NB Ex Rel. Peacock v. District of Columbia , 794 F.3d 31 ( 2015 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 24, 2015 Decided July 17, 2015
No. 14-7054
NB, BY HER PARENT AND NEXT FRIEND, MICHELLE PEACOCK,
ET AL.,
APPELLANTS
v.
DISTRICT OF COLUMBIA, A MUNICIPAL CORPORATION, ET AL.,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:10-cv-01511)
Jane M. Liu argued the cause for appellants. With her on
the briefs were Bruce J. Terris and Kathleen L. Millan.
John C. Keeney, Jr. was on the brief for amici curiae The
Legal Society of the District of Columbia, et al., in support of
appellant.
Richard S. Love, Senior Assistant Attorney General,
Office of the Attorney General for the District of Columbia,
argued the cause for appellees. With him on the brief were
Irvin B. Nathan, Attorney General at the time the brief was
filed, Todd S. Kim, Solicitor General, and Loren L. AliKhan,
Deputy Solicitor General.
2
Before: GRIFFITH and SRINIVASAN, Circuit Judges, and
SENTELLE, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge SRINIVASAN.
SRINIVASAN, Circuit Judge: The plaintiffs in this case
are Medicaid recipients who unsuccessfully sought coverage
for prescription drugs. They filed a lawsuit contending that
the defendants—the District of Columbia and certain of its
officials—unlawfully failed to afford them notice of their
entitlement to a hearing before denying their prescription drug
claims. They alleged that the lack of notice infringed Title
XIX of the Social Security Act and its implementing
regulations, the Due Process Clause of the Fifth Amendment
of the U.S. Constitution, and D.C. law. The district court
dismissed the federal claims, concluding that neither Title
XIX nor the Due Process Clause required the written notice
the plaintiffs sought. The court also dismissed the claims
under D.C. law because jurisdiction over those claims
depended on jurisdiction over the dismissed federal claims.
We affirm the district court’s dismissal of the Title XIX
claims, but we reverse the dismissal of the due process claims
and remand for further proceedings. On remand, the district
court can reconsider its jurisdiction over the D.C.-law claims
in light of our partial reversal.
I.
A.
Medicaid, established under Title XIX of the Social
Security Act, 42 U.S.C. §§ 1396 et seq., is a “cooperative
federal-state program that provides federal funding for state
medical services to the poor.” Frew ex rel. Frew v. Hawkins,
3
540 U.S. 431, 433 (2004). States participate in Medicaid on a
voluntary basis, but states electing to avail themselves of the
federal funding available under Title XIX must comply with
conditions imposed by federal law. Id.; see Nat’l Fed’n of
Indep. Bus. v. Sebelius, 132 S. Ct. 2566, 2607-08 (2012). The
District of Columbia qualifies as a state for purposes of this
litigation. See 42 U.S.C. § 1301(a)(1).
Under federal law, states choosing to participate in
Medicaid must provide a core set of mandatory services to
qualified beneficiaries. See id. §§ 1396a(a)(10)(A), 1396d(a).
For example, state Medicaid plans must provide coverage to
qualified beneficiaries for “inpatient hospital services” and
“laboratory and X-ray services.” Id. §§ 1396a(a)(10)(A),
1396d(a)(1), (3). In addition to those mandatory services, a
state may also elect to cover other categories of services.
Those optional services then become part of the state’s
Medicaid plan, in which event the optional services become
subject to the requirements of federal law. Doe 1-13 ex rel.
Doe, Sr. 1-13 v. Chiles, 136 F.3d 709, 714 (11th Cir. 1988).
Prescription drug coverage is one of those optional services,
see 42 U.S.C. §§ 1396a(a)(10)(A), 1396d(a)(12), and the
District has elected to offer coverage of certain prescription
drugs under Medicaid. The District’s Department of Health
Care Finance (DHCF) implements the prescription drug
portion of the District’s Medicaid program. See D.C. Code
§ 7-771.07.
