Cedars-Sinai Medical Center v. Shewry

• Decision Date: 21 March 2006
• Docket Number: No. B172699.,B172699.
• Citation: 41 Cal.Rptr.3d 48,137 Cal.App.4th 964
• Court: California Court of Appeals
• Parties: CEDARS-SINAI MEDICAL CENTER, Plaintiff and Appellant, v. Sandra SHEWRY, as Director, etc., et al., Defendants and Respondents.

41 Cal.Rptr.3d 48

137 Cal.App.4th 964

CEDARS-SINAI MEDICAL CENTER, Plaintiff and Appellant, v. Sandra SHEWRY, as Director, etc., et al., Defendants and Respondents.

No. B172699.

Court of Appeal, Second District, Division 2.

March 21, 2006.

Sonnenschein, Nath & Rosenthal, David L. Volk, Susan M. Walker; Greines, Martin, Stein & Richland, Robin Meadow, Cynthia Tobisman, Los Angeles, and Tillman J. Breckenridge for Plaintiff and Appellant.

Bill Lockyer, Attorney General, Thomas Yanger, Assistant Attorney General, John H. Sanders and Karen L. Fried, Deputy Attorneys General, for Defendants and Respondents.

DOI TODD, Acting P.J.

INTRODUCTION

In 1983, the state contracted with the University of California, Los Angeles Medical Center (UCLA) that UCLA be the sole provider of medical services to Medi-Cal beneficiaries in Los Angeles. With the state's approval, UCLA subsequently delegated to Cedars-Sinai Medical Center (Cedars-Sinai) the right to provide inpatient services to certain Medi-Cal beneficiaries and to bill the state for those services under UCLA's contract rate. The delegation contract was later amended to expand the services Cedars-Sinai could provide. For the next four years, instead of billing the state under UCLA's contract rate, Cedars-Sinai billed and was paid under a higher cost rate for certain patients. Later the state's audits concluded that Cedars-Sinai should have been paid UCLA's contract rate for treatment of these patients, and the state recouped more than $35 million in overpayments.

Cedars-Sinai filed administrative appeals of the audit findings, but contended that under Welfare and Institutions Code section 14087.27 it was first entitled to judicial review of the terms of the contracts at issue. The administrative law judge disagreed, proceeded with the hearings, and denied the appeals.

Cedars-Sinai then filed a petition for writ of mandate against the director of the California Department of Health Services and the department itself (collectively the Department). The trial court affirmed the administrative findings, but reduced the recouped amount by the statutory penalty of ten percent under Welfare and Institutions Code section 14171, subdivision (d). We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

The Medi-Cal Reimbursement Program

California's Medi-Cal program implements the federal Medicaid program, which funds medical services for elderly and low-income persons. (42 U.S.C. § 1396 et seq.; Welf. & Inst.Code, § 14000.) The Department administers the Medi-Cal program and reimburses hospitals for treating eligible Medi-Cal patients. (Welf. & Inst.Code, § 10721; Cal. Code Regs., tit. 22, § 50004.) The original federal Medicaid Act required states to reimburse hospitals for their "reasonable cost" of treating Medi-Cal patients, which included "the cost of services actually incurred by a hospital provider and otherwise allowable under Medicare." (Robert F. Kennedy Medical Center v. Belsché (1996) 13 Cal.4th 748, 751, 55 Cal.Rptr.2d 107, 919 P.2d 721.) In the early 1980's, Congress limited the reimbursement to "the costs that would have been incurred by an efficient and economically operated facility, even if a provider's actual costs were greater." (Id. at p. 752, 55 Cal. Rptr.2d 107, 919 P.2d 721; Cal.Code Regs., tit. 22, § 51536.)

In 1982, the California Legislature moved away from a pure cost-rate system and established a program by which the Department could contract with individual hospitals for the exclusive right to treat Medi-Cal patients. (Welf. & Inst.Code, § 14081.) The California Medical Assistance Commission (CMAC), acting on behalf of the Department, drafted a master contract and negotiated directly with hospitals or held competitive bidding. (See Welf. & Inst.Code, §§ 14082, 14082.5, 14083.) To maintain consistency in administration of the Medi-Cal program, CMAC took the position that material deviations from the master contract would be allowed only in the areas of contractual rates and identified services to be provided by a specific hospital. A hospital awarded a "selective provider contract" is reimbursed by the Department at the negotiated contract rate, which is often a per diem rate. (Welf. & Inst.Code, §§ 14082, 14084.) After the Department contracts with a sufficient number of hospitals to meet the needs of Medi-Cal beneficiaries in a geographic area, it declares the area "closed" and awards no further contracts. (Welf. & Inst.Code, § 14081.)

