Arizona Court of Appeals Division One Holds That Department of Economic Security Decision To Reduce Rates Paid to Service Providers and Suspend Certain Services for Developmentally Disabled Individuals Did Not Violate State or Federal Law.

After the Arizona legislature required significant budget cuts in early 2009, the Arizona Department of Economic Security (“DES”) suspended certain services and reduced by ten percent the rate it pays to providers of other services that DES provides to developmentally disabled individuals.  DES did not suspend any services provided pursuant to the federal Medicaid program but did reduce rates paid to providers of some of those services.  A group of providers and individuals who receive services filed suit seeking temporary and permanent injunctive relief on the basis that the rate cuts and service suspensions violated state and federal law.  After an expedited hearing, the superior court issued a preliminary injunction prohibiting the State from enforcing the suspensions of services or the rate cuts.  The State appealed the grant of the preliminary injunction.

In a unanimous Per Curiam opinion, the Court reversed the superior court, holding that the plaintiffs “failed to present substantial evidence to support the proposition that by imposing the service suspensions and the rate reductions, the State at this time has violated or is likely to violate state or federal law.”  First, the Court disposed of the State’s various jurisdictional arguments, concluding that (1) all but one of the plaintiffs had standing to seek relief; (2) the plaintiffs were not required to exhaust administrative remedies in this case; and, (3) the court had the power to review the legality of DES’s budget reduction decisions. 

Second, the Court held that, although the rate reductions and service suspensions threatened great hardship on the plaintiffs, the budget decisions did not violate state law.  The Court explained that individuals receiving services pursuant to an “Individual Support Plan” are not legally entitled to those services if the state has not appropriated sufficient funds.  Furthermore, the Court reasoned that the rate reductions complied with state law because the laws dictating a process for rate structures did not apply to one-time, emergency fiscal adjustments.  Finally, the Court was not convinced that the legislature improperly delegated to DES the duty of choosing specific cuts; the legislature was within its power to direct each agency to choose how a specific budget reduction would be allocated.

Third, the Court held that the plaintiffs failed to demonstrate a likely violation of federal law.  Many Plaintiff-Providers offered both state-only services and Medicaid-based services.  The plaintiffs argued that the combination of service suspensions and the ten-percent rate cut would impair the ability of those providers to continue offering sufficient Medicaid services, thus likely causing a violation of Arizona’s obligation under federal law to ensure qualified individuals receive Medicaid services.  The Court disagreed, holding that there was not substantial evidence to show that the network of providers would fail to provide sufficient Medicaid services, or that the state would fail to provide out-of-network services in the event the network was insufficient.  Therefore, the Court found that the rate reductions and service suspensions should not have been preliminarily enjoined.  The Court admonished the State, however, that if evidence came to light that the budget cuts in fact did impair the existing network of Medicaid providers, and the state fails to ensure out-of-network services, the plaintiffs could return to court with the new evidence.

Judges Johnsen, Winthrop, and Norris concurred in the Per Curiam opinion.