When a state elects to cover prescription drugs, as the
District has done, it can limit or condition coverage in certain
ways. First, Title XIX affords participating states some
latitude to determine which classes of prescription drugs to
cover. The statute specifies categories of drugs that a state
may entirely “exclude[] from coverage.” 42 U.S.C. § 1396r-
8(d)(2). Consistent with that authority, the District has opted
4
categorically to exclude from coverage certain classes of
prescription drugs, including, for instance, those prescribed
for conditions such as weight loss or erectile dysfunction. See
D.C. Mun. Regs. tit. 29, § 2706.3(d), (i). The District will
cover those drugs only if they have been “specifically placed”
on the District’s “Medicaid Preferred Drug List.” Id.; see
DHFC, Pharmacy Preferred Drug List (PDL) (June 17, 2015),
available at https://dc.fhsc.com/downloads/providers/
DCRx_PDL_listing.pdf.
Second, for non-excluded drugs, Title XIX enables a
state to limit the circumstances under which it will provide
coverage. A state may, for example, subject a drug to “prior
authorization” requirements. Id. § 1396r-8(d)(1)(A). The
District has established a prior authorization requirement for
certain drugs. Under the District’s prior authorization
requirement, a prescribing physician must obtain pre-approval
from DHCF and submit certain documentation before the
District’s Medicaid plan will cover the prescription. See NB
ex rel. Peacock v. District of Columbia (NB II), 682 F.3d 77,
80 (D.C. Cir. 2012).
According to the allegations in the complaint, DHCF uses
a third-party contractor, Xerox, to process prescription drug
claims under Medicaid. When a potential Medicaid claimant
presents a prescription to a pharmacist at a Medicaid-
participating pharmacy in the District, the pharmacist submits
an electronic claim to Xerox. Xerox then provides an
immediate computerized reply indicating whether Medicaid
will cover the prescription. Xerox determines, among other
things, whether the drug is covered by Medicaid or instead is
excluded from Medicaid coverage, and whether the patient
satisfies all other applicable threshold coverage restrictions
(e.g., whether the patient has met any applicable prior
authorization requirements). If Xerox determines that all
5
requirements for coverage are met, Xerox’s reply so informs
the pharmacist, and the pharmacist fills the prescription. If
Xerox determines that coverage should be denied, the patient
has the option to pay out-of-pocket for the drugs.
B.
Title XIX and its implementing regulations afford certain
procedural protections to Medicaid beneficiaries. The statute
provides that a state Medicaid plan “must” provide “for
granting an opportunity for a fair hearing before the State
agency to any individual whose claim for medical assistance
under the plan is denied or is not acted upon with reasonable
promptness.” 42 U.S.C. § 1396a(a)(3). “Medical assistance”
includes “payment of part or all of the cost” of “prescribed
drugs.” Id. § 1396d(a)(12). Under the statute, consequently,
denial of a claim for payment of “prescribed drugs” occasions
the grant of an “opportunity for a fair hearing before the State
agency.”
Regulations implementing § 1396a(a)(3) elaborate on the
requirement to give an opportunity for a hearing. Under the
regulations, the District must “grant an opportunity for a
hearing” to “[a]ny applicant who requests it because his claim
for services is denied or is not acted upon with reasonable
promptness,” and also to “[a]ny beneficiary who requests it
because he or she believes the agency has taken an action
erroneously.” 42 C.F.R. § 431.220(a)(1)-(2).
The regulations also specify circumstances in which
notice of the right to a hearing must be provided, as well as
the content of that notice. In particular, the District
6
must, at the time specified in paragraph (c) of
this section, inform every applicant or
beneficiary in writing—
(1) Of his right to a hearing;
(2) Of the method by which he may obtain a
hearing; and
(3) That he may represent himself or use
legal counsel, a relative, a friend, or other
spokesman.
Id. § 431.206(b)(1)-(3). Section 431.206(c)—i.e., “paragraph
(c) of th[at] section”—sets forth the times when that notice
must be afforded to a beneficiary, and requires notice “[a]t the
time of any action affecting his or her claim.” Id.
§ 431.206(c)(2) (emphasis added). And the regulations in
turn define “[a]ction” as a “termination, suspension, or
reduction of Medicaid eligibility or covered services.” Id.
