HARBOR VIEW MEDICAL CENTER v. BELSHE (1996)

Appellants are a group of seven hospitals providing inpatient services under the state's Medi–Cal program.   Reimbursement for hospital inpatient services provided to qualified Medi–Cal recipients is calculated at the lesser of:  the provider's customary charge, allowable costs, or an all-inclusive rate per discharge.  (Cal.Code Regs., tit. 22, § 51536, subd. (a).)  Health care providers participating in Medi–Cal are required to submit cost reports to the state Department of Health Services (“the Department”) for the purpose of determining reasonable costs for services and establishing rates of payment.   The Department reviews such reports, sometimes rejecting certain claims and sometimes accepting the reports as filed.

In Mission Community Hospital v. Kizer (1993) 13 Cal.App.4th 1683, 17 Cal.Rptr.2d 303, Division Five of this court resolved the issue of whether the Department has a mandatory duty to accept amended cost reports submitted by hospital providers after the Department's review is concluded.   The court held that the Department properly interpreted section 51019 of title 22 of the California Code of Regulations to allow submission of amendments only during the period while “proceedings” are pending.   Once the cost report becomes final by virtue of the Department's completion of its review, the provider is precluded from amending it unless an appeal is filed.  (Mission Community Hospital, v. Kizer, supra, 13 Cal.App.4th at pp. 1691–1692, 17 Cal.Rptr.2d 303.)   In so deciding, the court specifically left open the question of whether this represented a change in policy on the part of the Department and, if so, whether the change triggered the notice and hearing requirements of the California Administrative Procedure Act (Gov.Code, § 11340 et seq., hereinafter referred to as “the APA”).¹  (Mission Community Hospital v. Kizer, supra, 13 Cal.App.4th at p. 1692, 17 Cal.Rptr.2d 303.)   Appellants, whose nine petitions for writ of mandate were consolidated below, ask us to determine the question left open in Mission Community Hospital and to revisit that court's holding concerning the proper interpretation of the regulations and governing statutes.

FACTUAL AND PROCEDURAL BACKGROUND

Harbor View Medical Center

Appellant Harbor View Medical Center sought to reopen and amend its cost reports for four prior years:  the fiscal year ending September 30, 1983, on which an audit report was completed July 22, 1987;  the fiscal year ending September 30, 1984, on which an audit report was completed August 18, 1988;  the fiscal year ending September 30, 1985, on which an audit report was completed April 12, 1989;  and the fiscal year ending September 30, 1986, on which an audit report was completed March 3, 1989.   It submitted a request to reopen the costs reports for all four years on June 18, 1990.   The request was based on appellant's belief that malpractice insurance costs had been incorrectly reimbursed by retroactive application of the 1986 malpractice rule;  that there was a carry forward from 1983 and 1984 which should have been reimbursed for later years;  that the Medi–Cal settlement data, including the number of discharges, was not in accordance with the actual claims paid;  and that proper reimbursement had not been determined for hospital based physicians.   The request was denied by the Department in a letter dated August 29, 1990.

Memorial Hospital of Gardena

Memorial Hospital of Gardena desired to reopen and amend the cost report submitted for the fiscal period ending December 31, 1988.   The Department issued a letter on June 19, 1990, stating that it had conducted a review of the 1988 cost report and that it would be accepted as filed.   Appellant filed an appeal on July 5, 1990.   The basis of the appeal was that the settlement data was inaccurate in that the reimbursement for hospital based physicians had not been determined and the cost report did not include any malpractice costs under Title XIX.   It was informed by the Department's hearing and appeals division that since no adjustments were made to its cost report, the division could not accept its appeal request and that its proper recourse was to file an amended cost report.   The July 5 letter was treated as a request to reopen to file an amended cost report, and the Department issued a formal denial dated August 10, 1990.

St. Joseph Hospital of Orange

Appellant St. Joseph Hospital of Orange filed a cost report for the fiscal period ending June 30, 1984.   The audit for the 1984 report, disallowing several items, was completed on March 1, 1988.   St. Joseph's request to reopen was submitted on January 21, 1991, and was based on the contention that its medical malpractice costs should have been reimbursed in accordance with the pre–1979 rule.   It was denied on March 12, 1991.

St. Joseph also sought to amend the June 30, 1987, cost report.   The Department accepted the 1987 cost report as filed by letter dated September 1, 1989.   The request to reopen was filed on January 24, 1991.   At that time, there was pending a request for administrative adjustment to its Maximum Inpatient Reimbursement Limitation settlements for a number of years, including 1987.   The request to reopen was denied by letter dated April 15, 1991.

St. Joseph raised similar issues concerning the cost reports for the years ending June 1983, 1985, and 1986.   The audit report date for the 1983 period was January 9, 1987.   On July 12, 1989, the Department issued letters stating that the cost reports for 1985 and 1986 were accepted as filed.   The requests to reopen these three reports were submitted on October 19 and 20, 1989, and were based on improper reimbursement of medical malpractice costs, hospital based physicians, and malpractice insurance.   The requests were denied by the Department on March 6, 1990.

