Tulare Pediatric Health Care Ctr. v. State Dep't of Health Care Servs.

• Decision Date: 16 October 2019
• Docket Number: B287876
• Citation: 41 Cal.App.5th 163,253 Cal.Rptr.3d 895
• Court: California Court of Appeals Court of Appeals
• Parties: TULARE PEDIATRIC HEALTH CARE CENTER, Petitioner and Respondent, v. STATE DEPARTMENT OF HEALTH CARE SERVICES et al., Defendants and Appellants.

41 Cal.App.5th 163

253 Cal.Rptr.3d 895

TULARE PEDIATRIC HEALTH CARE CENTER, Petitioner and Respondent,

v.STATE DEPARTMENT OF HEALTH CARE SERVICES et al., Defendants and Appellants.

B287876

Court of Appeal, Second District, Division 8, California.

Filed October 16, 2019

Xavier Becerra, Attorney General, Julie Weng-Gutierrez, Senior Assistant Attorney General, Richard T. Waldow, Supervising Deputy Attorney General, and Jacquelyn Y. Young, Deputy Attorney General, for Defendants and Appellants.

Foley & Lardner, Erik K. Swanholt, and Adam J. Hepworth, Los Angeles, for Petitioner and Respondent.

WILEY, J.

Because California participates in the federal Medicaid program, California must pay federally qualified health centers for their services to Medicaid beneficiaries. ( 42 U.S.C. § 1396a(bb)(4).) The question is how much California must pay the counties and their clinics for providing this care. The answer is "100 percent " of the cost of a defined list of services. ( 42 U.S.C. § 1396a(bb)(4), italics added.)

Tulare County runs Tulare Pediatric Health Care Center ("Tulare Clinic"). The clinic is a federally qualified health center. California’s Department of Health Care Services ("the State") refused to pay Tulare Clinic the full amount the clinic paid to a contractor. Instead, the State paid Tulare Clinic an amount equal to only the contractor’s underlying costs. By statute, that was too little.

Tulare Clinic petitioned the court to require the State to pay 100 percent of the amount Tulare Clinic paid the contractor. The trial court rightly granted the petition, so we affirm.

I

We begin with the statutory backdrop, which is extensive. Then we state the facts.

A

Medicaid is a federal program subsidizing state spending on medical care for the poor. ( 42 U.S.C. § 1396-1 ; 42 C.F.R. § 430.0.) To get Medicaid funds, states must agree with the federal government to spend the funds in accord with federally imposed conditions. ( 42 C.F.R. § 430.10 ; see also Armstrong v. Exceptional Child Center, Inc. (2015) ––– U.S. ––––, 135 S.Ct. 1378, 1382, 191 L.Ed.2d 471.) And states must match federal dollars with their own, at a rate set by Congress. ( 42 U.S.C. §§ 1396a, 1396b.)

Federal regulations require each participating state to adopt a "State plan" outlining how it will follow federal Medicaid rules. ( 42 C.F.R. § 430.10 et seq. ) States develop standards to determine who qualifies for medical assistance under their State plan. ( 42 U.S.C. § 1396a(17).)

Medicaid beneficiaries are people getting medical assistance under a State plan.

Alongside Medicaid, a similar but independent federal program subsidizes healthcare by awarding grants to federally qualified health centers. This is under the aegis of the Public Health Services Act. ( 42 U.S.C. § 254b.) Health centers like Tulare Clinic qualify for grants by providing primary health services — immunizations, prenatal care, and the like — to medically underserved communities. ( 42 U.S.C. § 254b.) Some in these underserved communities are also Medicaid beneficiaries. (See Community Health Care Association of New York v. Shah (2d Cir. 2014) 770 F.3d 129, 136 ( Community Health ).)

When Congress authorized grants for health centers under the Public Health Services Act, it expected states to reimburse centers for all or part of centers’ cost of treating Medicaid beneficiaries. (See Pub.L. No. 94–63, § 330 (July 29, 1975) 89 Stat. 304; Community Health , supra , 770 F.3d at p. 136 [the grant program for health centers was established in 1975 as Section 330 of the Public Health Services Act, now codified at 42 U.S.C. § 254b ].) Congress heard testimony that, on average, states’ payments covered less than 70 percent of the centers’ cost of treating Medicaid beneficiaries. ( H.R.Rep. No. 101-247, 1st Sess., p. 392 (1989), reprinted in 1989 U.S. Code Cong. & Admin. News, p. 2118; see also Community Health , supra , 770 F.3d at p. 136.)

