Tamra Schott v. Wisconsin Department of Health and Human Services

COURT OF APPEALS
DECISION NOTICE
DATED AND FILED This opinion is subject to further editing. If
published, the official version will appear in
the bound volume of the Official Reports.
May 5, 2026
A party may file with the Supreme Court a
Samuel A. Christensen petition to review an adverse decision by the
Clerk of Court of Appeals Court of Appeals. See WIS. STAT. § 808.10
and RULE 809.62.

Appeal No. 2024AP1835 Cir. Ct. No. 2023CV80

STATE OF WISCONSIN IN COURT OF APPEALS
DISTRICT III

TAMRA SCHOTT,

PETITIONER-RESPONDENT,

V.

WISCONSIN DEPARTMENT OF HEALTH AND HUMAN SERVICES,

RESPONDENT-APPELLANT.

APPEAL from an order of the circuit court for Lincoln County:
GALEN BAYNE-ALLISON, Judge. Affirmed.

Before Stark, P.J., Hruz, and Gill, JJ.

¶1 STARK, P.J. In this case, Tamra Schott challenged the Wisconsin
Department of Health Services’ (DHS)1 failure to provide her with notice and a
1
The caption incorrectly names the Department of Health Services as the Department of
Health and Human Services.
No. 2024AP1835

“fair hearing,” pursuant to federal and state Medicaid law, after she was
involuntarily discharged from a psychosocial rehabilitation program in Lincoln
County (the County). The DHS argues that fair hearings are required only to
determine “whether the State, acting through the [DHS], has incorrectly denied
eligibility for Medicaid, has properly terminated or restricted Medicaid coverage
for certain services, or has correctly denied coverage based on a lack of medical
necessity.” According to the DHS, the involuntary discharge decision in this case
was a provider decision, and “[t]here is no ‘fair hearing’ mechanism for those
kinds of treatment decisions by a provider.”

¶2 The circuit court disagreed. It reversed an administrative law
judge’s (ALJ) decision concluding that Schott was required to exhaust her “local
level” appeal right, through a hearing before the Bureau of Prevention, Treatment,
and Recovery (the Bureau), prior to requesting a fair hearing before the DHS. The
DHS now appeals from the circuit court’s order, which determined that federal
and state law entitle Schott to a fair hearing to determine whether her involuntary
discharge from the psychosocial rehabilitation program was improper and awarded
her attorney fees and costs.

¶3 For the reasons that follow, we affirm the circuit court’s decision in
all respects. Based on the circumstances in this case, the decision to involuntarily
discharge Schott was not merely a provider decision. The decision was made by
an entity to which the DHS has, by and through its own promulgated rules,
delegated all authority to administer psychosocial rehabilitation programming in
the County, and the decision was based on the direct execution of the DHS’s own
discharge rules, not the medical judgment of a provider. Therefore, we conclude,
pursuant to federal and state law for Medicaid recipients, that Schott was entitled
to a fair hearing to challenge her involuntary discharge from the program. We

2
No. 2024AP1835

further conclude that the DHS’s denial of that fair hearing was not substantially
justified and that the court therefore did not erroneously exercise its discretion by
awarding Schott attorney fees and costs.

BACKGROUND

¶4 In October 2022, Schott, a recipient of “Medical Assistance,”
otherwise known as Medicaid,2 sought behavioral health services through the
County. Schott applied for these services through a “comprehensive community
services program” (CCS), see WIS. ADMIN. CODE § DHS 36.03(4) (July 2023)3
(defining “CCS” as “a county-wide or tribal community-based psychosocial
rehabilitation program that is operated by a county department or tribe to provide
or arrange for the provision of psychosocial rehabilitation services”), which the
County operates by contracting with a private entity called North Central Health

2
See 42 U.S.C. § 1396; WIS. STAT. § 49.45 (2023-24) (“Medical assistance;
administration”). “The Medicaid Program provides free or low-cost health care for low-income
people, families, and children, pregnant women, the elderly, and people with disabilities.” Papa
v. DHS, 2020 WI 66, ¶4, 393 Wis. 2d 1, 946 N.W.2d 17.

All references to the Wisconsin Statutes are to the 2023-24 version.
3
All references to WIS. ADMIN. CODE ch. DHS 36 are to the July 2023 register unless
otherwise noted.

3
No. 2024AP1835

Care (NCHC).4 It is undisputed that NCHC offers the only CCS program in the
County. Schott was found eligible, and NCHC began offering her CCS services.

¶5 On February 3, 2023, NCHC sent Schott a notice that she had been
involuntarily discharged from CCS. According to the notice, Schott was
discharged because NCHC had “not been able to establish a treatment plan within
the timeframe allowed for the abbreviated assessment.” The notice further
informed Schott that “[y]ou have the right to appeal this decision” and directed her
to “submit a written request for review of the determination of need for
psychosocial rehabilitation services” to the Bureau.5 The notice did not advise
Schott that she had a right to appeal her discharge before the termination of her
CCS services ended. The notice also did not advise her that she had a right to a
fair hearing to challenge that action, nor did it provide her with notice of the
procedures for a fair hearing. See WIS. ADMIN. CODE § DHS 36.17(5)(am)3.6

4
Wisconsin has opted to include CCS services as a benefit for Medicaid recipients.
See WIS. STAT. §§ 49.45(30e), 49.46(2)(b)6.Lm.; WIS. ADMIN. CODE § DHS 36.01. These
psychosocial rehabilitation services “assist individuals with mental disorders or substance-use
disorders to achieve the individual’s highest possible level of independent functioning, stability
and independence and to facilitate recovery.” WIS. ADMIN. CODE § DHS 36.03(22); see also
§ DHS 36.03(23) (defining “[r]ecovery”). The County offers social services to its residents
through its Department of Social Services, which is “a governmental agency authorized by
Wisconsin State Statutes, … under the direction of … the [DHS] and the State Department of
Children and Families.” Social Services Department, LINCOLN COUNTY, WI,
https://www.co.lincoln.wi.us/social-services (last visited Apr. 23, 2026). Lincoln County,
together with Marathon and Langlade Counties, holds a tri-county contract with NCHC to
administer CCS services for residents.
5
The Bureau is part of the DHS’s Division of Care and Treatment Services. WISCONSIN
DEPARTMENT OF HEALTH SERVICES, DIVISION OF CARE AND TREATMENT SERVICES,
https://www.dhs.wisconsin.gov/dcts/index.htm (last visited Apr. 23, 2026).
6
WISCONSIN ADMIN. CODE § DHS 36.17(5)(am)3. (Feb. 2026) has been recently
amended. See infra note 21.

