Motion to Dismiss - Opposition MPA - File by SantaCruzSentinel

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									 1   Dario de Ghetaldi – Bar No. 126782
     deg@coreylaw.com
 2   Jerry E. Nastari - Bar No. 151756
     jen@coreylaw.com
 3   Amanda L. Riddle – Bar No. 215221
     alr@coreylaw.com
 4   COREY, LUZAICH, PLISKA, DE GHETALDI & NASTARI LLP
     700 El Camino Real
 5   P.O. Box 669
     Millbrae, California 94030-0669
 6   Telephone: (650) 871-5666
     Facsimile: (650) 871-4144
 7
     Plaintiffs’ Co-Counsel
 8   [Other Plaintiffs’ Counsel Listed on Signature Page]

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10                                 UNITED STATES DISTRICT COURT
11                              NORTHERN DISTRICT OF CALIFORNIA
12                                                           Case No. 3:07-02888
13   COUNTY OF SANTA CRUZ, et al.,                           PLAINTIFFS’ MEMORANDUM OF
                                                             POINTS AND AUTHORITIES IN
14           Plaintiffs,                                     OPPOSITION TO DEFENDANT’S
                                                             MOTION TO DISMISS OR, IN THE
15                 v.                                        ALTERNATIVE, FOR SUMMARY
                                                             JUDGMENT
16   KATHLEEN SEBELIUS, Secretary of the
     Department of Health and Human Services,
17                                                           Hearing Date:       November 2, 2012
            Defendant.                                       Time:               9:00 AM
18                                                           Courtroom:          11
                                                             Judge:              Hon. Jeffrey S. White
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     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1                                                  TABLE OF CONTENTS

 2   I.      INTRODUCTION ............................................................................................................... 1 

 3   II.     STATEMENT OF FACTS.................................................................................................. 2 

 4   III.    SUBJECT MATTER JURISDICTION .............................................................................. 3 

 5           A.        Waiver of Sovereign Immunity ............................................................................... 3 

 6           B.        Claims “Under the Medicare Statute” ..................................................................... 5 

 7           C.        The Jurisdictional Requirement of Presentment Has Been Met ............................. 6 

 8           D.        There Are No Administrative Remedies to Exhaust ............................................... 9 

 9           E.        Alternatively, the Exhaustion Requirement Should Be Waived ........................... 11 

10   IV.     EQUAL PROTECTION ................................................................................................... 11 

11           A.        Congress Has Not Precluded Judicial Review of Constitutional Claims .............. 11 

12           B.        Standards of Review of Equal Protection Claims ................................................. 12 

13                     1.         General Principles of Rational Basis Review ........................................... 12 

14                     2.         Rational Basis Review of Agency Actions ............................................... 12 

15           C.        The Fundamental Purposes of the Medicare System Are Not Being Met ............ 13 

16           D.        The Agency Has Failed to Meet Its Own Payment Accuracy Standards .............. 15 

17           E.        The Secretary Has Failed to Adapt the Payment Localities to Changed

18                     Circumstances ....................................................................................................... 16 

19           F.        The Secretary Is Not Authorized to Decrease Payments to One Area in Order to

20                     Increase Them to Others ....................................................................................... 18 

21           G.        The Reasons Advanced by the Secretary Do Not Form a Rational Basis............. 19 

22                     1.         The Secretary’s Three Repeated Justifications for Inaction...................... 19 

23                     2.         The “Redistributive Impact” Between “Winners and Losers” .................. 20 

24                     3.         The Need to Obtain the “Support” of State Medical Associations ........... 22 

25                     4.         The Need for “Further Study” ................................................................... 23 

26                     5.         Administrative Burden .............................................................................. 24 

27                     6.         No Other Conceivable Rational Basis Exists ............................................ 26 

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                                                                  i
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   V.      UNLAWFUL DELEGATION .......................................................................................... 26 

 2           A.        The Challenge Is Not Time Barred ....................................................................... 26 

 3           B.        Plaintiffs Have Standing to Challenge the Secretary’s Unlawful Delegation ....... 27 

 4           C.        Plaintiffs Have Stated a Cognizable Claim for Unlawful Delegation ................... 27 

 5   VI.     DEFENDANT’S MOTION FOR SUMMARY JUDGMENT SHOULD BE DENIED .. 29 

 6   VII.    CONCLUSION ................................................................................................................. 30 

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                                                                 ii
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1                                               TABLE OF AUTHORITIES
 2
                                                                 Cases 
 3
     Am. Soc’y of Cataract & Refractive Surgery v. Shalala, 94 F. Supp.2d 914 (N.D. Ill. 2000) ..... 12
 4
     Am. Soc’y of Dermatology v. Shalala, 962 F.Supp. 141 (D.D.C. 1996) ...................................... 11
 5
     Bowen v. Massachusetts, 497 U.S. 879 (1988) .............................................................................. 4
 6
     Bowen v. N.Y., 476 U.S. 467 (1986)............................................................................................. 11
 7
     Briggs v. Sullivan, 886 F.2d 1132 (9th Cir. 1989) ..................................................................... 8, 9
 8
     Califano v. Yamasaki, 442 U.S. 682 (1979) ......................................................................... 7, 9, 11
 9
     Celotex v. Catrett, 477 U.S. 3172 (1986) ............................................................................... 29, 30
10
     City of Cleburne v. Cleburne Living Ctr., 473 U.S. 432 (1986) .................................................. 26
11
     Dandridge v. Williams, 397 U.S. 471 (1970) ............................................................................... 12
12
     Department of the Army v. Blue Fox, Inc. 525 U.S. 255 (1999) .................................................... 4
13
     FCC v. Beach Communications, Inc., 508 U.S. 307 (1993) ........................................................ 12
14
     Firth v. United States, 554 F.2d 990 (9th Cir.1977) ...................................................................... 6
15
     Furlong v. Shalala, 156 F.3d 384 (2nd Cir. 1998) ........................................................................ 14
16
     Gamboa v. Rubin, 80 F.3d 1338 (9th Cir. 1996) ........................................................................... 18
17
     Heckler v. Ringer, 466 U.S. 602 (1984) ......................................................................................... 6
18
     Hultzman v. Weinberger, 495 F.2d 1276 (3rd Cir.1974) .............................................................. 14
19
     In re Sanford Fork & Tool Co., 160 U.S. 247 (1895) .................................................................... 6
20
     In re University Medical Center, 973 F.2d 1065 (3rd Cir. 1992) ................................................. 14
21
     Johnson v. Shalala, 2 F.3d 918 (9th Cir. 1993)............................................................................. 11
22
     Lamberton v. Shalala, 857 F.Supp. 1349 (D.Ariz. 1994) ............................................................ 17
23
     Lands Council v. McNair, 537 F.3d 981 (9th Cir.2008) .............................................................. 13
24
     Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61 (1911) ........................................................ 12
25
     Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) ................................................................... 27
26
     Martin v. Shalala, 63 F.3d 497 (7th Cir. 1995) ............................................................................... 9
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     Mathews v. Eldridge, 424 U.S. 319 (1976) ................................................................................ 6, 7
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                                                                iii
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   Mathews v. Lucas, 427 U.S. 495 (1976) ...................................................................................... 12

 2   Mercy Hosp. & Med. Ctr., San Diego v. Harris, 625 F.2d 905 (9th Cir. 1980) .................... 13, 20

 3   Nashville C. & St.L. Ry. v. Walters, 294 U.S. 405 (1935) ........................................................... 16

 4   National Park and Conservation Assn. v. Stanton, 54 F.Supp.2d 7 (D.D.C. 1999) .................... 29

 5   Native Ecosystems Council v. U.S. Forest Service, 418 F.3d 953 (9th Cir. 2005) ....................... 26

 6   Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Cos., Inc., 210 F.3d 1099 (9th Cir. 2000) ............. 30

 7   North Star Alaska v. United States, 9 F.3d 1430 (9th Cir. 1993) .................................................... 3

 8   Northwest Environmental Advocates v. U.S. E.P.A., 537 F.3d 1006 (9th Cir. 2008) ................... 26

 9   People of State of Cal. v. F.C.C., 905 F.2d 1217 (9th Cir. 1990) ................................................. 18

10   Perot v. Federal Election Commission, 97 F.3d 553 ................................................................... 29

11   Regions Hosp. v. Shalala, 522 U.S. 448 (1998) .................................................................... passim

12   Shalala v. Illinois Council on Long Term Care, Inc., 529 U.S. 1 (2000) .................................. 6, 9

13   Sierra Club v. Sigler, 695 F.2d 957 (5th Cir. 1983) ...................................................................... 29

14   Sierra Forest Legacy v. Sherman, 646 F.3d 1161 (9th Cir. 2011) .......................................... 13, 20

15   Sowell v. Richardson, 319 F.Supp. 689 (D.S.C. 1970) ................................................................ 25

16   State of Alaska v. Babbitt, 38 F.3d 1068 (9th Cir. 1994) ............................................................... 5

17   Thomas-Lazear v. F.B.I, 851 F.2d 1202 (9th Cir. 1998) ................................................................. 5

18   Tucson Airport Authority v. General Dynamics Corp., 136 F.3d 641 (9th Cir. 1998) ................... 4

19   United Black Fund, Inc. v. Hampton, 352 F.Supp. 898 (D.D.C. 1972) ....................................... 29

20   United States v. Carolene Products, Co., 304 U.S. 144 (1938) ................................................... 16

21   Ursack Inc. v. Sierra Interagency Black Bear Group, 639 F.3d 949 (9th Cir. 2011) ............ 13, 26

22   Weinberger v. Salfi, 422 U.S. 749 (1975) ................................................................................ 7, 12

23   Wind River Mining Corp. v. United States, 946 F.2d 710 (9th Cir. 1991) .................................... 26

24
                                                                     Statutes 
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     28 U.S.C. § 1331 ............................................................................................................................ 5
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     28 U.S.C. § 2401(a) ...................................................................................................................... 27
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     42 U.S.C. § 1395ff ................................................................................................................... 8, 10
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                                                                      iv
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   42 U.S.C. § 1395ff(a)(1) .............................................................................................................. 10

 2   42 U.S.C. § 1395ff(a)(3) .............................................................................................................. 10

 3   42 U.S.C. § 1395ff(b) ................................................................................................................... 10

 4   42 U.S.C. § 1395l(u)(2) ................................................................................................................ 25

 5   42 U.S.C. § 1395w-4(c)(2)(B) ..................................................................................................... 16

 6   42 U.S.C. § 1395w-4(d)(4)(A) ..................................................................................................... 16

 7   42 U.S.C. § 1395w-4(e) ............................................................................................................... 19

 8   42 U.S.C. § 1395w-4(e)(1)(A) ......................................................................................... 14, 15, 18

 9   42 U.S.C. § 1395w-4(e)(1)(A)(iii) ............................................................................................... 19

10   42 U.S.C. § 1395w-4(e)(1)(C) ......................................................................................... 16, 21, 22

11   42 U.S.C. § 1395w-4(e)(1)(D) ..................................................................................................... 16

12   42 U.S.C. § 1395w-4(e)(1)(E) ...................................................................................................... 19

13   42 U.S.C. § 1395w-4(e)(1)(G) ..................................................................................................... 19

14   42 U.S.C. § 1395w-4(e)(1)(I) ....................................................................................................... 19

15   42 U.S.C. § 1395w-4(i)(1) ........................................................................................................... 11

