Aachc v. Ahcccs

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

ARIZONA ALLIANCE FOR No. 21-16262
COMMUNITY HEALTH CENTERS;
CANYONLANDS HEALTHCARE; D.C. No.
CHIRICAHUA COMMUNITY HEALTH 4:19-cv-00517-
CENTERS; DESERT SENITA JGZ
COMMUNITY HEALTH CENTER;
MARIPOSA COMMUNITY HEALTH
CENTER; MARANA HEALTH CENTER; OPINION
MOUNTAIN PARK HEALTH CENTER;
NATIVE HEALTH; NORTH COUNTRY
HEALTHCARE; SUN LIFE FAMILY
HEALTH CENTER; SUNSET
COMMUNITY HEALTH CENTER;
UNITED COMMUNITY HEALTH
CENTER-MARIA AUXILIADORA,
Plaintiffs-Appellants,

v.

ARIZONA HEALTH CARE COST
CONTAINMENT SYSTEM; JAMI
SNYDER, Director, Arizona Health
Care Cost Containment System, in
her official capacity,
Defendants-Appellees.
2 AACHC V. AHCCCS

Appeal from the United States District Court
for the District of Arizona
Jennifer G. Zipps, District Judge, Presiding

Argued and Submitted March 10, 2022
Phoenix, Arizona

Filed September 2, 2022

Before: Richard A. Paez, Richard R. Clifton, and
Paul J. Watford, Circuit Judges.

Opinion by Judge Clifton
 AACHC V. AHCCCS 3

SUMMARY *

Civil Rights/Medicaid

The panel reversed in part and vacated in part the district
court’s grant of defendants’ motion to dismiss, and
remanded for further proceedings, in an action in which
federally-qualified health centers operating in Arizona and
their membership organization alleged that the Arizona
Health Care Cost Containment System, which administers
Arizona’s Medicaid program, and its director violated 42
U.S.C. § 1396a(bb) and binding Ninth Circuit precedent by
failing or refusing to reimburse plaintiffs for the services of
dentists, podiatrists, optometrists, and chiropractors.

Federally-qualified health centers treat medically
underserved areas or populations and may seek mandatory
reimbursement from state Medicaid plans under § 1396a(bb)
for providing Medicaid recipients with services under the
Medicaid Act. Section 1396d(a)(2)(C) requires state
Medicaid plans to “cover [FQHC] services (as defined in
subsection (l)(2)) and any other ambulatory services offered
by a [FQHC] and which are otherwise included in the [state
Medicaid] plan.”

First, the panel held that this court’s precedent in
California Ass’n of Rural Health Clinics v. Douglas
(“Douglas”), 738 F.3d 1007 (9th Cir. 2013), established that
FQHC services are a mandatory benefit under
§ 1396d(a)(2)(C) for which plaintiffs have a right to
reimbursement under § 1396a(bb) that is enforceable under
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
4 AACHC V. AHCCCS

42 U.S.C. § 1983. The panel rejected defendants’
interpretation of § 1396d(a)(2)(C)’s phrase “which are
otherwise included in the plan” as applying to both the
phrases “FQHC services” and “other ambulatory services
offered by a [FQHC.]” The panel therefore rejected
defendants’ assertion that § 1396d(a)(2)(C) only required
states to cover FQHC services that are included in the state
Medicaid plan. The panel agreed with the district court that
defendants could not rely on § 1396d(a)(2)(C) as a basis for
excluding mandatory coverage of FQHC services because
the phrase “which are otherwise included in the plan,”
modified only the immediately preceding phrase, “and any
other ambulatory services offered by a [FQHC.]”

Second, the panel recognized that Douglas held that the
mandatory benefit of “FQHC services” under
§ 1396d(a)(2)(C) includes “services furnished by . . .
dentists, podiatrists, optometrists, and chiropractors” as well
as doctors of medicine and osteopathy. Although Arizona
may impose limitations on the mandatory benefit of FQHC
services, it may not impose a categorical exclusion of adult
chiropractic services.

Third, the panel held that Arizona’s categorical
exclusion of adult chiropractic services violated the
unambiguous text of the Medicaid Act as interpreted in
Douglas. The panel reversed the district court’s grant of
defendants’ Rule 12(b)(6) motion to dismiss in that regard
and remanded for further proceedings.

Fourth, the panel concluded that the record did not
establish that Chevron deference applied to Arizona’s
limitations on adult dental, optometry, and podiatry services,
which are components of the mandatory benefit of FQHC
services. The record lacked any evidence about the
 AACHC V. AHCCCS 5

reasoning for approving Arizona’s plan and consideration of
the potential impact of Arizona’s limited coverage of adult
dental, optometry, and podiatry services even when provided
by FQHCs. Thus, the panel vacated the district court’s grant
of defendants’ motion to dismiss in that regard and
remanded for the parties to further develop the record and
for the district court to rule in the first instance on whether
Arizona’s limitations on adult dental, optometry, and
podiatry services, which are components of the mandatory
benefit of FQHC services, were entitled to Chevron
deference.

COUNSEL

Matthew Sidney Freedus (argued) and Rose Dawn Griffin,
Feldesman Tucker Leifer Fidell LLP, Washington, D.C., for
Plaintiffs-Appellants.