Loma Linda University Medical Center

Appellant Loma Linda University Medical Center's dispute concerns the cost reports for the fiscal periods ending June 30, 1984 and June 30, 1985.   The audit report for the fiscal year ending in 1984 was issued on June 24, 1988.   The audit report for the fiscal year ending in 1985 was issued on February 24, 1989.   Requests to reopen were made on June 19, 1990, and December 3, 1990.   They were denied on August 7, 1990, and December 21, 1990, respectively.   The basis for the request to reopen the 1985 cost report was that Medi–Cal settlement data, including the number of discharges, was not in accordance with the actual claims paid.²

Anaheim Memorial Hospital

Appellant Anaheim Memorial Hospital desired to amend its five cost reports for the periods ending September 30, 1983, 1984, 1986, 1987, and 1988.   The audit report dates were:  November 14, 1986 for the 1983 report;  June 8, 1988 for the 1984 report;  February 2, 1990 for the 1986 and 1987 reports;  and September 14, 1990 for the 1988 report.   Separate requests to reopen were made on September 21, 1989, for the 1983 report;  November 27, 1989, for the 1984 report;  January 21, 1991 for the 1986 and 1987 reports;  and August 29, 1991, for the 1988 report.   The reasons for the requests were:  Medi–Cal settlement data not in accordance with the provider's records, Medi–Cal discharge count incorrectly determined, reimbursement not determined for hospital based physicians, and the exclusion of malpractice expenses was not in accordance with judicial interpretation of the applicable statutes.   The requests to reopen the 1983 and 1984 cost reports were denied on March 6, 1990.   The request to reopen the 1986 and 1987 cost reports were denied by letter dated April 17, 1991.   The request to reopen the 1988 report was denied on September 25, 1991.

Victor Valley Community Hospital

Victor Valley Community Hospital's petition was concerned with the cost report for the fiscal year ending September 30, 1984.   The audit for that cost report was completed on January 19, 1988, and the request to reopen was submitted on November 3, 1989.   Victor Valley's request to reopen was based on treatment of malpractice insurance costs and Medi–Cal settlement data.   The Department's denial was dated March 6, 1990.

Coastal Community Hospital

Appellant Coastal Community Hospital sought to reopen the cost report for the year ending March 31, 1988.   On October 6, 1989, the Department accepted the report as filed.   Appellant's request to reopen was made on February 26, 1990, based, like most of the others, on Medi–Cal settlement data and hospital based physician reimbursement.   Coastal Community's request was denied by the Department on May 3, 1990.

The Department's Denials

The Department denied all the appellants' requests to reopen.   The denials were set forth in letters containing the following language, or words to similar effect, explaining its rationale:  “In accordance with Title 22, Article 1.5, Section 51019, the Department may accept an amended cost report for the fiscal period for which appeal proceedings are pending.   The Department's records do not indicate that any current appeal proceedings exist under Article 1.5 for the fiscal period ending [applicable year].   Thus, your request to amend the audit report is denied.”   The denials were signed by Raelene Lechtenberg as Chief of the Audit Review and Analysis Section of the Financial Audits Branch of Audits and Investigations.

The Administrative Hearings

Each of the appellants then sought administrative review of the Department's refusal to accept amendments to the cost reports, and hearings were held before the hearing and appeals division.   Although no evidence was introduced on this point, in the papers filed in support of their administrative appeals, appellants attempted to explain why cost reports must often be amended after submission.  “As an inherent part of the reimbursement process, cost reports are filed which are incorrect.   Accounting assumptions are made which are only estimates;  not all data is available to make a totally correct determination of the proper reimbursement.”   Loma Linda in particular contended that “the error sought to be corrected is the amount of claims paid after the cutoff date used by the Department.   Since the Department is in control of the payment of these claims, it could make gross errors in the computation of the payment of claims or simply refuse to pay them altogether.   Under the Department's view, if it did not take action on submitted claims until 60 days after the audit report was issued, it could prevent Provider from having any appeal rights.”   Memorial Hospital of Gardena suggested similar reasons for the inability to file accurate cost reports in the first instance:  “Some of these data are under the control of the Department, e.g., claims not paid at the end of Provider's fiscal period, and some are the result of changes made which are not available at the time of filing the report, e.g., retroactive changes in methods of treatment of malpractice insurance.”   The Department's response was that “[h]istorically, all paid claims data is available within nine months of the appropriate fiscal year end.”   The Department also said that it “receives revisions to Cost Reports up until the time of ‘closure’ which is the date upon which the results of the Cost Audit are issued” and that providers would have at least one year from the date on which they submit their original cost reports to correct any later discovered errors since it takes the Department about that long to review and process a cost report.

The administrative law judges concluded that they lacked jurisdiction to hear the appeals.   The ALJ's reasoned that their authority was derived from article 1.5 of title 22 of the California Code of Regulations (Cal.Code Regs., tit. 22, §§ 51016–51048) which was promulgated to establish an administrative appeals procedure no greater than that mandated by section 14171 of the Welfare and Institutions Code. Section 14171 requires the Department to “establish administrative appeal processes to review grievances or complaints arising from the findings of an audit or examination made pursuant to Sections 10722 and 14170.”  (Welf. & Inst.Code, § 14171, subd. (a).)  To that end, section 51017 of the regulations states that a provider may request an administrative hearing “to examine any disputed audit or examination finding which results in an adjustment to Medi–Cal program reimbursement or reimbursement rates․”  Accordingly, when the provider seeks to amend its cost report to add a new claim rather than raise a dispute concerning the Department's treatment of an existing claim, the ALJ do not find it within their power to order the Department to consider this new claim.   By the same token, where the Department accepts the cost report as submitted, making no adjustment to the reimbursements claimed by the provider, the ALJ concluded that jurisdiction does not exist.   Their understanding of their limited jurisdiction allows them to review only the Department's adjustments to the reimbursements claimed by the providers in their cost reports.

