GRIJALVA V SHALALA

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

GREGORIA GRIJALVA; CAROL KNOX; MARY LEA; BEATRICE BENNETT; and MILDRED MORRELL, individuals and representatives of a class of persons similarly situated,
Plaintiffs-Appellees

v.

DONNA E. SHALALA, Secretary, Health and Human Services,
Defendant-Appellant,

JOSEPHINE BALISTRERI; FRED S. SCHERZ; KEVIN A. DRISCOLL; MINA AMES; EDMUNDO B. CARDENAS; ARLINE T. DONOHO; PATRICIA SLOAN; BETH ROBLEY; GOLDIE M. POWELL; RICHARD BAXTER,
Plaintiffs-Intervenors.

Appeal from the United States District Court for the District of Arizona
Alfredo C. Marquez, District Judge, Presiding

Argued and Submitted January 13, 1998--San Francisco, California

Filed August 12, 1998
Before: Herbert Y. C. Choy, Mary M. Schroeder, and Charles Wiggins, Circuit Judges.

Opinion by Judge Wiggins
SUMMARY
_________________________________________________________________

Health/Medicaid/Medicare and Government Assistance

The court of appeals affirmed a judgment of the district court.

The court held that a Medicare health services provider's denial of coverage to a beneficiary without adequate notice constitutes "government action" implicating constitutional due process protections.

In S 1395mm(c), the Medicare statute mandates procedural protections for beneficiaries who enroll in health maintenance organizations (HMOs) and other health services providers.

HMOs must provide meaningful procedures for hearing and resolving enrollee grievances.

Enrolled members also have appeal rights, including notice and an administrative hearing, and judicial review.

The statute's regulations provide that an HMO's appeal procedures must ensure that beneficiaries receive written information about the grievance and appeal procedures. If the HMO makes an "organizational determination" adverse to the enrollee, e.g., a denial of coverage, it must notify the enrollee, stating the specific reason for the determination, and informing the enrollee of his or her right to a reconsideration.

Failure to provide timely notice is an adverse determination.

A decision on a request for reconsideration that partially or fully upholds the adverse determination must be explained in writing.

With certain thresholds for the amount in controversy, the enrollee is entitled to a hearing before an administrative law judge, whose decision may be appealed to the Appeals Council, and then to a federal district court.

Appellant Secretary of the Department of Health and Human Services may not enter into a contract with an HMO unless it meets the requirements of S 1395mm(c) and (e): provides all Medicare services to eligible enrollees; has open enrollment periods; provides annual information to enrollees regarding their rights; provides covered services promptly; provides mandated procedural protections; and keeps its charges within specified limits. The Secretary may terminate a contract if the HMO does not perform as agreed or satisfied statutory or regulatory requirements.

The statute also provides for monetary penalties if an HMO fails to provide necessary covered services to an enrollee, and the failure adversely affects the enrollee.

In a 1993 nationwide class action, appellee Gregoria Grijalva and other Medicare beneficiaries enrolled in Arizona HMOs sued the Secretary, alleging that she failed to take effective action to implement the plaintiffs' notice and appeal rights when they were denied services by their HMOs, and failed to provide a procedure for obtaining contemporaneous review of HMO denial decisions.
The district court granted partial summary judgment for the plaintiffs, ruling that the "organizational determinations" made by HMOs constitute governmental action triggering constitutional due process protections. Citing Mathews v. Eldridge, 424 U.S. 319 (1976), the court also concluded that the regulations promulgated by the Secretary regarding adverse HMO determinations failed to afford sufficient due process to enrollees.

Eldridge held that the requirements of due process in the Medicare context involves a balancing of three factors: the
private interest that will be affected by the official action; the
risk of an erroneous deprivation of that interest the procedures used, and the
probable value of additional or substitute safeguards; and the
government's interest, including the functions involved and the fiscal and administrative burdens that the additional or substitute procedures would entail.

The district court ruled that the substantial private interest at stake was the potential that medical care would be precluded altogether when an HMO denies coverage without timely and adequate notice; that erroneous deprivation of medical care for beneficiaries occurred when the notices failed to provide adequate explanations for denials; and that the government's concerns over the burden that would be imposed by requiring added procedural protections were unwarranted.

In particular, the court found that the notices issued by the HMOs were inadequate: they were often illegible, failed to specify the reasons for denials, and failed to inform beneficiaries of their rights. In the court's view, subsequent due process on administrative review often came too late.

In an injunction, the court ordered the Secretary to enforce Medicare regulations by refusing to renew contracts with HMOs whose denial notices failed to provide due process.

Denial notices, the court ruled, had to be printed in at least 12-point type; state clearly the reasons for the denial; inform enrollees of their appeal rights; explain hearing rights and procedures; and provide instruction on how to obtain supporting evidence.