Logan T. Johnston (argued), Johnston Law Offices PLC,
Phoenix, Arizona, for Defendants-Appellees.
6 AACHC V. AHCCCS

OPINION

CLIFTON, Circuit Judge:

This appeal arises from the District Court’s dismissal of
a complaint brought by federally-qualified health centers
(“FQHCs”) operating in Arizona and the Arizona Alliance
for Community Health Centers, the “nonprofit membership
organization representing Arizona FQHCs” (“Plaintiffs”).
They filed suit against the Arizona Health Care Cost
Containment System (“AHCCCS”), which administers
Arizona’s Medicaid program, and Jami Snyder, AHCCCS’s
Director (“Defendants”). Plaintiffs’ complaint alleged that
Defendants violated 42 U.S.C. Ҥ 1396a(bb) and binding
Ninth Circuit precedent by failing or refusing to reimburse
FQHCs for the services of dentists, podiatrists, optometrists,
and chiropractors.” It cited California Ass’n of Rural Health
Clinics v. Douglas (“Douglas”), 738 F.3d 1007 (9th Cir.
2013), for its “holding that § 1396a(bb) affords each FQHC
an enforceable federal right to reimbursement for FQHC
services, which include the services of its dentists,
podiatrists, optometrists, and chiropractors (among others).”

Defendants brought a Rule 12(b)(6) motion to dismiss.
The District Court granted the motion. It concluded that
“Defendants cannot rely on [42 U.S.C. §] 1396d(a)(2)(C) as
a basis for excluding mandatory coverage of FQHC
Services,” which is a separate mandatory benefit for which
Defendants must reimburse Plaintiffs serving Medicaid
recipients under § 1396a(bb). However, the court ruled that
“Plaintiffs fail to state a claim for relief” because “Arizona
may cover [FQHC] Services with limits” and rejected
Plaintiffs’ contention that “Arizona impermissibly
categorically excludes FQHC Services in violation of the
Medicaid Act and Douglas[.]” Plaintiffs timely filed a notice
 AACHC V. AHCCCS 7

of appeal challenging the court’s grant of Defendants’
motion to dismiss.

We commend the District Court and counsel for both
sides for their skillful handling of the uncommonly complex
issues presented by this case. We summarize our resolution
of those issues as follows.

First, we consider the District Court’s ruling that
“Defendants cannot rely on § 1396d(a)(2)(C) as a basis for
excluding mandatory coverage of FQHC services” because
“the phrase ‘which are otherwise included in the plan,’
modifies only the immediately preceding phrase, ‘and any
other ambulatory services offered by a [FQHC.]’” We agree.
Our precedent in Douglas established that “FQHC services”
are a mandatory benefit under § 1396d(a)(2)(C). Douglas,
738 F.3d at 1014–15.

Second, we recognize that Douglas held that the
mandatory benefit of “FQHC services” under
§ 1396d(a)(2)(C) includes “services furnished by . . .
dentists, podiatrists, optometrists, and chiropractors” as well
as doctors of medicine and osteopathy. Id. at 1016.

Third, we hold that Arizona’s categorical exclusion of
adult chiropractic services violates the unambiguous text of
the Medicaid Act as interpreted in Douglas. Therefore, we
reverse the District Court’s grant of Defendants’ Rule
12(b)(6) motion to dismiss in that regard.

Fourth, we conclude that the record before us does not
establish that Chevron deference applies to Arizona’s
limitations on adult dental, optometry, and podiatry services,
which are components of the mandatory benefit of “FQHC
services.” Thus, we vacate the District Court’s grant of
Defendants’ motion to dismiss in that regard and remand for
8 AACHC V. AHCCCS

the parties to further develop the record and for the District
Court to rule in the first instance on whether Arizona’s
limitations on adult dental, optometry, and podiatry services
are entitled to Chevron deference.

I. Background

The Medicaid program was established in 1965 via Title
XIX of the Social Security Act, now codified at 42 U.S.C.
§ 1396 et seq., and is “a cooperative federal-state program
through which the federal government provides financial
assistance to states so that they can furnish medical care to
low-income individuals.” Douglas, 738 F.3d at 1010. A state
receiving Medicaid funds has discretion to develop its
Medicaid program in a manner that is responsive to the needs
of its citizens, as long as these programs are consistent with
federal requirements, in a system that the Supreme Court has
described as “designed to advance cooperative federalism.”
Wis. Dep’t of Health and Family Svcs. v. Blumer, 534 U.S.
473, 497 (2002). “Medicaid is jointly financed by the federal
and state governments and is administered by state
governments through state ‘plans,’ which are approved by
the federal Secretary of Health and Human Services”
(“HHS”). B.K. ex rel. Tinsley v. Snyder, 922 F.3d 957, 963
(9th Cir. 2019) (citing Douglas, 738 F.3d at 1010); see also
42 U.S.C. § 1396a(b).

The HHS Secretary delegated “the responsibility and the
authority to administer the Medicaid program and to review
state Medicaid plans and plan amendments for compliance
with federal law” to the regional administrator for Centers
for Medicaid and Medicare Services (“CMS”), who “must
review and approve or reject” any proposed state plan
amendments (“SPAs”). Managed Pharmacy Care v.
Sebelius, 716 F.3d 1235, 1241–42 (9th Cir. 2013) (citing
42 U.S.C. § 1396a(b) and 42 C.F.R. § 430.15(b)). CMS has
 AACHC V. AHCCCS 9

long approved Arizona’s plan and SPAs, including a 2017
SPA establishing a $1,000 cap on adult emergency dental
benefits. See Ariz. Rev. Stat. § 36-2907(A)(11) (2017).

