While Medicaid rules require state Medicaid programs to provide reimbursements for out-of-state services provided to beneficiaries, the District Of Colombia Court of Appeals has ruled that states can limit supplemental payments funded through a tax or assessment on in-state providers to in-state providers.

In Asante v. Kennedy, No. 23-5055 (D.C. Cir. 2025), border hospitals caring for California residents covered by California’s Medi-Cal program argued California violated the Commerce Clause and the Equal Protection Clause of the Constitution by refusing to pay Medi-Cal supplemental payments provided to in-state hospitals caring for Medi-Cal beneficiaries to the border hospitals treating Medi-Cal beneficiaries seeking care outside California. 

The Medi-Cal program is the program through which California participates in Medicaid. Federal Medicaid funding is available to States for expenditures related to the provision of a covered Medicaid service to a Medicaid beneficiary under 42 U.S.C. § 1396b.

For purposes of Asante, the Court distinguished between two types of State Medicaid expenditures:

• Base payments, which CMS has defined as payments made to providers “on a per-claim basis for services rendered to a Medicaid beneficiary,” and
• Supplemental payments, which are payments to providers separate from (and in addition to) the “per-claim” base payments for services rendered to a beneficiary.

See Medicare and Medicaid Programs; Minimum Staffing Standards for Long-Term Care Facilities and Medicaid Institutional Payment Transparency Reporting, 89 Fed. Reg. 40,876, 40,925 (June 21, 2024) (citing 42 U.S.C. § 1396b(bb)); 42 C.F.R. § 438.6(a).

The Medicaid law does not require states to fund their share of Medicaid expenditures entirely on their own. Instead, States may tax providers in accordance with specified criteria to generate funds that the federal government then matches. In 2009, California exercised this taxing authority by establishing a Quality Assurance Fee (“QAF”) as part of its administration of Medi-Cal. The QAF program operates by: (i) assessing a provider tax, which California calls a quality assurance fee, on nonexempt in-state hospitals; (ii) using those funds to generate matching federal Medicaid funding; and (iii) distributing the collected funds as supplemental payments to qualifying private in-state hospitals. Id. §§ 14169.50, 14169.52, 14169.54, 14169.55.

Following California’s original creation of the QAF program, a group of out-of-state hospitals located near the California border challenged the program in federal court in California, claiming an entitlement to receive the QAF supplemental payments, which by California law were to go solely to instate hospitals. At that time, California chose to settle rather than fight the out-of-state hospitals.  Consequently, California entered into settlement agreements under which it gave QAF supplemental payments to those out-of-state hospitals through 2019. Those settlement agreements expired in 2019.

When California sought and obtained in 2020 CMS approval of the QAF program with payments restricted to in-state hospitals for the next two-year cycle, California again faced challenges from out-of-state hospitals along its border.  A group of out-of-state hospitals located near the California border again argued in federal court that their exclusion from the QAF supplemental payments violates the Commerce Clause, the Equal Protection Clause, and federal Medicaid regulations. After district court granted summary judgment approving the California exclusion of the out-of-state providers, Asante v. Azar, 656 F. Supp. 3d 185, 190 (D.D.C. 2023), the border hospitals appealed.

In its ruling upholding California’s limitation of eligibility for the supplemental payments, the Court rejected each of the border hospital’s Constitutional challenges to their ineligibility.1

Regarding the Commerce Clause, the Court of Appeals rejected the border hospitals’ Commerce Clause’s claim that the QAF program discriminates against interstate commerce because California pays QAF supplemental payments only to in-state hospitals. The Appeals Court noted that both the QAF provider tax assessed against in-state hospitals and the QAF supplemental payments given to in-state hospitals are calculated based solely on the in-state provision of medical care to in-state patients. The QAF program does not assess a tax against out-of-state hospitals. Since California makes no “obvious effort to saddle those outside the State” with the costs of the QAF program.  Since out-of-state hospitals neither incur the costs (the provider tax) nor receive the benefits (the supplemental payments) of the QAF program, the Appeals Court held that the program does not discriminate against interstate commerce—as it imposes no “differential burden on any part of the stream of commerce” here. See W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 202 (1994).

The Court likewise rejected the border hospital’s claim that California violated the Equal Protection Clause. Noting that a challenged state law such as the California statute that does not include factors justifying heightened scrutiny must be upheld under the Equal Protection Clause “if there is any reasonably conceivable state of facts that could provide a rational basis” for it, the Court ruled that limiting eligibility for the supplemental payments to the in-state hospitals that paid the taxes that funds it.  Accordingly, the Court ruled the border hospitals were not entitled to receive supplemental payments under the Equal Protection Clause.

