Ansley v. Banner Health

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

WALTER ANSLEY, et al.,
Plaintiffs/Appellees/Cross-Appellants,

v.

BANNER HEALTH NETWORK, et al.,
Defendants/Appellants/Cross-Appellees.

No. 1 CA-CV 17-0075
FILED 3-12-2019

Appeal from the Superior Court in Maricopa County
No. CV2012-007665
The Honorable J. Richard Gama, Judge, Retired
The Honorable Dawn M. Bergin, Judge

AFFIRMED IN PART; REVERSED IN PART; REMANDED

COUNSEL

Levenbaum Trachtenberg, PLC, Phoenix
By Geoffrey M. Trachtenberg, Justin Henry
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants

The Entrekin Law Firm, Phoenix
By B. Lance Entrekin
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants

Gammage & Burnham, PLC, Phoenix
By Richard B. Burnham, Cameron C. Artigue, Christopher L. Hering
Counsel for Defendants/Appellants/Cross-Appellees
 ANSLEY, et al. v. BANNER HEALTH, et al.
Opinion of the Court

OPINION

Presiding Judge Diane M. Johnsen delivered the opinion of the Court, in
which Judge Kent E. Cattani and Judge Jennifer M. Perkins joined.

J O H N S E N, Judge:

¶1 Banner Health Network and other hospital groups ("the
Hospitals") each contracted with the Arizona Health Care Cost
Containment System ("AHCCCS") to serve AHCCCS members. The
plaintiffs in this case ("the Patients") received settlements or damage
awards from third-party tortfeasors for injuries that required treatment at
the Hospitals. The Patients sued to enjoin the Hospitals from enforcing
liens on their tort recoveries for the balance between the rates the Hospitals
agreed to accept from AHCCCS and what the Hospitals would have
charged non-AHCCCS patients. We hold that federal law preempts state
statutes authorizing the Hospitals to impose and enforce those liens, and
affirm the superior court's order enjoining the liens. For reasons set forth
below, we also reverse the court's judgment against the Patients on their
third-party-beneficiary claim for breach of contract and vacate and remand
for further consideration a portion of the attorney's fee award to the
Patients.

FACTS AND PROCEDURAL HISTORY

¶2 The Hospitals recorded their liens pursuant to two statutes,
Arizona Revised Statutes ("A.R.S.") sections 33-931 (2019) and 36-
2903.01(G)(4) (2019).1 The former allows a health-care provider to file a lien
for its "customary" charges against a patient's tort recovery. The latter
specifically applies when a hospital has served an AHCCCS member and
allows that hospital to "collect any unpaid portion of its bill from other
third-party payors or in situations" in which the general medical-lien
statute applies.

¶3 In their complaint, the Patients alleged federal Medicaid law
preempts the Arizona lien statutes in cases such as theirs, and sought an
injunction barring the Hospitals from recording liens on their tort

1 Absent material revision after the relevant date, we cite a statute's
current version.

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recoveries. The Patients argued the liens constitute impermissible "balance
billing," a term describing a health-care provider's effort to collect from a
patient "the difference in the amount paid by Medicaid, or a state plan like
AHCCCS, and the amount" the provider typically charges. Abbott v. Banner
Health Network, 239 Ariz. 409, 412, ¶ 9 (2016).

¶4 Early in the litigation, the superior court dismissed a group of
plaintiffs who had settled their lien claims with the Hospitals and entered
partial final judgment as to those plaintiffs pursuant to Arizona Rule of
Civil Procedure 54(b). Those plaintiffs appealed, arguing their settlements
lacked consideration because federal law preempted the Hospitals' liens.
This court accepted that argument, Abbott v. Banner Health Network, 236
Ariz. 436, 446, ¶ 30 (App. 2014) ("Abbott I"), but the supreme court reversed,
Abbott, 239 Ariz. 409 (2016) ("Abbott II"). The supreme court ruled the
settlements were valid and made "fairly and in good faith" because the
validity of the Hospitals' lien rights was not settled under Arizona law.
Abbott II, 239 Ariz. at 413, 414, 415, ¶¶ 12, 18, 20.

¶5 Meanwhile, the superior court certified the remaining
plaintiffs as a class, and both sides moved for summary judgment on the
preemption issue. The superior court ruled in favor of the Patients on their
claim for a declaratory judgment, holding that when a hospital has accepted
payment from AHCCCS for treating a patient, 42 Code of Federal
Regulations ("C.F.R.") § 447.15 (2019) preempts the hospital's state-law right
to a lien on the patient's tort recovery for the balance between what
AHCCCS paid and the hospital's customary charges. The court then
enjoined the Hospitals from "filing or asserting any lien or claim against a
patient's personal injury recovery, after having received any payment from
AHCCCS for the same patient's care." The court granted summary
judgment to the Hospitals, however, on the Patients' third-party-
beneficiary claim, which alleged the Hospitals breached their contracts with
AHCCCS by imposing the liens. Finally, the superior court awarded
attorney's fees to the Patients under the private attorney general doctrine
and denied both sides' motions for new trial.

¶6 The Hospitals appealed the preemption ruling and injunction,
and the Patients cross-appealed the judgment against them on their contract
claim. We have jurisdiction pursuant to Article 6, Section 9, of the Arizona
Constitution and A.R.S. §§ 12-120.21(A)(1) (2019) and -2101(A)(1) (2019).

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Opinion of the Court

DISCUSSION

A. Introduction.

¶7 In our initial opinion in the current appeal, we did not address
the superior court's order granting the Patients' claim for a declaratory
judgment that federal law preempts the Hospitals' state-law lien rights. We
concluded instead that the Patients were entitled to injunctive relief as
third-party beneficiaries of the contracts the Hospitals entered with
AHCCCS. Those contracts require the Hospitals to comply with applicable
federal law. Under that federal law, we held the Hospitals could not
enforce liens against the Patients' tort recoveries for the balance between
what AHCCCS paid the Hospitals and the Hospitals' customary rates.

¶8 The Hospitals moved for reconsideration, arguing for the first
time that under Astra USA, Inc. v. Santa Clara County, 563 U.S. 110 (2011),
the Patients could not sue as third-party beneficiaries of the contracts
because the federal law on which they based their claim affords no private
right of action. The Hospitals' argument under Astra requires us to address
the issue we deferred in our initial opinion. For that reason, we withdraw
that opinion and issue this one in its place.

B. Federal Law Preempts the Hospitals' Lien Rights.

¶9 Federal law may preempt state law by express preemption,
field preemption or conflict preemption. Capital Cities Cable, Inc. v. Crisp,
467 U.S. 691, 698-99 (1984); White Mtn. Health Ctr., Inc. v. Maricopa County,
241 Ariz. 230, 239-40, ¶ 33 (App. 2016).2 The issue here – conflict
preemption – arises when state law stands as an obstacle to the achievement
of Congress's full purpose, or when compliance with both federal and state
laws is impossible. Crisp, 467 U.S. at 699; White Mtn., 241 Ariz. at 240, ¶ 33.
A federal regulation has the same preemptive effect as a federal statute.
Crisp, 467 U.S. at 699. Thus, a federal regulation may render unenforceable

2 The Patients argue this court's decision in Abbott I, which concluded
that federal law preempts the lien statutes, see 236 Ariz. at 442, ¶ 18, is the
law of the case. In Abbott II, however, our supreme court reversed that
decision (albeit on other grounds). See 239 Ariz. at 415, ¶ 20. Assuming the
law-of-the-case doctrine might otherwise apply, we decline to apply it here.
See Powell-Cerkoney v. TCR-Montana Ranch Joint Venture, II, 176 Ariz. 275,
278-79 (App. 1993) (court has discretion whether to apply law-of-the-case
doctrine in favor of its own prior decision).