16   42 U.S.C. § 1395w-4(i)(1)(D) ........................................................................................................ 5

17   42 U.S.C. § 1395x(d) ..................................................................................................................... 7

18   42 U.S.C. § 1395x(s) ...................................................................................................................... 7

19   42 U.S.C. § 254e .......................................................................................................................... 25

20   42 U.S.C. § 405(g) ............................................................................................................. 5, 7, 8, 9

21   42 U.S.C. § 405(h) ..................................................................................................................... 7, 8

22   42 U.S.C. §§ 254c, et seq. ............................................................................................................ 19

23   5 U.S.C. § 702 ............................................................................................................................ 4, 5

24   5 U.S.C. § 702, et seq. .................................................................................................................... 4

25   5 U.S.C. § 706(2) ................................................................................................................... 13, 20

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                                                                       v
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1                                                               Regulations 

 2   42 C.F.R. § 405.926(a) ................................................................................................................. 10

 3   42 C.F.R. § 405.926(c) ................................................................................................................. 10

 4   42 C.F.R. § 414.66 ....................................................................................................................... 25

 5   42 C.F.R. § 414.67 ....................................................................................................................... 25

 6   42 C.F.R. §§ 405.900, et seq. ....................................................................................................... 10

 7   42 C.F.R. §§ 51c.102, et seq. ....................................................................................................... 19

 8
                                                                      Rules 
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     Federal Rules of Civil Procedure 56(c) ........................................................................................ 33
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     Federal Rules of Civil Procedure 56(c)(1) ................................................................................... 33
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     Federal Rules of Civil Procedure 56(c)(2) ................................................................................... 33
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     Federal Rules of Civil Procedure 56(d)........................................................................................ 34
13

14                                                           Other Authorities 

15   63 Federal Register 41002, 7/31/1998 ......................................................................................... 11

16   69 Federal Register 66236, 11/15/2004 ....................................................................................... 28

17   77 Federal Register 44722, 7/30/2012 ......................................................................................... 26

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                                                                     vi
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
                    “CMS has the responsibility to ensure that payments are accurate....”
 1                       Jonathan Blum, Director, Center for Medicare, CMS
                         Public Statement, September 16, 2010 [AR 164006]
 2

 3   I.      INTRODUCTION

 4           Why do physicians in Santa Cruz County receive 25% less from Medicare than

 5   physicians in two neighboring counties for providing exactly the same services?                       Why do

 6   physicians in San Diego County receive 11% less from Medicare than physicians in neighboring

 7   Orange County? Why does Medicare pay physicians in Santa Cruz County at the lowest rate in

 8   California while paying hospitals in Santa Cruz County at the highest rate in the nation? Why

 9   are there no psychiatrists in San Luis Obispo County who will treat Medicare patients? Why are

10   there similar problems in over 200 counties across the United States?

11           The answer is that none of the “fee schedule areas” or “localities” from which payments

12   to physicians are derived under Medicare Part B has been reconfigured since 1996, and some

13   have not been reconfigured since Medicare was first enacted in 1966. As a result, physicians in

14   over 200 counties are reimbursed at rates that are well below the physicians’ cost of providing

15   medical services. Is it any wonder that physicians in more and more counties can no longer

16   afford to take new Medicare patients or that some are treating no Medicare patients at all?

17           Plaintiffs, seven California counties, a small medical corporation, and a physician, are all

18   “suppliers” of medical services under Medicare Part B. Plaintiffs’ First Amended Complaint

19   (“FAC”) alleges violations of Plaintiffs’ equal protection rights and the unlawful delegation of

20   legislative powers arising out of the administration of Medicare Part B by the Centers for

21   Medicare and Medicaid Services (“CMS” or the “Agency”) since 2001.

22           Since 2001 the Agency has failed to follow its own payment accuracy standards and has

23   knowingly diverted, by now, almost $4 billion in windfall payments to suppliers in rural counties

24   that should have gone to Plaintiffs and Members of the Class. As a further result, Medicare

25   beneficiaries in those rural counties have been overcharged by almost $800 million.

26           Plaintiffs’ factual allegations are not wild or speculative imaginings, and actually stand

27   undisputed by Defendant.          Plaintiffs’ allegations are fully supported by the findings and

28   recommendations of no less than the Government Accountability Office (“GAO”) and the
                                                        1
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   Institute of Medicine (“IOM”), the health arm of the National Academy of Sciences. Within a

 2   few weeks after the initial complaint was filed, the GAO issued a report in June 2007 that

 3   contained findings and recommendations that closely paralleled those in the initial complaint.

 4   AR 11339-11531. Five months after the FAC was filed, the IOM issued a report that supported

 5   the allegations and requests for relief in the FAC. AR 163960-164223.

 6   II.     STATEMENT OF FACTS

 7           In 1966, payments to physicians and other “suppliers” under Part B were based on what

 8   the local insurance companies who then administered Medicare had determined were

 9   “reasonable charges” within 240 coverage areas. In 1989, Congress adopted the physician fee

10   schedule that determined costs of providing medical services within the existing payment

11   localities, and based payments on those local costs compared to the national average.

12           From 1992 through 1996, the Agency made extensive changes to the payment locality

13   structure using three different approaches that were not uniformly applied, ultimately creating 34

14   statewide localities and 55 single- or multi-county localities. Since 1997, payments under Part B

15   to suppliers in the single-county localities have been based on the costs in each separate county

16   compared to the national average. In contrast, payments to suppliers in statewide and multi-

17   county localities have been based on the average costs of the group of counties in those localities

18   compared to the national average.

19           Much of the 1996 revision to the payment locality structure was based on the use of the

20   “5% iterative method” where: (a) CMS ranked each county within a particular state from most

21   expensive to least; (b) compared the costs in the most expensive county to the average costs of

22   the remaining counties; and (c) created a single-county locality if the most expensive county’s

23   costs were 5% or more above the average. The process was then repeated or “iterated” until

24   there were no counties left in the particular state where the costs were 5% or more above the

25   average, and the remaining counties were then combined into a multi-county locality.

26           CMS has not reconfigured the payment locality structure since 1996 despite the fact that

27   shifting demographics across the country have increased costs of providing medical services in

28   over 200 counties to a point where those counties should have become single-county localities
                                                        2
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   under CMS’ own payment accuracy standards.                   Because CMS has not reapplied the 5%

 2   threshold since 1996, payments to physicians in many statewide or multi-county localities no

 3   longer reflect the actual cost of providing services, affecting both suppliers and beneficiaries in

 4   four ways: (1) suppliers in the high-cost counties are being underpaid; (2) suppliers in the low-

 5   cost counties are being overpaid; (3) Medicare beneficiaries in the low-cost counties are being

 6   overcharged on their 20% co-pay; and (4) beneficiaries in the high-cost counties are being

 7   undercharged. To date, underpayments to suppliers in high-cost counties total almost $3.7

 8   billion and overcharges to beneficiaries in low-cost counties total over $750 million.

 9           Defendant’s description of the statutory background is relatively accurate, but contains

10   one very significant error. The Secretary incorrectly states that “Congress directed the Secretary

11   to divide the United States into regions referred to as ‘fee schedule areas,’” citing 42 U.S.C. §§

12   1395w-4, subds. (e)(2)-(5) and (j)(2). Doc’t 118 at 2:25-3:4. Congress never directed the

13   Secretary to define the “fee schedule area” or “locality” boundaries. As more fully set forth in

14   the FAC, the Omnibus Budget Reconciliation Act of 1989 radically changed the way that fees

15   under Part B are calculated. FAC ¶¶ 88-89. A draft of the 1989 Act that did not make it through

16   committee included a provision that the Secretary would decide on a locality structure by 1992,

17   but the final bill deleted the existing provisions stating the methods by which geographic areas

18   were to be defined and did not replace them. FAC ¶¶ 112-116. In true Orwellian form, the

19   Secretary then unilaterally asserted the authority to define localities because the 1989 Act “did

20   not preclude” the exercise of that authority. FAC ¶¶ 117-126. Similarly, contrary to the

21   revisionist history of the Secretary’s motion (Doc’t 118 at 4:11-19), 42 U.S.C. § 1395u(b) does

22   not grant authority to the Secretary to initiate changes to the locality structure, the Secretary

23   presumed it did not prevent her from doing so. FAC ¶¶ 116-126.

24   III.    SUBJECT MATTER JURISDICTION

25           A.       Waiver of Sovereign Immunity

26           While it is true that pursuant to North Star Alaska v. United States, 9 F.3d 1430, 1432 (9th

27   Cir. 1993), Plaintiffs “may sue the United States only if Congress has waived sovereign

28   immunity for the lawsuit, and may bring [their] claim in federal district court only if Congress
                                                        3
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   has provided for jurisdiction there,” Plaintiffs have invoked the Administrative Procedure Act

 2   (“APA”), 5 U.S.C. § 702, et seq., as the source of Defendant’s waiver. FAC ¶¶ 71-72.

 3          Defendant has failed entirely to address waiver under the APA. While mentioning that

 4   the FAC invokes jurisdiction under the APA, Defendant wrongly concludes that the APA does

 5   not provide for a waiver of immunity. Doc’t 118, p. 11:13-15.

 6          According to the APA, a person suffering legal wrong because of agency action, or

 7   adversely affected or aggrieved by agency action within the meaning of a relevant statute, is

 8   entitled to judicial review. 5 U.S.C. § 702 (“Right of Review”). Waiver of sovereign immunity

 9   under the APA, however, occurs only if three conditions are met: (1) the claims are not for

10   money damages, (2) an adequate remedy for the claims is not available elsewhere, and (3) the

11   claims do not seek relief expressly or impliedly forbidden by another statute. Tucson Airport

12   Authority v. General Dynamics Corp., 136 F.3d 641, 646 (9th Cir. 1998).

13          As to the first prong, in adjudicating the issue of what constitutes a claim for “money

14   damages” under the APA, the Supreme Court has held that the APA did not foreclose judicial

15   review of a claim for monetary relief brought by the State of Massachusetts for reimbursements

16   under the Medicaid program because it did not seek “monetary damages” as that term is used in

17   the law. Bowen v. Massachusetts, 497 U.S. 879, 892-893 (1988). Rather, the State’s claim was

18   one “seeking reimbursement to which the State was allegedly already entitled, rather than money

19   in compensation for losses suffered as a result of the disallowance.” Bowen, 487 U.S. at 880.

20   “The fact that a judicial remedy may require one party to pay money to another is not a sufficient

21   reason to characterize the relief as ‘monetary damages.’” Bowen, 487 U.S. at 893.

22          Defendant’s reliance on Department of the Army v. Blue Fox, Inc. 525 U.S. 255 (1999), is

23   misplaced. The Supreme Court distinguished that case from its earlier decision in Bowen,

24   reasoning that “Bowen’s interpretation of § 702 … hinged on the distinction between specific

25   relief and substitute relief, not between equitable and nonequitable categories of remedies.” Id.

26   at 262. Because the lien sought by the subcontractor in the Army case was construed as “money

27   damages,” there was no waiver of sovereign immunity because the lien “constitute[d] substitute

28   or compensatory relief rather than specific relief.” Ibid.
                                                       4
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1          Here, the first prong of Tucson is satisfied because Plaintiffs do not seek money in

 2   compensation for the damage sustained by the failure of the Secretary to pay as mandated, but

 3   rather Plaintiffs seek the specific relief of reimbursement for services they have rendered. The

 4   second and third prongs of the Tucson analysis are similarly met. There are no adequate

 5   remedies available through the Agency or elsewhere, and Defendant points to no statute that

 6   expressly or impliedly forbids the constitutional challenges brought by Plaintiffs. FAC ¶¶ 70,

 7   552-556.

