Union of American Physicians & Dentists v. Kizer

• Citation: 272 Cal.Rptr. 886,223 Cal.App.3d 490
• Decision Date: 05 September 1990
• Docket Number: No. B041178,B041178
• Court: California Court of Appeals
• Parties: UNION OF AMERICAN PHYSICIANS AND DENTISTS, a California nonprofit corporation, and Sanford Marcus, M.D., Plaintiffs and Respondents, v. Kenneth KIZER, Director of the Department of Health Services, State of California; Department of Health Services, State of California, Defendants and Appellants. Civ.

Page 886

272 Cal.Rptr. 886

223 Cal.App.3d 490

UNION OF AMERICAN PHYSICIANS AND DENTISTS, a California nonprofit corporation, and Sanford Marcus, M.D., Plaintiffs and Respondents, v. Kenneth KIZER, Director of the Department of Health Services, State of California; Department of Health Services, State of California, Defendants and Appellants.

Civ. No. B041178.

Court of Appeal, Second District, Division 3, California.

Sept. 5, 1990.

John K. Van de Kamp, Atty. Gen., Charlton G. Holland, III, Asst. Atty. Gen., Stephanie Wald, Supervising Deputy Atty. Gen. and Harlan E. Van Wye, Deputy Atty. Gen., for defendants and appellants.

Davis, Cowell & Bowe, Richard G. McCracken and Andrew J. Kahn, San Francisco, for plaintiffs and respondents.

KLEIN, Presiding Justice.

Defendants and appellants the California Department of Health Services and its Director, Kenneth Kizer (hereafter, the Department), appeal a judgment in an action in mandamus and for injunctive and declaratory relief instituted by plaintiffs and respondents the Union of American Physicians and Dentists, a California nonprofit corporation (the UAPD) and its president, Sanford Marcus, M.D. (collectively, the UAPD).

The issues presented are (1) whether the Department's use of statistical sampling and extrapolation in provider audits and its promulgation of claims documentation requirements amounted to invalid "underground" regulations, and if so, (2) the nature of the relief to which UAPD members are entitled.

We conclude, inter alia, the trial court properly held the Department's challenged practices were infirm and unenforceable because said practices were not adopted in accordance with the Administrative Procedure Act (APA) (Gov.Code, § 11340 et seq.). (Grier v. Kizer (1990) 219 Cal.App.3d 422, 440, 268 Cal.Rptr. 244 (hg. den. June 21, 1990).) However, because statistical sampling and extrapolation does not substantially change the legal effect of past events, the Department may utilize such audit method in audits which were pending at the time it promulgated a formal regulation covering the method. (22 Cal.Code Regs. § 51458.2.) ¹ The judgment therefore is modified in part and otherwise is affirmed.

FACTUAL & PROCEDURAL BACKGROUND

For a number of years, the Department conducted audits of Medi-Cal providers by taking a small random sample of Medi-Cal claims, determining the error rate within that sample, and then extrapolating that error rate over the total amount received by the provider during the period covered by the audit. In addition, the Department utilized claims documentation requirements set forth in (1) Medi-Cal Bulletin No. 86B dated July 1978 (the 1978 Bulletin), (2) Medical Services Bulletin No. 66 dated May 1983 (the 1983 Bulletin), and (3) pages 3-77 through 3-80 of the Medi-Cal Provider Manual (the Provider Manual). Where the providers' records did not comport with those requirements, the Department would invalidate the charges and would seek to recover any amount it had overpaid.

In 1986, the UAPD, which has numerous members who are Medi-Cal providers, asked the Office of Administrative Law (OAL) to determine whether the sampling/extrapolation method and documentation requirements amounted to "underground" regulations in violation of the APA. On August 6, 1987, the OAL issued 1987 OAL Determination No. 10 (Docket No. 86-016), concluding the challenged rules should have been the subject of formal regulations and were infirm because they were not promulgated pursuant to the APA.

Thereafter, the Department codified the challenged rules in compliance with the APA, which requires an agency to give notice of the proposed adoption of a regulation and to afford interested persons the opportunity to present comments on the proposed regulatory action. (Gov.Code, §§ 11346.4, 11346.8.) The Department promulgated (1) a regulation on statistical sampling and extrapolation of Medi-Cal provider reviews (22 CCR § 51458.2, eff. May 13, 1988) and (2) a regulation incorporating by reference the American Medical Association's Physician's Current Procedural Terminology, which is a coded listing and description of medical services (22 CCR § 51050 as amended, eff. Oct. 31, 1987).

On April 27, 1988, the UAPD filed a petition for writ of mandate pursuant to Code of Civil Procedure section 1085 (section 1085), and for injunctive and declaratory relief. The UAPD sought to bar the Department from utilizing the challenged underground regulations in audit proceedings and to compel the Department to return monies it had obtained using those regulations.