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a state law that is otherwise consistent with federal law. City of New York v.
F.C.C., 486 U.S. 57, 63-64 (1988).

¶10 Medicaid is a "cooperative federal-state program" that pays
for health care for the needy and the disabled. Douglas v. Indep. Living Ctr.
of So. Calif., 565 U.S. 606, 610 (2012); 42 U.S.C. § 1396-1 (2019). A state that
chooses to participate must "comply with the Medicaid Act and its
implementing regulations." Rehabilitation Ass'n of Va., Inc. v. Kozlowski, 42
F.3d 1444, 1447 (4th Cir. 1994). To receive federal funds under the program,
a state must create a detailed plan that, inter alia, specifies "the nature and
scope" of the medical services it will cover. Douglas, 565 U.S. at 610; see also
42 U.S.C. § 1396a(a) (2019).3 The federal Center for Medicare and Medicaid
Services ("CMS"), a division of the Department of Health and Human
Services ("HHS"), reviews the state's plan to ensure it complies with federal
Medicaid statutes and regulations. See 42 U.S.C. § 1396a(b) (plan approval
by HHS secretary); 42 U.S.C. § 1316(a) (2019) (HHS power to withhold
funds if changes to state plan do not comply with federal law); 42 C.F.R. §
430.10 (2019) (describing contents of state plan); see also Spectrum Health
Continuing Care Group v. Bowling, 410 F.3d 304, 313 (6th Cir. 2005) ("state's
plan must comply with federal statutory and regulatory standards").

¶11 A fundamental principle of the program is that "Medicaid is
essentially a payer of last resort." Kozlowski, 42 F.3d at 1447. Toward that
end, patients must assign to the state Medicaid agency their rights "to any
payment from a third party that has a legal liability to pay for care and
services available under the plan." 42 U.S.C. § 1396k(a)(1)(A) (2019); see
A.R.S. § 36-2946(A) (2019) (patients must assign "all types of medical
benefits"); Olszewski v. Scripps Health, 30 Cal. 4th 798, 811 (2003).
Accordingly, when a hospital submits a claim for treating a plan member,
the state Medicaid agency first tries to determine whether a third party
(insurer, tortfeasor) may be liable for paying the claim. Olszewski, 30 Cal.
4th at 811. When no third party is liable or liability cannot be determined,
the state agency pays the hospital its negotiated rate for treating the patient.
42 C.F.R. § 433.139(c). If a third party is implicated, the agency rejects the
claim and returns it to the hospital to determine the amount of the third
party's liability. 42 C.F.R. § 433.139(b)(1) (2019). In such a case, the agency
will pay the hospital only the difference between the rate the agency
negotiated with the hospital and what the hospital receives from the third

3 A district court has held that portions of the Medicaid Act as
amended by the Affordable Care Act are unconstitutional. Texas v. United
States, 340 F. Supp. 3d 579, 619 (N.D. Tex. 2018). Nothing in that decision is
relevant to this opinion.

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party. Id. If a third party's liability comes to light only after the state agency
has paid the hospital's claim, the agency must seek reimbursement for itself
from the third party when it is cost effective to do so. 42 C.F.R. § 433.139(d).

¶12 Consistent with these rules aimed at limiting the costs that the
state Medicaid agency ultimately bears, Arizona law grants AHCCCS a lien
against a patient's recovery from a tortfeasor so that AHCCCS can recover
what it has paid to treat the patient. A.R.S. § 36-2915(A) (2019). Moreover,
Arizona requires that a hospital that serves an AHCCCS member must seek
payment from any liable third party (insurer, worker's compensation
carrier, tortfeasor) before it bills AHCCCS. See AHCCCS, Fee-for-Service
Provider Manual at 9-1 (Mar. 2014 rev.) ("AHCCCS has liability for
payment of benefits after Medicare and all other first- and third-party payer
benefits have been paid. Providers must determine the extent of the first-
and third-party coverage . . . prior to billing AHCCCS."); see also Arizona
Administrative Code ("A.A.C.") R9-22-1005 (requiring providers to identify
and notify AHCCCS of potential sources of first- and third-party liability).
And if a third party pays the hospital more than AHCCCS's scheduled rate,
the hospital is not entitled to additional payment from AHCCCS. A.A.C.
R9-22-1003 (AHCCCS pays no more than the difference between the
scheduled rate "and the amount of the third-party liability"); AHCCCS, Fee-
for-Service Provider Manual at 9-2 (Mar. 2014 rev.).

¶13 Under all these authorities, there is no dispute that if a
tortfeasor's liability becomes apparent after AHCCCS has paid a hospital,
AHCCCS may demand reimbursement from the tortfeasor. See 42 U.S.C. §
1396a(a)(25)(B). The issue here is whether federal law allows a hospital that
has accepted payment from AHCCCS to enforce a state-law lien against a
patient's tort recovery to obtain more for itself than what it agreed to accept
from AHCCCS for treating the patient.

¶14 The Hospitals' liens are based on two Arizona statutes. As
relevant here, A.R.S. § 33-931(A) states that a provider

is entitled to a lien for the care and treatment or transportation
of an injured person. The lien shall be for the claimant's
customary charges for care and treatment [and] extends to all
claims of liability or indemnity, except health insurance and
underinsured and uninsured motorist coverage . . . , for
damages accruing to the person to whom the services are
rendered . . . on account of the injuries that gave rise to the
claims and that required the services.

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The other statute specifically applies to hospitals that serve AHCCCS
members and states:

Payment received by a hospital from [AHCCCS] . . . is
considered payment by [AHCCCS] of [AHCCCS's] liability
for the hospital bill. A hospital may collect any unpaid
portion of its bill from other third-party payors or in
situations covered by [A.R.S. § 33-931].

A.R.S. § 36-2903.01(G)(4).

¶15 The Patients argue the Hospitals' liens are invalid under 42
C.F.R. § 447.15, a federal regulation issued in 1980. See 45 Fed. Reg. 24889
(Apr. 11, 1980). Federal regulations dictate the relationship between a state
Medicaid agency and the hospitals with which it contracts. As applicable
here, § 447.15 mandates that a state may contract only with providers that
agree to "accept, as payment in full, the amounts paid by the agency plus
any deductible, coinsurance or copayment required by the plan to be paid
by the individual." The Hospitals do not dispute that this regulation bars a
hospital that has contracted with AHCCCS from billing a patient for the
balance between what AHCCCS has paid and the hospital's customary
rates. We hold the regulation likewise bars a hospital from imposing a lien
on the patient's tort recovery for that balance.

¶16 A lien is a means of securing a debt; without a debt, there can
be no lien. See Matlow v. Matlow, 89 Ariz. 293, 298 (1961) ("In the absence of
an obligation to be secured there can be no lien."). Once a hospital has
accepted payment from AHCCCS for treating a patient, the patient owes
the hospital nothing beyond a "deductible, coinsurance or copayment." 42
C.F.R. § 447.15. Because the patient does not owe the hospital the balance
between what AHCCCS has paid the hospital and the hospital's customary
rate, the hospital may not collect that balance by imposing a lien on the
patient's property. The patient's property includes his or her recovery from
the tortfeasor that caused the injuries requiring treatment. See Samsel v.
Allstate Ins. Co., 204 Ariz. 1, 7, ¶ 21 (2002) (noting insured patient's "property
interest in his or her tort claim and eventual recovery"); Bowling, 410 F.3d at
317 (once judgment is entered against a tortfeasor or tortfeasor agrees to a
settlement, "proceeds are no longer the property of the tortfeasor," but
belong to the patient.) Just as the hospital may not seize a patient's car or
impose a lien against the patient's home, the hospital likewise may not use
state lien laws to seize the patient's tort recovery.

