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Due Process Procedures for Authorizing Medicaid Services

Class Action Settlement in North Carolina Yields Model Procedures

By Douglas Sea

Three disabled children, through their parents, filed a federal class action alleging multiple due process violations in the North Carolina Medicaid program that resulted in the denial, reduction, or termination of services to persons with mental illness or developmental disabilities (Amended Class Action Complaint for Declaratory and Injunctive Relief, McCartney v. Benton, No. 7-08-CV-57-H (E.D.N.C. May 16, 2008)). This litigation, which included an appeal to the Fourth Circuit, ultimately led to a settlement under which the state agency is required to implement new procedures and notices that have been described by the National Health Law Program as a national model (Press Release, Legal Services of Southern Piedmont & National Health Law Program (Nov. 19, 2010)). Here I describe the case, with a focus on the challenges, strategies, and practical issues faced by plaintiffs’ attorneys from the Legal Services of Southern Piedmont and the National Health Law Program.

Factual Background

Doctor treating clinic patientWe filed this case after our out-of-court efforts were only partially successful in convincing the North Carolina Medicaid agency to change its procedures to ensure due process in the “prior approval” of Medicaid services in the state. At the time North Carolina’s Medicaid program rarely paid managed care organizations in advance for their services. However, for many Medicaid services, including home- and community-based waivers, the state agency required prior authorization before services are received and periodic reauthorization to continue receiving them. For example, because some services could be authorized for only ninety days under state rules, they had to be reauthorized before the end of the ninety days to continue without interruption. The state agency contracted with private companies to perform this prior authorization. In the case of services for mental health, mental retardation, and developmental disabilities, a company called ValueOptions became the state’s contractor in 2007.

Under North Carolina’s prior-approval requirement, the doctor, service provider, or case manager must submit the authorization or reauthorization request on prescribed forms to the appropriate agency contractor, which, for the services at issue here, was ValueOptions. Then ValueOptions must approve, partially approve, or deny the request. If the request is not fully approved, ValueOptions must send written notice with appeal rights to the Medicaid recipient. Providers also are notified in writing and can look online to find the authorization for services for any recipient once ValueOptions enters it into its computer system. Before we ever filed suit, we negotiated this procedure and the notice templates, and they looked good on paper. In practice, all sorts of problems were occurring.

As alleged in the complaint, the named plaintiffs suffered a variety of verbal or informal denials of services at ValueOptions such as discouraging requests for services, encouraging the withdrawal or modification of a request, sending incomplete requests back as unable to be processed, instructing providers that they could not request services for more than a certain number of hours or that a service could not last more than a certain number of months, threatening providers with an increased risk of audit if those limits were exceeded (even for children for whom such limits violate federal requirements for early and periodic screening, diagnosis, and treatment), informing providers and nonlegally responsible guardians that they may have to repay Medicaid for services provided pending appeal, telephoning providers to inform them that a request could be denied entirely if not modified to reduce the request, and terminating services immediately and without notice if the recipient changed providers.

Allegations concerning the initial processing of requests included the failure of ValueOptions to obtain enough information to make an informed decision on the request, failure to consider medical records and other information submitted because it did not appear on the ValueOptions form or plan of care itself, and failure to process requests with reasonable promptness. Because reauthorization requests were often not acted on before the previous authorization period expired, services were often interrupted even when reauthorization was approved. Where reauthorization was denied or partially denied, ValueOptions failed to continue the previous authorization beyond its expiration date until ten days after written notice to terminate or reduce services, as is required by Goldberg v. Kelly and federal Medicaid regulations (397 U.S. 254 (1970); 42 C.F.R. §§ 431.206, 431.211, 431.214 (2011)).

Written adverse notices from ValueOptions often did not explain the factual or legal basis for the decision or even exactly what services for what period of time were being denied. Notices denying reauthorization were sometimes mislabeled as initial denials of services and thus did not discuss the right to continued services pending appeal. ValueOptions mailed notices to the address of the minor child or incompetent adult Medicaid recipient instead of to the recipient’s parent or legal guardian who might live elsewhere. ValueOptions mailed notices after the date printed on the notice, but the appeal deadline ran from the date on the notice.

