ROBERT KENNEDY MEDICAL CENTER v. COYE

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Court of Appeal, Second District, Division 2, California.

ROBERT F. KENNEDY MEDICAL CENTER, Plaintiff and Appellant, v. Molly Joel COYE, as Director, etc., Defendant and Respondent.

No. B 080999.

Decided: August 23, 1994

Hooper, Lundy & Bookman, Inc., and Patric Hooper, Los Angeles, for plaintiff and appellant. Daniel E. Lungren, Atty. Gen., Charlton G. Holland, Asst. Atty. Gen., John H. Sanders and Karen L. Fried, Deputy Attys. Gen., for defendant and respondent.

Introduction

Appellant, Robert F. Kennedy Medical Center (Kennedy), is a certified provider of hospital inpatient services under the Medi–Cal program.   Respondent is the Director of the State of California Department of Health Services (Department), the agency charged with administering the Medi–Cal program.   In 1990, the Department initiated efforts to recoup from Kennedy substantial overpayments of Medi–Cal reimbursements paid for inpatient services rendered to Medi–Cal beneficiaries in 1982, 1983 and 1985.   This appeal is taken from the judgment of the Los Angeles County Superior Court denying Kennedy's petition for a writ of mandate seeking to restrain the Department's action.

At issue is whether Welfare and Institutions Code section 14170 1 imposes a three-year limitations period upon the Department's final determination of the amount of Medi–Cal reimbursement due a provider of hospital inpatient services.   We reverse the judgment.

Overview of the Medi–Cal System

A succinct overview of the Medi–Cal system is found in Palmdale Hospital Medical Center v. Department of Health Services (1992) 8 Cal.App.4th 1306, 10 Cal.Rptr.2d 926 (Palmdale ), a case addressing the same issue presented herein with a contrary result.   Medicaid is a cooperative federal-state program created to provide medical assistance to persons unable to meet the costs of medical care.  (Palmdale, supra, at p. 1312, 10 Cal.Rptr.2d 926;  Wilder v. Virginia Hospital Assn. (1990) 496 U.S. 498, 502, 110 S.Ct. 2510, 2513, 110 L.Ed.2d 455 [Wilder ];  42 U.S.C. § 1396 et seq.)   Medi–Cal is California's implementation of the Medicaid program.  (Palmdale, supra, at p. 1312, 10 Cal.Rptr.2d 926;  § 14000 et seq.)

As originally enacted in 1965, the Medicaid Act required states to reimburse health care providers for the “reasonable cost” of their services.  (Wilder, supra, 496 U.S. 498, 505, 110 S.Ct. 2510, 2515.)   Consistent with this requirement, Medi–Cal rules initially provided for reimbursement “based on the ‘reasonable cost’ for such services” to Medi–Cal beneficiaries.  (Palmdale, supra, 8 Cal.App.4th at p. 1312, 10 Cal.Rptr.2d 926.)

In 1980 and 1981, before the fiscal years at issue, cost containment measures were introduced into the Medicaid and Medi–Cal reimbursement systems.   Congress replaced the “reasonable cost” standard for Medicaid reimbursement with a reimbursement rate “ ‘reasonable and adequate’ to meet the costs of ‘efficiently and economically operated facilities.’ ”  (Wilder, supra, 496 U.S. 496, 506, 110 S.Ct. 2510, 2516.)   Contemporaneously, California adopted regulations providing for reimbursement of the “lesser of ․:  (1) Customary charges.  [¶] (2) Allowable costs determined in accordance with applicable Medicare standards and principles of reimbursement.  [or] (3) All-inclusive rate per discharge.”  (Cal.Code Regs., tit. 22, § 51536, subd. (a).)  In 1982, Medi–Cal reimbursement for hospital inpatient services was further subjected to the proviso that “reimbursement shall ․ be payable at no more than the 60th percentile rate per discharge of the peer group to which the hospital is assigned by the Department.”  (Cal.Code of Regs., tit. 22, § 51539, subd. (b).)

On its own initiative, the Department developed an internal practice which divides the reimbursement process into two stages involving two of its different sections.   During the first phase, the Audits and Investigations Division examines the provider's cost data, comparing it to the “[c]ustomary charges” and “[a]llowable costs determined in accordance with applicable Medicare standards and principles of reimbursement.”  (Cal.Code Regs., tit. 22, § 51536, subds. (a)(1), (a)(2).)