The court also ordered that hearings must be informal, in-person, available on request for all service denials, timely, and expedited for acute care denials.

The Secretary appealed.

[1] The actions of private persons are not subject to the requirements of constitutional due process unless they can fairly be considered government action.

[2] To show that a private action is in fact state action, the plaintiff must show that there is a significantly close nexus between the state and the challenged action of the regulated entity so that the actionof the latter may be fairly treated as that of the state. Government action exists if there is a symbiotic relationship with a high degree of interdependence between the private and public parties such that they are joint participants in the challenged activity.

[3] In this case, the question was whether the HMO denials of services to Medicare beneficiaries with inadequate notice could fairly be treated as action of the federal government. In the circumstances of the Secretary's regulation of and delegation of Medicare coverage decisions to HMOs, HMO denials of services to beneficiaries with inadequate notice constituted federal action.

[4] HMOs and the federal government are essentially engaged as joint participants to provide Medicare services. The Secretary extensively regulates the provisions of services provided by HMOs. HMOs are required to comply with all federal laws and regulations. The Secretary is required to ensure that HMOs provide adequate notice and meaningful appeal procedures to beneficiaries. The Secretary pays HMOs for each enrolled beneficiary. The government has created the legal framework within which HMOs make adverse determinations, issue notices, and guarantee appeal rights. Beneficiaries enrolled in HMOs may appeal an adverse determination. These factors show federal action.

[5] The HMOs in this case were not making decisions to which the government merely responded. The HMOs were following congressional and regulatory orders and were making decisions as a governmental proxy--deciding that Medicare did not cover certain medical services. The decisions were coverage decisions--interpretations of the Medicare statute--rather than merely medical judgments.

[6] The government could not avoid due process requirements merely by delegating its duty to determine Medicare coverage to private entities.

[7] When denying medical services to enrolled Medicare beneficiaries, HMOs are federal actors.

[8] The balancing test in Eldridge applied to determine the necessary procedural protections to ensure that due process is provided to Medicare beneficiaries enrolled in HMOs.

[9] Although in some cases the effect of service denial may be remedied easily after the fact, the potential for irreparable damage is great when it comes to denial of medical services (particularly without notice of any reason). In many if not most cases, denial of coverage may result in total failure to receive the services.

[10] Other courts have found on similar facts that a significant private interest is at stake that weighs in favor of additional protections. The interest of the HMO enrollees in medical services weighed in favor of additional procedural protections beyond that offered by the Secretary's original regulations.

[11] The failure of the notices to provide adequate explanation for the denials created a high risk of erroneous deprivation of medical care to the beneficiaries. The appeal rights and other procedural protections available to beneficiaries are meaningless if the beneficiaries are unaware of the reason for service denial. Due process requires notice that gives an agency's reason for its action in sufficient detail that the affected party can prepare a responsive defense. Inadequate notice therefore creates the risk of erroneous deprivation by undermining the appeal process.

[12] The question is not whether inadequate notices actually result in erroneous deprivations, but whether they create an unjustifiably high risk of erroneous deprivation.

[13] The Secretary failed to show that the added procedural protections would result in significant additional costs to the government. The plaintiffs did not seek a hearing prior to every denial. Adequate notices do not impose a burden on HMOs that outweighs the beneficiaries' need for them. The Secretary failed to advance any convincing argument that an additional burden on the government outweighed the effects of the other factors, such that additional procedural safeguards were not necessary.

[14] Taken together, the Eldridge factors pointed to a need for additional procedural protections for Medicare beneficiaries enrolled in HMOs, in particular adequate notice of service denials, including the specific reason for the denial, an explanation of appeal rights, and expedited review for critical care denials.

[15] When injunctive relief is sought against a state agency or official, such relief must be no broader than necessary to remedy the constitutional violation.

[16]  However, the scope of the district court's injunction was neither an abuse of discretion nor the result of application of erroneous legal principles.

[17] The court required legible and clear notices that adequately explain the reasons for the denial of services and inform them of their appeal rights. The court required hearings to be informal and in person. An abuse of discretion was not apparent in these requirements. Many were already required by the Medicare statute and regulations. The court also required the Secretary to monitor the behavior of HMOs.This was not an abuse of discretion given that Congress implicitly required such in the statute.

[18] The district court did not abuse its discretion by prohibiting the Secretary from entering into new contracts with HMOs that fail to provide the procedural protections mandated by the court. The Medicare Act mandates that the Secretary may not enter into a contract with an HMO unless it meets the requirements of SS 1395mm(c) and (e). This is not permissive; it is mandatory.

_________________________________________________________________

COUNSEL

John F. Daly, United States Department of Justice, Washing-
ton, D.C., for the defendant-appellant.

Sally Hart Wilson, Center for Medicare Advocacy, Inc., Tuc-
son, Arizona, for the plaintiffs-appellees.