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¶17 Although this is an issue of first impression in Arizona, each
court addressing the issue elsewhere has come to the same conclusion. See
Bowling, 410 F.3d at 315 ("By accepting the Medicaid payment, the service
provider accepts the terms of the contract – specifically that the Medicaid
amount is payment in full."); Taylor v. Louisiana ex rel. Dep't of Health & Hosps.,
7 F. Supp. 3d 641, 644 (M.D. La. 2013) ("Congress did not intend for
providers to receive Medicaid reimbursement for patient care and then
intercept funds that the patient would otherwise receive."); Lizer v. Eagle Air
Med. Corp., 308 F. Supp. 2d 1006, 1009-10 (D. Ariz. 2004) (§ 447.15 preempts
right of provider that has accepted payment from AHCCCS to assert lien
against patient's tort recovery under A.R.S. § 33-931); Mallo v. Pub. Health
Trust of Dade County, Fla., 88 F. Supp. 2d 1376, 1387 (S.D. Fla. 2000) (provider
may not balance bill by imposing lien on patient's tort settlement; "health
care providers are not entitled to prey on an otherwise poor patient's
change in economic status"); Olszewski, 30 Cal. 4th at 820 (Medicaid statutes
and regulations "are unambiguous and limit provider collections from a
Medicaid beneficiary to, at most, the cost-sharing charges allowed under
the state plan, even when a third party tortfeasor is later found liable for the
injuries suffered by that beneficiary"); Pub. Health Trust of Dade County, Fla.
v. Dade County Sch. Bd., 693 So. 2d 562, 566-67 (Fla. Dist. Ct. App. 1996)
(Medicaid preempts Florida regulation allowing provider to balance bill by
imposing lien on patient's tort settlement).4

¶18 The Hospitals argue that "payment in full" under § 447.15
only limits a provider's right to payment from the state Medicaid agency or
the patient and does not prevent them from intercepting the balance from
a third-party tortfeasor. As stated, however, that interpretation is contrary
to Arizona law, under which a patient has a property interest in his or her
tort recovery. See Samsel, 204 Ariz. at 7, ¶ 21.

¶19 The Hospitals contend that "Congress has never articulated a
federal interest in protecting the tort recoveries of Medicaid beneficiaries,
and has acted as if the reverse were true." In support, they point to the

4 See also Evanston Hosp. v. Hauck, 1 F.3d 540, 543-44 (7th Cir. 1993)
(hospital could not return payment to state Medicaid agency and then
assert lien against patient who won a tort judgment; hospital's claim would
turn Medicaid "upside down by converting the system into an insurance
program for hospitals rather than for indigent patients"); Smallwood v. Cent.
Peninsula Gen. Hosp., 151 P.3d 319, 326 (Alaska 2006) ("Medicaid recipients
are the intended beneficiaries of the prohibition on balance billing. That
intent is evident from the state and federal Medicaid statutes and
regulations and from the terms of the provider agreement.").

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authorities discussed above that allow state Medicaid agencies to collect
from tortfeasors that have injured plan members. E.g., 42 U.S.C. §
1396a(a)(25)(H), -(45). But a Medicaid agency may use a lien only to collect
the amount it paid (and the hospital agreed to accept) for treating the
patient. By contrast, at issue here is whether a hospital may impose a lien
to collect sums beyond what it agreed to accept for treating the Medicaid
patient. The Hospitals cite no federal authority to support their contention
that Congress intended that a provider that chooses to treat a Medicaid
member may balance bill by intercepting that member's tort recovery.
Indeed, the Patients cite a 1967 Senate Report that stated, "As a matter of
public policy, it would be best for all concerned . . . if the reimbursement
made by the State" constituted a provider's entire compensation. S. Rep.
No. 744, at 187-88 (1967); see also Lizer, 308 F. Supp. 2d at 1009 (§ 447.15
prevents "providers from intercepting funds on the way to a patient.");
Briarcliff Haven, Inc. v. Dep't of Human Resources of State of Ga., 403 F. Supp.
1355, 1363 (N.D. Ga. 1975) ("The [M]edicaid program is not designed to
protect providers from the consequences of their business decisions or from
business risks.").

¶20 The Hospitals also point to two HHS documents they claim
are inconsistent with our analysis. The first document is a response by the
Health Care Financing Administration to a comment submitted on a draft
of a related regulation issued in 1990. See 55 Fed. Reg. 1423-02, at 1428 (Jan.
16, 1990) (codified at 42 C.F.R. § 447.20). The new regulation required state
plans to limit what a provider could collect from a patient "or any
financially responsible relative or representative" of the patient when a
third party is liable for payment. The comment expressed concern that by
limiting what a provider could collect "from a representative" of a patient,
the regulation would bar a provider from collecting from a patient's insurer
or other "resources available to the" patient. Id.; see also 42 C.F.R. § 447.20(a)
(2019). In response, the agency explained that "[t]he intent of this provision
is to protect the Medicaid recipient from being charged for a service in
excess of the amounts allowed under the State plan after considering the
third party's liability." Id. The Hospitals point to the agency's further
comment that "[t]he provider is not restricted from receiving amounts from
third party resources available to the recipient (or his or her legal
representative."). Id. But that statement was referring to a provider's right
to seek payment from a third party before accepting payment from the state
agency, not after. The agency referenced 42 C.F.R. § 433.139(b)(1), under
which a state Medicaid agency may pay a provider only "to the extent that
payment allowed under the agency's payment schedule exceeds the
amount of the third party's payment."

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¶21 The second HHS document the Hospitals cite is a 1997 letter
from the Acting Director of the Health Care Financing Administration.
According to the Hospitals, the letter construed § 447.15 to permit a
provider that has treated a Medicaid patient to return the state agency's
payment and seek its customary rates from the patient's tort recovery. But
the letter does not constitute formal agency policy or even guidance. See
Bowling, 410 F.3d at 318 (referenced letter "is neither listed on the [agency]
website . . . nor published elsewhere").

¶22 As applied to the Patients and the Hospitals in this case,
A.R.S. §§ 33-931(A) and 36-2903.01(G)(4) purport to allow a hospital that
has accepted payment from AHCCCS to impose a lien on the patient's claim
against a tortfeasor for the injuries that required the treatment for which
AHCCCS paid the hospital. But under 42 C.F.R. § 447.15, the Supremacy
Clause of the United States Constitution and the authorities cited above,
these statutes are invalid to the extent they allow a hospital to impose a lien
on a patient's tort recovery for the balance between what the hospital
accepted from AHCCCS for treating the patient and what it might have
charged another patient.

