Presentation Renee Montgomery gave to the North Carolina Society of Health Care Attorneys at its annual meeting and seminar held in Research Triangle Park.

In fiscal year 2002-2003, the Division of Medical Assistance ("DMA") is expected to pay health care providers over two billion dollars for services provided to persons enrolled in the Medicaid Program. Many North Carolina health care providers are substantially dependent upon this revenue source for their continued operations. Consequently, DMA's actions have been and will continue to be carefully scrutinized and have sometimes been the subject of legal challenges.

The first section of this paper discusses two recent legal challenges to actions taken by DMA that have adversely affected hundreds of home care agencies in North Carolina. In these two cases, The Association for Home and Hospice Care of North Carolina, Inc. ("AHHC"), a 470 member organization, filed Petitions for Contested Case Hearings with the Office of Administrative Hearings and successfully obtained injunctive relief to stay the effectiveness of DMA's actions. AHHC then conducted discovery, including document requests, interrogatories, and depositions of DMA decision-makers. In the first case, the Administrative Law Judge decided Summary Judgment in favor of AHHC. In the second case, AHHC will soon be filing a Motion for Summary Judgment. The Honorable Beecher R. Gray was assigned to both of these cases.

This second section of this paper analyzes provisions in the federal Medicaid laws, 42 U.S.C. § 1396a, that have successfully been used by providers to challenge actions by state Medicaid agencies.

The Cases Challenging DMA's Actions

I. The Actions of DMA at Issue

Case 1 — DMA decided that it would no longer pay for home care services provided in a person’s residence if a physician's verbal order was not countersigned within 30 days. DMA also decided that it would no longer pay for Personal Care Services when an individual also is receiving Medicare home health services. The verbal order decision was communicated in a letter from the Director of DMA to AHHC's Executive Director and the decision to no longer cover Personal Care Services was communicated to providers in seminars and in a Medicaid Bulletin.

Case 2 — DMA decided it would cut reimbursement for certain home and community-based services by 5% and for case management services in the Community Alternatives Program by 25 to 29%. These reimbursement cuts were announced to providers in two memos from the Director of DMA.

II. Filing the Petition for Contested Case Hearing

In both cases, AHHC filed a Petition for Contested Case Hearing with the Office of Administrative Hearings pursuant to the provisions of N.C.G.S. Chapter 150B, Article 3. The Petitions were verified so that they could be used in support of AHHC's Motion for Stay.

A. The Claims Asserted in Case 1. The allegations in the Petition included the following:

The Verbal Order Issue

• DMA has instituted a new prohibition on payment for services that is not contained in the Medicaid statute or regulations and is contrary to existing law allowing home care agencies to provide services based upon a physician's verbal order. DMA's position that the failure to get a counter-signature on a verbal order in 30 days invalidates the order also is directly contrary to the usual and customary practice in the health care industry of recognizing the validity of verbal orders.
• By making its new prohibition on payment for services applicable only to persons receiving Home Health Services and Personal Care Services in their homes and not to persons receiving Personal Care Services in adult care homes, DMA has violated the federal requirement that medically needy and categorically needy persons must be treated the same under a state's Medicaid Program. See 42 C.F.R. 440.240. Compliance with the requirement to treat equally all persons within the groups of medically needy and categorically needy is a requirement for the receipt of federal funds under the Medicaid Program and an obligation under the North Carolina State Medical Assistance Plan and North Carolina law. See 42 U.S.C. § 1396a and N.C.G.S. § 108A-56.
• DMA has attempted to institute major changes in reimbursement under the Medicaid Program without promulgating a regulation, as required under Article 3 of North Carolina Administrative Procedure Act.
• DMA also has violated federal law by failing to submit this new prohibition on payment for services for prior approval to the Governor and to the U.S. Department of Health and Human Services as an amendment to the State Medicaid Plan. Under federal requirements applicable to a state's Medicaid Program, DMA cannot institute this new prohibition on payment for Medicaid services without first filing an amendment to the State Medicaid Plan for approval. See 42 C.F.R. 430.12.
• DMA has violated federal law by failing to provide sufficient public notice of its intent to change the standards for payment. See 42 C.F.R. 447.205.
• DMA has arbitrarily determined that verbal orders of a physician for home health services are invalid, allowing recoupment of funds, when other health care providers, which have similar licensure requirements for countersigning verbal orders, have not been treated the same.

