California Pharmacists Associa v. David Maxwell-Jolly

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

CALIFORNIA PHARMACISTS 
ASSOCIATION; CALIFORNIA MEDICAL
ASSOCIATION; CALIFORNIA DENTAL
ASSOCIATION; CALIFORNIA HOSPITAL
ASSOCIATION; CALIFORNIA
ASSOCIATION FOR ADULT DAY
SERVICES; MARIN APOTHECARY, INC.,
DBA Ross Valley Pharmacy;
SOUTH SACRAMENTO PHARMACY;
FARMACIA REMEDIOS, INC.; ACACIA No. 09-55532
ADULT DAY SERVICES; SHARP D.C. No.
MEMORIAL HOSPITAL; GROSSMONT
HOSPITAL CORPORATION; SHARP
 2:09-cv-00722-CAS-
MAN
CHULA VISTA MEDICAL CENTER;
SHARP CORONADO HOSPITAL AND OPINION
HEALTHCARE CENTER; FEY GARCIA;
CHARLES GALLAGHER,
Plaintiffs-Appellees,
v.
DAVID MAXWELL-JOLLY, Director of
The California Department of
Health Care Services,
Defendant-Appellant.

Appeal from the United States District Court
for the Central District of California
Christina A. Snyder, District Judge, Presiding

Argued and Submitted
January 19, 2010—Pasadena, California

Filed March 3, 2010

3331
3332 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
Before: Stephen Reinhardt, William A. Fletcher and
Milan D. Smith, Jr., Circuit Judges.

Opinion by Judge Milan D. Smith, Jr.
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3335

COUNSEL

Edmund G. Brown Jr., Attorney General of California, Jenni-
fer M. Kim, Shannon M. Chambers and Randall R. Murphy,
Supervising Deputy Attorneys General, and Gregory M.
Cribbs, Deputy Attorney General, Los Angeles, California,
for defendant-appellant David Maxwell-Jolly.

Lloyd A. Bookman, Byron J. Gross, and Jordan B. Keville,
Hooper, Lundy & Bookman, Inc., Los Angeles, California,
for plaintiffs-appellees California Pharmacists Association, et
al.

OPINION

MILAN D. SMITH, JR., Circuit Judge:

We are once again asked to consider whether the California
Department of Health Care Services (Department) Director,
David Maxwell-Jolly (Director), should be enjoined from
implementing state legislation reducing payments to certain
3336 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
medical service providers. In this latest set of appeals,
Plaintiffs-Appellees (California Pharmacists), a group of adult
day health care centers (ADHCs), hospitals, pharmacies, and
beneficiaries of the State’s Medicaid program, Medi-Cal,
challenge a five percent reduction in those payments.1 We
affirm, and hold that the district court did not abuse its discre-
tion in granting California Pharmacists’s motion for a prelimi-
nary injunction because the State failed to “stud[y] the impact
of the [five] percent rate reduction on the statutory factors of
efficiency, economy, quality, and access to care” prior to
implementing the rate reductions. Indep. Living Ctr. of S.
Cal., Inc. v. Maxwell-Jolly, 572 F.3d 644, 652 (9th Cir. 2009)
(Independent Living II).

FACTUAL AND PROCEDURAL BACKGROUND

I. Medicaid and Medi-Cal

Under Title XIX of the Social Security Act (the Medicaid
Act), 42 U.S.C. § 1396 et seq., the federal government pro-
vides funds to participating states to “enabl[e] each State, as
far as practicable . . . to furnish . . . medical assistance on
behalf of families with dependent children and of aged, blind,
or disabled individuals, whose income and resources are
insufficient to meet the costs of necessary medical services.”
42 U.S.C. § 1396-1. “Medicaid is a cooperative federal-state
program that directs federal funding to states to assist them in
providing medical assistance to low-income individuals.”
Katie A. ex rel. Ludin v. Los Angeles County, 481 F.3d 1150,
1153-54 (9th Cir. 2007). As we have stated many times, it is
the states that choose whether to participate in Medicaid.
Should a state choose to participate in the Medicaid program,
it must comply with federal Medicaid law. Id. California has
chosen to participate in the program.
1
Here we deal only with providers and beneficiaries of ADHCs. Mirror-
ing the analysis of today’s holdings, we address the challenges to AB 1183
with respect to pharmacy and hospital providers, as well as their beneficia-
ries, in two separate, concurrently filed memorandum dispositions.
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3337
To receive federal funds, states must administer their pro-
grams in compliance with individual “State plans for medical
assistance,” which require approval by the federal Secretary
of Health and Human Services. 42 U.S.C. § 1396-1. The State
plan must “[s]pecify a single State agency established or des-
ignated to administer or supervise the administration of the
plan.” 42 C.F.R. § 431.10. The Defendant-Appellee’s agency,
the Department, “is the state agency responsible for the
administration of California’s version of Medicaid, the Medi-
Cal program.” Orthopaedic Hosp. v. Belshe, 103 F.3d 1491,
1493 (9th Cir. 1997) (Orthopaedic II).

The Medicaid Act provides detailed requirements for state
plans. See 42 U.S.C. § 1396a(a)(1)-(73). One of those provi-
sions is § 1396a(a)(30)(A) (hereafter § 30(A)), the provision
at issue in this appeal. Under § 30(A), a state plan must:

provide such methods and procedures relating to . . .
the payment for . . . care and services . . . as may be
necessary . . . to assure that payments are consistent
with efficiency, economy, and quality of care and are
sufficient to enlist enough providers so that care and
services are available under the plan at least to the
extent that such care and services are available to the
general population in the geographic area.

Id. § 1396a(a)(30)(A). Thus, a state plan must establish health
care provider reimbursement rates that are, among other
things: (1) “consistent with high-quality medical care” (qual-
ity of care); and (2) “sufficient to enlist enough providers to
ensure that medical services are generally available to Medic-
aid recipients” (access to care). Indep. Living Ctr. of S. Cal.,
Inc. v. Shewry, 543 F.3d 1050, 1053 (9th Cir. 2008) (Indepen-
dent Living I).