4
No. 2024AP1835

¶6 On March 3, 2023, Schott filed a request for a fair hearing, pursuant
to WIS. ADMIN. CODE § DHS 104.01(5) (May 2023),7 with the Division of
Hearings and Appeals (DHA), challenging her involuntary discharge.8 NCHC
subsequently moved to dismiss Schott’s request, arguing that she was “not entitled
to a fair hearing when appealing a CCS program discharge decision” because
NCHC is not “the agency or the department” and the discharge decision was a
“provider” decision, not a Medicaid benefit or eligibility determination.
According to NCHC, Medicaid beneficiaries “are only entitled to notice of
[§] DHS 104.01(5) appeal procedures but are not expressly entitled to an appeal as
a matter of right.” NCHC argued that Schott first had to appeal to the Bureau.
Schott disagreed, arguing that as a Medicaid recipient, she was entitled to
pretermination notice that her Medicaid benefits would be discontinued,
terminated, or suspended and was entitled to a fair hearing to contest that adverse
action with sufficient time to appeal before the effective date.

¶7 An ALJ granted NCHC’s motion to dismiss, concluding that the
matter was “not ripe for appeal on the merits.” According to the ALJ, “Wisconsin
must maintain a hearing system for [Medicaid] that meets the requirements of the
federal regulations,” which means that the hearing system “must provide for a
hearing before the [Medicaid] agency … or … an evidentiary hearing at the local
level, with a right of appeal to the [Medicaid] agency.” See 42 C.F.R. § 431.205
(2026).9 The ALJ stated that Schott should have exercised her “local level appeal

7
All references to WIS. ADMIN. CODE ch. DHS 104 are to the May 2023 register.
8
Corporation counsel for Marathon County appeared on behalf of NCHC in the matter.
9
As the relevant regulations have not materially changed since Schott was discharged,
all references to the Code of Federal Regulations are to the 2026 edition.

5
No. 2024AP1835

right”—i.e., a review by the Bureau—“before filing with the DHA.” The ALJ
also concluded that the notice NCHC sent to Schott was deficient because our
administrative code “require[s] that when the consumer receives [Medicaid], the
notice of discharge must contain the fair hearing procedures prescribed in [WIS.
ADMIN. CODE §] DHS 104.01(5),” but the notice Schott received “did not do so.”
Accordingly, the ALJ ordered NCHC to “issue a new notice of discharge to the
petitioner containing the language required under WIS. ADMIN. CODE
§ DHS 36.17(5)(am)3.”10

¶8 After the ALJ’s decision, NCHC issued a new notice to Schott. This
notice informed her that she had the right to appeal to the Bureau, but it also
contained the following language:

In addition to your right to appeal [to the Bureau], if you
are a Medicaid Recipient you have the right to notice of the
fair hearing procedures prescribed in [WIS. ADMIN. CODE
§] DHS 104.01(5), which may apply in the event you
receive an adverse decision after exercising the above
appeal.

The notice then quoted the fair hearing procedures in § DHS 104.01(5).

¶9 Schott filed a petition for rehearing, arguing that the ALJ made
material errors of law in her decision. According to Schott, requiring review by
the Bureau was not consistent with applicable federal or state regulations for
Medicaid recipients, which require a fair hearing. Schott also asserted that review
by the Bureau was not a “local evidentiary hearing” as defined by federal
regulations. See 42 C.F.R. § 431.205(b).

10
There are two decisions on the motion to dismiss in the administrative record. One
decision was issued on May 8, 2023, and one decision was issued on May 10, 2023, which
vacated the first decision.

6
No. 2024AP1835

¶10 The ALJ denied Schott’s petition for rehearing. The ALJ’s denial
was generally based on her adoption of NCHC’s arguments, and she provided the
following basis for the denial in the order:

Under WIS. ADMIN. CODE § DHS 36.17(5)(am)3.,
[Medicaid] beneficiaries who are involuntarily discharged
from the [CCS] program are only entitled to a notice that
contains the fair hearing procedures under WIS. ADMIN.
CODE § DHS 104.01(5)…. “The fair hearing process is not
intended for recipients who wish to lodge complaints
against providers concerning quality of services received,
nor is it intended for recipients who wish to institute legal
proceedings against providers. Recipients’ complaints
about quality of care should be lodged with the appropriate
channels established for this purpose, to include but not
limited to provider peer review organizations, consumer
advocacy organizations, regulatory agencies and the
courts.”

¶11 Schott then petitioned for judicial review of the ALJ’s decision
before the circuit court. In addition to the above arguments, Schott also argued
that the ALJ’s decision to impose an exhaustion requirement—i.e., an appeal
before the Bureau before pursuing a fair hearing—“in the absence of any
authority” was inconsistent with state regulations and would constitute
impermissible rulemaking.

¶12 After briefing on Schott’s petition, the circuit court held a
nonevidentiary hearing and issued an oral ruling, later memorialized by written
order, reversing the ALJ’s decision and remanding the case to the DHA for a fair
hearing proceeding to determine whether Schott’s involuntary discharge from
CCS was improper. The court reasoned that the ALJ’s decision “violated
[Schott’s] federal right to due process, and federal and state law, by requiring a
review by [the Bureau] of her discharge from [CCS], which denied [Schott’s] right
to a fair hearing with the DHA.” The court determined that a review by the
Bureau “is not a local level appeal as defined by federal regulations or the

7
No. 2024AP1835

equivalent of a fair hearing as required by law, and the decision by the [ALJ]
holding otherwise is inconsistent with federal and state law.” Finally, the court
awarded Schott attorney fees and costs, pursuant to WIS. STAT. § 814.245, after it
determined that the DHS was not “substantially justified” in taking its position in
this case. The DHS appeals.

DISCUSSION

¶13 On appeal, the DHS asks us to reverse the circuit court’s decision
and affirm the decision of the ALJ.11 The DHS’s arguments center upon the basic
premise that the court misunderstood how the DHS “functions under Wisconsin
and federal Medicaid regulations,” namely that the DHS acts as “essentially” an
insurer for Medicaid recipients. According to the DHS, those “insurer decisions
are what ‘fair hearings’ are for.” The DHS asserts, however, that “a ‘fair hearing’
is not an opportunity for a Medicaid recipient to review whether a particular
provider—here, [NCHC]—has correctly provided care.”

¶14 We disagree with DHS’s contention that the circuit court
misunderstood how DHS functions under the circumstances of this case. The
manner in which the DHS characterizes its operation and decision-making is not
the gauge by which we determine an individual’s rights under the Due Process
Clause of the Fourteenth Amendment or interpret statutes or rules. The
circumstances in this case demonstrate that NCHC’s decision to discharge Schott
from the CCS program was not a “provider” decision. The decision was the result

11
We note that on appeal, both Schott and the DHS agree that there should be no
exhaustion requirement before the Bureau for CCS participants who are Medicaid recipients.
Thus, we will not address further the question of whether the DHS engaged in impermissible
rulemaking by requiring Bureau review before holding a fair hearing.

