services before these changes were enacted. Specifically, the State did not: (1) identify the costs that efficiently and economically operated hospitals incur; (2) consider the extent to which the needs of Medicaid recipients would be met; (3) consider the availability of care and providers; (4) consider changes in beneficiary utilization of covered services; (5) consider input from beneficiaries regarding the extent of beneficiary access to the affected services and the impact the proposed rate change would have on continued service access; or (6) consider responsible cost studies to assure payments would bear a reasonable relationship to efficient and economical costs of providing quality care. The legislative record reflects that in deciding to reduce reimbursement rates and overhaul the reimbursement methodology, the State did not study, let alone consider, the impact RSA 126-A:3, VII(a), Rate Reduction Enactments, N.H. Laws of 2011 Chapters 223 and 224, and RSA 167:64, as amended, would have on efficiency, economy, and quality of care, and equal access to care and services for Plaintiffs. Rather, the record demonstrates that the State reduced reimbursement rates, underfunded the Medicaid program, and significantly altered the reimbursement methodology in RSA 126A:3, VII(a) and RSA 167:64, as amended, solely for budgetary reasons. By its express terms,

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the State enacted RSA 126-A:3, VII(a) to allow reduction of Medicaid outpatient reimbursement rates solely for budgetary reasons. See id. (providing, [i]f expenditures are projected to exceed the annual appropriation, the department may recommend rate reduction for providers to offset the amount of any such deficit.). The State enacted the October 30, 2008 outpatient reimbursement rate reduction to bring expected expenditures in line with appropriations for SFY 2009. See Feyrer Declaration at Exhibit C (October 30, 2008 Letter). The State enacted Executive Order 2008-10 to reduc[e] certain provider rates on December 1st and reduc[e] inpatient hospital rates . . . to protect other important services and to ensure that [the State] end[s] the year with a balanced budget. See Feyrer Declaration at Exhibit E (Transcript of November 21, 2008 hearing at 3). The State suspended outpatient settlement payments, eliminated reimbursement in certain catastrophic cases, reduced outpatient radiology reimbursements, eliminated hospitals ability to charge technical component fees for hospitalowned physician practices, and eliminated upper payment limit funding also to save money. Finally, the State enacted N.H. Laws of 2011, Chapters 223 and 224, and amended RSA 167:64 solely to reduce government spending despite DHHSs statements that a further reduction in funding levels and elimination of DSH payments to Provider Plaintiffs would have a significant fiscal impact on the care and services hospitals provide and could even result in closure. See Feyrer Declaration at Exhibits P (DHHSs Budget Options Report) and Q (DHHSs April 7, 2011 submission). Consequently, RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, directly conflict with, and stand as an obstacle to the accomplishment and execution of, the procedural requirements of Section 30(A). Accordingly, the plaintiffs are likely to succeed on the merits of their claims that the

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procedural requirements of Section 30(A) preempt RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended. ii. N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, directly conflict with, and stand as an obstacle to, Section 30(A)s substantive requirements.

In order to ensure that the substantive requirements of Section (30)(A) are met, the States reimbursement rates and methodologies must realize the goals of efficiency, economy, quality of care, and equal access to care and service. See Methodist Hosp., 91 F.3d at 1030; Conn. Assn of Health Care Facilities, Inc., 2010 U.S. Dist. LEXIS 54649, at *31. Courts interpreting Section 30(A)s requirements have concluded that the State must have in place ratesetting methodologies that bear a reasonable relationship to efficient and economical [providers] costs of providing quality services . . . Independent Living II, 572 F.3d at 651 (quoting Orthopaedic Hosp., 103 F.3d at 1496). Substantively, Section 30(A) also requires the State to set reimbursement rates and methodologies that ensure equal access to care and services at least to the extent that such care and services are available to the general population in the geographic area. See, e.g., King v. Sullivan, 776 F. Supp. 645, 655 (D.R.I. 1991) (42 U.S.C. 1396a(a)(30)(A) and 42 C.F.R. 447:204 function to prevent gross disparity between the availability of [a service offered under the State plan] and its availability to those who can afford to pay privately.); Clark v. Kizer, 758 F. Supp. 572, 575-76 (E.D. Cal. 1990), aff'd in part and vacated in part on other grounds sub. nom., Clark v. Coyne, 967 F.2d 585 (9th Cir. 1992); DeGregorio v. OBannon, 500 F. Supp. 541, 548-49 (E.D. Pa. 1980). The reimbursement rate must be set sufficiently high to allow some marginal profit in servicing Medicaid patients to enough . . . facilities so as to ensure that Medicaid patients have substantial access to such facilities. King, 776 F. Supp. at 655 (quoting

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DeGregorio, 500 F. Supp. at 550). The sufficiency of a states reimbursement payments is measured against the payments that a health care facility can demand from non-Medicaid patients. Id. But the [Medicaid] Act avoids setting an absolute level of reimbursement that defines what is sufficient under federal law. Id. [T]he test for evaluating [equal] access [under Section 30(A)] is to compare the access of Medicaid recipients living in a specific geographic area with the access of individuals in the same area who have private or public insurance coverage. Clark, 758 F. Supp. at 576 (citing H.R. Rep. No. 247, 101st Cong., 1st Sess. 390, reprinted in 1989 U.S. Code Cong. & Ad. News at 1906, 2116). Construing general population to mean population with insurance is also consistent with the Secretary of Health and Human Services[] regulations which have consistently measured access by comparing that of recipients of Medicaid to that of the insured population. Id. (citing Department of Health, Education and Welfare, Handbook of Public Assistance Administration, Supplement D: Medical Assistance Programs (1966-67) Part 7-5340). In determining compliance with the Medicaid Act, courts defer to the factors established by the United States Secretary of Health and Human Services (HHS). See Clark, 758 F. Supp. at 576. HHS assesses the following two factors: (1) the level of physician participation in the Medicaid program; and (2) the level of Medicaid reimbursement to those participating physicians. Id. Regarding the first factor, the longstanding criterion used by the Department of Health and Human Services . . . , for implementing the equal access requirement is a two-thirds participation ratio. Id. Although this is not a mandatory requirement, it is a useful figure to use for guidance in measuring compliance with the equal access provision. Id. Regarding the second factor, courts look to whether the Medicaid reimbursement rate is sufficient for providers to meet their overhead expenses. Id. at 577.