Dorothy Siemon, Bruce Vignery, American Association of
Retired Persons, Washington, D.C., for the Amici Curiae.

_________________________________________________________________

                               8841


OPINION

WIGGINS, Circuit Judge:

Medicare beneficiaries enrolled in health maintenance
organizations ("HMOs") in Arizona sued the Secretary of
Health and Human Services ("Secretary"). Their suit alleged
a failure to enforce due process requirements and a failure to
monitor HMO denials of medical services to enrolled Medi-
care beneficiaries. The district court granted Plaintiffs sum-
mary judgment, holding that HMO denials of medical
services to Medicare beneficiaries constitute state action and
that the regulations issued by the Secretary fail to provide due
process. The district court issued an injunction mandating cer-
tain procedural protections for Medicare beneficiaries
enrolled in HMOs. The Secretary appeals. We affirm.

I. Background

Congress passed the Medicare Act, Title XVIII of the
Social Security Act, 42 U.S.C. SS 1395 et seq., in 1965 to pro-
vide a federal health insurance program for the elderly and the
disabled. Today, a Medicare beneficiary can receive Medicare
services in two different ways. The first is to receive Medi-
care on a fee-for-service basis. Under this option, the benefi-
ciary goes to a health care provider for the necessary covered
services; either the provider or the beneficiary will be reim-
bursed by the government for the cost of the services. The
second, newer option is to enroll in an HMO or other eligible
organization.1 See 42 U.S.C. S 1395mm(b).

In 1982, Congress authorized the Secretary to enter into
"risk-sharing" contracts with HMOs. See S 1395mm. Under
these contracts, HMOs provide to enrolled Medicare benefi-
ciaries all the Medicare services provided in the statute, see
_________________________________________________________________
1 Here, "HMOs" refers to all eligible health services providers, including
HMOs and other "competitive medical plans." 42 U.S.C. S 1395mm(b).

                               8842


S 1395mm(c)(2)(A), in exchange for a monthly flat payment
from the Secretary, see S 1395mm(a).

The Medicare statute establishes in S 1395mm(c) proce-
dural protections for those beneficiaries that enroll in HMOs.
Among these, the HMO must "provide meaningful procedures
for hearing and resolving grievances between the organization
. . . and members enrolled . . . ." S 1395mm(c)(5)(A). HMO
members must also have certain appeal rights:

      A member enrolled with an eligible organization
      under this section who is dissatisfied by reason of his
      failure to receive any health service to which he
      believes he is entitled and at no greater charge than
      he believes he is required to pay is entitled, if the
      amount in controversy is $100 or more, to a hearing
      before the Secretary to the same extent as is pro-
      vided in [42 U.S.C. S 405(b)], and in any such hear-
      ing the Secretary shall make the eligible organization
      a party. If the amount in controversy is $1,000 or
      more, the individual or eligible organization shall,
      upon notifying the other party, be entitled to judicial
      review of the Secretary's final decision as provided
      in [42 U.S.C. S 405(g)] . . . .

S 1395mm(c)(5)(B).

The Secretary created additional appeal protections in sub-
sequent regulations. See 42 C.F.R. SS 417.600 - 417.638.
Under S 417.604, each HMO must establish appeal proce-
dures and ensure that beneficiaries receive written informa-
tion about the appeal and grievance procedures. See
S 417.604(a). If the HMO makes an "organization
determination" (defined in S 417.606) adverse to the enrollee,
"it must notify the enrollee of the determination within 60
days of receiving the enrollee's request for payment for
services." S 417.608(a)(1). An example of an adverse organi-
zation determination is an HMO's decision that certain medi-

                               8843


cal services are not covered by Medicare. The notice to the
beneficiary must "[s]tate the specific reasons for the
determination" and inform the enrollee of his or her "right to
a reconsideration." S 417.608(b). Failure to provide timely
notice is an adverse determination and may be appealed by
the enrollee. See S 417.608(c).

If the enrollee is dissatisfied with an adverse determination,
a request for reconsideration may be filed within 60 days from
the date of the notice. See SS 417.614 & 417.616(b). Within
60 days of the request, the HMO may make a decision fully
favorable to the enrollee. See S 417.620(a). If it decides to
make a decision that partially or completely affirms the
adverse determination, it must explain its decision in writing
and forward the case to the Health Care Financing Adminis-
tration ("HCFA"). See S 417.620(b). If the enrollee is dissatis-
fied with the result of the reconsideration, and the amount
remaining in controversy is $100 or more, the enrollee has a
right to a hearing before an administrative law judge ("ALJ").
See S 417.630. The enrollee can appeal that hearing decision
to the Appeals Council and then to the district court. See
SS 417.634 & 417.636.