The Refusal to Pay for PCS Services for Duly Eligible Persons

• DMA is ignoring its own regulation which specifically states that the only limitation on receiving Personal Care Services and home health aide services is the requirement that such services not be provided on the same day. 10 N.C.A.C. 26D.0017(b).
• DMA has failed to apply the same requirements to persons residing in adult care homes receiving Personal Care Services and Home Health Services, contrary to the federal mandate that categorically needy and medically needed persons must be treated the same under a State's Medicaid Program. See 42 C.F.R. 440.240. Compliance with the requirement to treat equally all persons within the groups of medically needy and categorically needy is a requirement for the receipt of federal funds under the Medicaid Program and an obligation under the North Carolina State Medical Assistance Plan and North Carolina law. See 42 U.S.C. § 1396a and N.C.G.S. § 108A-56.
• In imposing this new limitation on Medicaid coverage, DMA has failed to file an amendment to the State Medicaid Plan as required by federal law. As a condition to the receipt of federal funds, DMA is required to obtain prior approval for any change in Medicaid coverage by submitting a proposed amendment to the State Medicaid Plan to the Governor and to the U.S. Department of Health and Human Services. See 42 C.F.R. 430.12.
• DMA has failed to consider that home health aide services covered under the Medicare Program do not cover all services available to Medicaid recipients receiving Personal Care Services, resulting in the denial of Medicaid covered services to persons who require temporary nursing services.
• DMA has attempted to institute major changes in reimbursement and services under the Medicaid Program without promulgating regulations, as required under Article 3 of North Carolina Administrative Procedure Act.
• DMA's arbitrary refusal to provide Personal Care Services to certain North Carolina citizens is directly contrary to North Carolina public policy. It is the North Carolina General Assembly’s intent, as set forth in N.C.G.S. § 143B-181.6, that "[h]ome and community based services should be developed, expanded, or maintained in order to meet the needs of consumers in the least confusing manner..." and that "[a]ll services shall be responsive and appropriate to individual need and shall be delivered through a seamless system that is flexible and responsive regardless of funding source." DMA's decision will create confusion for North Carolina's needy, elderly citizens and a disruption in the services provided to them, directly contrary to this statement of North Carolina public policy.