§ 431.201. The regulatory notice requirements thus are
triggered by, inter alia, a “termination, suspension, or
reduction of Medicaid eligibility or covered services.”
When § 431.206(b)’s notice requirements come into play
because of a termination, suspension, or reduction of
Medicaid eligibility or covered services, a separate regulation
spells out additional content that must be included in the
notice. The District must include: (a) a statement of what
action it intends to take; (b) the reasons for the intended
action; (c) the specific regulations that support the action; (d)
an explanation of the individual’s right to a hearing; and (e)
an explanation of the circumstances that Medicaid coverage
will continue in the interim if a hearing is requested. Id.
§ 431.210(a)-(e).
 7
D.C. law imposes similar requirements. See NB II, 682
F.3d at 80 (citing D.C. Code § 4-205.55).
C.
1. The named plaintiffs in this case are nine D.C.
Medicaid recipients. They contend that the District, the
Director of DHCF, and the Mayor of D.C. have systematically
failed to provide Medicaid recipients with “adequate and
timely notice, the opportunity for a fair hearing, and the
opportunity for reinstated coverage pending a hearing
decision” when denying prescription drug coverage. Pls.’
Amend. Compl. ¶ 1. Those actions, the plaintiffs allege,
violate Title XIX and its implementing regulations, the Due
Process Clause of the Fifth Amendment of the Constitution,
and D.C. law. The plaintiffs seek no compensation (although
they do ask for costs and attorneys’ fees). Id. at 49. Instead,
they request declaratory and injunctive relief, and also seek
certification of a class.
The named plaintiffs allege multiple instances in which
their claims for prescription drug coverage have been denied
at District pharmacies. The denials, as described in the
complaint, appear to have occurred for a variety of reasons.
Some plaintiffs were informed that they failed to comply with
applicable prior authorization requirements, see, e.g., id. ¶¶
59, 77; others were advised that they were not covered by
Medicaid at all, see, e.g., id. ¶ 50; and still others were given
no reason for the coverage denial, see, e.g., id. ¶ 57. The
plaintiffs allege that, in all of those circumstances, they did
not “receive[] written notice of the fact that coverage of
[their] prescriptions was being denied, the reason for the
denial[s], the right to appeal, or the circumstances under
which Medicaid would continue providing coverage of [their]
prescriptions pending the appeal[s].” E.g., id. ¶ 98.
 8
2. The plaintiffs filed suit in the U.S. District Court for
the District of Columbia, and the district court dismissed the
action for lack of Article III standing. NB v. District of
Columbia (NB I), 800 F. Supp. 2d 51, 53 (D.D.C. 2011). On
appeal, we found that the plaintiffs had established standing,
NB II, 682 F.3d at 86-87, and remanded to the district court to
proceed to the merits.
On remand, the district court dismissed all claims. NB v.
District of Columbia (NB III), 34 F. Supp. 3d 146, 152
(D.D.C. 2014). In dismissing the claims under Title XIX, the
court initially examined circumstances involving denial of
prescription drug coverage for failure to demonstrate
Medicaid enrollment or to comply with applicable prior
authorization requirements. The court concluded that
Medicaid’s procedural protections—including the notice and
hearing sought by the plaintiffs—extended only to those who
were in fact enrolled in Medicaid and, as applicable, to those
who had met required prior authorization and other applicable
threshold criteria. Id. at 153-55. As for denials of coverage
for other reasons, the court concluded that the plaintiffs had
failed to allege that the denials stemmed from government
action. In the court’s understanding, the plaintiffs’ inability to
procure coverage for their medications was attributable, not to
the District, but instead “to a range of acts or omissions by
private actors—including errors or oversights by doctors and
pharmacists (and perhaps the patients themselves).” Id. The
court therefore concluded that the District had no obligation
under Title XIX or its regulations to give any written notice of
the denials. Id. at 155-56.
In dismissing the due process claims, the court again
focused initially on denials occasioned by the plaintiffs’
alleged failures to demonstrate Medicaid enrollment status or
to comply with prior authorization or other coverage criteria.