FQHCs treat medically underserved areas or populations
and are required to meet various eligibility criteria under the
Medicaid Act. One criterion is that they must be “receiving
a [federal] grant under [the Public Health Service Act,
42 U.S.C.] section 254b[.]” 42 U.S.C. § 1396d(l)(2)(B)
(defining the term “Federally-qualified health center”).
FQHCs may also seek mandatory reimbursement from state
Medicaid plans under § 1396a(bb) for providing Medicaid
recipients with services under the Medicaid Act. Section
1396a(bb) provides that “the State plan shall provide for
payment for services described in section 1396d(a)(2)(C) of
this title furnished by a Federally-qualified health center[.]”

Section 1396d(a)(2)(C) requires state Medicaid plans to
cover “[FQHC] services (as defined in subsection (l)(2)) and
any other ambulatory services offered by a [FQHC] and
which are otherwise included in the plan.” The cross-
referenced subsection—§ 1396d(l)(2) of the Medicaid
Act—defines the term “[FQHC] services” by reference to
[42 U.S.C.] § 1395x(aa)(1) of the Medicare Act, which
refers to, inter alia, “physicians’ services[.]”

When CMS approves an SPA, we have held that CMS
“implicitly approve[s the state’s] interpretation of the
Medicaid Act.” Douglas, 738 F.3d at 1014. Under most
circumstances, the HHS “Secretary’s exercise of discretion
in the ‘form and context’ of a SPA approval deserves
Chevron deference.” Managed Pharmacy Care, 716 F.3d at
1248 (quoting Price v. Stevedoring Servs. of Am., Inc.,
697 F.3d 820, 826 (9th Cir. 2012) (en banc)).
10 AACHC V. AHCCCS

In this case, as the District Court noted, “[t]he parties
agree that this action presents legal issues with no material
dispute of fact.” As outlined by the District Court, it is
undisputed that:

Arizona’s Medicaid plan covers the
following dental, podiatry, optometry, and
chiropractic services:

• Dental services for children under 21 and
limited emergency and non-emergency
dental services for elderly and
developmentally disabled beneficiaries in
long-term care facilities. Emergency
dental services for adults (such as
medically necessary extraction or
treatment for an acute infection) up to
$1,000 per year.

• Adult podiatry services if those services
are ordered by a primary care provider
and the authorization is documented in
the medical record.

• Optometry services for “[r]outine and
medically necessary vision services,
including examinations and the provision
of prescriptive lenses” for beneficiaries
under the age of 21. For adults,
examination and treatment of medical
conditions of the eye, and prescriptive
lenses only when used as the sole
prosthetic device following cataract
surgery.
 AACHC V. AHCCCS 11

• Chiropractic services for children under
21 years of age.

II. Procedural History

Plaintiffs are a group of FQHCs operating in Arizona and
the nonprofit membership organization representing Arizona
FQHCs. Defendant Jami Snyder is the Director of Defendant
Arizona Health Care Cost Containment System (AHCCCS),
which administers Arizona’s Medicaid program.

Plaintiffs initially filed this action in the District Court in
2019. The operative amended complaint sought declaratory
and injunctive relief, as well as costs and attorneys’ fees. It
alleged that Defendants were liable under 42 U.S.C. § 1983
for “violating § 1396a(bb) and binding Ninth Circuit
precedent by failing or refusing to reimburse FQHCs for the
services of dentists, podiatrists, optometrists, and
chiropractors.” The complaint cited Douglas for the
proposition “that § 1396a(bb) affords each FQHC an
enforceable federal right to reimbursement for FQHC
services, which include the services of its dentists,
podiatrists, optometrists, and chiropractors (among others).”
Plaintiffs also filed a motion for a preliminary injunction,
“request[ing] that the Court enter ‘an order compelling
AHCCCS to cover all (dental, podiatric, optometric, and
chiropractic) services provided’ by plaintiffs and non-
plaintiff FQHCs to Medicaid beneficiaries.”

Defendants filed a motion to dismiss Plaintiffs’
complaint for failure to state a claim under Federal Rule of
Civil Procedure 12(b)(6). Defendants argued that
§ 1396d(a)(2)(C) “does not unambiguously require states to
reimburse FQHCs for 100% of the [FQHC] Services” but
rather only obligates states “to cover FQHC services that are
included in the state Medicaid plan.” Defendants asserted
12 AACHC V. AHCCCS

that § 1396d(a)(2)(C)’s requirement that states cover FQHC
Services “and any other ambulatory services offered by a
[FQHC] and which are otherwise included in the [state
Medicaid] plan” only requires states to cover FQHC services
that are included in the plan, interpreting the phrase
“otherwise included in the plan” as applying to both the
phrases “FQHC services” and “other ambulatory services
offered by a [FQHC.]” Defendants contended that Douglas
was not dispositive because “Arizona does not, as Plaintiffs
claim, ‘categorically exclude’ any dental, podiatry,
optometry or chiropractic services provided by FQHCs” but
rather “covers these services [] with limitations.”

After hearing oral argument, the District Court granted
in part Defendants’ motion to dismiss and denied Plaintiffs’
motion for preliminary injunction. The court rejected
“Defendants’ interpretation of § 1396d(a)(2)(C)” and
instead “conclude[d] that the phrase ‘which are otherwise
included in the plan,’ modifies only the immediately
preceding phrase, ‘and any other ambulatory services
offered by a Federally-qualified health center.’” As a result,
it held that “Defendants cannot rely on [§] 1396d(a)(2)(C) as
a basis for excluding mandatory coverage of FQHC
Services.” Nonetheless, the court concluded that “Arizona
may cover [FQHC] Services with limits without violating
the Medicaid Act or Douglas.” It rejected Plaintiffs’
contention that “Arizona impermissibly categorically
excludes FQHC Services in violation of the Medicaid Act
and Douglas.” The court did not address Defendants’
alternative arguments that Medicaid’s comparability
requirement and the approval of Arizona’s Medicaid plan by
CMS supported dismissal of Count I.