With limited exceptions, noncontract hospitals in a closed area are generally not entitled to reimbursement for treating Medi-Cal patients. These exceptions include: (1) providing emergency care to a Medi-Cal patient, so long as the patient is transferred to a contract hospital once stabilized (Welf. & Inst.Code, §§ 14087, 14103.5); (2) providing services to a patient whose eligibility for Medi-Cal was unknown at the time of admission (retro-qualified patients) (Cal.Code Regs., tit. 22, §§ 50197, 51003, subd. (b), 51327, subd. (c)(3)(F)); and (3) providing services to a patient receiving prior authorization from the California Children's Services (CCS patients) (Cal.Code Regs., tit. 22, § 51013; Health & Saf.Code, § 123800 et seq.). Noncontract hospitals treating Medi-Cal patients pursuant to one of the exceptions are paid a cost rate, which is generally higher than a contract rate. (Cal.Code Regs., tit. 22, § 51546.)

Noncontract hospitals submit annual reports of their actual Medi-Cal costs, which the Department uses to generate a tentative settlement statement. (Robert F. Kennedy Medical Center v. Belshé, supra, 13 Cal.4th at p. 753, 55 Cal.Rptr.2d 107 919 P.2d 721; Fountain Valley Regional Hospital & Medical Center v. Bontá (1999) 75 Cal.App.4th 316, 320, 89 Cal.Rptr.2d 139.) The Department then has three years in which to conduct an audit, after which it issues a final audit report and settlement which determines the hospital's allowable Medi-Cal costs for services to Medi-Cal patients for the pertinent fiscal year. (Welf. & Inst.Code, § 14170 et seq.; Fountain Valley Regional Hospital & Medical Center v. Bontá, supra, at p. 320, 89 Cal.Rptr.2d 139.) Contract hospitals also file costs reports and are subject to audit by the Department, but such audits focus primarily on the number of days of care rendered, as opposed to complex cost reporting issues.

The Prime Contract

In 1983, the state awarded UCLA a selective provider contract to render inpatient hospital services to "any eligible beneficiary" (the prime contract). The prime contract defined "beneficiary" to include not only a patient who was eligible for Medi-Cal at the time of admission, but also persons whose eligibility was not determined until after inpatient services were rendered, i.e., retro-qualified patients.¹ The definition of beneficiary was standard language in the selective provider contracts and was not negotiable. The prime contract provided that UCLA would receive a specified per diem rate for treating Medi-Cal patients. No other hospital in Los Angeles was awarded a selective provider contract. As a result of the prime contract, UCLA became a full-service Medi-Cal provider, and Los Angeles was declared a closed area.

The Delegation Contract

As a noncontract hospital in a closed area, Cedars-Sinai could not receive reimbursement for Medi-Cal patients treated at its outpatient Ambulatory Care Clinic (ACC) who were later admitted for inpatient treatment. Cedars-Sinai was forced to turn away large numbers of Medi-Cal patients seeking outpatient treatment at the ACC. Not only did this negatively impact the patients, it also negatively impacted a Cedars-Sinai teaching program. As a teaching affiliate of UCLA, Cedars-Sinai allowed UCLA medical students to serve as clinical clerks at the ACC and to rotate through Cedars-Sinai's patient specialties to provide continuity of care to the ACC patients later admitted to Cedars-Sinai.

With the approval of the Department, UCLA and Cedars-Sinai entered into a delegation contract which allowed Cedars-Sinai to receive Medi-Cal reimbursement for treatment of the ACC patients under UCLA's prime contract. The delegation contract became effective August 10, 1984 and was the first of its kind in the state.²

The delegation contract provided: "[Cedars-Sinai] shall provide acute inpatient care to patients who are registered in the [Cedars-Sinai] Ambulatory Care Center (Clinic) and determined to require inpatient care in areas of medicine, surgery, obstetrics/gynecology, pediatrics, neonatology (intensive care and intermediate neonatal nursery services) and nursery on behalf of UCLA, and shall receive payment from UCLA pursuant to this agreement only when such patients are prior authorized in writing (Treatment Authorization Request) or by telephone (log number) by the Department of Health Services on admission of the patient to [Cedars-Sinai]." The delegation contract provided that Cedars-Sinai would be paid the same per diem rate that UCLA received under the prime contract.

The parties agreed that the delegation contract was to be "governed by and construed in accordance with all applicable laws, regulations and provisions of the [prime] contract, and obligations of UCLA under the [prime] contract." The delegation contract provided that either party could terminate the contract "without cause at any time by giving written notice to the other party . . . . no later than 60 days prior to the effective date of termination."

Cedars-Sinai and UCLA operated under the delegation contract for eight years. Although the delegation contract required Cedars-Sinai to bill UCLA for reimbursement of inpatient treatment of prior authorized ACC Medi-Cal patients, Cedars-Sinai apparently billed the Department directly under UCLA's contract provider number and received UCLA's contract rate. The Department continued to pay Cedars-Sinai at the cost rate for its treatment of emergency room, retro-qualified and CCS patients.

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