                                    PRECEDENTIAL

       UNITED STATES COURT OF APPEALS
            FOR THE THIRD CIRCUIT
                 _____________

              Nos. 12-3401 and 12-3501
                   _____________

     CHRIST THE KING MANOR, INC.; BALDOCK
     ASSOCIATES, d/b/a Baldock Health Care Center;
 BONHAM NURSING CENTER; BRIARLEAF NURSING
 AND CONVALESCENT CENTER, INC.; BROOKMONT
HEALTH CARE CENTER, LLC; CATHEDRAL VILLAGE;
     ELLEN MEMORIAL HEALTH CARE CENTER-
    HONESDALE, INC.; GREENLEAF NURSING AND
   CONVALESCENT CENTER, INC.; HUMBERT LANE
     ASSSOCIATES, d/b/a Humbert Lane Nursing and
   Rehabilitation Center; JEWISH HOME OF GREATER
      HARRISBURG; KINKORA PYTHIAN HOME
      CORPORATION; KUTZTOWN MANOR, INC.;
    MISERICORDIA CONVALESCENT HOME; CPSR
    ASSOCIATES, LLC, d/b/a Mon Valley Care Center;
 PICKERING MANOR HOME; 4144 SCHAPER AVENUE
     OPERATING COMPANY, LLC, d/b/a Presque Isle
Rehabilitation & Nursing Center; RHEEMS NURSING AND
  REHABILITATION, LLC; RESIDENCE FOR RENTAL
          CARE AT SHADYSIDE, LTD; PERINI
  SERVICE/SOUTHHAMPTON MANOR LIMITED, d/b/a
   Shippensburg Health Care Center; SIEMON NURSING
   HOME, INC.; WINDSOR, IN.C, d/b/a Snyder Memorial
Health Care Center; SOUTHWESTERN GROUP, LTD, d/b/a
  Southwestern Nursing Center; CARBON-SCHUYLKILL
 COMMUNITY HOSPITAL, INC., d/b/a St. Luke's Miners
  Memorial Geriatric Center; SUSQUEHANNA VALLEY
NURSING AND REHABILITATION CENTER, LLC; 890
WEATHERWOOD LANE OPERATING COMPANY, LLC,
    d/b/a The Rehabilitation and Nursing Center at Greater
Pittsburgh; WESTWOOD OPERARTOR, L.P., d/b/a Village
at Pennwood; MISERICORDIA CONVALESCENT HOME

                            v.

  SECRETARY UNITED STATES DEPARTMENT OF
   HEALTH AND HUMAN SERVICES; CHARLENE
FRIZZERA, in her official capacity as Acting Administrator
 of the Centers for Medicare & Medicaid Services (CMS);
HARRIET DICHTER, in her official capacity as Secretary of
  Public Welfare for the Commonwealth of Pennsylvania,
               Department of Public Welfare

CHRIST THE KING MANOR, INC.; BONHAM NURSING
CENTER; CATHEDRAL VILLAGE; ELLEN MEMORIAL
     HEALTH CARE CENTER-HONESDALE, INC.;
      SUSQUEHANNA VALLEY NURSING AND
           REHABILITATION CENTER, LLC;
    RHEEMS NURSING & REHABILITATION, LLC
  SOUTHWESTERN GROUP, LTD. d/b/a Southwestern
  Nursing Center; CPSR ASSOCIATES, LLC d/b/a Mon
Valley Care Center; KINKORA PYTHIAN HOME CORP.;
SIEMON NURSING HOME, INC. d/b/a Siemon's Lakeview
  Manor Estate; 4114 SCHAPER AVENUE OPERATING
   CO., LLC d/b/a Presque Isle Rehabilitation & Nursing
   Center; 890 WEATHERWOOD LANE OPERATING
  COMPANY, LLC d/b/a The Rehabilitation and Nursing




                            2
  center at Greater Pittsburgh; BRIARLEAF NURSING &
   CONVALESCENT CENTER, INC.; BROOKMOMT
 HEALTH CARE CENTER; KUTZTOWN MANOR, INC.;
GREENLEAF NURSING AND COVALESCENT CENTER;
WINDOSR, INC. d/b/a Snyder memorial Health Care Center;
CARBON-SCHUYKILL COMMUNITY HOSPITAL, INC.
    d/b/a St. Luke's Miner's Memorial Geriatric Center;
               PICKERING MANOR HOME,
                                    Appellants in 12-3401

  BALDOCK ASSOCIATES, d/b/a Baldock Health Care
 Center; HUMBERT LANE ASSOCIATES, d/b/a Humbert
          Lane Nursing and Rehabilitation Center,

                                Appellants in 12-3501
                    _______________

      On Appeal from the United States District Court
          for the Middle District of Pennsylvania
                  (D.C. No. 09-cv-02007)
          District Judge: Hon. John E. Jones, III
                     _______________

                  Argued: May 31, 2013

  Before: JORDAN and VANASKIE, Circuit Judges, and
            RAKOFF*, Senior District Judge.


_______________
        * Honorable Jed S. Rakoff, United States District
Court Senior Judge for the Southern District of New York,
sitting by designation.




                            3
                 (Filed: September 19, 2013)
                      _______________

Daniel K. Katirboff [ARGUED]
Capozzi & Associates
P.O. Box 5866
Harrisburg, PA 17110
      Counsel for Appellants

Sheila Lieber
United States Dep’t of Justice
Federal Programs Branch
901 E Street, NW
Washington, DC 20004

Jeffrey E. Sandberg [ARGUED]
United States Dep’t of Justice
Appellate Section
950 Pennsylvania Avenue, NW
Washington, DC 20530
      Counsel for Appellees

Patrick S. Crawley
Sean A. Kirkpatrick [ARGUED]
Office of Attorney General of Pennsylvania
Strawberry Square – 15th Fl.
Harrisburg, PA 17120
      Counsel for Appellee Harriet Dichter
                     _______________

                OPINION OF THE COURT
                    _______________




                                 4
JORDAN, Circuit Judge.

       This appeal arises from a challenge to the approval by
the Secretary of the United States Department of Health and
Human Services (“the Secretary” or “HHS”) of a 2008
amendment to Pennsylvania’s state plan for administering its
Medicaid program. Numerous private nursing facilities that
provide services to Medicaid recipients argue that the state
plan amendment, or “SPA,” violates Title XIX of the Social
Security Act, 42 U.S.C. §§ 1396 et seq. (the “Medicaid Act”
or the “Act”). Specifically, they contend that the SPA
adjusted Pennsylvania’s method for determining Medicaid
reimbursement rates to private nursing facilities for the 2008-
09 fiscal year without considering quality of care, which they
say violates 42 U.S.C. § 1396a(a)(30)(A) (“Section 30(A)”),
and without satisfying the public process requirements of 42
U.S.C. § 1396a(a)(13)(A) (“Section 13(A)”). To remedy
those alleged violations, Plaintiffs invoke the Administrative
Procedure Act (the “APA”) and the Supremacy Clause of the
Constitution, and seek declaratory and injunctive relief
against the Secretary, the Administrator of the Centers for
Medicare and Medicaid Services (“CMS”) (collectively, the
“Federal Defendants”), and the Secretary of Pennsylvania’s
Department of Public Welfare (“DPW” or the “State
Defendant”).1     The District Court granted in part the

      1
          When the nursing facilities first brought suit, the
Secretary of DPW was Estelle B. Richman, and the
Administrator of CMS was Charlene Frizzera. Since then,
others have served in both positions. The current Secretary of
DPW is Gary D. Alexander, and the current Administrator of
CMS is Marilyn Tavenner. Kathleen Sebelius has been the
Secretary of HHS since the complaint was filed.




                              5
Defendants’ motions to dismiss, and then entered summary
judgment in their favor on the remaining claims. For the
reasons that follow, we will affirm those rulings in part and
reverse them in part.

I.     Background

       A.     Factual and Statutory Background

       Medicaid is “a cooperative federal-state program that
provides medical care to needy individuals.” Douglas v.
Indep. Living Ctr. of S. Cal., 132 S. Ct. 1204, 1208 (2012).
States that choose to participate in the program are
responsible for developing and implementing a state
Medicaid plan and have considerable control over the plan’s
details and administration.       Pa. Pharmacists Ass’n v.
Houstoun, 283 F.3d 531, 533 (3d Cir. 2002) (en banc) (citing
Wilder v. Va. Hosp. Ass’n, 496 U.S. 498, 502 (1990)). In
order to qualify for federal funding, however, a state plan
must comply with the requirements of the Medicaid Act. 42
U.S.C. § 1396a (defining the requirements a state plan must
satisfy for approval); id. § 1396b(a) (providing for federal
payments “to each [s]tate which has a plan approved”).
Those requirements include, among other things, the so-called
“equal access provision” of Section 30(A), which mandates
that a state plan provide “methods and procedures” to assure
that the state pays participating nursing facilities and other
Medicaid providers at rates that are consistent with efficiency,
economy, quality of care, and adequate access to providers by
Medicaid beneficiaries. 42 U.S.C. § 1396a(a)(30)(A); see
Ark. Med. Soc’y, Inc. v. Reynolds, 6 F.3d 519, 522 (8th Cir.
1993) (explaining that Section 30(A) “is typically called the
equal access provision”). State plans must also satisfy




                               6
Section 13(A) of the Act, which requires that rates of
payment to hospitals and nursing facilities be determined
using a public process similar to notice-and-comment
rulemaking. 42 U.S.C. § 1396a(a)(13)(A).

        CMS is the division of HHS tasked with ensuring that
state plans comply with those and other requirements of the
Medicaid Act. States must submit their proposed plans to
CMS, and the agency must review each plan, “make a
determination as to whether it conforms to the requirements
for approval,” 42 U.S.C. § 1316(a)(1), and “approve any plan
which fulfills the conditions specified” in the Medicaid Act,
42 U.S.C. § 1396a(b). See also 42 C.F.R. § 430.12
(describing the submittal of state plans to CMS). A state may
later amend an approved plan, but any amendments must also
be submitted to CMS, and the agency must “determine
whether the [amended] plan continues to meet the
requirements for approval.”       42 C.F.R. § 430.12(c)(2)(i).
States are required to amend their plans “whenever necessary
to reflect,” among other things, “[m]aterial changes in State
law, organization, or policy, or in the State’s operation of the
Medicaid program.” Id.

       Pennsylvania has elected to participate in the Medicaid
program, and it has designated DPW as the “single [s]tate
agency” responsible for creating and administering the state’s
Medicaid plan.2 See 42 U.S.C. § 1396a(a)(5) (requiring states
to establish or designate “a single [s]tate agency to administer
… the plan”). Since 1996, Pennsylvania, in accordance with

       2
         Recognizing that Pennsylvania is typically referred to
as a “Commonwealth,” we nonetheless use the term “state,”
for ease of reference.




                               7
an approved state plan, has paid participating nursing
facilities for Medicaid-related services using an “annual
prospective payment rate” often referred to as the “case-mix
rate.”3 See 55 Pa. Code § 1187.95 (“Prices will be set
prospectively on an annual basis … .”); Christ the King
Manor v. Pennsylvania, 911 A.2d 624, 630 (Pa. Commw. Ct.
2006) (“Since July 1996, DPW compensated both public and
private nursing facilities through its [Medicaid] program
under what is known as the case-mix payment system.”).
DPW calculates the “case-mix rate” using a complex formula
that produces an individualized per diem reimbursement rate
for each facility based on the “allowable costs” incurred by
facilities,4 the acuity level of residents,5 and other factors.
See 55 Pa. Code § 1187.96 (describing the “[p]rice and rate-
setting computations”).        (See also J.A. at 232-242
(Pennsylvania’s State Plan).) The rate is effective for one
year, from July 1 through the following June 30, and it is
adjusted quarterly, based on resident acuity. 55 Pa. Code §
1187.95(a).