After entry of final judgment, Plaintiffs timely filed a
notice of appeal. Plaintiffs challenge the dismissal of their
 AACHC V. AHCCCS 13

complaint and do not appeal the denial of their motion for a
preliminary injunction.

III. Discussion

We have jurisdiction to review a district court’s final
judgment, including a grant of a Rule 12(b)(6) motion to
dismiss, under 28 U.S.C. §§ 1291 and 1294(1). We review
de novo a district court’s grant of a Rule 12(b)(6) motion to
dismiss for failure to state a claim. See Benavidez v. County
of San Diego, 993 F.3d 1134, 1141 (9th Cir. 2021). We
review de novo legal questions, such as a “court’s
interpretation of the Medicaid Act.” Douglas, 738 F.3d
at 1011. Our review of a grant of a Rule 12(b)(6) motion to
dismiss is generally limited to the contents of the complaint,
and we must construe the factual allegations in the complaint
in the light most favorable to the plaintiffs. See Pirani v.
Slack Techs., Inc., 13 F.4th 940, 946 (9th Cir. 2021); Depot,
Inc. v. Caring for Montanans, Inc., 915 F.3d 643, 653 (9th
Cir. 2019). 1

A. Section 1396d(a)(2)(C) of the Medicaid Act
establishes that “FQHC Services” are a mandatory
benefit that Defendants must cover.

First, we evaluate the District Court’s ruling that
“Defendants cannot rely on § 1396d(a)(2)(C) of the

Defendants argue that Plaintiffs raise “new theories that are
1

improper and should be disregarded,” but Plaintiffs disclaim doing so.
We agree with Defendants’ statement, unchallenged by Plaintiffs, that
the “complaint does not allege the AHCCCS limitations are arbitrary and
capricious” under the APA, nor does it allege “any violation of
§ 1396a(a)(30)(A),” including a challenge on the basis that “a study was
necessary to support AHCCCS’s limitations” under § 1396a(a)(30)(A).
Plaintiffs also do not allege “a violation of 42 C.F.R. § 440.230(b).”
14 AACHC V. AHCCCS

Medicaid Act as a basis for excluding mandatory coverage
of FQHC services” because “the phrase ‘which are otherwise
included in the plan,’ modifies only the immediately
preceding phrase, ‘and any other ambulatory services
offered by a [FQHC.]” We agree with the District Court’s
interpretation of the Medicaid Act as establishing that
“FQHC services” are a mandatory benefit that Defendants
must cover and for which Plaintiffs have a right to
reimbursement under § 1396a(bb) that is enforceable under
§ 1983. See Douglas, 738 F.3d at 1013. 2

Section 1396d(a)(2)(C) requires state Medicaid plans to
include “[FQHC] services (as defined in subsection (l)(2))
and any other ambulatory services offered by a [FQHC] and
which are otherwise included in the plan.” Defendants
argued before the District Court that “the phrase ‘otherwise
included in the plan’ requires states to cover only those
FQHC services that the state chooses to include in the state
Medicaid plan.” The District Court disagreed with
Defendants’ interpretation of § 1396d(a)(2)(C). We share
the District Court’s view that the Defendants’ interpretation
“would enable a state to categorically exclude all coverage
for all FQHC services” and “is contrary to the plain language
and purpose of the statute.” The District Court held that

2
Plaintiffs’ reply brief argues that Defendants “did not cross-appeal
the district court’s decision” on FQHC services being a separate
mandatory benefit. Nevertheless, our de novo review may address that
issue due to the inherent “interrelatedness of the issues on appeal and
cross-appeal” and our holding that “the requirement of a notice of cross-
appeal is a rule of practice, which can be waived at the court’s discretion,
rather than a jurisdictional requirement[.]” Mendocino Environ. Ctr. v.
Mendocino County, 192 F.3d 1283, 1298, 1299 (9th Cir. 1999). We
discuss the issue here to resolve any remaining uncertainty about
whether FQHC services are a mandatory benefit.
 AACHC V. AHCCCS 15

FQHC services are a mandatory benefit for three reasons.
We agree with all three of those reasons.

First, the court stated that the Medicaid Act lists
mandatory services that states must cover “in paragraphs
(1) through (5) . . . of [§] 1396d(a).” This includes
§ 1396d(a)(2)(C), which refers to “[FQHC] services . . . and
any other ambulatory services offered by a [FQHC] and
which are otherwise included in the plan[.]” The court
reasoned that “[i]f the phrase ‘which are otherwise included
in the plan’ modified both services listed in
[§] 1396d(a)(2)(C),” as Defendants argue, “neither service
would be mandated for state coverage[,]” which “would
render meaningless the specific listing of [§] 1396d(a)(2)(C)
under the list of services a state must provide in its plan
pursuant to 42 U.S.C. § 1396a(a)(10)(A).” We agree that the
logical reading of the phrase “which are otherwise included
in the plan,” is that it modifies only the immediately
preceding phrase, “and any other ambulatory services
offered by a [FQHC].”