 8          Defendant mistakenly relies on Thomas-Lazear v. F.B.I, 851 F.2d 1202, 1207 (9th Cir.

 9   1998), a defamation and false statement case where the court granted summary judgment for

10   defendant on the constitutional claims due to lack of liberty or property interest, and found that

11   the claims were barred under the Federal Tort Claims Act.

12          In any case, sovereign immunity does not bar judicial review of unconstitutional acts of

13   an agency as alleged in this case. State of Alaska v. Babbitt, 38 F.3d 1068, 1076 (9th Cir. 1994).

14          B.       Claims “Under the Medicare Statute”

15          The jurisdictional basis for Plaintiffs’ Equal Protection claims lies alternatively under 42

16   U.S.C. § 405(g), 28 U.S.C. § 1331, or 5 U.S.C. § 702. FAC ¶¶ 59-73. Laboring under the

17   mistaken assumption that the law of the case supports her position, Defendant argues that

18   Plaintiffs cannot maintain their claims under the “Medicare statute.” Doc’t 118, pp. 11:22-12:20.

19          Plaintiffs’ FAC was filed in accordance with the remand of the Circuit Court and does

20   not restate the former second, fifth, sixth, and seventh claims for relief which were dismissed

21   from their original Complaint for lack of subject matter jurisdiction under 42 U.S.C. § 1395w-

22   4(i)(1)(D) and/or denied for lack of a property interest. Doc’ts 1, 57, 80. Instead, Plaintiffs

23   restated and expanded the Equal Protection claims found in the first, third and fourth claims for

24   relief in the original Complaint, which are now the first, second and third claims in the FAC.

25          Dismissal of the Equal Protection claims was previously granted based upon the District

26   Court’s finding that the named Plaintiffs – then only counties – did not qualify as “persons”

27   within the meaning of the Fifth Amendment. Doc’t 57. On appeal, the Equal Protection claims

28   were remanded to this Court for further proceedings as follows:
                                                       5
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
            “Finally, we remand the Counties’ Equal Protection claims. Because we
 1          conclude, at least for purposes of this claim, that the Counties are persons, we
            move to considering whether the Secretary’s decision not to revise the fee
 2          schedule areas is supported by a rational basis. The district court did not reach
            this issue. In response to our request for supplemental briefing on rational basis,
 3          the Secretary relied on the rationality of the 1996 revision of the fee schedule,
            while the Counties pointed to demographic changes that made the 1996 schedule
 4          irrational. We cannot decide this issue on the complaint and the briefs alone.
            Accordingly, we remand the Equal Protection claims to the district court for
 5          further proceedings.” Doc’t 80, pp. 3-4.
 6   Nothing in the remand limits the scope of this Court’s review of the Equal Protection claims, and

 7   the Circuit Court made no express or implied finding that Plaintiffs cannot maintain their Equal

 8   Protection claims “under the Medicare statute.”

 9          It is well settled that on remand, a trial court may not deviate from the mandate of an

10   appellate court. “When a case has been decided by an appellate court and remanded, the court to

11   which it is remanded must proceed in accordance with the mandate and such law of the case as

12   was established by the appellate court.” Firth v. United States, 554 F.2d 990, 993 (9th Cir.1977).

13   The Supreme Court long ago emphasized that when acting under an appellate court’s mandate,

14   an inferior court “cannot vary it, or examine it for any other purpose than execution; or give any

15   other or further relief; or review it, even for apparent error, upon any matter decided upon

16   appeal; or intermeddle with it, further than to settle so much as has been remanded.” In re

17   Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895).

18          All of Plaintiffs’ Equal Protection claims are properly before this Court.

19          C.       The Jurisdictional Requirement of Presentment Has Been Met

20          It should be uncontested that Plaintiffs have satisfied the jurisdictional prerequisite of

21   presentment in accordance with the holding in Shalala v. Illinois Council on Long Term Care,

22   Inc., 529 U.S. 1, 23-24 (2000). In Illinois Council, 529 U.S. 1, the Supreme Court established

23   the rule that all claims relating to the Medicare Act must be presented to the agency for review,

24   whether or not such review was available and whether or not such review would be futile. See

25   also Heckler v. Ringer, 466 U.S. 602, 617 (1984); Mathews v. Eldridge, 424 U.S. 319, 328

26   (1976). Plaintiffs have done as Illinois Council requires. FAC ¶¶ 54-58.

27          Following the instructions of Dawn Cavanaugh of NHIC, Medicare’s carrier for

28   California, five of the Plaintiffs filed their Claim with NHIC and with the San Francisco office
                                                       6
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   of Medicare on March 14, 2007. FAC ¶¶ 54-55.                     On May 8, 2007, and May 16, 2007,

 2   respectively, the Counties of San Luis Obispo and Monterey filed joinders to the Claim with

 3   NHIC. FAC ¶¶ 56-57. The Claim also included a claim on behalf of a properly defined class of

 4   similarly situated persons and entities all of whom are suppliers of medical goods and services:

 5           “All physicians, practitioners and other persons or entities…who are “suppliers”
             as that term is defined in 42 U.S.C. § 1395x(d); who have furnished and provided
 6           “medical and other health services” as that term is defined in 42 U.S.C. §
             1395x(s) to Medicare beneficiaries…from March 14, 2001, to the present; who
 7           have accepted assignments for all items or services furnished to the beneficiaries
             that are at issue herein; who have waived all rights for payment for any
 8           beneficiary with respect to all items or services at issues herein; and who have
             provided such medical and other health services in counties located in fee
 9           schedule areas where the GAF of the county in which the medical and other
             health services were provided exceed the weighted average GAF of the remaining
10           counties in the fees schedule area by 5%.” FAC ¶ 558. 1
11   Plaintiffs Theodore M. Mazer, M.D., and Wolbers and Poree Medical Corporation are members

12   of the class defined in the claim (FAC ¶ 58), a class that is the same class defined in the FAC ¶

13   558.    Thus, each named Plaintiff and each member of the prospective Class is either an

14   individual or an entity who has already been determined by the Secretary to be eligible for

15   payment under Medicare Part B, but who has received a payment based upon an outdated

16   locality structure when demographic changes make use of that structure by the Secretary

17   irrational in violation of Plaintiffs’ constitutional rights. On May 11, 2007, NHIC responded to

18   the Claim stating that “it cannot grant, reject, or take any official action upon the submission,

19   because the submission is not a cognizable request for action by a carrier.” FAC ¶ 60.

20           The Secretary does not argue, nor could she, that 42 U.S.C. § 405(g) and (h) do not

21   provide jurisdiction over Plaintiffs’ claims if Plaintiffs have satisfied both the presentment and

22   exhaustion requirements, i.e., if they have presented a claim for benefits to the Secretary and

23   have fully pursued all available administrative remedies. Mathews, 424 U.S. at p. 328. This

24   holds true for unnamed class members as well as for named class representatives. Califano v.

25   Yamasaki, 442 U.S. 682, 697-701 (1979); Weinberger v. Salfi, 422 U.S. 749, 764 (1975).

26
             1
                 See the FAC for detailed definitions of the various components of the Physician Fee Schedule: (a)
27   “Geographic Practice Cost Index” or “GPCI” at ¶¶ 90-94; (b) “Relative Value Unit” or “RVU” at ¶¶ 95-101; (c)
     “Conversion Factor” or “CF” at ¶¶ 102-103; (d) “Geographic Adjustment Factor” or “GAF” at ¶¶ 107-111; and (e)
28   the operation of the physician fee formula at ¶¶ 104-106 and Ex. 1 to the FAC.
                                                           7
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1          Instead, Defendant mistakenly relies upon a series of straw man arguments.                        First,

 2   Defendant argues that the Court lacks jurisdiction over Plaintiffs’ claims solely because the

 3   claims cannot be maintained under the “Medicare statute” and that the District Court and the

 4   Ninth Circuit so found. However, as shown above, neither court found that the Equal Protection

 5   claims could not be maintained under 42 U.S.C. § 405, subds. (g) or (h). Second, Defendant

 6   argues that Plaintiffs have failed to properly present their claim and to exhaust administrative

 7   remedies.     This argument requires the Court to first accept Defendant’s inaccurate

 8   characterization of Plaintiffs’ Claim as a plain vanilla “request for redetermination,” then accept

 9   Defendant’s improper factual gloss of the Denial of Plaintiffs’ Claim, and then find that the

10   Claim was not presented consistently with 42 U.S.C. § 1395ff. However, as set forth more fully

11   in the following section, Plaintiffs’ Claim was not a request for “redetermination” of an “initial

12   determination.” The Claim was a clear and detailed challenge to the constitutional and statutory

13   validity of the Secretary’s policy regarding the locality structure. The regulations governing the

14   presentment of claims under Part B simply do not provide a process for such a claim.

15          Setting Defendant’s ipse dixit arguments aside, Plaintiffs have met the jurisdictional

16   requirement of presentment. Plaintiffs’ Claim and the FAC allege that the Agency makes

17   payments to Plaintiffs and Members of the Class, all of whom are “suppliers” under Medicare

18   Part B who have received assignments for payment from the beneficiaries they served, and that

19   since 2001 the Secretary has used and threatens to continue to use an outdated locality structure

20   to calculate payments to Plaintiffs and Members of the Class when the Secretary knows that

21   demographic changes make it irrational to do so. Plaintiffs and Members of the Class allege a

22   violation of their constitutional rights by the Secretary’s conduct which denies them equal

23   protection under the law and seek reimbursement for the unpaid portion of the prior claims they

24   had already presented to the Agency, some dating as far back as 2001.

25          Here, as in Briggs v. Sullivan, 886 F.2d 1132, 1139 (9th Cir. 1989), there is no need for

26   Plaintiffs or Members of the Class to “re-present” their initial claims to the Secretary in order to

27   obtain judicial review of the constitutional issues that are collateral to those claims:

28
                                                       8
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
            “The presentment requirement is satisfied when an individual makes a claim for
 1          benefits, and the Secretary determines that the claimant meets the eligibility
            requirements for those benefits. When benefits are suspended, or when they are
 2          not paid to begin with, because of a requirement collateral to the Secretary's
            eligibility criteria, the claimant's dispute with the Secretary is not, strictly
 3          speaking, a ‘claim for benefits’ in the sense in which the phrase was used by the
            Supreme Court in Mathews and City of New York. Accordingly, having presented
 4          their claims for benefits to the Secretary once already, there was no requirement
            in this case that the class members ‘re-present’ their claims to the Secretary in
 5          order to obtain review of the collateral issue. [Footnote omitted.]”
 6          The Ninth Circuit’s ruling in Briggs is consistent with Califano, 442 U.S. at pp. 697-701.

