SAN FRANCISCO (CN) – The Ninth Circuit reversed a lower court decision Monday that has left hospitals in states neighboring California saying they lost millions in underpaid claims.
A three-judge panel ruled unanimously that the California Department of Health Care Services should not have to reimburse 19 hospitals in Nevada, Oregon and Arizona for the reportedly underpaid services.
The original decision by the district court and Monday’s reversal hinge on the legal interpretation of the commerce clause.
“When a state is acting as a market participant, rather than a market regulator, its decisions are exempted from the dormant Commerce Clause,” U.S. Circuit Judge Ferdinand Fernandez wrote on behalf of the panel in a 17-page opinion.
According to the U.S. Constitution and ensuing case law, states may not regulate products with the intent of harming interstate commerce.
For example, California’s regulation of milk is more rigorous than federal law.
California is allowed to place more restrictive regulations on milk as long as the regulations apply evenly. Placing regulations only on milk imported from other states would violate the commerce clause.
In the present instance, the 19 hospitals from neighboring states claimed California did just that in regard to the health insurance market when it established new criteria for medical reimbursements to neighboring states.
The new rates were incorporated as part of Medi-Cal, California’s mechanism for distributing Medicaid payments to participants in the federal program.
The hospitals said the newly introduced policy was illegal and would costs them millions of dollars annually, particularly as California residents living near the borders of the three states often make use of out-of-state hospitals for emergency treatment.
One plaintiff, the University Medical Center of Southern Nevada, is the only Level I trauma center within a 200-mile radius of Las Vegas. And plaintiff Renown Regional Medical Center in Reno is the only Level II trauma center between Sacramento and Salt Lake City.
In 2015, District Court Judge Edward Chen agreed with plaintiffs’ arguments that California’s new regulations violate the commerce clause, but the Ninth Circuit said Chen’s ruling failed to account for the fact that California is a market participant, not just a regulator.
“States are not merely regulators, they are also economic actors that participate in the marketplace,” Fernandez wrote.
The panel determined that the California Health Department set reimbursement rates in a similar manner to private insurance providers and that their decisions regarding which hospitals they would or would not reimburse were akin to the decisions made by other insurance providers in the marketplace.
“Like others in the market, no one is required to deal with the department,” Fernandez wrote. “The beneficiaries (insureds) who receive protection through the program voluntarily choose to participate.”
Establishing the state as a market participant rather than a regulator resulted in the collapse of the rest of the hospital’s claims, which all hinged on the commerce clause.
“The district court’s resolution of the market participant issue was the foundation of its decision’s whole edifice and with the demolition of that foundation, the whole edifice falls and shatters,” Fernandez wrote.
The case was sent back to the Northern District of California federal court to decide the matter of attorney’s fees and other outstanding issues.