Children's Hosp. and Medical Cent. v. Bonta, A094061.

CourtCalifornia Court of Appeals
Writing for the CourtKline
Citation97 Cal.App.4th 740,118 Cal.Rptr.2d 629
PartiesCHILDREN'S HOSPITAL AND MEDICAL CENTER et al., Plaintiffs and Respondents, v. Diana BONTA', as Director, etc., et al., Defendants and Appellants.
Docket NumberNo. A094061.,A094061.
Decision Date15 April 2002
118 Cal.Rptr.2d 629
97 Cal.App.4th 740
CHILDREN'S HOSPITAL AND MEDICAL CENTER et al., Plaintiffs and Respondents,
Diana BONTA', as Director, etc., et al., Defendants and Appellants.
No. A094061.
Court of Appeal, First District, Division 2.
April 15, 2002.
Review Denied August 14, 2002.

[118 Cal.Rptr.2d 633]

[97 Cal.App.4th 747]

Bill Lockyer, Attorney General, Stephanie Wald, Supervising Deputy Attorney General, Asher Rubin, Deputy Attorney General, San Francisco, CA, Attorneys for Appellants.

Michael S. Sorgen, Law Offices of Michael S. Sorgen, San Francisco, CA, Dean L. Johnson, Dean L. Johnson, P.C., Mukilteo, WA, Attorneys for Respondents.


Respondents, 11 out-of-state hospitals1 that have provided services to California residents covered by the Medi-Cal program, commenced this action against appellants, Director of the state Department of Health Services, and the department itself (collectively DHS or Department), claiming that the difference between the reimbursement of in-state and out-of-state hospitals for costs incurred in the treatment and care of Medi-Cal beneficiaries violated not just state and federal laws but the commerce clause (U.S. Const., art. I, § 8, cl. 3) and equal protection provisions of the federal and state Constitutions. The trial court agreed with respondents, awarded damages, and granted respondents prejudgment interest and attorney fees. We shall lower the amount of prejudgment interest allowed but otherwise affirm the judgment.


The state Medi-Cal program effectuates the federal Medicaid program established under Title XIX of the Social Security Act (42 U.S.C. §§ 1396 et seq.) (the Medicaid Act), which authorizes the payment of federal funds to states to defray the cost of providing medical assistance to low-income persons. (See Rite Aid of Pennsylvania, Inc. v. Houstoun (3d Cir.1999) 171 F.3d 842, 845.) The state reimburses California hospitals for services to Medi-Cal beneficiaries in one of two ways: (1) According to a specific contractual rate of payment negotiated between the hospital and the California Medical Assistance Commission (CMAC); or (2) on the basis of actual

97 Cal.App.4th 748

costs, calculated by formulas set forth in the California Code of Regulations. (Cal. Code Regs.,2 tit. 22, §§ 51536, 51539, 51541, 51546, 51549.) California hospitals that have not negotiated contracts with CMAC, and are reimbursed on the basis of their actual costs, are paid the lesser of (1) their customary charges; (2) allowable costs determined by the Department; (3) the "[a]ll inclusive rate per discharge limitation" (ARPDL);3 or (4) the "peer grouping-rate

118 Cal.Rptr.2d 634

per discharge limitation" (PGRPDL).4 (Tit.22, § 51546(a).)

The complex formulas used to determine the reimbursement to which non-contract California hospitals are entitled require development of an input price index (consisting of "a market basket classification of goods and services purchased by hospitals, a corresponding set of market basket weights derived from each hospital's own mix of purchased good and services, and a related series of price indicators" (tit. 22 §51536, subd. (g)))5 and a hospital cost index (consisting of "an input price index and an allowance for changes in service intensity").6 (Tit. 22, § 51536(f).) The regulations also require classification of hospitals' fixed and variable costs, application of an annual service intensity allowance and volume adjustment in certain circumstances. In-state hospitals are placed into one of 36 enumerated peer group categories (tit. 22, § 51553) and reimbursement is payable "at no more than the 60th percentile rate per discharge of the peer group to which the hospital is assigned by the Department." (Tit. 22, § 51539(b).) Such hospitals may request administrative adjustments

97 Cal.App.4th 749

of the all-inclusive reimbursement rates and limits (tit. 22, §§ 51536(j), 51539(d)(1), 51550) and may appeal decisions on administrative adjustments (tit. 22, §§ 51536(k), 51539(d)(3)).