The Secretary possesses a number of sanctions to ensure
HMO compliance with the Medicare statute and the Secre-
tary's regulations. First, the Secretary "may not enter into a
contract . . . with an [HMO] unless it meets the requirements
of [S 1395mm(c)] and [S 1395mm(e)]." 42 U.S.C.
S 1395mm(c)(1). The specified sections require the HMO,
inter alia, to provide all Medicare services to eligible enroll-
ees, to have particular open enrollment periods, to provide
enrollees annually with information on their rights, including
appeal rights, to provide covered services "with reasonable
promptness," to provide the aforementioned procedural pro-
tections, and not to exceed certain limits on rates charged to
beneficiaries and the Secretary. SS 1395mm(c) & 1395mm(e).

Second, the Secretary may terminate any contract with an
HMO if she determines that the HMO has not met the terms

                               8844


of the contract or has not satisfied the statutory or regulatory
requirements. See S 1395mm(i)(1). If the Secretary deter-
mines that an HMO has failed to provide necessary covered
services to an enrollee and that failure has adversely affected
the individual, the Secretary may seek civil money penalties,
suspend enrollment, or suspend payment to the HMO. See
S 1395mm(i)(6).

In 1993, five Medicare beneficiaries enrolled in an Arizona
HMO sued the Secretary. Among other claims, Plaintiffs
alleged that the Secretary "has failed and refused to take
effective action to implement beneficiaries' notice and appeal
rights when they are denied health care services by their
HMOs," and "has failed and refused to provide Medicare ben-
eficiaries enrolled in HMOs with a procedure of obtaining
review of HMO denial decisions contemporaneously with the
denial decisions." In a decision not on appeal, the district
court certified a nationwide plaintiff class.

In October 1996, the district court granted partial summary
judgment to Plaintiffs on the claims described above. See Gri-
jalva v. Shalala, 946 F. Supp. 747 (D. Ariz. 1996). The court
held that the "organization determinations" made by HMOs
constitute state action, triggering constitutional due process
requirements. See id. at 751-53. The court also held that the
regulations promulgated by the Secretary regarding adverse
determinations by HMOs fail to provide sufficient due pro-
cess to enrollees under Mathews v. Eldridge, 424 U.S. 319
(1976). See Grijalva, 946 F. Supp. at 756-60. In particular, the
district court found that the notices issued by HMOs failed to
provide adequate notice: they were often illegible, failed to
specify the reason for the denial, and failed to inform the ben-
eficiary that he or she had the right to present additional evi-
dence to the HMO. See id. at 757-59. Therefore,
"[s]ubsequent due process, available in the administrative
review phase of the appeal, comes too late in many cases
. . . ." Id. at 759. The district court also found that the lan-
guage of S 1395mm(c)(1) ("The Secretary may not enter into

                               8845


a contract . . . with an eligible organization unless it meets the
requirements of this subsection") was mandatory, requiring
the Secretary to enforce her regulations by refusing to renew
a contract with an HMO if the denial notices of that HMO fail
to provide due process. See id. at 760.

The district court found that the Secretary violated
S 1395mm(c)(1) by entering into a contract with any HMO
that failed to provide timely notice for any and all denials of
service. The court held that the notice must be legible (at least
12-point type), state clearly the reason for the denial, inform
the enrollee of all appeal rights, explain hearing rights and
procedures, and provide "instruction on how to obtain sup-
porting evidence, including medical records and supporting
affidavits from the attending physician." Id. at 760-61. The
district court also held that any hearing must be "informal, in-
person communication with the decisionmaker," available
upon request for all service denials, and timely. Id. at 761.
The district court also required expedited hearings for "acute
care service denials." Id.

On March 3, 1997, the district court issued an injunction
mandating the above requirements. See Grijalva v. Shalala,
No. CIV 93-711 TUC ACM, 1997 WL 155392 (D. Ariz. Mar.
3, 1997).

The Secretary appealed the district court's decision in May
1997. The district court granted her a stay of its injunction
pending this appeal.

II. Standards of Review

We review a grant of summary judgment de novo. See Bag-
dadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir. 1996). We must
determine, viewing the evidence in the light most favorable to
the nonmoving party, whether there are any genuine issues of
material fact and whether the district court applied correctly
the relevant substantive law. See id. We may affirm on any

                               8846


ground supported by the record. See Intel Corp. v. Hartford
Accident & Indem. Co., 952 F.2d 1551, 1556 (9th Cir. 1991).

We review the scope of an injunction for an abuse of dis-
cretion or application of erroneous legal principles. See SEC
v. Interlink Data Network, 77 F.3d 1201, 1204 (9th Cir.
1996).

