Robert F. Kennedy Medical Center v. Belshe

• Decision Date: 01 August 1996
• Docket Number: No. S042553,S042553
• Citation: 919 P.2d 721,55 Cal.Rptr.2d 107,13 Cal.4th 748
• Court: California Supreme Court
• Parties: , 919 P.2d 721, Medicare & Medicaid Guide P 44,541, 96 Cal. Daily Op. Serv. 5753, 96 Daily Journal D.A.R. 9345 ROBERT F. KENNEDY MEDICAL CENTER, Plaintiff and Appellant, v. Kimberly BELSHE, as Director, etc., Defendant and Respondent.

Page 107

55 Cal.Rptr.2d 107

13 Cal.4th 748, 919 P.2d 721,

Medicare & Medicaid Guide P 44,541,

96 Cal. Daily Op. Serv. 5753,

96 Daily Journal D.A.R. 9345

ROBERT F. KENNEDY MEDICAL CENTER, Plaintiff and Appellant, v. Kimberly BELSHE, as Director, etc., Defendant and Respondent.

No. S042553.

Supreme Court of California.

Aug. 1, 1996.

Hooper, Lundy & Bookman and Patric Hooper, Los Angeles, for Plaintiff and Appellant.

Daniel E. Lungren, Attorney General, Charlton G. Holland III, Assistant Attorney General, John H. Sanders and Karen L. Fried, Deputy Attorneys General, for Defendant and Respondent.

GEORGE, Chief Justice.

Plaintiff Robert F. Kennedy Medical Center, a provider of hospital inpatient services under the California Medical Assistance Program (Medi-Cal) seeks a writ requiring the Director of the California Department of Health Services (Department) to rescind the Department's final settlement determining the amount of Medi-Cal reimbursement that is due plaintiff, because notice of the final settlement was issued more than three years after plaintiff submitted its cost reports for the years in question. Plaintiff contends that the provision in Welfare and Institutions Code section 14170, subdivision (a)(1), ¹ specifying that cost report data submitted by Medi-Cal providers "shall be considered true and correct unless audited or reviewed within three years" of submission to the Department, establishes a three-year limitations period within which the Department must determine the amount of reimbursement due a provider.

We granted review to resolve a conflict between the decision reached by the Court of Appeal in the present case and the decision rendered by another division of the same Court of Appeal in Palmdale Hospital Medical Center v. Department of Health Services (1992) 8 Cal.App.4th 1306, 10 Cal.Rptr.2d 926 on this issue. For the reasons that follow, we conclude that section 14170, subdivision (a)(1), requires the Department to raise any challenge to the accuracy of the provider's cost report data within three years, but does not establish a time limitation governing the Department's final determination of the amount of reimbursement due a provider.

Accordingly, in the present case the Department complied with section 14170, subdivision (a)(1), when it issued its final audit report within three years of submission of cost reports by plaintiff for each of the years in question, and was not barred from making a final settlement (determining reimbursement liability) after expiration of that three-year period. Therefore, the judgment of the Court of Appeal, directing issuance of the writ relief sought by plaintiff, must be reversed.

I

The Medi-Cal program (§ 14000 et seq.) represents California's implementation of the federal Medicaid program (42 U.S.C. §§ 1396-1396v), through which the federal government provides financial assistance to states so that they may furnish medical care to qualified indigent persons. (See Palmdale Hospital Medical Center v. Department of Health Services, supra, 8 Cal.App.4th 1306, 1312, 10 Cal.Rptr.2d 926.) The Department is the single state agency designated to administer the Medi-Cal program. (§ 14203.)

When originally enacted in 1965, the Medicaid Act required states to reimburse health care providers for the "reasonable cost" of hospital services rendered; the term "reasonable cost" was defined under federal standards to correspond to the cost of services actually incurred by a hospital provider and otherwise allowable under Medicare. (See Wilder v. Virginia Hospital Assn. (1990) 496 U.S. 498, 505, 507, 110 S.Ct. 2510, 2515, 2516, 110 L.Ed.2d 455; California Hospital Ass'n v. Obledo (9th Cir.1979) 602 F.2d 1357, 1358, 42 C.F.R. §§ 413.5, 413.9 (1995).) In accordance with these federal standards, former section 14105 (the predecessor to section 14170), as originally enacted, provided for hospital reimbursement on the basis of "reasonable cost for ... services." (Stats.1966, 2d Ex.Sess.1965, ch. 4, § 2, p. 115.) The statute, however, did not contain any provision for an audit of a provider's expenditures under the Medi-Cal program.