      3
         Pennsylvania uses the term “rate” in this context to
mean payment level, and we adopt that usage, even though
“rate” is often used to refer to “the proportion by which
quantity or value is adjusted.” See Black’s Law Dictionary
1289 (8th ed. 2004).
      4
        Pennsylvania defines “allowable costs” as costs
“which are necessary and reasonable for an efficiently and
economically operated nursing facility to provide services to
[Medicaid] residents.” 55 Pa. Code Ann. § 1187.2.
      5
        “Acuity” refers to the severity of illness a patient
experiences. See Stedman’s Medical Dictionary (28th ed.), at
22.




                              8
       Under       that     methodology,       Pennsylvania’s
reimbursement rates to nursing facilities have risen steadily
each year, and, beginning in 2000, the state grew concerned
that the pace of that inflation was creating unsustainable
costs. In June 2005, DPW announced that reimbursement
rates had increased by 29.4% over the previous five years,
and that, unless rates were somehow limited, there would be
“insufficient funds available to make case-mix payments to
[Medicaid] nursing facilities in accordance with the existing
case-mix payment methodology.” 35 Pa. Bull. 3267 (June 4,
2005). Therefore, after soliciting public comments and
receiving input from Pennsylvania’s Medical Assistance
Advisory Committee,6 DPW proposed using a budget
adjustment factor, or “BAF,” to slow the increasing rates.

        As it has come to be used in Pennsylvania, a BAF is a
fraction by which each provider’s case-mix payment rate is
multiplied, thereby reducing the reimbursement rate by a
certain percentage. For example, if a case-mix rate of $100
was multiplied by a BAF of 0.900, the resulting
reimbursement rate would be $90, or 10% less than what was
called for by the case-mix calculation.             Under the
methodology proposed by DPW in 2005, the size of the BAF
was to be dictated by the funds appropriated by the state
legislature for payments to nursing facilities for the 2005-06
fiscal year. Application of the BAF would therefore “cap”
payments to providers based on budget allocation decisions
by the Pennsylvania legislature. 35 Pa. Bull. 6232 (Nov. 12,

      6
          States are required to “provide for a medical care
advisory committee … to advise the Medicaid agency
director about health and medical care services.” 42 C.F.R.
431.12(b).




                              9
2005). For the 2005-06 fiscal year, the BAF rate cap allowed
payments to increase by 2.8% from the previous year.
Although the BAF reduces the case-mix rate for a given year,
that does not necessarily mean that the adjusted rate will be
less than it was the previous year. As described above, rates
calculated using the case-mix methodology have steadily
increased each year. If an annual increase is larger than the
reduction imposed by the BAF in that year, then rates can still
increase in absolute terms. For example, if rates increased
under the case-mix methodology by five percent from one
year to the next, and then the BAF reduced rates by three
percent, there would still be an overall increase in rates from
the previous year.

        Although DPW initially portrayed the BAF as “an
interim measure, applicable only to the computation of
payment rates for the 2005-2006 fiscal year,” id., BAFs
became a fixture of the state’s rate-calculation methodology.
For each year between 2005 and 2008, the Pennsylvania
legislature authorized the use of a BAF, after which DPW
submitted the BAF to CMS as a state plan amendment, and
the agency approved the change. As a result, the case-mix
rate calculated for each of those years was reduced by the
amount defined in that year’s BAF; the 2005-06 rates were
reduced by 4.878%, the 2006-07 rates by 6.245%, and the
2007-08 rates by 6.806%, as compared to what the rates
would have been without the application of the BAF.7

      7
         The BAFs for those years were 0.95122, 0.93755,
and 0.93194, respectively. Because the annual case-mix rate
is multiplied by the BAF, it is reduced by a certain
percentage. For example, if you multiply a case-mix rate by
0.95122, you arrive at a figure that is 95.122% of the original




                              10
        On June 28, 2008, two days before the prior legislative
authorization for a BAF was set to expire, DPW issued a
public notice and request for comment announcing the state’s
intent to “authorize the continued use of a budget adjustment
factor” in calculating nursing facility payment rates. 38 Pa.
Bull. 3561 (June 28, 2008) (the “June Notice”). The June
Notice explained that the continued use of a BAF would
ensure that “the aggregate increase in the Statewide day-
weighted average payment rate … does not exceed the
percentage rate of increase permitted by the funds
appropriated for nursing facility services.” Id. It defined the
formula for calculating the BAF, which, as in years 2005 to
2008, was determined by the amount the legislature allocated
for nursing facility reimbursements. The June Notice also
projected that for fiscal year 2008-09 the BAF would be
0.90551, meaning that the per diem rates under the case-mix
method would be decreased by 9.449% from what they would
have been without the application of the BAF. Id. That
projection was based on the funds allocated for nursing
facility services in the governor’s proposed budget.

        A week later, on July 4, 2008, the Pennsylvania
legislature passed “Act 44,” 62 Pa. Stat. Ann. § 443.1(7)(iii).
As if the bureaucratese were not already painfully thick in
this field, the Act directed DPW to apply what it called a
“revenue adjustment neutrality factor,” which is another term
for a BAF, in each fiscal year between July 1, 2008 and June
30, 2011. 62 Pa. Stat. Ann. § 443.1(7)(iii)(A). Act 44 also
codified the methodology announced in the June Notice, and


rate. That decrease amounts to the 4.878% reduction
described above.




                              11
provided that “the revenue adjustment neutrality factor shall
limit the estimated aggregate increase in the [s]tatewide day-
weighted average payment rate … to the amount permitted by
the funds appropriated by the General Appropriations Act for
those fiscal years.” Id. Translation: the BAF would continue
to cap annual rates at the amount Pennsylvania decided it
could afford to pay. On the same day, the legislature enacted
the General Appropriations Act for fiscal year 2008-09,
which appropriated slightly more funds for nursing facility
services than had been called for in the governor’s proposed
budget. Soon after those enactments, DPW published another
notice and request for comment regarding provider rates. 38
Pa. Bull. 3943 (July 19, 2008) (the “July Notice”). The July
Notice announced that DPW had calculated proposed annual
per diem rates for 2008-09, and that, “[c]ontingent on CMS
approval,” it would apply a BAF to those rates. Id.

      On September 30, 2008, DPW submitted a proposed
BAF for 2008-09, designated as “SPA 08-007,” to CMS for
approval.8 In a brief cover letter accompanying the SPA,

       8
           DPW actually submitted two SPAs, one regarding
the rate-calculation methodology for private nursing facilities
(SPA 08-007) and one regarding the calculation for public
nursing facilities (SPA 08-008). In their complaint, Plaintiffs
challenge both SPAs, but they raised no specific objection to
SPA 08-008 in the District Court or in this appeal, and they
have therefore waived any argument against it. See McCray
v. Fidelity Nat’l Title Ins. Co., 682 F.3d 229, 241 (3d Cir.
2012) (“[A]n appellant waives an argument in support of
reversal if he does not raise that argument in his opening brief
… .” (alteration and internal quotation marks omitted));
United States v. Dupree, 617 F.3d 724, 727 (3d Cir. 2010)




                              12
DPW explained that its purpose was “to authorize the
continued use of the budget adjustment factor (BAF) for non-
public nursing facility payment rates for the 2008-2009 rate
year.” (J.A. at 191.) The letter described the formula for
calculating the BAF, and said that “the non-public BAF
produced by this formula [for rate year 2008-09] is .90891.”
(J.A. at 192.) It further explained that the BAF served “to
moderate the growth of nursing facility payment rates
consistent with the fiscal resources of the Commonwealth,
while still providing payment rate increases sufficient to
assure that consumers will continue to have access to
medically necessary nursing facility services.” (J.A. at 191.)
Finally, the letter assured CMS that Pennsylvania had
“provided advance notice of its intent to amend its State Plan”
by publishing public notices in the Pennsylvania Bulletin.
(J.A. at 192.) With the cover letter, DPW submitted to CMS
a SPA submittal form, a chart showing that the total cost of
the state’s Medicaid program was within the regulatory
limits,9 copies of the June and July Notices, and a description
of the methods and standards used to calculate the per diem
payment rates. That description did not explain the basis for
the particular BAF proposed for 2008-09 but rather referred


(noting the “well-established proposition that arguments not
raised in the district courts are waived on appeal”). In any
event, Plaintiffs are all private nursing facilities and so were
unaffected by the changes proposed in SPA 08-008.
       9
          Federal regulations require that Medicaid payments
not exceed an “upper payment limit” that is defined as “a
reasonable estimate of the amount that would be paid for the
services furnished” under the payment principles defined in
the Act. 42 C.F.R. 447.272(b).




                              13
to Pennsylvania’s statutory provisions defining the case-mix
method and explained the use of BAFs generally. No other
information regarding the reasons behind the new BAF, or its
anticipated effect on care, was included in DPW’s initial
submission.

        In November 2008, DPW published a public notice
that included the information it had provided to CMS. 38 Pa.
Bull. 6343 (Nov. 15, 2008) (the “November Notice”). The
November Notice announced that, based on the amounts
appropriated by the state legislature, the BAF for the 2008-09
fiscal year would be 0.90891. Id. That BAF was the same as
stated in the SPA, but it differed from the estimate included in
the June Notice because of the disparity between the
governor’s proposed budget and the one the legislature
actually passed, which increased appropriations to nursing
facilities slightly. Still, the proposed BAF represented the
largest downward adjustment to the case-mix rate calculation
since Pennsylvania had introduced BAFs, reducing each
nursing facility’s proposed per diem rate by 9.109%.10
Application of the BAF to the 2008-09 case-mix rates meant
that, on average, provider payments would be one percent
higher in fiscal year 2008-09 than they had been in fiscal year

       10
            As described above, see supra note 7 and
accompanying text, per diem rates calculated using the case-
mix methodology are multiplied by the BAF. A case-mix rate
multiplied by 0.90891 (the BAF for the 2008-09 fiscal year)
will be 90.891% of its original value. In other words,
application of the proposed BAF reduces the case-mix rate by
9.109%. Plaintiffs incorrectly state in their opening brief that
the 2008-09 BAF “results in a reduction of 9.0891%.”
(Appellants’ Opening Br. at 26.)




                              14
2007-08, due to the continuing increase in per diem rates
under the case-mix methodology.11

        Meanwhile, CMS was reviewing SPA 08-007. Keith
Leuschner, the CMS employee responsible for reviewing
Pennsylvania’s SPAs, contacted DPW in November 2008 to
clarify what effect the SPA would have on the federal dollars
flowing to Pennsylvania. In particular, Leuschner was
concerned because the form DPW submitted with its SPA
showed negative numbers in the “federal budget impact” box
for fiscal years 2008 and 2009, which suggested “that
nonpublic nursing facilities would be paid less [under the
amended plan] than if the state continued using the existing
payment methodology.” (J.A. at 180.) Leuschner asked
DPW if that was the case, and the agency responded that the
numbers on the form were actually incorrect, and “that

       11
             As discussed above, rates can still increase in
absolute terms from year to year, even with the application of
a BAF, because of the continuing use of the case-mix
methodology. The specific basis for the one percent increase
in 2008-09 is not entirely clear, as the case-mix rates for the
2007-08 fiscal year are not in the record. What we do know
is that: (1) the 2007-08 rates were calculated using the case-
mix methodology, and were then reduced by 6.806% (using
the 2007-08 BAF); (2) the 2008-09 rates were calculated
using the case-mix methodology, and were then reduced by
9.109% (using the 2008-09 BAF); and (3) the 2008-09 rates
resulted in payments that, overall, were one percent higher
than in the previous year. The increase therefore must have
been due to some component of the case-mix formula, as the
change in the BAF served only to reduce the case-mix rates
by a larger amount.