8
No. 2024AP1835

of the direct execution of the DHS’s own discharge rules by the only entity that
the DHS has designated to provide CCS services to Medicaid recipients in the
County, and that discharge decision resulted in a complete denial of eligible
Medicaid benefits or services. Federal and state law protect Medicaid recipients
whose benefits or services are terminated or changed. The DHS, as the single
state agency responsible for administering Medicaid services in Wisconsin, is
responsible for ensuring that recipients receive those due process rights and
protections. Therefore, for the reasons that follow, we affirm the circuit court’s
order in all respects.

I. Fair Hearing

¶15 We first address the DHS’s assertion that Schott was not entitled to a
fair hearing “because the circumstances triggering one were not present.” The
DHS asks us to affirm the final administrative decision concluding that no fair
hearing was available or required. “When an appeal is taken from a circuit court
order reviewing an agency decision, we review the decision of the agency, not the
circuit court.” Hilton ex rel. Pages Homeowners’ Ass’n v. DNR, 2006 WI 84,
¶15, 293 Wis. 2d 1, 717 N.W.2d 166. Pursuant to our review under WIS. STAT.
ch. 227, we “shall affirm the agency’s action,” unless we determine there is “a
ground for setting aside, modifying, remanding or ordering agency action or
ancillary relief.” WIS. STAT. § 227.57(2).

¶16 Here, the facts of this case are undisputed, so our review will address
only questions of law—including federal and state statutory and regulatory
interpretation. If we conclude “that the agency has erroneously interpreted a
provision of law and a correct interpretation compels a particular action,” then we
“shall set aside or modify the agency action” or “remand the case to the agency for

9
No. 2024AP1835

further action under a correct interpretation of the provision of law.” WIS. STAT.
§ 227.57(5). “When reviewing questions of law decided by an agency, including
statutory interpretation, our review is de novo.” DOR v. Microsoft Corp., 2019
WI App 62, ¶13, 389 Wis. 2d 350, 936 N.W.2d 160 (citing Tetra Tech EC, Inc. v.
DOR, 2018 WI 75, ¶84, 382 Wis. 2d 496, 914 N.W.2d 21); § 227.57(11) (“Upon
review of an agency action or decision, the court shall accord no deference to the
agency’s interpretation of law.”). However, “due weight shall be accorded the
experience, technical competence, and specialized knowledge of the agency
involved.” Sec. 227.57(10). Nevertheless, “‘[d]ue weight’ is a matter of
persuasion, not deference.” Tetra Tech, 382 Wis. 2d 496, ¶78.12

12
The DHS specifically argues that we “should afford due weight respect to the [DHS’s]
understanding of how Medicaid and its requirements function.” It contends that “the [DHS] is the
state agency with specialized knowledge and experience administering Medicaid and its
requirements in Wisconsin” because it is the single state agency designated to administer the state
plan.

Schott observes, however, that the DHS “touts its ‘great deal of experience in
administering Medicaid and its requirements’ as sufficient for it to enjoy due weight deference,”
but it “then roots its further legal arguments in a claim that it is only an ‘insurer’ of Medicaid.”
According to Schott, the DHS “cannot have it both ways. It cannot be only an ‘insurer’ free from
the responsibilities imposed by its own regulations, and also an expert in administering those
regulations.” As our supreme court recognized in Tetra Tech,

“due weight” is not a talisman that automatically grants its bearer
additional rhetorical power. If an agency brings to court nothing
but a rote recitation of its background with the subject matter, it
should not expect the statutory directive to give its argument
extra heft. The agency should be prepared to explain how its
experience, technical competence, and specialized knowledge
give its view of the law a significance or perspective unique
amongst the parties, and why that background should make the
agency’s view of the law more persuasive than others.

Tetra Tech EC, Inc. v. DOR, 2018 WI 75, ¶79, 382 Wis. 2d 496, 914 N.W.2d 21.

10
No. 2024AP1835

¶17 “[S]tatutory interpretation ‘begins with the language of the statute,’”
and the “language is given its common, ordinary, and accepted meaning, except
that technical or specially-defined words or phrases are given their technical or
special definitional meaning.” State ex rel. Kalal v. Circuit Ct. for Dane Cnty.,
2004 WI 58, ¶45, 271 Wis. 2d 633, 681 N.W.2d 110 (citation omitted). We
interpret statutory language “in the context in which it is used; not in isolation but
as part of a whole; in relation to the language of surrounding or closely-related
statutes; and reasonably, to avoid absurd or unreasonable results.” Id., ¶46.

¶18 We apply this same interpretative framework to administrative code
provisions, and we also review interpretations of the administrative code de novo.
Envirologix Corp. v. City of Waukesha, 192 Wis. 2d 277, 291, 531 N.W.2d 357
(Ct. App. 1995). “Administrative rules and statutory provisions dealing with the
same subject matter are read together and harmonized if possible.” Id. “Where a
conflict arises between a statute and an administrative rule, the statute prevails.”
Grafft v. DNR, 2000 WI App 187, ¶12, 238 Wis. 2d 750, 618 N.W.2d 897.

¶19 We begin by outlining the legal framework upon which this case
rests. “Medicaid is a cooperative federal-state program through which the Federal
Government provides financial assistance to States so that they may furnish
medical care to needy individuals.” Newcap, Inc. v. DHS, 2018 WI App 40, ¶4,
383 Wis. 2d 515, 916 N.W.2d 173 (citation omitted). Although “[s]tates
voluntarily opt into the federal scheme,” by doing so, states “bind themselves to
abide by the rules and regulations imposed by the federal government in return for
federal funding.” Papa v. DHS, 2020 WI 66, ¶4, 393 Wis. 2d 1, 946 N.W.2d 17
(citation omitted); Harris v. McRae, 448 U.S. 297, 301 (1980) (explaining that a
state’s participation in Medicaid requires it to comply with federal Medicaid law);
42 U.S.C. § 1396a(a)(1); see generally 42 U.S.C. §§ 1396-1396w-5.

