Before: Herbert Y. C. Choy, Mary M. Schroeder, and Charles Wiggins, Circuit Judges.
The opinion of the court was delivered by: Wiggins, Circuit Judge
Appeal from the United States District Court for the District of Arizona Alfredo C. Marquez, District Judge, Presiding
Argued and Submitted January 13, 1998--San Francisco, California
Medicare beneficiaries enrolled in health maintenance organizations ("HMOs") in Arizona sued the Secretary of Health and Human Services ("Secretary"). Their suit alleged a failure to enforce due process requirements and a failure to monitor HMO denials of medical services to enrolled Medicare beneficiaries. The district court granted Plaintiffs summary judgment, holding that HMO denials of medical services to Medicare beneficiaries constitute state action and that the regulations issued by the Secretary fail to provide due process. The district court issued an injunction mandating certain procedural protections for Medicare beneficiaries enrolled in HMOs. The Secretary appeals. We affirm.
Congress passed the Medicare Act, Title XVIII of the Social Security Act, 42 U.S.C. SS 1395 et seq., in 1965 to provide a federal health insurance program for the elderly and the disabled. Today, a Medicare beneficiary can receive Medicare services in two different ways. The first is to receive Medicare on a fee-for-service basis. Under this option, the beneficiary goes to a health care provider for the necessary covered services; either the provider or the beneficiary will be reimbursed by the government for the cost of the services. The second, newer option is to enroll in an HMO or other eligible organization.*fn1 See 42 U.S.C. S 1395mm(b).
In 1982, Congress authorized the Secretary to enter into "risk-sharing" contracts with HMOs. See S 1395mm. Under these contracts, HMOs provide to enrolled Medicare beneficiaries all the Medicare services provided in the statute, see S 1395mm(c)(2)(A), in exchange for a monthly flat payment from the Secretary, see S 1395mm(a).
The Medicare statute establishes in S 1395mm(c) procedural protections for those beneficiaries that enroll in HMOs. Among these, the HMO must "provide meaningful procedures for hearing and resolving grievances between the organization . . . and members enrolled . . . ." S 1395mm(c)(5)(A). HMO members must also have certain appeal rights:
A member enrolled with an eligible organization under this section who is dissatisfied by reason of his failure to receive any health service to which he believes he is entitled and at no greater charge than he believes he is required to pay is entitled, if the amount in controversy is $100 or more, to a hearing before the Secretary to the same extent as is provided in [42 U.S.C. S 405(b)], and in any such hearing the Secretary shall make the eligible organization a party. If the amount in controversy is $1,000 or more, the individual or eligible organization shall, upon notifying the other party, be entitled to judicial review of the Secretary's final decision as provided in [42 U.S.C. S 405(g)] . . . .S 1395mm(c)(5)(B).
The Secretary created additional appeal protections in subsequent regulations. See 42 C.F.R. SS 417.600 - 417.638. Under S 417.604, each HMO must establish appeal procedures and ensure that beneficiaries receive written information about the appeal and grievance procedures. See S 417.604(a). If the HMO makes an "organization determination" (defined in S 417.606) adverse to the enrollee, "it must notify the enrollee of the determination within 60 days of receiving the enrollee's request for payment for services." S 417.608(a)(1). An example of an adverse organization determination is an HMO's decision that certain medical services are not covered by Medicare. The notice to the beneficiary must "[s]tate the specific reasons for the determination" and inform the enrollee of his or her "right to a reconsideration." S 417.608(b). Failure to provide timely notice is an adverse determination and may be appealed by the enrollee. See S 417.608(c).
If the enrollee is dissatisfied with an adverse determination, a request for reconsideration may be filed within 60 days from the date of the notice. See SS 417.614 & 417.616(b). Within 60 days of the request, the HMO may make a decision fully favorable to the enrollee. See S 417.620(a). If it decides to make a decision that partially or completely affirms the adverse determination, it must explain its decision in writing and forward the case to the Health Care Financing Administration ("HCFA"). See S 417.620(b). If the enrollee is dissatisfied with the result of the reconsideration, and the amount remaining in controversy is $100 or more, the enrollee has a right to a hearing before an administrative law Judge ("ALJ"). See S 417.630. The enrollee can appeal that hearing decision to the Appeals Council and then to the district court. See SS 417.634 & 417.636.
The Secretary possesses a number of sanctions to ensure HMO compliance with the Medicare statute and the Secretary's regulations. First, the Secretary "may not enter into a contract . . . with an [HMO] unless it meets the requirements of [S 1395mm(c)] and [S 1395mm(e)]." 42 U.S.C. S 1395mm(c)(1). The specified sections require the HMO, inter alia, to provide all Medicare services to eligible enrollees, to have particular open enrollment periods, to provide enrollees annually with information on their rights, including appeal rights, to provide covered services "with reasonable promptness," to provide the aforementioned procedural protections, and not to exceed certain limits on rates charged to beneficiaries and the Secretary. SS 1395mm(c) & 1395mm(e).
Second, the Secretary may terminate any contract with an HMO if she determines that the HMO has not met the terms of the contract or has not satisfied the statutory or regulatory requirements. See S 1395mm(i)(1). If the Secretary determines that an HMO has failed to provide necessary covered services to an enrollee and that failure has adversely affected the individual, the Secretary may seek civil money penalties, suspend enrollment, or suspend payment to the HMO. See S 1395mm(i)(6).
In 1993, five Medicare beneficiaries enrolled in an Arizona HMO sued the Secretary. Among other claims, Plaintiffs alleged that the Secretary "has failed and refused to take effective action to implement beneficiaries' notice and appeal rights when they are denied health care services by their HMOs," and "has failed and refused to provide Medicare beneficiaries enrolled in HMOs with a procedure of obtaining review of HMO denial decisions contemporaneously with the denial decisions." In a decision not on appeal, the district court certified a nationwide plaintiff class.
In October 1996, the district court granted partial summary judgment to Plaintiffs on the claims described above. See Grijalva v. Shalala, 946 F. Supp. 747 (D. Ariz. 1996). The court held that the "organization determinations" made by HMOs constitute state action, triggering constitutional due process requirements. See id. at 751-53. The court also held that the regulations promulgated by the Secretary regarding adverse determinations by HMOs fail to provide sufficient due process to enrollees under Mathews v. Eldridge, 424 U.S. 319 (1976). See Grijalva, 946 F. Supp. at 756-60. In particular, the district court found that the notices issued by HMOs failed to provide adequate notice: they were often illegible, failed to specify the reason for the denial, and failed to inform the beneficiary that he or she had the right to present additional evidence to the HMO. See id. at 757-59. Therefore, "[s]ubsequent due process, available in the administrative review phase of the appeal, comes too late in many cases . . . ." Id. at 759. The district court also found that the language of S 1395mm(c)(1) ("The Secretary may not enter into a contract . . . with an eligible organization unless it meets the requirements of this subsection") was mandatory, requiring the Secretary to enforce her regulations by refusing to renew a contract with an HMO if the denial notices of that HMO fail to provide due process. See id. at 760.
The district court found that the Secretary violated S 1395mm(c)(1) by entering into a contract with any HMO that failed to provide timely notice for any and all denials of service. The court held that the notice must be legible (at least 12-point type), state clearly the reason for the denial, inform the enrollee of all appeal rights, explain hearing rights and procedures, and provide "instruction on how to obtain supporting evidence, including medical records and supporting affidavits from the attending physician." Id. at 760-61. The district court also held that any hearing must be "informal, inperson communication with the ...