¶23 The Hospitals argue that when CMS, the division of HHS that
oversees Medicaid, approved Arizona's AHCCCS plan, it impliedly
approved the two Arizona lien statutes and the rights they grant providers
to intercept patients' tort recoveries. But the Hospitals cite nothing in the
record, the AHCCCS plan or the law to support the premise that in
approving Arizona's plan, CMS had the authority to review – or actually
did review – any state statutes that might bear in some way on AHCCCS.
Contrary to the Hospitals' contention, CMS determines only whether the
plan a state submits conforms with the Medicaid Act and related federal
regulations; Congress has not granted CMS authority to determine the
validity of state law. See 42 C.F.R. § 430.14 (2019); see also 42 C.F.R. §§ 430.10,
430.15. Further, nothing in our record supports the proposition that
Arizona's state plan includes or incorporates the two lien statutes at issue.
The cases the Hospitals cite do not hold otherwise. See Cmty. Health Care
Ass'n of N.Y. v. Shah, 770 F.3d 129, 144 (2d Cir. 2014) (CMS reviewed
provider payment schedules "as amendments to the state plan"); S.D. ex rel.
Dickson v. Hood, 391 F.3d 581, 596 (5th Cir. 2004) (CMS's "review and
determination definitively indicate whether it interprets a state plan or
amendment to be in conformity with the [federal] statute.") (emphasis
added); Pharm. Research & Mfrs. of Am. v. Thompson, 362 F.3d 817, 821-22
(D.C. Cir. 2004) (review of state plan).

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¶24 In their motion for reconsideration, the Hospitals assert that
Douglas, 565 U.S. at 614, teaches that CMS reviews state statutes when it
approves a state's Medicaid plan, and that CMS will not approve a plan
without approving the statutes. At issue in Douglas, however, were three
statutes California enacted to change payment provisions in its state
Medicaid plan – the Supreme Court even described the measures as
"statutory amendments to its plan." Id. at 613. In the absence of any other
authority, we do not read Douglas to stand for the proposition that CMS
reviews any and all state statutes that might bear on patients' and providers'
rights when it approves a state's Medicaid plan. See Olszewski, 30 Cal. 4th
at 825.

¶25 The Hospitals similarly argue the AHCCCS plan allows
providers to use liens to balance bill. But the Arizona plan does not address
balance billing, let alone endorse it. For their contention to the contrary, the
Hospitals rely on a brief portion of "Attachment 4.19-A," a 66-page section
of the AHCCCS plan titled "Methods and Standards for Establishing
Payment Rates [for] Inpatient Hospital Care." In the definitions section,
Attachment 4.19-A provides as follows:

Prospective rates are inpatient hospital rates defined in
advance of a payment period and represent payment in full
for covered services excluding any quick-pay discounts, slow
pay penalties, and third party payments regardless of billed
charges or individual hospital costs.

The Hospitals contend this language means that after a hospital has
accepted "payment in full" from AHCCCS for treating a patient, it may
impose a lien on the patient's tort recovery as a permissible "third party
payment."

¶26 But the brief reference in Attachment 4.19 to "third party
payments" in a section of the plan specifying the rates AHCCCS will pay
hospitals does not constitute an endorsement of a hospital's right to accept
payment from AHCCCS, then impose a lien on the patient's tort recovery
for more. The word "lien" is not even used. As set out in ¶ 11, supra, because
AHCCCS is the "payer of last resort," a hospital must determine whether a
third party may be liable for the cost of treatment before the hospital bills
AHCCCS. If the hospital ascertains that a third party is liable, it may bill
AHCCCS only for the difference between what it has recovered from the
third party and the AHCCCS scheduled rate. Against that backdrop, the
reference to "third party payment" in Attachment 4.19-A refers to a

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payment made before the hospital accepts payment from AHCCCS, not
after.

¶27 The Hospitals also point to A.A.C. R9-22-1007 as support for
their contention that Arizona's AHCCCS plan allows balance billing. The
cited regulation is titled "Notification for Perfection, Recording, and
Assignment of AHCCCS Liens." It requires that when a hospital has treated
an AHCCCS member for an injury "reflecting the probable liability of a
first- or third-party," the hospital must, within 30 days of discharging the
patient, notify AHCCCS "under R9-22-1008" or mail the agency "a copy of
the lien the hospital proposes to record or has recorded under A.R.S. § 33-
932." A.A.C. R9-22-1007. The Hospitals argue the regulation effectively
acknowledges a hospital's right to record a lien against a patient's tort
recovery after accepting payment from AHCCCS. But read in context with
A.A.C. R9-22-1008, which requires providers to notify AHCCCS of the
"[a]mount estimated to be due for care of member," it is clear that R9-22-
1007 concerns a lien the hospital would record before AHCCCS determines
what to pay the hospital, not after. See ¶¶ 11-12, supra.

¶28 The Hospitals' argument that the AHCCCS plan permits them
to use liens to balance bill patients also disregards the mandate in A.A.C.
R9-22-702(B), under which a provider "must accept payment from
[AHCCCS] or a contractor as payment in full." Beyond repeating the
requirement prescribed by 42 C.F.R. § 447.15, the Arizona regulation goes
on to specifically limit the circumstances under which a provider may
demand payment from a patient. See A.A.C. R9-22-702(C), (D). As relevant
here, the regulation allows a provider to pursue a patient only (1) to collect
a copayment and (2) to collect "that portion of a payment made [to the
patient] by a third party" that is subject to the patient's "statutory
assignment of rights to AHCCCS." A.A.C. R9-22-702(D); see also A.R.S. §§
36-2946(A) (patient's assignment of medical benefits), -2915(A) (AHCCCS
lien on patient's tort claim). In other words, the only specified circumstance
in which a hospital may demand that a patient turn over a tort recovery is
when the proceeds are subject to an assignment or lien in favor of AHCCCS.
There is no corresponding provision in the regulation allowing a hospital
to compel a patient to relinquish a tort recovery to satisfy the hospital's lien
rights.

¶29 In short, the provisions the Hospitals cite in the Arizona plan
are part and parcel of a provider's duty under the plan to "cost avoid" before
it bills AHCCCS, not a license to accept payment from AHCCCS, then
enforce a lien against the patient's tort recovery for the balance between that
payment and what the provider would have charged another patient.

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Accordingly, we hold that when CMS approved the AHCCCS plan, it did
not authorize providers to accept payment from AHCCCS, then enforce
liens against patients' recoveries from tortfeasors.

¶30 In their motion for reconsideration, the Hospitals cite Murphy
v. Nat'l Collegiate Athletic Ass'n, 138 S. Ct. 1461, 1479 (2018), in arguing 42
C.F.R. § 447.15 cannot preempt Arizona's lien statutes because it does not
"regulate[] private actors." At issue in Murphy was a 1992 federal statute
making it unlawful for a state to promote or authorize sports gambling. See
28 U.S.C. § 3702(2)(1). The Court ruled the statute could not be upheld as
"a valid preemption provision" because it purported to regulate activity by
the states, not by individuals. 138 S. Ct. at 1481 (statute did not "impose any
federal restrictions on private actors").

¶31 The Hospitals contend that, like the gambling statute in
Murphy, the Medicaid Act and 42 C.F.R. § 447.15 regulate states, not private
actors. But the Murphy court cited with approval Morales v. Trans World
Airlines, Inc., 504 U.S. 374 (1992), under which the "private actor"
requirement would not exempt the Hospitals' lien rights from preemption.
In Morales, the Court addressed the Airline Deregulation Act of 1978, which
simultaneously lifted existing federal regulation of airlines and forbade
states from "enact[ing] or enforc[ing] any law, rule, regulation, standard, or
other provision having the force and effect of law relating to rates, routes,
or services" of any airline carrier covered by the act. See Morales, 504 U.S. at
383; 49 U.S.C. App. § 1305(a)(1) (1988 ed). The Murphy court acknowledged
that the airline statute's "language might appear to operate directly on the
States," but warned that "it is a mistake to be confused by the way in which
a preemption provision is phrased." 138 S. Ct. at 1480. "[I]f we look beyond
the phrasing" of the statute, the Court reasoned, "it is clear that . . . [i]t
confers on private entities (i.e., covered carriers) a federal right to engage in
certain conduct subject only to certain (federal constraints)." Id. As in
Morales, any contention here that the preemptive federal law technically
regulates the states, not private actors, ignores the reality that when the
private actors choose to participate in the Medicaid market, their rights are
regulated by federal law, not conflicting state law.