11
No. 2024AP1835

¶20 Wisconsin participates in the federal Medicaid program, and the
DHS is the “single State agency” that administers and supervises the
administration of our state Medicaid plan. WIS. STAT. § 49.45; 42 C.F.R.
§ 431.10(b). Importantly, the DHS must develop a Medicaid plan with rules that
mirror federal Medicaid laws and regulations. 42 U.S.C. § 1396a(a); 42 C.F.R.
§§ 431.200, 431.202; see also WISCONSIN DEPARTMENT OF HEALTH SERVICES,
STATE PLAN UNDER TITLE XIX OF THE SOCIAL SECURITY ACT MEDICAL
ASSISTANCE PROGRAM,
https://www.dhs.wisconsin.gov/mandatoryreports/mastateplan/pages1-33.pdf (last
visited Apr. 24, 2026).

¶21 While the DHS has a host of Medicaid-related responsibilities, as
relevant here, the DHS must establish a hearing system that meets certain explicit
due process requirements. See 42 U.S.C. § 1396a(a)(3); 42 C.F.R. §§ 431.200,
431.205, 431.220. Federal law refers to these due process requirements as a “fair
hearing.” See § 1396a(a)(3) (stating that the state plan for Medicaid must “provide
for granting an opportunity for a fair hearing before the State agency to any
individual whose claim for medical assistance under the plan is denied or is not
acted upon with reasonable promptness”).

¶22 As relevant here, the fair hearing system must provide for a hearing
before “[t]he Medicaid agency”—the DHS—or “[a]n evidentiary hearing at the
local level, with a right of appeal to” the DHS. See 42 C.F.R. § 431.205(b)(1)-(2)
(emphasis added). Wisconsin’s system for fair hearings is delegated to the DHA.
WIS. STAT. § 227.43(1)(bu); WIS. ADMIN. CODE § HA 3.01 (June 2023);13 WIS.

13
All references to WIS. ADMIN. CODE ch. HA 3 are to the June 2023 register.

12
No. 2024AP1835

ADMIN. CODE § DHS 104.01(5). Importantly, “[t]he hearing system must meet the
due process standards set forth in Goldberg v. Kelly, 397 U.S. 254 (1970)”; “must
be accessible to persons who are limited English proficient and persons who have
disabilities”; and “must comply with the United States Constitution” and multiple
other federal laws. Sec. 431.205(d)-(f); see also WIS. ADMIN. CODE §§ HA 3.06,
3.07, 3.08, 3.09. The Goldberg requirements include timely and adequate notice,
the opportunity to present evidence and confront and cross-examine witnesses, the
right to retain counsel, the right to a decision by an impartial decisionmaker, and
the right to a statement explaining the reasons for the decision. Driver v. Housing
Auth. of Racine Cnty., 2006 WI App 42, ¶13, 289 Wis. 2d 727, 713 N.W.2d 670;
Goldberg, 397 U.S. at 267-71.

¶23 The DHS “must grant an opportunity for” a “fair hearing” to an
individual when, as relevant to this case, “the agency has taken an action
erroneously, denied his or her claim for eligibility or for covered benefits or
services, or issued a determination of an individual’s liability, or has not acted
upon the claim with reasonable promptness,” including “[a]n initial or subsequent
decision regarding eligibility,” “[a] change in the amount or type of benefits or
services,” or “[a] prior authorization decision.” See 42 C.F.R. § 431.220(a)(1)
(emphasis added); WIS. ADMIN. CODE § HA 3.03. The Code of Federal
Regulations defines an “[a]ction,” as relevant to this case, to mean “[a]
termination, suspension of, or reduction in covered benefits or services, including
benefits or services for which there is a current approved prior authorization.” 42
C.F.R. § 431.201. Stated clearly, when an individual’s Medicaid benefits or
services are terminated, suspended, or reduced by the agency, that person is

13
No. 2024AP1835

entitled to due process, including the right to a fair hearing. 14 42 C.F.R.
§§ 431.200, 431.205; WIS. ADMIN. CODE § DHS 104.01(5)(b);15 WIS. ADMIN.
CODE §§ HA 3.01(2), (3)(b), 3.03(1)(c).

¶24 To resolve this case, then, we must determine (1) whether NCHC’s
decision to discharge Schott was a decision of “the agency”—i.e., state action—
and (2) whether that decision resulted in “[a] termination, suspension of, or
reduction in covered [Medicaid] benefits or services.” See 42 C.F.R. §§ 431.201,
431.220(a)(1); WIS. ADMIN. CODE § DHS 104.01(5)(b). If we answer both
questions in the affirmative, Schott is entitled to proper notice of her rights and a
fair hearing to contest her involuntary discharge from CCS. See 42 C.F.R.
§§ 431.202-431.211, 431.220; § DHS 104.01(5); WIS. ADMIN. CODE §§ HA 3.04,
3.05.

14
Pursuant to the Code of Federal Regulations, the Medicaid recipient must receive
notice of the proposed action; a clear description of the intended action and a statement of the
reasons and the legal basis supporting that action; an explanation of the right to request a fair
hearing; an explanation of the circumstances under which Medicaid benefits will continue if a
hearing is requested; and sufficient time to file an appeal before the effective date. See 42 C.F.R.
§§ 431.205-431.211, 431.220.
15
WISCONSIN ADMIN. CODE § DHS 104.01(5)(b) provides as follows:

The purpose of the fair hearing is to allow a recipient to appeal
department actions which result in the denial, discontinuation,
termination, suspension or reduction of the recipient’s
[Medicaid] benefits. The fair hearing process is not intended for
recipients who wish to lodge complaints against providers
concerning quality of services received, nor is it intended for
recipients who wish to institute legal proceedings against
providers. Recipients’ complaints about quality of care should
be lodged with the appropriate channels established for this
purpose, to include but not limited to provider peer review
organizations, consumer advocacy organizations, regulatory
agencies and the courts.

14
No. 2024AP1835

A. Decision of the agency

¶25 The DHS argues that we should “reject Schott and the circuit court’s
reasoning that [NCHC], when making treatment decisions about Schott, was
somehow acting on behalf of the Department.” According to the DHS, it “plays
no role in such provider-patient treatment decisions and lacks authority to be
involved.” The basis of the DHS’s position in this case is its belief that, within the
Medicaid construct, it serves as the Medicaid insurer and that fair hearings are
required to review the decisions it makes in that role. Thus, the DHS contends
that “the hearings can be used to challenge eligibility determinations and coverage
and medical necessity decisions, not individual choices about care made by a
provider, like a doctor or, here, a CCS provider.”