                              15
nonpublic nursing homes were going to be paid more under
the proposed rate methodology for state rate-setting year
2008-2009 than they would have been paid if the existing rate
structure were not changed.” (J.A. at 180.) To demonstrate
that assertion, DPW provided a spreadsheet, which Leuschner
understood to be comparing the rates for the 2008-09 fiscal
year     calculated    “under      Pennsylvania’s    proposed
methodology” with those “calculated in accordance with the
methodology Pennsylvania had in place under the existing
and (at that time approved) rate-setting method.”12 (J.A. at
181.) Leuschner “concluded that the total payments to
private nursing homes were estimated to increase slightly
during federal fiscal years 2008 and 2009 under the proposed
SPAs,” and so “recommended proceeding with approval.”
(J.A. at 182.) CMS made a few “pen and ink” changes to the
transmittal form to correct the federal budget impact numbers
(J.A. at 221), and, on December 12, 2008, it approved the
SPA. In doing so, it specifically certified that the SPA
conformed with the requirements of Section 13(A) and
Section 30(A), and retroactively made the SPA’s effective
date July 1, 2008.13

      12
         As discussed infra, Leuschner’s understanding does
not appear to have been accurate, as he implies that the 2008-
09 rates would have been lower if the SPA were not
approved. That is incorrect, because if CMS did not
authorize the use of a BAF for the 2008-09 fiscal year, as
requested by SPA 08-007, then the per diem rates would not
have been adjusted at all. Leuschner was correct, however,
that reimbursement rates would increase in absolute terms
from 2007-08 to 2008-09.
      13
        Regulations permit CMS in some situations to make
a plan amendment retroactively effective. See 42 C.F.R.




                             16
        In March 2009, DPW published a final public notice
announcing the finalized annual per diem payment rates, after
the application of the BAF, for private nursing facilities for
2008-09. 39 Pa. Bull. 1596 (Mar. 28, 2009). It then sent
letters to all participating nursing facilities to notify them of
their final individualized rates.

       B.     Procedural History

        Following DPW’s publication of the final payment
rates, Plaintiffs filed timely state administrative appeals with
DPW’s Bureau of Hearings and Appeals (the “BHA”)
challenging those rates and asking that DPW “recalculate
them consistent with [the] law.” (Administrative Appeal,
Doc. 20, Ex. A, at 14.) See 55 Pa. Code §§ 41.5 (giving BHA
“exclusive jurisdiction over provider appeals”) & 41.31
(allowing “[a] provider that is aggrieved by an agency action”
to “appeal and obtain review of that action by the [BHA] by
filing a request for hearing”). They claimed that DPW had
violated the Medicaid Act and its own regulations by
providing inadequate notice of and public process for the
proposed rate changes, by retroactively setting the 2008-09
rates, and by failing to provide CMS with any information on
which that agency of the federal government could base its
conclusion that SPA 08-007 satisfied Section 30(A)’s
requirements. In particular, Plaintiffs alleged that there was

§§ 430.20(b)(2) & 447.256(c) (permitting a state plan
amendment that changes the state’s payment methods and
standards to become effective as early as “the first day of the
calendar quarter in which an approvable amendment is
submitted”).




                               17
no evidence of any consideration of the SPA’s effect on
quality of care.

       In October 2009, with those state administrative
appeals pending, Plaintiffs filed the present action in the
United States District Court for the Middle District of
Pennsylvania, bringing claims for declaratory and injunctive
relief against the Secretary of HHS, the Administrator of
CMS, and the Secretary of DPW. Specifically, the complaint
asserted a claim under the APA against the Federal
Defendants, seeking to have HHS’s approval of SPA 08-007
set aside as being contrary to law. The complaint also
included a claim under the Supremacy Clause against the
State Defendant, seeking to bar the application of SPA 08-
007 in the determination of payment rates. Those claims
were primarily based on the Federal and State Defendants’
alleged violations of Section 30(A) and Section 13(A) in their
development and approval of the 2008-09 state plan
amendments.

       Both the Federal and the State Defendants filed timely
motions to dismiss Plaintiffs’ claims.          The Federal
Defendants argued that the APA claim was barred by
sovereign immunity, but the District Court disagreed,
concluding that the claim fell within the scope of the waiver
of federal sovereign immunity provided for in the APA.14 It


       14
           The APA provides a waiver of federal sovereign
immunity to people “adversely affected or aggrieved by
agency action within the meaning of the relevant statute,” 5
U.S.C. § 702, when the agency action is made reviewable by
statute or there is a final agency action “for which there is no




                              18
therefore denied the Federal Defendants’ motion to dismiss.
The State Defendant’s motion raised three independent bases
for dismissal: the abstention doctrine described in Younger v.
Harris, 401 U.S. 37 (1971), mootness, and Eleventh
Amendment sovereign immunity. The District Court granted
the motion in part. It abstained from deciding the Supremacy
Clause claim insofar as it related to “conduct occurring prior
to CMS approval of the proposed amendments[,]” as those
issues could be adequately addressed in the ongoing state
administrative proceeding. Christ the King Manor, Inc. v.
Sebelius, No. 1:09-cv-2007, at 19 (M.D. Pa. June 29, 2010)
(slip op.). It also dismissed the request for declaratory relief
on immunity grounds, explaining that, if it “were to issue a
declaratory decree to the effect that State Defendant’s
implementation of the [SPA] violated federal law,” the decree
could have res judicata effect in the state administrative
appeals process, which “would leave to the state system ‘only
a form of accounting proceeding whereby damages or
restitution would be computed.’” Id. at 25 (quoting Green v.
Mansour, 474 U.S. 64, 73 (1985)).) The District Court held
that the case was not moot, however, and it did not dismiss
Plaintiffs’ claim for injunctive relief regarding the continuing
application of the amended state plan.

       The parties proceeded to discovery, and subsequently
filed cross motions for summary judgment on the remaining
claims. The District Court granted the Federal and State
Defendants’ motions on July 24, 2012,15 holding that,

other adequate remedy,” id. § 704. On appeal, the Federal
Defendants do not contest that the waiver applies here.
       15
      The case was stayed from March 2011 until March
2012 while the Supreme Court decided Douglas v.




                              19
“[g]iven [the] regulatory framework … and the deference
afforded agency decision-making, … there is substantial
evidence in the [administrative record] to support the
Secretary’s approval of the SPAs under [S]ection 30(A).”
Christ the King Manor, Inc. v. Sebelius, No. 1:09-cv-2007,
2012 WL 3027543, at *8 (M.D. Pa. July 24, 2012). It further
held that CMS could properly conclude that DPW had
substantially complied with the public process requirements
of Section 13(A). Id. at *15. The Court therefore found that
HHS’s approval of SPA 08-007 was not arbitrary or
capricious, and that the State Defendant’s implementation of
the SPA was proper. Id. at *16-*17. Accordingly, it denied
Plaintiffs’ motion and entered judgment for the Defendants.
Id. at *17. This timely appeal followed, in which Plaintiffs
appeal both the grant of summary judgment and the earlier
partial dismissal of Plaintiffs’ claim against the State
Defendant.

II.   Discussion16

      On appeal, Plaintiffs ask that we reverse the District
Court’s orders and enter judgment in their favor on all counts.
They repeat their contention that HHS’s approval of SPA 08-




Independent Living Center of Southern California, 132 S. Ct.
1204 (2012), a case discussed infra that arose from
California’s cuts to Medicaid reimbursement rates.
      16
           The District Court had jurisdiction pursuant to 28
U.S.C. § 1331 and 5 U.S.C. §§ 701-706. We have
jurisdiction pursuant to 28 U.S.C. § 1291.




                              20
007,17 as well as DPW’s implementation of it, violates federal
law, specifically Sections 30(A) and 13(A) of the Medicaid
Act. They also argue that their claim against the State
Defendant can be addressed in this proceeding and should be
resolved in their favor. This appeal therefore presents two
distinct issues: first, whether the Federal Defendants’
approval of SPA 08-007 was proper under the APA, and,
second, what relief, if any, Plaintiffs can obtain from the State
Defendant in this suit.

       A.     APA Claim Against the Federal Defendants

      Plaintiffs argue that HHS’s approval of SPA 08-007
was improper for two reasons.18 First, they say that there was

       17
         For simplicity, we will generally refer to “HHS” or
“the Secretary” when discussing the SPA approval process.
We recognize that CMS conducted the approval process and
exercised delegated authority in approving SPA 08-007.
       18
             Although SPA 08-007 only defined nursing
facilities’ reimbursement rates for the 2008-09 fiscal year, no
party contends that Plaintiffs’ challenge to HHS’s approval
decision is moot. Nonetheless, we have an independent
obligation to determine whether Plaintiffs’ claim presents a
justiciable case or controversy. Rendell v. Rumsfeld, 484 F.3d
236, 240 (3d Cir. 2007). “[A] case will be considered moot,
and therefore nonjusticiable as involving no case or
controversy, if the issues presented are no longer ‘live’ or the
parties lack a legally cognizable interest in the outcome.” In
re Surrick, 338 F.3d 224, 229 (3d Cir. 2003) (quoting In re
Kulp Foundry, Inc., 691 F.2d 1125, 1128 (3d Cir. 1982))
(internal quotation marks omitted). We conclude that
Plaintiffs’ claim against the Federal Defendants is not moot.




                               21
insufficient evidence in the administrative record to support
any conclusion that the SPA satisfies Section 30(A) of the
Medicaid Act. Discussed in more depth below, that provision
requires that a state plan provide “methods and procedures”
necessary to “assure” that payments to providers are
“consistent with” efficiency, economy, quality of care, and
adequate access to providers. 42 U.S.C. § 1396a(a)(30)(A).
Plaintiffs note that SPA 08-007 categorically reduced – by
more than nine percent – the per diem payments which are
called for by the state’s own case-mix calculation, and which


Although SPA 08-007 will not define their reimbursement
rates in the future, nursing facilities continue to believe that
the HHS’s decision to approve the SPA violated federal law,
and that they are entitled to reimbursement rates for 2008-09
that are calculated in accordance with a properly approved
state plan. This appeal provides an opportunity for them to
obtain some measure of relief, since, if the agency’s action
was arbitrary or capricious under the APA, we must set that
action aside and require the agency to conform its action to
federal law. 5 U.S.C. § 706(2)(A) (“The reviewing court
shall … hold unlawful and set aside agency action … found
to be … arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law … .”); see also Fla.
Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985)
(explaining that, “[i]f the record before the agency does not
support the agency action, … the proper course, except in rare
circumstances, is to remand to the agency for additional
investigation or explanation”). Plaintiffs therefore have an
interest in the outcome of this appeal “that is real and not
hypothetical,” and their claim against the Federal Defendants
provides an “occasion for meaningful relief.” Rendell, 484
F.3d at 240 (internal quotation marks omitted).




