Second Circuit: No Property Right to Continue as a Medicaid Fiscal Intermediary; CDPAP Consolidation Survives Takings, Contracts, and Due Process Challenges

Introduction

In Principle Homecare, LLC v. McDonald (No. 25-466, 2d Cir. Oct. 21, 2025), the Second Circuit affirmed the dismissal of constitutional challenges brought by former fiscal intermediaries (FIs) in New York’s Consumer Directed Personal Assistance Program (CDPAP). CDPAP enables Medicaid beneficiaries to directly hire personal assistants; historically, hundreds of private FIs handled payroll, taxes, and compliance on consumers’ behalf. In 2024, New York restructured CDPAP to replace the diffuse FI network with a single, statewide fiscal intermediary selected through a procurement process.

Several prior FIs sued the Commissioner of Health, alleging that the consolidation violated the Takings Clause, the Contracts Clause, and the Fourteenth Amendment’s Due Process Clause. They argued the law destroyed the value of their contracts with Medicaid managed care organizations (MMCOs) by making performance impossible after April 1, 2025. The district court dismissed under Rule 12(b)(6), and the Second Circuit, in a per curiam decision by Judges Walker, Carney, and Sullivan, affirmed.

The opinion clarifies a core principle for vendors operating in heavily regulated, publicly funded programs: private companies have no property right or reasonable contractual expectation to continue participating in a program whose structure is subject to the State’s broad policy control; legislation that forecloses future performance without appropriating contract rights is neither a “taking” nor a substantial impairment of contract; and rational-basis review is satisfied by conceivable administrative-efficiency justifications.

Summary of the Opinion

Takings Clause: The court held that the CDPAP amendment did not regulate or appropriate the plaintiffs’ private property rights in their MMCO contracts. Although the statute made future performance impossible by requiring MMCOs to contract only with the new statewide FI, it did not nullify or take any rights under the contracts (e.g., to collect past-due sums or assign rights). Plaintiffs’ asserted interest—continued participation as FIs—is a mere expectation, not a protected property interest in this heavily regulated arena.
Contracts Clause: The amendment was not a substantial impairment because the contracts did not create a reasonable expectation that CDPAP’s multi-intermediary structure would persist indefinitely. The contracts expressly incorporated compliance with applicable laws and contemplated automatic adjustments to account for changes in state law and regulation.
Due Process Clause (substantive): Even assuming a protected interest, the amendment easily satisfied rational-basis review. It is at least “reasonably conceivable” that consolidating 600 entities into one would reduce oversight burdens and increase administrative efficiency.
Disposition: Affirmed. The plaintiffs failed to state claims under the Takings, Contracts, and Due Process Clauses.