¶32 In sum, we conclude that federal law, specifically 42 C.F.R. §
447.15, preempts Arizona's lien statutes to the extent they allow a provider
to accept payment from AHCCCS, then impose a lien on the patient's tort
recovery for the balance of what the provider would charge another patient.

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C. The Patients' Claim for Injunctive and Declaratory Relief Based on
Preemption.

¶33 Given our conclusion that Medicaid law preempts the
Arizona lien statutes, if the Hospitals had sued the Patients or their lawyers
to enforce liens against the Patients' tort recoveries, the Hospitals' claim
would be barred by preemption under the Supremacy Clause of the United
States Constitution. See, e.g., PLIVA, Inc. v. Mensing, 564 U.S. 604, 617
("Where state and federal law 'directly conflict,' state law must give way.")
(citation omitted). In such a situation, the federal law "effectively repeal[s]
contrary state law." Id. at 621; see Armstrong v. Exceptional Child Center, Inc.,
135 S. Ct. 1378, 1384 (2015) ("[O]nce a case or controversy properly comes
before a court, judges are bound by federal law."). But the Patients are the
plaintiffs here, and they sued seeking to use preemption as a sword (to
enjoin the Hospitals from enforcing the liens) rather than as a shield (to
defeat a mirror-image suit by the Hospitals).

¶34 Citing Armstrong, the Hospitals argue the Patients' claims for
declaratory and injunctive relief based on preemption are not cognizable.
The plaintiffs in Armstrong were health-care providers who sued the
director of the Idaho Department of Health and Welfare, alleging that
state's Medicaid plan paid them less than federal law required. 135 S. Ct. at
1382. At issue was § 30(A) of the Medicaid Act, which requires states to set
payment rates for medical providers that "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 levels comparable
to those available to the general public. 135 S. Ct. at 1382 (quoting 42 U.S.C.
§ 1396a(a)(30)(A)). The providers alleged the rates in the Idaho plan
conflicted with § 30(A)'s mandate. They argued § 30(A) therefore
preempted the Idaho plan, and "asked the court to enjoin [Idaho] to increase
these rates." 135 S. Ct. at 1382.

¶35 In ruling against the providers, the Supreme Court held the
Supremacy Clause "is not the source of any federal rights, and certainly
does not create a cause of action." Id. at 1383 (quotations and citations
omitted). "It instructs courts what to do when state and federal law clash,
but is silent regarding who may enforce federal laws in court, and in what
circumstances they may do so." Id. The Court acknowledged a long line of
cases allowing "injunctive relief against state officers who are violating, or
planning to violate, federal law." Id. at 1384, citing Ex parte Young, 209 U.S.
123, 150-51 (1908); Osborn v. Bank of United States, 9 Wheat. 738, 838-39, 844
(1824). But notwithstanding those cases, a court's power to grant equitable
relief based on federal preemption "is subject to express and implied

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Opinion of the Court

statutory limitations." Armstrong, 135 S. Ct. at 1385. Thus, a preemption
claim is not cognizable if Congress has precluded private enforcement of
the applicable federal law or otherwise has "displace[d] the equitable relief
that is traditionally available to enforce federal law." Id. at 1385-86.

¶36 Applying that rule, the Armstrong Court examined § 30(A) of
the Medicaid Act to discern whether Congress intended "to foreclose
equitable relief" based on that provision. 135 S. Ct. at 1385 (quotation
omitted). The Court identified "[t]wo aspects" of § 30(A) that it held
"establish Congress's 'intent to foreclose' equitable relief." Id. First,
Congress created just one remedy "for a State's failure to comply with
Medicaid's requirements." Id. (citing 42 U.S.C. § 1396c (2019) (power of
Secretary of HHS to withhold Medicaid funds when state's Medicaid plan
"no longer complies" with federal law)). "[T]he express provision of one
method of enforcing a substantive rule suggests that Congress intended to
preclude others." Id. at 1385 (quotation omitted). Second, the Court cited
"the judicially unadministrable nature of § 30(A)'s text." Id. "Explicitly
conferring enforcement of this judgment-laden standard upon the Secretary
alone establishes, we think, that Congress 'wanted to make the agency
remedy that it provided exclusive.'" Id. (citation omitted). In sum, the
Court held that "[t]he sheer complexity associated with enforcing § 30(A),
coupled with the express provision of an administrative remedy, § 1396c,
shows that the Medicaid Act precludes private enforcement of § 30(A) in
the courts." Id.

¶37 The Hospitals argue that when it comes to enforcing the
federal ban on balance billing under 42 C.F.R. § 447.15, the Medicaid Act
likewise "displace[s]" a private party's right to enjoin a violation of federal
law. They argue that, after Armstrong, the only means by which anyone
may bring "a Medicaid-preemption claim" is by challenging CMS or HHS
under the federal Administrative Procedure Act for the federal agency's
approval of the state plan or its failure to withhold funding for a state's
purported violation of the Medicaid Act. See 5 U.S.C. § 702 (judicial review
of agency action).

¶38 But the Hospitals' argument sweeps too broadly. Contrary to
their assertion, Armstrong does not support the proposition that Congress
intended to foreclose any claim to enjoin a non-state actor from exercising
a state-law right preempted by any provision of Medicaid law. Although
the Armstrong Court held there is no private right of action against a state
official to enforce § 30(A) of the Medicaid Act, five of the nine justices
declined to hold that no provision of the Medicaid Act may be privately

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Opinion of the Court

enforced. See 135 S. Ct. at 1388 (Justice Breyer declining to join Part IV of
Justice Scalia's five-member majority opinion).

¶39 As for the narrow legal issue actually decided in Armstrong –
that providers may not sue to enjoin a state's violation of § 30(A) of the
Medicaid Act – neither of the two grounds the Court cited for that decision
applies here. In the first place, § 1396c of the Medicaid Act, which the Court
held is the exclusive remedy for a violation of § 30(A), does not provide the
exclusive remedy – or any remedy – for the preemption violation at issue
here. The providers in Armstrong argued the rates in the Idaho Medicaid
plan violated § 30(A) because they were too low. In rejecting their claim,
the Court held that when a state Medicaid plan fails to comply with the
federal act, the only remedy "is the withholding of Medicaid funds by the
Secretary of Health and Human Services." 135 S. Ct. at 1385, citing 42 U.S.C.
§ 1396c. That provision empowers HHS to withhold funding when it finds
that a state Medicaid plan "no longer complies" with federal law or that "in
the administration of the plan there is a failure to comply substantially"
with federal law. 42 U.S.C. § 1396c.

¶40 But here, and in contrast to the plaintiffs in Armstrong, the
Patients do not contend anything in Arizona's AHCCCS plan is preempted
by federal law. They have no complaint with the Arizona plan or how
AHCCCS implements the Arizona plan. Instead, they claim federal law
preempts the Hospitals' rights to enforce liens that state law otherwise
allows. As we have held, supra ¶¶ 22-28, Arizona's AHCCCS plan neither
incorporates nor countenances application of the Arizona lien statutes
under the circumstances presented here. When hospitals seek to intercept
AHCCCS members' tort recoveries, they are exercising their rights under
state statute, not under the AHCCCS plan or the administration of that plan
subject to review by HHS. For that reason, § 1396c of the Medicaid Act is
irrelevant to the Patients' claim against the Hospitals, and the Hospitals cite
no authority to the contrary. See Tohono O'odham Nation v. Ducey, 130 F.
Supp. 3d 1301 (D. Ariz. 2015) (equitable relief barred by Armstrong when
"Congress had created a remedy" and "entrusted that remedy to the
executive branch, not the courts").