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Other factors considered by the Secretary and by courts in determining substantive compliance with Section 30(A)s requirements are: (1) whether providers are widely opting out of the Medicaid program or restricting their Medicaid caseloads; (2) whether a steady stream of reports that recipients are having difficulty obtaining care exists; (3) the utilization rate of Medicaid services; and (4) whether the state agency charged with implementing the Medicaid Act has indicated that the States reimbursement rates are inadequate. Id. at 577-78. Additionally, the Court should consider whether the State uses a provider tax to fund the entire Medicaid program or actually participates in the program by providing contributions from the general fund. (See CMS Summary to Proposed Rule 42 C.F.R. 443.68(f)(2), at 20-21 (indicating that Medicaid payments that simply repay providers for their tax proceeds do not ensure the integrity and development of sound payment rates in compliance with the requirements of 42 U.S.C. 1396a(a)(30)(A)). The facts set forth in the Provider Plaintiffs Declarations are compelling evidence that the financial impact of the States modifications to Medicaid reimbursement methodologies upon Provider Plaintiffs is so severe that New Hampshire Medicaid patients equal access to critical health care and services will be detrimentally affected. Application of the first two HHS factors makes this point clear. Level of Provider Participation in the Medicaid Program. As a direct result of the States reduction in Medicaid reimbursement rates, several Provider Plaintiffs are considering taking or are taking the following actions with respect to their hospital-affiliated physician practices: (1) closing these practices to new Medicaid patients; (2) generally reducing or limiting Medicaid patients access to physician primary care providers; or (3) terminating their physician practices Medicaid contract with the State altogether. See, e.g., Rose Declaration 37; Dudley

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Declaration 33; Lipman Declaration 39; OLeary Declaration 29. Provider Plaintiffs hospital-affiliated physician practices employ a significant percentage of the States physicians. As a result, implementation of the above actions would materially reduce the level of physician participation in the States Medicaid program, and thus severely curtail equal access to care for Medicaid patients. Moreover, Provider Plaintiffs are considering eliminating their provision of elective procedures and program enrollments to Medicaid patients, or limiting access to non-emergent hospital outpatient practices for new Medicaid patients. See, e.g., Lipman Declaration 39; Batty Declaration 37. These actions would limit thousands of New Hampshire Medicaid patients access to these covered health care services within their geographic area. Id. Level of Medicaid Reimbursement to Participating Providers. The States Medicaid reimbursement rates fall woefully short of covering Provider Plaintiffs actual costs for providing these services. For example, in 2010, the Elliot Hospital of the City of Manchester (Elliot Hospital) provided care to more than 26,212 New Hampshire Medicaid patients. See Elwell Declaration 20. The total actual cost to Elliot Hospital to provide these services was approximately $32.9 million. See id. Of this amount, the State reimbursed $14.7 million. See id. This means that the Elliot incurred a total of $18.2 million in unreimbursed costs for the delivery of health care and services to New Hampshires Medicaid patients. See id. In 2010, the States payment of UPL and DSH funds somewhat reduced the gaping discrepancy between actual costs incurred by the Elliot to care for Medicaid patients and the reimbursement paid by the State for that care. See id. at 29, 33. However, the States subsequent elimination of UPL and DSH payments means that, for 2011, the Elliot will sustain exorbitant and unsustainable financial losses for treating Medicaid patients. See id. at 38.

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Other Plaintiff Providers will fare no better under the States Medicaid reimbursement scheme. See, e.g., OLeary Declaration 28; Kilfeather-Mackey Declaration 42; Rose Declaration 35; Dudley Declaration 32; Lipman Declaration 37; Batty Declaration 33; Marzinzik Declaration 31; Plamondon Declaration 32; Walchek Declaration 32. Application of the additional HHS factors further establishes that the States Medicaid reimbursement rates and changes to its reimbursement methodologies will have a dire impact upon the well over 100,000 New Hampshire Medicaid patients served by the Provider Plaintiffs. See, e.g., Elwell Declaration 20; Rose Declaration 19; Dudley Declaration 14; Walcek Declaration 16; Batty Declaration 15; Kilfeather-Mackey Declaration 20 (including out-ofstate Medicaid patients in calculation). As discussed above, several Provider Plaintiffs are considering restricting their Medicaid case load or opting out of the Medicaid program. See, e.g., Lipman Declaration 39; Batty Declaration 37; Rose Declaration 37; Dudley Declaration 33; OLeary Declaration 29. Moreover, DHHS has explicitly indicated that elimination of DSH payments to hospitals will have a significant fiscal impact on hospitals in that it will downshift the financial responsibility to the hospitals . . . There is a strong possibility that this reduction could result in a hospitals inability to sustain operations and therefore closure. Feyrer Declaration, Exhibit P at 7; see also Exhibit Q at 15. Finally, the State is using the MET provided by the States hospitals to fund its entire Medicaid program. See N.H. Laws of 2011, Chapters 223 and 224. The factual record before the Court makes evident that the States Medicaid payment system to the Provider Plaintiffs fails to comply with the substantive requirements of Section 30(A) because it does not assure access to care for New Hampshire Medicaid patients. Thus, the Provider Plaintiffs are likely to succeed on the merits of their claim that the substantive

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requirements of Section 30(A) preempt N.H. Laws of 2011, Chapters 223 and 224 and RSA 167:64, as amended. b. RSA 126-A:3, VII(a) and RSA 167:64, as amended, are facially preempted by the Supremacy Clause because they establish methodologies that do not assure rates consistent with efficiency, economy, and quality of care, and equal access to care and services. In a facial challenge to legislation, the plaintiffs must establish that no set of circumstances exists under which the legislation would be valid. Pharm. Research & Mfrs. of Am. v. Concannon, 249 F.3d 66, 77 (1st Cir. 2001). The existence of a hypothetical or potential conflict is insufficient to warrant the preemption of the state statute. Id. (quoting Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982)). Section 30(A) requires States to implement reimbursement methodologies that produce reimbursement rates greater than or equal to an amount sufficient to assure that payments are consistent with efficiency, economy, and quality of care and are 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 in the geographic area. (emphasis added). The plain meaning of the word assure is to make sure of something, to make (a doubtful thing) certain; guarantee, and to make safe or secure. WEBSTERS NEW WORLD COLLEGE DICTIONARY 86 (4th Ed. 2000). Thus, a reimbursement methodology capable of producing reimbursement rates substantially below the statutorily-required minimum does not assure, make certain, or guarantee payments consistent with efficiency, economy, and quality of care, and equal access to care and services. In this case, RSA 126-A:3, VII(a) and RSA 167:64, as amended, are facially preempted by Section 30(A) because they allow the State to set reimbursement rates that will not assure, make certain, or guarantee payments consistent with efficiency, economy, and quality of care,