The elaborate formulae designed to sensitively determine the costs in-state hospitals incur in treating Medi-Cal patients have no application to out-of-state hospitals that treat such persons. Nor are outof-state hospitals permitted to negotiate reimbursement contracts with the CMAC. The methodology DHS uses to reimburse out-of-state hospitals is prescribed by subdivision (i) of Welfare and Institutions Code section 14105.15, which was enacted in 1992 (hereafter subdivision (i)). This statute provides that "reimbursement for out-of-state acute inpatient hospital services provided to Medi-Cal beneficiaries shall not exceed the current statewide average of contract rates for acute inpatient hospital services negotiated by the California Medical Assistance Commission or the actual billed charges, whichever is less." (Ibid.) In addition to their constitutional claims, respondents challenged DHS's application of subdivision (i) on the ground the Department "does not pay out-of-state hospitals the `current' statewide average of contract rates, but rather uses an average of the different rates paid in-state contract hospitals on December 1 of the previous year." The complaint states that "[i]n an inflationary economy, such as the one that hospitals operate in, last year's average rate is always less than the `current' rate."

118 Cal.Rptr.2d 635

Furthermore, while out-of-state hospitals may request administrative adjustments to the rate of reimbursement, administrative decisions to grant or deny such adjustments may not be appealed and are final. (Tit. 22, § 51543(b).) This contrasts with the rights of in-state hospitals, which may appeal denial of an adjustment administratively and, if need be, judicially. (Tit. 22, § 51539(d)(3).)

Under the reimbursement methodology used by DHS prior to the 1992 enactment of subdivision (i), out-of-state hospitals were reimbursed "at a percentage of allowable billed charges based on Medicaid information obtained from the Medicaid program for the state of location." (Tit. 22, former § 51543(a) (amended 1992).) The percentage of reimbursement was determined by one of five alternative methodologies, depending on the extent of the information made available to DHS. (Ibid.) Respondents allege, and the trial court essentially agreed, that under the prior reimbursement methodology California paid out-of-state hospitals 65 percent of their charges. Under the new scheme, respondents receive only 38 percent of their charges.

The states in which respondent hospitals are variously located—Nevada, Arizona and Oregon—prohibit them from refusing to treat Medi-Cal patients. (See Orthopaedic Hospital v. Belshe (9th Cir.1997) 103 F.3d 1491,

97 Cal.App.4th 750

1498 ["hospitals have a legal obligation to provide those services regardless of the level of Medi-Cal reimbursement rates"].) Because they must treat such persons, respondents have incurred substantial shortfalls in reimbursement based on a comparison of the amounts they now receive to the amounts they would have received under the prior rates.

The Federal Proceedings

In 1995, before they commenced this state proceeding, respondents and other hospitals filed an action against DHS in the United States District Court for the Northern District of California (Children's Hospital and Medical Center v. Belshe, No. C-95-1076 MHP), alleging that California's reimbursement scheme for out-of-state hospitals did not comply with the socalled Boren Amendment to the Medicaid Act (42 U.S.C. former § 1396a(a)(13)(A); see Historical Notes, 42 U.S.C.A. (2001 supp.) foll. § 1396a, p. 286 (West 1992) [repealed]), and seeking declaratory and injunctive relief. The federal action sought no damages but only declaratory relief invalidating the existing reimbursement scheme, compelling DHS to replace it with a more equitable system.

Prior to enactment of the Boren Amendment, states that participated in the federal Medicaid program were required to reimburse hospitals for the reasonable cost of providing inpatient services, which was ordinarily accomplished through retrospective payments based on a hospital's costs for specified services. (See, West Virginia-University Hospitals, Inc. v. Casey (3d Cir.1989) 885 F.2d 11, 15, aff'd. on other grounds, 499 U.S. 83, 111 S.Ct. 1138, 113 L.Ed.2d 68 (1991).) The Boren Amendment required states to prospectively establish reimbursement rates that "are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services." 7 The measure

118 Cal.Rptr.2d 636

had two purposes: to encourage health care providers to meet a reasonable rate or absorb the loss if their costs exceeded that rate and to provide states greater flexibility in determining the method of payment. (S.Rep. No. 97-139, 97th Cong., 1st Sess. 478, reprinted in 1981 U.S.Code Cong. & Admin. News 744; see also Wilder v. Virginia Hospital Association (1990) 496 U.S. 498, 515, fn. 13, 110 S.Ct. 2510, 110 L.Ed.2d 455; Folden v. Washington State DSHS. (9th Cir.1992) 981 F.2d 1054,1056.)

97 Cal.App.4th 751

In orders dated January 9, 1997, and February 5, 1998, United States District Court Judge Marilyn Hall Patel denied DHS's motion for summary judgment, determined that the procedural and substantive requirements of the Boren Amendment apply equally to in-state and out-of-state hospitals and found that DHS failed to meet its procedural requirements in setting reimbursement rates for out-of-state hospitals. Judge Patel specifically held that DHS did not discharge its obligation under the Boren Amendment to make requisite adjustments in the payments to out-of-state hospitals that "serve a disproportionate share of low-income patients with special needs."

In her 1998 order, Judge Patel noted that in 1997, while the action before her was pending, portions of the Boren Amendment were repealed...

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