¶41 Nor does the second ground on which the Court ruled in
Armstrong apply here. The statute at issue there, § 30(A) of the Medicaid
Act, requires states to adopt provider rate schedules that are "consistent
with efficiency, economy, and quality of care," while at the same time
"safeguard[ing] against unnecessary utilization of . . . care and services." See
135 S. Ct. at 1385. The Court observed that the "judgment-laden standard"
set forth in § 30(A) was "judicially unadministrable," further supporting its

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Opinion of the Court

conclusion that Congress intended to foreclose a private right of action to
enforce it. 135 S. Ct. at 1385.

¶42 By contrast, the Patients' claim is not based on § 30(A) but
instead on 42 C.F.R. § 447.15. As we have held, the regulation preempts a
hospital's right under state law to impose a lien on a patient's tort recovery
to collect the balance between the hospital's customary rates and what it
accepted from AHCCCS for treating the patient. The regulation raises none
of the "administrability" issues that § 30(A) posed in Armstrong. Nor does
enforcement of § 447.15 require any exercise of agency expertise or
discretion. Whether the regulation preempts a state lien statute that
otherwise would allow a hospital to balance bill is a legal issue of the sort
that courts typically resolve. Indeed, as noted above, the injunction the
superior court entered here gave the Patients the same relief that would
have been available to them in defending a hypothetical action by the
Hospitals to enforce liens against the Patients' tort recoveries. See
Armstrong, 135 S. Ct. at 1384 ("a court may not hold a civil defendant liable
under state law for conduct federal law requires"); Public Health, 693 So. 2d
at 566 (affirming judgment based on preemption in favor of Medicaid
patient when hospital sued to enforce lien).

¶43 In sum, the Patients' preemption claim presents neither of the
concerns that caused the Armstrong Court to conclude that Congress
intended to preclude equitable relief to the providers in that case. The
Patients' claim is not grounded in the AHCCCS plan that CMS approved
and therefore does not implicate the single remedy of administrative
review that the Court cited in Armstrong. 135 U.S. at 1385. And the Patients'
contention that 42 C.F.R. § 447.15 preempts Arizona's lien statutes presents
none of the judicial administrability issues posed by the injunction the
providers sought under § 30(A) of the Medicaid Act. Accordingly, we
affirm the order of the superior court granting declaratory and injunctive
relief to the Patients on their claim that federal law preempts the Hospitals'
rights under A.R.S. §§ 33-931 and 36-2903.01(G)(4) to enforce liens on the
Patients' recoveries for amounts beyond what AHCCCS paid the Hospitals
for treating the Patients.

D. The Hospitals Breached a Contract Duty to Patients by Imposing
the Liens.

¶44 Federal law spells out the provisions that must be contained
in the Participating Provider Agreements ("PPAs") that a state enters with
providers to serve patients under Medicaid. See 42 C.F.R. §§ 434.1(b) (2019),
434.6(a) (2019). In their cross-appeal, the Patients argue the superior court

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Opinion of the Court

erred by dismissing their claim for relief as third-party beneficiaries of
PPAs signed by the Hospitals and AHCCCS between 1994 and 2010 that
incorporate federal law preempting Arizona's lien laws.

1. Rights as third-party beneficiaries of the PPAs.

¶45 Under Arizona law, a contract may allow a claim by a
purported third-party beneficiary only if (1) "an intention to benefit [the
claimant is] indicated in the contract itself"; (2) "[t]he contemplated benefit
[is] both intentional and direct"; and (3) "it . . . definitely appear[s] that the
parties intend to recognize the third party as the primary party in interest."
Nahom v. Blue Cross & Blue Shield of Ariz., Inc., 180 Ariz. 548, 552 (App. 1994)
(quoting Norton v. First Fed. Sav., 128 Ariz. 176, 178 (1981)). In Nahom we
held that a patient was a third-party beneficiary entitled to enforce a
hospital's agreement with the patient's insurer to accept the insurer's
payment as payment in full. Id. at 550-51, 552.

¶46 Under Nahom, if the Hospitals' contracts with AHCCCS bar
them from imposing liens on the Patients' tort recoveries, the Patients are
third-party beneficiaries of those contracts. See id. at 553 (question is
whether claimant is the beneficiary of the particular contract provision on
which claim is brought). As in Nahom, the Patients are members of a class
who would be the intended direct beneficiaries of a contract provision
barring a hospital from imposing a lien on a patient's tort recovery. See id.
at 552. Thus, Nahom controls here: If the PPAs prohibit the Hospitals from
balance billing by imposing the liens, the Patients are third-party
beneficiaries who may sue to enforce that prohibition. Accord Linton v.
Comm'r, 65 F.3d 508, 520 (6th Cir. 1995) (patients are third-party
beneficiaries of providers' contracts with state Medicaid agency).

2. Incorporation of federal law.

¶47 Interpretation of the PPAs is a matter of law that we review
de novo. Grosvenor Holdings, L.C. v. Figueroa, 222 Ariz. 588, 593, ¶ 9 (App.
2009). A contract incorporates the law in force at the time of its
execution. State ex rel. Romley v. Gaines, 205 Ariz. 138, 142, ¶ 13 (App. 2003)
("Regardless of the language of a contract, it is always to be construed in the
light of the law then in force.") (quotation and alteration omitted); Ward v.
Chevron U.S.A. Inc., 123 Ariz. 208, 209 (App. 1979) ("The law in force at [the
date of execution] form[s] a part of each contract."). Therefore, "a valid
statute is automatically part of any contract affected by it, even if the statute
is not specifically mentioned in the contract." Banner Health v. Med. Sav. Ins.
Co., 216 Ariz. 146, 150, ¶ 15 (App. 2007) (quoting Higginbottom v. State, 203

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Opinion of the Court

Ariz. 139, 142, ¶ 11 (App. 2002)). The same is true with other legal
provisions affecting the rights of the parties in effect at the time of
execution. See, e.g., Colman v. Button, 42 Ariz. 141, 144 (1933) (constitution);
Rehart v. Clark, 448 F.2d 170, 173 (9th Cir. 1971) (regulation); cf. Qwest Corp.
v. City of Chandler, 222 Ariz. 474, 484-85, ¶ 34 (App. 2009) (common law).

¶48 At the time the Hospitals entered the PPAs, the Arizona lien
statutes at issue here, A.R.S. §§ 33-931 and 36-2903.01(G)(4), were in place;
so was the federal regulation prohibiting balance billing, 42 C.F.R. §
447.15. As we have held, the federal regulation preempts §§ 33-931 and 36-
2903.01(G)(4) insofar as those statutes allow a hospital that has accepted
payment from AHCCCS to impose a lien on a patient's tort recovery for the
balance between the AHCCCS payment and the hospital's customary rate.
As incorporated by law into the PPAs, § 447.15 invalidated any state-law
rights the contracts otherwise might have allowed the Hospitals to impose
the liens at issue here. See Maryland v. Louisiana, 451 U.S. 725, 747 (1981) ("A
state statute is void to the extent it conflicts with a federal statute."); AES
Sparrows Point LNG, LLC v. Smith, 527 F.3d 120, 125-26 (4th Cir. 2008)
(preempted state law "unenforceable under the Supremacy Clause").