¶26 We reject the DHS’s attempt to distance itself from NCHC’s
decision. By operation of law, the DHS bears responsibility for NCHC’s actions
involving Medicaid recipients, and, therefore, NCHC’s decision to involuntarily
discharge Schott pursuant to the rules promulgated by the DHS is properly deemed
an act of “the agency.” See 42 C.F.R. § 431.220(a)(1). The DHS has delegated
the implementation and execution of CCS to the county departments.16 WIS.
STAT. § 49.45(30e)(a)2. (stating that CCS services are reimbursable provided
“[t]he county in which the individual resides elects to make the
services … available in the county through the [Medicaid] program”); WIS.
ADMIN. CODE §§ DHS 36.03(9) (defining “county department” as “a county

16
Wisconsin is not required, pursuant to federal law or regulation, to provide
“psychosocial services” to Medicaid recipients, see 42 C.F.R. § 440.225, but the state has opted
to do so within its Medicaid plan, see WIS. STAT. §§ 49.45(30e), 49.46(2)(b)6.Lm.; WIS. ADMIN.
CODE § DHS 36.01.

15
No. 2024AP1835

department of human services” under WIS. STAT. § 46.23), 36.04(1) (“A county
department or tribe seeking to operate a certified [CCS] program shall apply to the
[DHS] for certification on an application form provided by the [DHS].”).17
Nevertheless, the DHS retains significant oversight of CCS programs. The DHS
promulgates the rules regarding “[s]tandards for determining whether an
individual is eligible under [§ 49.45(30e)](a)3.”; “[t]he scope of psychosocial
services that may be provided under [WIS. STAT. §] 49.46(2)(b)6.Lm.”;
“[r]equirements for certification of [CCS] programs”; and “[a]ny other conditions
for coverage of [CCS] under the [Medicaid] Program.” Sec. 49.45(30e)(b); see
generally WIS. ADMIN. CODE ch. DHS 36.

¶27 As relevant here, WIS. ADMIN. CODE § DHS 36.17(5) outlines the
procedures by which an individual may be discharged from CCS. Generally,
“[d]ischarge from the CCS shall be based on the discharge criteria in the service
plan of the consumer unless any one of the following” situations apply:

1. The consumer no longer wants psychosocial
rehabilitation services.

2. The whereabouts of the consumer are unknown for at
least 3 months despite diligent efforts to locate the
consumer.

3. The consumer refuses services from the CCS for at least
3 months despite diligent outreach efforts to engage the
consumer.

4. The consumer enters a long-term care facility for
medical reasons and is unlikely to return to community
living.

17
Counties may also elect to provide services through a regional, multi-county model
based on criteria specified by the DHS. WIS. STAT. § 49.45(30e)(d). Some counties, either
individually or as a regional group, further delegate CCS implementation to another entity. See
§ 49.45(30e); WIS. ADMIN. CODE § DHS 36.07(3).

16
No. 2024AP1835

5. The consumer is deceased.

6. Psychosocial rehabilitation services are no longer
needed.

Sec. DHS 36.17(5)(a)1.-6.

¶28 With that background in mind, the question is whether NCHC’s
involuntary discharge decision qualified, under federal and state Medicaid law, as
an agency decision. In order to demonstrate that the DHS is responsible for the
specific conduct of which she complains, first, Schott “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.’” See Blum v. Yaretsky, 457 U.S. 991, 1004 (1982) (citation omitted).
“[T]he mere fact that a business is subject to state regulation,” however, “does not
by itself convert its action into that of the State for purposes of the Fourteenth
Amendment.” Id. (citation omitted). Second, the State must have “exercised
coercive power or … provided such significant encouragement, either overt or
covert, that the choice must in law be deemed to be that of the State.” Id. “Mere
approval of or acquiescence in the initiatives of a private party is not sufficient to
justify holding the State responsible for those initiatives under the terms of the
Fourteenth Amendment.” Id. at 1004-05. Finally, “the required nexus may be
present if the private entity has exercised powers that are ‘traditionally the
exclusive prerogative of the State.’” Id. at 1005 (citation omitted).

¶29 Analyzed in light of these principles, the “close nexus” between
NCHC and the DHS is clear: NCHC has been tasked with executing all of the
DHS’s duties under federal and state law to implement and operate CCS programs
in the County. As noted above, CCS is defined as “a county-wide or tribal
community-based psychosocial rehabilitation program that is operated by a county

17
No. 2024AP1835

department or tribe to provide or arrange for the provision of psychosocial
rehabilitation services.” WIS. ADMIN. CODE § DHS 36.03(4) (emphasis added).
Lincoln County, together with two other counties, has delegated responsibility for
operating the entire CCS program in those counties to NCHC. Thus, we agree
with Schott that “NCHC is not like one of the 79 physical therapist ‘providers’ that
offer Medicaid-covered services in Lincoln County, or the 119 nurse
practitioners.” As Schott argues, with the DHS’s regulatory oversight, NCHC
makes eligibility determinations with respect to CCS, enrolls participants, assesses
participant needs, creates and implements service plans, requests reimbursement
from the DHS, and informs consumers of their rights upon discharge. NCHC is
not merely a provider.

¶30 Furthermore, NCHC’s discharge decision in this case was also not
merely a provider decision. According to the record, the notice stated that Schott
was discharged from NCHC because “[w]e have not been able to establish a
treatment plan”—what the administrative code calls a “service plan”—“within the
timeframe allowed for the abbreviated assessment.” See WIS. ADMIN. CODE
§ DHS 36.17(2), (2m), (5); see also WIS. ADMIN. CODE §§ DHS 36.16 (outlining
the assessment process), 36.03(27) (defining “[s]ervice plan” to mean “a written
plan of psychosocial services to be provided or arranged for a consumer that is
based on an individualized assessment of the consumer”). We agree, based on the
plain language of the administrative code, with Schott’s argument before the ALJ
that the failure to establish a treatment plan “alone is not a basis for discharge”
under § DHS 36.17(5)(a). Schott noted before the ALJ, however, that in its “Final
Report,” “NCHC claimed that [Schott’s] ‘involuntary discharge from CCS is

18
No. 2024AP1835

consistent with #3 of the above discharge criteria,’ and referenced”
§ DHS 36.17(5)(a)3.18 See supra ¶27.

¶31 Thus, NCHC’s discharge decision resulted from the direct execution
of the DHS’s own discharge rules. The discharge decision was not based on
medical judgment, was not based on NCHC’s own policies or procedures, and was
not based on criteria established in a service plan. The decision was the execution
of a rule promulgated by the DHS concerning how CCS programs are to operate.
See Blum, 457 U.S. at 1012 (White, J., concurring) (explaining that to “satisfy[]
the state-action requirement,” “respondents must show that the transfer or
discharge is made on the basis of some rule of decision for which the state is
responsible” (emphasis added)). Therefore, the “close nexus” between the DHS
and NCHC establishes that NCHC is a state actor and that its decision is properly
considered an act of the DHS. See id. at 1004.