II. Assembly Bill 5

On February 16, 2008, the California legislature enacted
Assembly Bill X3 5 (AB 5) in special session. See 2008 Cal.
3338 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
Legis. Serv. 3rd Ex. Sess. Ch. 3. AB 5 reduced by ten percent
payments under the Medi-Cal fee-for-service program for
physicians, dentists, pharmacies, ADHCs, clinics, health sys-
tems, and other providers for services provided on or after
July 1, 2008. Cal. Welf. & Inst. Code § 14105.19(b)(1). Sec-
tion 14105.19 of the California Welfare & Institutions Code
also reduced payments to managed health care plans by the
actuarial equivalent of the ten percent payment reduction. Id.
§ 14105.19(b)(3). Finally, AB 5 reduced payments to acute
care hospitals not under contract with the Department for
inpatient services. Id. § 14166.245(c). Under AB 5, these cuts
were scheduled to take effect on July 1, 2008.

In Independent Living II, a group of pharmacies, health
care providers, senior citizens’ groups, and Medi-Cal benefi-
ciaries brought an action under the Supremacy Clause, alleg-
ing that AB 5 conflicted with the requirements of § 30(A). We
agreed, and held that under Orthopaedic II § 30(A) requires
the Director to set provider reimbursement rates that “ ‘bear
a reasonable relationship to efficient and economical hospi-
tals’ costs of providing quality services, unless the Depart-
ment shows some justification for rates that substantially
deviate from such costs.’ ” Indep. Living II, 572 F.3d at 651
(quoting Orthopaedic II, 103 F.3d at 1496). We explained that
Orthopaedic II interpreted § 30(A) to require the Director to
“ ‘rely on responsible cost studies, its own or others’, that pro-
vide reliable data as a basis for its rate setting.’ ” Id. at 652
(quoting Orthopaedic II, 103 F.3d at 1496). However, prior to
enacting AB 5,

[t]he Director failed to provide any evidence that the
Department or the legislature studied the impact of
the ten percent rate reduction on the statutory factors
of efficiency, economy, quality, and access to care
. . . , nor did [the Director] demonstrate that the
Department considered reliable cost studies when
adjusting its reimbursement rates.
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3339
Id.

III. Assembly Bill 1183

On September 16, 2008, the California legislature passed
Assembly Bill 1183 (AB 1183), which became effective on
September 30, 2008. See Cal. Legis. Serv. Ch. 758. AB 1183
amended § 14105.19(b)(1) to provide that the ten percent rate
reductions previously called for in AB 5 would end on Febru-
ary 28, 2009. Id. AB 1183 also added § 14105.191 and
amended § 14166.245 of the California Welfare & Institutions
Code, for either one percent, five percent, or ten percent rate
reductions, depending on provider type. See Cal. Welf. & Inst.
Code §§ 14105.191, 14166.245.

On January 29, 2009, California Pharmacists challenged
the AB 1183 Medi-Cal reimbursement rate reductions. Cali-
fornia Pharmacists sought to enjoin the Director from imple-
menting AB 1183’s five percent reduction in payments to
ADHCs. ADHCs provide an alternative to institutional care,
responding to the State’s need “to establish and to continue a
community-based system of quality adult day health care
which will enable elderly persons or adults with disabilities to
maintain maximum independence.” Cal. Health & Safety
Code § 1570.2. Though recognizing the need for custodial
care, the California legislature has concluded that “overreli-
ance on [custodial] care has proven to be a costly panacea in
both financial and human terms, often traumatic, and destruc-
tive of continuing family relationships and the capacity for
independent living.” Id.

The district court granted the preliminary injunction. It held
that California Pharmacists had demonstrated a likelihood of
success on the merits for three reasons. First, the legislative
history showed no indication that the legislature considered
§ 30(A) prior to passage of AB 1183. Second, since the
Department was given no discretion to alter the rate reduc-
tions imposed by the legislature, any analysis that the Depart-
3340 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
ment completed in February 2009, and thus after the
reductions were enacted, did not satisfy the requirements of
Orthopaedic II. And third, any analysis conducted by the
Department was inadequate because the Department relied on
costs incurred at intermediate care facilities (NF-As), which
the district court considered to be an inadequate proxy for
ADHC costs. The district court also held that California Phar-
macists had demonstrated a risk of irreparable harm and that
the balance of equities and public interest weighed in favor of
injunctive relief. The Director timely appealed.

The Director raises three issues on appeal. First, the Direc-
tor argues that the district court erred in holding that the legis-
lature itself was required to conduct cost studies or analyses
prior to enactment of AB 1183 to determine whether the pro-
posed rate reductions complied with the efficiency, economy,
and quality of care provisions of § 30(A). Second, the Direc-
tor contends that even if the legislature was required to con-
duct the relevant analysis, the district court committed clear
error in concluding that the legislature did not adequately con-
sider the § 30(A) factors prior to enacting AB 1183. Third, the
Director argues that the district court erred in concluding that
California Pharmacists had met their burden of demonstrating
irreparable harm with respect to reduced reimbursement rates
under AB 1183.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction over this appeal pursuant to 28 U.S.C.
§ 1292(a)(1). A district court’s decision to grant or deny a
preliminary injunction is reviewed for abuse of discretion.
Indep. Living II, 572 F.3d at 651. We recently restated our
two-part test used to determine whether a district court has
abused its discretion. First, we “determine de novo whether
the trial court identified the correct legal rule to apply to the
relief requested.” United States v. Hinkson, 585 F.3d 1247,
1262 (9th Cir. 2009) (en banc). If the trial court did not iden-
tify the correct legal rule, it abused its discretion. Id. at 1262.
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3341
Second, we must determine if the district court’s “application
of the correct legal standard was (1) ‘illogical,’ (2) ‘implausi-
ble,’ or (3) without ‘support in inferences that may be drawn
from the facts in the record.’ ” Id. (quoting Anderson v. City
of Bessemer City, 470 U.S. 564, 577 (1985)).