B. The Claims Asserted in Case 2. The allegations in Case 2, the rate reduction case, included:

• DMA's unilateral change in methodology and reduction in payment rates violate the federal requirement that a Medicaid agency's payments be sufficient to enlist enough providers so that services under Medicaid are available to recipients at least to the extent that those services are available to the general population. See 42 U.S.C. § 1396a(a)(30)(A). See also 42 C.F.R. § 447.204. DMA's actions will force many home care providers to go out of business and many other home care providers to stop serving Medicaid patients.
• DMA's unilateral change in methodology and reduction in payment rates violate the federal requirement that the State Plan for Medical Assistance must provide payments for services that are consistent with efficiency, economy, and quality of care. 42 U.S.C. § 1396a(a)(30)(A). DMA failed to consider these factors as required before making its decisions. By reimbursing the majority of home care providers less than their costs for providing Personal Care Services, DMA is failing to provide reasonable reimbursement, and such failure will result in denying access to services for many Medicaid eligible North Carolinians. Those care providers that do not go out of business or stop seeing Medicaid patients will be forced to substantially reduce direct care costs which will have a significant, adverse impact on quality of care.
• DMA has failed and refused to negotiate a reimbursement rate for Personal Care Services, and instead has dictated the rate to be effective July 1, 2002, contrary to its own regulations and the State Medicaid Plan requiring that the rate be negotiated.
• DMA has failed to comply with the requirements of N.C.G.S. § 108A-55(c) which requires that DMA establish the methods by which reimbursement amounts are determined in accordance with Chapter 150B, North Carolina’s Administrative Procedure Act.
• DMA has attempted to deprive home care providers of their rights to reconsideration and appeal as set forth in DMA's regulations and as required by federal law and is attempting to make its reimbursement rate changes effective before providers can avail themselves of the reconsideration process, directly contrary to DMA's own regulations. See 10 N.C.A.C. 26K.
• DMA has failed to provide the required notice of its intent to change the methods and standards for setting payment rates for services, including an explanation of the reason for the proposed change and an address where written comments can be submitted and reviewed, in violation of federal requirements. See 42 C.F.R. § 447.205.
• DMA has not promptly submitted an amendment to the State Medicaid Plan to the Centers for Medicare and Medicaid Services ("CMS") of the U.S. Department of Health and Human Services as required. See 42 C.F.R. § 430.12.
• Upon information and belief, DMA failed to consult with its Medical Care Advisory Committee as required prior to making these reimbursement decisions that will have a major impact on Medicaid covered home and community-based services in North Carolina. See 42 C.F.R. § 431.12(e).
• By making its methodology changes and rate reductions applicable only to persons receiving Personal Care Services in their homes and not to persons receiving Personal Care Services in adult care homes, DMA has violated the federal requirement that medically needy and categorically needy persons must be treated the same under the State's Medicaid Program. See 42 C.F.R. § 440.240
• DMA's unilateral reduction of reimbursement for home and community-based services will force many North Carolina citizens to be institutionalized, contrary to North Carolina public policy. It is the North Carolina General Assembly’s intent, as set forth in N.C.G.S. § 143B-181.6, that "[h]ome and community-based services should be developed, expanded, or maintained in order to meet the needs of consumers in the least confusing manner and based on the desires of the elderly and their families" and that "[a]ll services shall be responsive and appropriate to individual need and shall be delivered through a seamless system that is flexible and responsive regardless of funding source." DMA's decisions will deny North Carolina's citizens services to which they are entitled, directly contrary to North Carolina public policy.
• DMA has admitted in public documents that cutbacks in Personal Care Services, Private Duty Nursing Services, and CAP Programs will be more costly to the State in the long run because these services are less expensive than nursing homes and other institutionalized settings. DMA is aware of the devastating impact on North Carolina's Medicaid population that these service reductions will have. Nevertheless, DMA contends that it is taking these actions because of North Carolina's budget problems, which is an impermissible reason for denying needed Medicaid services. Furthermore, neither the Governor's proposed budget, the budget under consideration by the North Carolina Senate, nor the Department's previous public documents regarding options available for cutbacks have included the substantial, across the board cutbacks recently announced by DMA. DMA has violated State and federal law and its responsibility to North Carolina's needy citizens by targeting home and community-based services and by attempting to bypass the legislative process in implementing these major reimbursement changes.

In each of these cases, AHHC alleged that it is a person aggrieved as defined in N.C.G.S. § 150B-2(6), which is a prerequisite to initiating a contested case hearing, and that DMA violated the standards of N.C.G.S. § 150B-23(a). A petitioner is required to show that the Agency

       1. Exceeded its authority or jurisdiction;
       2. Acted erroneously;
       3. Failed to use proper procedure;
       4. Acted arbitrarily or capriciously; or
       5. Failed to act as required by law or rule.

In these cases, AHHC alleged that the actions of DMA violated all of the standards of N.C.G.S. § 150B-23(a) and sought reversal of DMA's decisions.

III. Injunctive Relief

Under N.C.G.S. § 150B-33(b)(6), the Administrative Law Judge has the authority to "[s]tay the contested action by the Agency pending the outcome of the case, upon such terms as he deems proper, and subject to the provisions of G.S. 1A-1, Rule 65..."

