California Assn. of Nursing Homes etc., Inc. v. Williams

• Decision Date: 24 February 1970
• Citation: 4 Cal.App.3d 800,84 Cal.Rptr. 590
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA ASSOCIATION OF NURSING HOMES, SANITARIUMS, REST HOMES AND HOMES FOR THE AGED, INC., a California non-profit corporation, on behalf of a class of persons too numerous to mention, Plaintiff and Appellant, v. Spencer W. WILLIAMS, Administrator of the Health and Welfare Agency of theState of California, Defendant and Respondent. Civ. 12230.

Page 590

84 Cal.Rptr. 590

4 Cal.App.3d 800

CALIFORNIA ASSOCIATION OF NURSING HOMES, SANITARIUMS, REST HOMES AND HOMES FOR THE AGED, INC., a California non-profit corporation, on behalf of a class of persons too numerous to mention, Plaintiff and Appellant, v. Spencer W. WILLIAMS, Administrator of the Health and Welfare Agency of theState of California, Defendant and Respondent.

Civ. 12230.

Court of Appeal, Third District, California.

Feb. 24, 1970.

Rehearing Denied March 24, 1970.

See 85 Cal.Rptr. 735.

Hearing Denied April 29, 1970.

Wilke, Fleury, Sapunor & Hoffelt, by Richard H. Hoffelt, Sacramento, for plaintiff and appellant.

Thomas C. Lynch, Atty. Gen., by Walter J. Wiesner, Deputy Atty. Gen., Sacramento, for defendant and respondent.

FRIEDMAN, Associate Justice.

At issue in this appeal is the validity of an administrative regulation prescribing the standards which determine the level of state payments for the care of Medi-Cal patients in nursing and convalescent homes.

Petitioner is an association of state-licensed nursing and convalescent homes. At the commencement of this action respondent Spencer Williams held the office then entitled Administrator of the Health and Welfare Agency, now called Secretary of the Human Relations Agency. The Director of Health Care Services is the official currently directing the Medi-Cal program. ¹ Petitioner filed this declaratory relief and mandamus action in the Sacramento Superior Court assailing validity of the regulation and contending that its financial provisions forced nursing homes to operate at a loss. After a hearing the court entered a judgment sustaining the regulation and declaring its validity. Petitioner appeals.

The basic features of the Medi-Cal program were described in some detail in Morris v. Williams (1967) 67 Cal.2d 733, 63 Cal.Rptr. 689, 433 P.2d 697. Suffice it to say here that Title XIX of the Social Security Act (Public Law 89--97, 79 Stat. 286, 1965) authorized federal financial support to states which adopted conforming medical assistance programs. The California Legislature responded with the enactment of legislation establishing the Medi-Cal program. (Stats.2d Ex.Sess.1965, ch. 4; Welf. & Inst.Code, div. 9, pt. 3, ch. 7.) ² The new law became effective as an urgency measure on November 15, 1965, but expressly deferred operative date of the program until March 1, 1966.

As presently framed, the Medi-Cal legislation reposes administrative responsibility in the Director and Department of Health Care Services (§§ 14061--14062). It authorizes a variety of health care services for the needy, including nursing home services. (§ 14053.) One provision (§ 14104 as last amended by Stats.1969, ch. 880) directs the department 'to the extent feasible' to contract with carriers for the rendition of health services through health benefit plans. The same provision expresses a formula for establishing payment rates to the providers of health services. ³ Another provision (§ 14105, as last amended by Stats.1969, ch. 1274) authorizes the Director to 'limit the rates of payment for such services' and to adopt rules and regulations, including those which fix rates of payment for services not rendered under contract with carriers. ⁴

Inasmuch as sections 14104 and 14105 call for regulations covering rates of payment for health services, the issues will be better viewed in the light of the Government Code provisions establishing procedures for the adoption of regulations. With inapplicable exceptions, regulations adopted by state agencies must be filed with the Secretary of State and published in the California Administrative Code. (Gov.Code, §§ 11380, 11409.) 'Basic minimum procedural requirements' for the adoption or amendment of regulations call upon the agency to publish and mail notice of its proposed action, to provide interested persons an opportunity for hearing and to give consideration to all relevant matter presented to it. (Gov.Code, §§ 11420, 11423, 11424, 11425.) The demand for prior notice and hearing does not apply to the adoption of an emergency regulation which is accompanied by a statement of facts constituting the emergency; an emergency regulation, however, becomes ineffective at the end of 120 days unless within that time the agency certifies that it has provided notices and an opportunity for hearing. (Gov.Code, §§ 11421, 11422.1.) Regulations ordinarily become effective 30 days after filing, but an emergency regulation may be made effective immediately. (Gov.Code, § 11422.) Any interested person may petition a state agency requesting the adoption or repeal of a regulation. (Gov.Code, § 11426.) Any interested person may obtain a judicial declaration as to the validity of a regulation in a declaratory relief action; in addition to any other ground of invalidity, the judgment may declare the regulation invalid for substantial violation of the procedural statutes or, in the case of an emergency regulation, upon the ground that the facts in the accompanying statement do not constitute an emergency. (Gov.Code, § 1440.)