In 1969, former section 14105 was amended to include, among other provisions, the following language: "Cost reports and other data submitted by providers to a state agency for the purpose of determining reasonable costs for services or establishing rates of payment shall be considered true and correct unless audited within eighteen (18) months after July 1, 1969, the close of the period covered by the report, or after the date of submission of the original or amended report by the provider, whichever is later." (Stats.1969, ch. 1274, § 1, pp. 2486-2487.) ² In 1973, section 14105 was amended again to extend the 18-month period governing the auditing process to 3 years. (Stats.1973, ch. 856, § 1, p. 1548.) In 1977, the pertinent provisions of section 14105 were recodified as section 14170 (Stats.1977, ch. 1046, § 6, pp. 3172-3173), discussed in detail, post.

In 1980 and 1981, in an effort to contain spiraling Medicaid costs for hospital services, Congress amended the Medicaid standard for hospital reimbursement, replacing the "reasonable cost" standard with the current standard requiring states to reimburse hospital providers at rates that are "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities...." (42 U.S.C. § 1396a(a)(13)(A); Wilder v. Virginia Hospital Ass'n., supra, 496 U.S. at pp. 506-507, 110 S.Ct. at p. 2516.) Under this new standard, states were permitted to develop alternate methodologies to limit reimbursement based upon the costs that would have been incurred by an efficient and economically operated facility, even if a provider's actual costs were greater. (Wilder v. Virginia Hospital. Ass'n., supra, 496 U.S. at pp. 506-507, 110 S.Ct. at p. 2516.)

In response to this change in Medicaid standards, the Department promulgated regulations imposing additional limits on the reimbursement available to a provider. The first, embodied in title 22 of the former California Administrative Code (now California Code of Regulations), section 51536 (enacted July 1, 1980), establishes a maximum reimbursement limit for hospital inpatient services, constituting the lesser of (1) customary charges, (2) allowable costs determined in accordance with applicable Medicare standards and principles of reimbursement, and (3) the "all-inclusive rate per discharge." The "all-inclusive rate per discharge" established by section 51536 determines the maximum allowable average cost per Medi-Cal patient that is reimbursable. In calculating this maximum rate per patient treated, the provider is given full credit for certain costs, such as rents and property taxes (§ 51536, subd. (b)(7)), but not for other costs (such as costs of services that have increased significantly over those incurred in prior years). The regulation also controls the amount that the all-inclusive rate per discharge may increase above the rate allowed in prior years. (§ 51536, subds. (c)-(i).) The rate must be updated annually and must incorporate data based upon a series of price indicators that may be derived from a variety of sources, including the consumer price index. (§ 51536, subd. (g).) This rate, when multiplied by the number of Medi-Cal patients treated, establishes an upper limit on the total reimbursement available to the provider. (§ 51536, subd. (b)(6).)

The Department also promulgated California Administrative Code (now California Code of Regulations), title 22, section 51539 (issued November 1, 1982), which established a "peer group" limit prohibiting reimbursement at a rate per patient greater than the 60th percentile of the rate per discharge of the provider's "peer group," established according to factors such as the size of the facility and the types of patients served. (§ 51539, subd. (b).)

Under this methodology limiting total reimbursement, the Department retained the existing reasonable cost standard (in the form of the lesser of customary charges and allowable costs), while engrafting onto the existing standard new limitations on reimbursement--the all-inclusive rate per discharge and the peer group limit--restricting reimbursement to those costs that would have been incurred by an efficient and economically operated facility.

In order to furnish hospitals with a cash flow sufficient to provide Medi-Cal services during a particular fiscal year, the Department is authorized to make interim payments based upon the hospital provider's historical rates of Medi-Cal reimbursement for costs. (Cal.Code Regs., tit. 22, § 51536, subd. (c)(2).) At the close of the year, the provider submits its cost reports to the Department, setting forth the provider's actual costs for covered services that in the provider's view are allowable under Medi-Cal. (See 42 C.F.R. §§ 413.20, 413.24(a), (b) (1995).) Based upon the unaudited cost report data, the Department makes a "tentative settlement," ³ reconciling the amount of interim payments with the reported unaudited costs. (Cal.Code Regs., tit. 22, § 51536, subd. (b)(9).) Thereafter, following completion of the audit process, the Department issues a final audit report and settlement, determining among other items the provider's allowable costs as established by the Department, and reconciling the difference, if any, between the tentative settlement and the final audit settlement.

The Department then undertakes the calculations necessary to determine a final reimbursement settlement ⁴ of Medi-Cal liabilities based upon the maximum inpatient reimbursement limit, incorporating the all-inclusive rate per discharge and the peer group limit, and utilizing the audited cost data as well as information from other sources. In this final settlement, the Department reconciles the amount of interim payments made with the maximum amount reimbursable under the...