In Case 1, AHHC moved for a Temporary Restraining Order ("TRO") so that DMA's actions could be enjoined without waiting the ten days that would be required if only a motion for preliminary injunction were filed. In accordance with Rule 65 of the N.C. Rules of Civil Procedure, the Administrative Law Judges require that the agency against which the restraint is being sought be notified about the TRO hearing with an opportunity to be heard, if possible. In Case 1, the parties had a few hours notice that Judge Gray would consider AHHC's Motion for a TRO that afternoon. The TRO was granted after DMA refused to voluntarily stop publication of its new payment and coverage decisions. Under the Order, DMA was restrained from posting, publishing, or otherwise disseminating information pertaining to its positions regarding (1) physician verbal orders for home care services and (2) dual eligibility for Medicare home health and PCS (with the exception of the mailing of the January 2002 Medicaid Bulletin which Respondent had represented could not be stopped). DMA also was restrained from beginning any recoupment proceedings based on these new payment and coverage decisions.

A hearing was later held on AHHC's Motion for Preliminary Injunction during which both parties presented witnesses and exhibits. Following the hearing, Judge Gray entered a Preliminary Injunction. Judge Gray ordered that DMA would continue to be restrained from posting, publishing, or otherwise disseminating information on its verbal order and dual eligibility decisions. DMA also was restrained from pursuing or initiating any recoupments based on these decisions.

To deal with the fact that DMA had sent out the January 2002 Medicaid Bulletin containing communications about these new DMA decisions, the Preliminary Injunction also ordered that DMA post a copy of the Preliminary Injunction Order on its website and provide a link to the posting in the February and March 2002 Medicaid Bulletins. DMA also was ordered to mail a copy of the Order to all AHHC agencies.

In Case 2, AHHC did not file a Motion for a TRO because there was sufficient time before the effective date of the rate cuts to have a hearing on a Motion for Preliminary Injunction. AHHC's Motion for Preliminary Injunction was heard on the same day the rate cuts were to go into effect and the injunction was entered at that date. DMA was enjoined from giving effect to the reimbursement reductions previously announced. DMA also was ordered to promptly communicate with all recipients of its prior communications that it was enjoined from implementing the previously announced reimbursement reductions until further order of the Court. A copy of Judge Gray's Preliminary Injunction Order in Case 2 is included in the Appendix to the paper.

IV. The Discovery Phase

In both Cases 1 and 2, AHHC engaged in written discovery and conducted depositions. All of the discovery rules of the North Carolina Rules of Civil Procedure apply to proceedings before the Office of Administrative Hearings. See N.C.G.S. § 150B-28(a). Under N.C.G.S. § 150B-28(b), an agency should make identifiable agency records available promptly on request, without the necessity of a formal Request for Production of Documents. Documents obtained from DMA and statements made in depositions of DMA's decision-makers and other representatives were quoted extensively in AHHC's Motion for Summary Judgment in Case 1.

V. The Summary Judgment Motion

Following discovery in Case 1, AHHC filed a Motion for Summary Judgment. Under N.C.G.S. §§ 150B-33(b)(3a) and 36(d), an Administrative Law Judge has authority to grant summary judgment if he or she determines that there are no material issues of fact in dispute. In supporting its Motion for Summary Judgment, AHHC relied upon the depositions of DMA employees, documents discovered from DMA, affidavits, and its Verified Petition. Following oral argument on the Motion, the Administrative Law Judge granted Summary Judgment in favor of AHHC. A copy of Judge Gray's decision granting summary judgment is provided in the Appendix to this paper. In the Summary Judgment decision, Judge Gray specifically ordered that the Preliminary Injunction entered earlier in the case would remain in effect.

