Defining Provider Classes and Pre‐Approval Standards for State‐Directed Medicaid Payments

Introduction

The Judgment in Safe Haven Home Care, Inc. et al. v. United States Department of Health and Human Services et al. addresses a fundamental issue in the administration of Medicaid funds in New York. At its core, the case revolves around the propriety of the U.S. Centers for Medicare & Medicaid Services’ (CMS) decision to pre-approve New York State Department of Health’s (NYSDOH) application to direct approximately $361.25 million in increased federal matching funds toward a subset of licensed home care services agencies (LHCSAs). The critical legal questions center on two primary axes: whether the classification of eligible providers based on revenue thresholds complies with federal regulations and whether CMS was mandated to evaluate actuarial soundness during the pre-approval phase.

The litigation involves multiple parties: among the Plaintiffs-Appellants are several LHCSAs that were excluded due to not meeting a designated revenue threshold. Appellants argue that the pre-approved application improperly defined the eligible provider class and that a failure to assess actuarial soundness rendered the approval unlawful under the Administrative Procedure Act (APA). On the opposite side, the Defendants-Appellees include federal and state officials and agencies, whose actions in approving NYSDOH’s application are now upheld on appeal.

Summary of the Judgment

In a comprehensive decision delivered by Circuit Judge Gerard E. Lynch and joined by his colleagues, the court affirmed the district court’s grant of summary judgment in favor of the Federal Appellees and dismissed claims against the State Appellees. The Judgment held that CMS’s pre-approval of NYSDOH’s state-directed payment application complied with the relevant federal statutes and regulations. Specifically, the decision confirmed that:

The definition of the provider class—limited to the top one-third of revenue-generating LHCSAs—was reasonably based on shared, identifiable characteristics that further the Medicaid program’s goals.
CMS was not obligated to assess actuarial soundness during the pre-approval process; instead, such evaluation was appropriately deferred to the periodic rate certification process.
The district court’s exclusion of extra-record evidence (pertaining largely to actuarial considerations) was proper and did not warrant reversal.

Accordingly, the court concluded that both the Federal and State Appellees acted within their statutory authority, and the appeal was dismissed.

Analysis

Precedents Cited

The Judgment referenced a number of precedents that illuminate the regulatory environment underpinning state-directed Medicaid payments. Notable among these are:

EX PARTE YOUNG, 209 U.S. 123 (1908): This landmark decision underpins the legal standing for challenging state actions under federal law. The district court’s dismissal of claims under EX PARTE YOUNG was supported by this precedent, reinforcing that Appellants had failed to allege a proper cause of action.
Community Health Care Ass'n of New York v. Shah, 770 F.3d 129 (2d Cir. 2014): This case clarified the role of managed care organizations in state Medicaid programs, a context that is critical for understanding why the state-directed payments and the subsequent provider classifications are subject to strict regulatory oversight.
Kisor v. Wilkie, 588 U.S. 558 (2019): Emphasized the reliance on traditional statutory interpretation methods (i.e., text, structure, history, and purpose), which the court applied to interpret “a class of providers” as used in the CMS regulations.

These precedents, among others, influenced the court’s reasoning by framing the scope of judicial review over agency actions. The reliance on statutory text and contextual analysis played a central role in affirming that CMS’s discretionary decisions were well within the boundaries established by law.

Legal Reasoning

The court’s legal reasoning can be broken into two major components: the definition of the provider class and the evaluation of actuarial soundness.

1. Provider Class

At issue was whether CMS regulations permit a state to limit its funding only to certain LHCSAs based on revenue generation. The court examined the language of the pertinent regulation, 42 C.F.R. § 438.6(c)(2)(ii)(B), noting that the term “class” requires only that providers share an identifiable, common characteristic. The court emphasized that the regulation does not necessarily imply that the designated class must include all providers of a given service. Instead, the statute and regulatory guidance allow states flexibility in defining such classes so long as the definition plausibly furthers Medicaid-related objectives, such as improving the quality and capacity of the workforce. The court held that selecting the top one-third of LHCSAs (which accounted for 92% of managed care revenue) was a reasonable exercise of this discretion.