¶32 The DHS disputes this conclusion, however, arguing that Blum
supports its position.19 In Blum, Medicaid participants were patients in a nursing
home, and the nursing home’s committee of physicians, “whose functions
include[d] periodically assessing whether each patient [was] receiving the

18
It does not appear that NCHC argued to the contrary before the ALJ, and on appeal,
the DHS does not assert that Schott was discharged under any other provision or, specifically,
under her treatment/service plan, as no such plan existed. Furthermore, the DHS does not allege
that Schott’s discharge was based on policies or procedures developed directly by NCHC.
19
The DHS also relies upon general agency principles in support of its argument, stating
that there was no “manifestation by the principal to the agent that the agent may act on his [or
her] account, and consent by the agent so to act.” See State v. Timblin, 2002 WI App 304, ¶27,
259 Wis. 2d 299, 657 N.W.2d 89 (citation omitted). We conclude that general agency principles
are considered under the standard discussed in Blum v. Yaretsky, 457 U.S. 991 (1982), which is
applicable here. Therefore, we do not further address the DHS’s arguments concerning general
agency law.

19
No. 2024AP1835

appropriate level of care, and thus whether the patient’s continued stay in the
facility [was] justified,” determined that the patients “did not need the care they
were receiving and should be transferred to a lower level of care.” Id. at 994-95.
In response, the patients commenced a class action lawsuit, arguing that “the
defendants had not afforded them adequate notice either of [the committee’s]
decisions and the reasons supporting them or of their right to an administrative
hearing to challenge those decisions” in violation of the Due Process Clause. Id.
at 996.

¶33 The United States Supreme Court observed that the patients were
“not challenging particular state regulations or procedures, and their arguments
concede[d] that the decision to discharge or transfer a patient originates not with
state officials, but with nursing homes that are privately owned and operated.” Id.
at 1003. Therefore, the Court explained, the patients sought “to hold state officials
liable for the actions of private parties.” Id. The Court rejected that request,
stating that “[t]he decisions about which respondents complain [were] made by
physicians and nursing home administrators, all of whom are concededly private
parties.” Id. at 1005. Further, the Court recognized that “[t]here is no suggestion
that those decisions were influenced in any degree by the State’s obligation to
adjust benefits in conformity with changes in the cost of medically necessary
care.” Id.

¶34 The material facts in Blum are not on par with the situation here, and
as a result, the Court’s reasoning in Blum provides support for the opposite
conclusion in this case—namely that NCHC is a state actor and its decision is
properly considered an act of the DHS. The Blum Court did not conclude there
was a “close nexus” in that case because it determined that the physician
committee’s decisions were essentially the decisions of a provider because the

20
No. 2024AP1835

decisions “ultimately turn[ed] on medical judgments made by private parties
according to professional standards that are not established by the State” and were
not decisions that the state regulated. Id. at 1008 (emphasis added). Further, the
Court rejected the patients’ arguments that regulations imposed a penalty based on
these medical judgments and reasoned that “those regulations themselves do not
dictate the decision to discharge or transfer in a particular case.” Id. at 1009-10.

¶35 Here, as outlined above, NCHC’s decision to discharge Schott from
CCS was not based on medical judgment, as in Blum. Instead, DHS-created rules
“dictate[d] the decision to discharge” Schott in this case, based on either her
failure to complete a service plan or her alleged refusal of service. See id.; WIS.
ADMIN. CODE § DHS 36.17(5)(a). Therefore, like Blum’s “patient care
assessment forms designed by the State,” see Blum, 457 U.S. at 1008, the DHS’s
rules required NCHC to complete an assessment and create a service plan pursuant
to WIS. ADMIN. CODE §§ DHS 36.16 and 36.17(2). Unlike in Blum, however,
these rules do “require [NCHC] to rely on the [assessment and service plan] in
making discharge … decisions.” See Blum, 457 U.S. at 1008. Accordingly, the
decision to discharge Schott was based on standards established by the DHS to
administer CCS programs; therefore, NCHC was standing in the shoes of the DHS
when it made its decision to discharge Schott.

¶36 The DHS also challenges Schott’s reliance on J.K. ex rel. R.K. v.
Dillenberg, 836 F. Supp. 694 (D. Ariz. 1993). In that case, the question was “the
sufficiency of behavioral health services” provided to children under Arizona’s
Medicaid plan. Id. at 695-96. Like the DHS, the Arizona Department of Health
Services contracted out its behavioral health services for Medicaid-covered
children to a regional behavioral health program. See id. at 697. At issue was the
regional program’s “new policy” whereby “children residing in residential

21
No. 2024AP1835

treatment centers or therapeutic group homes would be discharged from treatment
in ninety days.” Id.

¶37 The United States District Court for the District of Arizona
distinguished the case from Blum, noting that the “[p]laintiffs herein are not
complaining about the actions of a private provider but of a private entity that has
been assigned the entire responsibility for a state-created service” “as its means of
carrying out its public duties.” J.K., 836 F. Supp. at 698. Thus, the district court
determined that “the actions undertaken by [the regional program], to the extent
that [they] are later proven to be an impermissible reduction of services, were
effected on behalf of the government and constitute state action.” Id. at 698-99.

¶38 The DHS disputes the application of J.K. to the facts of this case
because, it claims, the J.K. court provided “little analysis” for its departure from
Blum. It further argues that the DHS “has not delegated its ‘mandated health care
duties’ to any entity and it likewise has no contract so delegating” because the
DHS “has no duty to offer CCS services that … is, in turn, being passed off to
another entity.” Again, we disagree with the DHS’s characterization.

¶39 As noted above, Wisconsin has opted to include “psychosocial
services” provided by a CCS as an “optional” benefit for Medicaid recipients.
See 42 C.F.R. §§ 440.210 (required services for categorically needy), 440.220
(required services for medically needy), 440.225 (optional services); WIS. STAT.
§§ 49.45(30e)(a)2., 49.46(2)(b)6.Lm.; WIS. ADMIN. CODE § DHS 36.01; see also
42 C.F.R. §§ 440.130(d), 440.140, 440.160, 440.60. Thus, the CCS programs are
executing state responsibilities under federal Medicaid law, and, according to the
rules established by the DHS, operation of CCS programs is delegated to the
“county department” but overseen by the DHS. See WIS. ADMIN. CODE

22
No. 2024AP1835

§§ DHS 36.03(4), (9), 36.04(1); WIS. STAT. § 51.42(7). The County has delegated
the operation of all CCS services to NCHC. By operating in this capacity, NCHC
is not merely a private actor doing business with the DHS. See J.K., 836 F. Supp.
at 698; see also 42 U.S.C. § 1396u-2; 42 C.F.R. § 431.10(c).