9
Those circumstances triggered no protections under the Due
Process Clause, the court determined, because the plaintiffs
lacked a “legitimate claim of entitlement to the drugs.” Id. at
157-58. As for the denials of prescription drug claims for
reasons other than failure to demonstrate Medicaid enrollment
status or to comply with threshold coverage criteria, the court
again determined that the plaintiffs failed to allege that any
“state action” caused the denials. Id. at 158-59. With no
federal causes of action remaining in the case, the court then
dismissed the D.C.-law claims for lack of pendant
jurisdiction. Id.
II.
The plaintiffs contend that Title XIX’s implementing
regulations entitle Medicaid recipients to written notice of an
opportunity for a hearing at which they can challenge the
point-of-sale denial of prescription drug benefits. The
plaintiffs also claim an entitlement to notice of the reasons for
the decision and of the status of their coverage pending a
hearing; but those arguments are essentially derivative of their
claim to notice of an opportunity for a hearing. See 42 C.F.R.
§ 431.210. We conclude that the regulations afford the
plaintiffs no basis for relief. We therefore affirm the district
court’s dismissal of their Title XIX claims.
A.
The plaintiffs’ argument for relief under Title XIX is that
the District “must provide Medicaid recipients with notice of
the reason for the denial and the opportunity for a
hearing . . . whenever a Medicaid recipient’s claim for a
prescription drug is denied for any reason.” Appellants’ Br.
7. That is, the plaintiffs argue that any denial of a claim for
prescription drug coverage at a pharmacy triggers a right to
10
notice under Title XIX. We disagree. Title XIX and its
implementing regulations do not afford the plaintiffs the
notice they seek whenever a claim for prescription drug
coverage is denied.
Under Title XIX, a “[s]tate plan for medical assistance
must . . . provide for granting an opportunity for a fair hearing
before the State agency to any individual whose claim for
medical assistance under the plan is denied.” 42 U.S.C.
§ 1396a(a)(3). The District does not dispute that the
plaintiffs’ claims for prescription drug benefits qualify as
“claim[s] for medical assistance” within the meaning of that
provision. The District therefore assumes it has an obligation
under the statute to afford the plaintiffs “an opportunity for a
fair hearing”—i.e., a hearing upon request—to challenge the
denial of prescription drug coverage.
Here, however, none of the plaintiffs requested a hearing.
And while the statute requires the District to provide for
“granting an opportunity for a fair hearing,” the statute itself,
as the District points out, contains no obligation to afford
notice of an opportunity to request a hearing. Perhaps for that
reason, the plaintiffs do not argue that the statute, of its own
force, confers an entitlement to written notice of an
opportunity for a hearing. The plaintiffs instead rely on the
regulations implementing Title XIX as the source of their
alleged entitlement to notice under the Medicaid laws.
Those regulations contain a provision setting forth
“[w]hen a hearing is required.” 42 C.F.R. § 431.220. Under
that regulation, the District “must grant an opportunity for a
hearing” to, among others, “(1) [a]ny applicant who requests
it because his claim for services is denied or is not acted upon
with reasonable promptness,” as well as “(2) [a]ny beneficiary
who requests it because he or she believes the agency has
11
taken an action erroneously.” Id. § 431.220(a)(1)-(2). With
regard to the second category, the regulations elsewhere
define an “[a]ction” as a “termination, suspension, or
reduction of Medicaid eligibility or covered services.” Id.
§ 431.201. The result is that the District must grant a hearing
to (1) an applicant whose “claim for services is denied” and
also to (2) a beneficiary who believes that he has been
subjected to an erroneous “termination, suspension, or
reduction” of “Medicaid eligibility or covered services.”
A separate set of regulations speaks to the provision of
notice of the opportunity for a hearing. Significantly, those
regulations call for notice only with regard to the second of
the above categories of individuals for whom a hearing is
available (i.e., persons against whom the District takes an
“action” as defined by the regulations), not the first category
(i.e., persons as to whom a claim for services is “denied”). To
be sure, the regulations governing hearings generally provide
that “[t]he hearing system must meet the due process
standards set forth in Goldberg v. Kelly, 397 U.S. 254 (1970),
and any additional standards specified in this subpart.” 42
C.F.R. § 431.205(d). That provision, however, does not
specifically refer to notice. It instead more generally calls for
the District to establish a system for hearings that conforms to
the requirements of due process. The provision thus
ultimately adds little to the plaintiffs’ arguments under the
Due Process Clause (which we separately consider below).