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and equal access to care and services. RSA 126-A:3, VII(a) permits DHHS, with the approval of the legislative fiscal committee, to reduce provider reimbursement rates if [DHHSs] expenditures are projected to exceed [its] annual appropriation, without regard to whether such reductions will assure payments consistent with efficiency, economy, and quality of care, and equal access to care and services. This methodology is not limited by the requirements set forth in Section 30(A) nor is it capable of assuring payments consistent with efficiency, economy, and quality of care, and equal access to care and services. Similarly, RSA 167:64, as amended, is not limited by the requirements of Section 30(A) nor is it capable of assuring payments consistent with efficiency, economy, and quality of care, and equal access to care and services as its predecessor did. Rather, RSA 167:64, as amended, permits the State to budget any amount of UCC funds for the general fund and to leave no money to fund the Medicaid or DSH programs. Thus, RSA 167:64, as amended, provides the State with the ability to underfund the Medicaid and DSH programs and effectively set Medicaid reimbursement rates at amounts insufficient to assure payments consistent with efficiency, economy, and quality of care, and equal access to care and services for Medicaid recipients, as it has done in this case.19 The plain language of Section 30(A) forbids the use of such methodologies. Accordingly, because RSA 126-A:3, VII(a) and RSA 167:64, as amended, directly conflict with, and stand as an obstacle to the accomplishment and execution of the full purposes of, Section 30(A), the Medicaid Act facially preempts them. c. Plaintiffs are likely to succeed on the merits of their claims that RSA 126A:3, VII(a), the Rate Reduction Enactments, Laws of 2011, Chapters 223 and
19

It bears repeating that the State amended RSA 167:64 in 2009 apparently to comply with the requirements of the Medicaid Act. This methodology included RSA 167:64, I(a), which provided: no less than 50 percent of the moneys paid into the [UCC] fund . . . be utilized to support uncompensated care in hospitals . . . . The State has now removed this limitation on its reimbursement methodology and, in doing so, has created a methodology that does not assure payments consistent with Section 30(A).

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224, and RSA 167:64, as amended, directly conflict with, and stand as an obstacle to, 42 U.S.C. 1396a(b) and 42 C.F.R. 430.12. A preemption analysis requires an examination of congressional intent, and federal regulations have no less preemptive effect than federal statutes. Community Pharms. of Indiana, Inc. v. Indiana Family & Social Servs. Administration, Case No. 1:11-cv-0893-TWP-DKL, slip op. at 5 (S.D. Ind. July 8, 2011) (citing Fidelity Federal Savings & Loan Assn v. de la Cuesta, 458 U.S. 141, 152-53 (1982)). 42 U.S.C. 1396a(b) and 42 C.F.R. 430.12 require state plan amendments to the State Medicaid plan to be submitted and approved by CMS. 42 C.F.R. 430.12(c) states in relevant part that: The [state] plan must provide that it will be amended whenever necessary to reflect . . . (ii) Material changes in State law, organization, or policy, or in the States operation of the Medicaid program. New Hampshires state plan includes this requirement and parrots the language of 42 C.F.R. 430.12(c). See Feyrer Declaration at Exhibit V (State Plan Section 7.1). Additionally, [t]he state plan must be amended to reflect changes in federal law or policy or material changes in state law, organization, policy, or operation of the state Medicaid program, and the amendments also must be submitted for [CMS] approval. Oregon Assn of Homes for Aging, Inc., 5 F.3d at 1241 (9th Cir. 1993) (citing 42 C.F.R. 430.12(c)); see Wis. Hosp. Assn v. Reivitz, 820 F.2d 863 (7th Cir. 1987). The States failure to do so renders the resulting material change in state law, organization, or operation of the state Medicaid program invalid and of no force and effect. Oregon Assn of Homes for Aging, Inc., 5 F.3d at 1241 (9th Cir. 1993); see Community Pharms. of Indiana, Inc., Case No. 1:11-cv-0893-TWP-DKL, slip op. at 9 (entering temporary restraining order on theory that State could not enforce fee reduction prior to HHS review and approval). In this case, RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011,

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Chapters 223 and 224, and RSA 167:64, as amended by Chapter 224, directly conflict with, and stand as an obstacle to, 42 U.S.C. 1396a(b) and 42 C.F.R. 430.12. RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended by Chapter 224, all materially changed state law, policy, and operation of the States Medicaid program and therefore had to be submitted to CMS for review and approval as state plan amendments. Since they were enacted, neither RSA 126-A:3, VII(a), the Rate Reduction Enactments, Laws of 2011, Chapters 223 and 224, nor RSA 167:64, as amended by Chapter 224, were ever submitted to CMS for review and approval as state plan amendments. Accordingly, RSA 126-A:3, VII(a), the Rate Reduction Enactments, Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, are unenforceable and of no force and effect until they are reviewed and approved by CMS as state plan amendments. In sum, Plaintiffs have shown that they are likely to succeed on the merits of their claims that Section 30(A), 42 U.S.C. 1396a(b), and 42 C.F.R. 430.12 preempt RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended. 2. Plaintiffs will suffer irreparable harm in the absence of preliminary injunctive relief because Medicaid beneficiaries will be denied care and services and Medicaid providers will continue to lose considerable revenue and be forced to cut services and reduce staff. As stated earlier, Section 30(A) requires states to set reimbursement rates and implement rate-setting methodologies sufficient to assure payments consistent with efficiency, economy, quality of care, and equal access to care and services for Medicaid recipients. The equal access to care and services provision requires that a state plan establish reimbursement rates sufficient to enlist enough providers to ensure that medical services are generally available to Medicaid recipients. Cal. Pharms. Assn, 596 F.3d at 1113; King, 776 F. Supp. at 655; Clark, 758 F.