¶40 Any argument by the DHS that it has not “delegated” the CCS
program because counties choose to offer it is irrelevant to an individual’s right to
a fair hearing. The DHS cannot legally distance itself from NCHC’s decisions. If
an authorized administrator—whether that be the county department or a private
entity that operates the CCS program for the county—takes an “action” involving
a Medicaid recipient, that “action” triggers due process protections. See 42 C.F.R.
§ 431.220(a). Because the DHS certifies and funds these programs, in part,
through Medicaid, the DHS is responsible, regardless of which entity physically
takes the action. And that legal link remains even though not all CCS enrollees
are Medicaid recipients. Due process cannot be ignored because, as the DHS
argues, the CCS services do not “apply exclusively to Medicaid recipients.”20

20
In its reply brief, the DHS cites Saint Anthony Hospital v. Whitehorn, 132 F.4th 962
(7th Cir. 2025), J.K. ex rel. R.K. v. Dillenberg, 836 F. Supp. 694 (D. Ariz. 1993), and Catanzano
ex rel. Catanzano v. Wing, 103 F.3d 223 (2d Cir. 1996), as examples where the state Medicaid
agency had delegated its duties. The DHS argues that these cases support its position that “CCS
programs under Wisconsin law were not created to serve Medicaid recipients specifically and are
not administered by the [DHS],” arguing that these cases “are apples-to-oranges here.”
Nevertheless, the DHS has not identified any legal authority suggesting that an entity’s decision
can never constitute “state action” under Blum if the entity has been delegated duties beyond
those related to Medicaid recipients. It strains credulity that where an entity is delegated more
power it also holds less responsibility. Regardless of an entity’s specific role—for example, as a
managed-care organization or exclusively devoted to providing a Medicaid service, see
Whitehorn, 132 F.4th at 965; Catanzano, 103 F.3d at 225-26; J.K., 836 F. Supp. at 695-96—if
the entity has assumed the responsibility for administering the state’s duties under federal
Medicaid law, its decisions that result in adverse actions for recipients are subject to challenge by
the fair hearing procedures.

23
No. 2024AP1835

¶41 We are also persuaded by the J.K. court’s discussion of the
“devastating” public policy implications if state agencies are not held responsible.
See J.K., 836 F. Supp. at 699. As the court explained,

It is patently unreasonable to presume that Congress would
permit a state to disclaim federal responsibilities by
contracting away its obligations to a private entity. The
law demands that the designated single state Medicaid
agency must oversee and remain accountable for uniform
statewide utilization review procedures conforming to bona
fide standards of medical necessity.

Id. (citations omitted). We agree with Schott that “[w]hen an optional service is
added to the state’s Medicaid plan, that optional service becomes subject to the
requirements of federal law just as if it were a mandatory service.” See Lankford
v. Sherman, 451 F.3d 496, 504 (8th Cir. 2006) (“Once the state offers an optional
service, it must comply with all federal statutory and regulatory mandates.”);
Tallahassee Mem’l Reg’l Med. Ctr. v. Cook, 109 F.3d 693, 698 (11th Cir. 1997)
(“[E]ven when a state elects to provide an optional service, that service becomes
part of the state Medicaid plan and is subject to the requirements of federal law.”).
Accordingly, the DHS cannot contract away its obligations to Medicaid recipients;
therefore, NCHC’s decision to involuntarily discharge Schott pursuant to a
DHS-promulgated rule is properly considered a decision of the agency.

B. Action of the agency

¶42 Now that we have determined that NCHC’s decision qualified as an
agency decision under federal Medicaid law, we must determine whether that
decision qualified as an “action” for purposes of federal fair hearing requirements.
See 42 C.F.R. §§ 431.201, 431.220. As noted above, and as relevant to this case,
Medicaid recipients are entitled to a fair hearing to challenge “[a] termination,
suspension of, or reduction in covered [Medicaid] benefits or services” prior to

24
No. 2024AP1835

that service’s termination. 42 C.F.R. §§ 431.201, 431.205, 431.220(a)(1); WIS.
ADMIN. CODE § HA 3.03(1)(c); WIS. ADMIN. CODE § DHS 104.01(5)(b) (“The
purpose of the fair hearing is to allow a recipient to appeal department actions
which result in the denial, discontinuation, termination, suspension or reduction of
the recipient’s [Medicaid] benefits.”); see also WIS. ADMIN. CODE
§§ DHS 36.17(5)(am)3., 36.19(1)(c). When the “agency has taken an action” that
a consumer believes is erroneous, the DHS, as the “single State agency”
responsible for administering or supervising the administration of the Medicaid
plan in Wisconsin, must ensure compliance with all of the relevant federal and
state laws and regulations. See 42 C.F.R. §§ 431.10(b), 431.220(a)(1); see also 42
U.S.C. § 1396a(a)(3); Harris, 448 U.S. at 301.

¶43 Here, we conclude that NCHC’s act of involuntarily discharging
Schott from the CCS program resulted in a termination of a covered Medicaid
benefit or service, and, therefore, Schott was entitled to a fair hearing to challenge
that termination. Again, it is undisputed that NCHC operates the only CCS
program in the County (and in two other counties). This monopoly is by design.
As Schott argues, “[t]he regulations guiding the CCS program, created by the
[DHS] itself, do not allow [Schott] the luxury to shop for other CCS ‘providers.’”
Given the nature of the services provided by NCHC, and the lack of any other
CCS providers in the County, Schott’s involuntary discharge by NCHC resulted in
her inability to access any CCS services, which qualifies as a termination—
meaning “[t]he act of ending something,” see Termination, BLACK’S LAW
DICTIONARY (12th ed. 2024)—or at the very least a reduction of Medicaid benefits
or services, and it effectively resulted in a denial of her claim for mental health
services through Medicaid. See 42 C.F.R. §§ 431.201, 431.220(a)(1); WIS.

25
No. 2024AP1835

ADMIN. CODE § DHS 104.01(5)(b). This complete denial of eligible services
entitled Schott to a fair hearing to challenge this adverse action.