                              22
are represented by the state as reflecting what is “necessary
and reasonable for an efficiently and economically operated
nursing facility to provide services to [Medicaid] residents.”
55 Pa. Code § 1187.2. They say that the arbitrary reduction
imposed by the SPA threatens the quality of care provided to
Medicaid recipients, yet the administrative record is “silent”
as to the Defendants’ “consideration of the quality of care
factor.” (Appellants’ Opening Br. at 45.) Therefore, they
contend, HHS improperly concluded that the amended state
plan satisfies Section 30(A). Plaintiffs’ second contention is
that HHS erred in concluding that DPW had satisfied the
public process requirements of Section 13(A).           More
particularly, they say that the only public notice published
before the SPA’s effective date failed to comply with federal
regulations regarding the content of such notices.

        The District Court rejected both lines of argument.
According significant deference to HHS’s interpretations of
the Medicaid Act, the Court held that the record was
sufficient to support the Secretary’s approval of the SPA.
Christ the King Manor, 2012 WL 3027543, at *8-*9. For the
reasons elaborated herein, we disagree in part. Although we
agree with the District Court that we must defer to HHS’s
reasonable interpretations of the Medicaid Act, and that DPW
satisfied the public process requirements of Section 13(A), we
part ways when it comes to the District Court’s decision that
HHS could properly conclude on the evidence before it that
SPA 08-007 complies with Section 30(A). Our conclusion is,
to the contrary, that HHS’s approval of the SPA was arbitrary
and capricious, and must be set aside.




                             23
              1.     Standard of Review

        “We apply de novo review to a district court’s grant of
summary judgment in a case brought under the APA, and in
turn apply the applicable standard of review to the underlying
agency decision.” Pa. Dep’t of Pub. Welfare v. Sebelius, 674
F.3d 139, 146 (3d Cir. 2012) (internal quotation marks
omitted). Section 706 of the APA governs our review of the
agency action. CBS Corp. v. FCC, 663 F.3d 122, 137 (3d Cir.
2011). It provides that we shall “hold unlawful and set aside
agency action, findings, and conclusions” that are “arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law.” 5 U.S.C. § 706(2)(A). Under that
restricted standard of review, we must consider whether the
agency “examine[d] the relevant data and articulate[d] a
satisfactory explanation for its action,” while being careful
“not to substitute [our own] judgment for that of the agency.”
Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983); see also Prometheus
Radio Project v. FCC, 373 F.3d 372, 389-90 (3d Cir. 2004)
(“[W]e must ensure that, in reaching its decision, the agency
examined the relevant data and articulated a satisfactory
explanation for its action, including a ‘rational connection
between the facts found and the choice made.’” (quoting State
Farm, 463 F.3d at 43)). An agency action may be arbitrary
and capricious “if the agency has relied on factors which
Congress has not intended it to consider, entirely failed to
consider an important aspect of the problem, offered an
explanation for its decision that runs counter to the evidence
before the agency, or is so implausible that it could not be
ascribed to a difference in view or the product of agency
expertise.” State Farm, 463 U.S. at 43.




                              24
       In determining whether any of those circumstances
exist, we are conscious of our responsibility to “uphold a
decision of less than ideal clarity if the agency’s path may
reasonably be discerned.” Id. (quoting Bowman Transp. Inc.
v. Ark.-Best Freight Sys., 419 U.S. 281, 286 (1974) (internal
quotation marks omitted)). Nevertheless, we should not
“supply a reasoned basis for the agency’s action that the
agency itself has not given.” Id. (internal quotation marks
omitted).      Our review must also be based on “the
administrative record [that was] already in existence” before
the agency, not “some new record made initially in the
reviewing court” or “post-hoc rationalizations” made after the
disputed action. Rite Aid of Pa., Inc. v. Houstoun, 171 F.3d
842, 851 (3d Cir. 1999) (internal quotation marks omitted).

       The agency action at issue here is HHS’s approval of
Pennsylvania’s SPA 08-007, which Plaintiffs argue was
arbitrary and capricious because there was insufficient
evidence in the administrative record that, as required by
Section 30(A), DPW had considered the SPA’s impact on
quality of care, or that it had followed the public process
requirements of Section 13(A). In so arguing, Plaintiffs
implicitly take issue with HHS’s interpretation of the
Medicaid Act. By approving SPA 08-007, HHS evidently
concluded that Pennsylvania’s amended state plan satisfies
the requirements of Sections 30(A) and 13(A) of the Act. See
42 U.S.C. § 1316(a)(1) (requiring the Secretary to “make a
determination as to whether [the submitted plan] conforms to
the requirements for approval”). To reach that conclusion,
the agency had to determine what those requirements entail,
which involves interpreting the relevant provisions.
Therefore, we must establish at the outset whether to accord
Chevron deference to agency interpretations of the Medicaid




                             25
Act inherent in HHS approval of a state plan amendment.19
See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
467 U.S. 837, 842-44 (1984) (barring a court from
“substitut[ing] its own construction of a statutory provision
for a reasonable interpretation made by the administrator of
an agency”).

       Under the Supreme Court’s decision in United States
v. Mead Corp., “administrative implementation of a particular
statutory provision qualifies for Chevron deference when it
appears that Congress delegated authority to the agency
generally to make rules carrying the force of law, and that the
agency interpretation claiming deference was promulgated in
the exercise of that authority.” 533 U.S. 218, 226-27 (2001).
As the United States Court of Appeals for the Ninth Circuit
recently explained, the Supreme Court “[a]rguably … has
already concluded that SPA approvals meet” that standard,
and thus are entitled to Chevron deference. Managed
Pharmacy Care v. Sebelius, 716 F.3d 1235, 1246 (9th Cir.
2013). In Douglas v. Independent Living Center of Southern
California, Inc., the Supreme Court said that “[t]he Medicaid
Act commits to the federal agency the power to administer a
federal program,” and that, in approving a SPA, “the agency

      19
            We have previously held that Chevron deference
applies to HHS’s interpretations of the Medicaid Act in the
context of a challenge to a state plan amendment, but only in
a case that was decided before the Supreme Court’s decision
in United States v. Mead Corp., 533 U.S. 218 (2001), which
limited that deference to certain types of agency action. See
Erie Cnty. Geriatric Ctr. v. Sullivan, 952 F.2d 71, 77 (3d Cir.
1991) (granting “substantial deference” to the Secretary’s
interpretations of the Act).




                              26
has acted under [that] grant of authority.” 132 S. Ct. 1204,
1210 (2012). The Douglas Court noted that the agency’s
approval “carries weight,” especially when “the language of
the particular provision at issue … is broad and general,
suggesting that the agency’s expertise is relevant in
determining its application.” Id. Although the Court stopped
short of explicitly holding that the Chevron framework
applies to SPA approvals, those statements in dicta strongly
suggest as much, and we “do not view them lightly.” Galli v.
N.J. Meadowlands Comm’n, 490 F.3d 265, 274 (3d Cir. 2007)
(alteration and internal quotation marks omitted); see also id.
(“To ignore what we perceive as persuasive statements by the
Supreme Court is to place our rulings … in peril.”).

       In addition to that suggestion from the Supreme Court,
some of our sister circuits have held that SPA approvals are
the type of agency action entitled to Chevron deference under
Mead, and no circuit court precedent holds to the contrary. In
Managed Pharmacy Care, for example, the Ninth Circuit
concluded that “Congress explicitly granted the Secretary
authority to determine whether a State’s Medicaid plan
complies with federal law,” and that “[i]t is well within the
Secretary’s mandate to interpret the statute via case-by-case
SPA adjudication.” 716 F.3d at 1249. Similarly, the D.C.
Circuit has held that, through express delegation of
interpretive authority, “Congress manifested its intent that the
Secretary’s determinations, based on interpretation of the
relevant statutory provisions, should have the force of law.”
Pharm. Research & Mfrs. of Am. v. Thompson, 362 F.3d 817,
822 (D.C. Cir. 2004). In short, the reasoning goes, the
Chevron framework applies to SPA approvals. Id. at 821; see
also Managed Pharmacy Care, 716 F.3d at 1248 (“Chevron
applies to SPA approvals … .”); Harris v. Olszewski, 442




                              27
F.3d 456, 467 (6th Cir. 2006) (“[T]he agency’s approval of
the state plan amendment is entitled to Chevron deference.”).

       We agree. The Medicaid Act expressly states that the
Secretary must “approve any plan which fulfills the
conditions specified” in the statute. 42 U.S.C. § 1396a(b).
Through that provision, Congress delegated to the agency the
responsibility to make interpretive decisions regarding which
state plans satisfy the Act’s requirements. Those decisions
carry the force of law, as HHS is prohibited from making
payments to states whose plans do not comply with the Act,
42 U.S.C. § 1396c,20 and the state must pay for Medicaid
services “using rates determined in accordance with methods
and standards specified in an approved State plan,” 42 C.F.R.
447.253(i). See Nat’l Cable & Telecomms. Ass’n v. Brand X
Internet Servs., 545 U.S. 967, 980-81 (2005) (applying the
Chevron framework because a statute gave an agency “the
authority to promulgate binding legal rules” (citing Mead,
533 U.S. at 231-34)). SPA approvals are therefore the type of
agency action that warrants Chevron deference under Mead.




      20
            Section 1396c was held unconstitutional in certain
respects, not applicable here, in National Federation of
Independent Businesses v. Sebelius. 132 S. Ct. 2566, 2607
(2012) (holding that HHS “cannot apply § 1396c to withdraw
existing Medicaid funds for failure to comply with the
requirements set out in the [Medicaid] expansion” provided
for in the Patient Protection and Affordable Care Act, 124
Stat. 119).




                             28
       With that in mind, we turn to HHS’s approval of SPA
08-007, given the strictures of Section 30(A) and Section
13(A).

                     2.    Compliance with Section 30(A)

      Section 30(A) requires that a state Medicaid plan:

      provide such methods and procedures relating
      to the utilization of, and the payment for, care
      and services available under the plan … as may
      be necessary to safeguard against unnecessary
      utilization of such care and services and 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.

42 U.S.C. § 1396a(a)(30)(A) (emphasis added). Put more
simply, it mandates that a state plan include “methods and
procedures” that “assure that payments to providers produce
four outcomes: (1) ‘efficiency,’ (2) ‘economy,’ (3) ‘quality of
care,’ and (4) adequate access to providers by Medicaid
beneficiaries.” Pa. Pharmacists Ass’n, 283 F.3d at 537
(quoting 42 U.S.C. § 1396a(a)(30)(A)). Section 30(A) is one
of the statutory prerequisites a state plan must satisfy to
receive federal approval, and thus federal funding. See 42
U.S.C. § 1396a(a) (defining the requirements that a state plan
“must” satisfy); id. § 1396a(b) (“The Secretary shall approve




                              29
any plan which fulfills the conditions specified in subsection
(a) of this section … .”).