The Department opposed the petition, contending state and federal law authorized it to use statistical sampling in auditing A hearing on the petition was held on July 18, 1988. The trial court ruled "[a]udits done prior to May 15, 1988, are invalid as there was no compliance with the [APA]." It continued the matter for additional briefing on the issue of return of funds.

providers, that the OAL's adverse determination was not binding, and that the individual [223 Cal.App.3d 496] providers who had failed to pursue an administrative appeal had waived the right to recoup funds through the UAPD's action.

A further hearing was held on September 8, 1988. The trial court then held the sampling and extrapolation methodology and documentation requirements were invalid and unenforceable for failure to comply with the APA. The judgment bars the Department from utilizing its underground regulations with respect to probability sampling and statistical extrapolation or the documentation guidelines contained in the Bulletins and Provider Manual. However, it permits the Department to utilize CCR sections 51458.2 and 51050 in provider audits commenced after the effective dates of those regulations. ² The case was ordered remanded to the Department with respect to any claims of reimbursement by provider members of the UAPD.

CONTENTIONS

The Department contends: (1) it had authority to use the challenged rules; (2) the OAL's determination is erroneous and nonbinding; (3) UAPD members whose audits were final at the time this litigation was commenced are not entitled to a return of monies paid as a result of those audits; and (4) on remand it may employ statistical sampling and extrapolation to audit providers whose audits were not yet final at the time CCR section 51458.2 took effect.

DISCUSSION

1. Challenged practices were invalid underground regulations.

Welfare & Institutions Code section 14124.5, found within the California Medi-Cal Act (Welf. & Inst.Code, §§ 14000 et seq., 14000.4) explicitly makes the Department's rule making subject to the provisions of the APA. (Grier, supra, 219 Cal.App.3d at pp. 432-433, 268 Cal.Rptr. 244.) The APA prohibits state agencies from utilizing any rule which is a regulation as defined in Government Code section 11342, subdivision (b), unless the rule has been duly adopted as a regulation. (Gov.Code, § 11347.5.) A regulation is defined as "every rule, regulation, order, or standard [of] general application ... adopted by any state agency to implement, interpret, or make specific the law enforced or administered by it, or to govern its procedure, except one which relates only to the internal management of the state agency." (Gov.Code, § 11342, subd. (b).)

a. Under Grier, Department's use of statistical sampling and extrapolation in provider audits required adoption of formal regulation.

Many of the Department's arguments in the instant appeal were addressed and disposed of in our opinion in Grier v. Kizer, supra, 219 Cal.App.3d 422, 268 Cal.Rptr. 244, wherein we held the Department's failure to promulgate a formal regulation in compliance with the APA with respect to statistical sampling and extrapolation precluded it from utilizing such method. We held the internal management exception to the APA, invoked by the Department, to be narrow and inapplicable where a rule is to have general application and is to affect persons subject to regulation by the agency. (Id., at p. 440, 268 Cal.Rptr. 244.)

In Grier, we rejected the Department's position that its use of probability sampling and extrapolation was entitled to great weight as its own administrative interpretation of the Medi-Cal Act. " 'To hold otherwise might help perpetuate the problem' of ' " 'house rules of the agency' " ' which are promulgated without public notice, opportunity to be heard, filing with the Secretary of State, and publication in the California Code of Regulations. [Armistead v. State On the other hand, the OAL's determination invalidating the challenged audit method was entitled to due consideration because the OAL is charged with interpreting whether an agency rule is a regulation as defined in Government Code section 11342, subdivision (b). (Grier, supra, 219 Cal.App.3d at pp. 434-435, 268 Cal.Rptr. 244.) ³

Personnel Board (1978), supra, 22 Cal.3d 198, at p. 205, 149 Cal.Rptr. 1, 583 P.2d 744.]" (Grier, supra, 219 Cal.App.3d at p. 435, 268 Cal.Rptr. 244.)

The OAL's analysis set forth a two-part test: " 'First, is the informal rule either a rule or standard of general application or a modification or supplement to such a rule? [p] Second, does the informal rule either implement, interpret, or make specific the law enforced or administered by the agency or govern the agency's procedure?' (1987 OAL Determination No. 10, supra.)" (Grier, supra, 219 Cal.App.3d at p. 434, 268 Cal.Rptr. 244.)

The OAL concluded this particular audit method "was a standard of general application 'applied in every Medi-Cal case reviewed by [DepartmentS audit teams and ... used to determine the amount of overpayment.' Further, the method implemented [Welf. & Inst.Code] sections 14170 and 14133, which authorize the Department to audit providers and to take appropriate steps to recover overpayments. The Department thus had the rulemaking authority to adopt regulations concerning the use of probability sampling and statistical...