Second, the court reasoned that because “Congress did
provide a list of optional services that States could cover . . .
at [§] 1396d(a)(6)–(16), (18)–(20), (22)–(27)” and chose not
to include FQHC services in that list, the Medicaid Act
should be interpreted as establishing that FQHC services are
not an optional benefit, but rather a mandatory benefit. We
agree.

Third, the court concluded that “reading the phrase
‘which are otherwise included in the plan’ to modify only
the phrase ‘and any other ambulatory services’ gives effect
to the phrase” because “there are a number of optional
services that may be provided by a FQHC that fall outside
the scope of mandatory FQHC services defined in
§ 1396d(l)(2)” and “‘ambulatory services’ covers a broad
16 AACHC V. AHCCCS

category of outpatient services[,]” many of which fall
outside the scope of the “mandatory FQHC services defined
in § 1396d(l)(2).” Under the canons of statutory
interpretation, including the rule against surplusage, we
agree with the District Court that courts must “interpret [a]
statut[e] as a whole, giving effect to each word and making
every effort not to interpret a provision in a manner that
renders other provisions of the same statute inconsistent,
meaningless or superfluous” and that “[p]articular phrases
must be construed in light of the overall purpose and
structure of the whole statutory scheme.” United States v.
Neal, 776 F.3d 645, 652 (9th Cir. 2015) (quotation marks
and citations omitted).

Moreover, we conclude that our precedent in Douglas
established that FQHC services are a mandatory benefit
under the Medicaid Act. In that case, we addressed “whether
California legislation that eliminate[d] coverage for certain
healthcare services . . . conflict[ed] with the Medicaid
Act[.]” Douglas, 738 F.3d at 1010–11. The California “state
legislature passed California Welfare and Institutions Code
§ 14131.10 (“§ 14131.10”), which eliminated certain
[Medicaid] benefits that the state deemed optional, including
adult dental, podiatry, optometry and chiropractic services.”
Id. at 1010. California amended its state plan accordingly
and submitted the SPA to CMS for approval. Id. The
plaintiffs in Douglas—an association of rural health clinics
and one FQHC—challenged the implementation of
§ 14131.10 and argued that the Medicaid Act prohibited
California’s elimination of coverage for these services. See
id. at 1010–11. We agreed, holding that FQHC services are
a mandatory benefit under § 1396d(a)(2)(C) for which
[FQHCs] must be reimbursed. As we explained:
 AACHC V. AHCCCS 17

The Medicaid Act requires participating
states to cover certain services in their state
plans. 42 U.S.C. § 1396a(a)(10) (referring to
42 U.S.C. § 1396d(a)(1)–(5), (17), (21),
(28)). These mandatory services include . . .
FQHC services. Id. § 1396d(a)(2)(B)–(C).
Specifically, Medicaid requires payment for
. . . “Federally-qualified health center
services (as defined in subsection (l)(2) of
this section) and any other ambulatory
services offered by a Federally-qualified
health center and which are otherwise
included in the plan.” Id. § 1396d(a)(2).

Douglas, 738 F.3d at 1015.

Accordingly, we conclude that FQHC services are a
mandatory benefit under § 1396d(a)(2)(C).

B. Douglas held that the mandatory benefit of “FQHC
services” under § 1396d(a)(2)(C) includes services
furnished by chiropractors, dentists, optometrists,
and podiatrists.

We turn to the question of which services are included in
the definition of FQHC services under § 1396d(a)(2)(C), for
which Douglas is also instructive. We review de novo legal
questions, such as a “court’s interpretation of the Medicaid
Act.” Douglas, 738 F.3d at 1011. Section 1396d(a)(2)(C) of
the Medicaid Act requires coverage for the mandatory
benefit of “[FQHC] services (as defined in subsection
[1396d](l)(2) [of the Medicaid Act,])” which defines FQHC
services as “services of the type described in subparagraphs
(A) through (C) of section 1395x(aa)(1)” of the Medicare
Act. “[P]hysicians’ services” are included among those
services described. Douglas, 738 F.3d at 1016. Douglas
18 AACHC V. AHCCCS

concluded that the “FQHC services that Medicaid requires
states to cover are coequal to those services as they are
defined in § 1395x(aa) of the Medicare statute” because
§ 1396d(l)(2) of the Medicaid Act references
§ 1395x(aa)(1)(A–C) of the Medicare Act and, thus,
“Medicaid imports the Medicare definitions wholesale.” Id.
Douglas ruled that “physicians’ services” as used in
§ 1395x(aa)(1) of the Medicare Act “include[s] not only the
services furnished by doctors of medicine and osteopathy,
but also the services furnished by dentists, podiatrists,
optometrists and chiropractors.” Id.

Douglas’s interpretation of FQHC services as including
“physicians’ services” defined broadly is not disturbed by
the fact that an entirely different section of the Medicaid
Act—§ 1396d(a)(5)(A)—“separately [] requires state plans
to cover ‘physicians’ services furnished by a physician’”
defined narrowly to include only doctors of medicine and
osteopathy. Id. Neither the term “physicians’ services
furnished by a physician” under § 1396d(a)(5)(A) nor that
provision’s parenthetical reference to § 1395x(r)(1) apply to
our inquiries in Douglas or this appeal, which both involve
“physicians’ services” as used in § 1395x(aa)(1).

C. Although Arizona may impose limitations on the
mandatory benefit of “FQHC services,” Arizona
may not impose a categorical exclusion of adult
chiropractic services.