 7   In Califano, the Secretary sought to recoup overpayments to a number of Medicare beneficiaries.

 8   Two groups of plaintiffs filed class action lawsuits seeking declaratory and injunctive relief, a

 9   statewide class was certified in one, a nationwide class was certified in the other, summary

10   judgment was granted in favor of each class, and the cases were consolidated on appeal by the

11   Ninth Circuit. The Secretary contended that “even if class relief were appropriate, a nationwide

12   class should not have been certified, and, because the classes here include individuals who have

13   not filed for reconsideration or waiver, relief was awarded to persons over whom the courts had

14   no § 205(g) jurisdiction.” Id., at p. 698. The Supreme Court flatly rejected the Secretary’s

15   argument that “Congress contemplated a case-by-case adjudication of claims under § 205(g) that

16   is incompatible with class relief” and affirmed. Id., at pp. 697-701. 2

17          Here, Plaintiffs and Members of the Class have all presented initial claims for benefits to

18   the Agency having received assignments of the right to make those claims from the beneficiaries

19   to whom they provided medical services. Plaintiffs went beyond the requirements of Briggs and

20   Califano and presented their Claim to the Agency on behalf of themselves and all other similarly

21   situated suppliers seeking reimbursement based on collateral constitutional and statutory

22   grounds. Plaintiffs were not required as the Secretary contends to “re-present” their initial

23   claims to the Secretary in order to satisfy the presentment requirement of Illinois Council.

24          D.        There Are No Administrative Remedies to Exhaust

25          Defendant relies on Martin v. Shalala, 63 F.3d 497, 503-505 (7th Cir. 1995) for the

26   proposition that Plaintiffs have failed to exhaust all available administrative remedies. Doc’t

27   118, 14:19-15:11. The dispute in Martin arose during the time when localities were set by local

28          2
                The reference is to § 205(g) of the Medicare Act, codified at 42 U.S.C. § 405(g).
                                                          9
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   insurance companies based on their coverage areas, and the court held that the plaintiffs were

 2   required to present their locality configuration issue to “the carrier that handled the disputed

 3   claim to review the locality designation within the context of that claim.” Id., at p. 505. Martin,

 4   however, was decided three years before 1998 when the Secretary first adopted the current

 5   regulatory scheme that controls the claims process.               See 63 FR 41002, 7/31/1998.             It is

 6   significant to note that the Secretary has not identified a single regulation to support the

 7   argument that any administrative processes exist for the review of Plaintiffs’ Claim.

 8              Under 42 U.S.C. § 1395ff(a)(1), the Secretary is required to promulgate regulations for

 9   “initial determinations” made by a carrier as to whether an individual is entitled to benefits under

10   Part A or B, the amount of those benefits, and “any other initial determination” made by a

11   carrier.     Under 42 U.S.C. §§ 1395ff(a)(3) and 1395ff(b), no initial determination may be

12   appealed unless a party has sought a redetermination from the carrier.

13              The Secretary has adopted regulations implementing the directives of § 1395ff in 42

14   C.F.R. §§ 405.900, et seq. [Determinations, Redeterminations, Reconsiderations, and Appeals

15   under Original Medicare (Parts A & B)]. Under 42 C.F.R. § 405.926, subds. (a) and (c), actions

16   that are not “initial determinations” and which are not appealable within the agency include

17   “[a]ny determination for which CMS has sole responsibility” and “[a]ny issue regarding the

18   computation of the payment amount of program reimbursement of general applicability for

19   which CMS or a carrier has sole responsibility under Part B such as the establishment of a fee

20   schedule....” The determination to create or modify the locality structure is something “for

21   which CMS has sole responsibility” as well as an “issue regarding the computation of the

22   payment amount of program reimbursement of general applicability for which CMS ... has sole

23   responsibility.”     Therefore neither the determination to create or modify a locality can be

24   appealed under the regulator scheme because neither qualifies as an “initial determination.”

25              Thus, the Secretary’s own regulations preclude any appeal within the agency from a

26   decision on a claim that involves issues such as those presented by Plaintiffs. This was conceded

27   by Defendant’s counsel on appeal: “If they are challenging the definition of the fee schedule

28   areas … there would have been no administrative review.” FAC ¶ 62.
                                                        10
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1          Where there is no administrative review, there are no administrative remedies to exhaust.

 2          E.       Alternatively, the Exhaustion Requirement Should Be Waived

 3          Even if administrative remedies exist, Plaintiffs respectfully request that this Court

 4   exercise its discretion and determine they should be waived. The claim must be (1) collateral to

 5   a substantive claim of entitlement (collaterality), (2) colorable in its showing that denial of relief

 6   will cause irreparable harm (irreparability), and (3) one whose resolution would not serve the

 7   purposes of exhaustion (futility). Johnson v. Shalala, 2 F.3d 918, 921 (9th Cir. 1993).

 8          First, as in Bowen v. N.Y., 476 U.S. 467, 483 (1986), Plaintiffs’ action is collateral to a

 9   substantive claim to entitlement in that it involves a challenge to the constitutional validity of

10   rules, regulations, and policies of HHS which have systematically denied Plaintiffs and Members

11   of the Class treatment equal to that of suppliers in other localities. FAC ¶ 67. Second, similar to

12   the allegations in Bowen v. N.Y., 476 U.S. at 483-484, Plaintiffs have alleged the Secretary’s

13   failure to modify the locality structure has caused wide-spread, adverse public health effects in

14   the form of a reduction in access to medical care for Medicare beneficiaries in over 200 counties

15   across the United States, and that any further delays in seeking modification of the locality

16   definitions would only hasten the growth of the existing adverse public health effects. FAC ¶ 68.

17   Finally, the locality issue has been before the Secretary since 2001, the Claim was presented in

18   2007, and not a single step has been taken to resolve either. FAC ¶ 69. As in Bowen v. N.Y., 476

19   U.S. at 484-486, requiring exhaustion in this case would truly be futile and there is no chance

20   that in waiving exhaustion there would be any premature interference with any agency process.

21   IV.    EQUAL PROTECTION

22          A.       Congress Has Not Precluded Judicial Review of Constitutional Claims

23          “Constitutional questions obviously are unsuited to resolution in administrative hearing

24   procedures and, therefore, access to the courts is essential to the decision of such questions.”

25   Califano v. Sanders, 430 U.S. 99, 109 (1977).

26          Defendant mistakenly relies on two cases for the startling proposition that Congress can

27   foreclose judicial review of constitutional issues. The court in Am. Soc’y of Dermatology v.

28   Shalala, 962 F.Supp. 141, 146 (D.D.C. 1996), did not hold that Ҥ 1395w-4(i)(1) precludes
                                                       11
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   judicial review of constitutional challenge[s] based entirely on the Medicare statute. [Emphasis

 2   added.]” Doc’t 118 at p. 15:19:22. The court’s ruling was more prosaic: “Because plaintiffs’

 3   underlying claims are based entirely on statute, they have no absolute right to judicial review.”

 4   Am. Soc’y of Dermatology, 962 F.Supp. at 146. In Am. Soc’y of Cataract & Refractive Surgery

 5   v. Shalala, 94 F. Supp.2d 914, 921 (N.D. Ill. 2000), the court quoted Am. Soc’y of Dermatology

 6   and made exactly the same ruling.

 7          In Weinberger, 422 U.S. at 749, the Supreme Court rejected the Secretary’s contention

 8   that a statute prohibited judicial review of a constitutional question, stating, “Not only would

 9   such a restriction have been extraordinary, such that ‘clear and convincing’ evidence would be

10   required before we would ascribe such intent to Congress [citation], it would have raised a

11   serious constitutional question of the validity of the statute as so construed.”

12          B.       Standards of Review of Equal Protection Claims

13                   1.      General Principles of Rational Basis Review

14          Plaintiffs agree that when a federal statutory economic or social welfare program is

15   challenged on equal protection grounds, and no suspect class or fundamental constitutional right

16   is implicated, the proper standard of judicial review is rational basis, the “paradigm of judicial

17   restraint.” FCC v. Beach Communications, Inc., 508 U.S. 307, 314 (1993). Plaintiffs agree that

18   Congress does not violate the right to equal protection “merely because the classifications made

19   by its laws are imperfect,” Dandridge v. Williams, 397 U.S. 471, 485 (1970), “or because in

20   practice [a classification] results in some inequality,” Lindsley v. Natural Carbonic Gas Co., 220

21   U.S. 61, 78 (1911). Plaintiffs agree that “[i]n areas of social and economic policy, a statutory

22   classification ... must be upheld against equal protection challenge if there is any reasonably

23   conceivable state of facts that could provide a rational basis for the classification.” Beach

24   Communications, 508 U.S. at 313. However, this highly deferential rational basis standard is

25   “not a toothless one.” Mathews v. Lucas, 427 U.S. 495, 510 (1976).

26                   2.      Rational Basis Review of Agency Actions

27          Defendant cites a total of twenty cases in her Memorandum dealing with the equal

28   protection issue. Doc’t 118 at 17:9-22:10. Of those cases, sixteen deal with review of legislative
                                                       12
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   action, and none of them are useful in this inquiry because the proper standard for reviewing

 2   agency action is subtly different from the standard used to review legislative action.

 3          Rational basis review of agency action is “identical to arbitrary and capricious review

 4   under the APA.” Ursack Inc. v. Sierra Interagency Black Bear Group, 639 F.3d 949, 958 (9th

 5   Cir. 2011); Mercy Hosp. & Med. Ctr., San Diego v. Harris, 625 F.2d 905, 907 (9th Cir. 1980); 5

 6   U.S.C. § 706(2). Courts “will reverse [an agency’s] decision as arbitrary and capricious only if

 7   the agency relied on factors Congress did not intend it to consider, entirely failed to consider an

 8   important aspect of the problem, or offered an explanation that runs counter to the evidence

 9   before the agency or is so implausible that it could not be ascribed to a difference in view or the

10   product of agency expertise.” Sierra Forest Legacy v. Sherman, 646 F.3d 1161, 1176 (9th Cir.

11   2011) (quoting Lands Council v. McNair, 537 F.3d 981, 987 (9th Cir.2008) (en banc)).

12          As more fully set forth below, the Secretary’s failure to reconfigure the locality structure

13   for Medicare Part B lacks a rational basis and is arbitrary and capricious because: (a) it does not

14   meet the overriding purpose of the Medicare statutes; (b) the Secretary’s own payment accuracy

15   standards are not being adhered to; (c) the Secretary has failed to adapt the locality configuration

16   to meet changed economic circumstances; (d) the Secretary admits there is no authority to

17   increase payments to one area at the expense of another; (e) none of the justifications advanced

18   by the Secretary are rational or supported by the Administrative Record; and (f) there is no other

19   conceivable rational basis that would support the Secretary’s actions.

20          C.       The Fundamental Purposes of the Medicare System Are Not Being Met

21          The most important purposes of Medicare – insuring the provision of adequate medical

22   care to the elderly and infirm and the accuracy of payments to “suppliers” – are not being met

23   due to the Secretary’s failure to correct the locality structure. In fact, Defendant’s continued use

24   of the outdated locality structure does not further, but deliberately thwarts these goals. It results

25   in a reduced amount of care for elderly and infirm in the affected counties because physicians

26   and other suppliers cannot afford to continue treating and cannot take on new Medicare patients

27   when they are not being equitably compensated for their services.

28
                                                       13
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1          Various courts have identified the “fundamental purpose of the Medicare system” as the

 2   “provision of adequate medical treatment to the elderly and disabled.” In re University Medical

 3   Center, 973 F.2d 1065, 1083-84 (3rd Cir. 1992); see also Furlong v. Shalala, 156 F.3d 384, 392

 4   (2nd Cir. 1998) (“The underlying purpose of the Medicare statute is to provide affordable medical

 5   insurance for the aged and disabled.”); Hultzman v. Weinberger, 495 F.2d 1276, 1281 (3rd

 6   Cir.1974) (“the broad remedial purpose” is “to insure that adequate medical care is available to

 7   the aged throughout this country”).