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Supp. at 575-76; DeGregorio, 500 F. Supp. at 547-48. Thus, to show a risk of irreparable harm, [P]laintiffs may show either, as Medicaid beneficiaries, that enforcement of a proposed rule may deny them medical care, or, as Medicaid providers, that they will lose considerable revenue through the reduction in payments that they will be unable to recover due to the States Eleventh Amendment sovereign immunity. Cal. Pharms. Assn, 596 F.3d at 1113-14 (internal quotations omitted). Additionally, 42 U.S.C. 1396a(b), and 42 C.F.R. 430.12 require that material changes in state law, policy, or operation of the States Medicaid program be submitted to CMS for review and approval. These laws are designed to safeguard the public and prevent the State from enacting and enforcing legislation and regulations that undermine the purposes of the Medicaid Act. It is well-settled that when a statute contains, either explicitly or implicitly, a finding that violations will harm the public, the courts may grant preliminary equitable relief on a showing of a statutory violation without requiring any additional showing of irreparable harm. Govt of the Virgin Islands, Dept of Conservation v. Virgin Islands Paving, Inc., 714 F.2d 283, 286 (3d Cir. 1983), superseded on other grounds by statute, Edwards v. HOVENSA, LLC, 497 F.3d 355 (3d Cir. 2007); see United States v. Richlyn Labs., Inc., 827 F. Supp. 1145, 1150 (E.D. Pa. 1992) (Indeed, because Congress has seen fit to act in a given area by enacting a statute, irreparable injury must be presumed in a statutory enforcement action.); United States v. DAnnolfo, 474 F. Supp. 220, 222 (D. Mass. 1979) (When the government acts to enforce a statute or make effective a declared policy of Congress, the standard of public interest and not the requirements of private litigation measure the propriety and need for injunctive relief.) (internal quotations omitted).

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In this case, if RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, remain in full force and effect, Plaintiff Providers will be forced to cut services or reduce staff in an attempt to remain financially stable and avoid closure. See OLeary Declaration 29-30; Kilfeather-Mackey Declaration 43-44; Rose Declaration 36-41; Dudley Declaration 33-35; Elwell Declaration 39-40; Batty Declaration 34-39; Lipman Declaration 38-41. These injuries are irreparable and Provider Plaintiffs have no way to avoid these ruinous actions. Provider Plaintiffs losses will also have a significant, adverse effect on Patient Plaintiffs access to Medicaid care and services. See id. Patient Plaintiff will find it increasingly difficult to find and access specific Medicaid services in his geographic area and will likely have difficulty securing appointments with providers. See Doe Declaration 14; see also Lipman Declaration 38-41. Moreover, because ongoing violations of Section 30(A), 42 U.S.C. 1396a(b), and 42 C.F.R. 430.12, will injure the public, the irreparable harm standard is met. Thus, because Plaintiffs will be immediately and significantly harmed if RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, are allowed to remain in full force and effect, the plaintiffs have shown irreparable harm on their Section 30(A) claims. 3. The balance of the equities and the public interest weigh in favor of preliminary injunctive relief. In balancing the equities, the Court must consider whether issuing a preliminary injunction will burden the defendant less than denying an injunction would burden the plaintiffs. Gonzalez-Droz, 573 F.3d at 79. [W]hen courts are faced with a conflict between financial concerns and preventable human suffering, they often have little difficulty concluding that the balance of hardships tips decidedly in plaintiffs favor. Community Pharms. of Indiana, Inc.,

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Case No. 1:11-cv-0893-TWP-DKL, slip op. at 9 (quoting Lopez v. Heckler, 713 F.2d 1432, 1437 (9th Cir. 1983)). In evaluating the impact on the public interest, the Court must consider whether some critical public interest exists that would be injured by granting preliminary relief. Hybritech Inc. v. Abbott Labs., 849 F.2d 1446, 1458 (Fed. Cir. 1988), abrogated on other grounds as recognized in Red Bend Ltd. v. Google, Inc., 2011 U.S. Dist. LEXIS 36217 (D. Mass. March 31, 2011). In this case, the balance of the equities and the public interest weigh in favor of a preliminary injunction. The burden on the Commissioner is less than the burden on the plaintiffs. The Commissioner need only comply with his federal duties under the Medicaid Act and refrain from enforcing illegal and unenforceable rate reductions and methodology changes. Conversely, illegal and inadequate reimbursement rates and methodologies will require Provider Plaintiffs to run multi-million dollar deficits. See, e.g., OLeary Declaration 28. Provider Plaintiffs will be forced to cut services and reduce staff. See, e.g., id. at 29. These adverse impacts threaten the discontinuance and delay of care and services to Patient Plaintiff who has ongoing medical needs. See Doe Declaration 14; see also Lipman Declaration 38-41. Regarding the public interest, Congress, in passing the Medicaid Act, expressed a strong public policy in favor of safeguarding access to health care. Schweiker v. Hogan, 457 U.S. at 590. In structuring the Medicaid program, Congress chose to direct those limited funds to persons who were most impoverished and whobecause of their physical characteristicswere often least able to overcome the effects of poverty. The legislative history of the 1965 Amendments makes clear that this group was not chosen for administrative convenience: These people are the most needy in the country, and it is appropriate for medical care costs to be met, first, for these people.

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Id. (quoting H.R. Rep. No. 213, 89th Cong., 1st Sess., pt. 1, p. 66 (1965)). Thus, while a State is free to exercise its judgment and reduce Medicaid appropriations and reimbursement rates, it may not do so purely for budgetary reasons or in a manner that violates federal law. The public has a strong interest in the faithful application of the laws, Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 1066 (D.C. Cir. 1998), and in maintaining a Medicaid program that provides efficient, economical, and quality care, as well as equal access to medical care and services. In this case, the State has undermined the public policy underlying the Medicaid Act by enacting large rate cuts, underfunding the Medicaid program, overtaxing hospitals, and significantly altering its rate-setting methodologies. The public has a significant interest in the continued solvency and operation of New Hampshires hospitals. Additionally, no critical public interest would be harmed by granting preliminary injunctive relief. In sum, Plaintiffs have shown that: (1) they are likely to succeed on the merits of their Supremacy Clause claims; (2) they will suffer immediate, irreparable injury if a preliminary injunction is not issued; (3) the burden on the State is substantially less than the burden on Plaintiffs; and (4) the public interest weighs in favor of preliminary injunctive relief. Accordingly, Plaintiffs are entitled to preliminary injunctive relief on their Supremacy Clause claims. C. Plaintiffs Are Entitled To A Preliminary Injunction On Their 42 U.S.C. 1983 Claims Because The State Has Violated Their Procedural Rights Established By Section 13(A)(ii) And 42 C.F.R. 447.205.