The challenged regulation is section 51511 of title 22, California Administrative Code. Since its original adoption in June 1966 it has been amended five times, the current regulation representing its sixth version. The original regulation and all later mutations were purportedly adopted as 'emergency' regulations. For present purposes it will be adequate to set out in the margin the version in effect at the time this lawsuit was commenced, the amendment filed on June 8, 1967. ⁵

Aside from the fixed ceiling on per diem payments, the challenged regulation does not on its face establish a standard for reimbursing nursing and convalescent homes. Rather, it incorporates by reference the contents of a statement or document entitled 'State Schedule of Maximum Allowances, Section II Part C, Long-Term Care Facilities.' The Schedule of Maximum Allowances appears nowhere in the California Administrative Code. It takes the form of a pamphlet published by the State Department of Finance, bearing the issue date of February 1, 1967, but declaring an effective date of July 1, 1966. By fixing reimbursement in accordance with the Schedule of Maximum Allowances in effect at the time services are provided, Regulation 51511 evidences a design to incorporate future changes in reimbursement standards adopted by the Department of Finance. Pending this appeal, the Department issued a new version of the Schedule of Maximum Allowances dated August 1, 1969.

In summary, the Schedule of Maximum Allowances issued by the Department of Finance declares its application to all medical care and rehabilitation programs operated by the state, with certain exceptions of no moment here. It provides for fixed levels of payment according to a schedule of specified rates or, alternatively, an individualized rate as shown by costs statements submitted by the particular nursing home. The individualized rate is determined by compounding two kinds of costs: departmental, i.e., primarily administrative and operating expenses, and nondepartmental, i.e., taxes, insurance and capital-related costs. Actual departmental costs are limited by three factors: (a) an assumed bed occupancy level of 90%, (b) administrative costs not exceeding 15% Of operating costs, and (c) a scale of departmental cost ceilings, expressed in fixed dollar amounts and varying with the number of beds in the facility. ⁶ Nondepartmental costs are fixed by an artificial formula roughly amounting to 18% Of the facility's equalized assessed value (as shown on the county tax rolls) per bed per day.

The daily rate established by the rate schedule or the combination of the particular facility's departmental and nondepartmental costs as provided in the Schedule of Maximum Allowances is, in turn, subject to the $14 ceiling presently fixed by Regulation 51511 (fn. 5, supra).

Before bringing suit, petitioner resorted to the administrative remedy provided by Government Code, section 11426, filing an administrative petition which alleged that Regulation 51511 resulted in per diem payments less than the nursing homes' reasonable cost per patient and requesting a public hearing and amendment of the regulation. An administrative hearing was held on October 20, 1967. At the hearing petitioner and another party presented oral testimony and an extensive set of documentary exhibits. The Health and Welfare Agency presented no evidence either to support its existing regulation or to rebut the showing of the complainants. It did not expressly reject the petition nor did it take action to amend the existing regulation. This suit was filed on January 23, 1968. ⁷

In the trial court and in their original briefs on appeal, the parties raised three basic issues: (1) whether Regulations 51511 violates the statutory mandate requiring reimbursement for health services at rates based on reasonable costs; (2) whether, like public utilities, nursing and convalescent homes are constitutionally entitled to rates supplying a reasonable financial return on their investments; (3) whether, assuming invalidity of the administratively fixed reimbursement standard, the nursing and convalescent homes are entitled to reimbursement at a higher rate applied retroactively to March 1, 1966, the commencement of the Medi-Cal program.

Preliminary inquiry led this court to believe that the appeal might turn on sufficiency of the Medi-Cal agency's administrative procedures, that is, that the trial court might have erred in sustaining Regulation 51511 in the face of an administrative record which prevented meaningful judicial review. We requested and received supplemental briefs on this and allied questions. We have concluded that the adoption and repeated amendment of the regulation are characterized by serious procedural vices which prevent meaningful judicial review and frustrate any attempt to pass upon its substantive compliance with...