On Tuesday, January 20, 2015, the U.S. Supreme Court will hear oral argument in a significant Medicaid-preemption case from the Ninth Circuit, Exceptional Child Center, Inc. v. Armstrong. In that case, Medicaid-participating health care facilities in Idaho sued the state’s Department of Health and Welfare officials for failure to properly reimburse the providers for their costs under the Medicaid Act. The providers argue that Idaho’s low reimbursement rates violated Section 30(A) of the Medicaid Act, which requires states to reimburse providers at the rates that are “consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers.” 42 U.S.C. § 1396a(a)(30(A).

The Ninth Circuit had previously interpreted this language to require reimbursement at the “rates that bear a reasonable relationship to provider’s costs,” and rejected excuses from this requirement that are based on “purely budgetary reasons.” Orthopaedic Hosp. v. Belshe, 103 F.3d 1491, 1499 & n.3 (9th Cir. 1997). Based on the providers’ demonstration that the prior reimbursement rates were inadequate and obsolete and the parties’ stipulation that the state did not implement the proposed rate increases solely because it did not appropriate the necessary funds, the Ninth Circuit agreed with the providers.

Key to the Supreme Court’s consideration of the case is the fact that the providers’ suit was predicated solely on the Supremacy Clause of the U.S. Constitution. In considering this case, the Justices will grapple with the question of whether the Supremacy Clause indeed creates such an implied right of action to sue state officials, even when the federal statute does not create a private right of action, and even when the statute does not create federal “rights” enforceable under 42 U.S.C. § 1983. The Court’s decision will resolve a three-way circuit split that exists on this issue today.

Addressing the issue on behalf of 27 bipartisan Attorneys General, the Texas Attorney General argues in its amicus brief that the Ninth Circuit’s interpretation of the Supremacy Clause is erroneous, and exposes the states to unwarranted litigation from private parties, under various statutes beyond the Medicaid Act. The Attorneys General further maintain that the Ninth Circuit’s interpretation of the Supremacy Clause would render 42 U.S.C. § 1983 superfluous and allow private litigants to make an end-run around the Court’s implied right of action jurisprudence. They urge that even if implied right of action existed, the Medicaid Act’s section at issue cannot preempt state law because it merely establishes criteria for federal reimbursement. At most, the state’s failure to meet Section 30(A)’s reimbursement requirements can result in reduction or cutoff of federal funds to the state. But, in their view, it does not result in the state’s choice being preempted.

The Medicaid services providers in turn argue, with assistance from multiple amici, including the U.S. Chamber of Commerce, the American Hospital Association and the Federation of American Hospitals, that maintaining a private right of action is an important, time-tested method for enforcement of the Supremacy Clause against state and local mandates that interfere or conflict with federal law. The providers emphasize that claims seeking to enforce the Constitution arise as a necessary incident of the constitutional structure, and do not depend on the rights-creating language that is necessary to enforce statutes. They rely on the number of the Supreme Court’s cases – including, most notably, Ex parte Young, 209 U.S. 123 (1908), which upheld an individual’s claim to enjoin statue officials from enforcing an unconstitutional law. Based on the Young line of cases, the providers argue that, at a minimum, constitutional claims do not require statutory authorization when they merely pursue equitable relief.

The outcome of this case will be significant for the Medicaid-participating health care community. As the American Hospital Association’s brief points out, in 2012 alone, the cost of providing care to Medicaid beneficiaries exceeded reimbursements by $13.7 billion. In that same year, American hospitals treated 11.2 million Medicaid beneficiaries, being reimbursed at only 89 cents per each dollar they spent. In the climate when states continue cutting back the rates for outpatient and inpatient reimbursements, the Medicaid providers’ ability to challenge the state’s reimbursement rates in federal court is exceedingly important to the viability of Medicaid-participating health care facilities. It is also key for ensuring equal access to quality medical services for one-fifth of the population who are covered by the Medicaid Act.