In granting a request for a preliminary injunction, a district
court abuses its discretion if it “base[s] its decision on an erro-
neous legal standard or clearly erroneous findings of fact.”
Earth Island Inst. v. U.S. Forest Serv., 442 F.3d 1147, 1156
(9th Cir. 2006), abrogated on other grounds by Winter v. Nat-
ural Res. Def. Council, Inc., 129 S. Ct. 365 (2008). We
review conclusions of law de novo and findings of fact for
clear error. Id. Under this standard, “[a]s long as the district
court got the law right, it will not be reversed simply because
the appellate court would have arrived at a different result if
it had applied the law to the facts of the case.” Id. (internal
quotation marks omitted).

DISCUSSION

[1] In seeking a preliminary injunction in a case in which
the public interest is involved, a plaintiff must overcome four
hurdles. Thus, California Pharmacists must show that: (1)
they are likely to succeed on the merits; (2) they are likely to
suffer irreparable harm in the absence of preliminary relief;
(3) the balance of equities tips in their favor; and (4) an
injunction is in the public interest. Cal. Pharms. Ass’n v.
Maxwell-Jolly, 563 F.3d 847, 849 (9th Cir. 2009) (citing Win-
ter, 129 S. Ct. at 376); see also Am. Trucking Ass’ns, Inc. v.
City of Los Angeles, 559 F.3d 1046, 1052 (9th Cir. 2009).

I. Likelihood of Success on the Merits

[2] In Orthopaedic II, we held that § 30(A) requires

the Director [to] set hospital outpatient reimburse-
ment rates that bear a reasonable relationship to effi-
3342 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
cient and economical hospitals’ costs of providing
quality services, unless the Department shows some
justification for rates that substantially deviate from
such costs. To do this, the Department must rely on
responsible cost studies, its own or others’, that pro-
vide reliable data as a basis for its rate setting.

103 F.3d at 1496.

We address the Director’s arguments in turn.

A. The Body Responsible for Complying with § 30(A)

First, the Director argues that Orthopaedic II did not hold
that rate setting must be based upon pre-enactment legislative
studies undertaken and completed by the legislature itself
prior to legislative action authorizing a state department to
implement rate reductions. According to the Director, at issue
in Orthopaedic II were statutorily mandated rate changes not
unlike those set pursuant to AB 1183. However, despite those
enactments, we focused solely on the Department’s actions,
rather than on the legislature’s, and thus only the Department
is required to consider the § 30(A) factors. We disagree.

In Orthopaedic II, none of the disputed rate-settings was
actually set by the legislature. See Orthopaedic Hosp. v.
Kizer, No. 90-4209, 1992 WL 345652 (C.D. Cal. Oct. 5,
1992) (Orthopaedic I). To the contrary, the legislative enact-
ments granted the Director broad discretion to set the applica-
ble rates in the face of general governing criteria. See, e.g.,
Orthopaedic I, 1992 WL 345652, at *7 (describing that reim-
bursement rates for rural hospitals were to “be set at a level
which will provide incentives for rural hospitals to focus on
the provision of outpatient services and . . . reduce the finan-
cial losses incurred by the facilities”); id. at *8 (describing
that for delivery services rates the Department “shall elimi-
nate the Medi-Cal reimbursement differential for obstetrical
services” by equalizing reimbursement for Caesarean and
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3343
non-Cesarean section deliveries); id. at *9 (statute required
the Department to amend the method for reimbursing dispro-
portionate share hospitals for outpatient services, to which the
“Department responded by developing a new payment meth-
odology”). Since the Director set the challenged rates, Ortho-
paedic II addressed whether the Medicaid Act “requires the
Department to consider the costs hospitals incur in delivering
services when setting specific payment rates under [§ 30(A)].”
103 F.3d at 1496 (emphases added). Looking to the clear lan-
guage in the statute, we noted that § 30(A) “provides that pay-
ments for services must be consistent with efficiency,
economy, and quality of care, and that those payments must
be sufficient to enlist enough providers to provide access to
Medicaid recipients.” Id. We reasoned that costs were an inte-
gral factor to be considered in the payment calculus, since
“[t]he Department cannot know that it is setting rates that are
consistent with [§ 30(A)’s relevant factors] without consider-
ing the costs of providing such services.” Id. (emphasis
added). Thus, we held that “payments for hospital outpatient
services must bear a reasonable relationship to the costs of
providing quality of care incurred by efficiently and economi-
cally operated hospitals.” Id.

[3] Unlike the statutes at issue in Orthopaedic II, the State
has taken a different approach to setting rates under AB 1183.
Under AB 1183, the legislature mandated that the Director
reduce provider payments by a fixed percentage. See, e.g.,
Cal. Welf. & Inst. Code § 14105.191(b)(2) (“[P]ayments to
the following classes of providers shall be reduced by 5 per-
cent for Medi-Cal fee-for-service benefits[.]”). Thus, the
Director is misguided in arguing that our focus on the Depart-
ment in Orthopaedic II absolves the legislature of the same
requirements when it sets rates. In other words, in Orthopae-
dic II, there was no question that the Department set reim-
bursement rates. Those rates provided payments for the
medical service at issue under the State’s plan—there, hospi-
tal outpatient services. We had no reason to focus on what the
State legislature considered before rates were set since the
3344 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
legislature was one step removed from the regulations pro-
mulgated by the Department. As noted, the legislature merely
outlined broad goals for the Department, a process separate
and distinct from determining the effect of a specific rate
reduction on the statutory factors of efficiency, economy,
quality, and access to care. Yet if the legislature elects to by-
pass the Department, and set rates itself, it must engage in the
same principled analysis we required of the Director in Ortho-
paedic II.