This is illustrated by the decision in the Harbor View administrative appeal, which stated:  “Where ․ the Audits Branch has issued consecutive audit reports which were never appealed in a timely manner, the resultant absence of pending proceedings precludes the acceptance by the Department of requests to amend cost reports, and this forum lacks jurisdiction to hear the matter,” citing title 22, section 51019 of the California Code of Regulations.   The decision in the Anaheim Memorial Hospital matter (fiscal years ending in 1986 and 1987) similarly stated that the hearing officer had no jurisdiction to hear the matter because no audit findings had been challenged by the provider.

In the decision and order on the Coastal Community matter, where the cost report was accepted as filed, the ALJ stated:  “Because there were no audit or examination findings which resulted in any adjustments to Medi–Cal program reimbursement, the aforementioned sections of title 22 and the Welfare and Institutions Code do not set forth any basis for filing an appeal․  [¶] ․ The aforementioned sections allow later filing recourse only for pending proceedings, which was not the case in this matter, and further require the existence of a disputed audit or examination finding before a case can go to hearing.   The lack of a basis for proceeding to hearing precludes this forum from moving forward, and therefore, the appeal must be denied.”   And in the decision in the Loma Linda matter (for the fiscal year ending in 1985), the ALJ explained that the only remedy available to providers who did not dispute an audit finding lay with the courts:  “The Provider is seeking an order compelling the Department to accept an amended cost report.   The items sought to be amended were not the subject of audit adjustments.   On its face, the Provider's appeal does not involve a ‘․ disputed audit or examination finding which results in an adjustment to Medi–Cal program reimbursement․’  [Quoting § 51017, art. 1.5 of tit. 22, Cal.Code of Regs.] While judicial remedies may be available to the Provider in Superior Court through the Writ of Mandate process, its December 24, 1990 request for hearing does not raise an issue which may be considered at this administrative forum.”

The Writ Petitions

Altogether, appellants brought nine petitions for writ of mandate seeking an order from the trial court directing the Department to accept their amended cost reports.   The petitions were consolidated for hearing, six by order of the trial court, and the remaining three by stipulation.   The basis of the petitions was that the Department should have followed federal guidelines, which allow providers to amend or reopen cost reports within three years of the “Notice of Program Reimbursement,” ³ and that the decision to preclude appellants' amended cost reports derived from a change in policy adopted without benefit of the APA's notice and hearing requirements.

To establish the Department's former practices, appellants asked the trial court to apply the doctrine of collateral estoppel based on two decisions by separate superior courts involving the Department:  Hoag Memorial Hospital et al. v. Kizer et al., LASC case No. BS005864 and San Francisco General Hospital v. Kizer, SFSC case No. 924787.⁴  In San Francisco General Hospital, the provider had sought to reopen certain cost reports within three years from the issuance of the Department's final audit report.   In its statement of decision, the court found that “[u]ntil mid–1989, [the Department's] administrative practice was to allow cost report amendments in accord with the standards of 42 C.F.R. § 405.1885 and HIM–15 [PRM–1] § 2931.2.” ⁵ The court also ruled that “[the Department] was ․ obliged to amend and reopen the cost reports to consider the increased salary payments in the 1982 and 1983 cost reports ․ by virtue of [its] prior administrative practice of allowing such amendments.”

In Hoag, the court directed the Department to “accept petitioner's cost reports for fiscal years ending September 19, 1987 and September 17, 1988 pursuant to 42 C.F.R. § 405.1885, and to recompute and pay the amount of reimbursement due petitioner under the amended cost reports, plus interest according to law․”  The court specifically found that “the [Department] did effect changes in the policy with respect to the filing of amendments and did not notify the petitioner of the changes.”

The trial court herein took judicial notice of the decisions, but ruled that collateral estoppel would not be applied based on the holding in California Optometric Assn. v. Lackner (1976) 60 Cal.App.3d 500, 505, 131 Cal.Rptr. 744, that “[t]he courts will not apply ․ [collateral estoppel] to foreclose the relitigation of an issue of law covering a public agency's ongoing obligations to administer a statute enacted for the public benefit and affecting members of the public not before the court.”   In its order, the court made a finding that “at least since 1989 respondent interprets 22 Cal.Code of Regs. section 51019 to disallow a right to amend cost reports if no proceedings are pending,” and concluded that “[s]ince there were no pending proceedings in relation to the subject cost reports while the petitioner's requests to amend were made, petitioners had no right to amend their cost reports.”   The court made no finding concerning what the Department's procedures had been prior to 1989, ruling that “[w]hether or not there was a change in policy of applying [M]edicare standards, it is not in the public interest to apply the doctrine of collateral estoppel.”   Judgment was entered on the order, and appellants appealed.

DISCUSSION

ICollateral Estoppel

The appellants raised four issues in the trial court:  (1) whether prior to mid–1989 the Department applied the federal criteria for deciding when to accept amended cost reports from medical providers and then changed its policy in 1989 without notice to providers;  (2) whether the alleged change in its procedures was accomplished without compliance with necessary provisions of the APA relating to promulgation of administrative regulations;  (3) whether federal law requires the Department to apply federal criteria;  and (4) whether the Department's current interpretation of the regulations to prohibit amendments to cost reports where no audit or appeal proceedings are pending is erroneous or in conflict with the governing statutes.⁶  On appeal, appellants contend the trial court erred in failing to apply the doctrine of collateral estoppel to establish the fact that the Department abruptly changed its policy regarding amended cost reports in mid–1989.

