Rehab Arizona v. Ahcccs

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

REHAB ARIZONA, L.L.C., Plaintiff/Appellant,

v.

ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM, et al.,
Defendants/Appellees.

No. 1 CA-CV 18-0511
FILED 4-9-2019

Appeal from the Superior Court in Maricopa County
No. CV2017-014551, LC2017-000497-001
The Honorable Patricia A. Starr, Judge

AFFIRMED

COUNSEL

The Nelson Law Group, P.L.L.C., Phoenix
By Timothy A. Nelson
Counsel for Plaintiff/Appellant

Johnston Law Offices, P.L.C., Phoenix
By Logan T. Johnston III
Counsel for Defendants/Appellees
 REHAB ARIZONA v. AHCCCS, et al.
Decision of the Court

MEMORANDUM DECISION

Judge Kenton D. Jones delivered the decision of the Court, in which
Presiding Judge Lawrence F. Winthrop and Judge Maria Elena Cruz joined.

J O N E S, Judge:

¶1 Rehab Arizona, L.L.C. (RAZ) appeals the superior court’s
order affirming the Arizona Health Care Cost Containment System
(AHCCCS) decision finding a credible allegation of fraud and upholding
the suspension of Medicaid payments to RAZ. For the following reasons,
we affirm.

FACTS AND PROCEDURAL HISTORY

¶2 AHCCCS is the state agency that administers health care
programs to Arizona’s eligible indigent population.1 At the relevant time,
RAZ was a health care provider that offered rehabilitative therapies to
patients in Mesa, approximately fifty percent of whom were AHCCCS
members.

¶3 In August 2014, RAZ contracted with AHCCCS to provide
services to AHCCCS members. Under the Participating Provider
Agreement (PPA), RAZ agreed: “No Provider may bill with another
Provider’s ID number, except in locum tenens situations.”2 The PPA also
required RAZ to comply with all federal, state, and local laws governing its
performance of the PPA.

¶4 In February 2017, AHCCCS referred RAZ to the Arizona
Attorney General (AAG) for engaging in fraudulent billing practices.
AHCCCS confirmed RAZ had submitted claims seeking reimbursement for
services purportedly performed by Dr. Carvel Jackson, even though Dr.
Jackson had not actually provided those services. Indeed, in September

1 “We view the facts in the light most favorable to upholding the
director’s decision.” Eaton v. AHCCCS, 206 Ariz. 430, 431, ¶ 2 (App. 2003)
(citing Empire W. Cos. v. Ariz. Dep’t of Econ. Sec., 182 Ariz. 95, 97 (App. 1995)).

2 Locum tenens means “a practitioner who temporarily takes the place
of another.” Dorland’s Illustrated Medical Dictionary 1088 (31st ed. 2007).

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2016, Dr. Jackson had written to RAZ, advising it was inappropriately
doing business under his name and he was “not willing to allow [RAZ] to
continue to use J Carvel Jackson DO, the name, the person, the tax
identification numbers or insurance contracts without compensation.”

¶5 The AAG opened a criminal investigation into RAZ’s billing
practices. In March 2017, AHCCCS imposed a temporary, system-wide
suspension of [Medicaid] payments . . . pending further investigation into
a credible allegation of fraud leveled against [RAZ].” AHCCCS further
advised that “the allegation, facts and existing evidence . . . ha[d] sufficient
indicia of reliability to justify this suspension of payment.” RAZ requested
a hearing to determine whether AHCCCS had properly suspended its
payments.

¶6 At the August 2017 hearing, RAZ argued AHCCCS lacked the
legal authority to impose the suspension, or alternatively, good cause
existed to lift the suspension. RAZ submitted affidavits illustrating its
commitment to compliance with the PPA after identifying various “areas
needing improvement” in October 2016. RAZ emphasized it had
terminated its former compliance officer and engaged an independent
consulting firm to ensure future compliance.

¶7 The administrative law judge (ALJ) rejected RAZ’s
arguments, found a credible allegation of fraud existed, and recommended
that the suspension of payments remain in effect until AHCCCS determines
“there is insufficient evidence of fraud . . . or legal proceedings related to
[the] fraud are completed.” AHCCCS adopted the ALJ’s findings of fact
and recommendation and denied RAZ’s appeal. The superior court
affirmed AHCCCS’s decision, and RAZ timely appealed to this Court. We
have jurisdiction pursuant to Arizona Revised Statutes (A.R.S.) §§ 12-
120.21(A)(1)3 and -2101(A)(1).