Analysis

Precedents Cited and Their Role

Lingle v. Chevron U.S.A. Inc., 544 U.S. 528 (2005) and Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992): Lingle frames the modern takings analysis, distinguishing per se takings from other regulatory takings assessed under Penn Central. Lucas explains the per se rule when all economically beneficial use is eliminated. The court invoked these to describe the takings framework and then concluded the threshold was not met because the law did not regulate private property interests at all.
Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978) and Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922): Cited to note the general multi-factor test for non-per se takings. The panel did not apply Penn Central because it found no government regulation of plaintiffs’ property rights—the claim failed at the starting gate.
Omnia Commercial Co. v. United States, 261 U.S. 502 (1923): Contracts are “property” for takings purposes, but Omnia also teaches that government actions that frustrate a contract—without appropriating it—do not necessarily “take” the contract right. The court acknowledged contracts as property but found no appropriation or regulation of the contracts as such.
Kearney & Trecker Corp. v. United States, 688 F.2d 780 (Ct. Cl. 1982): Central to the reasoning: government action that makes performance impossible is not itself an appropriation of contract rights. The Second Circuit relied on this proposition to distinguish incidental economic effects from a cognizable taking.
Connolly v. PBGC, 475 U.S. 211 (1986): The government may “disregard” existing contractual arrangements via general regulation without effecting a taking. The court used Connolly to emphasize that regulation impacting contract performance does not transform into a compensable taking absent appropriation of property rights.
Mitchell Arms, Inc. v. United States, 7 F.3d 212 (Fed. Cir. 1993): No enforceable rights for takings purposes arise in areas “voluntarily entered into” and “pervasively” controlled by government. This underscores that vendors in Medicaid programs cannot reasonably expect stability immune from policy changes.
Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980): A “mere unilateral expectation” does not create a protected property interest. The panel deployed this concept to reject the theory that continued FI status is protected property.
Hudson Water Co. v. McCarter, 209 U.S. 349 (1908): Private parties cannot insulate themselves from the State’s regulatory power by contract. This supports the conclusion that FI-MMCO contracts cannot bind the State to a particular program structure.
United States v. General Motors Corp., 323 U.S. 373 (1945): The “bundle of rights” conception of property. The court used this to stress that the ability to remain in CDPAP was not among the rights inhering in the MMCO contracts.
Sveen v. Melin, 584 U.S. 811 (2018): Clarifies the Contracts Clause framework: threshold substantial impairment (focus on reasonable expectations) and, if present, whether the law reasonably advances a significant and legitimate public purpose. The court used Sveen to structure its Contracts Clause analysis.
Exxon Corp. v. Eagerton, 462 U.S. 176 (1983): State laws that restrict or even bar performance of preexisting private contracts do not automatically trigger heightened Contracts Clause scrutiny. This helped the court cabin the Clause’s reach in heavily regulated economic contexts.
Buffalo Teachers Federation v. Tobe, 464 F.3d 362 (2d Cir. 2006) and Sanitation & Recycling Industries, Inc. v. City of New York, 107 F.3d 985 (2d Cir. 1997): The Second Circuit’s emphasis that the “primary consideration” is whether reasonable expectations were disrupted, and a warning against reviving Lochner-era scrutiny. These anchor the holding that FI-MMCO contracts did not create a reasonable expectation of program permanence.
Winston v. City of Syracuse, 887 F.3d 553 (2d Cir. 2018), Molinari v. Bloomberg, 564 F.3d 587 (2d Cir. 2009), and Beatie v. City of New York, 123 F.3d 707 (2d Cir. 1997): Define the substantive due process test and its deferential rational-basis standard: a law is upheld if any reasonably conceivable facts could justify it. The panel applied this to conclude that consolidating oversight provides a rational basis.
Pleading standards: Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009): The court reviewed the 12(b)(6) dismissal de novo and required plausible factual allegations—standards the complaint did not meet on any claim.

Legal Reasoning

1) Takings Clause

The court began by clarifying that the Takings Clause protects “private property” from being “taken” for public use without compensation. While contract rights can be property, the key question is whether the State regulated or appropriated the contract rights themselves. Here, the statute did not:

It did not void or seize any right to payment for past services or other vested contract rights.
It did not bar assignment or enforcement of accrued rights under the MMCO agreements.
It altered the future structure of CDPAP by requiring MMCOs to contract only with the State-selected statewide FI.

Relying on Kearney & Trecker and Connolly, the panel treated this as a permissible, generally applicable policy change that affects the value or feasibility of performance but does not “take” the contracts. The plaintiffs’ core complaint—loss of continued participation as FIs—is, in the court’s view, merely an economic expectation in a sphere “pervasively” controlled by government (per Mitchell Arms). That kind of expectation is not a protected property interest in the takings sense (Webb’s Fabulous Pharmacies).

The court also emphasized that the funding stream at issue is Medicaid dollars. Nothing in the private FI–MMCO contracts could grant the FIs a perpetual right to participate in a Medicaid program or freeze the State’s authority to restructure it (Hudson Water Co.). The “bundle of rights” inherent in the MMCO contracts (General Motors) did not include an entitlement to the program’s continued multi-FI architecture. Because the law did not regulate private property rights—only the State’s procurement and program design—the takings claim failed at the threshold, without requiring a Penn Central balancing analysis.

2) Contracts Clause

Applying Sveen, the court asked first whether there was a “substantial impairment” of a contractual relationship, focusing on disruption of reasonable expectations. Two features doomed the claim:

Regulatory context: The FI–MMCO contracts existed in the shadow of a Medicaid program subject to substantial state control. Reasonable parties could not expect the multi-FI model to continue indefinitely.
Contract terms: The agreements explicitly required compliance with applicable laws and regulations and contemplated unilateral, automatic amendments to reflect changes in state law. Those provisions undercut any claim that the bargain guaranteed stability of the program’s structure.