 Generally, a party to a prior action is collaterally estopped from relitigating factual and legal issues which have been finally decided against it in that action whether or not the party seeking to invoke the doctrine was a party to it.  (Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 874, 151 Cal.Rptr. 285, 587 P.2d 1098.)  “But when the issue is a question of law rather than of fact, the prior determination is not conclusive either if injustice would result or if the public interest requires that relitigation not be foreclosed.  [Citations.]”  (Consumers Lobby Against Monopolies v. Public Utilities Com. (1979) 25 Cal.3d 891, 902, 160 Cal.Rptr. 124, 603 P.2d 41.)   This exception is routinely applied where a party seeks to invoke the doctrine in a case involving the state or a governmental agency.  (See, e.g., City of Sacramento v. State of California (1990) 50 Cal.3d 51, 64, 266 Cal.Rptr. 139, 785 P.2d 522;  Palmdale Hospital Medical Center v. Department of Health Services (1992) 8 Cal.App.4th 1306, 1311, 10 Cal.Rptr.2d 926;  California Optometric Assn. v. Lackner, supra, 60 Cal.App.3d at p. 505, 131 Cal.Rptr. 744.)

 While the trial court correctly refused to collaterally estop the Department from debating the legal issue raised by appellants, the question concerning its prior practices was a purely factual one, fully litigated in Hoag and San Francisco General Hospital.   The exception to the general rule of collateral estoppel does not apply in this situation.   The Department is, therefore, bound by the finding that it changed its policy in mid–1989 from compliance with the federal policy of considering requests to reopen as long as they were submitted within three years of the completion of Departmental review, to a policy of rejection unless the request was made before the Department's final report issued or while an administrative appeal was pending.

We would not reach a different conclusion even were we persuaded that the public policy exception to the collateral estoppel doctrine allowed the Department to relitigate an issue of fact.   The Department has raised no justification for departing from the Hoag and San Francisco General Hospital courts' findings.   In testimony taken before the hearing officer in the San Francisco General Hospital litigation, Ms. Lechtenberg stated that sometime in mid–1989 she changed the policy of the Audit Review and Analysis Section, directing her staff to discontinue using the Medicare criteria for determining whether to reopen appeals.   She admitted that prior to that time letters went out that were in conflict with her interpretation of section 51019.

The Department objected to the court's taking judicial notice of the prior court actions or of the transcript of the Lechtenberg testimony, but did not present any evidence to suggest that it had not changed its policy in 1989 as alleged.   To the contrary, the Department submitted a declaration from Ms. Lechtenberg in the Memorial Hospital of Gardena administrative appeal in which she admitted that “[i]n cases similar to the case now before Administrative Hearings and Appeals, Declarant has repeatedly testified, and now reasserts, that the Department had previously failed to comply with applicable statutory and regulatory requirements pertaining to the acceptance of amended cost reports” and that “[o]n occasions prior to December 1988, the Department may have wrongfully failed to comply with section 51019.”   Ms. Lechtenberg went on to state that “since about June 1989, Department has complied with [its current interpretation of] the requirements of section 51019.”   In addition, Ms. Lechtenberg testified in conjunction with the administrative appeal for Anaheim Memorial (for fiscal years ending in 1983 and 1984).   In her testimony, she made clear that she made the decision to reject the requests to reopen on behalf of the Department because she believed section 51019 mandated rejection of requests to reopen unless an appeal was pending.   She admitted that previously there were other means for changing a cost report.

Ms. Lechtenberg's was not the only evidence before the trial court to address this point.   James C. Ravindran in a declaration filed in support of the Anaheim Memorial petition for writ of mandate stated that he had frequent occasion to submit requests to reopen or amend cost reports to the Department and that “[u]p to mid–1989, such requests were uniformly granted where the Provider satisfied one or more of the federal Medicare criteria set forth in ․ 42 Code of Federal Regulations ․ 405.1885(a) which permit Providers to ‘reopen’ or amend their cost reports.”

Moreover, the ALJ in the Anaheim General fiscal year 1988 administrative appeal specifically found that “[p]rior to 1989 the Department had a practice of allowing providers to reopen filed cost reports in order to correct errors.   The Department generally allowed reopening of cost reports if the request was made within three years of the original filing and came within one of three specific criteria followed by the Medicare program.   Sometime during mid–1989 the Department changed its position on allowing providers to reopen filed cost reports.   The Department no longer followed the three criteria as before, and would allow amendments to cost reports only if there was a pending proceeding for that fiscal year.”

In light of the overwhelming evidence in support of the proposition that the Department instituted a change in mid–1989, the uniformity of the earlier courts' findings, and the lack of countervailing evidence from the Department, we must conclude that the courts in Hoag and San Francisco General were correct and that the Department is bound by the factual determination made therein in accordance with the doctrine of collateral estoppel.

II

Department's Interpretation of Section 51019

 The Department's rationale for refusing to accept appellants' amended cost reports derives from its current interpretation of section 51019 of title 22 of the California Code of Regulations.  Section 51019 provides:  “(a) An amended cost report may be submitted by a provider and accepted by the Department for the fiscal period or periods for which proceedings are pending under this article. [¶] (b) The hearing officer may suspend the proceedings until identification of any additional disputes that may result from an amended report filed by a provider. [¶] (c) Additional issues which are raised by accepted cost report amendments may be included in the proceedings at the request of the provider in accordance with Section 51022.[¶] (d) The hearing officer may dismiss the proceedings without prejudice to the right to request a subsequent hearing under this article when the hearing officer deems this course to be appropriate.”   According to the Department, this regulation means that amended cost reports will be accepted only while “proceedings” are pending.  “Proceedings” can include a review of a cost report, an audit of a cost report, or an appeal from a disputed audit item.   Under its interpretation, the Department will accept amendments to a cost report while its review of the original report is pending or while an administrative appeal is pending but at no other time.