III. Discussion

A. State Action Doctrine

The Secretary appeals the district court's holding that HMO
denials of medical services to enrolled Medicare beneficiaries
constitute state action and therefore invoke constitutional due
process protections.2

[1] The actions of private parties are not subject to the
requirements of constitutional due process unless they can
fairly be considered government action. See Shelley v.
Kraemer, 334 U.S. 1, 13 (1948). We use the same standards
to attribute the actions of private actors to the federal govern-
ment under the Fifth Amendment as we do to attribute private
actions to state governments under the Fourteenth Amend-
ment. See Kitchens v. Bowen, 825 F.2d 1337, 1340 (9th Cir.
1987).

[2] The actions of private entities constitute state action
under particular circumstances. In order to show that a private
action is in fact state action, the plaintiff must show that
" `there is a sufficiently close nexus between the State and the
challenged action of the regulated entity so that the action of
the latter may be fairly treated as that of the State itself.' "
Blum v. Yaretsky, 457 U.S. 991, 1004 (1982) (quoting
_________________________________________________________________
2 The district court held that such HMO denials constitute "state action."
We interpret this as holding that such HMO actions constitute government
action, specifically federal action.

                               8847


Jackson v. Metropolitan Edison Co., 419 U.S. 345, 351
(1974)). The government's regulation of the private actor is
insufficient alone to show federal action. See Blum, 457 U.S.
at 1004; Jackson, 419 U.S. at 350. Government action exists
if there is a symbiotic relationship with a high degree of inter-
dependence between the private and public parties such that
they are "joint participant[s] in the challenged activity." See
Burton v. Wilmington Parking Auth., 365 U.S. 715, 725
(1961). Government action exists if the challenged private
action occurs under government compulsion. See Adickes v.
S. H. Kress & Co., 398 U.S. 144, 170-71 (1970). The govern-
ment must do more, however, than merely acquiesce in the
challenged action. See Flagg Bros., Inc. v. Brooks, 436 U.S.
149, 164 (1978) (holding that government inaction is insuffi-
cient for state action). A detailed inquiry into the facts of the
particular case may be necessary to determine whether there
is state or federal action. See Jackson, 419 U.S. at 351.

[3] In this case, the question is whether the challenged
action -- HMO denials of services to Medicare beneficiaries
with inadequate notice -- may fairly be treated as that of the
federal government. We agree with the district court's cogent
analysis and conclusion that, in the circumstances of the Sec-
retary's regulation of and delegation of Medicare coverage
decisions to HMOs, HMO denials of services to Medicare
beneficiaries with inadequate notice constitute federal action.

[4] We find that HMOs and the federal government are
essentially engaged as joint participants to provide Medicare
services such that the actions of HMOs in denying medical
services to Medicare beneficiaries and in failing to provide
adequate notice may fairly be attributed to the federal govern-
ment. The Secretary extensively regulates the provision of
Medicare services by HMOs. HMOs are required, by the
Medicare statute and their contracts with the Secretary, to
comply with all federal laws and regulations. The Secretary
is required to ensure, inter alia, that HMOs provide adequate
notice and meaningful appeal procedures to beneficiaries. The

                               8848


Secretary pays HMOs for each enrolled Medicare beneficiary
(regardless of the services provided). The federal government
has created the legal framework -- the standards and enforce-
ment mechanisms -- within which HMOs make adverse
determinations, issue notices, and guarantee appeal rights.
Medicare beneficiaries enrolled in HMOs may appeal an
HMO's adverse determination to the Secretary, who has the
power to overturn the HMO's decision. Each of these factors
alone might not be sufficient to establish federal action.
Together they show federal action. See Catanzano v. Dow-
ling, 60 F.3d 113, 117-120 (2d Cir. 1995) (similar analysis in
Medicaid context); J.K. v. Dillenberg, 836 F. Supp. 694, 697-
99 (D. Ariz. 1993) (same).

The Secretary argues that the Supreme Court case of Blum
v. Yaretsky, 457 U.S. 991 (1982), mandates a finding that
HMO adverse determinations are not state action. We dis-
agree.

In Blum, the Supreme Court held that nursing home deci-
sions made by doctors and administrators to transfer patients
to other facilities, thereby terminating their Medicaid benefits,
did not constitute state action. The Court held that the deci-
sions at issue in the case turned "on medical judgment made
by private parties according to professional standards that are
not established by the State." 457 U.S. at 1008. Because state
officials did not have the power to approve or disapprove the
nursing home decisions, but just altered the level of Medicaid
benefits accordingly, the Court held that the decisions were
not state action. See id. at 1010.