Section 13(A) and its implementing regulations create procedural rights that the plaintiffs may enforce under 42 U.S.C. 1983. Section 1983 imposes liability on anyone who, acting under color of state law, deprives a person of any rights, privileges, or immunities secured by the Constitution and laws. Rio Grande Community Health Ctr., Inc. v. Rullan, 397 F.3d 56, 72

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(1st Cir. 2005) (quoting 42 U.S.C. 1983). Not all violations of federal law give rise to 1983 actions: [the] plaintiff must assert the violation of a federal right, not merely a violation of federal law. Id. (quoting Blessing v. Freestone, 520 U.S. 329, 340 (1997) (emphases in original)). Such a right must be unambiguously conferred by the statutory provision at issue. Id. at 72-73 (quoting Gonzaga Univ. v. Doe, 536 U.S. 273, 283 (2002)). The Supreme Court, in Blessing [v. Freestone, 520 U.S. 329 (1997)], has laid out a three-part test to act as guidance in determining whether a provision creates a right that is enforceable under 1983: 1) whether Congress intended that the provision in question benefit the plaintiff, 2) whether the right supposedly protected by the statute is vague and amorphous so that its enforcement would strain judicial competence, and 3) whether the provision unambiguously imposes a binding obligation on the States. This test is merely a guide, however, as the ultimate inquiry is one of congressional intent. Gonzaga tightened up the Blessing requirements. It did not precisely follow the Blessing test but rather relied on several somewhat different factors in determining whether a right existed: whether the provision contains rightscreating language, whether the provision had an aggregate as opposed to an individualized focus, and the other sorts of enforcement provisions that Congress has provided for. Id. 1. Plaintiffs are likely to succeed on the merits of their claims that the State violated their procedural rights under Section (13)(A)(ii) and 42 C.F.R. 447.205. A series of cases from this Circuit establish that Section 13(A)(ii) creates procedural rights enforceable under Section 1983. First, in American Society of Consultant Pharms. v. Concannon, 214 F. Supp. 2d 23 (D. Me. 2002), overruled on other grounds by Long Term Care Pharm. Alliance v. Ferguson, 362 F.3d 50, 58-59 (1st Cir. 2004), an organization representing pharmacists sued the Maine Department of Human Services Commissioner alleging, in part, that the Department violated Section 13(A) of the Medicaid Act when it imposed an emergency rule reducing reimbursement rates for prescription drugs. Id. at 24. The plaintiff sought redress

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through Section 1983. Id. Applying the Blessing-Gonzaga factors, the court held that Section 13(A)(ii) supports a cause of action pursuant to Section 1983 by hospitals and Medicaid recipients. Id. at 28-29. In reaching this conclusion, the court stated: Section 13(A) mandates that a state plan provide . . . for a public process for determination of rates of payment under the plan for hospital services, nursing facility services, and services of intermediate care facilities for the mentally retarded under which . . . providers, beneficiaries and their representatives, and other concerned State residents are given a reasonable opportunity for review and comment on the proposed rates . . . 42 U.S.C. 1396a(a) (13) (A) (ii). This language speaks both in terms of a class of individuals benefited (providers, beneficiaries and their representatives, and other concerned State residents), and a duty of the state to provide those individuals with a reasonable opportunity for review and comment . . . Id. Thus, it satisfies the basic criteria of Gonzaga. Id. at 28. The court further concluded that the right conferred by Section 13(A)(ii) was the right to a reasonable opportunity to comment on changes to the rate of reimbursement for those particular services. Id. at 29. The same issue was addressed a year later in Long Term Care Pharmacists Alliance v. Ferguson. 260 F. Supp. 2d 282 (D. Mass. 2003), overruled by Long Term Care Pharms. Alliance v. Ferguson, 362 F.3d 50 (1st Cir. 2004). There, an organization representing pharmacists sued the Massachusetts Division of Health Care Finance and Policy alleging, in part, that the Division had violated Section 13(A) when it promulgated certain emergency rules that would reduce the reimbursement rate for long-term care pharmacy services. Id. at 286. The plaintiff sought preliminary injunctive relief under Section 1983 to prevent the emergency rules from taking effect. Id. at 289. Applying the Blessing factors, that court held that Section 13(A) establishes a clear right enforceable by the judiciary. Id. at 290. The court reasoned: Congress clearly intended for Section 13(A) to benefit beneficiaries and providers. The plain language of Section 13(A)

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specifically requires that providers, beneficiaries and their representatives be given a reasonable opportunity for review and comment on the proposed rates, methodologies, and justifications. 42 U.S.C. 1396a(a)(13)(A)(ii). The provision also unambiguously creates a binding obligation on Massachusetts by speaking in mandatory, rather than permissive, terms (A State plan for medical assistance must ... provide for a public process for determination of rates of payment under the plan for ... nursing facility services) (emphasis supplied). Finally, Section 13(A) provides a set of clear and understandable requirements that are within judicial competence to enforce. Id. The court further concluded that Section 13(A) could not be clearer: Defendant must provide a public process with a reasonable opportunity for review before implementing any rate changes for the services listed. Id. The Division argued, however, that the plaintiffs members did not provide services encompassed by Section 13(A) and therefore the notice and comment provisions of the statute had no application. Id. at 291-92. The court disagreed, finding that the plaintiffs members provided services covered by Section 13(A) and, in part, entered a preliminary injunction on that basis. Id. at 292, 295. The court further highlighted the dangers of noncompliance with Section 13(A)s procedural requirements: [w]here interested persons have not been afforded an opportunity to comment . . . it is more likely that significant factors will be overlooked or too easily discounted. In contrast, . . . inviting public comment . . . provides further assurance of agency exposure to various considerations, and militates against the post hoc review of the agencys reasoning process. Id. at 292 (quoting Kollett v. Harris, 619 F.2d 134, 140 n.5 (1st Cir. 1980)). On appeal, the First Circuit agreed with the district court that subsection 13(A) requires something on the order of notice and comment rulemaking for states in their setting of rates for

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reimbursement of hospital services, nursing facility services, and services for intermediate care facilities for the mentally retarded provided under the Medicaid Act. Long Term Care Pharm. Alliance, 362 F.3d at 54 (citing Am. Soc. of Consultant Pharms., 214 F. Supp. 2d at 28-29). The First Circuit further stated that subsection 13(A) does provide notice and comment rights as to rates set for nursing facility services, but concluded that the plaintiffs members did not provide services covered by Section 13(A). Id. at 55.20 In its extended discussion of the legislative history and intended purpose of Section 13(A), the court made a crucial observation regarding legislative intent: it is easy to imagine why Congress wanted special protection for care facilities. Their sunk-cost structure makes them especially vulnerable to slow destruction by long-term underfunding; by contrast, the market reaction is likely to be quick and decisive if the Commonwealth seeks to underpay for drugs, whether provided by ordinary retailers or closed pharmacies. If WAC plus 5% is not enough to elicit an adequate supply, the Division will simply be forced to pay more and promptly so. Thus, whether or not Congress even thought specifically about closed pharmacies, the likely purpose for its broader distinction suggests a rationale that leaves closed pharmacies on the unprotected side of the line and outside subsection (13)(A). We so hold. Id. at 56 (emphasis added). Thus, while the Court of Appeals did not reach the question of whether Section 13(A) rights may be enforced through Section 1983, its lengthy discussion of Section 13(A) and favorable citation to American Society of Consultant Pharmacists strongly indicates that the First

20

The First Circuit explained: [I]t cannot be enough to trigger subsection 13(A) that Long Terms members happen to be doing something (providing drugs) for which reimbursement rates would require notice and comment rulemaking if done directly by the nursing home. Id. (emphasis in original).