       We have considered Section 30(A)’s requirements on
two previous occasions. In Rite Aid of Pennsylvania v.
Houstoun, we held that it mandates “substantive compliance”
with the four specified factors, but it “does not impose any
particular method or process for getting to that result.” 171
F.3d at 851. Rather, in contrast to an earlier and now-
repealed provision of the Medicaid Act known as the “Boren
Amendment,” which “specifically requir[ed] that states take
into account certain findings” and make particular
assurances,21 Section 30(A) leaves it “up to a state how it will


       21
           The Boren Amendment required that a state pay
providers using rates that “the State finds, and makes
assurances satisfactory to the Secretary, are reasonable and
adequate to meet the costs which must be incurred by
efficiently and economically operated facilities in order to
provide care and services in conformity with applicable State
and Federal laws, regulations, and quality and safety
standards … .” 42 U.S.C. § 1396a(a)(13)(A) (1994). The
Boren Amendment was interpreted to impose both procedural
and substantive requirements on states in setting
reimbursement rates, and to be enforceable in a private right
of action under 42 U.S.C. § 1983. See Wilder v. Va. Hosp.
Ass’n, 496 U.S. 498, 524 (1990) (“The Boren Amendment …
creates a right, enforceable in a private cause of action
pursuant to § 1983, to have the State adopt rates that it finds
are reasonable and adequate rates to meet the costs of an
efficient and economical health care provider.”). The
Amendment was repealed in 1997, after substantial lobbying




                              30
‘assure’ the [required] outcomes.” Id. at 852. Nonetheless,
we said that the state’s “process of decision-making” in
setting a rate methodology must be “reasonable and sound,”
id. at 853, and “budgetary considerations may not be the sole
basis for a rate revision,” id. at 856. In Pennsylvania
Pharmacists Association v. Houstoun, we again interpreted
Section 30(A), this time for the purpose of determining
whether it granted Medicaid providers a cause of action under
42 U.S.C. § 1983. 283 F.3d at 534-35. In holding that it does
not, we explained that “Section 30(A), unlike the Boren
Amendment, does not demand that payments be set at levels
that are sufficient to cover provider costs,” but instead
requires that they be “sufficient to meet recipients’ needs.”22
Id. at 538.         Therefore, under this Court’s existing
jurisprudence, Section 30(A) allows states to set a rate
methodology using any process that is reasonable, considers
more than simply budgetary factors, and results in payments
that are sufficient to meet recipients’ needs.

       But while those prior interpretations help guide our
analysis, they do not necessarily control the outcome here.
Under Chevron, if HHS applied a different but nonetheless
permissible interpretation of Section 30(A), then we must

efforts by states seeking greater latitude in setting their rates.
Pa. Pharmacists Ass’n, 283 F.3d at 536, 539 & n.12.
       22
           Of course, the law of supply and demand does not
disappear, no matter how much one might wish it would, so a
focus on recipients that gives no thought to provider costs
will soon leave ample demand from needy recipients and no
providers to supply services. Setting payment levels to meet
recipients’ needs must therefore inevitably take into account
provider costs.




                               31
defer to that interpretation, even if it conflicts with our
precedent. As the Supreme Court has made clear, a judicial
precedent cannot displace a conflicting agency construction
unless the statute “unambiguously forecloses the agency’s
interpretation.” See Brand X, 545 U.S. at 982-83. The
question before us is therefore whether HHS’s approval of
SPA 08-007 was based on a permissible construction of
Section 30(A), not whether the SPA satisfies our prior
interpretation of the statute. Cf. Managed Pharmacy Care,
716 F.3d at 1246-50 (deferring to HHS’s interpretation of
Section 30(A) instead of applying the court’s prior
interpretation of that provision).

       To answer that question, we must consider the basis
HHS had for concluding that Section 30(A) is satisfied, which
requires that we examine the record it had before it during the
SPA approval process. Rite Aid, 171 F.3d at 851 (“[I]n
reviewing section 30(A) issues a court must confine itself to
the agency’s administrative record … .”). That record is
remarkably thin, especially when compared to the
administrative records developed in other Section 30(A)
challenges. In Rite Aid, for example, the state amended
reimbursement rates to pharmacies after conducting cost
studies of pharmacy pricing data, considering input from
interested parties, seeking additional data on the
reimbursement rates of third-party payors, and comparing
Pennsylvania’s rates to the rates in neighboring states. Id. at
848; see also, e.g., Long Term Care Pharmacy Alliance v.
Ferguson, 362 F.3d 50, 52 (1st Cir. 2004) (noting that the
state agency revised rates after it “held hearings … and
sought data from Massachusetts pharmacies as to their costs
of acquisition of individual drugs”). Here, on the other hand,
there is no indication in the record as to how Pennsylvania




                              32
settled on the particular rate-calculation methodology
proposed in SPA 08-007. Although DPW explained that the
2008-09 BAF was intended to limit payments to the amount
appropriated by the state legislature, that explanation is the
same as the one offered for BAFs overall. It reveals nothing
about how the particular BAF proposed in SPA 08-007 –
which differed from the ones imposed in years past and
required independent approval – was selected, other than that
it was based on legislative appropriations for that fiscal year.
Absent information on how the appropriated amount was
determined, or a reasoned explanation for why that amount
allows for rates that are “consistent with” efficiency,
economy, quality of care, and adequate access, DPW’s
description of the BAF methodology provides no insight into
whether the SPA complies with Section 30(A). The state
gave no such information, and HHS did not request any.
There are no studies or analyses of any kind in the record, and
the only “data” DPW provided was a spreadsheet comparing
rates under the proposed SPA with those paid the previous
year. HHS therefore had to base its approval decision solely
on the proposed methodology itself, a comparison to the
previous year’s rates, and DPW’s unsupported assertion that
the new BAF would permit “payment rate increases sufficient
to assure that consumers will continue to have access to
medically necessary nursing facility services.” (J.A. at 191.)

        Notwithstanding the sparseness of the administrative
record, the Federal Defendants argue that it supports the
Secretary’s approval of SPA 08-007. Specifically, they say
that HHS could properly conclude that the SPA satisfies
Section 30(A) for three reasons: first, payments to nursing
facilities increased slightly from the previous fiscal year
under the proposed SPA, second, Pennsylvania had




                              33
previously employed BAFs without harming quality of care,
and, third, other statutory provisions independently assure
that Medicaid recipients will receive quality care.        The
Federal Defendants focus particularly on the overall increase
in payments, emphasizing that “the budget adjustment factor
did not cut payment rates in absolute terms, but rather served
to moderate the rate of increase in provider payments under
the case-mix system and thereby avoid an unsustainable pace
of inflation.” (U.S. Br. at 19.)

        But while that assertion is undisputed, and reducing
unsustainable inflation is certainly a laudable and entirely
legitimate state objective, the small absolute increase in
payments from 2007 to 2008 reveals practically nothing about
SPA 08-007’s compliance with Section 30(A). As the
Federal Defendants acknowledge, that increase is due to the
application of the case-mix methodology, which has been in
place since 1996. An essential premise of their argument
seems to be that the case-mix method results in payments that
are unduly high, and that do not in fact reflect the “necessary”
costs of providing care to Medicaid recipients. That may be
the case, but there is no evidence of it anywhere in the record,
and DPW never suggests that the state’s underlying
methodology is flawed. Rather, the state repeatedly explains
that it must reduce the case-mix rates for budgetary reasons,
not because they are based on a rate-calculation methodology
that overcompensates providers.

       The case-mix method sets per diem rates for each
nursing facility by considering, among other things, the
projected acuity level of Medicaid recipients and the costs
“which are necessary and reasonable for an efficiently and
economically operated nursing facility to provide services” to




                              34
those patients. 55 Pa. Code § 1187.2. In other words, it
determines payments by considering the costs of providing
care to Medicaid recipients, which means that the increase in
payment rates is due, at least in part, to increasing costs. The
contested SPA does not change that aspect of the rate
calculation methodology; it just adds one last step: using a
BAF to reduce the final per diem rates. The overall increase
in payments therefore tells us nothing about the SPA’s effect
on quality of care; it just shows that the cost of caring for
Medicaid recipients – as determined under the case-mix
methodology – continues to go up.

        To demonstrate that point, we need only look to
DPW’s proposed rate revisions for 2005. The BAF initially
proposed for the 2005-06 fiscal year would have allowed
rates to increase two percent from the previous year – twice
the increase allowed by the 2008-09 BAF. After interested
parties raised numerous criticisms about the proposed change,
the legislature appropriated additional funds and the BAF was
revised to allow for a 2.8% increase in rates. 35 Pa. Bull.
6233 (Nov. 12, 2005). DPW explained that the adjustment in
the cap addressed quality of care concerns, and thus DPW
effectively acknowledged that rates can increase in absolute
terms while still being inadequate to meet recipients’ needs.
Id. at 6233-34.

       In reviewing SPA 08-007, however, HHS not only
treated the absolute increase as sufficient assurance of quality
of care; it also seemed to misunderstand the SPA’s effect on
Pennsylvania’s rate calculation methodology. Based on a
spreadsheet showing the one percent increase in payments
from the previous year, the CMS employee responsible for
reviewing the SPA concluded that rates would be higher




                              35
under the SPA than they would have been “if the existing rate
structure were not changed,” in effect concluding that the
SPA was responsible for the rate increase. (J.A. at 180.) But
that cannot be the case, as the only change proposed in the
SPA was the use of a BAF that more substantially reduced the
case-mix rates than in any previous year. See supra note 12.
Moreover, under the previously approved state plan, BAFs
were authorized only through 2008, meaning that the
approved rate-calculation method did not involve the use of
any BAF for the 2008-09 fiscal year. Rates were therefore
projected to increase in 2008-09 despite the proposed SPA,
not because of it.

        Pennsylvania’s previous use of BAFs also provides no
assurance that payments under SPA 08-007 would be
consistent with quality of care. According to the Federal
Defendants, because Pennsylvania had “already employed a
budget adjustment factor in three previous fiscal years” (U.S.
Br. at 19) without causing “any apparent issues with quality
of care or beneficiary access to services” (id. at 20), HHS
could reasonably conclude that SPA 08-007 “was likewise
compliant with Section 30(A)” (id.). They emphasize that,
even with ongoing monitoring activities, HHS had not been
made “aware of any complaints by beneficiaries or nursing
facilities … about payments made pursuant to the BAF
system.” (Id.) They further note that federal regulations
permit HHS to approve a state plan amendment “on the basis
of policy statements and precedents previously approved” by
the agency. 42 C.F.R. § 430.15(b). Therefore, they argue,
HHS could reasonably conclude that the proposed
amendment, which “employed a substantially similar
methodology” to the one taken the previous three years, “was
likewise compliant with Section 30(A).” (U.S. Br. at 20.)




                             36
        The obvious flaw in that argument is that earlier
adjustments do not reveal how a later and different
adjustment may change a system already affected by the
earlier adjustments. The fifth blow to a boxer’s chin may be
no more forceful than the previous four, but still be forceful
enough to shatter a weakened jaw. And if the fifth blow is
more forceful, a “no worries” mindset is even less warranted.
The 2008-09 fiscal year’s adjustment of 9.109% is not
necessarily the same in its impact as the 6.806% adjustment
that was proposed for 2007-08.