Congress was concerned that, because Medicaid fell short of covering the full cost of treating its own beneficiaries, health centers would use Public Health Services Act grants to subsidize treatment of Medicaid patients. ( H.R.Rep. No. 101-247, 1st Sess., pp. 392–393 (1989), reprinted in 1989 U.S. Code Cong. & Admin. News, pp. 2118–2119.) This practice compromised centers’ ability to care for those without any public or private coverage whatsoever, who were the very people Congress sought to help when it passed the Public Health Services Act. (See ibid .) So Congress amended Medicaid rules to require states to pay health centers 100 percent of their costs for a defined list of services. ( H.R.Rep. No. 101-247, 1st Sess., p. 393 (1989), reprinted in 1989 U.S. Code Cong. & Admin. News, p. 2119; see also Three Lower Counties Community Health Services, Inc. v. Maryland (4th Cir. 2007) 498 F.3d 294, 297–298 ( Three Lower Counties ).)

This situation has created a complex payment structure: one funding source is a combination of federal and state funding, while another is solely federal. That is, a combination of federal and state funds support care for patients who are Medicaid beneficiaries. But federal funds alone support care for patients without any health coverage, because those monies come from Public Health Services Act grants, which are strictly federal in origin. (See Alameda Health System v. Centers for Medicare & Medicaid Services (N.D.Cal. 2017) 287 F.Supp.3d 896, 902.)

This scheme continues to the present day, with a modification for administrative purposes. The modification was in 2000, when Congress adopted a "prospective payment system" to relieve health centers from the burden of providing new cost data every year. ( Three Lower Counties , supra , 498 F.3d at p. 298.) Under this new system, health centers that become federally qualified after 2000, including Tulare Clinic, receive Medicaid payment equal to "100 percent of the costs of furnishing [defined] services" during their first year. ( 42 U.S.C. § 1396a(bb)(4).) In later years, payment is increased by a set percentage and is adjusted only to account for changes in the scope of the centers’ services. ( 42 U.S.C. § 1396a(bb)(3).)

Federal law gives states different ways of determining "100 percent of the costs of furnishing [defined] services" in the initial year. One option — the one pertinent here — is to determine the costs according to "the regulations and methodology" for centers federally qualified before 2000. ( 42 U.S.C. § 1396a(bb)(4).) That method requires states to pay "an amount (calculated on a per visit basis) that is equal to 100 percent of the average of the costs of the center ... of furnishing such services during fiscal years 1999 and 2000 which are reasonable and related to the cost of furnishing such services." ( 42 U.S.C. § 1396a(bb)(2).)

California incorporated these rules into its Medicaid program, which is Medi- Cal. (Welf. & Inst. Code, §§ 14063, 14132.100, subd. (i)(3).) The Department of Health Care Services administers Medi-Cal and audits payments to health centers. ( Welf. & Inst. Code, §§ 14100.1, 14170, subd. (a)(1).)

B

Here are some facts.

Tulare County operates Tulare Clinic, which is a federally qualified health center. Tulare County staffed the clinic by contracting with Dr. Prem Kamboj, who agreed to provide necessary personnel to run the clinic. Tulare agreed to pay Kamboj $106 per patient visit, whether it was Kamboj personally or some other individual who provided the care.

In 2011, Tulare Clinic submitted a cost report to the State. The purpose was to set the clinic’s rate under the prospective payment system. Tulare Clinic incorporated Kamboj’s fee of $106 per patient visit. The clinic then added up its other costs, like office and printing supplies and so forth, and calculated its total cost to be $167.85 per patient visit.

This $167.85 rate apparently was a bargain. The preceding rate had been $226 per patient visit. Tulare County previously ran a different health center that provided the same services as Tulare Clinic, but it cost 35% more than Tulare Clinic’s cost per patient visit. At oral argument all counsel embraced this fact. The State’s lawyer admitted this fact placed Tulare County in a "sympathetic" light, presumably because the county’s actions seemed like good government at work.

Even though Tulare County’s new arrangement seemed to be a more efficient arrangement than its old system, the State audited Tulare Clinic’s 2009 to 2010 fiscal year expenses. No one disputes Tulare Clinic indeed paid Kamboj $106 per patient visit. But the State did not accept what Tulare Clinic actually paid as Tulare Clinic’s actual cost . Instead, it demanded Kamboj’s records so it could determine his costs. This is akin to demanding cost records from the subcontractor water company that resupplies the clinic’s water cooler.

The State’s auditor concluded, in some instances, Kamboj’s costs were less than $106 per visit. Apparently, the State’s reasoning was the Kamboj’s costs had to be less, because "the doctor is providing more than just one-on-one professional services to patients. He’s providing his staff. He’s providing his medical assistants ..., doctors from his private practice, and, of course, the contract doesn’t say that, but he’s providing any specialists and physicians to the clinic, and he’s charging a hundred and six dollars per visit to the County."

In other instances, the State faulted Kamboj because he could not support his cost claims with documentation.

As a result, the State made seven audit adjustments that reduced Tulare Clinic’s cost of "Physician Services Under Agreement" from $2,308,058 to $1,696,095. These adjustments, and others not on appeal, reduced California’s payment rate to Tulare Clinic to $120.98 per patient visit.

Tulare Clinic petitioned the trial court to require the State to set aside the adjustments to the clinic’s costs and to recalculate its payment rate accordingly. The trial court granted the petition, finding 42 United States...