Moreover, in Orthopaedic I, the Director made the inverse
of the argument he asserts here. There, he argued that in
enacting the governing statutes, the legislature considered the
relevant § 30(A) factors, thus excusing the Department’s need
to do the same when it set rates based on the legislature’s
commands. See Orthopaedic I, 1992 WL 345652, at *7-11.
The district court rejected this argument, holding first that the
statutes did not “purport to establish any specific payment
rates,” id. at 7, and second that even if the legislature had con-
sidered the relevant factors, that did not “relieve the Depart-
ment of the obligation to further consider [the relevant
factors] in exercising what discretion it had in implementing
the legislature’s general mandate,” id. at 9. In addition, the
court noted, “nor is there adequate evidence in the record
demonstrating that the state legislature at any time considered
[the relevant factors] in connection with the equalization of
rates.” Id. The district court explained:

In sum, if there was evidence both that (1) in setting
the challenging rates, the Department had merely in
rote fashion been implementing a precisely-crafted
statutory enactment that did not permit the Depart-
ment to exercise any significant discretion whatso-
ever, and further, that (2) the legislature in enacting
the statute had expressly considered “efficiency,
economy, and quality of care,” the Court might agree
that the Department need not have considered “effi-
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3345
ciency, economy, and quality of care,” at all. But
there is convincing evidence of neither.

Id. Thus, we are not telling the State something new.

Indeed, we find no distinction between the method by
which rates were set under either AB 1183 or AB 5. Under
AB 5, the California legislature enacted a statutorily man-
dated across-the-board rate reduction. In holding that the
Director violated § 30(A) when he implemented AB 5’s rate
reductions, we held “[t]he Director failed to provide any evi-
dence that the Department or the legislature studied the
impact of the ten percent rate reduction on the statutory fac-
tors . . . prior to enacting AB 5.” Indep. Living II, 572 F.3d
at 652 (emphases added). We noted several times our concern
with the context in which the legislation was passed, and
focused on what State officials failed to consider prior to
enactment. See id. at 655-56 (holding that the State’s decision
to pass legislation reducing Medi-Cal reimbursement rates for
purely budgetary concerns violated federal law); id. at 656
(concluding that the State’s Legislative Analyst was the only
“State official” to have “considered—let alone studied” the
impact of the rate reduction on services provided to Medi-Cal
beneficiaries); id. at n.12 (“Nothing in the record connects the
decision to cut Medi-Cal reimbursement rates by ten percent
across-the-board to a factfinding process initiated by state
officials.”). Such an approach is consistent with that of our
sister circuits, where in the context of legislative, as opposed
to agency, rate-setting, they too have focused on ensuring that
the legislative body had information before it so that it could
properly consider efficiency, economy, quality of care, and
access to services before enacting rates. See Minn. Homecare
Ass’n, Inc. v. Gomez, 108 F.3d 917, 918 (8th Cir. 1997) (hold-
ing that although the agency did not provide any formal
§ 30(A) analysis to the legislature, lobbyists “actively partici-
pated in the . . . legislative session” such that the legislature
adequately considered § 30(A) when it raised reimbursement
rates); cf. Ark. Med. Soc’y, Inc. v. Reynolds, 6 F.3d 519, 530
3346 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
(8th Cir. 1993) (refusing to consider evidence offered during
agency hearings regarding the effect of rate cuts on accessibil-
ity because it “could only be confirmed by historical data
accumulated after the cuts were made”).2

[4] In sum, we find nothing remarkable in holding that the
final body responsible for setting Medicaid reimbursement
rates must study the impact of the contemplated rate reduction
on the statutory factors of efficiency, economy, quality of
care, and access to care prior to setting or adjusting payment
rates. We emphasize that the State need not follow “any pre-
scribed method of analyzing and considering [the § 30(A)]
factors.” Minn. Homecare Ass’n, 108 F.3d at 918; Orthopae-
dic II, 103 F.3d at 1498 (refusing to impose a “rigid formula”
for the Department to follow). But as we stated in Orthopae-
dic II, “Congress intended payments to be flexible within a
range; payments should be no higher than what is required to
provide efficient and economical care, but still high enough
to provide for quality care and to ensure access to services.”
103 F.3d at 1497. The only way to ensure that Congress’s
intent is realized is for the State to study the impact of the
contemplated rate change on the statutory factors prior to set-
ting rates. Thus, in no way do we mean to suggest that the
State is proscribed from setting or adjusting reimbursement
rates. We simply reaffirm that if it does so, it must comply
with federal law.
2
The Director’s reliance on Folden v. Wash. State Dep’t of Soc. &
Health Servs., 981 F.2d 1054 (9th Cir. 1992), is also misplaced. In Folden,
the owners of fourteen nursing home care facilities challenged Washing-
ton state Medicaid payments under a now repealed section of the Medicaid
Act known as the Boren Amendment. 981 F.2d at 1056. We have numer-
ous times rejected the Director’s attempt to “graft past judicial interpreta-
tion of the Boren Amendment onto this court’s interpretation of § 30(A).”
Indep. Living II, 572 F.3d at 654-56 & nn.11-12; Alaska Dep’t of Health
and Soc. Servs. v. Ctrs. for Medicare and Medicaid Servs., 424 F.3d 931,
940-41 (9th Cir. 2005).
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3347
B. Legislative Consideration Prior to Setting Rates

Having determined that the State legislature was required
to study the impact of the five percent rate reduction on the
statutory factors of efficiency, economy, quality, and access
to care prior to enacting AB 1183, we next consider whether
it did so. The Director argues that even though the legislature
was not required to do so, the district court committed clear
error in concluding that the legislature did not adequately con-
sider the § 30(A) factors prior to implementing AB 1183.

In support of his argument, the Director submits the decla-
ration of the Department’s Deputy Director for Legislative
and Governmental Affairs. The Deputy Director states that in
May 2008, the Senate and Assembly proposals were released
in public hearings held by the Senate and Assembly Budget
Committees. According to the Deputy Director, Department
employees “provid[ed] information, technical assistance, and
responses to numerous inquiries to legislative staff members
concerning the various 5% and 1% rate reductions that were
included in AB 1183.” The Director also references the May
30, 2008, agenda released by the Assembly Budget Subcom-
mitee No. 1 on Health and Human Services. That agenda lists
certain “items to be heard” including proposed actions to
“Maintain Essential Health Care Services and Eligibility,”
such as “Restore 10% provider rate cut for physicians and
other healthcare providers” and “Partially restore long-term
care rate reductions enacted in AB 5 X 3 (reduce cut from
10% to 5%).” The only proposed action that includes a dis-
cussion relevant to ADHCs explains that individuals with
developmental disabilities living in Intermediate Care Facili-
ties are eligible for ADHC services, and that such clarification
in a trailer bill is necessary so that the State’s Department of
Developmental Services will no longer have to “fund these
ADHC services at 100 percent General Fund cost.”