       The Federal Defendants portray the continued use of
BAFs generally as the key change proposed by SPA 08-007,
and they treat BAFs as simply another variable in the case-
mix methodology. Just as provider costs and resident acuity
vary year to year under the approved rate-calculation formula,
so too does the BAF, they imply. But a BAF is not simply a
variable in an approved formula; each new BAF effectively
establishes a new formula by which final rates are calculated,
and hence is a “[m]aterial change[]” to the state’s plan that
requires its own approval. See 42 C.F.R. § 430.12(c)(1)(ii)
(requiring a state to amend its plan when necessary to reflect
“[m]aterial changes … in the State’s operation of the
Medicaid program”). Depending on what the state legislature
decides, a BAF could cut per diem rates by less than five
percent, as it did in 2005, or by nine percent, as SPA 08-007
proposed, or potentially by even more. Yet under the Federal
Defendants’ reasoning, the use of any BAF, regardless of its
size, could be justified by the fact that a previous, smaller
adjustment to the cost-based rate proved acceptable. That
conclusion is unsupported and unsupportable. A BAF is – at
base – simply a budget-based cut to provider payments, and




                             37
the size of that cut matters to Medicaid recipients and
providers. Although it may be possible to decrease payments
by nine percent, as SPA 08-007 does, and not affect quality of
care, it is also very possible that care will be significantly and
negatively affected, and the success of earlier cuts does not
suggest otherwise. It is simply not reasonable to conclude
that, because prior cuts did not seem too painful, a deeper cut
would not hurt.

        That leaves “independent statutory assurances” as the
only basis, beyond DPW’s bare assertion that consumers will
still have access to Medicaid services, upon which HHS could
conclude that the rate-calculation methodology of SPA 08-
007 will produce payments that are consistent with quality of
care. It is true, as the Federal Defendants note, that we have
previously considered it reasonable for a state “to rely upon
laws or regulations which independently ensure quality care”
when setting payment rates under Section 30(A). Rite Aid,
171 F.3d at 855. Seizing upon that statement, the Federal
Defendants describe provisions of the Nursing Home Reform
Act, 42 U.S.C. §§ 1395i-3, 1396, that allow for “oversight
and inspection of nursing facilities” and “require[]
certification that participating facilities satisfy certain ‘quality
of care’ standards.” (U.S. Br. at 21 (citing those provisions).)
They also note that in 2005 Pennsylvania instructed nursing
facilities that they have an obligation “to provide appropriate,
high-quality care” that “exists independent of any particular
payment rate or any features of the rate-setting methodology.”
(Id. (quoting 35 Pa. Bull. 6232 (Nov. 12, 2005)) (internal
quotation marks omitted).) Based on our holding in Rite Aid,
the Federal Defendants contend that HHS could have
reasonably relied upon such “independent assurances of
quality of care” when it approved SPA 08-007.




                                38
        Those assurances cannot be the sole basis for a rate
revision, however, or Section 30(A)’s quality of care
component – and HHS’s review of that component – would
be rendered meaningless. In Rite Aid, independent statutory
assurances were but one feature of an ample record. See 171
F.3d at 848 (describing the studies conducted). We never
suggested that, as long as states declare their insistence on
quality care under other statutory provisions, reimbursement
rates will be deemed to satisfy Section 30(A). Such an
interpretation of Section 30(A) not only defies its plain
language and nullifies HHS’s review process under that
provision, see Erie Cnty. Geriatic Ctr. v. Sullivan, 952 F.2d
71, 78 (3d Cir. 1991) (declining to interpret the Medicaid Act
in a manner that renders HHS review “hardly more than
ministerial”), it also ignores fiscal realities by implying that a
state can continue to assure quality of care by holding nursing
homes to high standards while simultaneously underfunding
them. In short, simply passing a statute saying that nursing
homes will provide quality care does not make it so. Section
30(A) cannot reasonably be interpreted to mean that once a
state has declared its commitment to quality of care, it need
not consider that factor in setting its reimbursement rates.

       Nor is a state’s unsupported assertion that its plan
meets Section 30(A)’s requirements, without any
accompanying explanation or evidence, a sufficient basis to
support HHS approval. In approving a state plan, HHS must
be able to conclude that the plan “provide[s] such methods
and procedures … as may be necessary … to assure that
payments are consistent with efficiency, economy, and
quality of care.” 42 U.S.C. § 1396a(a)(30)(A). It is true that
Section 30(A) grants states considerable latitude in selecting a




                               39
method for calculating reimbursement rates, and that it “does
not impose any particular method or process” for meeting its
substantive requirements. Rite Aid, 171 F.3d at 851. But that
latitude is not limitless. The reimbursement rates that states
select affect the funding they are entitled to receive from the
federal government, and material changes to those rates are
thus subject to federal approval. Section 30(A) gives teeth to
the approval process, allowing HHS to reject state plans that
provide inadequate assurance that payments will be consistent
with efficiency, economy, quality of care, and adequate
access. See 42 C.F.R. § 430.15(c)(1) (providing that CMS,
with HHS’s approval, “retains authority for determining that
proposed plan material is not approvable or that previously
approved material no longer meets the requirements for
approval”). And HHS has done so before, denying approval
to state plan amendments when states “provide[] no … data to
substantiate [their] proposed rates,” Alaska Dep’t of Health &
Soc. Servs. v. Ctrs. for Medicare & Medicaid Servs., 424 F.3d
931, 937 (9th Cir. 2005), or when they provide “unsupported
assertions” of compliance with Section 30(A), Minnesota v.
Ctrs. for Medicare & Medicaid Servs., 495 F.3d 991, 996 (8th
Cir. 2007) (internal quotation marks omitted).

       If we were to hold that DPW’s bare assertion is
sufficient to satisfy Section 30(A), we would make that
provision a dead letter. The Medicaid Act requires that HHS
“approve any plan which fulfills the conditions” imposed on
state plans. 42 U.S.C. § 1396a(b). Therefore, in order for
HHS to deny approval on Section 30(A) grounds, a plan must
fail to fulfill its conditions. If a state could satisfy those
conditions simply by asserting that it has done so, then HHS
would lack the authority to disapprove a plan due to a state’s
lack of data or its “unsupported assertions.” No court has




                              40
countenanced such an impotence-inducing interpretation of
Section 30(A). On the contrary, in holding that Section 30(A)
confers no private right of action against the state under 42
U.S.C. § 1983, courts have repeatedly assured Medicaid
providers and recipients that the quality of care and access
requirements will not “go unenforced” because “HHS [is]
responsible for ensuring that state plans are administered in
accordance with these requirements.” Pa. Pharmacists Ass’n,
283 F.3d at 543-44; see also Long Term Care Pharm.
Alliance v. Ferguson, 362 F.3d 50, 56 (1st Cir. 2004) (“Of
course, the Secretary of HHS … can enforce compliance with
[Section 30(A)] and implementing regulations … by
disapproving a state plan … .”). There is no suggestion in the
text, its accompanying regulations, or the legislative history
that HHS’s oversight role in enforcing Section 30(A)’s
requirements involves simply accepting a state’s assertions at
face value. See 42 U.S.C. § 1396a(b) (requiring the Secretary
to approve plans that “fulfill[] the conditions specified in
subsection (a),” which include Section 30(A)); 42 C.F.R.
§ 430.12(c) (requiring “[p]rompt submittal of amendments …
[s]o that CMS can determine whether the plan continues to
meet the requirements for approval”); 146 Cong. Rec.
H11682-02 (explaining that, even with the repeal of the
Boren Amendment, the Medicaid Act ensures through
Section 30(A) that states “provide adequate reimbursement”).
Therefore, to the extent that HHS’s approval of a SPA rests
on such an interpretation, it is not a “permissible construction
of the statute” entitled to deference under Chevron. 467 U.S.
at 842-43.23

       23
          Before the District Court, the Federal Defendants
argued that HHS “was required to more rigorously scrutinize
a proposed amendment only when [the state’s] assurances




                              41
were questionable on their face.” Christ the King Manor,
2012 WL 3027543, at *6. Although the Federal Defendants
do not repeat that argument on appeal, we take a moment to
address it here, as the District Court seems to have found it
convincing. See id. at *8-*9 (agreeing with the Federal
Defendants’ interpretation of the state’s obligations under
Section 30(A)); see also id. at *14 (concluding that “it was
within CMS’s expertise to determine whether DPW’s
representations concerning approval of the SPAs, which
mirrored those approved in the past, complied with section
30(A)”). HHS may choose not to exercise the same rigor in
scrutinizing all state plan amendments. But it must actually
scrutinize them, at least to the extent necessary to “make a
determination as to whether [the amendment] conforms to the
requirements for approval.”        42 U.S.C. § 1316(a)(1).
Furthermore, we reject the notion that, as a threshold matter,
we must determine whether a SPA is facially questionable
before reviewing the agency’s action. Such an approach
would require a reviewing court to make its own assessment
of whether a proposed change should have raised red flags
regarding quality of care, a task which is for HHS and which
we are ill-equipped to perform. Here, for example, the
Federal Defendants indicate that a 9.109% reduction is
nothing to worry about, but, absent information justifying that
assertion, a court has no way to know if such a reduction
should have caused HHS to take a closer look. The BAF
proposed in SPA 08-007 could have reduced rates by 5%,
10%, 15%, or something even greater, and presumably the
Federal Defendants would agree that, at some point, it would
be arbitrary and capricious for HHS to approve the SPA
based solely on soothing words from the state. For that
reason, the burden is on the agency, not on the reviewing




                              42
        Of course, as the Federal Defendants rightly note,
there is a bit more in the record in this case than the state’s
assertion that SPA 08-007 would “still provid[e] payment rate
increases sufficient to assure that consumers will continue to
have access to medically necessary nursing facility services.”
(J.A. at 191.) There is also “data,” in the form of the
spreadsheet DPW submitted at HHS’s request, “showing that
payments to nonpublic nursing facilities would increase”
from the prior fiscal year. (U.S. Br. at 23.) But, as described
above, that increase does not, by itself, tell us or HHS
anything about the SPA’s effect on quality of care or access
to providers.24 So far as the record shows, Pennsylvania
decided to reduce its cost-based per diem rates to the amount
that it could afford to pay, without taking any steps to ensure
that payments would still be consistent with quality of care
and adequate access. In approving that decision, HHS seems
to have “entirely failed to consider” those “important

court, to supply a reasoned basis for its action. See State
Farm, 463 U.S. at 43.
       24
              Although Plaintiffs focus their argument on the
“quality of care” factor, we note that “quality of care” and
“adequate access to providers” are related concepts, and that
budget cuts have the capacity to affect both components of
Section 30(A). If, for example, a state reduces its payments
to significantly below the amount necessary for a nursing
facility to treat its patients, some facilities might cut corners
and provide inadequate care, whereas others might stop
accepting Medicaid patients altogether and thus restrict access
to providers. See Orthopaedic Hosp. v. Belshe, 103 F.3d
1491, 1498 (9th Cir. 1997) (discussing the possible effects of
payment reductions on access to providers).




                               43
aspect[s]” of Section 30(A). See State Farm, 463 U.S. at 43.
Indeed, the record suggests that the agency misunderstood the
proposed changes and blessed the SPA based solely on the
absolute increase in payments from the previous year. There
is no indication that the agency “examine[d] the relevant
data,” nor did it “articulate a satisfactory explanation for its
action.” Id. Therefore, because we cannot discern from the
record a reasoned basis for the agency’s decision, we
conclude that its approval of SPA 08-007 was arbitrary and
capricious under the APA.