DISCUSSION

I. AHCCCS Had Legal Authority to Suspend Payments to RAZ.

¶8 RAZ argues AHCCCS lacked legal authority to suspend
Medicaid payments because: (1) Arizona never adopted enabling
legislation that authorized payment suspension; (2) the federal regulation
authorizing a payment suspension, 42 C.F.R. § 455.23, exceeds the scope of
the Patient Protection and Affordable Care Act (ACA), 42 U.S.C.

3 Absent material changes from the relevant date, we cite the current
version of rules and statutes.

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§ 1396b(i)(2)(C); and (3) the federal regulation authorizing payment
suspension violates the Tenth Amendment. To resolve these issues, we
must interpret state and federal law. We review questions of statutory and
constitutional interpretation de novo. State v. McCann, 200 Ariz. 27, 28, ¶ 5
(2001) (citation omitted); Canon Sch. Dist. No. 50 v. W.E.S. Constr. Co., 177
Ariz. 526, 529 (1994) (citing Marsoner v. Pima Cty., 166 Ariz. 486, 488 (1991)).

¶9 Although RAZ admits federal fraud and abuse controls
apply, see A.R.S. § 36-2905.04(C) (“[T]he [M]edicaid fraud and abuse
controls that are enacted under federal law apply to all . . . contractors . . .
that provide services to persons who are eligible for the system.”), it argues
that no Arizona statute grants AHCCCS the authority to suspend Medicaid
payments based upon an unproven allegation of fraud. RAZ correctly
notes that state administrative agencies have no inherent power. Ariz. State
Bd. of Regents ex rel. Ariz. State Univ. v. Ariz. State Pers. Bd., 195 Ariz. 173,
175, ¶ 9 (1999) (citing Kendall v. Malcolm, 98 Ariz. 329, 334 (1965)). Indeed,
an administrative agency’s powers are limited to those granted by
constitution or statute. Id. Moreover, the state agency must exercise its
authority in a manner compatible with the administrative structure
Congress enacted into law. FDA v. Brown & Williamson Tobacco Co., 529 U.S.
120, 125 (2000) (quoting ETSI Pipeline Project v. Missouri, 484 U.S. 495, 517
(1988)). Thus, AHCCCS’s power to suspend Medicaid payments exists only
to the extent provided by enabling legislation.

¶10 Arizona law authorizes AHCCCS to supervise the
“[e]stablishment and management of a system to prevent fraud by
members, subcontracted providers of care, contractors and noncontracting
providers.” A.R.S. § 36-2903(B)(9). AHCCCS may govern providers by
contract and “require contract terms as necessary in the judgment of the
director to ensure adequate performance and compliance with all
applicable federal laws.” A.R.S. § 36-2903(M); see also 42 C.F.R.
§ 455.23(a)(1) (requiring a suspension of “all Medicaid payments to a
provider after the agency determines there is a credible allegation of
fraud”). AHCCCS “may also adopt rules for the withholding or forfeiture
of payments” to a contractor that fails “to comply with a provision of the
contractor’s contract.” A.R.S. § 36-2903(M). Finally, AHCCCS can impose
sanctions upon a contractor for violating any provision of its contract. Ariz.
Admin. Code R9-22-606(A).

¶11 These statutes and regulations specifically authorize
AHCCCS to impose sanctions, including suspending Medicaid payments,
if RAZ violates any provision of its PPA. RAZ admitted it violated the PPA
by billing under Dr. Jackson’s name for services provided by

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uncredentialed physicians who replaced Dr. Jackson, as well as midlevel
providers Dr. Jackson supervised. Therefore, suspension was justified
under these circumstances.

¶12 RAZ next argues 42 C.F.R. § 455.23 exceeds the scope of the
ACA. Specifically, RAZ contends that although the ACA requires the
Department of Health and Human Services (DHHS) to withhold payments
from a state in specific circumstances, it does not require a state to withhold
payments from providers.