 Interpretation of a regulation is governed by the same rules which apply when interpreting a statute:  “The fundamental rule of construing a statute or regulation is ascertaining the intent of the regulation so as to effectuate the purpose of the law.   To determine intent, the court turns first to the words, attempting to give effect to the usual, ordinary import of the language and to avoid making any language mere surplusage.   The words must be construed in context in light of the nature and obvious purpose of the regulation where they appear.   The various parts of an enactment must be harmonized in context of the framework as a whole.   The regulation must be given a reasonable and common sense interpretation consistent with the apparent purpose and intention of the agency, practical rather than technical in nature, and which, when applied, will result in wise policy rather than mischief or absurdity.”  (Aguilar v. Association for Retarded Citizens (1991) 234 Cal.App.3d 21, 28–29, 285 Cal.Rptr. 515, citations omitted.)

The Department contends that we need look no further than the words of the regulation.   The court in Mission Community Hospital concurred that the Department's interpretation represented the only reasonable reading of the regulation's language, so long as the Department defines “proceedings” to include both audit and review proceedings as well as administrative appeals.   (13 Cal.App.4th at p. 1691, fn. 9, 17 Cal.Rptr.2d 303;  see also Coastal Community Hospital v. Belshe, supra, 45 Cal.App.4th at p. 396, 52 Cal.Rptr.2d 659.)   However, another possible interpretation was highlighted by the administrative law judges in several of the administrative hearings which underlie the petitions.

To understand the ALJ's position, we must first recall that section 51019 appears in article 1.5 of title 22, which is entitled “Provider Audit Appeals.”   As we have noted, section 51017 of article 1.5 was promulgated to comply with section 14171 of the Welfare and Institutions Code and allows a provider to “request a hearing under the provisions of this article to examine any disputed audit or examination finding which results in an adjustment to Medi–Cal program reimbursement or reimbursement rates by submitting a Statement of Disputed Issues to the Department in accordance with Section 51022.”   Because of section 51019's placement within the article governing administrative appeals, several of the Department's hearing officers have said that the regulation was intended to cover the situation where the provider seeks to file an amended cost report while an appeal from an audit is pending but in no other situation.   Judge Carisoza, the ALJ in the St. Joseph matter for the fiscal period ending June 30, 1987, perhaps explained it best when he said:  “The Department has taken the position in this case that since no proceedings were pending under Article 1.5 at the time the Provider had requested to file an amended cost report, the Department could deny the Provider's request to file an amended cost report.  [¶] The Department's argument that it can only accept amended cost reports if there is a pending proceeding is incorrect.   The Department is not prohibited by any law or regulation from accepting amended cost reports at any time if it so chooses.   The language of section 51019 is not to be taken as a limitation or clarification of the Department's authority to accept amended cost reports.   The language of that section simply serves as a notice to both the Department and providers that the existence of a pending proceeding does not preclude a provider from filing an amended cost report, having that amended cost report accepted by the Department, and having any new issues raised by that amended report considered at that proceeding or a subsequent proceeding.   This section only confirms the provider's right to file an amended cost report even if proceedings are currently then pending.  [¶] [T]his tribunal has been unable to find any statutory or regulatory provisions which require the Department to accept amended cost reports at any time.   Furthermore, this tribunal has been unable to find any statutory or regulatory provisions which prevent the Provider from filing amended cost reports whenever it deems that necessary.”

Judge McKibbin, in the decision in the St. Joseph Hospital matter for the fiscal year ending in 1984, agreed with Judge Carisoza:  “It must ․ be noted that the Provider's argument is based upon the Department's stated position that section 51019 of title 22, California Code of Regulations, provides authority for acceptance of amended cost reports when, and only when, an audit appeal is pending.   This interpretation of the regulation by the Department, and therefore by the Provider as well is incorrect.”   Judge McKibbin further explained that “[t]he regulation merely permits the Department to exercise its discretion to accept amended cost reports when appeals are pending without specifying any standards or guidelines.   It presupposes that such standards or rules exist outside the administrative appeal process and are followed by the department when it exercises its discretion to accept or reject a tendered amendment to a cost report.   One of the purposes of this regulation is to confirm that the filing of an audit appeal does not prevent the Department from accepting an amended cost report, but its primary thrust is to set forth how pending appeals will be treated when this authority is exercised.   Article 1.5 was adopted to define an adjudicatory appeal process, not fully delineate any of the Department's non-adjudicatory, program responsibilities (e.g., when, how, and under what circumstances should it accept an amended cost report).”

The ALJ in the Loma Linda fiscal year 1985 matter, Judge Lasley, Jr., similarly noted a possible interpretation of the regulation in conflict with the Department's:  “[T]he Department's stated position is that section 51019 of title 22, California Code of Regulations, provides authority for acceptance of amended cost reports when, and only when, an audit appeal is pending.   This interpretation of this regulation by the Department is incorrect.  [¶]․  [¶] [T]itle 22, California Code of Regulations, section 51019 does not in itself limit or define the Department's authority to accept amended cost reports or the Provider's right to file one other than to confirm that this authority may be exercised when an audit appeal is pending.   It does not define or otherwise limit the Department's authority, if any, to accept or reject amendments to cost reports tendered before audit, after audit, or before an appeal is filed.”