¶49 Two versions of express "compliance-with-law" clauses in the
PPAs bolster our conclusion that the contracts required the Hospitals to
comply with 42 C.F.R. § 447.15. In the first version, the General Terms and
Conditions included this term:

6. The Provider shall comply with all federal, State and local
laws, rules, regulations, standards and executive orders
governing performance of duties under this Agreement,
without limitation to those designated within this Agreement.

The like provision in the second version simply stated that the provider
agrees "[t]o comply with all applicable Federal and State laws and
regulations."

¶50 The Hospitals argue the PPAs do not encompass subsequent
changes in the law. See, e.g., Fla. E. Coast Ry. Co. v. CSX Transp., Inc., 42 F.3d
1125, 1130 (7th Cir. 1994) ("[S]ubsequent changes in the law that are not
anticipated in the contract generally have no bearing on the terms of their
agreement."); Dairyland Greyhound Park, Inc. v. Doyle, 719 N.W.2d 408, 429-
33 (Wis. 2006) (post-contract amendment to statute not incorporated in
parties' agreement). But the relevant law here has not changed: HHS issued
42 C.F.R. § 447.15 in 1980 – before the PPAs at issue were executed – and
the regulation has not materially changed since then. See 45 Fed. Reg. 24889

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(Apr. 11, 1980). Nor does our decision that federal law preempts the lien
statutes depart from prior Arizona common law. Excepting our earlier
decision in Abbott I (later vacated, and which held the lien statutes were
preempted), no Arizona appellate court has decided the issue. See Abbott
II, 239 Ariz. at 414, ¶ 17, vacating Abbott I, 236 Ariz. at 436.

¶51 The Hospitals argue otherwise, citing Arizona cases that refer
to the medical-lien statutes and the rights they purport to grant AHCCCS
providers. But none of the cases the Hospitals cite addresses (or even
mentions) whether 42 C.F.R. § 447.15 or any other federal authority
preempts a provider's right to balance bill under Arizona law. See, e.g.,
Andrews v. Samaritan Health Sys., 201 Ariz. 379, 384, ¶ 17 (App. 2001);
LaBombard v. Samaritan Health Sys., 195 Ariz. 543, 549, ¶ 23 (App. 1998). Nor
does our supreme court's decision in Abbott II, 239 Ariz. at 414, ¶¶ 17-19,
reach the issue of preemption. Although the court in that case stated that
the preemptive effect of federal law on providers' lien rights "was not
settled in Arizona," it made that comment in explaining that the parties'
accord and satisfaction was valid because no Arizona appellate court had
ruled on the issue before the settlements there were executed. Id.

¶52 The Hospitals also assert that the parties to the PPAs – the
Hospitals themselves and AHCCCS – intended that the Hospitals would be
able to enforce liens on patients' recoveries from tortfeasors. In support of
this argument, the Hospitals cite A.A.C. R9-22-1007. As discussed, ¶ 27
supra, however, we do not accept the Hospitals' interpretation of that
regulation. In any event, by agreeing in the PPAs to comply with federal
law, the Hospitals agreed that a federal regulation preempting their state-
law lien rights would trump any lien right allowed by AHCCCS regulation.

¶53 In their motion for reconsideration of our initial opinion in
this appeal, the Hospitals argue that one may not sue as a third-party
beneficiary of a contract that incorporates federal law when that federal law
does not itself permit equitable relief. See Astra, 563 U.S. at 118. It was
undisputed in Astra that the applicable federal law afforded the plaintiffs
no private right of action. Id. at 113. Given our conclusion that the Patients
may sue to enforce a breach of 42 C.F.R. § 447.15, Astra does not bar their
third-party-beneficiary claim.

¶54 Accordingly, the Hospitals breached a duty owed to the
Patients under the PPAs when they imposed the liens at issue here because
those liens were invalid under federal law. We hold the superior court
erred when it denied the Patients' motion for summary judgment on their

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Opinion of the Court

claim for breach of the PPAs and direct entry of judgment in the Patients'
favor on that claim.

E. The Breadth of the Injunction.

¶55 The Hospitals argue the superior court lacked the power to
grant the Patients injunctive relief on the Patients' claim for breach of the
PPAs. The injunction the court issued, however, was based not on the
Patients' contract claim but on their claim for equitable relief under general
preemption principles. See generally Ariz. R. Civ. P. 23(b)(2) (class-action
treatment when defendant "has acted or refused to act on grounds that
apply generally to the class, so that final injunctive relief or corresponding
declaratory relief is appropriate for the class as a whole").

¶56 We review the superior court's grant of an injunction for
abuse of discretion but review its application of law de novo. See Cheatham
v. DiCiccio, 240 Ariz. 314, 317-18, ¶ 8 (2016). The superior court abuses its
discretion if it applies the incorrect substantive law or injunction standard
or bases "its decision on an erroneous material finding of fact." TP Racing,
L.L.L.P. v. Simms, 232 Ariz. 489, 492, ¶ 8 (App. 2013).

¶57 The Hospitals contend the injunction is too broad in that it
purports to extend to medical services not funded by AHCCCS. In relevant
part, the injunction permanently enjoins the Hospitals "from filing or
asserting any lien or claim against a patient's personal injury recovery, after
having received any payment from AHCCCS for the same patient's care."
(Emphasis in original.) The Hospitals argue the reference to "any payment"
may prevent a hospital from filing a lien to collect fees it is owed for services
not covered by AHCCCS. The Hospitals contend there are situations in
which AHCCCS covers only some of the services they have provided a
patient, and they argue the injunction erroneously will bar them from
seeking payment for services for which AHCCCS has not paid.

¶58 The Hospitals, however, do not point to anything in the
record showing that such a situation has occurred, and we normally will
not issue advisory opinions on issues not squarely before us. Sw. Barricades,
L.L.C. v. Traffic Mgmt., Inc., 240 Ariz. 139, 142, ¶ 17, n.3 (App. 2016). Should
the situation the Hospitals posit arise, they "will be able, at that time, to
apply to the superior court for appropriate modification" to the injunction.
TP Racing, 232 Ariz. at 496, ¶ 25; see also State v. Portland Cement Ass'n, 142
Ariz. 421, 425 (App. 1984) (court of original jurisdiction has power to
modify its injunction when circumstances change).

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F. Attorney's Fees.

¶59 After prevailing on their claim based on the Supremacy
Clause, the Patients sought attorney's fees under the private attorney
general doctrine, and the court entered an award of $1,221,902. See generally
Arnold v. Ariz. Dep't of Health Servs., 160 Ariz. 593, 609 (1989) (private
attorney general doctrine allows fees to party that has vindicated an
important public right).

¶60 The Hospitals argue the private attorney general doctrine
does not allow an award of fees on a preemption claim brought under the
Supremacy Clause. See Alyeska Pipeline Serv. v. Wilderness Soc'y, 421 U.S.
240, 245-71 (1975) (doctrine does not allow fees award in challenge to
federal agency action); Challenge, Inc. v. State ex rel. Corbin, 138 Ariz. 200, 206
(App. 1983) (federal law governs availability of fees in claim brought under
42 U.S.C. § 1983). We need not decide whether the private attorney general
doctrine applies in a preemption claim brought under the Supremacy
Clause because we conclude the superior court had discretion to award fees
under A.R.S. § 12-341.01(A) (2019) to the Patients on their third-party claim
for breach of contract.