In light of Douglas, we hold that Arizona’s categorical
exclusion of all adult chiropractic services violates the
unambiguous text of § 1396d(a)(2) of the Medicaid Act,
which Douglas interpreted as including “services furnished
by . . . chiropractors.” Douglas, 738 F.3d at 1015–17 (ruling
that the Medicaid Act “imports the Medicare definitions
wholesale” by “statutory commandments [that] are
 AACHC V. AHCCCS 19

unambiguous” (emphasis added)). Douglas emphatically
declared that “[a]ny alternate reading of the statute would do
violence to Medicaid’s command that the term . . . ‘[FQHC]
services’ shall have the meaning[] given [it] in Medicare.”
Id. at 1016–17 (citing 42 U.S.C. § 1396d(l)(2)) (other
citation omitted). Although Defendants assert that “Arizona
does not, as Plaintiffs claim, ‘categorically exclude’ any
dental, podiatry, optometry or chiropractic services provided
by FQHCs” but rather “covers [them] with limitations,” the
District Court recognized that “[t]he only category of
physicians’ service which Arizona does not cover is adult
chiropractic.” Nevertheless, the District Court ruled that
“Arizona’s lack of coverage of one of the four types of
covered physicians’ services” is permissible under Douglas
because “Arizona provides for some coverage of [FQHC]
Services”—limited coverage for dental, optometry, and
podiatry services—and “[b]ecause Plaintiffs agree that
mandatory Services can be limited [and so] the Court cannot
conclude that Arizona impermissibly categorically excludes
FQHC Services in violation of the Medicaid Act and
Douglas, as alleged by Plaintiffs in their Complaint.” We
disagree.

Whether Arizona’s categorical exclusion of adult
chiropractic services violates the Medicaid Act is a legal
question that we review de novo. The District Court’s
statement about Arizona’s motivation for that categorical
exclusion—“there is no indication that Arizona, like
California in Douglas, excludes coverage of adult
chiropractic services solely because Arizona does not
consider chiropractic services to be covered FQHC
physicians’ services”—is immaterial to that legal question.
Once again, we turn to Douglas.
20 AACHC V. AHCCCS

Douglas held that the unambiguous text of
§ 1396d(a)(2)(C) requires that services by chiropractors be
included in the applicable definition of “physicians’
services” as a component of FQHC services, given that
§ 1396d(a)(2)(C)’s “statutory text does not use vague and
amorphous words” but rather “outlines specifically the types
of services provided by RHCs and FQHCs that a state plan
must cover.” Douglas, 738 F.3d at 1014.

Douglas’s holding is not unsettled by states’ discretion
to impose limitations to eligibility for and the extent of
medical services. Arizona’s categorical exclusion of all adult
chiropractic services does not limit the eligibility for or the
extent of those services, but rather excludes them altogether.
See id. at 1010. Defendants contend that because Arizona
covers some chiropractic services for those under 21 years
of age, Arizona is merely limiting eligibility for those
services, which is often permissible under the Medicaid Act.
However, that exact argument could have been made in
Douglas, because under the California statute at issue in that
case, some dental, podiatry, optometry, and chiropractic
services for non-adults would have been covered.
Nevertheless, Douglas held that California’s statute
“eliminat[ing] . . . adult dental, podiatry, optometry and
chiropractic services” violated the Medicaid Act’s “statutory
commandments[, which] are unambiguous.” Id. at 1010,
1016. In other words, Douglas directly supports the
conclusion that a statute precluding coverage of dental,
podiatry, optometry, and chiropractic services, even if only
for adults, is more akin to impermissible categorical
exclusions than mere limitations.

The most significant factual distinction between
Douglas and this case is that the California statute in
Douglas would have categorically excluded the four
 AACHC V. AHCCCS 21

categories of dental, podiatry, optometry, and chiropractic
services, while, in this case, Arizona only categorically
excludes chiropractic services. However, this distinction
does not change our conclusion that Arizona’s categorical
exclusion of adult chiropractic services violates the
Medicaid Act. Here, the District Court erroneously allowed
Defendants to nullify the unambiguous statutory text
establishing “services furnished by . . . chiropractors” as
included in the mandatory benefit of “physicians’ services.”
Redefining an unambiguously defined mandatory benefit by
categorically excluding one of its primary components rises
to the level of an “alternate reading of the statute” that
Douglas warned “would do violence to [the] Medicaid
[Act].” Douglas, 738 F.3d at 1017 (citing 42 U.S.C.
§ 1396d(l)(2)).

Finally, Douglas’s express holding on “services
furnished by . . . chiropractors” renders the District Court’s
analogy of chiropractic services to preventive services inapt,
because we have never held that the latter are included in the
unambiguous statutory definition of “physicians’ services.”

Therefore, we hold that Arizona’s categorical exclusion
of adult chiropractic services violates § 1396d(a)(2) of the
Medicaid Act. We reverse the District Court’s grant of
Defendants’ motion to dismiss on this issue and remand for
further proceedings. 3

3
The District Court “d[id] not address Defendants’ alternative
argument that . . . the approval of Arizona’s Medicaid plan by [CMS]
support[s] dismissal” under Chevron. Because our analysis flows from
the Act’s unambiguous text, however, it is not afforded Chevron
deference. See Managed Pharmacy Care v. Sebelius, 716 F.3d 1235,
1245–46 (9th Cir. 2013). Similarly, the District Court declined to address
Defendants’ “comparability” argument. We have ruled that the
22 AACHC V. AHCCCS

D. The record before us does not establish that
Arizona’s limitations on adult dental, optometry, and
podiatry services are entitled to Chevron deference,
so we vacate and remand for the parties to further
develop the record and for the district court to
consider this issue in the first instance.