2. Actuarial Soundness

The second key facet of the legal analysis concerns whether CMS was required to assess actuarial soundness at the pre-approval stage. Appellants contended that both CMS regulations (specifically 42 C.F.R. § 438.6(c)(2)(i)) and statutory mandates under 42 U.S.C. § 1396b(m)(2)(A)(iii) compelled an evaluation of the actuarial soundness of state-directed payments. However, the court found that the regulation’s structure clearly delineated the pre-approval process from the subsequent actuarial review conducted within the framework of periodic rate certifications. Subdivision (ii) specifically lists the criteria for pre-approval and makes no explicit reference to an actuarial assessment. Therefore, the court reasoned that CMS acted lawfully by deferring that analysis until later in the process.

Overall, the decision relied heavily on a close reading of regulatory text and public comments from earlier rulemaking (especially the transition from a more restrictive language in the proposed rule to the final adopted language that allowed flexibility in provider classification), thereby rejecting the inference that all LHCSAs must be funded equally.

Impact on Future Cases and the Area of Law

The Judgment is likely to have a substantial impact on future disputes involving state-directed payments under Medicaid managed care. Key implications include:

Flexibility in Provider Class Definitions: States may continue to tailor provider classes based on revenue or other measurable characteristics, provided the classification is reasonably connected to policy objectives such as quality improvement and workforce capacity.
Pre-Approval versus Periodic Review Processes: The decision reinforces the separation between pre-approval review and the subsequent actuarial evaluation during rate certification. This delineation provides clarity on administrative obligations and helps insulate CMS’s pre-approval decisions from later judicial scrutiny regarding actuarial soundness.
Judicial Deference to Agency Expertise: By affirming the district court’s review under de novo standards deference (with respect to statutory interpretations) yet narrow review for APA claims, the Judgment further supports agencies’ discretion in sensitive policy areas such as Medicaid financing.

In effect, the ruling solidifies an important interpretative framework for Medicaid payment regulation which will steer both state-level initiatives and future judicial challenges regarding CMS’s oversight responsibilities.

Complex Concepts Simplified

Several complex legal concepts are central to this Judgment. To aid understanding:

Class-of-Providers: This term simply refers to grouping providers based on shared characteristics (for example, revenue levels). The idea is that by focusing on a particular “class,” states can more effectively target resources to achieve policy goals without diluting funds across providers unlikely to make significant changes.
Actuarial Soundness: This concept involves the idea that payments (such as capitation rates) should be determined based on sound financial and statistical analysis to ensure that they are sufficient to cover the necessary costs. In this context, although actuarial soundness is crucial, the regulation specifies that its verification is to occur within the rate certification process rather than pre-approval.
Pre-Approval vs. Periodic Rate Certification: Pre-approval is an initial check (focused on whether the state’s proposal meets certain structural requirements) while periodic rate certification is a more in-depth review that includes evaluating whether payment rates are financially justified (“actuarially sound”) over time.

Conclusion

The Judgment in this case sets a significant precedent by confirming that CMS’s approach to pre-approving state-directed Medicaid payments is consistent with federal law. The decision affirms that:

State agencies have the statutory latitude to define provider classes using parameters, such as revenue thresholds, as long as such distinctions serve a legitimate public policy purpose.
CMS is not required to evaluate actuarial soundness at the pre-approval stage; rather, that evaluation is reserved for the subsequent rate certification process.
Challenges based on extra-record evidence concerning actuarial soundness are properly limited to the scope of the administrative record.

Ultimately, this ruling not only upholds the administrative process used by CMS and NYSDOH in directing over $361 million in funds but also clarifies key regulatory standards that will guide future Medicaid funding disputes. The decision reinforces judicial deference to agency expertise in complex policy areas and provides states with clear guidance on structuring state-directed payments in a manner that is both legally compliant and policy effective.