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Circuit agrees that Section 13(A)(ii) confers procedural rights that hospitals and Medicaid recipients may enforce via Section 1983.21 Indeed, the First Circuits statements in Long Term Care Pharmacists Alliance find ample support in Blessing and Gonzaga. The Blessing-Gonzaga factors indicate that Section 13(A) creates procedural rights for hospitals and Medicaid beneficiaries that the plaintiffs may enforce via Section 1983. In 1997, Congress repealed an earlier version of Section 13(A), the so-called Boren Amendment,22 and replaced it with statutory language establishing carefully and clearly prescribed procedural rights. Among the procedural rights established in Section (13)(A)(ii) is the right of hospitals and Medicaid recipients to a reasonable opportunity to comment on proposed changes to the rate of reimbursement for hospital services. Am. Soc. of Consultant Pharms., 214 F. Supp. 2d at 28-29. These rights are not vague or amorphous. Section 13(A) uses rights-creating language such as must provide for a public process under which proposed rates and methodologies are
21

Other circuit courts have also indicated that Section 13(A) creates procedural rights that hospitals and Medicaid recipients may enforce via Section 1983. See Fla. Assn of Rehab. Facilities, Inc. v. Dept of Health & Human Rehab. Servs., 526 F.3d 685, 690 (11th Cir. 2008) (finding that Section 13(A) require[s] states to follow these steps: . . .; (ii) give reasonable opportunity for review and comment on the rates and their methodologies and justifications to providers, beneficiaries and their representatives, and concerned State residents; . . . . and reaching the merits of plaintiffs Section 13(A) claim); Childrens Seahorse House v. Waldman, 197 F.3d 654, 659 (3rd Cir. 1999) ([Section 13(A)] now mandates that a state provide for a public process for determination of rates . . . . Providers, beneficiaries, and other concerned state residents must be given a reasonable opportunity for review of and comment on the proposed rates, methodologies, and justifications.).
22

The so-called Boren Amendment provided in relevant part: A State plan for medical assistance must . . . provide . . . for payment . . . of the hospital services . . . through the use of rates . . . which the State finds, and makes assurances satisfactory to the Secretary, are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities . . . to assure that individuals eligible for medical assistance have reasonable access . . . to inpatient hospital services of adequate quality. 42 U.S.C. 1396a(a)(13)(A) (1992). One of the primary purposes for passing the Boren Amendment was to provide states with flexibility in setting reimbursement rates and thereby reduce Medicaid costs. Evergreen Presbyterian Ministries v. Hood, 235 F.3d 908, 919 n.12 (5th Cir. 2000), overruled on other grounds by Equal Access for El Paso, Inc. v. Hawkins, 509 F.3d 697, 704 (5th Cir. 2007). However, because of the litigation that was generated after the Boren Amendments enactment, Congress recognized that the Amendment had the opposite effect on Medicaid costs than it had intended. Id. Accordingly, Congress replaced the Boren Amendment with the more limited requirement that states provide for a public notice-and-comment process in their reimbursement ratemaking decisions. Id.

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published, and hospitals and Medicaid recipients are given a reasonable opportunity for review and comment. Determining whether there has been adequate notice and a reasonable opportunity to comment is well within the judicial wheelhouse. Finally, CMSs primary enforcement mechanism, the discontinuance of federal matching funds, is ill-equipped to enforce Section (13)(A)(ii). States are only required to assure CMS that they have a public process in place that conforms with Section 13(A). See 42 C.F.R. 430.10 (The State plan is a comprehensive written statement submitted by the agency describing the nature and scope of its Medicaid program and giving assurance that it will be administered in conformity with the specific requirements of title XIX, the regulations in this Chapter IV, and other applicable official issuances of the Department.). New Hampshires state plan, quite literally, does nothing more than that. It simply states that the State has in place a public process which complies with the requirements of Section [1396a](a)(13)(A) of the Social Security Act. See Feyrer Declaration at Exhibit B (State Plan, Attachment 4.19 A Page 6, Inpatient Hosp. Servs., Public Process for Determination of Rates). It does not appear that CMS oversees this public process or has any way of determining whether the State is complying with Section 13(A)s requirements.23 Thus, no adequate enforcement mechanism exists that would help providers and Medicaid beneficiaries secure the procedural rights afforded them under Section 13(A). Accordingly, the Blessing-Gonzaga factors establish that Provider Plaintiffs and Patient Plaintiff have procedural rights under Section 13(A) that they may enforce through Section 1983. a. The State failed to comply with Section 13(A) as to each of the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended.
23

Additionally, CMSs enforcement mechanism could ultimately harm hospitals and Medicaid beneficiaries more than it helps. This would effectively chill hospitals and Medicaid recipients from reporting violations.

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The State has failed to comply with the notice-and-comment requirements of Section (13)(A)(ii) with respect to the Rate Reduction Enactments, Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended. Specifically, the State failed to give providers, beneficiaries and their representatives, and other concerned State residents . . . a reasonable opportunity for review and comment on the proposed rates, methodologies, and justifications. 42 U.S.C. 1396a(a)(13)(A). Rather, the history of each rate reduction and methodology change demonstrates that the State did not provide hospitals or Medicaid beneficiaries with notice and a reasonable opportunity for review and comment on the proposed rate reductions and methodology changes. See, e.g., OLeary Declaration 16-20. Also, as stated more fully below, the State did not comply with the notice requirement of 42 C.F.R. 447.205. 42 C.F.R. 447.205(a), one of Section 13(A)s implementing regulations, provides that the [state Medicaid] agency must provide public notice of any significant proposed change in its methods and standards for setting payment rates for services. A change in the reimbursement rate of 1% or less can constitute a significant change under 42 C.F.R. 447.205(a) depending on the circumstances. See N.C., Dept of Human Servs., Div. of Med. Assistance, 999 F.2d 767, 771 (4th Cir. 1993); but see Cal. Assn of Bioanalysts v. Rank, 577 F. Supp. 1342, 1351 (C.D. Cal. 1983) (finding that reimbursement rate change of 1% or less does not constitute a significant change under 42 C.F.R. 447.205). Courts have held that the notice requirements of 42 C.F.R. 447.205 apply to any changes in methods and standards for setting payment rates made by the State, including significant changes made by the legislature. See, e.g., Cal. Pharms. Assn, 596 F.3d at 1107; Wis. Hosp. Assn, 820 F.2d at 865; Mission Hosp. Regional Med. Ctr., 168 Cal. App. 4th at 486-88.

