Department 29 Superior Court of California County of Sacramento 720 Ninth Street Timothy M. Frawley, Judge Lynn Young, Clerk Friday, July 18, 2008, 9:00 a.m. AVALON CARE CENTER – SONORA, L.L.C, et al. v. SANDRA SHEWRY, in her official capacity as Director of the California Department of Health Care Services Proceedings: Filed By: Petition for Writ of Mandate James P. Holloway, Ober Kaler Grimes & Shriver, PC, Attorneys for Petitioners Case Number: 34-2008-00000805
The following shall constitute the Court's tentative ruling on the above-entitled matter. The tentative ruling shall become the ruling of the Court unless a party desiring to be heard so advises the clerk of this Department no later than 4:00 p.m. on the court day preceding the hearing, and further advises the clerk that such party has notified the other side of its intention to appear. TENTATIVE RULING Petitioners are nine limited liability companies responsible for operating "freestanding 'level-B' nursing facilities." Petitioners bring this petition for a peremptory writ of mandate under Code of Civil Procedure § 1085 to challenge the methodology used by the California Department of Health Care Services to calculate the professional liability insurance cost portion of Petitioners' 2005 Medi-Cal reimbursement rates. Petitioners allege that the Department's reimbursement methodology fails to comply with the requirements established by the Welfare and Institutions Code, the federally-approved State Medi-Cal Plan Amendment, and the Department's own guidelines. Specifically, Petitioners allege that the Department was legally required to reimburse Petitioners for their liability insurance costs based on Petitioners' "most recently available" cost data, which, in this case, was Petitioners' 2003 Supplemental Schedules of costs. Petitioners contend that the Department, in contravention of its obligation to calculate rates using the 2003 Supplemental Schedules, instead calculated rates based on the lesser of the costs reported in (i) the 2003 Supplemental Schedules; (ii)
Page 1 of 5
the 2003 audited cost report; or (iii) the 2002 audited cost report. Petitioners contend that this "lesser of" methodology is an unlawful underground regulation (hereinafter the "lesser-of regulation"). Although the Department denies that the lesser-of regulation is an underground regulation, the Department admits that it used the lesser-of regulation to calculate Petitioners' reimbursement rates. (See Declaration of Matsumoto, ¶¶ 22-23.) Since there was no 2003 audited cost report, the Department used the lesser-of regulation to choose between the 2002 audited cost report and the costs reported in the 2003 Supplemental Schedules. Because the costs reported on the 2002 audit cost report (adjusted for inflation) were less than the costs reported in the unaudited Supplemental Schedules, the Department determined the 2002 costs were "more reliable" and used them to calculate Petitioners' 2005 reimbursement rates. Petitioners allege that in failing to use the "most recent" cost data, the Department failed to comply with its obligations under state law. Based on the Department's failure to comply with state law, Petitioners allege that they are entitled to a writ of mandate restraining the Department from using the lesser-of methodology, and compelling the Department to re-calculate Petitioners' 2005 reimbursement rates using the 2003 cost data. Petitioners also seek an award of damages in the sum of $1,336,873, representing the difference between the amount that the Department purportedly should have paid Petitioners and the amount that the Department actually paid. The petition for a peremptory writ of mandate is GRANTED. The reimbursement methodology used by the Department to reimburse Petitioners for their liability insurance costs failed to comply with the statutory mandate of AB 1629 (Welfare & Institutions Code § 14126 et seq., hereinafter the "Act"), the State Plan Amendment, and the Department's own guidelines (Medi-Cal Bulletin 343). In general, mandamus does not lie to compel the doing of an act in a particular manner unless the failure to act in that manner constitutes a clear abuse of discretion. (Syngenta Crop Protection, Inc. v. Helliker (2006) 138 Cal.App.4th 1135, 1181; Carrancho v. California Air Resources Bd. (2003) 111 Cal.App.4th 1255, 1265.) However, where a statute or regulation clearly defines the specific course of conduct that an agency must take, that course of conduct becomes mandatory and eliminates any element of discretion. (Carrancho v. California Air Resources Bd. (2003) 111 Cal.App.4th 1255, 1267.) Here, the Department concedes that the Act (AB 1629) requires the Department to reimburse nursing facilities for their liability insurance costs on a pass-through basis using each facility's "prior year's costs." (See Opposition Brief, p.12; see also Welf. & Instit. Code § 14126.023(a)(5).) The Department contends, nonetheless, that because the Act does not define "the prior year's costs," the Department had the discretion to rely on the "most reliable" cost data available, even if this is not the most recent information available. Thus, the Department contends it had the discretion to bypass Petitioners' unaudited 2003 cost data and look back to the 2002 audited cost data.