Next, the Director points to the California Senate Commit-
tee on Budget and Fiscal Review for May 30, 2008, which
3348 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
includes recommendations for modification of several rate
reductions or elimination of services. With respect to ADHC
services, one entry contains the same description of the pro-
posed trailer bill needed to clarify that individuals with devel-
opmental disabilities in Intermediate Care Facilities are
eligible for participation in the ADHC Program. The other
entry relevant to ADHCs is a brief explanation of the Depart-
ment’s request for an increase in funds for ADHC services
due to an increase in enrollees.

The Director also points to the June 11, 2008, Subcommit-
tee 3 Health, Human Services, Labor, and Veterans Affairs
Major Action Report. That Report notes certain of the Depart-
ment’s “Highlights for the Medi-Cal Program.” The Deputy
Director calls particular attention to the entry that indicates
that the 2008-09 budget bill “Provided a partial restoration to
the rates reimbursed under Medi-Cal by providing a 5 percent
across-the-board restoration to the 10 percent reduction as
proposed by the Governor and taken in Special Session
through [AB 5]. In the Medi-Cal Program, this resulted in an
increase of about $597 million ($302 million General Fund).”
The Report also noted adoption of the ADHC proposals set
forth above.

The Director further points to the Budget Conference Com-
mittee 2008 Action List dated July 9, 2008, which shows
seven items that the Assembly and Senate voted on, ulti-
mately contained in AB 1183, such as “Partial Restoration of
Medi-Cal Fee-For-Service Provider Payments” and “Partial
Restoration of Medi-Cal Pharmacy Rate.” The Director
argues that this Action List illustrates “that the Assembly and
Senate voted on the very Medi-Cal rate reduction language
that was ultimately contained in AB 1183.” The July 2008
Summary Overview Budget Conference Committee Report
summarizes many of the rate reductions enacted as part of AB
1183. Finally, the Director refers to the State’s Legislative
Analyst Office’s analysis of the 2008-09 Budget, which
includes recommendations from the State’s Legislative Ana-
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3349
lyst concerning the Governor’s proposed reductions to pro-
vider reimbursement.

[5] The district court explicitly mentioned the legislative
history described above (with the exception of the Legislative
Analyst Office’s analysis), and determined that it does not
show that there was consideration of the § 30(A) factors. We
agree, since the legislative history nowhere mentions any of
the § 30(A) factors, see Orthopaedic I, 1992 WL 345652, at
*8 (“Tellingly—although not dispositively the terms ‘effi-
ciency,’ ‘economy,’ and ‘equality [sic] of care’ appear
nowhere in these documents.”), and is concerned solely with
budgetary matters, see Indep. Living II, 572 F.3d at 659
(“State budgetary concerns cannot . . . be the conclusive fac-
tor in decisions regarding Medicaid.” (internal quotation
marks omitted)). Indeed, the legislative history contains no
indication that, in adjusting rates under AB 1183, the State
“ ‘rel[ied] on responsible cost studies, its own or others’, that
provide reliable data as a basis for its rate setting.’ ” Id. at 652
(quoting Orthopaedic II, 103 F.3d at 1496). The Legislative
Analyst Office’s analysis of the 2008-09 Budget appears to be
the very same report we referenced in Independent Living II.
See id. at 656. It discusses the Governor’s proposal of a ten
percent provider rate reduction, which the State’s own Legis-
lative Analyst recommended rejecting for all providers except
hospitals because those rate reductions had “the potential to
negatively impact the operation of the Medi-Cal Program and
the services provided to beneficiaries by limiting access to
providers and services.” It is hardly clear error for the district
court to have failed to mention a report conducted without
regard to the specific rate reductions before it. Accordingly,
we will not disrupt the district court’s factual findings, as they
are not clearly erroneous.

C. The Department’s Analysis

The Director also argues that the district court erred in fail-
ing to consider the analysis conducted by the Department,
3350 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
completed after the law’s enactment. In rejecting the Depart-
ment’s analysis, the district court held that AB 1183 did not
provide the Department with any discretion, citing Cal. Welf.
& Inst. Code § 14105.191(a), which provides that
“[n]otwithstanding any other provision of law, in order to
implement changes in the level of funding for health care ser-
vices, the director shall reduce provider payments.” (emphasis
added). The district court reasoned that since the Department
was not given any authority to alter the rate reduction
imposed by the legislature, the Department’s post hoc analy-
sis does not satisfy the requirements of Orthopaedic II. The
district court went on to hold that even if a post hoc analysis
was sufficient, the Department relied on an inadequate proxy
for ADHC costs when it considered data for NF-As.

[6] To satisfy § 30(A), any analysis of reimbursement rates
on the statutory factors of efficiency, economy, quality, and
access to care, must have the potential to influence the rate-
setting process. See Indep. Living II, 572 F.3d at 652 n.9
(holding that the district court did not abuse its discretion in
concluding that post hoc rationalizations of the disputed reim-
bursement rates do not satisfy the procedural requirements of
Orthopaedic II); see also Orthopaedic II, 103 F.3d at 1499
(“[T]he Department must consider hospitals’ costs based on
reliable information when setting reimbursement rates . . . .”
(emphases added)); Ark. Med. Soc’y, 6 F.3d at 530. Yet the
Department’s analysis of AB 1183 with respect to ADHCs
was issued on February 24, 2009, more than five months after
the legislature enacted AB 1183, but prior to the cuts’ imple-
mentation. Therefore, for the Department’s analysis to have
the requisite potential effect, the Director would have to have
discretion regarding implementation of the rates.