Under the regulations specifically addressing the
provision of notice of an opportunity for a hearing, the
requirement to afford notice arises, in relevant part, only “at
the time specified in paragraph (c)” of § 431.206. Id.
§ 431.206(b). The referenced “paragraph (c)” in turn calls for
the District to provide the mandated notice “(1) [a]t the time
that [an] individual applies for Medicaid” and “(2) [a]t the
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time of any action affecting his or her claim.” Id.
§ 431.206(c)(1)-(2) (emphasis added). The plaintiffs make no
claim of an entitlement to notice under subparagraph (1). We
therefore focus our attention on subparagraph (2), under
which notice is required at the time of an “action” affecting a
Medicaid beneficiary’s claim. Because, as explained, the
term “action” means a “termination, suspension, or reduction
of Medicaid eligibility or covered services,” id. § 431.201, the
pertinent question is whether any denial of prescription drug
coverage at a pharmacy amounts to a “termination,
suspension, or reduction of Medicaid eligibility or covered
services,” id.
We think the answer is no. The regulations, as explained,
draw a distinction between a person whose “claim for services
is denied” and a person who “believes the agency has taken
an action erroneously.” Id. § 431.220(1)-(2) (emphasis
added); see id. § 431.200(a)-(b). While both the “denial” of a
claim and an “action” affecting a claim (i.e., a termination,
suspension, or reduction of Medicaid eligibility or covered
services) trigger an “opportunity for a hearing” under the
regulations, id. § 431.220, the regulations pointedly call for
the provision of notice of the opportunity to request a hearing
only with regard to an “action affecting [a beneficiary’s]
claim,” id. § 431.206(c). The regulations contain no such
requirement of notice whenever a claim for coverage is
“denied.”
The distinction drawn by the notice regulations is
reinforced by the difference in common understanding
between a “denial,” on one hand, and a “termination,
suspension, or reduction,” on the other. In many cases, a
denial maintains the status quo; but in all cases, a
“termination, suspension, or reduction” alters the status quo.
That much is evident from the ordinary meanings of the
13
terms. All that is required for a denial is that a request be
turned down or rejected—a decision that, in many cases, will
maintain the status quo. But a “termination” is “an act of
ending something,” Termination, Merriam-Webster
Dictionary Online, http://www.merriam
webster.com/dictionary/termination (last visited June 30,
2015); a “suspension” is the “act of stopping or delaying
something,” Suspension, Merriam-Webster Dictionary
Online, http://www.merriam-
webster.com/dictionary/suspension (last visited June 30,
2015); and a “reduction” is “the act of making something
smaller,” Reduction, Merriam-Webster Dictionary Online,
http://www.merriam-webster.com/dictionary/reduction (last
visited June 30, 2015). All of those latter definitions involve
a change in, not mere maintenance of, existing conditions.
The procedures governing notice set forth in the
regulations cement our understanding that a denial of
prescription drug coverage would not generally qualify as a
“termination, suspension, or reduction” of covered services.
Apart from certain narrow exceptions not in issue here, the
regulations provide that, when the District is required to
afford notice, it must give notice “at least 10 days before the
date of [an] action,” 42 C.F.R. § 431.211; see also id.
§§ 431.213, 431.214—that is, ten days before the date of a
“termination suspension, or reduction of Medicaid eligibility
or covered services,” id. § 431.201. That requirement makes
sense in the case of a “termination, suspension, or reduction
of Medicaid eligibility or covered services” as ordinarily
understood: an action that alters the status quo. The advance-
notice requirement, however, makes little sense in the context
of a garden-variety denial of prescription drug coverage at the
point-of-sale in a pharmacy, which need not manifest any
alteration of the status quo.