Although we agree with appellants that these opinions illustrate the existence of an ambiguity in the regulations not discussed by the court in Mission Community Hospital, we are left with the question of how the ambiguity should be resolved.   As the ALJ's themselves recognized, the opinions expressed in their decisions were nothing more than dicta since they had no jurisdiction to hear the appeals brought by appellants.

 In this situation, with two equally plausible interpretations of the regulations before us, we are compelled to follow the rule that agency interpretations of their own regulations are entitled to great weight.  “As a general rule, the courts defer to the agency charged with enforcing a regulation when interpreting a regulation because the agency possesses expertise in the subject area.  [Citation.]”  (Aguilar v. Association for Retarded Citizens, supra, 234 Cal.App.3d at p. 28, 285 Cal.Rptr. 515.)   The fact that the Department's current interpretation of the relevant regulation represents a change from its prior understanding is not determinative.  “Like courts, agencies may overrule prior decisions or practices and may initiate new policy or law through adjudication․  ‘[D]eliberate change in or deviation from established administrative policy should be permitted so long as the action is not arbitrary or unreasonable.’ ”  (Weiss v. State Board of Equalization (1953) 40 Cal.2d 772, 776–777, 256 P.2d 1;  Goleta Valley Community Hospital v. Department of Health Services (1983) 149 Cal.App.3d 1124, 1128, 197 Cal.Rptr. 294.)

Of course, agencies cannot be permitted to adopt regulations or interpret them in such a way as to conflict with the governing statutes.   However, the Welfare and Institutions Code has little to say about the procedures for filing cost reports.   Section 14170 provides in relevant part:  “Amounts paid for services provided to Medi–Cal beneficiaries shall be audited by the department in the manner and form prescribed by the department․  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.”   Thus, the statute anticipates that providers will file amended cost reports and mandates that they be reviewed within three years by the Department, but contains no clear provision delineating the time period during which amended reports must be filed.   It would seem that the Legislature was content to allow the Department to create its own procedures for dealing with timing for the submission of such reports.

 Where there is no clear legislative instruction, the task of the reviewing court is “ ‘ “to decide whether the [agency] reasonably interpreted the legislative mandate.”  [Citation.]’ ”  (Woods v. Superior Court (1981) 28 Cal.3d 668, 679, 170 Cal.Rptr. 484, 620 P.2d 1032, quoting Credit Ins. Gen. Agents Assn. v. Payne (1976) 16 Cal.3d 651, 657, 128 Cal.Rptr. 881, 547 P.2d 993.)   As discussed in Mission Community Hospital and Coastal Community Hospital, an interpretation of section 51019 that allows providers to amend their cost report during the period in which the Department is conducting its review or audit, or, in the case of audited reports, while an appeal from the audit is pending is a reasonable statutory interpretation.   It provides closure and prevents a reopening and rehashing of stale claims every time a new interpretation of the reimbursement regulations is proposed.   Since the Department takes at least a year to review cost reports—and sometimes substantially longer—this rule gives providers ample time to obtain data unknown at the time of the original submission of the report, such as the amount of claims paid for the prior year.   We conclude that the Department's interpretation of its legislative mandate and its own regulations is a reasonable one and will not attempt to replace it with one of our own.

III

APA Compliance

 Appellants contend that even if the Department's interpretation of section 51019 is reasonable, because it represents a departure from prior procedure, it is subject to the notice and publication requirements of the APA. We do not agree.   An agency may interpret an existing regulation, particularly a regulation having to do with its procedures, without engaging in a formal rulemaking.  (Coastal Community Hospital v. Belshe, supra, 45 Cal.App.4th at p. 396, 52 Cal.Rptr.2d 659;  Aguilar v. Association for Retarded Citizens, supra, 234 Cal.App.3d at p. 27, 285 Cal.Rptr. 515;  Skyline Homes, Inc. v. Department of Industrial Relations (1985) 165 Cal.App.3d 239, 253, 211 Cal.Rptr. 792;  Marina Village v. California Coastal Zone Conservation Com. (1976) 61 Cal.App.3d 388, 393–394, 132 Cal.Rptr. 120.)

In Marina Village v. California Coastal Zone Conservation Com., supra, the state Coastal Commission had adopted a regulation which allowed any person aggrieved by a determination of a regional commission on a claim of exemption to appeal to the commission within “ten (10) days.”   State law allowed appeals from other types of decisions to be taken within “10 working days.”   Realizing that this created a potential source of confusion, the commission decided to interpret its own regulation to allow appeals involving a claim of exemption to be filed within 10 working days.   The court concluded that the commission's interpretation of its own regulation was reasonable and did not require a formal rulemaking to be effective.  (61 Cal.App.3d at pp. 393–394, 132 Cal.Rptr. 120.)

The same conclusion was reached by the court in Skyline Homes, Inc. v. Department of Industrial Relations, supra.   There the Division of Labor Standards Enforcement (“DLSE”) of the Department of Industrial Relations interpreted a wage order promulgated by the Industrial Welfare Commission (“IWC”) as prohibiting the use of more than 40 hours in a work week to establish the “ ‘regular rate of pay’ ” to be used in computing overtime compensation of salaried employees.  (165 Cal.App.3d at p. 245, 211 Cal.Rptr. 792.)   The employer contended that the DLSE had undertaken a rulemaking without complying with the APA.  (Id. at p. 253, 211 Cal.Rptr. 792.)   The court disagreed:  “[T]he DLSE is not promulgating regulations.   The regulation is wage order 1–76, properly promulgated by the IWC.   The DLSE is charged with enforcing the wage order, and to do so, it must first interpret them.   The enforcement policy is precisely that—an interpretation—and need not comply with the APA.” (Ibid.)