In his reply brief, and for the first time in this litigation, the
Director argues that the Department’s post-enactment study is
sufficient because the Department retained discretion under
AB 1183 not to implement the reductions before March 1,
2009. Thus, the Director argues, the Department’s February
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3351
24, 2009, analysis would still be meaningful because the
Director had authority to affect rates by deciding not to imple-
ment them.3 Although the Director has clearly waived this
argument by failing to raise it in his opening brief, see Indep.
Towers of Wash. v. Washington, 350 F.3d 925, 929 (9th Cir.
2003), we nevertheless consider and reject the Director’s
argument on the merits.

The Director argues that if the Department determined that
the reduced payments for any services would not comply with
the relevant § 30(A) factors, the Department retained the discre-
3
The Director’s argument that he has discretion regarding the rates is
drawn from a footnote in the district court’s analysis in Orthopaedic I.
There, the Director argued that legislative consideration of the § 30(A)
factors excused the Department from again having to consider § 30(A). In
rejecting that argument, the district court noted that the relevant statutory
enactments “gave the Department fairly wide discretion in implementing
the basic changes outlined in the statute.” Orthopaedic I, 1992 WL
345652, at *9. To buttress that conclusion, the district court pointed out
that under the Medicaid Act, the “ultimate responsibility” for administra-
tion of a state’s Medicaid program is entrusted to a “single state agency.”
Id. at n.14 (quoting 42 C.F.R. § 431.10). As a result, the district court con-
cluded that under federal law, the state agency has the “final say in what
payment rates to set, notwithstanding a legislature’s efforts to provide
broad guidelines for the agency.” Id. (emphasis added). The court found
it particularly relevant that the California legislature directed the Depart-
ment to “seek federal approval for this section, if necessary.” Id. (citing
California Senate Bill 2563) (internal quotation marks omitted). The court
also noted that subsection (a) under the Medi-Cal enabling statute grants
the Department “extremely broad authority” to “comply with legislative
budgetary enactments” only to the extent that those enactments comply
with federal law. Id.
As we have described, there are a number of notable differences
between the legislative enactments at issue in Orthopaedic I and AB 1183,
thus raising the question of whether, under AB 1183, the Director had the
“final say in what payment rates to set.” Id. However, because we reject
the Director’s argument for the reasons set forth below, we do not decide
whether differences between AB 1183 and the legislative enactments at
issue in Orthopaedic I are dispositive of the Director’s discretion in this
case.
3352 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
tion4 not to implement those reductions. As a result, the legis-
lature made implementation of the rate reductions dependent
on whether the Department determined that they complied
with federal law.5

The Director relies on § 14105.191(i), which states:

The department shall promptly seek any necessary
federal approvals for the implementation of this sec-
tion. To the extent that federal financial participation
is not available with respect to any payment that is
reduced or limited pursuant to this section, the direc-
tor may elect not to implement that reduction or lim-
itation.

Cal. Welf. & Inst. Code § 14105.191(i). The Director also
points to the Medi-Cal enabling statute, Cal. Welf. & Inst.
Code § 14105(a):

The director shall prescribe the policies to be fol-
lowed in the administration of this chapter, may limit
the rates of payment for health care services, and
4
At oral argument the Director conceded that he did not have authority
to change the rates set by the legislature, but, he argued, he could exercise
a veto power based on a determination that the rates did not comply with
the statutory factors in § 30(A). We need not decide whether the type of
discretion contemplated by § 14105(a) of the California Welfare & Institu-
tions Code is different from that under § 14105.191(i). That is, that the
Director may “limit the rates,” or “adopt regulations setting rates” under
§ 14105(a) would seem to provide for a different type of discretion than
deciding simply not to implement the rates as set. However, because we
hold that the Director did not retain any discretion to act once rates had
been set, we do not discuss the distinction, if any, between the discretion
contemplated by § 14105(a) as opposed to § 14105.191(i).
5
We need not decide whether a study completed after rates have been
set complies with § 30(A) where the Department has discretion not to
implement the rates. For purposes of our analysis only, we assume such
a study would suffice, but do not so hold because we find that the Director
did not retain any discretion in this case.
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3353
shall adopt any rules and regulations as are necessary
for carrying out, but are not inconsistent with, the
provisions thereof.

Subsection (a) goes on to provide:

In order to implement expeditiously the budgeting
decisions of the Legislature, the director shall, to the
extent permitted by federal law, adopt regulations
setting rates that reflect these budgeting decisions
within one month after the enactment of the Budget
Act and of any other appropriation that changes the
level of funding for Medi-Cal services.

Cal. Welf. & Inst. Code § 14105(a).

[7] The Director’s is not the most natural reading of the
statute. Section 14105.191(i) does not clearly invest the
Director with the discretion not to implement the legislature’s
rate reductions. Rather, it first directs the Department to “seek
any necessary federal approvals” to implement the rate reduc-
tions. Cal. Welf. & Inst. Code § 14105.191(i). Only then does
it permit the Director not to implement any reduction “[t]o the
extent that federal financial participation is not available.” Id.
(emphasis added). Thus, the most natural reading would seem
to be one of budgetary concern; if federal money is not avail-
able for any particular payment reduction, the Director may
choose to save the State money by not implementing the
reduction. Such a reading comports with the budgetary nature
of AB 1183’s legislative history. See Ariz. State Bd. For
Charter Sch. v. U.S. Dep’t of Educ., 464 F.3d 1003, 1008 (9th
Cir. 2006) (“When a natural reading of the statute[ ] leads to
a rational, common-sense result, an alteration of meaning is
not only unnecessary, but also extrajudicial.”).

[8] The Director asks that we read into the statutory text a
process by which the Department could first analyze the
impact of the five percent payment reduction on the § 30(A)
3354 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
factors and then elect to implement the reduction based on
that analysis. However, regardless of whether any such pro-
cess was contemplated in the statute, the record clearly dem-
onstrates that no process of the kind the Director envisions
took place. First, on September 30, 2008, the Department sub-
mitted its State Plan Amendment, incorporating AB 1183’s
rate reductions. In its State Plan Amendment, the Department
stated that it had “determined that payments will continue to
comply with any upper spending limits contained in Part 447
that were adopted to implement the ‘efficiency, economy, and
quality of care’ provision of [§ 30(A)]. Beneficiaries will con-
tinue to have access to covered services as required by Part
447.” Yet the Department did not issue a § 30(A) analysis
until February 24, 2009 and produced nothing that would
indicate that it studied the impact of AB 1183 on efficiency,
economy, quality, and access to care prior to September 30,
2008. The State Plan Amendment also does not mention the
Department’s discretion not to implement the rate reductions
based on federal participation.