       In so holding, we do not imply that the payments
Pennsylvania made to providers during the 2008-09 fiscal
year were in fact inconsistent with any of Section 30(A)’s
requirements. It is possible that the state was able to adjust
the per diem rates by nine percent while maintaining quality
care and ensuring adequate access to providers. But it is also
possible that the state’s nine percent adjustment threatened to
harm care to Medicaid recipients in ways that previous,
smaller adjustments had not. The problem here is that, at
least so far as the record shows, HHS did not actually
determine which scenario it confronted, and thus we are
obligated to set its approval decision aside. 5 U.S.C. § 706(2)
(requiring courts to “hold unlawful and set aside agency
action … found to be arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law”).25

       25
          That does not mean that Plaintiffs will necessarily be
entitled to a rate recalculation, and we in no way suggest that
they should have been paid in accordance with the previously
approved state plan, which did not involve the use of any
BAF for the 2008-09 fiscal year. When, as here, “the record
before the agency does not support the agency action,” the




                              44
                    3.     Compliance with Section 13(A)

        Plaintiffs also contend that HHS’s approval of SPA
08-007 was arbitrary and capricious because the state failed to
comply with the public process requirements of Section
13(A) and its accompanying regulations. They say that,
although DPW provided numerous public notices of its
proposed changes, only the June Notice was published before
the SPA’s effective date, and it inadequately described the
new rate methodology and did not include certain details
required by federal regulations. Specifically, they complain
that the Notice was published only two days before the SPA’s
proposed effective date, did not include the specific BAF
ultimately adopted, failed to provide an estimate of the
expected increase or decrease in aggregate expenditures, and
did not identify any local agencies where copies of the
proposed changes would be available for public review.
Because of those alleged deficiencies, they argue that HHS
could not have lawfully accepted DPW’s assurance that
Pennsylvania had “provided advance notice of its intent to
amend its State Plan.” (J.A. at 192.)



agency may be afforded an opportunity “for additional
investigation or explanation,” upon which the agency could
lawfully base its action. Fla. Power & Light Co., 470 U.S. at
744. Cf. 42 U.S.C. § 1316(a)(4) (providing that, when a court
of appeals reviews a state’s appeal of an agency decision
regarding a state plan, the court “may remand the case to the
Secretary to take further evidence, and [she] may thereupon
make new or modified findings of fact and may modify [her]
previous action”).




                              45
       Section 13(A) of the Medicaid Act requires that states
seeking to change their rate-setting methodologies provide a
public process under which:

      (i) proposed rates, the methodologies
      underlying the establishment of such rates, and
      justifications for the proposed rates are
      published,

      (ii) providers, beneficiaries and their
      representatives, and other concerned State
      residents are given a reasonable opportunity for
      review and comment on the proposed rates,
      methodologies, and justifications, [and]

      (iii) final rates, the methodologies underlying
      the establishment of such rates, and
      justifications for such final rates are published
      ….

42 U.S.C. § 1396a(a)(13)(A). In other words, a state must
provide notice of “proposed rates together with the
methodologies and justifications used to establish those
rates,” and give “concerned state residents … a reasonable
opportunity” to review and comment on them. Children’s
Seashore House v. Waldman, 197 F.3d 654, 659 (3d Cir.
1999). Federal regulations provide further guidance on the
substantive requirements of that notice. Under 42 C.F.R.
§ 447.205, notice of a “significant proposed change” in a
state’s rate-setting methodology must “[d]escribe the
proposed change in methods and standards,” “[g]ive an
estimate of any expected increase or decrease in annual
aggregate expenditures,” “[e]xplain why the agency is




                             46
changing its methods and standards,” and “[i]dentify a local
agency … where copies of the proposed changes are available
for public review.” 42 C.F.R. § 447.205(a), (c). Section
447.205 also provides that the notice must “[b]e published
before the proposed effective date of the change.” Id.
§ 447.205(d)(1). Those notice requirements must be satisfied
in order for a state plan amendment to receive approval. Id.
§ 447.253(h).

       Our review of the state’s compliance with Section
13(A) is circumscribed by HHS’s decision to approve the
SPA. As the Ninth Circuit has explained, “[o]ur duty is not to
determine for ourselves whether the State’s notice sufficiently
complied with the statute and regulations; that duty is
imposed on the Secretary.” Indep. Acceptance Co. v.
California, 204 F.3d 1247, 1251-52 (9th Cir. 2000). We must
instead consider, as we did with Section 30(A), “whether the
Secretary acted arbitrarily or capriciously when she accepted
the State’s assurance of notice as satisfactory to her.” Id. at
1252. In doing so, we accord deference to the Secretary’s
reasonable interpretations of Section 13(A), see supra Section
II.A.1, and we must give controlling weight to her
interpretations of her own regulations unless they are
inconsistent with the regulation or plainly erroneous. Thomas
Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994).

       Under that standard, we cannot say that it was arbitrary
or capricious for HHS to accept DPW’s assurance that it had
provided adequate notice of the proposed changes to its rate-
calculation methodology.       Section 13(A) speaks very
generally, requiring simply that the state provide notice and a
“reasonable opportunity” for comment on proposed rate
revisions. 42 U.S.C. § 1396a(a)(13)(A). The June Notice did




                              47
so, as it put providers and beneficiaries on notice of the
estimated BAF for 2008-09, informed them as to how and
why the BAF would be determined, and provided thirty days
for submission of comments. See Evergreen Presbyterian
Ministries, Inc. v. Hood, 235 F.3d 908, 920 (5th Cir. 2000)
(holding that a state satisfied Section 13(A)’s notice
requirements because its notices “outlined the substance of
the plan in sufficient detail to allow interested parties to
decide how and whether to seek more information on the
plan’s particular aspects” (internal quotation marks omitted)),
abrogation on other grounds recognized by Equal Access for
El Paso, Inc. v. Hawkins, 509 F.3d 697, 704 (5th Cir. 2007).
Although the Notice was published just days before the
SPA’s requested effective date of July 1, 2008, the new rates
were not actually implemented on that date; rather the SPA
was made retroactively effective when it was approved in
December 2008. Interested parties therefore had ample
opportunity to review and comment on the proposed changes
before they were finalized.26 Furthermore, although the BAF
described in the June Notice differed slightly from the one
submitted in the SPA, the revised BAF was, on its face, more
favorable to nursing facilities. HHS could therefore have
reasonably concluded that the June Notice “outlined the
substance” of the new rate calculation methodology “in
sufficient detail” to alert nursing facilities to the scope and
nature of the proposed change. Evergreen, 235 F.3d at 920.

       That DPW may have failed to literally comply with
federal regulations regarding public notice does not make

      26
         Notably, Plaintiffs do not contend that they lacked
actual notice of the proposed changes, or that they were
denied adequate opportunity to comment on the new BAF.




                              48
HHS’s acceptance of its assurances arbitrary or capricious.
According to Plaintiffs, the June Notice violated 42 C.F.R.
§ 447.205(c) by not providing a numeric estimate of the
“expected increase or decrease in annual aggregate
expenditures,” and by not identifying any county offices
where copies of the Notice would be available for public
review. (Appellants’ Opening Br. at 59.) Plaintiffs do not
dispute, however, that the estimated BAF included in the
Notice revealed the percentage by which rates would be
adjusted, which HHS could reasonably have found to be an
acceptable substitute to a dollar estimate of the state’s
aggregate expenditures. See Evergreen, 235 F.3d at 921
(permitting “the use of a percentage, rather than a dollar
figure” in a state’s notice of a proposed amendment).

        Plaintiffs also do not contend that the June Notice was
unavailable for public review – they just say it was not made
available in the precise manner provided for in the regulation.
But again, it is within the Secretary’s discretion to consider
publication in the Pennsylvania Bulletin the effective
equivalent of distributing a notice to county offices. In any
event, based on the record before it, HHS could readily
conclude that Pennsylvania had “substantial[ly] compli[ed]”
with federal notice requirements, which is all that is necessary
for the Secretary to reasonably accept a state’s assurances to
that effect. Indep. Acceptance Co., 204 F.3d at 1252 (holding
that “in accepting the State’s assurance, the Secretary was not
required to hold the State to absolutely literal compliance
with the notice requirements,” but rather “had discretion to
determine whether the State had given sufficient assurance
that its notice was in substantial compliance”); see also
Oklahoma v. Shalala, 42 F.3d 595, 603 (10th Cir. 1994)
(deferring to CMS’s decision to “relax[] the notice




                              49
requirement from full formal compliance to ‘at least minimal
compliance’ through publication of ‘an appropriate public
notice before the effective date of the proposed change’”).

        We therefore agree with the District Court that HHS
was neither arbitrary nor capricious in accepting DPW’s
assurance that the state had satisfied Section 13(A)’s public
process requirements. That does not mean that Plaintiffs’
dissatisfaction with the process at issue here is unreasonable.
Their fundamental complaint – that DPW published an
incomplete notice two days before the proposed effective date
of a major change to the administration of its Medicaid
program – is an accurate description of the state’s actions.
But HHS accepted those actions as being sufficiently
compliant with federal law, and, particularly in light of the
actual time the public had to consider the proposed change,
we cannot say that the agency’s conclusion was arbitrary or
capricious on this record.




                              50
      B.      Supremacy Clause Claim Against the State
              Defendant27

       In addition to their claim against the Federal
Defendants, Plaintiffs also seek declaratory and injunctive
relief against the Secretary of DPW. The underlying
substance of that claim is virtually identical to Plaintiffs’
complaint against the Federal Defendants – they say that the
rate revisions adopted by SPA 08-007 violate Section 30(A)
and Section 13(A) of the Medicaid Act, and are thus
preempted by federal law. Plaintiffs ask that we therefore
enjoin the “continuing application” of the SPA (J.A. at 111),
and that we require DPW to pay nursing facilities “using rates
determined in accordance with the methods and standards

      27
          We note at the outset that it is questionable whether
Plaintiffs can sustain a cause of action under the Supremacy
Clause at all. In Douglas v. Independent Living Center, the
Supreme Court granted certiorari “to decide whether
Medicaid providers and recipients may maintain a cause of
action under the Supremacy Clause to enforce a federal
Medicaid law.” 132 S. Ct. at 1207. The Court declined to
answer that question, however, instead concluding that
federal approval of the contested state plan put the case “in a
different posture” and remanding the case to the court of
appeals. Id. at 1210. Therefore, although the dissent strongly
suggested that the Supremacy Clause does not provide a
cause of action when Congress has declined to provide one,
id. at 1211, the Court’s previous decision in Shaw v. Delta Air
Lines, 463 U.S. 85, 96 n.14 (1983), which recognized a
private right of action under the Supremacy Clause, remains
binding on us. Lewis v. Alexander, 685 F.3d 325, 346 n.20
(3d Cir. 2012).




                              51
specified in the [state plan] in effect prior to changes
contained in the vacated amendments” (J.A. at 140).

       The District Court rejected Plaintiffs’ claim for several
reasons. First, invoking Younger v. Harris, 401 U.S. 37
(1971), it abstained from deciding the claim to the extent it
challenged state conduct that occurred before federal approval
of the SPA. The Court also denied all declaratory relief,
concluding that such relief was barred by Eleventh
Amendment sovereign immunity. That left only Plaintiffs’
request for an injunction, which the Court allowed to proceed
to discovery. The District Court subsequently entered
summary judgment in favor of the State Defendant on that
claim because of its conclusion “that the Federal Defendants’
approval of the SPAs was not arbitrary or capricious under
the APA.” Christ the King Manor, 2012 WL 3027543, at
*17. Although we have now decided that that conclusion was
in error, we will nonetheless affirm the District Court’s grant
of summary judgment to the State Defendant on the basis that
the Eleventh Amendment deprives us of jurisdiction to grant
the requested relief.28



       28
          “We exercise plenary review over a district court’s
grant of summary judgment,” and we will affirm only if
“there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Mabey
Bridge & Shore, Inc. v. Schoch, 666 F.3d 862, 867 (3d Cir.
2012) (internal quotation marks omitted). “Dismissal of an
action based upon sovereign immunity is subject to plenary
review by this Court.” Blanciak v. Allegheny Ludlum Corp.,
77 F.3d 690, 694 (3d Cir. 1996).