¶13 The ACA provides that payments by DHHS cannot be made
“for an item or service . . . furnished . . . by any individual or entity to whom
the State has failed to suspend payments under the plan during any period
when there is pending an investigation of a credible allegation of fraud.”
42 U.S.C. § 1396b(i)(2)(C). Under the ACA, the State has discretion to forego
the suspension if it determines “there is good cause not to suspend such
payments.” 42 U.S.C. § 1396b(i)(2)(C). The federal regulation
implementing this statute likewise provides that a state Medicaid agency
“must suspend all Medicaid payments to a provider after the agency
determines there is a credible allegation of fraud . . . unless the agency has
good cause to not suspend payments.” 42 C.F.R. § 455.23(a)(1).

¶14 Under this statutory scheme, the federal regulation
implements the ACA’s mandate that, to receive reimbursements from
DHHS, a state must withhold payments to an entity that is the subject of a
pending investigation of a credible allegation of fraud. Nothing within the
record suggests this requirement is inconsistent with the intent of Congress.
Accordingly, 42 C.F.R. § 455.23 does not exceed the scope of the ACA.4

¶15 RAZ further argues 42 C.F.R. § 455.23 violates the Tenth
Amendment. The Tenth Amendment provides that all “powers not
delegated to the United States by the Constitution, nor prohibited by it to
the States, are reserved to the States, respectively, or to the people.” U.S.
Const. amend. X. Although Congress cannot require states to regulate,
Congress can provide states with encouragement or incentives to

4 We also reject RAZ’s argument that the federal regulation violates
the intent of Executive Order No. 13765. The Order is intended to
“minimize the unwarranted economic and regulatory burdens of the
[ACA].” Exec. Order No. 13765, 82 Fed. Reg. 8351 (Jan. 20, 2017). The Order
does not “create any right or benefit . . . enforceable at law or in equity,”
and nothing in the Order suggests it was intended to limit or waive
investigations regarding credible allegations of Medicaid fraud. Id. at 8352.

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implement certain regulations. New York v. United States, 505 U.S. 144, 166,
178 (1992); South Dakota v. Dole, 483 U.S. 203, 206-07, 211 (1987). The Tenth
Amendment is only implicated if the “financial inducement offered might
be so coercive as to pass the point at which ‘pressure turns into
compulsion.’” Dole, 483 U.S. at 211 (quoting Steward Mach. Co. v. Davis, 301
U.S. 548, 590 (1937)).

¶16 Pursuant to 42 C.F.R. § 455.23(a)(1), “[t]he State Medicaid
agency must suspend all Medicaid payments to a provider after the agency
determines there is a credible allegation of fraud . . . unless the agency has
good cause to not suspend payments.” RAZ argues this provision imposes
an “affirmative unconditional duty” upon the states. A state is not,
however, required to accept federal Medicaid funds, and it is only after a
state elects to receive these funds that it must comply with the attending
federal regulation. Moreover, a state retains the discretion to decline a
payment suspension if it finds good cause to do so. Thus, the statute is not
so coercive as to constitute compulsion, and therefore does not violate the
Tenth Amendment. The fact that another provision of the ACA, not at issue
here, violated the Constitution does not persuade us that 42 C.F.R. § 455.23
does. See Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 587-88 (2012)
(concluding the rest of the ACA “will remain ‘fully operative as a law,’”
and “need not fall in light of [the Court’s] constitutional holding”) (quoting
Champlin Ref. Co. v. Corp. Comm’n of Okla., 286 U.S. 210, 234 (1932)).

II. Substantial Evidence Supports the Finding of a Credible
Allegation of Fraud.

¶17 RAZ argues the suspension of Medicaid payments should be
lifted because “there has been no fraud.” We will uphold AHCCCS’s
decision unless it is “illegal, arbitrary, capricious or involved an abuse of
discretion.” Eaton, 206 Ariz. at 432, ¶ 7 (citing Samaritan Health Servs. v.
AHCCCS, 178 Ariz. 534, 537 (App. 1994)). We examine the record to
determine whether substantial evidence supports the judgment, but we will
not reweigh the evidence. Webb v. State ex rel. Ariz. Bd. of Med. Exam’rs, 202
Ariz. 555, 557, ¶ 7 (App. 2002) (citing Carley v. Ariz. Bd. of Regents, 153 Ariz.
461, 463 (App. 1987), and DeGroot v. Ariz. Racing Comm’n, 141 Ariz. 331, 336
(App. 1984)).

¶18 Substantial evidence supports the ALJ’s finding that a
credible allegation of fraud against RAZ existed. At the hearing, witnesses
testified RAZ procured payments for services being performed by an
unauthorized provider by using a different, credentialed provider’s

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identification. Written communications by Dr. Jackson further supported
the allegation. Accordingly, we find no abuse of discretion.

