Hi Lauren,
Myself, I would try Xiao Chai Hu Tang (with even some Qin Jiao added) for this dog. This formula, also known as Minor Bupleurum, contains Ginseng, which we've noted to be quite helpful in diabetes in dogs (but not especially in cats). It also opens the GB channel which traverses the hip region. It's a moving formula, and we know the dog has Stasis, because it is better with movement. It addresses muscle atrophy, primarily because localized muscle atrophy is often a problem with channel Qi and Blood flow, rather that Spleen or Kidney deficiency. In humans, the main channels delivering Qi and Blood to the limbs are the Yang Ming channels (ST, LI). Using thermography, it's quite clear that in dogs, and maybe most quadripeds, it's the Shao Yang channels (GB, TB). So just opening the GB channel using XCHT maybe enough to reverse that atrophy, eliminate the pain, and restore mobility. It's what I'd try. For years, I tried Shen Tong Zhu Yu Tang, but found it unrewarding. It's more helpful for the forelimbs and neck, and where there is both Blood stasis and Wind invasion.
Good luck with your case!
Steve