 8          The Supreme Court has held that “the Legislature’s overriding purpose in the Medicare

 9   scheme [is] reasonable (not excessive or unwarranted) cost reimbursement.” Regions Hosp. v.

10   Shalala, 522 U.S. 448, 459 (1998). A necessary corollary of that overriding purpose is the

11   avoidance of inadequate cost reimbursement. Indeed, 42 U.S.C. § 1395w-4(e)(1)(A) requires the

12   Secretary to establish indexes that reflect the costs of providing medical services “in the different

13   fee schedule areas compared to the national average of such costs.”

14          There are more specific goals with regard to payments to “suppliers” under Medicare Part

15   B. In a September 2004 study conducted for MedPAC, the Urban Institute observed:

16          “The goal of the Medicare fee schedule was to create a payment system for
            physician services in which fees varied with resource costs.... The fundamental
17          reason that policymakers vary physician fees across geographic areas is to adjust
            for differences in input prices faced by physicians that are beyond their control....
18          Adjustments for input price differences can be seen as promoting fairness by
            acknowledging cost differences across areas.” FAC ¶ 490.
19
            Physicians and other suppliers in the over 175 affected counties cannot afford to continue
20
     treating Medicare patients and cannot take on new Medicare patients because they are not being
21
     equitably compensated for their services. This results in a reduction in access to medical care for
22
     Medicare beneficiaries in many areas of the United States. FAC ¶¶ 7-11, 40, 197, 308.
23
            The June 2007 GAO Report warned of that very result (FAC ¶ 495):
24
            “Relative underpayments to physicians may have important consequences for
25          beneficiary access. Officials from several state medical associations told us that
            geographic areas that are relatively underpaid have difficulty attracting and
26          retaining physicians, which may lead to beneficiary access problems.”
27          The statutory goals are simply not being met by the use of the current classifications and

28   Defendant should not be heard to claim that the use of those classifications is rational.
                                                       14
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1          D.       The Agency Has Failed to Meet Its Own Payment Accuracy Standards

 2          In 1996, the Secretary described the proposal to restructure the 1966 localities as one that

 3   would use statistical criteria in a way that accurately reflected area costs:

 4           “Our proposal is not intended as a payment reduction policy. Rather, it is
            intended as a restructuring of localities based on area costs wherein existing
 5          localities with costs that are significantly higher than other localities with their
            State remain distinct localities while localities with similar costs within the State
 6          are collapsed into a residual State locality.... Our proposal to aggregate current
            localities is based on the application of statistical criteria comparing area costs.
 7          [Emphasis added.]” FAC ¶ 491.
 8          In response to commenters from urban areas “whose costs were not significantly higher

 9   than rural areas and, thus, were collapsed into statewide or State residual areas” who opposed the

10   proposal, the Secretary identified the 5% iterative method the means for “maintaining an

11   acceptable degree of accuracy”:

12           “[U]rban areas whose costs do not meet our statistical criteria, that is, are not
            more than 5 percent higher than the combined costs of all lower-price localities in
13          their State, are combined with these lower-price localities into a new locality. We
            believe that, for all of the reasons stated in the introduction, our proposed locality
14          structure has many advantages over the current structure while maintaining an
            acceptable degree of accuracy in tracking area cost differences. [Emphasis
15          added.]” FAC ¶ 504.
16          That degree of accuracy has not been maintained since 2001. Under 42 U.S.C. § 1395w-

17   4(e)(1)(A) the Secretary is required to establish indexes that reflect the costs of providing

18   medical services “in the different fee schedule areas compared to the national average of such

19   costs.” In this case, the Secretary’s failure to reconfigure the locality structure under Part B has

20   created a system rife with what the Secretary had classified in 1996 as “inadequate tracking of

21   input price variations,” “inaccurate GAFs,” “severe” and “inappropriate” boundary differences,

22   and “unacceptable payment errors” – not to mention the “substantial underpayments” and

23   “substantial overpayments” that now total not merely millions, but billions of dollars. FAC ¶¶

24   247-256, 287; Regions Hospital, 522 U.S. at 461-462.

25          Nevertheless, the Secretary has refused to remedy these accuracies and implement the

26   payment accuracy standards adopted after years of study in 1996. In good conscience, how can

27   this failure be seen as anything but irrational when examined in light of the Secretary’s own

28   exacting standards? Perhaps that is why the Secretary has not argued that these persistent
                                                       15
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   inaccuracies are in any way acceptable, appropriate, or rational when viewed in the context of

 2   the payment accuracy standards adopted by the Secretary in 1996.

 3          E.       The Secretary Has Failed to Adapt the Payment Localities to Changed

 4                   Circumstances

 5          In the CY 1997 Final Rule the Agency stated in response to commenters who asked if

 6   HCFA planned to change localities on a periodic basis to recognize future cost change:

 7          “While we do not plan to routinely revise payment areas as we implement new
            GPCIs, we will review the areas in multiple locality States if the newer GPCI data
 8          indicates dramatic relative cost changes among areas.” FAC ¶ 268.
 9   Despite this assurance, despite the emergence of dramatic relative cost changes among areas that

10   exceeded the thresholds set by HCFA in 1996, and despite a dozen years of attempts to

11   effectuate a change, the Agency has never modified the locality structure for Part B. The

12   Secretary’s failure to make adjustments that reflect those changes is not rational.

13          The constitutionality of the Secretary’s action or inaction is measured not by the

14   circumstances in 1996, but within the context of the changes in economic conditions that began

15   in 2001 and continue to the present. In United States v. Carolene Products, Co., 304 U.S. 144,

16   153 (1938), the Supreme Court held that the “constitutionality of a statute predicated upon the

17   existence of a particular state of facts may be challenged by showing to the court that those facts

18   have ceased to exist. [Citation.]” See also Nashville C. & St.L. Ry. v. Walters, 294 U.S. 405,

19   415 (1935) (“[a] statute valid when enacted may become invalid by change in the conditions to

20   which it is applied”).

21          Under 42 U.S.C. § 1395w-4(e)(1)(D), the Agency is required to “use the most recent data

22   available relating to practice expenses, malpractice expenses, and physician work effort in

23   different fee schedule areas” in establishing the GPCIs. All aspects of the physician fee schedule

24   – other than the locality structure – are regularly reviewed to adjust for changing economic

25   conditions. See 42 U.S.C. § 1395w-4, subds. (c)(2)(B) [RVUs adjusted every 5 years], (d)(4)(A)

26   [conversion factors adjusted every 3 years], (e)(1)(C) [GPCIs adjusted every 3 years]. Why

27   require the use of the “most recent data available” if the Agency is free to ignore the significance

28   of that data? Why attempt to maintain “an acceptable degree of accuracy in tracking area cost
                                                       16
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   differences” if the Agency is free to ignore unacceptable degrees of payment accuracy? Why

 2   adjust all other aspects of the physician fee schedule based on changing economic conditions and

 3   fail to make similar adjustments to the locality structure for sixteen years? How is that rational?

 4          The Secretary has shown a vigilant concern for maintaining payment accuracy where it

 5   benefits the agency. In Regions Hospital, 522 U.S. at 457-464, a reaudit of the hospital’s total

 6   allowable base year graduate medical education (“GME”) costs reduced the allowable costs –

 7   and Medicare’s reimbursement obligation – from $9.9 million to $5.9 million. The hospital

 8   challenged Medicare’s reaudit regulation, and the Supreme Court held the regulation was a

 9   reasonable interpretation of Congress’ 1986 changes to the methodology for calculating

10   reimbursable GME costs.

11          The position taken by the Secretary in Regions Hospital is wholly inconsistent with the

12   lack of action taken by the Secretary in this case. There, the Secretary defended the validity of

13   the regulation, arguing that it is “hard to believe that Congress intended that misclassified and

14   nonallowable costs [would] continue to be recognized through the GME payment indefinitely.”

15   Regions Hospital, 522 U.S. at 458-459.

16          The Supreme Court agreed with the Secretary’s swift action to correct the error, stating:

17          “Had Congress contemplated that the Secretary would not have responded to the
            1986 GME Amendment swiftly enough to catch [the] 1984 [notice of amount of
18          program reimbursement or “NAPR”] errors within the Secretary’s three-year
            reopening period, what would the Legislature have anticipated as the proper
19          administrative course? Error perpetuation until Congress plugged the hole? Or
            the Secretary’s exercise of authority to effectuate the Legislature’s overriding
20          purpose in the Medicare scheme: reasonable (not excessive or unwarranted) cost
            reimbursement?” Regions Hospital, 522 U.S. at 459-460.
21

22          The Supreme Court further stated:

23          “The Secretary so proceeded on the assumption that Congress, when it changed
            the system for GME cost reimbursement, surely did not want to cement
24          misclassified and nonallowable costs into future reimbursements, thus
            perpetuating literally million-dollar mistakes.” Regions Hospital, 522 U.S. at
25          461-462.
26          In Lamberton v. Shalala, 857 F.Supp. 1349, 1355 (D.Ariz. 1994), the court examined the

27   $1500 automobile equity AFDC exemption and the Secretary’s failure to adjust that amount for

28   inflation over a ten year period. The court found that the failure was unreasonable:
                                                       17
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1           “The Ninth Circuit has thus far had no occasion to decide whether a regulation
             may be deemed per se irrational because its drafters failed to account for the
 2           effects of intervening inflation, but has held that a federal agency endowed with
             regulatory authority is ‘obligated to reevaluate its policies when circumstances
 3           affecting its rulemaking proceedings change.’ [People of State of Cal. v. F.C.C.,
             905 F.2d 1217, 1230 (9th Cir. 1990).] The Court will follow this general rule
 4           rather than the limited one defendants advance. In so ruling, the Court concurs
             with Judge Thomas A. Wiseman's observations:
 5
             “‘The fact that Congress, in OBRA, did not mandate a review of the apposite
 6           regulation to adjust for inflation does not alter this Court's opinion. First,
             congressional silence on the need for review of the effects of inflation does not
 7           necessarily equal a bar to such review. Second, the Secretary himself rendered
             this silence unimportant by promulgating a rationale for the regulation that
 8           implied sensitivity to changing financial conditions. Even if the Secretary
             generally has no affirmative duty to review regulations in the absence of
 9           congressional direction to do so, where a regulation’s rationality is dependent on
             current socioeconomic conditions periodic review is essential to preserve that
10           rationality.’ [Citation.]”
11   Accord Gamboa v. Rubin, 80 F.3d 1338, 1346-49 (9th Cir. 1996). 3

12           The Secretary’s sixteen year-long failure to adapt localities to adjust for changing

13   economic conditions has “cemented” a system infected with “inadequate tracking of input price

14   variations,” “inaccurate GAFs,” “severe” and “inappropriate” boundary differences, and

15   “unacceptable payment errors.”          The Secretary justified cutting payments of $4 million in

16   Regions Hospital because of reimbursement errors, but here seeks to distance herself from errors

17   that result in underpayments of billions of dollars. FAC ¶¶ 247-256, 287; Regions Hospital, 522

18   U.S. at 461-462. Such a massive and protracted failure simply cannot be defended as rational.

19           F.       The Secretary Is Not Authorized to Decrease Payments to One Area in Order

20                    to Increase Them to Others

21           The Secretary has no authority to adopt a policy of overpaying suppliers in some counties

22   while underpaying others in violation of the payment accuracy mandate of 42 U.S.C. § 1395w-

23   4(e)(1)(A), and the Secretary has admitted as such. In 2004, the CMA proposed a locality

24   modification for California that would have removed ten counties from the existing “Rest of

25   California” payment locality and converted them into ten new single-county payment localities.

26   Payments to all other California localities would have been reduced over a two-year period in

27           3
                 The opinion in 80 F.3d 1338 was vacated by the opinion in Gamboa v. Chandler, 101 F.3d 90 (9th Cir.
     1996), after a rehearing en banc on the grounds that there was no appealable order and no final judgment.
28
                                                        18
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   order to keep the “Rest of California” locality at 2004 payment levels. (FAC ¶¶ 284-288.) The

 2   Secretary rejected the proposal because “CMS does not have the authority under [42 U.S.C. §

 3   1395w-4(e)] to reduce the GPCIs of some localities in a State to offset higher payments to other

 4   localities.” (FAC ¶ 289.) The Secretary should not be allowed to gainsay that admission.