VI. The Final Agency Decision

Prior to the changes to North Carolina's Administrative Procedure Act that became effective January 1, 2001, the APA did not specifically address the final agency decision-maker's authority when the Administrative Law Judge entered Summary Judgment in favor of one of the parties. With the APA changes, a new subsection was added to N.C.G.S. § 150B-36 which provides in part:

 (d) An administrative law judge may grant judgment on the pleadings, pursuant to a motion made in accordance with G.S. 1A-1, Rule 12(c), or summary judgment, pursuant to a motion made in accordance with G.S. 1A-1, Rule 56, that disposes of all issues in the contested case. Notwithstanding subsection (b) of this section, a decision granting a motion for judgment on the pleadings or summary judgment need not include findings of fact or conclusions of law, except as determined by the administrative law judge to be required or allowed by G.S.1A-1, Rule 12(c) or Rule 56. For any decision by the administrative law judge granting judgment on the pleadings or summary judgment that disposes of all issues in the contested case, the agency shall make a final decision. If the agency does not adopt the administrative law judge's decision, it shall set forth the basis for failing to adopt the decision and shall remand the case to the administrative law judge for hearing. The party aggrieved by the agency's decision shall be entitled to immediate judicial review of the decision under Article 4 of this Chapter.

An agency must make the final agency decision within the time periods set forth in N.C.G.S. § 150B-44. An agency that is subject to Article 3 of the APA that fails to make the final decision within the statutory time period is deemed to have adopted the Administrative Law Judge's decision as the Agency's final decision. In Case 1, the Administrative Law Judge's decision became DMA's final decision pursuant to this statutory provision.

The use of Federal Medicaid Laws to Challenge State Medicaid Agencies

Any state receiving federal funding for a Medicaid Program must develop a State Medicaid Plan which meets the requirements of federal law. See 42 U.S.C. § 1396a(a). The Secretary of the U.S. Department of Health and Human Services has the authority to withhold federal funds from states failing to comply with these requirements. In addition North Carolina law specifically incorporates all federal requirements in North Carolina's Medicaid Program. N.C.G.S. § 108A-56. The key substantive and procedural provisions of the federal Medicaid statutes and regulations that have been successfully relied upon by providers to challenge actions by state Medicaid agencies are addressed below.

Substantive Requirements

I. A State Medicaid Agency must treat equally all persons within the gorup of medically needy and categorically needy.

Services available to each categorically needy person must be the same as those available to a medically needy person. Additionally, services within each group — among the categorically needy and among the medically needy — must be of equal "amount, duration, and scope." See 42 CFR § 440.240; 42 U.S.C. § 1396a(a)(10)(B).

In denying a service to some members of a group and providing it to others, a state Medicaid agency violates federal law. See Sobky v. Smoley, 855 F. Supp. 1123, 1140 (E.D. Cal. 1994). In Sobky, the court granted summary judgment in favor of plaintiffs in an action brought by providers and recipients contending that California's Medicaid Program violated the provisions of 42 U.S.C. § 1396a(a)(10)(B) because its methadone program failed to fund enough methadone maintenance slots for all of the categorically needy who were eligible for the service. "By denying the same service to the categorically needy members of the plaintiff class that is received by other categorically needy persons and by some medically needy persons, the State violates § 1396a(a)(10)(B)." Id. See also Rodriguez v. City of New York, 197 F.3d 611, 616 (2d Cir. 1999) (section 1396a(a)(10) applies to situations where the same benefit is funded for some recipients but not others).

II. Medicaid payments must be consistent with efficiency, economy, and quality of care and sufficient to enlist enough providers.

Under 42 U.S.C. § 1396a(a)(30A), the State Plan must

"provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan...to assure that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the Plan at least to the extent that such care and services are available to the general population in the geographic area;..."