Finally, the Appeals Court also rejected the border hospitals’ last argument that California’s QAF program violated HHS Regulations by denying the supplemental payments to the border hospitals because the supplemental payments are not reimbursements for services and therefore not covered by 42 C.F.R. § 431.52.

Accordingly, the Appeals Court ruled that California does not violate the Commerce Clause or Equal Protection Clause of the United States Constitution by excluding out-of-state hospitals located along the California border (“border hospitals”) that treat California residents enrolled in Medi-Cal from eligibility to collect Medi-Cal supplemental payments paid to California hospitals for treating Medi-Cal-covered Californians.

The author of this update, Cynthia Marcotte Stamer has decades of experience advising health care providers, Medicare and Medicaid Advantage and other public and private health plans and plan sponsors, government contractors and grant recipients, government health and social security programs, and their technology, data, third party administrators, and other managed care and other health care, defense, technology, life sciences and other clients about health industry quality, technology, reimbursement, licensing and accreditation, compliance, enforcement, governmental affairs, dispute resolution, and other compliance, risk management and operational matters. If you have questions or need advice or help evaluating or addressing these or other compliance, risk management, or other concerns, contact her. 

For More Information

We hope this update is helpful. For more information about the  or other health or other employee benefits, human resources, or health care developments, please contact the author Cynthia Marcotte Stamer via e-mail or via telephone at (214) 452-8297.

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About the Author

Recognized by her peers as a Martindale-Hubble “AV-Preeminent” (Top 1%) and “Top Rated Lawyer” with special recognition LexisNexis® Martindale-Hubbell® as “LEGAL LEADER™ Texas Top Rated Lawyer” in Health Care Law and Labor and Employment Law; as among the “Best Lawyers In Dallas” for her work in the fields of “Labor & Employment,” “Tax: ERISA & Employee Benefits,” “Health Care” and “Business and Commercial Law” by D Magazine, Cynthia Marcotte Stamer is a practicing attorney board certified in labor and employment law by the Texas Board of Legal Specialization and management consultant, author, public policy advocate and lecturer widely known for her more than 35 years of health industry and other management work, public policy leadership and advocacy, coaching, teachings, and publications including leading edge work on workforce and other risk management and compliance.

Ms. Stamer’s work throughout her career has focused heavily on working with health care, health insurance and managed care, insurance and financial services, defense contractors, and other workforce and data sensitive businesses domestically and internationally on employment, benefits, data and other knowledge use and protection, Federal Sentencing Guidelines and other workforce and heath care management, internal and operational controls, regulatory and public policy and other legal and operational concerns.  As a part of this work, she has had extensive involvement in the design, enforcement, investigation, mitigation and defense of trade secret and other information privacy and confidentiality, HRIS, claims, electronic medical records, payment, and other systems and technologies; HIPAA and other health industry, DOD,  FACTA, GLB, EU, and other data privacy and security, trade secret and other confidential information; and other information privacy and security laws, policies, practices, contracts and requirements. 

In addition, Ms. Stamer serves as a Scribe for the American Bar Association (“ABA”) Joint Committee on Employee Benefits annual agency meetings with OCR and shares her thought leadership as International Section Life Sciences Committee Vice Chair, and a former Council Representative, Past Chair of the ABA Managed Care & Insurance Interest Group, former Vice President and Executive Director of the North Texas Health Care Compliance Professionals Association, past Board President of Richardson Development Center (now Warren Center) for Children Early Childhood Intervention Agency, past North Texas United Way Long Range Planning Committee Member, and past Board Member and Compliance Chair of the National Kidney Foundation of North Texas, and a Fellow in the American College of Employee Benefit Counsel, the American Bar Foundation and the Texas Bar Foundation, Ms. Stamer also shares her extensive publications and thought leadership as well as leadership involvement in a broad range of other professional and civic organizations. 

Author of many highly regarded compliance, training and other resources on cybercrime and other data privacy and security, health and other employee benefits, health care, insurance, workforce and other risk management and compliance, Ms. Stamer is widely recognized for her thought leadership and advocacy in these matters.  

For more information about Ms. Stamer or her health industry and other experience and involvements, see www.cynthiastamer.com or contact Ms. Stamer via telephone at (214) 452-8297 or via e-mail here.

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