 5          Congress has not given the Secretary any authority to gerrymander locality boundaries to

 6   encourage physicians to practice in rural areas. (See FAC ¶ 154 and Defendant’s MPA at 19:24-

 7   25.) Instead, Congress itself has provided for increased payments to underserved areas of the

 8   country in a number of other sections of the Medicare Act by: (a) providing for bonus payments

 9   and other incentives for those practicing in Health Professional Shortage Areas (“HPSA”) (42

10   U.S.C. §§ 254c, et seq., and 42 C.F.R. §§ 51c.102, et seq.); (b) setting a floor for Alaska’s work

11   GPCI at 1.5 (42 U.S.C. § 1395w-4(e)(1)(G)); (c) setting a 1.0 practice expense GPCI floor for

12   the five “Frontier States” (North Dakota, South Dakota, Montana, Idaho, and Nevada) (42 U.S.C.

13   § 1395w-4(e)(1)(I)); (d) setting a 1.00 work GPCI floor for all localities (42 U.S.C. § 1395w-

14   4(e)(1)(E)); and (e) providing that the work GPCIs reflect only one-quarter of the relative cost

15   differences compared to the national average (42 U.S.C. § 1395w-4(e)(1)(A)(iii)).                     Setting

16   “floors” for the various GPCIs and reducing the relative effect of cost differences both have the

17   effect of raising payments to low cost areas and lowering payments to high cost areas.

18          Congress simply has never authorized the Agency to invent and implement its own

19   method of providing additional compensation to suppliers in rural counties, let alone implement

20   a method that does so by reducing payments to other counties. However well-intentioned, the

21   Secretary’s desires cannot be accomplished by ultra vires acts.

22          G.       The Reasons Advanced by the Secretary Do Not Form a Rational Basis

23                   1.      The Secretary’s Three Repeated Justifications for Inaction

24          The Secretary has repeatedly advanced three justifications for failing to modify the

25   locality structure: (1) concern that a “significant redistribution” among “winners and losers”

26   would occur; (2) the need to obtain the “support” of state medical associations; and (3) the need

27   for “further study.” In examining the rational basis for those justifications, it is significant to

28   note that other than the copies of the Federal Register in which this three-part mantra is chanted,
                                                       19
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   the Secretary failed to include any documents in the Administrative Record that would support

 2   those justifications. Plaintiffs pointed out the omissions (Doc’t 107, p. 4:1-10) and Defendant

 3   chose not to augment the Administrative Record (Doc’t 112).

 4          In reviewing these justifications, the Court is “limited to determining whether the agency

 5   action was arbitrary, capricious, an abuse of discretion, not in accordance with law, or

 6   unsupported by substantial evidence on the record taken as a whole. 5 U.S.C. § 706(2).” Mercy

 7   Hosp., 625 F.2d at p. 907; Sierra Forest Legacy, 646 F.3d at p. 1176. Here, the Court should

 8   find the three justifications are unsupported by any evidence and lack a rational basis.

 9                   2.      The “Redistributive Impact” Between “Winners and Losers”

10          The Secretary has repeatedly expressed misguided concern about the existence of a

11   “redistributive impact” among “winners and losers” if the locality structure were to be corrected.

12   FAC ¶¶ 178, 192, 280, 384, 391, 401, 483-484, 503, 511, 515, 517-527. This concern does not

13   justify inaction; inaction itself has already created the winners and losers. The import of the

14   Secretary’s argument is that she feels constrained to avoid a deliberate decision-making process

15   that would reallocate resources and eliminate the system of winners and losers that occurred by

16   economic chance. As the payment system is budget neutral and payment amounts in multi-

17   county localities are based on the average costs, Plaintiffs and Members of the Class are funding

18   the windfall overpayments to suppliers in the rural counties in their Rest-of-State localities. A

19   concern over discontinuing unearned and inequitable overpayments cannot be a rational basis for

20   perpetuating the current payment inaccuracies, and cannot support a policy of overpaying some

21   suppliers while underpaying others in violation of 42 U.S.C. § 1395w-4(e)(1)(A).

22          In reality, the current locality structure ensures there are more “losers” than “winners”

23   because it results in three categories of “losers”: (1) Plaintiffs and Members of the Class, by

24   virtue of the massive payment inaccuracies; (2) Medicare beneficiaries residing in the affected

25   high-cost counties, who suffer from reduced availability of care; and (3) Medicare beneficiaries

26   residing in the rural counties, who are overcharged because they pay 20% of the improperly

27   inflated rates. The only “winners” under the current locality system are suppliers in rural

28   counties who receive windfall overpayments.
                                                       20
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1          On the other hand, if the Secretary implemented the 5% iterative method and revised the

 2   locality structure, the Plaintiffs would be reimbursed accurately, beneficiaries in the affected

 3   counties would enjoy a greater availability of care, and beneficiaries in the rural counties would

 4   no longer be overcharged. The only “losers” under a revised locality structure would be the

 5   suppliers in the rural counties in the rest-of-state localities, who would only “lose” their windfall

 6   overpayments – something that they are not entitled to receive in the first place. Thus, if the

 7   Secretary were truly concerned about “winners” and “losers,” the current locality structure would

 8   be revised pursuant to the 5% iterative method that Defendant adopted in 1996.

 9          In the past, the Secretary mitigated the effects of payment reductions resulting from

10   locality changes by phasing in the reductions over several years. The Secretary did so when

11   implementing the 1996 locality changes and again in 2009 in correcting locality configurations

12   in Texas. FAC ¶¶ 260-262, 383. There is no rational impediment to employing a similar

13   mitigation method here. See 42 U.S.C. § 1395w-4(e)(1)(C).

14          In addition, the Secretary’s assertion that she must avoid creating winners and losers is

15   not supported by the record. The Secretary has shown no such concern for “winners” and

16   “losers” in other aspects of the physician fee schedule and locality configuration. In 2010, the

17   Secretary proposed a seemingly innocuous modification to the way in which the practice expense

18   GPCI was calculated by modifying the relative weights given to various cost components that are

19   used in its calculation. The CY 2011 Proposed Rule did not quantify the redistributive effect this

20   shift would have had on payments to suppliers, and did not discuss the adverse effect this shift

21   would have had on beneficiaries in those rural counties where payment rates would rise. Upon

22   examination, Plaintiffs’ counsel recognized that it would result in an immediate redistribution of

23   approximately $5.3 billion from urban to rural counties.                FAC ¶ 400.        Despite the huge

24   difference in redistributive effect, the Secretary published no estimate of the redistributive effect,

25   expressed no concern for any resulting “winners and losers,” expressed no concern for seeking

26   the “support” of state medical associations, and expressed no concern for any administrative

27   burden that might result. The Secretary certainly did not proceed “with caution” or see a need

28   for “further study” in making the proposal, having only undertaken four months of study at most,
                                                       21
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   and having undertaken no consultation with suppliers, supplier groups, independent contractors,

 2   advisory boards, or other governmental agencies. FAC ¶¶ 393-401.

 3            Another example of the Secretary’s lack of concern can be found in the correction of a

 4   mistake in the 1997 locality reconfiguration. In 1997, the Agency mistakenly combined Houston

 5   County and Harris County (where the city of Houston is located) into the “Houston Metro”

 6   locality, and also mistakenly combined Austin County and Travis County (where the city of

 7   Austin is located) into the “Austin Metro” locality. Based on their relative costs, both Houston

 8   County and Austin County should have been included in the rural “Rest of Texas” locality, while

 9   Harris County and Travis County should have been made single-county localities. The error was

10   brought to the attention of the Agency by the 2006 CMA Study (AR 162870-162955), Plaintiffs’

11   March 2007 Claim at ¶¶ 217-222, and Plaintiffs’ June 2007 Complaint at ¶¶ 234-239. In late

12   2009, the Agency “discovered” the error and placed Houston County and Austin County in the

13   “Rest of Texas” locality, and converted Harris County and Travis County into single-county

14   localities. The Agency did not follow the rule making process, did not attempt to rectify the

15   payment errors of the prior twelve years, did not seek approval from the state medical

16   association, and gave no apparent consideration to any “redistributive effect” on “winners and

17   losers.” FAC ¶¶ 381-384.

18            Continuing to make inaccurate payments will only worsen this major problem.

19                     3.       The Need to Obtain the “Support” of State Medical Associations

20            The Secretary has also repeatedly cited the need to obtain the “support” of state medical

21   associations prior to implementation of any locality change. FAC ¶¶ 179-180, 190, 193-195,

22   280-282, 291-292, 296-298, 314, 322, 331, 363, 378, 384-385, 388, 391-392, 410, 417, 503, 540-

23   544. In her motion, the Secretary claims that she is “required to consult with ‘appropriate

24   representatives of physicians’ about reviewing and adjusting geographic adjustment factors and
                                                                                                                          4
25   thus about any changes to the fee schedule areas,” citing 42 U.S.C. § 1395w-4(e)(1)(C).

26            4
                 The Secretary is incorrect in her characterization of her statutory duty. The statute in question provides:
     “The Secretary, not less often than every 3 years, shall, in consultation with appropriate representatives of
27   physicians, review the indices established under subparagraph (A) and the geographic index values applied under
     this subsection for all fee schedule areas. Based on such review, the Secretary may revise such index and adjust such
28   index values….” The reference is to the tri-annual GPCI updates that have been performed since 1995, and not to
                                                            22
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   Plaintiffs do not object to the consultation with state medical associations. It is the Secretary’s

 2   insistence on receiving the support of those associations that Plaintiffs contend is irrational.

 3           First, the use of Relative Value Unit (“RVU”) weighting instead of population weighting

 4   means that modifying a locality will only affect payments to the counties that were in the locality

 5   before the modification, and will not affect payment rates to any other county in the particular

 6   state. Thus, there is no reason to seek the opinion of suppliers in counties in the rest of a state

 7   that would not be affected at all by a locality modification.

 8           Second, state medical associations are not representative of all suppliers in a state who

 9   provide medical services under Part B, and do not represent affected beneficiaries at all.

10           Third, state medical associations include many members who do not provide medical

11   services under Part B such as medical students, retired physicians, and practice managers. The

12   opinion of such members should carry little or no weight in the decision making process.

13           It is certainly rational to seek the opinions of all, but it is not rational to make the support

14   of a group that is only partially representative of those affected a prerequisite for change.