¶44 At the time Schott was involuntarily discharged by NCHC, two
sections of WIS. ADMIN. CODE ch. DHS 36 recognized Medicaid recipients’ rights
to fair hearing procedures, distinct from those of “all other consumers.”21 See
WIS. ADMIN. CODE §§ DHS 36.17(5)(am)3., 36.19(1). As relevant here,
§ DHS 36.17(5)(am) provided as follows:

21
Earlier this year, the DHS amended portions of WIS. ADMIN. CODE ch. DHS 36,
including WIS. ADMIN. CODE §§ DHS 36.17(5)(am) and 36.19(1) (Feb. 2026), pursuant to its
“agency review of rules and enactments on a biennial basis.” Clearinghouse Rule 25-055, 842B
WIS. ADMIN. REG., 3 (Feb. 23, 2026),
https://docs.legis.wisconsin.gov/code/register/2026/842b/register/final/cr_25_055_rule_text/cr_2
5_055_rule_text.pdf. According to the DHS, the amendments were made because

[§§] DHS 36.17(5)(am) and 36.19(1) contain provisions that are
obsolete and in conflict because they refer to fair hearings that
are inconsistent with [WIS. ADMIN. CODE §] DHS 104.01(5).
These references appear to apply to clinical decisions to
discharge an individual from [CCS], but the fair hearing process
is not intended for recipients who wish to lodge complaints
against providers concerning quality of services received or
discharge from a program. See [§] DHS 104.01(5)(b). These
provisions should be updated accordingly.

Id. at 7.

Therefore, the current version of WIS. ADMIN. CODE § DHS 36.17(5)(am) (Feb. 2026) no
longer references Medicaid or the fair hearing procedures and provides as follows:

(am) When a consumer is discharged from the CCS program,
the consumer shall be given written notice of the discharge. The
notice shall include all of the following:

1. A copy of the discharge summary developed under par. (b).

2. Written procedures on how to re-apply for CCS services.

3. Information on how the consumer who is involuntarily
discharged from the CCS program can submit to the department
a written request for a review of the discharge.

26
No. 2024AP1835

(am) When a consumer is discharged from the CCS
program, the consumer shall be given written notice of the
discharge. The notice shall include all of the following:

1. A copy of the discharge summary developed under
par. (b).

2. Written procedures on how to re-apply for CCS
services.

3. If a consumer is involuntarily discharged from the
CCS program and the consumer receives Medical
Assistance, the fair hearing procedures prescribed in [WIS.
ADMIN. CODE §] DHS 104.01(5). For all other consumers,
information on how the consumer can submit a written
request for a review of the discharge to the department.

¶45 On appeal, the DHS “acknowledges” that this provision of the
administrative code “could, at first blush, appear to create tension,” but it argues
that “read in context, that notice provision can be applied in harmony with the fair
hearing provisions.” According to the DHS, the “cross reference” to WIS. ADMIN.
CODE § DHS 104.01(5) within WIS. ADMIN. CODE § DHS 36.17(5)(am) “points to
something specific: to ‘department’ actions concerning” changes in Medicaid
benefits. “In other words,” argues the DHS, “the notice provision provides for
broad notice where it could be the case that a fair hearing is required.” Here,
however, because the DHS contends this involuntary discharge was a provider
decision, it contends that “the fair hearing provision would not apply.”

¶46 Regardless of the DHS’s attempt to complicate straightforward
regulatory language, the significant point is that the prior version of WIS. ADMIN.
CODE § DHS 36.17(5)(am) recognized that CCS participants who receive
Medicaid benefits have due process rights unique to their status as Medicaid
recipients. The DHS’s act of removing the fair hearing language from the
administrative code does nothing to alter Medicaid law. Federal law still requires
the DHS to provide a fair hearing to a Medicaid recipient “who requests it because
he or she believes the agency has taken an action” that results in “termination,

27
No. 2024AP1835

suspension of, or reduction in covered benefits or services” “erroneously.” 42
C.F.R. §§ 431.201, 431.220(a)(1); see also WIS. ADMIN. CODE
§ DHS 104.01(5)(b); WIS. ADMIN. CODE § HA 3.03(1)(c), (4).22

¶47 In summary, NCHC decided to discharge Schott from the CCS
program as a state actor on behalf of the DHS and pursuant to a DHS-promulgated
rule. Schott’s involuntary discharge resulted in the termination of her CCS
benefits with no other way to receive the covered service. Schott is therefore
entitled to a fair hearing to review that decision.

II. Fees and costs

¶48 Finally, the DHS asks us to reverse the circuit court’s award of
attorney fees and costs to Schott under WIS. STAT. § 227.485. Pursuant to
§ 227.485(3), the prevailing party “shall” be awarded “the costs incurred in
connection with the contested case, unless … the state agency which is the losing
party was substantially justified in taking its position or … special circumstances
exist that would make the award unjust.”23 The circuit court specifically found
that there was an absence of authority in federal or state law to support the DHS’s
position in this case and that the DHS had “elected to advance” a policy argument
“that is simply a parade of horribles.” As a result, the court concluded that the
DHS was not substantially justified in taking its position.

22
We also note that in the alternative to a fair hearing before the DHS, the DHS could
provide for a local level intermediary review. See 42 C.F.R. § 431.205(b). However, the current
purported local level appeal to the Bureau does not satisfy the federal regulatory requirements
because it does not provide for an evidentiary hearing with proper due process protections.
See id.
23
This case does not involve special circumstances.

28
No. 2024AP1835

¶49 “‘Substantially justified’ means having a reasonable basis in law and
fact.” WIS. STAT. § 227.485(2)(f). Therefore, “[t]o satisfy its burden the
government must demonstrate (1) a reasonable basis in truth for the facts alleged;
(2) a reasonable basis in law for the theory propounded; and (3) a reasonable
connection between the facts alleged and the legal theory advanced.” Sheely v.
DHSS, 150 Wis. 2d 320, 337, 442 N.W.2d 1 (1989) (citation omitted).
Nevertheless, “[l]osing a case does not raise the presumption that the agency was
not substantially justified,” and “advancing a ‘novel but credible extension or
interpretation of the law’” is also not “grounds for finding a position lacking
substantial justification.” Id. at 338 (citation omitted). We apply the erroneous
exercise of discretion standard when reviewing a circuit court’s “substantially
justified” determination. See id. at 337.

¶50 We conclude that the circuit court did not erroneously exercise its
discretion when it awarded Schott attorney fees and costs. As the facts in this case
were not at issue, we look only to whether the DHS has met its burden to prove
that there was “a reasonable basis in law for the theory propounded” and “a
reasonable connection between the facts alleged and the legal theory advanced.”
See id. As explained above, the DHS’s position in this case is directly contrary to
unambiguous federal and state Medicaid law and ignores the consequences of its
delegation of authority to NCHC for all CCS services in the County.
Significantly, the result of the DHS’s unsupported position is the denial of due
process rights to a vulnerable population—those suffering with mental health
and/or substance-use concerns that are also eligible for Medicaid.

29
No. 2024AP1835

¶51 Accordingly, we cannot conclude that the circuit court erroneously
exercised its discretion by determining that the DHS was not substantially justified
in taking its position. We affirm the court’s award of fees and costs.

By the Court.—Order affirmed.

Recommended for publication in the official reports.

30