We now turn to whether Arizona’s limitations on adult
dental, optometry, and podiatry services violate the
provisions of the Medicaid Act that Plaintiffs’ complaint
addresses. We must consider whether those limitations are
entitled to Chevron deference in light of CMS’s approval of
Arizona’s plan and SPAs. In Douglas, we held that CMS’s
approval of a state plan may qualify for Chevron deference.
See 738 F.3d at 1014. Although the California statute at issue
in Douglas did not involve statutory ambiguity and thus did
not fulfill Chevron “Step One,” we noted that when CMS
approved California’s SPA “eliminat[ing] certain
[Medicaid] benefits that the state deemed optional, including

“comparability” rule is only violated if some “recipients” are denied or
given “services that are ‘less in amount, duration, or scope than the
medical assistance made available to’ other recipients” for an improper
reason. Arc of California v. Douglas, 757 F.3d 975, 985 (9th Cir. 2014)
(emphasis added) (quoting 42 U.S.C. § 1396a(a)(10)(B)). Because
“comparability” must exist among recipients of medical services, not
among providers with reimbursement rights under § 1396a(bb)—which
Defendants acknowledge—our holding that Arizona’s categorical
exclusion of adult chiropractic services violates the Medicaid Act does
not, as Defendants allege, “effectively end a state’s discretion to limit
[chiropractic] services in any setting because comparability would
require these services to be available without limitation in all outpatient
settings.” Cf. Douglas, 738 F.3d at 1010 (“Each state has discretion to
create reasonable standards for determining eligibility for medical
services and the extent of those services, provided those standards
comply with federal law.” (citing Schweiker v. Gray Panthers, 453 U.S.
34, 36–37 (1981))).
 AACHC V. AHCCCS 23

adult dental, podiatry, optometry and chiropractic
services[,]” CMS “implicitly approved California’s
interpretation of the Medicaid Act[.]” Id. at 1010, 1014.

Douglas’s conclusion that CMS’s approval of
California’s SPA entitled California’s interpretation of the
Medicaid Act to Chevron deference was based on our
opinion in Managed Pharmacy Care, in which we held that
CMS’s approval of the SPA at issue in that case was entitled
to Chevron deference. See Douglas, 738 F.3d at 1014;
Managed Pharmacy Care, 716 F.3d at 1248 (“[T]he
Secretary’s exercise of discretion in the ‘form and context’
of a SPA approval deserves Chevron deference.” (quoting
Price v. Stevedoring Servs. of Am., Inc., 697 F.3d 820, 826
(9th Cir. 2012) (en banc))). We determined that the language
in 42 U.S.C. § 1396a(b) requiring the HHS Secretary to
approve state plans was a clear delegation of authority. See
Managed Pharmacy Care, 716 F.3d at 1249. Although the
Secretary’s approval lacked formal procedures, we
concluded that “[d]etermining a plan’s compliance with [the
Medicaid Act], as well as its compliance with a host of other
federal laws, is central to the program because a State cannot
participate in Medicaid without a plan approved by the
Secretary as consistent with those laws” and “the agency is
the expert in all things Medicaid.” Id. at 1248. We noted that
CMS had issued approval letters for the SPAs at issue in the
case, which articulated the Secretary’s reasoning for
concluding that the SPAs complied with the Medicaid Act.
See id. at 1243. Thus, applying the two-step “familiar
standard” of Chevron, “[w]e defer[red] to the Secretary’s
decision that [the] SPAs . . . compl[ied] with” the Medicaid
Act. Id. at 1246 (citing Chevron, U.S.A., Inc. v. Nat. Res.
Def. Council, Inc., 467 U.S. 837, 842–43 (1984)), 1250.
24 AACHC V. AHCCCS

Even assuming that Chevron Step One is met (i.e., that
statutory ambiguity existed regarding whether Arizona’s
limitations on adult dental, optometry, and podiatry services
violate the Medicaid Act), the record does not contain
sufficient evidence for Arizona’s interpretation of the Act as
allowing those limitations to fulfill Chevron Step Two,
which requires that the interpretation be “based on a
permissible construction of the statute.” Chevron, 467 U.S.
at 843; see Judulang v. Holder, 565 U.S. 42, 53 n.7 (2011)
(“[U]nder Chevron step two, we ask whether an agency
interpretation is arbitrary or capricious in substance.”
(citations and quotation marks omitted)); Schneider v.
Chertoff, 450 F.3d 944, 960 (9th Cir. 2006) (“[At Chevron
Step Two, w]e must defer to the regulation unless the
Secretary’s interpretation . . . frustrates the policy Congress
sought to implement.”).