14
For instance, if the District were set to implement a
reduction in the menu of covered services for Medicaid
beneficiaries, it could give beneficiaries notice ten days in
advance of the “action” it “intends to take” and of the
“individual’s right to request” a “hearing” in connection with
that action. Id. § 431.210(a), (d)(1)-(2). By contrast, there
would be no way for the District to know ten days in advance
that a patient will come to a pharmacy with a prescription but
will fail to comply with applicable prior authorization
requirements, thereby triggering a denial of coverage. In such
a case, it would be impossible for the District to comply with
the requirement under § 431.211 to give ten-day advance
notice of the opportunity for a hearing. It therefore would
make little sense to read the regulations to impose the notice
requirement (including the obligation to give notice ten days
in advance) for every denial of prescription drug coverage at
the point-of-sale.
For those reasons, we reject the plaintiffs’ argument that
Title XIX’s notice regulations are triggered whenever there
has been a denial of a claim for prescription drug coverage at
the point-of-sale. We therefore affirm the district court’s
dismissal of the plaintiffs’ Title XIX claims, albeit on
different grounds. See United States v. Coughlin, 610 F.3d
89, 108 (D.C. Cir. 2010).
III.
The district court also dismissed the plaintiffs’ due
process claims. To bring a claim under the Due Process
Clause, a plaintiff must show (i) deprivation of a protected
liberty or property interest, see Gen. Elec. Co. v. Jackson, 610
F.3d 110, 117 (D.C. Cir. 2010); (ii) by the government, see
Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 50 (1999);
(iii) without the process that is “due” under the Fifth
15
Amendment, see Mathews v. Eldridge, 424 U.S. 319, 334-35
(1976). The district court determined that, for most of the
alleged denials, the plaintiffs lacked a protected property
interest. The court further concluded that, for all of the
alleged denials, the plaintiffs failed to allege a deprivation at
the hands of the government. We disagree as to both
conclusions, and we therefore remand for further proceedings
to determine what process is “due” to the plaintiffs.
A.
“The first inquiry in every due process challenge is
whether the plaintiff has been deprived of a protected interest
in ‘liberty’ or ‘property.’” Gen. Elec. Co., 610 F.3d at 117.
“Only after finding the deprivation of a protected interest do
we look to see if the government’s [actions] comport with due
process.” Id. (brackets omitted). We conclude that the
plaintiffs have adequately alleged a protected property interest
in their prescription drug benefits.
It is well established that certain government benefits
give rise to property interests protected by the Due Process
Clause. See, e.g., Goldberg v. Kelly, 397 U.S. 254 (1970).
Not all government benefits do, however. To have a
protected property interest in a given benefit, “a person
clearly must have more than an abstract need or desire for it.
He must have more than a unilateral expectation of it. He
must, instead, have a legitimate claim of entitlement to it.”
Bd. of Regents of State Colls. v. Roth, 408 U.S. 564, 577
(1972). We have thus indicated in similar circumstances that
a “legitimate claim of entitlement” is an essential condition of
a protected property interest. See Roberts v. United States,
741 F.3d 152, 161 (D.C. Cir. 2014).
16
The District, echoing the district court’s reasoning,
contends that, to the extent the plaintiffs failed to meet
preconditions to prescription drug benefits under Medicaid
(e.g., valid Medicaid enrollment and satisfaction of any prior
authorization requirements), the plaintiffs had no “legitimate
claim of entitlement” to those benefits for due process
purposes. The District’s argument misapprehends what is
meant by a “legitimate claim of entitlement.” A “legitimate
claim of entitlement” means that a person would be entitled to
receive the government benefit assuming she satisfied the
preconditions to obtaining it. A claim of entitlement therefore
is “legitimate” if award of the benefit would follow from
satisfaction of applicable eligibility criteria. See Wash. Legal
Clinic for the Homeless v. Barry, 107 F.3d 32, 36 (D.C. Cir.
1997). Insofar as the government retains “unfettered
discretion” to withhold the benefit even upon satisfaction of
all eligibility criteria, “no constitutionally protected property
interest exists.” Id. But if “the statute or implementing
regulations place ‘substantive limitations on official
discretion’” to withhold award of the benefit upon satisfaction
of the eligibility criteria, there is a legitimate claim of
entitlement, as to which the Due Process Clause affords
protection. Id. (quoting Olim v. Wakinekona, 461 U.S. 238,
249 (1983)). Compare Daniels v. Woodbury Cnty., Iowa, 742
F.2d 1128, 1132-33 (8th Cir. 1984) (award of benefit
sufficiently mandatory), with Eidson v. Pierce, 745 F.2d 453,
461 (7th Cir. 1984) (award of benefit insufficiently
mandatory).