Skyline was followed under similar circumstances in Aguilar v. Association for Retarded Citizens, supra, in which the court explained:  “DLSE's action here amounted to no more than an interpretation of [the relevant] Wage Order and its application to a specific situation.   DLSE's interpretation did not create a new rule or policy;  it construed the words of the IWC Wage Order.   The fact DLSE did not adopt [the employer's] interpretation does not mean that DLSE must have engaged in rule-making rather than interpretation.   Adoption of an interpretation consistent with the language and intention of the Wage Order as a prelude to enforcement does not require compliance with the APA.” (234 Cal.App.3d at p. 27, 285 Cal.Rptr. 515.)

Here, the Department's decision to limit the right to amend or reopen a cost report derived from its interpretation of an existing regulation, like its interpretation of section 51017 discussed in Coastal Community Hospital v. Belshe, supra, 45 Cal.App.4th 391, 52 Cal.Rptr.2d 659.   It need not comply with the APA to institute this type of change.⁷

IV

Retroactivity

 Our conclusions that the Department's interpretation of section 51019 was reasonable and that compliance with the APA was unnecessary does not, however, give the Department license to change procedures governing the time within which an action must be accomplished without notice to the affected parties.   An administrative agency's interpretation of a regulation is subject to the same rules regarding retroactivity as a judicial interpretation of a statute.  (People ex rel. Deukmejian v. CHE, Inc. (1983) 150 Cal.App.3d 123, 134–135, 197 Cal.Rptr. 484.)   That is to say, generally an interpretation of an existing statute or regulation has retroactive effect, “[b]ut considerations of fairness and public policy may require that a decision be given only prospective application.   [Citations.]”  (Woods v. Young (1991) 53 Cal.3d 315, 330, 279 Cal.Rptr. 613, 807 P.2d 455;  accord, Camper v. Workers' Comp. Appeals Bd. (1992) 3 Cal.4th 679, 688, 12 Cal.Rptr.2d 101, 836 P.2d 888.)  “Particular considerations relevant to the retroactivity determination include the reasonableness of the parties' reliance on the former rule, the nature of the change as substantive or procedural, retroactivity's effect on the administration of justice, and the purposes to be served by the new rule.  [Citation.]”  (Woods v. Young, supra, at p. 330, 279 Cal.Rptr. 613, 807 P.2d 455.)

Rulings on procedures that affect that date by which an act must be taken are often given prospective application because parties may have reasonably relied on an earlier rule or interpretation.   For example, in Woods v. Young, supra, the Supreme Court resolved a conflict in the appellate courts' interpretation of the statute regarding tolling the statute of limitations for filing a medical malpractice claim.   Earlier courts of appeal had said that whenever plaintiff had given 90–day notice of intent to sue, the one-year statute of limitations for medical malpractice was automatically tolled for 90 days.   The Supreme Court concluded that the intent of the statute would be served by a construction which gave additional time to only those plaintiffs who served the 90–day notice during the last 90 days of the one-year limitations period.  (53 Cal.3d at p. 325, 279 Cal.Rptr. 613, 807 P.2d 455.)   However, the court refused to give its ruling retroactive effect because litigants had reasonably relied on the alternate interpretation and “[r]etroactive application of an unforeseeable procedural change is disfavored when such application would deprive a litigant of ‘any remedy whatsoever.’  [Citations.]”  (Id. at p. 330, 279 Cal.Rptr. 613, 807 P.2d 455.)   Instead, the court afforded litigants a reasonable time, 90 days from the day its decision became final, to file suit.  (Id. at p. 331, 279 Cal.Rptr. 613, 807 P.2d 455.)

In this instance, the appellants acting in reasonable reliance on the Department's former procedure giving them three years to submit an amended cost report may have taken additional time, striving to make their amended reports as complete and accurate as possible.   It was unfair and unreasonable for the Department to immediately apply its 1989 interpretation of section 51019 and deny the requests to reopen of providers who had no reason to expect that their submissions would be treated as untimely.

We cannot reach a determination as to precisely when application of the Department's new rule should have begun on the record before us.   Resolution of that issue is complicated by the fact that the Department does not publish decisions, as do the courts, but merely sends a letter stating its decision to the affected party.   The first letters in the record here delineating the Department's new procedures are dated March of 1990.   These were in response to St. Joseph's requests to reopen in October of 1989 (for fiscal years 1985 and 1986);  Anaheim Memorial's requests submitted in September and November of 1989 (for fiscal years 1983 and 1984);  and Victor Valley's request submitted in November of 1989 (for fiscal year 1984).   Coastal Community submitted a request to reopen in February of 1990.   Otherwise, the other requests at issue were all made after March of 1990, although it is not clear whether appellants other than those who had received the March letters were aware of the change in the Department's policy.   We are therefore remanding this matter to the trial court for a determination of two questions:  (1) when did appellants have, or when should they reasonably have had, notice of the Department's change in its procedures concerning the period for amending cost reports and (2) once notice was received, how much time did each appellant reasonably need to prepare and submit amended reports for years which had already become final.

To the extent the court finds that appellants did not have sufficient notice to enable them to submit an earlier amendment, the petitions should be granted and the Department directed to consider each request under the federal criteria.

DISPOSITION

The judgment is reversed and the case is remanded to the trial court for further proceedings in accordance with the views expressed in this opinion.   Each party to bear their own costs.