15                   4.      The Need for “Further Study”

16           The Secretary has repeatedly cited the need for “further study” before implementation of

17   any locality change. FAC ¶¶ 364, 378-380, 385-392, 405-407, 533-539. Yet over the last twelve

18   years, CMS has received, undertaken, or commissioned at least ten (10) studies on over twenty

19   (20) ways the locality structure might be modified to achieve greater uniformity of treatment and

20   greater payment accuracy: (1) CMS in 2001-2003 (Plaintiffs’ Supplements to Administrative

21   Record (“PSAR”) 1-13); (2) CMS in 2004-2006 (PSAR 14-310); (3) the CMA in 2006 (FAC ¶¶

22   315-320; AR 162870-162955); (4) the GAO in 2007 (FAC ¶¶ 324-333; AR 11339-11531); (5)

23   MedPAC in 2007 (FAC ¶¶ 335-343; AR 163639-163959); (6) RTI/UI in 2008 (FAC ¶¶ 365-

24   370; AR 11532-11649); (7) CMS in 2008 (FAC ¶¶ 371-373); (8) Acumen from 2008-2010 FAC

25   ¶¶ 374-379; AR 11650-11750, 163149-163256); (9) IOM Phase I in 2011 (AR 163960-164223);

26   and (10) IOM Phase II in 2012 (PSAR 351-613).

27
     changes to the locality structure. FAC ¶¶ 94, fn. 6, 270, fn. 9. As the Agency expressly stated in 1994, the
28   calculation of GPCIs is an issue that is separate from the configuration of localities. FAC ¶ 184.
                                                            23
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1          It seemed the Secretary was ready to act with the release of the 2011 IOM Phase I Report

 2   that was deliberately timed to allow the IOM’s recommendations to be implemented in CY 2012.

 3   As Jonathan Blum, Director, Center for Medicare, stated:

 4          “The goal of this study is to help influence and improve the CMS rule-making
            processes by making actionable recommendations. This goal and the timeline of
 5          this report were designed with CMS rule-making in mind. CMS and IOM have
            agreed on a schedule that would result in IOM producing a report in time for
 6          the rulemaking cycle for physician fee schedule rates on January 1, 2012. The
            IOM study timeline is fixed with the 2012 rule-making cycle. [Emphasis added.]”
 7          AR 164006.
 8   Although the IOM Phase I Report made specific recommendations for reconfiguration of the

 9   locality structure, it did not did not lead to any rule making activity or any change. Instead, the

10   Secretary again stated the need for further study. 77 FR 44754-59, 7/30/2012; PSAR 647-652.

11          By this time, there should be no dispute that: (a) reconfiguration is needed because, as

12   the GAO found in 2007, there are “large payment differences” in 447 counties in the United

13   States; (b) suppliers in over 200 counties have been underpaid over a twelve-year period by large

14   margins, some upwards of 15-20%; (c) suppliers have been overpaid over that same twelve-year

15   period at the expense of Plaintiffs and Members of the Class; and (d) Medicare beneficiaries,

16   among the most vulnerable and underprivileged of our population, are being overcharged, some

17   upwards of 15-20%.         Still, the Secretary has no current plan to implement any sort of

18   reconfiguration, and, given the necessity for notice and comment, no such change can be

19   implemented until January 1, 2014 at the earliest. See FAC ¶¶ 533-539.

20          The need for “further study” only relates to the prospective relief sought by Plaintiffs and

21   does not relate to the retrospective relief they seek for reimbursement of past underpayments.

22   Uniform reapplication of the 5% iterative method would correct the payment disparities suffered

23   by Plaintiffs and Members of the Class. There is no rational reason why a known, previously

24   utilized and highly studied method should not be employed to immediately implement that cure

25   while “further studies” are undertaken seeking what may be a better or more systemic cure.

26                   5.      Administrative Burden

27          The Secretary expressed concern in one issue of the Federal Register about additional

28   administrative costs that may result from a reconfiguration of the locality structure, however, the
                                                       24
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   Secretary has never articulated even so much as an estimate of the magnitude of such additional

 2   costs. FAC ¶ 528. The Secretary’s concern is misplaced for three reasons.

 3          First, insuring the availability of adequate health care is one of the fundamental purposes

 4   of the Medicare Act, and that purpose is paramount to concerns over administrative burdens:

 5          “The legislation which created health insurance for the aged is remedial and
            therefore to be construed liberally to effectuate the congressional purpose.
 6          [Citation.] The purpose of the Act was to insure that adequate medical care was
            available to the aged throughout this country. [Citation.] Neither the courts nor
 7          the Secretary should, in the interest of minimizing costs, so interpret the
            provisions of the Act as to frustrate its purpose.” Sowell v. Richardson, 319
 8          F.Supp. 689, 691 (D.S.C. 1970) (emphasis added).
 9          Second, the GAO specifically found that even though reapplication of the 5% iterative

10   method to all states (including single-locality states) would increase the number of localities

11   nationwide from 87 to 219, it would reduce the national average payment difference by 52%

12   while imposing only “a minimal amount of additional administrative burden on CMS, Medicare

13   carriers, and physicians.”      FAC ¶¶ 528-530.         The Part B localities are by far the largest

14   geographic units and fewest in number that Medicare uses to compute payments to suppliers.

15   Medicare uses county-based geographic areas to define “physician scarcity areas” (“PSA”)

16   where physicians receive a 5% incentive payment for providing services to beneficiaries. See 42

17   U.S.C. § 1395l(u)(2) and 42 C.F.R. § 414.66. Medicare also uses county and partial-county

18   based geographic units to define “health professional shortage areas” (“HPSA”) where

19   physicians receive a 10% incentive payment for providing services to beneficiaries. See 42

20   U.S.C. § 254e and 42 C.F.R. § 414.67. Medicare regularly publishes the ZIP codes that define

21   the PSAs and HPSAs in the Federal Register. See 69 FR 66236, 66697-66899 (11/15/2004); AR

22   5670-5672. Compared to using 43,000 or more ZIP codes, adding only 132 localities seems like

23   a very simple undertaking in this computerized age.

24          Third, the Secretary’s concern about additional administrative costs does not appear to

25   consider or compare the cost of repeated and often duplicative studies of the locality issue.

26          Contrasting the “minimal amount” of additional administrative burden with the fact that

27   the reapplication of the 5% iterative method would result in a reduction of the national average

28   payment difference by 52% leads to the inescapable conclusion that the Secretary may not rely
                                                       25
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   on a justification whose relationship to an asserted goal is so attenuated as to render the

 2   justification arbitrary. See City of Cleburne v. Cleburne Living Ctr., 473 U.S. 432, 446 (1986).

 3                   6.      No Other Conceivable Rational Basis Exists

 4          An agency action will not be reversed as arbitrary and capricious where the agency is

 5   able to demonstrate a “rational connection between the facts found and the conclusions made.”

 6   Ursack Inc., 629 F.3d at 949, (quoting Native Ecosystems Council v. U.S. Forest Service, 418

 7   F.3d 953, 960 (9th Cir. 2005) (internal citation marks omitted)).

 8          Here, there is no rational connection between (1) the fact – found as early as 2001 – that

 9   the payments Plaintiffs should be receiving are diverted to other suppliers as windfall

10   overpayments and (2) the Secretary’s determination to preserve the current structure for the

11   foreseeable future.     It is also irrational for the Secretary to choose to cement payment

12   inaccuracies in a way that the Secretary previously found unacceptable. The Secretary’s stated

13   reasons for preserving the outdated locality structure –concerns over “winners” and “losers,” the

14   need to obtain the “support” of state medical associations, the need for further study, and some

15   unspecified and unquantified costs – have no statutory basis and are entirely irrational.

16          Maintenance of the current locality structure will only ensure that excessive cost

17   reimbursement will continue and that Medicare’s “overriding purpose” and payment accuracy

18   objective will not be met. Regions Hospital, 522 U.S. at 459; FAC ¶ 33; PSAR 958-961.

19   V.     UNLAWFUL DELEGATION

20          A.       The Challenge Is Not Time Barred

21           “[A] substantive challenge to an agency decision alleging lack of agency authority may

22   be brought within six years of the agency’s application to the specific challenger…The right to

23   bring a civil suit challenging an agency action accrues ‘upon the completion of the administrative

24   proceedings. [Citations omitted.]’” Wind River Mining Corp. v. United States, 946 F.2d 710,

25   716 (9th Cir. 1991); see also Northwest Environmental Advocates v. U.S. E.P.A., 537 F.3d 1006,

26   1018-19 (9th Cir. 2008). Here, the administrative proceedings were completed on May 11, 2007,

27   when NHIC denied Plaintiffs’ March 14, 2007 claim. FAC ¶ 60. Plaintiffs’ original Complaint

28
                                                       26
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   was filed in this Court on June 4, 2007, less than a month later, and clearly within the six year

 2   statute of limitations provided under 28 U.S.C. § 2401(a). Doc’t 89.

 3           B.       Plaintiffs Have Standing to Challenge the Secretary’s Unlawful Delegation

 4           To prove standing, Plaintiffs must show: (1) they have suffered a concrete, personal, and

 5   particularized “injury in fact” to a legally protected interest; (2) a causal connection between the

 6   injury and the action of the defendant, fairly traceable to the challenged action; and (3) a

 7   likelihood, as opposed to mere speculation, that the injury will be redressed by a favorable

 8   decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-561 (1992).

 9           No locality changes have been made since 1997 as a result of the Secretary’s unlawful

10   delegation, and, as a further result, Plaintiffs and Members of the Class have been underpaid by

11   billions of dollars. They will continue to be underpaid until the Secretary either: (a) restructures

12   the Part B payment localities through a reapplication of the 5% iterative threshold and other

13   standards of payment accuracy identified by the Agency in 1996; or (b) restructures the localities

14   in a uniform manner that meets or exceeds those payment accuracy standards. FAC ¶¶ 622-623.

15           The FAC sets forth how this Court can redress their unlawful delegation claim,

16   notwithstanding the argument of Defendant at Doc’t 118, pp. 28:7-29:1, by entering an order: (i)

17   prohibiting the Secretary from configuring or maintaining a locality structure does not meet or

18   exceed the 1996 standards of payment accuracy; and (ii) prohibiting the Secretary…from

19   delegating any part of the duty to reconfigure the payment locality structure under Medicare

20   Part B to state medical associations. [Emphasis added.]” FAC ¶ 625.

21           Thus, Plaintiffs have pled facts supporting each of the standing requirements of Lujon.

22           C.       Plaintiffs Have Stated a Cognizable Claim for Unlawful Delegation

23           The FAC contains a detailed summary of the factual basis of Plaintiffs’ unlawful

24   delegation claim at ¶¶ 609-625 that the Secretary either ignores or misstates. 5 One need look no

25

26           5
                 For example, Plaintiffs do not allege that the Agency’s 2005 “two county fix” was “rejected … in part
     because one of the plaintiffs was opposed to the project.” Doc’t 118 at p. 26:18-22. A proper reading of FAC ¶ 313,
27   fin. 36, shows that the proposal was supported by a majority of commenters, and opposed by a comparative handful
     of commenters from Monterey and San Diego Counties, not by the counties themselves. The Agency has included
28   those comments in the Administrative Record and there is no excuse for the misstatement. See AR 12681-14616.
                                                           27
      Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   further than CMS’ own statements and its inaction to see that the Agency has unlawfully

 2   delegated its presumed authority to state medical associations to initiate locality changes:

 3         “We do recognize that changing demographics over time may lead to payment disparities…We rely
            upon State medical societies to identify and resolve these disparities….”
 4
           “[W]e have refrained, in the past, from making changes to payment localities unless the State medical
 5          association provides evidence that any proposed changes has statewide support.”
 6         “For many years, we have not considered making changes to localities without the
            support of a State medical association in order to demonstrate consensus for the change
 7          among the professionals whose payments would be affected (since such changes would
            be redistributive, with some increasing and some decreasing).”
 8

 9   The FAC identifies these statements and more in the same vein at ¶¶ 292, 296, 297, 314, 322,

10   331, 363, 378, 385, 388, 391-392, 417, and footnotes 33, at page 70, and 53, at page 105.