The District therefore errs in arguing that a plaintiff must
show that she satisfies the preconditions to prescription drug
coverage in order to have a “legitimate claim of entitlement”
to coverage. For instance, the District contends that a plaintiff
has no legitimate claim of entitlement in connection with a
drug requiring prior authorization unless the plaintiff has in
17
fact secured prior authorization. And the District similarly
argues that a plaintiff has no legitimate claim of entitlement if
she is not enrolled in Medicaid or if she fails to present valid
proof of enrollment. Those arguments incorrectly skip ahead
to the plaintiff’s ultimate eligibility for a government benefit
instead of asking whether she would be entitled to the benefit
if she were to satisfy the preconditions to obtaining it.
Here, we find that the plaintiffs have a legitimate claim of
entitlement to coverage of any drug not completely excluded
from coverage under Medicaid. The District’s Medicaid
regulations providing for prescription drug coverage use
mandatory, non-discretionary terms. See, e.g., D.C. Mun.
Regs. tit. 29, § 2703.1 (“The District of Columbia Medicaid
Program shall reimburse claims . . . .” (emphasis added)).
And the District makes no argument that, upon the
satisfaction of all eligibility criteria, it retains discretion to
deny a claim for a covered prescription drug. The plaintiffs
therefore have protected property interests in the coverage of
prescription drugs not completely excluded from Medicaid
coverage.
Of course, a plaintiff would still need to demonstrate
valid Medicaid enrollment and compliance with any prior
authorization or other threshold requirements in order for her
prescription, in fact, to be covered. But the procedural
protections of the Due Process Clause exist to give her a fair
opportunity to show that she meets the criteria for coverage.
We therefore conclude that the prescription drug coverage
sought by the plaintiffs qualifies as a property interest
protected by the Fifth Amendment.
18
B.
Because due process offers no shield against purely
private conduct, “however discriminatory or wrongful,”
Jackson v. Metro. Edison Co., 419 U.S. 345, 349 (1974), we
next examine whether the alleged deprivation of the plaintiffs’
property interests occurred at the hands of the government.
See Am. Mfrs. Mut. Ins. Co., 526 U.S. at 50. We find the Due
Process Clause’s state action requirement to be satisfied here:
The plaintiffs adequately alleged that Xerox, a private
company, determined their eligibility for benefits while acting
as an agent of the District.
At the motion-to-dismiss stage, we must accept all factual
allegations in the complaint as true. Browning v. Clinton, 292
F.3d 235, 242 (D.C. Cir. 2002). The plaintiffs’ complaint
includes a series of detailed allegations concerning the denials
of their claims after they presented their prescriptions in a
pharmacy and sought to invoke Medicaid coverage. As
described by the plaintiffs:
[T]he recipient presents the prescription to a
pharmacy provider. The pharmacy provider
immediately submits an electronic claim
through its computer to [Xerox]. The claims
are decided immediately. The pharmacy
provider receives an electronic return message
from [Xerox] indicating whether the
prescription will be covered by Medicaid. If
the claim is denied, the pharmacy provider
provides an electronic return message with a
rejection code that corresponds to the reason
for the denial of the claim.
19
Pls.’ Amend. Compl. ¶ 34. Accepting the truth of those
allegations, that is more than enough for us to make a
reasonable inference that Xerox, upon submission of a
prescription to a pharmacy, engages in a real-time
determination of the plaintiffs’ eligibility for prescription drug
benefits under Medicaid.