FOOTNOTES

1.   Subsequently, the same court decided in Coastal Community Hospital v. Belshe (1996) 45 Cal.App.4th 391, 52 Cal.Rptr.2d 659, that the APA did not apply to the Department's interpretation of section 51017 of the regulations to preclude the provider from taking an administrative appeal as a backdoor method of correcting errors in cost reports which the Department has accepted as filed.   The court concluded this was “an internal management procedure necessary to the efficient management of the Medi–Cal program and not subject to the California Administrative Procedure Act. [Citation.]”  (45 Cal.App.4th at p. 396, 52 Cal.Rptr.2d 659.)

2.   Loma Linda's petition for writ of mandate relating to the 1984 cost report is not in the record and its reasons for attempting to reopen the 1984 cost report are not known.

3.   The Notice of Program Reimbursement is sent to Medicare providers when review of their cost reports are completed and informs them of the amount of their reimbursement and whether any claims will be denied.   The Department does not use this terminology.   It issues a “Report on the Cost Report Review” when its review is completed.

4.   More precisely, appellants asked the court to take judicial notice of those portions of the decision in San Francisco General Hospital v. Kizer of which judicial notice was taken in Hoag. Apparently, the court in Hoag took judicial notice of the transcripts of the testimony of Raelene Lechtenberg and Gary Wong taken by the petitioner in the San Francisco General Hospital administrative hearing.   The appellants also lodged a certified copy of the transcript of the Lechtenberg and Wong testimony with the court.

5.   42 Code of Federal Regulations section 405.1885 provides in relevant part:  “(a) A determination of an intermediary, a decision by a hearing officer or panel of hearing officers, a decision by the Board, or a decision of the Secretary may be reopened with respect to findings on matters at issue in such determination or decision, by such intermediary officer or panel of hearing officers, Board, or Secretary, as the case may be, either on motion of such intermediary officer or panel of hearing officers, Board, or Secretary, on the motion of the provider affected by such determination or decision to revise any matter in issue at any such proceedings.   Any such request to reopen must be made within 3 years of the date of the notice of the intermediary or Board hearing decision, or where there has been no such decision, any such request to reopen must be made within 3 years of the date of notice of the intermediary determination.   No such determination or decision may be reopened after such 3–year period except as provided in paragraphs (d) and (e) of this section.  [Paragraph (d) has to do with determinations procured by fraud;  paragraph (e) contains a special rule for cost reporting periods prior to December 31, 1971.][¶] ․ [¶] (c) Jurisdiction for reopening a determination or decision rests exclusively with that administrative body that rendered the last determination or decision.”The Provider Reimbursement Manual (“PRM”) and Health Insurance Manual (“HIM”) are publications of the Secretary of Health and Human Services.   (See Saint Mary of Nazareth Hospital Center v. Schweiker (D.C.Cir.1983) 718 F.2d 459, 462;  International Philanthropic Hospital Foundation v. Heckler (9th Cir.1984) 724 F.2d 1368, 1369.)   Section 2931.2 provides in relevant part:  “Ordinarily, a cost report filed in a manner consistent with regulations and policy governing its preparation is intended to be final when settlement has been made or following an audit when determined to be necessary by the intermediary․  [¶] Under limited circumstances, the program will accept an amended cost report.   An amended cost report is one which is intended to revise information submitted on a cost report which has previously been filed by the provider.  [¶] A provider may file or an intermediary may require an amended cost report to:  [¶] 1. correct material errors detected subsequent to the filing of the original cost report, [¶] 2. comply with the health insurance policies or regulations, or [¶] 3. reflect the settlement of a contested liability[.]”  (PRM–1, § 2931.2, ¶ 7738, p. 2789.)

6.   On appeal, appellants abandon the contention that the Department is required by federal law to follow the federal guidelines.   The argument has twice been rejected by the appellate courts.  (See, e.g., Mission Community Hospital v. Kizer, supra, 13 Cal.App.4th at pp. 1689–1690, 17 Cal.Rptr.2d 303;  Pacific Coast Medical Enterprises v. Department of Benefit Payments (1983) 140 Cal.App.3d 197, 216, 189 Cal.Rptr. 558.)

7.   The authorities cited by appellants, Union of American Physicians & Dentists v. Kizer (1990) 223 Cal.App.3d 490, 272 Cal.Rptr. 886, and Grier v. Kizer (1990) 219 Cal.App.3d 422, 268 Cal.Rptr. 244, had to do with the Department's method of calculating reimbursement rates not the procedures for claiming reimbursement, and are not to the contrary.   Neither is Armistead v. State Personnel Board (1978) 22 Cal.3d 198, 149 Cal.Rptr. 1, 583 P.2d 744, in which the court held that a rule preventing state employees from withdrawing their resignations prior to the effective date was subject to the APA because “[i]t concerns termination of employment, a matter of import to all state civil service employees.”  (22 Cal.3d at p. 203, 149 Cal.Rptr. 1, 583 P.2d 744.)   In Goleta Valley Community Hospital v. Department of Health Services, supra, 149 Cal.App.3d 1124, 197 Cal.Rptr. 294, the court said that it was improper for the Department to interpret its rules to preclude administrative appeals of interim rate reductions without undertaking a formal rulemaking.   Since the court went on to hold that the federal statute mandated an appeal of interim rate reductions, that aspect of the opinion could be construed as dicta.   To the extent it is not, we find ourselves in disagreement with the decision.

BARON, Associate Justice.

CHARLES S. VOGEL, P.J., and HASTINGS, J., concur.