This equal access provision provides an unambiguous and compulsory framework to guide agency decisions regarding reimbursement rates. See Arkansas Medical Society, Inc. v. Reynolds, 6 F.3d 519, 530 (8th Cir. 1993). In Arkansas individual Medicaid providers, professional associations, individual Medicaid recipients, and disability associations brought a § 1983 action against the Arkansas Department of Human Services claiming that it violated § 1396a(a)(30)(A) by failing to consider whether proposed reimbursement rate reductions to Medicaid providers were consistent with efficiency, economy, and quality of care, and whether the rate cuts would affect Medicaid recipients' access to health care services. 6 F.3d 519 (8th Cir.1993).

The Court held that, when setting reimbursement rates under the Medicaid Act, the Department is required to consider the relevant factors of equal access, efficiency, economy, and quality of care. 6 F.3d. at 530. In this case, the Court found that the Department's reimbursement rate reductions were overwhelmingly based on budgetary concerns, and without regard to the requirements of the federal Medicaid statute. The Court stated that budgetary considerations cannot be the conclusive factor in decisions regarding Medicaid. Id. at 531. Because budgetary reasons were the guiding force behind the Department's decision, and the relevant factors did not in any way form the basis for the Department's rate-making decision, the Department's decision violated the requirements of § 1396a(a)(30)(A).

In Ohio Hosp. Assn. v. Ohio Dept. of Human Services, three hospital associations and a number of individual hospitals sought an injunction from the Ohio Department of Human Services as a result of the Department's implementation of reimbursement reductions to Medicaid rates. 579 N.E.2d 695 (Ohio 1991). The Supreme Court of Ohio held that a rule implementing a rate change that was adopted solely for budgetary reasons, without due consideration of its affect on the quality of care, violates the Medicaid Act.

In Illinois Hosp. Assn. v. Illinois Dept. of Public Aid, a hospital association, nine hospitals and two Medicaid recipients together brought a § 1983 action against the Illinois Department of Public Aid alleging that it had violated the Medicaid Act by improperly enacting reimbursement rules. 576 F.Supp. 360 (N.D.Ill.1983). The plaintiffs alleged that the Department had violated § 1396a(a)(30)(A) by failing to assure that payments were consistent with efficiency, economy, and quality of care.

In granting a preliminary injunction against the Illinois State Medicaid agency, the court found that the Department had improperly failed to consider the impact on access to care if facilities were forced to curtail or cease operations. 576 F. Supp. at 369. The Court determined that federal law requires that a rate determination cannot be made solely based on the amount of money appropriated by a given state's legislature; rather the state Medicaid agency must make an objective, principled decision with regard to what rates are reasonable and adequate. Id. at 368.

In Orthopaedic Hosp. v. Belshe, a hospital and hospital association brought an action claiming that the Department of Health and Human Services violated the Medicaid Act by setting reimbursement rates for hospital providers of outpatient services without proper consideration of the effect of hospital costs on the relevant statutory factors. 103 F.3d 1491 (9th Cir.1997). The Court held that the Department must set rates that bear a reasonable relationship to efficient and economical costs of providing quality services, unless the Department can show some justification for rates that substantially deviate from such costs. Id. at 1499. To do this, the Department must rely on responsible cost studies that provide reliable data as a basis for its rate setting. Id.

III. The State Medicaid Agency must furnish Medicaid promptly to recipents without delay.

Medical assistance provided under a State Plan must be "furnished with reasonable promptness to all eligible individuals." 42 U.S.C. § 1396a(a)(8). "Under 42 C.F.R. § 435.930, administrative procedures may not delay a state’s provision of services." Sobky v. Smoley, 855 F. Supp. 1123, 1140, 1147 (E.D. Cal. 1994).

In Sobky, the court granted summary judgment for the plaintiffs who had been placed on waiting lists for services, finding that "the reasonable promptness provision is violated not only by undue administrative delays, such as in processing requests for services, but also by delay caused by insufficient funding." Sobky, 855 F. Supp. at 1148.

The reasonable promptness provision applies to all medical assistance provided under a State Plan, including optional services that a state has elected to provide. See Doe v. Chiles, 136 F.2d 709, 714 (11th Cir. 1998).