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In this case, the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, constitute significant changes to the methods and standards for setting payment rates for Medicaid Services. The October 30, 2008 rate reduction effected a 33.48% reduction in the outpatient reimbursement rate. The November 21, 2008 rate reduction effected a 10% reduction in the inpatient reimbursement rate. In 2010 alone, the States implementation of methodology changes to provider-based billing, outpatient radiology services and cost settlements, and suspension of catastrophic payments cost the Provider Plaintiffs over $10 million. See OLeary Declaration 21; Kilfeather-Mackey Declaration 35; Rose Declaration 29; Walcek Declaration 25; Plamondon Declaration 25; Dudley Declaration 25; Marzinzik Declaration 24; Elwell Declaration 31; Batty Declaration 26; Lipman Declaration 31. N.H. Laws of 2011, Chapters 223 and 224 and RSA 167:64, as amended, have effected a significant change in the reimbursement methodology that will cause the States hospital system to incur enormous losses in uncompensated care. See id. Consequently, the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, constitute significant changes to the methods and standards for setting payment rates for Medicaid services. Accordingly, each rate reduction and methodology change triggered the States notice and comment obligations under Section 13(A) and 42 C.F.R. 447.205.24

24

Additionally, 42 C.F.R. 447.205(c) requires the notice: (1) [d]escribe the proposed change in methods and standards; (2) [g]ive an estimate of any expected increase or decrease in annual aggregate expenditures; (3) [e]xplain why the agency is changing its methods and standards; (4) [i]dentify a local agency in each county (such as the social services agency or health department) where copies of the proposed changes are available for public review; (5) [g]ive an address where written comments may be sent and reviewed by the public; and (6) [i]f there are public hearings, give the location, date and time for hearings or tell how this information may be obtained. The State failed to comply with all of these requirements for each Rate Reduction Enactment, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended.

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Additionally, courts have held that a State must comply with 42 C.F.R. 447.205(d) before a significant change to the reimbursement rate or methodology may be put into effect. Illinois v. Shalala, 4 F.3d 514 (7th Cir. 1993); Cal. Assn of Bioanalysts, 577 F. Supp. at 1348. In this case, the Rate Reduction Enactments, N.H. Laws of Chapter 2011, Chapters 223 and 224, and RSA 167:64, as amended, have not been published in accordance with 42 C.F.R. 447.205(d) though they effect significant changes to the Medicaid reimbursement rates and methodologies. The States failure to comply with the notice requirements of 42 C.F.R. 447.205 renders each rate reduction and change in methodology unenforceable and of no force and effect until DHHS complies with the requirements of 42 C.F.R. 447.205. See N.C., Dept of Human Servs., Div. of Med. Assistance, 999 F.2d at 771-72 (affirming Secretarys conclusion that significant changes to North Carolinas reimbursement rates could not be put into effect until the State complied with 42 C.F.R. 447.205); Illinois v. Shalala, 4 F.3d at 518 (affirming the Secretarys conclusion that Illinois legislatively mandated rate changes could not be put into effect under 42 C.F.R. Sec. 447.205 . . . until the day after they were published in the Illinois Register.). Thus, Plaintiffs are likely to succeed on the merits of their Section 1983 claims that the State violated their rights to notice and a reasonable opportunity to comment on proposed rate reductions and methodology changes under Section 13(A) and its implementing regulation, 42 C.F.R. 447.205. 2. Plaintiffs are likely to suffer irreparable harm in the absence of preliminary injunctive relief because Medicaid beneficiaries will be denied care and services and Medicaid providers will continue to lose considerable revenue and will be forced to cut Medicaid services and reduce staff. As stated earlier, to show a risk of irreparable harm, plaintiffs may show either, as Medicaid beneficiaries, that enforcement of a proposed rule may deny them medical care, or, as Medicaid providers, that they will lose considerable revenue through the reduction in payments

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that they will be unable to recover due to the States Eleventh Amendment sovereign immunity. Cal. Pharms. Assn, 596 F.3d at 1113-14 (internal quotations omitted). The Medicaid statutes notice and comment provisions (especially those related to the most vulnerable populations in hospitals, . . .) are included in the statute in order to ensure that any material actions taken by state regulators affecting these populations will be fully informed in terms of the impact on patients prior to the action being taken. Long Term Care Pharm. Alliance, 260 F. Supp. 2d at 293-94, overruled by, Long Term Care Pharm. Alliance v. Ferguson, 362 F.3d 50 (1st Cir. 2004); see Kollett, 619 F.2d at 140 n.5 (Where interested persons have not been afforded an opportunity to comment . . . it is more likely that significant factors will be overlooked or too easily discounted. In contrast, . . . inviting public comment . . . provides further assurance of agency exposure to various considerations, and militates against the post hoc review of the agencys reasoning process.). Moreover, when a statute contains, either explicitly or implicitly, a finding that violations will harm the public, the courts may grant preliminary equitable relief on a showing of a statutory violation without requiring any additional showing of irreparable harm. Govt of the Virgin Islands, Dept of Conservation v. Virgin Islands Paving, Inc., 714 F.2d 283, 286 (3d Cir. 1983), superseded on other grounds by statute, Edwards v. HOVENSA, LLC, 497 F.3d 355 (3d Cir. 2007). In this case, if the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, remain in full force and effect, Provider Plaintiffs will be forced to cut Medicaid services or reduce staff in an attempt to remain financially stable. See, e.g., OLeary Declaration 29. These injuries are irreparable and Provider Plaintiffs have no way to avoid these ruinous actions. Provider Plaintiffs losses will likely also have an adverse impact on Patient Plaintiffs access to medical care and services. See Lipman Declaration 38-