[5] Unlike the nursing home doctors and administrators in
Blum, the HMOs in this case are not making decisions to
which the government merely responds. HMOs are following
congressional and regulatory orders and are making decisions
as a governmental proxy -- they are deciding that Medicare
does not cover certain medical services. In Blum, by contrast,
the nursing homes decided that certain medical services were

                               8849


no longer medically necessary. While such an inquiry may
occur in HMO service denials, the decisions in the case at
hand are more accurately described as coverage decisions --
interpretations of the Medicare statute -- rather than merely
medical judgments (particularly when no reason for the denial
is given other than that the service does not meet "Medicare
guidelines . . . based upon [the HMO's] understanding and
interpretation of Medicare . . . coverage policies and
guidelines," to quote a typical notice provided by Plaintiffs).

[6] The district court's reasoning and holding that HMO
service denials are federal action therefore do not run counter
to Blum. As noted by the district court, the government cannot
avoid the due process requirements of the Constitution merely
by delegating its duty to determine Medicare coverage to pri-
vate entities. See 946 F. Supp. at 752; see also Burton, 365
U.S. at 725 ("But no State may effectively abdicate its respon-
sibilities by either ignoring them or by merely failing to dis-
charge them whatever the motive may be.").

[7] We hold, therefore, that, when denying medical services
to enrolled Medicare beneficiaries, HMOs are federal actors.

B. Due Process and Mathews v. Eldridge

[8] The parties agree that the balancing test used by the
Supreme Court in Mathews v. Eldridge, 424 U.S. 319 (1976),
applies to determine the necessary procedural protections to
ensure that due process is provided to Medicare beneficiaries
enrolled in HMOs.

In Mathews v. Eldridge, the Supreme Court considered the
sufficiency of the procedures by which Social Security dis-
ability benefits were terminated. See 424 U.S. 319 (1976).
The Supreme Court held that constitutional due process is
flexible, demanding particular protections depending on the
situation. See id. at 334. The requirements of due process in
a particular situation depend on an analysis of three factors:

                               8850


      First, the private interest that will be affected by the
      official action; second, the risk of an erroneous
      deprivation of such interest through the procedures
      used, and the probable value, if any, of additional or
      substitute procedural safeguards; and finally, the
      Government's interest, including the functions
      involved and the fiscal and administrative burdens
      that the additional or substitute procedural require-
      ments would entail.

Id. at 335. A court must balance these factors to determine
whether the particular additional procedural safeguards sought
by a plaintiff are required in a given situation. 3 See id.

We agree with the district court's analysis of the Eldridge
factors and its conclusion that due process requires additional
protections for Medicare beneficiaries enrolled in HMOs.

1. Private Interest at Stake

The district court held that the private interest at stake from
an HMO's initial denial of Medicare coverage is the potential
that medical care will be precluded altogether. The court held
that this interest is a substantial private interest in additional
protections such as timely and effective notice of service
denials. We agree.

In Eldridge, the Court held that the private interest at stake
was the individual's interest in "uninterrupted receipt" of dis-
ability benefits. 424 U.S. at 340. The Court held that this
interest was not based on financial need (unlike the situation
of the welfare recipient in Goldberg v. Kelly, 397 U.S. 254
(1970)) and does not implicate a high degree of potential
deprivation. See id. at 340-41.
_________________________________________________________________
3 The Secretary argues that, in general, the Secretary's views on the
appropriate level of procedural protections should be accorded "great
deference." There is nothing in Mathews v. Eldridge or subsequent cases
to suggest that such is necessary or advisable.

                               8851


The district court was correct in holding that Plaintiffs'
interest in Medicare benefits is greater than the interest of the
plaintiff in Eldridge. As the district court noted, "[u]nlike
Eldridge, the deprivation suffered from an HMO denial to
provide care cannot so easily be remedied by retroactive
recoupment of benefits." 946 F. Supp. at 757. An HMO's
denial of coverage is an initial refusal to provide any medical
services. The mere fact that the enrollee may be able to go
elsewhere and pay for the services herself is of little comfort
to an elderly, poor patient -- particularly one who is ill and
whose skilled nursing care has been terminated without a spe-
cific reason or description of how to appeal.

[9] The Secretary argues that the district court erred by
"adjudicating a complex procedural scheme as falling short of
basic standards of fairness, without conducting the sort of
detailed inquiry needed." For example, the Secretary argues,
the district court should have distinguished between different
types of medical services and their urgency when considering
this first Eldridge factor, the magnitude of the private interest
at stake. The Secretary also argues that the district court's
finding that the interests of Medicare HMO enrollees are
"especially" great because they may not receive immediate
medical care is erroneous because some beneficiaries can seek
those services elsewhere (and then seek reimbursement from
the HMO) or disenroll from the HMO. The Secretary's argu-
ments fail. Although, in some cases, the effect of service
denial may be remedied easily after the fact, the potential for
irreparable damage is surely great when it comes to denial of
medical services (particularly denial without notice of any
reason for the denial), unlike the suspension of disability ben-
efits pending review as in Eldridge. In many, if not most,
cases, the denial of coverage may result in total failure to
receive the services.