In addition, on February 13, 2009, the State published
notice in the California Regulatory Notice Register that “Sec-
tion 14105.191 of the [Welfare and Institutions] Code is
reducing the payments that would otherwise be paid for [adult
day health care services] under the current rate methodology
from 10 percent to 5 percent for dates of service on or after
March 1, 2009. The State’s Notice further provided that the
Department

is mandated by state law to implement the above
change in reimbursement. [The Department] has
considered the impact of this reimbursement on pro-
viders and Medi-Cal beneficiaries. [The Depart-
ment’s] assessment is that reimbursement will
continue to compensate a high percentage of costs
incurred for these facility services and that Medi-Cal
beneficiaries will continue to have access to these
services consistent with [§ 30(A)].
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3355
As with the State Plan Amendment, the Notice pre-dates any
analysis issued by the Department, yet definitively announces
payment reductions from ten to five percent. Moreover, the
Notice states that the Department “is mandated” to implement
the rates, further undermining the Director’s reading of
§ 14105.191(i).

[9] In sum, the Director’s argument that he retained discre-
tion not to implement AB 1183’s rate reductions is not sup-
ported by the record. The Department’s February 24 analysis
issued well after decisions had been made to reduce payments
by five percent, and nothing in the record indicates that the
Department retained the discretion not to implement the rate
reductions based on a § 30(A) analysis. To comply with
§ 30(A), the State must study the impact of the contemplated
rate reduction on the statutory factors of efficiency, economy,
quality, and access to care prior to legislative enactment or in
a manner that allows meaningful consideration of such input
prior to implementation. Here, the State did neither.

[10] In addition, regardless of whether the Director
retained the discretion to act in the manner he posits, we agree
with the district court that the Department’s analysis was
insufficient. Reviewing for clear error, we hold that the dis-
trict court did not abuse its discretion in finding that the
Department’s reliance on NF-A rather than ADHC data was
inadequate. The Department looked to the average costs of
only six NF-A facilities, with widely varied costs, as a proxy
for the 313 ADHCs in the Medi-Cal program. In its ADHC
analysis, completed in February 2009, the Department
explained that it had “just begun the process of auditing the
costs of ADHCs for purposes of establishing rates under the
new costs based methodology that is scheduled to go into
effect on August 1, 2010[,]” and therefore, “in order to assess
how ADHC reimbursement compares to the costs that may be
incurred by an ADHC in providing ADHC services to Medi-
Cal recipients,” it used as a proxy how Medi-Cal reimburse-
ment compares to NF-A costs. The Director concedes that a
3356 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
prospective cost reimbursement methodology for ADHCs is
“still more than one year away.” In the meantime, nothing in
the record indicates that the district court clearly erred in con-
cluding that the Department’s use of NF-A costs was an inad-
equate proxy for ADHC costs. Cf. Orthopaedic II, 103 F.3d
at 1500 (holding that the Department violated § 30(A) when
readopting reimbursement rates for hospitals’ costs by not
considering hospitals’ costs when reevaluating its rates).
Accordingly, it was not an abuse of discretion for the district
court to have rejected the Department’s analysis.

II. Irreparable Harm

The Director also argues that the district court erred in
holding that California Pharmacists demonstrated a likelihood
of irreparable harm. After reviewing the evidence, the district
court held that “the evidence submitted by plaintiffs indi-
cate[s] that Medi-Cal beneficiaries are at risk of losing access
to ADHC services due to the AB 1183 rate reduction.” The
Director argues that in determining whether California Phar-
macists have shown a likelihood of irreparable harm, the dis-
trict court was required to compare Medi-Cal beneficiaries’
access to ADHC services to that of the general population’s.

Once again, under § 30(A), each state’s Medicaid plan
must be

sufficient to enlist enough providers so that care and
services are available under the plan at least to the
extent that such care and services are available to the
general population in the geographic area.

42 U.S.C. § 1396a(a)(30)(A). This is referred to as the “equal
access to care provision,” Orthopaedic II, 103 F.3d at 1498,
and requires that a state plan establish reimbursement rates
sufficient to enlist enough providers to ensure that medical
services are generally available to Medicaid recipients, id. at
1497. The Director argues that the district court erred in fail-
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3357
ing to apply the equal access to care provision in the context
of plaintiffs’ claims of irreparable injury. In other words, the
Director argues that there can be no finding of irreparable
harm where “care and services are available under the plan at
least to the extent that such care and services are available to
the general population in the geographic area.” § 30(A).
According to the Director, applying this standard here, the
evidence before the district court established that ADHC ser-
vices are not generally available to the general population and
thus California Pharmacists made no showing of irreparable
injury.

In Independent Living II, we discussed the distinction
between § 30(A)’s procedural and substantive requirements.
We considered the “potential difficulties inherent in assessing
substantive compliance with the factors laid out in § 30(A),”
which made more attractive, by comparison, the “process-
oriented view of the statute espoused in Orthopaedic [II].”
Indep. Living II, 572 F.3d at 657. While explaining that there
is a difference between substantive and procedural compli-
ance with § 30(A), id. at 656, we also explained their interde-
pendence, since “it is fair to assume that a rate that is set
arbitrarily, without reference to the Section 30(A) require-
ments, is unlikely to meet the equal access and quality
requirements,” id. at 657 (internal quotation marks omitted).
We reaffirmed Orthopaedic II’s requirement that states com-
ply with the procedural components of § 30(A) by setting pro-
vider reimbursement rates only after consideration of the
relevant statutory factors of efficiency, economy, quality, and
access to care. Id.