After that division has completed its task, the Hospital Reimbursement Section, relying “in large part” upon the information thus received, “performs the various calculations necessary to arrive at the provider's all-inclusive rate per discharge and 60th percentile peer group determination.”  (See Cal.Code Regs., tit. 22, §§ 51536, subd. (a)(3), 51539, subd. (b).)  The Hospital Reimbursement Section ultimately issues a final settlement, which appellant refers to as “the rate development final settlement,” to the provider informing it of the results.

To furnish hospitals sufficient cash flow to treat Medi–Cal patients during a fiscal year, the Department is authorized by statute to make interim payments based on estimates of the hospital's historical cost-to-charge ratio, as set forth in federal regulations.  (Cal.Code Regs., tit. 22, § 51536, subd. (c)(2);  42 C.F.R. § 413.64.)   At the close of the fiscal year, “[i]n order to reimburse the provider as quickly as possible” (42 C.F.R. § 413.64(f)(2)), an initial retroactive adjustment or “tentative settlement” of Medi–Cal sums due is made based on the unaudited cost reports and other data submitted by the provider hospital.2  (Cal.Code Regs., tit. 22, § 51536, subd. (b)(9);  42 C.F.R. § 413.64(f)(2).)   Later, a “final settlement” of Medi–Cal liabilities resulting from the application of all inclusive and peer group rates per discharge is determined by the Department, using the provider's audited cost data and data provided by the Office of Statewide Health Planning and Development for the final settlement year.  (Cal.Code Regs., tit. 22, § 51536, subd. (b)(10);  42 C.F.R. § 413.64(f)(2) & (3).)   Any difference between the amount of the interim payment and the final reimbursement figure creates a liability or offset for the Medi–Cal provider.

For the fiscal years in question, all organizations operating health care facilities were also subject to the requirements of the Health Facilities Disclosure Act (the Act) (former Health & Saf.Code, § 440 et seq., repealed by Stats.1982, ch. 329, § 7, p. 1613, operative Jan. 1, 1986);  (Health & Saf.Code, § 443.10 et seq.), “the Legislature's response to rapidly increasing health care costs, which threatened to deny needed services to many Californians unless the health care system was made more accountable.”   (Wilson v. California Health Facilities Com. (1980) 110 Cal.App.3d 317, 321, 167 Cal.Rptr. 801.)   The Act required annual reporting by health care providers of detailed financial data, for the purpose, among others, of establishing reimbursement rates assuring health facilities of a fair and reasonable payment for services rendered.  (See former Health & Saf.Code, § 441, subd. (a)(3).)   The financial reports required by the Act must be filed within four months after the close of the provider's calendar or fiscal year.   (Former Health & Saf.Code, § 441.18;  Health & Saf.Code, § 443.33.)

The statute at issue, section 14170, provides in relevant part:

“(a)(1) Amounts paid for services provided to Medi–Cal beneficiaries shall be audited by the department in the manner and form prescribed by the department.   The department shall maintain adequate controls to ensure responsibility and accountability for the expenditure of federal and state funds.   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 or reviewed by the department within 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.   Moreover the cost reports and other data for cost reporting periods beginning on January 1, 1972, and thereafter shall be considered true and correct unless audited or reviewed within three years after 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.

“(2) Nothing in this section shall be construed to limit the correction of cost reports or rates of payment when inaccuracies are determined to be the result of intent to defraud, or when a delay in the completion of an audit is the result of willful acts by the provider or inability to reach agreement on the terms of the final settlement.”  (Emphasis added.)

Procedural and Factual Summary

Kennedy timely filed its annual Medi–Cal cost reports for the fiscal periods ending December 31, 1982, December 31, 1983, and December 31, 1985.   In accordance with its established practice, the Department filed its audit reports and timely notified Kennedy of final settlement amounts due based on audited cost data for the fiscal years ending on December 31, 1982, December 31, 1983, and December 31, 1985.   Nonetheless, on July 12, 1990, the Hospital Reimbursement Section of the Department notified Kennedy that it had recalculated the settlement amounts due for the fiscal years 1982 through 1985, based on the all-inclusive rate per discharge and 60th percentile peer group limitations.   This remarkably tardy change would impose liability upon Kennedy for Medi–Cal interim overpayments totalling more than $1 million.

Kennedy filed an administrative appeal challenging the timeliness of the Department's adjustments to the final settlements for 1982, 1983 and 1985.   The administrative law judge ruled that the final settlement reached by application of the Department's all-inclusive and peer group rate per discharge standards was not untimely.   This decision was adopted by the Department on April 9, 1992.   Citing Palmdale, supra, 8 Cal.App.4th 1306, 10 Cal.Rptr.2d 926, the superior court denied Kennedy's petition for a peremptory writ of mandate.   It held, inter alia, that no statute of limitations was applicable to the Department's final settlement of Kennedy's Medi–Cal liability.