The Secretary argues that the district court failed to recog-
nize that the Medicare program is not need-based, a fact
which the Secretary argues mandates holding against addi-

                               8852


tional procedural protections. The Secretary cites to Eldridge
for this proposition. The Court in Eldridge, however, dis-
cussed the fact that the disability benefits were not need-based
in order to distinguish the case from that in Goldberg v. Kelly,
397 U.S. 254 (1970), where the Court had held that a hearing
was necessary prior to the suspension of welfare benefits. The
Court did not hold that a program has to be need-based in
order for this factor to weigh in favor of additional protec-
tions.

[10] Other courts have found on similar facts that a signifi-
cant private interest is at stake that weighs in favor of addi-
tional protections. See, e.g., Kraemer v. Heckler, 737 F.2d
214, 222 (2d Cir. 1984) ("In applying the balancing test, the
private interest at stake [in the termination of Medicare cover-
age] should be weighed more heavily than in Eldridge
because of the astronomical nature of medical costs.");
Vorster v. Bowen, 709 F. Supp. 934, 946 (C.D. Cal. 1989)
("The private interest, in this case, is the claimant's need to
obtain reimbursement for medical bills that he or she has
already paid. That interest is fairly great. Congress enacted
the [Medicare] program because of the special coincidence of
medical needs and financial problems of the elderly."). The
interest of the HMO enrollees in medical services weighs in
favor of additional procedural protections beyond that offered
by the Secretary's original regulations.

2. Risk of Erroneous Deprivation

[11] The district court also held that factor two weighed in
favor of greater procedural protections for Medicare benefi-
ciaries enrolled in HMOs. The court reviewed Plaintiffs' anal-
ysis of notice failures and conducted its own review of the
notices provided to Plaintiffs. The court held that the notices
failed to provide adequate explanation for the denials. See 946
F. Supp. at 757-58. We agree. This failure creates a high risk
of erroneous deprivation of medical care to Medicare benefi-
ciaries. The appeal rights and other procedural protections

                               8853


available to Medicare beneficiaries are meaningless if the
beneficiaries are unaware of the reason for service denial and
therefore cannot argue against the denial. "Due process
requires notice that gives an agency's reason for its action in
sufficient detail that the affected party can prepare a respon-
sive defense." Barnes v. Healy, 980 F.2d 572, 579 (9th Cir.
1992). Therefore, inadequate notice creates the risk of errone-
ous deprivation by undermining the appeal process.

[12] The Secretary attacks the district court's analysis of
this factor by arguing that the court simply identified an
"arguable problem" faced by enrollees -- inadequate notice
-- rather than address whether that problem actually results
in deprivations. The Secretary argues that the district court
"simply assumed that the perceived failures of notice resulted
in fewer appeals, and that more appeals would diminish erro-
neous deprivations." The Secretary fails to recognize the real
problem: Inadequate notice renders the existence of an appeal
process meaningless. Moreover, the question established by
Eldridge is not whether the inadequate notices actually
resulted in erroneous deprivations, but whether the inadequate
notices created an unjustifiably high risk of erroneous depri-
vation. Because due process has at its foundation the notion
of adequate notice, the risk of erroneous deprivation caused
by ineffective notices points towards the need for added pro-
cedural protections for Medicare beneficiaries enrolled in
HMOs.

3. The Government's Interest

The Secretary argues that the district court paid only cur-
sory attention to this factor, dismissing the government's con-
cerns. The Secretary argues that the procedures sought by
plaintiffs would impose a large burden on HMOs, which
would accordingly affect the benefits received by enrollees.

[13] The district court did not engage in as detailed an anal-
ysis of this third factor as of the other two. A shorter analysis,

                               8854


however, does not mean the analysis is cursory or dismissive.
The Secretary has failed to show that the added procedural
protections sought by Plaintiffs would result in significant
additional costs to the government. Unlike the plaintiff in
Eldridge, Plaintiffs do not seek a hearing prior to every
denial, which would greatly increase costs. Adequate notices
do not impose a burden on HMOs that outweighs the benefi-
ciaries' need for them. "[A] weighing of the Mathews [v.
Eldridge] factors suggests that the administrative burden of
providing an explanation for denying a [certain benefit] is
minimal in light of the added potential for spotting errone-
ously withheld [benefits]." Barnes v. Healy, 980 F.2d 572,
579 (9th Cir. 1992). The Secretary fails to advance any con-
vincing argument that an additional burden on the government
outweighs the effects of the other factors such that additional
procedural safeguards are not necessary.

[14] Taken together, the Eldridge factors point to a need for
additional procedural protections for Medicare beneficiaries
enrolled in HMOs, in particular for adequate notice of service
denials, including the specific reason for the denial and an
explanation of appeal rights, and expedited review for critical
care denials. We therefore affirm the district court's holdings
on Eldridge.

