On October 16, 2019, in Tulare Pediatric Health Care Center v. State Department of Health Care Services, the Second District Court of Appeal (“Court”) upheld the grant of a petition to require the California Department of Health Care Services (“DHCS”) to pay 100 percent of the amount paid by Tulare Pediatric Health Care Center (“Tulare Clinic”), a federally qualified health center (“FQHC”), to a contractor for services to Medi-Cal program beneficiaries.
Background
In 2009 and 2010, Tulare Clinic contracted with Dr. Prem Kamboj to provide personnel to run the clinic. Under the agreement with Dr. Kamboj, Tulare Clinic paid $106 per patient visit, regardless of the individual who provided the care.
In 2011, Tulare Clinic submitted a cost report for its 2009 and 2010 fiscal year expenses to DHCS to set its rate under the Medi-Cal prospective payment system. On the cost report, Tulare Clinic calculated its total per visit cost to be $167.85, including the full $106 per visit paid to Dr. Kamboj. This total cost was $58 per visit less than the preceding rate. Despite the lowered cost per visit, during its audit of Tulare Clinic’s expenses, DHCS did not accept the $106 per visit as Tulare Clinic’s actual cost and demanded to see Dr. Kamboj’s records to determine his costs in providing services. The DHCS auditor concluded that in some instances, Dr. Kamboj’s costs were less than $106 per visit and DHCS made seven audit adjustments that reduced Tulare Clinic’s cost of “Physician Services Under Agreement” by 26.5 percent. Tulare Clinic petitioned to require DHCS to set aside the adjustments and recalculate the payment rate using the full $106 per visit cost.
Holding and Reasoning
The Court upheld the trial court’s grant of Tulare Clinic’s petition to require DHCS to accept the full $106 per visit cost, holding that under Section 1396a(bb)(4) of Title 42 of the United States Code (“Subdivision (bb)(4)”), California is required to pay FQHCs 100 percent of the cost of defined services. The Court based its holding on the plain meaning of Subdivision (bb)(4), which requires States’ Medicaid programs “provide payment for services…furnished by [FQHCs]…that is equal to 100 percent of the costs of furnishing such services.” According to the Court, this interpretation is not only in accord with California statute on the question, but also with Congressional intent in enacting Subdivision (bb)(4).
Next, the Court addressed three arguments made by DHCS. First, the Court addresses DHCS’ assertion that Medicare cost principles found in part 413 of Title 42 of the Code of Federal Regulations (“Part 413”), incorporated into the Medi-Cal program through California’s State Plan, limit costs to the contractor’s (in this instance Dr. Kamboj’s) reasonable costs, rather than Tulare Clinic’s costs. The Court addresses procedural issues with this argument, in particular the failure of DHCS to include the controlling version of the State Plan in the administrative record, as well as substantive issues. In particular, the Court read the requirements of Part 413 to be broad and inclusive when defining and describing reasonable costs, supporting Tulare Clinic’s interpretation, and to articulate the principle that the Medicare program (and by extension the Medi-Cal program) should pay enough to cover the costs of its own beneficiaries and not subsidize the costs of non-beneficiaries. The only exception in Part 413 that requires payment based on contractor costs rather than provider costs the Court found to be inapplicable as it applies only where the provider and contractor are related by common ownership or control.
The second argument by DHCS addressed by the Court was that DHCS could reduce payment to an FQHC when the FQHC pays a contractor more than the contractor’s underlying costs. The Court held that such an approach would effectively disallow contracting by making it unduly burdensome. Further, the Court recognized there are practical reasons, including efficiency, that may cause an FQHC to contract for services rather than perform the services in-house, even where the contractor hired turns a profit.
The third argument proffered by DHCS and rejected by the Court to support its audit adjustments was that by requiring payment of 100 percent of Tulare Clinic’s costs in hiring Dr. Kamboj, the Court would create a situation where reasonable costs for contractor services would be determined by the provider alone, leading to excessive contractor costs. The Court believed this danger to be overblown because DHCS has other means of addressing unreasonable contractor costs than payment reductions. The Court explained that DHCS “cannot reduce payment based on regulations that do not apply, with no other showing of unreasonableness.”
Key Takeaways for FQHCs
- Congressional Intent and Underlying Principles Guide Statutory and Regulatory Interpretation. The Court’s reasoning was focused on the principle of 100 percent cost coverage articulated by Subdivision (bb)(4), keeping Congressional intent at the center of its statutory and regulatory interpretation. Even though the Court held the plain language of Subdivision (bb)(4) was clear, Congressional intent was a major guiding factor in interpreting both Subdivision (bb)(4) and Part 413 and finding 100 percent of contractor costs must be paid.
- DHCS Must Have Both Legal Authority and Factual Support for Audit Adjustments. The Court held that DHCS lacks power to reduce payments to FQHCs for services provided by contractors absent express statutory or regulatory authority and without facts to prove unreasonableness of costs. DHCS’ oversight responsibilities and obligations to ensure only reasonable costs are paid does not provide it with blanket authority to police costs by any means it deems appropriate.
- Practical Considerations and Consequences of Statutory Interpretation are Important. The Court took into consideration the practical effects of DHCS’ proposed interpretation of Section (bb)(4), finding that it would effectively make contracting for services infeasible. The Court also recognized contracting could provide benefits to FQHCs, even where the contractor profited from the contract with the FQHC, that make the cost of the contract reasonable.
Questions
If you have any questions regarding this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.
Jennifer Scott
jscott@kmtg.com | 916-321-4349