[11] The Director’s approach to the irreparable harm anal-
ysis conflates § 30(A)’s procedural and substantive require-
ments. We do not require plaintiffs to show the State has
committed a substantive violation of § 30(A)’s access provi-
sion when they can show that the State did not comply with
§ 30(A)’s procedural components. In other words, showing a
procedural violation of the statute—that is, the State’s failure
3358 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
to consider the impact of the contemplated rate on the statu-
tory factors set forth in § 30(A)—may demonstrate a likeli-
hood of success on the merits that the setting of provider
reimbursement rates conflicts with § 30(A). Determining
whether plaintiffs have made a sufficient showing of irrepara-
ble harm is a separate inquiry, which does not turn on the
State’s substantive compliance with § 30(A). Rather, to show
a risk of irreparable harm, plaintiffs may show either, as Med-
icaid beneficiaries, “that enforcement of a proposed rule ‘may
deny them needed medical care[,]’ ” Indep. Living II, 572
F.3d at 658 (quoting Beltran v. Myers, 677 F.2d 1317, 1322
(9th Cir. 1982)), or, as Medicaid providers, that they will lose
considerable revenue through the reduction in payments that
they will be unable to recover due to the State’s Eleventh
Amendment sovereign immunity, Cal. Pharms. Ass’n, 563
F.3d at 850-52.

[12] Requiring a substantive violation of the equal access
to care provision in order to meet the irreparable injury prong
would also run afoul of our Supremacy Clause jurisprudence.
In California Pharmacists, we held that in an action brought
under the Supremacy Clause, a finding of irreparable harm
does not turn on “whether the plaintiffs asserting the eco-
nomic injury were in any sense intended beneficiaries of the
federal statute on which the Supremacy Clause cause of
action was premised.” Id. at 851. Because “[a] cause of action
based on the Supremacy Clause obviates the need for reliance
on third-party rights,” private parties bringing a Supremacy
Clause cause of action can “enforce the structural relationship
between the federal and state governments so long as they
ha[ve] Article III standing as, essentially, private enforcers of
the Supremacy Clause.” Id. Thus, as stated above, plaintiffs
need only show harm to Medi-Cal service providers or their
members in order to obtain injunctive relief. Id. at 850. The
Director’s more narrow approach would allow injunctive
relief only where plaintiffs are able to show that Medi-Cal
beneficiaries have worse access to care and services than that
available to the general population.
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3359
[13] Finally, we have stated that even if § 30(A) imposes
a substantive requirement, a rate reduction might still conflict
with the statute if at least some providers stop treating Medi-
Cal beneficiaries. Indep. Living II, 572 F.3d at 656-57. The
Director concedes that here, the evidence indicates that at
least some ADHC Medi-Cal providers would stop treating
beneficiaries due to AB 1183. Thus, even if we were to
require a substantive violation of the statute to support a find-
ing of irreparable harm, we would find that violation here.

[14] Therefore, we reject the Director’s argument that
there can be no finding of irreparable harm unless the plain-
tiffs show a substantive violation of § 30(A)’s access to care
provision. The Director makes no serious attempt to dispute
the district court’s factual finding that, in light of the evi-
dence, “Medi-Cal beneficiaries are at risk of losing access to
ADHC services due to the AB 1183 rate reduction.” Upon our
review of the evidence, we do not find the district court’s con-
clusion to be clearly erroneous. Accordingly, the district court
did not abuse its discretion in finding that California Pharma-
cists established sufficient irreparable harm to warrant a pre-
liminary injunction.

III. Balance of Equities and the Public Interest

Finally, the Director argues that because of the State’s
deepening fiscal crisis, a preliminary injunction should not
issue. The Director insists that the legislature be allowed to
exercise “its considered judgment” in a manner that serves the
best interests of both Medi-Cal recipients and the State as a
whole, and that injunctions against payment reductions have
forced the State to eliminate many optional Medi-Cal ser-
vices. The district court recognized the State’s interest in
meeting its financial obligations but held that the State’s
financial woes were outweighed by the public’s interest in
access to health care, particularly because “nothing . . . pre-
vents [the State] from imposing a rate reduction after . . .
3360 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY
appropriately consider[ing] and appl[ying] the relevant fac-
tors.”

[15] “The public interest analysis for the issuance of a pre-
liminary injunction requires us to consider ‘whether there
exists some critical public interest that would be injured by
the grant of preliminary relief.’ ” Indep. Living II, 572 F.3d at
659 (quoting Hybritech Inc. v. Abbott Labs., 849 F.2d 1446,
1458 (Fed. Cir. 1988)). We have held that “there is a robust
public interest in safeguarding access to health care for those
eligible for Medicaid, whom Congress has recognized as ‘the
most needy in the country.’ ” Id. (quoting Schweiker v.
Hogan, 457 U.S. 569, 590 (1982)). We continue to recognize
this important public interest in the context of social welfare
cases. As the district court stated, the State is free to exercise
its “considered judgment” and reduce Medi-Cal reimburse-
ment rates. Yet it may not do so for purely budgetary reasons,
Ark. Med. Soc’y, 6 F.3d at 531, nor may it do so in a manner
that violates federal law, Indep. Living II, 572 F.3d at 659.
Accordingly, we hold that the district court did not abuse its
discretion in concluding that the balance of hardships and the
public interest weighed in favor of enjoining implementation
of the five percent rate reduction required by AB 1183.

CONCLUSION

We have now handed down multiple decisions instructing
the State on § 30(A)’s procedural requirements. We trust that
the State now understands that in order for it to comply with
§ 30(A)’s “requirement that payments for services must be
consistent with efficiency, economy, and quality of care, and
sufficient to ensure access,” Orthopaedic II, 103 F.3d at 1500,
it must: (1) “rely on responsible cost studies, its own or oth-
ers’, that provide reliable data as a basis for its rate setting,”
id. at 1496; and (2) study the impact of the contemplated rate
change(s) on the statutory factors prior to setting rates, or in
a manner that allows those studies to have a meaningful
impact on rates before they are finalized. Because the State
 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3361
did neither with respect to AB 1183, we affirm the district
court’s order granting California Pharmacists’s motion for a
preliminary injunction.

AFFIRMED.