We recognize that the Supreme Court has long held that
“[n]othing in the [Medicaid] statute suggests that
participating States are required to fund every medical
procedure that falls within the delineated [mandatory]
categories of medical care.” Beal v. Doe, 432 U.S. 438, 441
(1977). Critically, however, at Chevron Step Two, we must
consider the full scope of the agency’s decision-making
process, including the reasoning offered for its decision. See,
e.g., Friends of Animals v. Haaland, 997 F.3d 1010, 1017
(9th Cir. 2021) (holding that a rule was not entitled to
Chevron deference at Step Two because the agency relied
“on an unreasonable justification” that did not “accord with
the aims” of the relevant statute); see also Holder v.
Martinez Gutierrez, 566 U.S. 583, 597 (2012) (looking to an
agency’s justification for its decision to determine whether
the interpretation actually “expresses the [agency’s] view,
based on its experience implementing the [statute], the
statutory text, administrative practice, and regulatory
 AACHC V. AHCCCS 25

policy,” about how the statute should be read). Chevron Step
Two requires that the record contain at least some
information about how the agency developed its
interpretation because, as we have ruled when determining
whether an agency action survives Chevron Step Two, “an
agency’s action must be upheld, if at all, on the basis
articulated by the agency itself.” Friends of Animals,
997 F.3d at 1016 (citation and quotation marks omitted); see
also Perez-Guzman v. Lynch, 835 F.3d 1066, 1079 n.8 (9th
Cir. 2016) (“[A]gency action rises or falls on the agency’s
own contemporaneous reasoning[.]”). The Supreme Court
has specified that where an agency “has failed to provide
even [a] minimal level of analysis” so that “its path may
reasonably be discerned . . . its action is arbitrary and
capricious and so cannot carry the force of law.” Encino
Motorcars, LLC v. Navarro, 579 U.S. 211, 221 (2016)
(citation and quotation marks omitted); see also Grand
Canyon Tr. v. Provencio, 26 F.4th 815, 824 (9th Cir. 2022)
(stating that if an agency fails to provide “the minimal level
of analysis required,” Chevron deference may not apply to
the agency’s interpretation at all).

The record in this case does not contain sufficient
evidence for Arizona’s interpretation to fulfill Chevron Step
Two. The record lacks any evidence about CMS’s reasoning
for approving Arizona’s plan and SPAs. We distinguish the
facts here from those in Managed Pharmacy Care, in which
CMS issued approval letters for the relevant SPAs that
clearly outlined the Secretary’s interpretation of the
Medicaid Act and her reasoning for concluding that
California’s SPAs complied with the Act’s requirements.
716 F.3d at 1243, 1245; see also Arc of Cal. v. Douglas,
757 F.3d 975, 988 (9th Cir. 2014) (contrasting the record in
Managed Pharmacy Care, which included “formal approval
of two SPAs, communicated in letters expressly stating that
26 AACHC V. AHCCCS

the SPAs in those instances were consistent with Section
30(A),” with the record before it, which contained no
evidence that CMS concluded that the state’s limitations on
services for the developmentally-disabled complied with the
Medicaid Act).

In contrast to the record in Managed Pharmacy Care, the
record before us contains no evidence regarding CMS’s
reasoning for approving Arizona’s plan and SPAs or CMS’s
consideration of the potential impact of Arizona’s
limitations on adult dental, optometry, and podiatry services.
Nothing in the record explains CMS’s interpretation of
§ 1396a(bb) or contains any evidence that CMS considered
Arizona to be in compliance with that provision despite the
State’s limited coverage of adult dental, optometry, and
podiatry services even when provided by FQHCs. Indeed,
Arizona conceded at oral argument that CMS offered no
explanation of its decision to approve Arizona’s plan and
SPAs. Instead, Arizona claimed that CMS’s reasoning was
“implicit in the approval,” which consisted solely of a date
stamped on a line labeled “Approval Date.”

We decline to read into the sparse record before us the
reasoned decision-making that is required for an agency’s
interpretation to fulfill Chevron Step Two and, in turn, be
entitled to deference. See Gila River Indian Cmty. v. United
States, 729 F.3d 1139, 1150 (9th Cir. 2013) (citing
approvingly the holding in Vill. of Barrington v. Surface
Transp. Bd., 636 F.3d 650, 660 (D.C. Cir. 2011), that “an
agency warrants deference at Chevron step two only if the
agency has offered a reasoned explanation for why it chose
that interpretation judged according to only the rationales the
agency actually offered in its decision” (quotation marks and
brackets omitted)), as amended (July 9, 2013). There is
simply not enough evidence in the record to establish that
 AACHC V. AHCCCS 27

CMS gave any consideration to whether Arizona was in
compliance with the requirements of the Medicaid Act at
issue. 4 Therefore, we vacate the District Court’s grant of
Defendants’ motion to dismiss in that regard and remand for
the parties to further develop the record before the District
Court—the proper forum for such fact-finding—and for the
District Court to rule in the first instance on whether
Arizona’s limitations on adult dental, optometry, and
podiatry services, which are components of the mandatory
benefit of “FQHC services,” are entitled to Chevron
deference. 5

IV. Conclusion

We reverse in part and vacate in part the District Court’s
grant of Defendants’ motion to dismiss, and remand for
further proceedings consistent with this opinion.

4
Plaintiffs argue that the “sole limitation” on FQHC services in
Arizona’s plan is that they require “authorization by appropriate entity.”
Defendants dispute this characterization, arguing that the cited language
refers to limitations on an individual’s ability to access services through
an FQHC and that limitations on the type and scope of services
available—for example, the limitation on dental coverage to only
emergency care—are included elsewhere in plan amendments that were
approved by CMS. Because we lack sufficient evidence to support a
Chevron analysis regardless of which limitations apply to FQHCs, we
leave this issue to the District Court to resolve in the first instance.

5
In this appeal of a motion to dismiss, we need not address
Plaintiffs’ contention that Arizona may only impose limitations on
“FQHC services” based on medical necessity and CMS-approved
utilization limits, citing various statutory provisions and regulations not
raised in Plaintiffs’ complaint.
28 AACHC V. AHCCCS

Each party shall bear its own costs.

REVERSED IN PART, VACATED IN PART, AND
REMANDED.