¶61 In their motion for reconsideration, the Hospitals do not
contend the hourly rates represented in the fees award are unreasonably
high, but urge us to remand the fees award so that the superior court may
exercise its discretion to decide whether to award fees under § 12-341.01(A).
See Associated Indem. Corp. v. Warner, 143 Ariz. 567, 570 (1985) (citing factors
court should consider in deciding whether to award fees under § 12-341.01).
In awarding fees to the Patients under the private attorney general doctrine,
however, the superior court expressly stated it also had considered "the
factors set forth" in Warner.

¶62 In support of a fees award under § 12-341.01, the Patients have
filed an "exemplar" retainer agreement signed by plaintiff Walter Ansley.
In relevant part, it states:

On behalf of the class and of themselves, Plaintiff
acknowledges that Attorneys may apply to the Court for fees
of up to 30% of all recoveries and relief obtained, plus
advanced costs, all of which shall be fully subject to court
approval. . . . In the event the Court awards an hourly fee to
be paid by Defendants, Plaintiffs will support an application
to the Court for a fee of $410 per hour for the two senior
attorneys and $125 per hour for any billable paralegal time.

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The Hospitals argue § 12-341.01(A) does not allow fees because this retainer
agreement did not obligate the Patients to pay the lawyers for their work
on the case. See § 12-341.01(B) ("award may not exceed the amount paid or
agreed to be paid").

¶63 The law is clear that a contingent fee agreement by which a
client promises to pay a lawyer a percentage of the client's recovery will
satisfy § 12-341.01(B). See Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529,
545 (1982) (applying § 12-341.01(B)); Moedt v. General Motors Corp., 204 Ariz.
100, 103, ¶ 11 (App. 2002) (contingent fee agreement created "genuine
financial obligation" on the part of the client to pay fees). The Hospitals do
not take issue with that principle. They contend, however, that even though
the retainer agreement here would require the Patients to pay their lawyers
30% of any monetary recovery, since the Patients recovered no damages,
their lawyers are entitled to nothing.

¶64 But the contingent-fee provision in the retainer agreement is
broader than "damages" and applies to "all recoveries and relief obtained."
The "relief obtained" in this case is the injunction the Patients' lawyers won
against past, present and future liens by the Hospitals on tort recoveries by
the plaintiff class. The Hospitals do not argue that the fees the superior
court awarded exceed the ratio of 30% of the funds the injunction preserved
for members of the class.

¶65 Otherwise, as for the amount of the award, the Hospitals
contend the superior court abused its discretion by failing to discount the
fees the Patients sought for work performed (1) in a similar federal-court
case they voluntarily dismissed before commencing this one; and (2) on
issues pertaining to the group of Abbott plaintiffs who had settled their lien
claims with the Hospitals. "We review the amount of the superior court's
attorney fees and costs awards for an abuse of discretion." Lee v. ING Inv.
Mgmt., LLC, 240 Ariz. 158, 161, ¶ 11 (App. 2016).

¶66 The Hospitals argue that more than $485,000 of the fees
awarded were incurred not in this case but in a federal-court lawsuit the
Patients filed, then voluntarily dismissed, before refiling their claims in
superior court. The Patients contend that those fees included the time spent
in "vet[ting] hundreds of potential class representatives" for the claims,
researching Medicaid plans across the country and interviewing expert
witnesses.

¶67 The Hospitals cite Vicari v. Lake Havasu City, 222 Ariz. 218,
223-24, ¶¶ 18-21 (App. 2009), for the proposition that the defendant is the

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Opinion of the Court

prevailing party when a plaintiff voluntarily dismisses the complaint. The
issue here, however, is whether a court abuses its discretion in awarding
fees for legal work performed in connection with a prior case before
dismissing it, when that work is integral to the plaintiff's successful
prosecution of a subsequent claim. When the Hospitals objected in the
superior court to the Patients' request for the fees they incurred in the
federal case, the Patients responded that the legal and factual research
performed in that case was "clearly calculated to – and in fact did – bring
about" their success in this case. Under the circumstances, the superior
court did not abuse its discretion in declining to reduce the Patients' fees to
take into account work performed in the federal matter. See First Nat. Bank
of Ariz. v. Cont'l Bank, 138 Ariz. 194, 200 (App. 1983) ("pre-complaint
investigation and evaluation of the potential claim is part of the process and
expense of litigation").

¶68 The Hospitals finally argue that the superior court abused its
discretion in awarding fees for work performed for the group of patients
whose claims were dismissed in Abbott II. The Hospitals contend that
$60,442 of the fees the Patients were awarded was incurred in connection
with superior court proceedings involving those plaintiffs.

¶69 In determining the reasonableness of the number of hours
expended by an attorney, the superior court must consider whether the
claimed work "would have been undertaken by a reasonable and prudent
lawyer to advance or protect [the] client's interest." Schweiger v. China Doll
Rest., Inc., 138 Ariz. 183, 188 (1983). "Furthermore, time spent on
unsuccessful issues or claims may not be compensable." Id. On the other
hand, when a party has "accomplished the result sought in the litigation,
fees should be awarded for time spent even on unsuccessful legal theories.
Where a party has achieved only partial or limited success, however, it
would be unreasonable to award compensation for all hours expended,
including time spent on . . . unsuccessful issues or claims." Id. at 189; Orfaly
v. Tucson Symphony Soc'y, 209 Ariz. 260, 266-67, ¶ 24 (App. 2004).

¶70 When the superior court in this case ruled on the Patients' fee
request in 2014, that court could not know that the supreme court ultimately
would reject the Abbott plaintiffs' claims. Although the Hospitals addressed
this issue in a motion for new trial filed after the case was reassigned to
another division of the Maricopa County Superior Court, the judge newly
assigned to the case declined to reconsider the fees award in light of the
supreme court's decision in Abbott II.

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 ANSLEY, et al. v. BANNER HEALTH, et al.
Opinion of the Court

¶71 Under the circumstances, we remand the fees award to the
superior court so that it may exercise its discretion to review the Patients'
claim for the $60,442 in fees incurred in connection with the claims brought
by the Abbott plaintiffs.

CONCLUSION

¶72 We hold that applicable federal law, 42 C.F.R. § 447.15,
preempts A.R.S. §§ 33-931 and 36-2903.01(G)(4) to the extent those statutes
allow a health-care provider that has accepted payment from AHCCCS for
treating a patient to impose a lien on the patient's tort recovery for the
difference between what the provider accepted from AHCCCS and the
amount the provider would have charged a non-AHCCCS patient. For the
reasons set out above, we affirm the superior court's entry of summary
judgment in favor of the Patients on their claim for declaratory relief and
the court's order enjoining the Hospitals from enforcing any lien rights they
may have under state law to recover those funds.

¶73 We also hold the Patients are third-party beneficiaries of the
contracts the Hospitals entered with AHCCCS to serve AHCCCS members.
Those contracts required the Hospitals to comply with federal law,
including 42 C.F.R. § 447.15. Accordingly, we reverse and remand the
dismissal of the Patients' claim for breach of contract and direct entry of
judgment in favor of the Patients on that claim.

¶74 Finally, we affirm the superior court's award of fees to the
Patients, excepting only the amount of $60,442, which the Patients sought
for work performed in connection with the Abbott case, and we direct the
superior court on remand to reconsider that fees claim. We award the
Patients their costs on appeal and their attorney's fees pursuant to A.R.S. §
12-341.01(A), contingent upon compliance with Arizona Rule of Civil
Appellate Procedure 21.

AMY M. WOOD • Clerk of the Court
FILED: AA

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