Given that the core expectation was conditional—payment for services to the extent the vendors were permitted to participate—the elimination of their role was not a substantial impairment of the contract in the constitutional sense. Because the threshold was not met, the panel did not proceed to the second step of Sveen (whether the law reasonably advanced a significant public purpose). Nevertheless, the court’s discussion suggests that efficiency and oversight interests would easily suffice.

3) Substantive Due Process

The panel recited the two-part test (Winston): a protected interest plus lack of rational relation to legitimate governmental objectives. Rather than decide whether a protected interest existed, the court assumed arguendo and disposed of the claim under rational-basis review. It is “readily conceivable” that moving from roughly 600 FIs to one statewide FI would streamline oversight and reduce administrative burdens, satisfying the deferential standard articulated in Molinari and Beatie.

Impact and Future Implications

State authority to restructure Medicaid programs: The decision affirms broad latitude for states to consolidate or reconfigure vendor networks in Medicaid-funded programs without incurring takings or Contracts Clause liability, so long as the legislation does not appropriate vested contract rights or forbid enforcement of accrued payments.
Limits on contract-based constitutional claims in regulated markets: Vendors cannot convert business-model disruption into a takings claim where the government has neither seized nor nullified rights under the contracts. Similarly, standard compliance-with-law clauses and the foreseeability of regulatory change often defeat the “reasonable expectations” component of substantial impairment under the Contracts Clause.
Pleading-stage screening of takings claims: By framing the threshold inquiry as whether the challenged statute regulates private property rights at all, the court provides a path to dismiss Penn Central-style claims early where the government action targets program structure, not private property.
Rational-basis deference for economic regulation: The opinion reinforces that conceivable administrative-efficiency or oversight rationales will sustain substantive due process challenges to economic legislation, especially where the law restructures a state-run, publicly funded service.
Drafting and transactional practice: Contractors in public programs should anticipate the risk of elimination or consolidation and consider incorporating protective business terms—diversified revenue streams, termination and wind-down provisions, and contingencies for program redesign. But they should not expect constitutional protection for continued participation absent appropriation of accrued rights.
Open questions and boundaries:
- Would a different outcome follow if a statute extinguished claims for past-due payments or expressly voided accrued rights under existing contracts? The court’s reasoning suggests that such abrogation could implicate takings or substantial impairment analyses.
- What if legislation compelled assignment or novation of existing contracts? The panel’s focus on non-appropriation indicates a line between disabling future performance and commandeering contract rights.
- Equal Protection: Although plaintiffs raised an equal protection theory below, the appeal did not press it. The court’s rational-basis analysis in due process likely would have foreclosed equal protection claims premised on similar facts.

Complex Concepts Simplified

Takings Clause (Regulatory vs. Per Se): A per se taking occurs when regulation wipes out all economic use of property. Otherwise, courts balance factors under Penn Central. But if a law does not regulate private property rights at all—e.g., it changes a public program’s structure without seizing contract rights—there is no “taking” to analyze.
Appropriation vs. Incidental Impact: The government “takes” property when it seizes or nullifies rights. A policy may incidentally harm a business (e.g., making future performance unviable) without appropriating property. Only the former triggers compensation.
“Mere Unilateral Expectation”: Not all economic hopes are property interests. When operating in a heavily regulated sphere (like Medicaid), vendors cannot claim a property right to the program’s existing structure.
Contracts Clause—Substantial Impairment: Courts ask whether a law undermines reasonable expectations under a contract. Provisions requiring compliance with changing laws weaken claims of impairment when government later changes program rules.
Rational-Basis Review: For most economic laws, the government wins if any plausible reason—like administrative efficiency—can justify the law. Courts do not demand proof that the policy is optimal or even particularly effective.

Conclusion

Principle Homecare, LLC v. McDonald squarely holds that vendors in a Medicaid-funded program have no constitutional entitlement to continue in their roles when the State redesigns the program’s architecture. New York’s move to a single statewide fiscal intermediary neither appropriated the plaintiffs’ contract rights (defeating the Takings Clause claim) nor disrupted reasonable expectations under their FI–MMCO agreements (defeating the Contracts Clause claim). And the legislature’s apparent goal—streamlining oversight—is more than adequate under rational-basis review for substantive due process.

The opinion is a clear signal to states contemplating consolidation of public-service vendor networks: so long as accrued rights are not appropriated or extinguished, restructuring to improve administration and oversight will typically survive constitutional challenge. For private participants in regulated programs, the case underscores a hard reality—program participation is a policy-contingent privilege, not a property right.