C. The Scope of the Injunction

[15] The Secretary challenges the scope of the injunction
issued by the district court.4 The scope of an injunction is
_________________________________________________________________
4 In addition, the Secretary argues that the district court should not have
issued any injunction, because the proper course, if the existing regula-
tions were insufficient to provide due process, was to remand the case to
the Secretary for her to produce new regulations comporting with due pro-
cess. The cases cited by the Secretary, however, do not support this argu-
ment in the present case.

For example, in Thompson v. United States Dep't of Labor, 885 F.2d
551 (9th Cir. 1989), this court remanded the case to the Secretary on very

                               8855


reviewed for an abuse of discretion or application of errone-
ous legal principles. See SEC v. Interlink Data Network, 77
F.3d 1201, 1204 (9th Cir. 1996). "When injunctive relief is
sought against a state agency or official, such relief `must be
no broader than necessary to remedy the constitutional
violation.' " Barnes v. Healy, 980 F.2d 572, 576 (9th Cir.
1992) (quoting Toussaint v. McCarthy, 801 F.2d 1080, 1086
(9th Cir. 1986)).

[16] The Secretary argues vociferously that the injunction
issued by the district court was widely and irrationally broad
in scope. For example, the Secretary repeatedly ridicules the
district court's requirement of 12-point type for all notices of
service denials. The scope of the district court's injunction,
however, is not either an abuse of discretion or the result of
application of erroneous legal principles.

[17] The district court required legible (which requires 12-
point type for senior citizens) and clear notices that ade-
quately explain to beneficiaries the reasons for the denial of
services and inform them of their appeal rights. The court
required any hearings to be informal and in-person. An abuse
_________________________________________________________________
particular facts. The Secretary had entered into a settlement agreement
with a whistleblower who had sued the Department. Despite prior discus-
sions on the question, the agreement was silent on the question of whether
the Secretary could dismiss the complaints with prejudice. The Secretary
then dismissed the complaints with prejudice. This court held that the Sec-
retary could not dismiss the complaints with prejudice and remanded the
case for the Secretary to decide if it still wanted to enter into the settlement
agreement. See 885 F.2d at 558.

This case is not analogous. The Secretary never had adjudicative juris-
diction over this case. The Secretary does not provide any case that states
that this court must remand to her on the facts of this case. The issuance
of an injunction was within the district court's equitable powers. See
Weinberger v. Romero-Barcelo, 456 U.S. 305, 312-13 (1982) (holding that
a district court possesses the equity jurisdiction to issue an injunction, pro-
vided that it has subject matter jurisdiction and that Congress has not man-
dated otherwise).

                               8856


of discretion is not apparent in these requirements. Moreover,
many of them are already required by the Medicare statute or
the Secretary's regulations (which might make them redun-
dant, but does not make them an abuse of discretion). The
court also required the Secretary to monitor the behavior of
HMOs. This requirement is not an abuse of discretion given
that Congress implicitly required such in the Medicare statute
by forbidding the Secretary from entering into contracts with
HMOs that did not comply with the statute or the regulations
and by providing the Secretary with the power to sanction the
HMOs.

[18] The Secretary argues that the district court abused its
discretion by prohibiting the Secretary from entering into new
contracts with HMOs that fail to provide the procedural pro-
tections mandated by the court. The Secretary argues that
Congress provided the Secretary with a wide range of
enforcement mechanisms, and that the district court could not
require the Secretary to use the harshest mechanism. This
argument fails. The Medicare Act mandated that the Secretary
"may not enter into a contract . . . with an[HMO] unless it
meets the requirements of [S 1395mm(c)] and
[S 1395mm(e)]." 42 U.S.C. S 1395mm(c)(1). Under its clear
meaning, this provision is not permissive; to the contrary, it
is mandatory. The district court did not err or abuse its discre-
tion.

The Secretary notes that, since the district court's summary
judgment and injunction in favor of Plaintiffs, she has pro-
mulgated new regulations providing additional procedural
protections for Medicare beneficiaries enrolled in HMOs. She
asks us to review and modify the district court's injunction
accordingly. Finding it unnecessary to do so, we decline her
invitation. The district court has continuing jurisdiction over
the modification of the injunction. See Transgo, Inc. v. Ajac
Transmission Parts Corp., 768 F.2d 1001, 1030 (9th Cir.
1985) (declining to remand to district court with directions to
modify injunction, noting that the party "may apply directly"

                               8857


to the district court for modification in light of post-trial
events). The Secretary may move in the district court for a
modification of its injunction.

IV. Conclusion

For the foregoing reasons, we AFFIRM the district court's
summary judgment and injunction in favor of Plaintiffs.

AFFIRMED.

                               8858