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Ninth Circuit: California Does Not Violate Commerce Clause When Setting Lower Rates for Out-of-State Hospitals

Litigation & Dispute Resolution Alert Rodney W. Ott

Can a state agency set lower Medicaid reimbursement rates for out-of-state hospitals without discriminating against interstate commerce? The Ninth Circuit answered that question “yes” in Asante v. California Department of Health Care Services, ___ F.3d ___, 2018 WL 1570659 (April 2, 2018). In Asante, Ninth Circuit considered a program, Medi-Cal, administered by the California Department of Health Services. Under this program, the Department issued regulations setting lower Medicaid reimbursement rates for out-of-state hospitals than for in-state hospitals providing equivalent services to California residents. Nineteen hospitals in Oregon, Nevada and Arizona located near the borders of California sued, alleging among other claims that California's actions violated the dormant Commerce Clause of the United States Constitution. The trial court agreed, finding that California's reimbursement policies violated the dormant Commerce Clause, and awarded the hospitals attorney fees.

The Ninth Circuit reversed the trial court, beginning its decision with a discussion of the underlying dormant Commerce Clause doctrine established by the Supreme Court. The Supreme Court has long held that the Commerce Clause in the U.S. Constitution has a "negative" power which prevents states from unjustifiably discriminating against or burdening the flow of interstate commerce. Under the so-called "dormant" Commerce Clause, a state cannot retreat into economic isolation or regulate in a way which improperly benefits in-state economic interests or burdens out-of-state competitors. 

But the Supreme Court has also recognized a "market participant" exception to the dormant Commerce Clause. When the state acts as a "market participant" rather than a market regulator, its decisions and activity are exempted from the dormant Commerce Clause. The theory is that a state, when acting as a market participant, can choose who to deal with, just as any other business can, and therefore can favor its own citizens if it chooses to do so. Under this exception, the Supreme Court has held, for example, that a state can favor in-state scrap processors over out-of-state processors when paying a "bounty" on scrapping abandoned cars, favor state residents when selling cement from a state-owned cement plant, or favor its own residents when contracting on city-owned construction projects—all without violating the dormant Commerce Clause. 

While the line between a state functioning as a market participant and regulator is not always clear, in Asante, the Ninth Circuit had little trouble holding that California's actions were "proprietary" rather than "regulatory" and only affected "the immediate parties with which the government transacts business." The court compared the State of California to "a private insurer participating in the market." A key part of its decision was that participation in the Medi-Cal program was voluntary: "the Hospitals are not required to participate in the Medi-Cal insurance program; no hospital is. They may or may not, as they see fit." It is correct that, if a beneficiary of the Medi-Cal program wants to use an out-of-state hospital, the beneficiary must determine whether the hospital participates, but "that is the very sort of issue that is faced regularly by insureds in the private insurance market." The court also pointed out that the Department was subject to market pressures and had to set its payment rates at a level sufficient to attract enough hospitals in an area to participate. 

Finally, the Ninth Circuit was unconvinced by the argument that the out-of-state hospitals were required, due to federal law or their own state law, to provide emergency services to everyone, including indigent Medi-Cal beneficiaries: "We fail to see how that removes the Department from the market participant category. The burdens imposed by the statutes are not imposed by the Department; they apply to everyone regardless of their wealth or insurance status, if any. That is, if a hospital desires payment by others, it must follow the policies of the entity paying them -- whether that is the Department, or an insurance company, or another payor, or someone else." 

What’s Next?

By holding that states may discriminate against out-of-state hospitals, the next question is whether other states in the Ninth Circuit will respond to California in kind. It also remains to be seen (1) whether other similar state agencies outside the Ninth Circuit will follow California’s lead, (2) whether other hospitals will bring similar Commerce Clause challenges, and (3) how those suits will be decided. The question decided in Asante remains unsettled outside the Ninth Circuit.

For additional information, please call your local Quarles & Brady attorney or contact