11          The 1990 Omnibus Budget Reduction Act provided that Nebraska and Oklahoma would

12   become single-state localities if the Agency received written expression of support from each

13   congressional delegation from the state and organizations representing urban and rural

14   physicians in the state. FAC ¶¶ 131-132. In November 1990, President George H.W. Bush

15   directed the Agency not to enforce that provision because it vested significant authority to

16   execute federal law to persons not appointed by the President, and attempted to confer

17   lawmaking power on individual members of Congress. FAC ¶¶ 133-135. This fact is highly

18   relevant for two reasons. First, if Congress cannot constitutionally delegate authority to state

19   medical associations to initiate and approve locality changes, then the Agency certainly lacks the

20   authority to do so. FAC ¶ 621. Second, where the Chief Executive has issued a directive to the

21   Agency not to depend on the support of state medical associations for locality changes, it raises

22   the question, “By what authority does an agency of the executive branch ignore such a directive

23   from the Chief Executive?”

24          Other than the 2009 correction of the four Texas counties’ locality mis-designations

25   (FAC ¶¶ 260-262, 383), the Agency has only definitively proposed a locality change twice since

26   1997. FAC ¶ 614. The first proposal that the Agency put out for public comment was the one

27   initiated by the California Medical Association and was not adopted for questionable reasons.

28
                                                       28
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   FAC ¶¶ 284-292, 615. The second was not adopted because it was not supported by the

 2   California Medical Association. FAC ¶¶ 300-313.

 3          Under the unlawful delegation doctrine, an agency may not completely shift its

 4   responsibility to administer its duties to a private actor. Perot v. Federal Election Commission,

 5   97 F.3d 553, 559 (D.C. Cir. 1996). This is particularly true where an agency has delegated duties

 6   to a private actor whose objectivity may be questioned on grounds of conflict of interest. Sierra

 7   Club v. Sigler, 695 F.2d 957, 962 (5th Cir. 1983). Delegations by federal agencies to private

 8   entities are valid so long as the federal agency or official retains final reviewing authority.

 9   United Black Fund, Inc. v. Hampton, 352 F.Supp. 898, 904 (D.D.C. 1972). However, “[t]he

10   relevant inquiry in any delegation challenge is whether Congress intended to permit the

11   delegatee to delegate the authority conferred by Congress.” National Park and Conservation

12   Assn. v. Stanton, 54 F.Supp.2d 7 (D.D.C. 1999). In this case, there was no express delegation of

13   authority by Congress to the Secretary to create or modify fee schedule areas in the first instance,

14   nor is there any indication of Congress’ intent to permit the Secretary to delegate the authority to

15   approve or initiate locality modifications. FAC ¶¶ 119-126.

16          Here, as in Stanton, 54 F.Supp.2d at 19-21: (a) the Secretary retained no oversight over

17   the state medical associations actions or inactions; (b) the associations’ interests are likely to

18   conflict with the payment accuracy standards that the Secretary is mandated to achieve; (c) the

19   Secretary lacks authority to appoint or remove members from the associations; (d) the Secretary

20   lacks authority to determine which interests would be represented on the associations; and (e) the

21   Secretary lacks authority to control association funding. FAC ¶¶ 609-625.

22          The motion to dismiss the unlawful delegation claim should be denied.

23   VI.    DEFENDANT’S MOTION FOR SUMMARY JUDGMENT SHOULD BE DENIED

24          Defendant moves, in the alternative, for summary judgment under Fed.R.Civ.P. 56(c).

25   “Summary judgment is proper ‘if the pleadings, depositions, answers to interrogatories, and

26   admissions on file, together with the affidavits, if any, show that there is no genuine issue as to

27   any material fact and that the moving party is entitled to a judgment as a matter of law.’”

28   Celotex v. Catrett, 477 U.S. 317, 322 (1986); see also Fed.R.Civ.P. 56(c)(1) and (c)(2). “The
                                                       29
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for

 2   discovery and upon motion, against a party who fails to make a showing sufficient to establish

 3   the existence of an element essential to that party’s case, and on which that party will bear the

 4   burden of proof at trial.” Celotex, 477 U.S. at 323.

 5          “A moving party without the ultimate burden of persuasion at trial…has both the initial

 6   burden of production and the ultimate burden of persuasion on a motion for summary judgment.

 7   Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Cos., Inc., 210 F.3d 1099, 1102 (9th Cir. 2000). “In

 8   order to carry its burden of production, the moving party must either produce evidence negating

 9   an essential element of the nonmoving party’s claim or defense or show that the nonmoving

10   party does not have enough evidence of an essential element to carry its ultimate burden of

11   persuasion at trial.” Ibid. “The nonmoving party, of course, must have had sufficient time and

12   opportunity for discovery before a moving party will be permitted to carry its initial burden of

13   production by showing that the nonmoving party has insufficient evidence.” Id. at 1105-1106;

14   see also, Celotex, 477 U.S. at 326.

15          Summary judgment is unwarranted as Defendant has utterly failed to cite to any materials

16   in the record that establish the absence of a genuine dispute, or to demonstrate that Plaintiffs

17   have not produced admissible evidence to support the facts alleged. Should the Court, however,

18   entertain Defendant’s summary judgment motion as viable, Plaintiffs have submitted a request

19   under Rule 56(d) to take discovery.  

20   VII.   CONCLUSION

21          When asked by a reporter to comment on the allegations of Plaintiffs’ initial Complaint,

22   John Scully, former CMS Administrator, candidly stated, “Sometimes you have to make

23   arbitrary calls based on the best data you have.” FAC at p. 88, fn. 45. From a review of the

24   entire record, it appears that the Agency actually prefers to ignore the best data available and be

25   content with an arbitrary system where payments are not accurate and beneficiaries suffer, and

26   that system is exactly what the Secretary continues to condone.

27          Plaintiffs respectfully request that this Court prescribe a different and less arbitrary

28   approach and deny Defendant’s motion to dismiss, or, in the alternative, for summary judgment.
                                                       30
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1   Dated: September 14, 2012
 2                                                 COREY, LUZAICH, PLISKA, DE GHETALDI & NASTARI LLP
 3

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                                                            By:
 5                                                                DARIO DE GHETALDI, ESQ.,
                                                                  Co-Counsel for Plaintiffs
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                                                       31
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1                                  OTHER PLAINTIFFS’ CO-COUNSEL
 2   Colleen Duffy-Smith - Bar No. 161163                       Michael G. Reedy - Bar No. 161002
     cduffysmith@mdstlaw.com                                    mreedy@mcmanisfaulkner.com
 3   Morgan Duffy-Smith & Tidalgo LLP                           McManis Faulkner
     1960 The Alameda, Suite 220                                Fairmont Plaza, 10th Floor
 4   San Jose, CA 95126                                         50 West San Fernando Street
     Telephone: 408-244-4570                                    San Jose, CA 95113
 5   Facsimile: 408-882-7927                                    Telephone: 408-297-8700
     [Co-Counsel for All Plaintiffs]                            Facsimile: 408-279-3244
 6                                                              [Co-Counsel for the Counties of Marin,
                                                                Monterey, San Diego, Santa Barbara, and
 7                                                              Sonoma]
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                                                       32
     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888
 1                                INDIVIDUAL PLAINTIFFS’ COUNSEL
 2   Dana M. McRae – Bar No. 142231                              Thomas E. Montgomery – Bar No. 109654
     dana.mcrae@santa-cruz.ca.us                                 thomas.montgomery@sdcounty.ca.gov
 3   Santa Cruz County Counsel                                   San Diego County Counsel
     Office of the County Counsel                                Deborah Anne McCarthy – Bar No. 99062
 4   Government Center, County of Santa Cruz                     deborah.mccarthy@sdcounty.ca.gov
     701 Ocean Street, Room 505                                  Assistant County Counsel
 5   Santa Cruz, CA 95060                                        C. Ellen Pilsecker – Bar No. 154241
     Tel: 831-454-2040                                           ellen.pilsecker@sdcounty.ca.gov
 6   Fax: 831-454-2115                                           Chief Deputy County Counsel
     Attorneys for the County of Santa Cruz                      Office of the County Counsel
 7                                                               County Administration Center
     Bruce Goldstein – Bar No. 135970                            1600 Pacific Highway, Room 355
 8   bgoldste@sonoma-county.org                                  San Diego, CA 92101
     Sonoma County Counsel                                       Tel: 619-531-4860
 9   Linda Schiltgen – Bar No. 197615                            Fax: 619-531-6005
     lschiltg@sonoma-county.org                                  Attorneys for the County of San Diego
10   Deputy County Counsel
     Office of the County Counsel                                Daniel J. Wallace – Bar No. 37287
11   575 Administration Drive, Suite 105A                        Santa Barbara County Counsel
     Santa Rosa, CA 95403                                        Celeste E. Anderson – Bar No. 141965
12   Tel: 707-565-2421                                           canders@co.santa-barbara.ca.us
     Fax: 707-565-2624                                           Deputy County Counsel
13   Attorneys for the County of Sonoma                          Office of the County Counsel
                                                                 105 East Anapamu, Suite 201
14   Patrick K. Faulkner – Bar No. 70801                         Santa Barbara, CA 93101
     Marin County Counsel                                        Tel: 805-568-2950
15   Jack F. Govi – Bar No. 88483                                Fax: 805-781-4221
     Assistant County Counsel                                    Attorneys for the County of Santa Barbara
16   Mari-Ann Gibbs Rivers – Bar No. 117053
     mrivers@co.marin.ca.us                                      Warren R. Jensen – Bar No. 71349
17   Deputy County Counsel                                       San Luis Obispo County Counsel
     Office of the County Counsel                                Susan Hoffman – Bar No. 122304
18   3501 Civic Center Drive, Suite 303                          shoffman@co.slo.ca.us
     San Rafael, CA 94903                                        Deputy County Counsel
19   Tel: 415-499-6117                                           Rita L. Neal – Bar No. 151156
     Fax: 415-499-3796                                           rneal@co.slo.ca.us
20   Attorneys for the County of Marin                           Deputy County Counsel
                                                                 Office of the County Counsel
21   Charles J. McKee – Bar No. 152458                           1055 Monterey Street, Suite D320
     Monterey County Counsel                                     San Luis Obispo, CA 93408
22   William M. Litt – Bar No. 166614                            Tel: 805-781-5400
     littwm@co.monterey.ca.us                                    Fax: 805-781-4221
23   Deputy County Counsel                                       Attorneys for the County of San Luis Obispo
     Office of the County Counsel
24   168 West Alisal Street, 3rd Floor
     Salinas, CA 93901
25   Tel: 831-755-5045
     Fax: 831-755-5283
26   Attorneys for the County of Monterey
27

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     Plaintiffs’ MPA in Opposition to Defendant’s Motion to Dismiss or for Summary Judgment; Case No. 3:07-CV-02888

								
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