Procedural Requirements

IV. The State Medicaid Agency must consult with its medical advisory committee.

Federal law requires that DMA establish a Medical Care Advisory Committee ("MCAC") to advise the agency about health and medical care services. See 42 C.F.R. § 431.12. This Committee must have an opportunity for participation in policy development and program administration; the federal language addressing this physician participation is mandatory, not permissive. See 42 C.F.R. § 431.12(e). This regulation is privately enforceable against a state agency that has failed to comply with its duty to consult adequately with the MCAC. Rite Aid of Pennsylvania v. Houstoun, 171 F.3d 842, 856 (3rd Cir. 1999).

The Court of Appeals for the First Circuit has noted that case law under § 431.12(e) "suggests that States should undertake their MCAC consultations as early in the Plan amendment process as practicable, preferably before any final decision on proposed changes to their reimbursement methodologies," though there is no prescribed time bar for the MCAC consultation. Visiting Nurse Assn. v. Bullen, 93 F.3d 997, 1010 (1st Cir. 1996).

V. The State Medicaid Agency must file amendments to the state medicaid plan.

If a state determines that it will participate in Medicaid, CMS must approve a State Plan for Medical Assistance. See 42 C.F.R. § 430.12; North Carolina Dep’t of Human Resources, Division of Medical Assistance v. United States Department of Health and Human Services, 999 F.2d 767, 768 (4th Cir. 1993). The State Medicaid Plan "must specify, inter alia, the type and scope of Medicaid services that are available, and the payment levels for those services." Id.(emphasis added).

As federal and state laws and regulations change, DMA must amend the Plan when required to do so. Amendments are necessary to reflect, inter alia, "[m]aterial changes in State law, organization, or policy, or in the State’s operation of the Medicaid program," 42 C.F.R. § 430.12 (c), and such subsequent amendments to a State Medicaid Plan "must be submitted to [CMS] for approval." North Carolina, 999 F.2d at 768. The process for amending State Plans allows states to change their Medicaid programs without submitting an entirely new State Plan. See Independent Acceptance Co. v. California, 204 F.3d 1247, 1249 (9th Cir. 2000).

VI. The State Medicaid Agency must give sufficient public notice of the intent to change standards for payment.

Federal regulations require the State to provide public notice "of any significant proposed change in its methods and standards for setting payment rates for services" before the change is implemented. 42 C.F.R. § 447.205(a). Notice must contain a description of the proposed change, an address where written comments can be submitted and reviewed, and an explanation of why the change is occurring. See 42 C.F.R. § 447.205(c). Notice must be published in the North Carolina Register or in newspapers of minimum circulation before the proposed effective date of the change. See § 447.205(b). Actual notice of an adjustment to a State’s Medicaid reimbursement rates does not eliminate the state's need to satisfy the public notice requirement. Oklahoma v. Shalala, 42 F.3d 595 (10th Cir. 1994). See also, Illinois v. Shalala, 4 F.3d 514 (7th Cir. 1993).

While a state may argue that its proposed changes are not "significant" and thereby do not trigger the public notice requirement, courts have tended to find "significance" in most rate changes. For example, a 5.9% annual inflation adjustment was determined to be significant in Oklahoma, and rate reductions that averaged 1.8% were held to be significant and material in Wisconsin Hosp. Assn. v. Reivitz, 820 F.2d 863, 869 (7th Cir. 1987).

In North Carolina, the Fourth Circuit rejected DMA's claim that a change in reimbursement for nursing homes affecting less than 1% of North Carolina's Medicaid expenditures was not a significant change to the State's Medicaid Plan and therefore required no prior public notice. 999 F.2d at 771. The court also rejected DMA's claim that the failure to give public notice was harmless error. Id. As a result of DMA's failure to give public notice, the effective date of its proposed change in reimbursement was delayed until public notice was given.