The District points out that Xerox’s claims system is not
necessarily involved every time a pharmacist informs a
patient that coverage has been denied. That may be true. For
instance, a pharmacist might simply decline to relay a
prescription through Xerox’s system and then unilaterally
inform a plaintiff that coverage has been denied. But in
addition to their general description of the process, the
plaintiffs also included in their complaint specific instances—
with rejection codes—in which Xerox determined their
coverage. See, e.g., Pls.’ Amend. Compl. ¶ 81. With
upwards of 6,000 claims passing through Xerox’s system on a
single day (of which approximately half may be denied), see
id. ¶ 44, we readily infer at this stage that many of the
plaintiffs’ claims follow that process. For purposes of
resolving the District’s motion to dismiss, we make the
reasonable inference that, unless a plaintiff has otherwise
alleged specific facts to the contrary, a pharmacist who
informs a claimant of a coverage denial is generally
communicating the results of Xerox’s determination.
Xerox, therefore, took the “action.” But is Xerox’s
action “state action?” We find that it is. While the actions of
private actors generally do not count as state action for due
process purposes, see, e.g., S.F. Arts & Athletics, Inc. v. U.S.
Olympic Comm., 483 U.S. 522, 543-47 (1987), the state
action requirement is met if “there is such a close nexus
between the State and the challenged action that seemingly
private behavior may be fairly treated as that of the State
20
itself,” Brentwood Acad. v. Tenn. Secondary Schs. Athletic
Ass’n, 531 U.S. 288, 295 (2001) (internal quotation marks
omitted). The requisite nexus generally exists when a private
party acts as an agent of the government in relevant respects.
See Skinner v. Ry. Labor Execs.’ Ass’n, 489 U.S. 602, 614
(1989). Here, the allegations in the complaint support the
inference that Xerox acted as the District’s agent for purposes
of determining a person’s eligibility for prescription drug
coverage under Medicaid. The District does not contend
otherwise.
The District instead argues that the state action
requirement remains unsatisfied because Xerox is not
necessarily at fault in circumstances in which the Xerox
system denies coverage to which a beneficiary in fact has an
entitlement. After all, the District observes, there may be
myriad reasons for the erroneous denial of prescription drug
coverage, including “pharmacy, physician, or patient error.”
Appellees’ Br. 45. That is undoubtedly the case. But it still
remains Xerox’s determination that occasions denial of the
recipients’ claimed coverage. Xerox’s actions—on behalf of
the District—effected the denial of prescription drug
coverage. We therefore find the state action requirement to
be satisfied.
C.
The final step in the due process inquiry calls for
assessing whether the plaintiffs received constitutionally
adequate process in connection with the denial of benefits.
“[D]ue process is flexible and calls for such procedural
protections as the particular situation demands.” Mathews,
424 U.S. at 334. The analysis
21
generally requires consideration of three
distinct factors: First, the private interest that
will be affected by the official action; second,
the risk of an erroneous deprivation of such
interest through the procedures used, and the
probable value, if any, of additional or
substitute procedural safeguards; and finally,
the Government’s interest, including the
function involved and the fiscal and
administrative burdens that the additional or
substitute procedural requirement would entail.
Id. at 335.
Here, the plaintiffs do get some process: Upon a denial
of coverage, they may contact DHCF and the District will
provide them with a reason. See, e.g., Pls.’ Amend. Compl.
¶ 102. And a hearing is always available to “[a]ny beneficiary
who requests it because he or she believes the agency has
taken an action erroneously.” 42 C.F.R. § 431.220(a)(2). But
the plaintiffs contend that the Due Process Clause entitles
them to more process, including written notice of the
opportunity to request a hearing anytime prescription drug
coverage is denied at the point-of-sale.
We do not resolve that issue. The district court has yet to
pass upon it, so neither will we. See Liberty Prop. Trust v.
Republic Props. Corp., 577 F.3d 335, 341 (D.C. Cir. 2009).
Rather, we remand the case to permit the district court to
conduct an inquiry in the first instance into what process is
due.
22
* * * * *
For the foregoing reasons, we affirm in part and reverse
in part the district court’s decision. We affirm the court’s
dismissal of the plaintiffs’ Title XIX claims. We reverse the
court’s dismissal of the due process claims and remand for
consideration of what process the plaintiffs are due under the
Fifth Amendment. Finally, we note that the district court can
reconsider its jurisdiction over the D.C.-law claims in light of
our partial reversal.
So ordered.