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41; see also Doe Declaration 14. Moreover, because a violation of Section 13(A) will continue to result in significant harm to the public, the irreparable harm standard is met. Accordingly, because Plaintiffs will be significantly harmed if the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, are allowed to remain in full force and effect, Plaintiffs have shown irreparable harm on their Section 13(A) claims. 3. The balance of the equities and the public interest weigh in favor of preliminary injunctive relief. As stated earlier, in balancing the equities, the Court must consider whether issuing a preliminary injunction will burden the defendants less than denying an injunction would burden the plaintiffs. Gonzalez-Droz, 573 F.3d at 79. Moreover, in evaluating the impact on the public interest, the Court must consider whether some critical public interest exists that would be injured by granting preliminary relief. Hybritech Inc., 849 F.2d at 1458. In this case, enjoining the continued enforcement of the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, will burden the Commissioner less than denying an injunction will burden the Plaintiffs. The Commissioner need only comply with his federal duties under the Medicaid Act by refraining from enforcing illegally enacted rate reductions and methodology changes. Conversely, denying the injunction will continue to force Provider Plaintiffs to receive illegal and unenforceable reimbursement rates that were not promulgated in accordance with the Medicaid Acts requirements and did not afford the Plaintiffs their procedural rights. Regarding the public interest, the public has a strong interest in ensuring that the State abides by the provisions of the Medicaid Act and does not compromise the fiscal integrity of its hospital system by imposing unenforceable rate reductions and methodologies on Plaintiffs. See Mova Pharm. Corp., 140 F.3d at 1066 (finding that the public has a strong interest in the faithful

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application of the laws). Additionally, no critical public interest will be injured by granting preliminary relief. In sum, Plaintiffs have shown that: (1) they are likely to succeed on the merits of their Section 1983 claims; (2) they will suffer immediate, irreparable injury if a preliminary injunction is not issued and illegal rate reductions and methodologies are allowed to remain in effect; (3) the burden on the State is substantially less than the burden on them; and (4) the public interest weighs in their favor. Accordingly, Plaintiffs are entitled to preliminary injunctive relief on their Section 1983 claims. D. Plaintiffs Are Not Required To Post A Bond In This Case Federal Rule of Civil Procedure 65(c) provides in part that [n]o restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper. Although the rule speaks in mandatory terms, an exception to the bond requirement has been crafted for, inter alia, cases involving the enforcement of public interests arising out of comprehensive federal health and welfare statutes. Pharm. Socy of the State of New York, Inc. v. N.Y. State Dept of Social Servs., 50 F.3d 1168, 1174 (2d Cir. 1995); see Crowley v. Local No. 82, Furniture & Piano Movers, 679 F.2d 978, 1000 (1st Cir. 1982) (recognizing that no bond is required in suits to enforce important federal rights or public interests and citing cases), revd on other grounds, 467 U.S. 526 (1984). In this case, Plaintiffs seek to enforce public interests arising out of the federal Medicaid statute. Thus, Plaintiffs are not required to post a bond in this case. IV. CONCLUSION

For the above reasons, Plaintiffs are entitled to a preliminary injunction on their Section 30(A) Supremacy Clause claims and Section 13(A) Section 1983 claims. Plaintiffs are likely to

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succeed on the merits of their Section 30(A) Supremacy Clause claims because Section 30(A) preempts RSA 126-A:3, VII(a), the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended. Plaintiffs will be irreparably harmed if these rate reductions and methodology changes remain in effect. Provider Plaintiffs will be forced to cut services and reduce staff. Patient Plaintiff will no longer have access to services that have been cut and will find it increasingly difficult to access medical care. Moreover, because a violation of Section 30(A) adversely effects the public, irreparable injury is presumed. Finally, the burden on the Commissioner to comply with his federal duty is significantly less than the burden on Plaintiffs, and the public has a strong interest in the continued operation and solvency of the States hospital system. Plaintiffs are also likely to succeed on the merits of their Section 13(A) Section 1983 claims because they have enforceable, procedural rights under Section 13(A) and have shown that the State has violated those rights. Plaintiffs will be irreparably harmed if the Rate Reduction Enactments, N.H. Laws of 2011, Chapters 223 and 224, and RSA 167:64, as amended, remain in effect. Provider Plaintiffs will be forced to cut back services and reduce staff. Patient Plaintiff will no longer have access to services that have been cut and will find it increasingly difficult to access medical care. Moreover, because a violation of Section 13(A) adversely affects the public, irreparable injury is presumed. Also, the burden on the Commissioner to comply with his federal duty is significantly less than the burden on Plaintiffs. Finally, the public has a strong interest in assuring that: (1) DHHS has input from hospitals and Medicaid recipients before reducing its reimbursement rates or changing its reimbursement methodologies; (2) illegal rate reductions and methodology changes do not jeopardize the

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continued operation of the States hospital healthcare system; and (3) the law is applied faithfully.

Respectfully submitted, PROVIDER PLAINTIFFS, By their Attorneys, NIXON PEABODY LLP

Dated: July 25, 2011

/s/ W. Scott OConnell W. Scott OConnell, Esquire N.H. Bar No. 9070 Gordon J. MacDonald, Esquire N.H. Bar No. 11011 Emily P. Feyrer, Esquire (Petition for Admission Pending) N.H. Bar No. 20434 900 Elm Street, 14th Floor Manchester, NH 03101-2031 (603) 628-4000 soconnell@nixonpeabody.com gmacdonald@nixonpeabody.com efeyrer@nixonpeabody.com

OF COUNSEL:

/s/ John E. Friberg, Jr. John E. Friberg, Jr., Esquire N.H. Bar No. 11287 Elliot Health System One Elliot Way, Suite 303 Manchester, NH 03103 (603) 663-8940 jfriberg@Elliot-HS.org

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/s/ Constance Sprauer Constance Sprauer, Esquire N.H. Bar No. 16879 Exeter Hospital 5 Alumni Drive Exeter, NH 03833 (603) 742-5252 csprauer@ehr.org

/s/ Erica Bodwell Erica Bodwell, Esquire N.H. Bar No. 8915
Southern New Hampshire Medical Center

8 Prospect Street Nashua, NH 03061 (603) 577-2677 erica.bodwell@snhmc.org

/s/ Mitchell Jean Mitchell Jean, Esquire N.H. Bar No. 1261 LRGHealthcare 80 Highland Street Laconia, NH 03246 (603) 524-2890 mjean@lrgh.org

JOHN DOE, By his attorney, ORR & RENO, P.A.

/s/ William L. Chapman William L. Chapman, Esquire N.H. Bar No. 397 One Eagle Square Concord, NH 03302 (603) 224-2381 wchapman@orr-reno.com

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