After recipients appealed, the state agency failed to reinstate authorization promptly to continue services pending appeal, failed to give access to the entire file prior to the hearing, delayed processing appeals, gave misleading information about the appeal process, and encouraged the withdrawal of appeals.

Once a hearing was held, the state agency refused in two different ways to permit a de novo hearing. First, the agency did not permit new evidence at the hearing, especially if it concerned treatment or an evaluation that occurred after the date of the initial denial. Second, the agency did not consider on appeal the recipient’s prospective need for the service if the period of time for which authorization had been initially requested and denied had already expired by the hearing date. Delays in processing appeals thus led to appeals becoming moot before they were heard. The state agency told our minor client’s mother that she should dismiss her appeal because it would not succeed in meeting her son’s ongoing need for services. Ironically, at the same time, the agency and ValueOptions were telling providers not to submit a new request for services while an appeal of a prior denial was pending.

Given these facts, this case was not just a dispute about legal principles or written policies but rather was about the practical implementation problems that arise in assuring due process in the prior approval of Medicaid services. For example, does the agency assure that authorization continues past the end of a previously authorized period if there is a delay in acting on the reauthorization request? Is maintenance-of-service authorization promptly entered into the computer once an appeal has been filed? Do instructions to the contractor allow clinical discussions with providers but prohibit informal verbal denials and discouraging requests for services? How can the state prevent the threat of an audit from discouraging providers from requesting services or filing appeals or even providing services pending appeal? How can the agency hold a meaningful hearing when the period of time at issue has expired? This case was in large part an attempt to solve these practical problems.

Litigation Challenges

One of our biggest challenges was proving that the many different alleged practices, which were generally not included in any written policy, were widespread, continuing, and systemic rather than past, isolated errors. The district court agreed with the defendant that a class could not be certified prior to the completion of the first round of a bifurcated discovery process. In light of the recent decision by the U.S. Supreme Court in Wal-Mart Stores Incorporated v. Dukes, plaintiffs’ attorneys should expect similar challenges in other “pattern and practice” class actions (see 131 S. Ct. 2541 (2011)).

We therefore knew we needed to gather large amounts of evidence from providers and recipients about all of the alleged practices before we could even obtain class certification or ask in discovery for information that would identify class members. (Once a class is certified, it is much easier to obtain a protective order allowing class counsel to access information about unnamed class members otherwise protected by state and federal privacy laws.) This process was very difficult, particularly because providers and ValueOptions, not recipients, had most of the evidence we needed. Providers were going out of business; employees of providers were quitting; and many providers did not want to be involved in litigation, feared retaliation, or simply did not want to take the time to gather documentation for us. A related challenge was the risk that evidence would become stale or that witnesses and provider records would disappear before trial. This risk increased because the defendant filed motions to dismiss and then filed an interlocutory appeal when the district court denied those motions, all of which delayed formal discovery, including subpoenas to nonparties (see McCartney v. Cansler, 608 F. Supp. 2d 694 (E.D.N.C. 2009)).

We thus devoted a great deal of resources to gathering evidence. Fortunately Legal Services of Southern Piedmont had an “impact fund” from attorney fee awards in previous class actions to hire temporary staff. We used law students and volunteers and recruited a large law firm to work pro bono on factual investigation and discovery in the case. Legal Services of Southern Piedmont regularly reached out to legal services field programs and to provider groups for help in obtaining evidence and potential plaintiffs. We clearly delineated the responsibilities of each attorney and created a document-control system to allow us to organize and cross-reference potential evidence as it was collected.

Litigated Legal Issues

We carefully timed the initial filing of the complaint to be sure that the named plaintiff’s factual situation had not changed, so he would clearly have standing as of the date of filing. We filed an amended complaint a few weeks later to add more plaintiffs and allegations. Nonetheless, efforts by the state agency to challenge standing and to moot out the case began immediately; approving many new services for the named plaintiffs and issuing instructions to the agency’s contractor to stop certain practices were among such efforts. Also, after the state legislature passed changes in the Medicaid appeal process, the state agency argued that the new law rendered the case moot.