Discussion

To the extent Palmdale so holds (see 8 Cal.App.4th at p. 1316, fn. 5, 10 Cal.Rptr.2d 926), we must respectfully disagree with our colleagues and adhere to the position we previously expressed in our unpublished decision referred to in Palmdale, supra, at p. 1309, 10 Cal.Rptr.2d 926, and discussed by the parties here.   To us, it appeared, and still appears, manifest from section 14170's plain and unambiguous language that the entire inpatient reimbursement settlement procedure, including final determination of the applicable “[a]ll-inclusive rate per discharge” (Cal.Code Regs., tit. 22, § 51536, subd. (a)(3)) and the “60th percentile rate per discharge of the peer group to which the hospital is assigned by the Department” (Cal.Code Regs., tit. 22, § 51539, subd. (b)) must be concluded within the three-year period described in the statute, at least in the absence of circumstances not here presented.  (See § 14170, subd. (a)(2).)

To hold otherwise would render both needless and meaningless subdivision (a)(2) of section 14170, which provides that “correction of cost reports or rates of payment [are not subject to the prescribed limitation period] when inaccuracies are determined to be the result of intent to defraud, or when a delay in the completion of an audit is the result of willful acts by the provider or inability to reach agreement on the terms of final settlement.”   The Department does not contend that any of these limited exceptions are present here.

The fact that the three-year limitation on the audit and review process was enacted at a time when the auditing of the provider's cost report “was virtually all that was required” (Palmdale, supra, 8 Cal.App.4th at p. 1314, 10 Cal.Rptr.2d 926) to reach final settlement of a provider's Medi–Cal reimbursement bespeaks the Legislature's intention to impose reasonable, ascertainable limits on the final settlement process.   Neither the lack of amendment to section 14170 after the adoption of the all inclusive rate per discharge and peer group rate per discharge standards, nor the provision of separate administrative appeal processes for the auditing of provider cost reports and the application of cost containment standards convinces us that the Legislature intended to relieve the Department of its obligation to afford health care providers some semblance of stability by completing its review process within the specified time limits.  (Cf. Palmdale, supra, at p. 1315, 10 Cal.Rptr.2d 926.)

For each of the fiscal years in question, the Department completed its audit and review of Kennedy's cost reports in a timely fashion.   However, for reasons it has made no effort to explain, the Department allegedly neglected to take into account the all-inclusive and peer group rates per discharge limitations until more than three years after the filing of Kennedy's annual cost reports for the disputed years.

It bears noting that the delays in reaching a final settlement amount were not insignificant.   In its multiyear inpatient reimbursement settlement dated July 1990, the Department sought to recoup more than $400,000 for services rendered by Kennedy to Medi–Cal patients seven years earlier, in 1982;  more than $800,000 for services rendered six years earlier, in 1983;  and more than $200,000 for services four years earlier, in 1985.   Few businesses could operate successfully if its financial position were to remain so long unknown and imperiled.

The Department's tardy adjustment of Kennedy's liability violated section 14170's three-year limitation period and should have been restrained.3

The judgment is reversed and the matter is remanded to the superior court with directions to issue a peremptory writ of mandate directing the Department to set aside its final decision of April 22, 1992, and restraining the Department from recouping from Kennedy reimbursement reductions against final settlements for the years 1982, 1983, and 1985, as set forth in the Department's Medi–Cal Hospital Inpatient Reimbursement Settlement (Provider No. ZZT/HSC30420F) letter of July 12, 1990.   The parties are to bear their own costs on appeal.

FOOTNOTES

1.   All further statutory references are to the Welfare and Institutions Code unless otherwise stated.

2.   The provider's cost report is due on or before the last day of the third month following the close of the period covered by the report.   (42 C.F.R. § 413.24(f)(2).)   A 30–day extension of the due date may be granted for good cause shown.  (Ibid.)

3.   Our construction of section 14170 makes it unnecessary to address Kennedy's assertion that the Department's recoupment of Medi–Cal overpayments is time barred by several other statutory limitations periods.  (See Code Civ.Proc., §§ 337, 338;  see also City and County of San Francisco v. Thompson (1985) 172 Cal.App.3d 652, 659, 218 Cal.Rptr. 445 and County of San Mateo v. Booth (1982) 135 Cal.App.3d 388, 400–401, 185 Cal.Rptr. 349 [held:  a county's action for reimbursement of public assistance for child support is subject to the three-year limitations period of Code of Civil Procedure section 338 for liabilities created by statute].)

FUKUTO, Associate Justice.

GATES, Acting P.J., and NOTT, J., concur.

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