                              52
       The Eleventh Amendment to the Constitution
provides that:

       The Judicial power of the United States shall
       not be construed to extend to any suit in law or
       equity, commenced or prosecuted against one of
       the United States by Citizens of another State,
       or by Citizens or Subjects of any Foreign State.

U.S. Const. amend. XI. The Supreme Court has made clear
that, under that Amendment, “an unconsenting State is
immune from suits brought in federal courts by her own
citizens as well as by citizens of another State.” Edelman v.
Jordan, 415 U.S. 651, 663 (1974) (citing Hans v. Louisiana,
134 U.S. 1, 10 (1890)). Therefore, unless Congress has
“specifically abrogated” the states’ sovereign immunity or a
state has unequivocally consented to suit in federal court, we
lack jurisdiction to grant relief in such cases. Blanciak v.
Allegheny Ludlum Corp., 77 F.3d 690, 694 (3d Cir. 1996); id.
at 694 n. 2 (“[T]he Eleventh Amendment is a jurisdictional
bar which deprives federal courts of subject matter
jurisdiction.”).

       Suits against state officials are a different matter,
however. Based on its landmark holding in Ex parte Young,
209 U.S. 123 (1908), the Supreme Court has permitted suits
against state officials that seek prospective relief to end an
ongoing violation of federal law. Pa. Fed’n of Sportsmen’s
Clubs, Inc. v. Hess, 297 F.3d 310, 323 (3d Cir. 2002). The
theory behind Young is that a state officer lacks the authority
to enforce an unconstitutional state enactment, and thus the
officer is “stripped of his official or representative character
and becomes subject to the consequences of his individual




                              53
conduct.” Id. (quoting MCI Telecomm. Corp v. Bell Atl. Pa.,
271 F.3d 491, 506 (3d Cir. 2001)) (internal quotation marks
omitted). Plaintiffs can therefore bring suit against state
officers, but their remedies are limited to those that are
“designed to end a continuing violation of federal law.”
Green v. Mansour, 474 U.S. 64, 68 (1985). Plaintiffs may not
be awarded damages or other forms of retroactive relief.
Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89,
103 (1984).

       That bar on retroactive relief includes forms of
equitable relief that are functionally equivalent to damage
awards. Green, 474 U.S. at 69-70 (citing Edelman, 415 U.S.
at 666-69).      As we explained in Blanciak v. Allegheny
Ludlum Corp., “relief that essentially serves to compensate a
party injured in the past by the action of a state official, even
though styled as something else, is barred by the Eleventh
Amendment.” 77 F.3d at 697-98 (citing Green, 474 U.S. at
68; Edelman, 415 U.S. at 664-68). We contrasted such relief
with remedies that may have “a substantial ancillary effect on
the state treasury,” but primarily serve “to bring an end to a
present, continuing violation of federal law.” Id. at 698
(quoting Papasan v. Allain, 478 U.S. 265, 278 (1986))
(internal quotation marks omitted). The label given to the
requested relief is “of no importance” – we must “look to the
substance rather than the form of the relief requested” to
determine if it is barred by the Eleventh Amendment. Id.
When an action “is in essence one for the recovery of money
from the state, the state is the real, substantial party in interest
and is entitled to invoke its sovereign immunity from suit
even though individual officers are nominal defendants.”
Edelman, 415 U.S. at 663 (quoting Ford Motor Corp. v.




                                54
Dep’t of Treasury, 323 U.S. 459, 464 (1945)) (internal
quotation marks omitted).

       Under that standard, the remedies Plaintiffs seek
against the State Defendant cannot properly be characterized
as claims for prospective relief “designed to end a continuing
violation of federal law.” Green, 474 U.S. at 68. Plaintiffs
challenge the Secretary of DPW’s development and
application of SPA 08-007, which, as already extensively
discussed, used a BAF to adjust reimbursement rates for the
2008-09 fiscal year.29 That SPA has not been in effect since
July 1, 2009, and Plaintiffs do not claim that Pennsylvania’s
current rate-calculation methodology violates federal law.
More to the point, they do not identify any ongoing conduct
by the Secretary of DPW that must be enjoined to ensure the
supremacy of federal law. Instead, they challenge the rates
DPW paid five years ago, and they argue that they are entitled
to “prospective corrective payments” from the state.

      29
           The District Court construed Plaintiffs’ claim more
broadly, saying that it challenged not only SPA 08-007, but
also “the underlying methodology” contained in the SPA –
that is, the use of budget-based adjustments generally. That
construction is too generous. Plaintiffs’ complaint is quite
specific in stating that it challenges SPA 08-007 and SPA 08-
008 (which, as discussed supra note 8, is no longer at issue).
Moreover, all of the factual allegations in the complaint focus
on the state’s adoption and implementation of SPA 08-007,
and key to Plaintiffs’ argument is that the BAF in that SPA
was more damaging than in previous years. We therefore
construe Plaintiffs’ complaint as a challenge to the particular
rates calculated using SPA 08-007, not as a generalized
challenge to the use of a budget adjustment factor.




                              55
(Appellants’ Opening Br. at 72.) Their overall case against
the State Defendant therefore seems to be precisely the kind
of suit that is barred by the Eleventh Amendment, as it seeks
“to compensate a party injured in the past by the action of a
state official,” not to “bring an end to a present, continuing
violation of federal law.” Blanciak, 77 F.3d at 697-98.

        A closer look at the requested remedy exposes the
problem. Plaintiffs ask for an injunction that “requires” the
Secretary of DPW “to assure” that the state “pays for nursing
facility provider services” using the pre-SPA rates, and that
“precludes” DPW “from any further reliance” on SPA 08-
007. (J.A. at 113.) In other words, they ask that we require
DPW to pay the 2008-09 rates in accordance with the
previously approved state plan, which did not apply a BAF at
all. Because SPA 08-007 is no longer in effect, that remedy
will not help prevent future violations of federal law, and it is
useful to Plaintiffs only if it “might be offered in state-court
proceedings as res judicata on the issue of liability, leaving to
the state courts only a form of accounting proceeding
whereby damages or restitution would be computed.” Green,
474 U.S. at 73. In fact, the record strongly suggests the
Plaintiffs will do just that, as they have initiated state
administrative proceedings requesting that DPW “recalculate”
the 2008-09 rates “consistent with [the] law.”
(Administrative Appeal, Doc. 20, Ex. A, at 14.) The relief
requested here would therefore “have much the same effect as
a full-fledged award of damages or restitution by the federal
court” – forms of relief that are clearly barred by the Eleventh
Amendment.30 Green, 474 U.S. at 73.

       30
          The District Court reached a similar conclusion,
holding that “insofar as [Plaintiffs] request … declaratory




                               56
        Plaintiffs’ arguments to the contrary are unavailing.
They make no attempt to argue that there is an ongoing
violation of federal law; rather, they contend that,
notwithstanding the Eleventh Amendment, they are entitled to
“complete retroactive relief” against the State Defendant.
(Appellants’ Opening Br. at 68.) First, they suggest that
Pennsylvania consented to suit in federal court by
participating in Medicaid. That argument clearly fails, as the
Supreme Court has previously held that a state’s participation
in Medicaid is not “sufficient to waive the protection of the
Eleventh Amendment.” Fla. Dep’t of Health & Rehab. Servs.
v. Fla. Nursing Home Ass’n, 450 U.S. 147, 150 (1981).



relief that the State Defendant’s implementation” of the SPA
“violates federal law,” that claim is barred by sovereign
immunity under Edelman and Green. Christ the King Manor,
Inc. v. Sebelius, No. 1:09-cv-2007, at 25 (M.D. Pa. June 29,
2010). The Court concluded that Plaintiffs had one viable
request for prospective relief, however – their request for
“injunctive relief preventing the State Defendant from basing
its Medicaid reimbursement payments” on SPA 08-007. Id.
But, as described above, that relief cannot be considered
prospective, because Plaintiffs do not ask that we enjoin a
continuing violation of federal law, but rather that we require
DPW to pay nursing facilities using the state plan in effect
prior to the challenged SPA. When, as in this case, there is
no ongoing violation of federal law, the requested injunction
is effectively a request for a declaration that the prior rate
calculations were unlawful, and is thus barred by the Eleventh
Amendment.




                              57
       Plaintiffs’ second contention is that their claim under
the APA can somehow include relief against the State
Defendant. They say that, when a plaintiff’s Supremacy
Clause claims “are inextricably intertwined” with an APA
claim, “the APA claim must be deemed to provide for and
permit the related resolution” of the Supremacy Clause
claims. (Appellants’ Opening Br. at 69.) But the only
support Plaintiffs provide for that truly novel proposition is
the Supreme Court’s recent decision Douglas v. Independent
Living Center, which held nothing of the sort. Indeed,
Douglas strongly suggested that once an APA claim arises
due to a SPA approval, a Supremacy Clause claim
challenging the SPA is unsustainable, because allowing “a
Supremacy Clause action to proceed once the agency has
reached a decision threatens potential inconsistency or
confusion.” 132 S. Ct. at 1210. In any event, Douglas
certainly did not hold that the presence of a cause of action
against a federal agency under the APA abrogates a state’s
immunity from suit in federal court.

        Finally, Plaintiffs say that “the State Defendant is an
indispensable party” under Rule 19 of the Federal Rules of
Civil Procedure. (Appellants’ Opening Br. at 70.) Even if
that were the case (and we express no opinion on the issue),
being an indispensable party does not affect a state’s
sovereign immunity. Under the Eleventh Amendment, an
unconsenting state cannot be sued in federal court by one of
its citizens, regardless of whether the state is an essential
party to the controversy.

       Therefore, as Plaintiffs do not contend that there is an
ongoing violation of federal law, we conclude that their claim
against the State Defendant is barred by Eleventh




                              58
Amendment sovereign immunity. Accordingly, since we can
affirm on any basis supported by the record, Travelers Indem.
Corp. v. Dammann & Co., Inc., 594 F.3d 238, 256 n.12 (3d
Cir. 2010), we will affirm the District Court’s grant of
summary judgment to the State Defendant.31

III.   Conclusion

       In sum, we will affirm in part and reverse in part the
District Court’s orders. Because the State Defendant is
immune from Plaintiffs’ requested relief under the Eleventh
Amendment, we will affirm the District Court’s orders
entering judgment in favor of that defendant. The District
Court erred, however, in granting summary judgment to the
Federal Defendants. By approving SPA 08-007 without any
assurance that the amended plan would produce payments
that are consistent with quality of care, the Secretary of HHS
acted arbitrarily and capriciously, and the APA requires that
we set that approval aside. Accordingly, we will reverse the
District Court’s grant of summary judgment to the Federal
Defendants and will remand the case with instructions to
enter a declaratory judgment in favor of Plaintiffs on their
claim that HHS’s approval of SPA 08-007 was arbitrary and
capricious under the APA.



       31
          Because we hold that the Eleventh Amendment bars
all requested relief against the State Defendant, which
deprives us of subject matter jurisdiction, we do not reach the
question of whether the District Court properly abstained
from resolving certain components of Plaintiffs’ claim, nor do
we consider whether their claim is moot.




                              59