To defend against mootness, we made sure that each of the named plaintiffs had chronic conditions and therefore would continue to need Medicaid services and faced the risk of repeated violations unless the court enjoined the defendants’ practices. Also helpful in preventing mootness was plaintiffs’ request that the court order prospective reinstatement of all class members whose services had been improperly denied, reduced, or terminated. The Fourth Circuit reaffirmed our right to seek such relief under the Eleventh Amendment (D.T.M. v. Cansler, 382 F. App’x 334, 337 (4th Cir. 2010) (citing Kimble v. Solomon, 599 F.2d 599, 605 (4th Cir. 1979))).

Another litigated issue was to what extent we had to prove that the practices were authorized or at least permitted to continue by the state agency. The agency argued that Monell v. Department of Social Services precluded respondeat superior liability under Section 1983 (see 436 U.S. 658 (1978)). The district court rejected this defense; the “single state agency” requirement in the Medicaid statute prohibits the agency from contracting away its obligation to provide due process (608 F. Supp. 2d at 701 (citing 42 U.S.C. § 1396a(a)(5); 42 C.F.R. § 431.10)), the court agreed with plaintiffs. The Fourth Circuit took a slightly different approach in its ruling, holding that Monell applies only to claims for damages, not to injunctive relief (382 F. App’x at 338).

This issue arose in part because of an early tactical decision not to join the state contractor, ValueOptions, as a defendant. We felt confident that the court would agree with us on the single state Medicaid agency issue, and we did not want the agency to be able to pass the buck. We also wanted to limit the number of parties and attorneys on the other side. Ultimately this decision probably made it easier for the state agency to settle the case by imposing new duties on ValueOptions because ValueOptions was not at the negotiating table.

One of the defendant’s primary legal arguments was that Medicaid recipients have no right to continuation of services beyond the end of the period for which services have previously been authorized. The defendant asserted that the plaintiffs’ entitlement to a particular Medicaid service was therefore time-limited. The district court rejected this argument in denying the defendant’s motion to dismiss (608 F. Supp. 2d at 698–99). The Fourth Circuit did not reach the issue because it declined to reach any issues other than the Eleventh Amendment in an interlocutory appeal and refused to consider the merits under that analysis (382 F. App’x at 336, 337–38).

The defendant’s Eleventh Amendment argument was based in part on the agency’s theory that the entitlement to Medicaid services was time-limited, and thus the relief sought pertained to a past period of time. The agency also argued that the Medicaid statute gave a right to payment only for past services, that individual involvement by the agency defendant was necessary under the Eleventh Amendment, and that certain allegations in the complaint were written in the past tense. Both the district court and the Fourth Circuit rejected all of these arguments. The Fourth Circuit relied heavily on the Supreme Court’s decision in Verizon Maryland Incorporated v. Public Service Commission in refusing to allow the defendant to bootstrap other issues into its Eleventh Amendment appeal or to require the district court to go beyond the allegations of the complaint in its Eleventh Amendment analysis (382 F. App’x at 337–38 (citing 535 U.S. 635 (2002))).

Critical to defeating the state agency’s motion to dismiss on this and other issues was careful and specific pleading in the amended complaint—avoiding or explaining boilerplate language and alleging that the practices were authorized or permitted by the defendant, that the practices were ongoing, and that the named plaintiffs were suffering ongoing harm. In light of the Supreme Court’s recent decision in Ashcroft v. Iqbal, this type of specific, nonconclusory, factual pleading is now essential in federal court (see 129 S. Ct. 1937 (2009)).

Another litigated issue arose from the three plaintiffs having each pursued administrative appeals of the terminations or reductions of their services besides filing this lawsuit, and two of those appeals were pending when the case was filed. We could not ethically advise our clients not to pursue their administrative remedies, particularly because they could and did receive continued services pending the outcome of those appeals. The defendant argued that the court should abstain under Younger v. Harris, a position that the district court rejected (608 F. Supp. 2d at 703 (discussing 401 U.S. 37 (1971))). The agency also unsuccessfully argued that the plaintiffs’ claims were not ripe until administrative remedies were exhausted (608 F. Supp. 2d at 701). The defendant argued that under the progeny of Parratt v. Taylor a due process claim did not lie where the plaintiff had not exhausted a facially adequate administrative remedy (see 451 U.S. 527 (1981)). The plaintiffs successfully relied on the Supreme Court’s holding in Patsy v. Board of Regents that administrative remedies need not be exhausted under Section 1983 (see 457 U.S. 496 (1982)). We were able to distinguish the Parratt line of cases because this case challenged systemic practices rather than individual unauthorized actions.