III. Substantial Evidence Supports the Decision Not to Lift the
Suspension.

¶19 Alternatively, RAZ argues that even if the payment
suspension was lawful, AHCCCS has since abused its discretion by failing
to lift the suspension for good cause pursuant to 42 C.F.R. § 455.23(e)(2), (3),
(4), or (6). We will uphold AHCCCS’s decision unless it is illegal, arbitrary,
capricious, or involved an abuse of discretion. See supra ¶ 17.

¶20 AHCCCS may lift a previously imposed payment suspension
if it finds good cause to do so. 42 C.F.R. § 455.23(a)(1), (e). As relevant here,
AHCCCS may find good cause if:

(2) Other available remedies implemented by the State
more effectively or quickly protect Medicaid funds.

(3) The State determines, based upon the submission of
written evidence by the individual or entity that is the subject
of the payment suspension, that the suspension should be
removed.

(4) Beneficiary access to items or services would be
jeopardized by a payment suspension because of either of the
following:

(i) An individual or entity is the sole community
physician or the sole source of essential specialized
services in a community.

(ii) The individual or entity serves a large number of
beneficiaries within a HRSA-designated medically
underserved area.

....

(6) The State determines that payment suspension is not
in the best interests of the Medicaid program.

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42 C.F.R. § 455.23(e).5

¶21 RAZ argues AHCCCS should have lifted the suspension
pursuant to 42 C.F.R. § 455.23(e) because its prior practices resulted from a
good faith misunderstanding of AHCCCS requirements and because it has
since demonstrated a commitment to future compliance. These
circumstances do not constitute good cause under 42 C.F.R. § 455.23(e)(2),
which requires a finding that “other available remedies implemented by the
State more effectively or quickly protect Medicaid funds.” (Emphasis
added). RAZ’s internal actions regarding compliance do not fall within this
category. Moreover, the ALJ already considered and rejected RAZ’s
arguments when it declined to lift the suspension. Nothing within the
record suggests error in this finding.

¶22 RAZ also argues the payment suspension jeopardizes
beneficiary access to items or services. See 42 C.F.R. § 455.23(e)(4).
Although approximately fifty percent of RAZ’s patients were AHCCCS-
eligible members, nothing within the record reflects that RAZ is “the sole
source of essential specialized services in a community” or that RAZ
provides services within an area designated by the Health Resources and
Services Administration as “medically underserved.” Id. Accordingly,
subsection (4) is not applicable.

¶23 RAZ argues that the payment suspension is not in the best
interest of the Medicaid program. However, substantial evidence supports
the ALJ’s finding that a credible allegation of fraud against RAZ exists and
that the investigation is ongoing. Accordingly, nothing in the record
suggests Medicaid would benefit from RAZ’s continued operations.

¶24 Finally, RAZ argues that the duration of the investigation
constitutes good cause to lift the suspension. The duration of a suspension,
however, is not enumerated in the federal regulation as a basis for good
cause. See 42 C.F.R. § 455.23(e). Moreover, because RAZ did not develop
this argument at the administrative hearing, it is waived. See Stulce v. Salt
River Project Agric. Improvement & Power Dist., 197 Ariz. 87, 94, ¶¶ 27-28

5 AHCCCS may also find good cause if “[l]aw enforcement officials
have specifically requested that a payment suspension not be imposed
because such a payment suspension may compromise or jeopardize an
investigation,” or “[l]aw enforcement declines to certify that a matter
continues to be under investigation.” 42 C.F.R. § 455.23(e)(1), (5). Neither
of these subsections apply here.

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(App. 1999). Accordingly, we find no abuse of discretion in AHCCCS’s
decision not to lift the suspension.

CONCLUSION

¶25 We affirm the superior court’s order affirming the suspension
of Medicaid payments to RAZ.

¶26 RAZ requests an award of attorneys’ fees but fails to specify
a statutory basis for its request. Accordingly, we deny RAZ’s request. See
ARCAP 21(a)(2) (stating a claim for fees must “specifically state the statute,
rule, decisional law, contract, or other authority for an award of attorneys’
fees [and] [i]f a party fails to comply with this requirement, the appellate
court may decline to award fees on that basis”).

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

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