Settlement Issues

Negotiations between the parties began even before the case was filed and continued intermittently thereafter, but progress was extremely difficult. The defendant’s strategy in the case appeared to be to file motions to dismiss and then file an interlocutory appeal in order to delay discovery and try to render the plaintiffs’ evidence stale. Ultimately this strategy probably backfired by giving the plaintiffs the momentum of court victories without ever having to produce a single piece of evidence. The district court’s decision to bifurcate discovery also probably increased the pressure on the defendant to settle to avoid the expense and burden to both the state agency and its contractor from two rounds of discovery.

The case almost settled during mediation ordered by the Fourth Circuit. The mediation ordered by the Fourth Circuit is a very good one for legal services cases because, unlike district court–ordered mediation, the Fourth Circuit, rather than the parties, pays the mediator. Here the mediation fell apart when the defendant refused to bifurcate the discussion of attorney fees from the merits and insisted that we accept an inadequate sum for fees as part of the settlement. The named plaintiffs were very supportive of our need for a reasonable attorney fee to be able to monitor and enforce implementation of any settlement or to file new litigation if needed to protect their rights. We terminated negotiations, in part due to this issue, and the case proceeded to briefing and oral argument.

Negotiations resumed after remand by the Fourth Circuit, just before discovery was to begin. The negotiations probably ultimately succeeded in part because a mediator was no longer involved; this made it easier for the parties to communicate directly with each other instead of waiting for the mediator to shuttle back and forth. Another factor was that an agency attorney who had not been involved in conducting the litigation became more active in negotiations, perhaps bringing a more dispassionate and practical view than that of the attorney general’s office, which was still in the heat of battle with us.

The most difficult barrier to settlement was probably the state’s insistence that a state statute precluded the agency from agreeing to any consent judgment that would require the future expenditure of funds not yet appropriated by the legislature. Instead of a consent judgment enforceable by the court, the ultimately agreed-upon settlement structure required approval of a conditional settlement agreement by the court, followed by implementation of the settlement, followed by a period of monitoring of the state’s compliance with the agreement, and ending with dismissal of the lawsuit if the defendant is in substantial compliance with the agreement at the end of the monitoring period. If not, the settlement agreement becomes void and the litigation is reopened.

We agreed to this design for several reasons. We began to see that it was the only way to settle the case; a similar framework had been successful in another case; and the state agency agreed to implement very good new procedures for all Medicaid services, not just those covered by the class definition in this case. We believed that once these complex procedures were fully implemented, they would likely remain in place even after the case was dismissed, particularly because the state agency’s lawyers knew that we would file a new lawsuit if needed and would have the funds to do so. Along with other advocates, we succeeded while the case was pending in amending state legislation to include some of the most important protections such as the right to a true de novo hearing; the legislation amendment made it more likely that dismissal of the lawsuit would not lead to a reversal of the defendant’s practices (see N.C. Gen. Stat. § 108A-70.9A70.9B (2011)).

The final settlement agreement included attached notice templates, scripts for phone conversations, and detailed procedures that the state agency and its contractors must follow. The court approved the settlement, which, according to the defendant, has been implemented. The monitoring period is ongoing.


This case is a lesson in making due process work in the real world of Medicaid services as well as on paper, the need for adequate resources and experienced counsel in complex litigation, and the practical, procedural, and legal issues that are likely to arise in pattern and practice class action litigation under Section 1983 against a state agency.

Author’s Acknowledgment

I would particularly like to thank my cocounsel, Jane Perkins of the National Health Law Project, whose assistance was critical to our ultimate success in this case.

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