Page 2 of 5
The Court does not agree. The plain language of the Act requires that rates be based on "the prior year's costs." The Act does not state that rates may be based on costs in any prior year. Nothing in the Act suggests an intent to avoid the use of "unaudited" data. Indeed, it is clear from the Act that the Legislature contemplated the Department would rely on unaudited cost data submitted by providers in setting reimbursement rates. (See Welf. & Instit. Code § 14170 [cost reports and other data submitted by providers to a state agency for the purpose of establishing rates of payment shall be considered true and correct unless audited or reviewed]; § 14126.023, subdivision (h) [requiring Department to conduct audits of cost data], and subdivision (h)(4) [authorizing recovery of overpayments], subdivision (i)(2) [stating Department shall prospectively adjust a facility's reimbursement rate if the Department determines there is a difference between reported costs and audited expenditures].) Nor is there any support for the Department's position that the purpose of the Act was to confer discretion on the Department to rely on the "most reliable" cost data in setting rates. The Legislature's intent, as plainly stated in Welfare and Institutions Code § 14126.02(a), was to devise a reimbursement methodology that more effectively ensures access to appropriate and quality care, advances decent wages and benefits for nursing home workers, supports provider compliance with state and federal requirements, and encourages administrative efficiency. (Welf. & Instit. Code § 14126.02(a).) Moreover, even if the Department had discretion under the Act, that discretion was expended by the adoption of the precise reimbursement methodology described in the federally-approved State Plan Amendment and provider Bulletin 343. The State Plan Amendment provides that the Medi-Cal proportional share of passthrough per diem costs will be calculated as the actual allowable Medi-Cal cost as reported on the provider's most recently available cost report and/or supplemental schedule(s), as adjusted for audit findings. (Administrative Record, Ex. 1, p.14.) The State Plan Amendment states that supplemental reports of pass-through costs for professional liability insurance "may" be audited or reviewed prior to use in rate-setting. The State Plan Amendment does not appear to require the use of audited reports, but even if it did, the failure to conduct an audit would not appear to be grounds to use outdated information. The language in the Department's provider Bulletin is similar to the State Plan Amendment. The Bulletin states that the Medi-Cal proportional share of the passthrough per diem costs will be calculated as the "actual allowable Medi-Cal cost as reported on the . . . most recent available cost report and/or supplemental schedule(s), as adjusted for audit findings." (Administrative Record, Ex. 2, pp. 3, 8.) Thus, both the State Plan Amendment and the Department's own guidelines require the Department to use the most recent cost data. The Department argues that nothing in the Act, the State Plan Amendment, or the provider Bulletin restricts the use of audited data in the setting of reimbursement rates.
Page 3 of 5
Rather, the Department contends, they encourage or require the Department to use audited data. The Department is missing the point. It is undisputed that the Department is permitted – and in some cases obligated – to audit reported costs. It also is undisputed that when a provider's reported costs have been audited, the Department is permitted to use the audited cost information to set payment rates. However, the relevant question is not whether reported costs are subject to audit prior to use in the rate-setting process, but whether the Department has the discretion to exclude the most recent cost information merely because the Department has failed or refused to conduct an audit of that information. Stated differently, the issue is whether the Department may employ a ratesetting methodology that excludes a provider's most recent cost report simply because it reports higher costs and has not been audited. The Court concludes that the Department does not have this discretion. 1 In sum, the Court concludes that the Department was required by the Act, the State Plan Amendment, and the Department's own guidelines to calculate Petitioners' reimbursement rates using the "most recently available" liability insurance cost data. Because it is undisputed that the Department did not use this data, a writ of mandate is appropriate to compel the Department to comply with the law. (See California Assn. for Health Services at Home v. State Dept. of Health Services (2007) 148 Cal.App.4th 696, 705-706.) Accordingly, the petition is granted and a writ of mandate shall issue compelling the Department to re-calculate Petitioners' 2005 liability insurance costs using the "most recent" 2003 cost data, and reimburse Petitioners for the difference between the amount that the Department should have paid under the Act, the State Plan Amendment, and Bulletin 343, and the amount that the Department actually paid pursuant to the unlawful lesser-of regulation. Petitioners' request for an award of damages is denied, without prejudice. Although the Court agrees that a petitioner may recover damages in a mandamus action under Code of Civil Procedure § 1095, the Court finds that a damage award is unnecessary and would be imprudent. A damage award is unnecessary because the writ can compel the relief Petitioners seek. A damage award would be imprudent because, while the Court can compel the Department the Department to re-calculate the appropriate reimbursement rate without using the unlawful lesser-of regulation, it is not clear that the Court can compel the Department to establish the particular reimbursement rate advocated by Petitioners since, among other things, Petitioners' 2003 cost information is subject to audit and review, and the facility-specific per diem payment is subject to ceilings and other limitations. The Court also denies Petitioners' request for an injunction to restrain the Department's use of the lesser-of regulation. Since it is undisputed that the Department is
1
The Department may have discretion under the State Plan Amendment to exclude particular cost report information that it deems inaccurate, incomplete, or unrepresentative, based on the specific facts and circumstances. (See Administrative Record, Ex. 1, p.4.)
Page 4 of 5
no longer using the lesser-of regulation, Petitioners have no present right (or need) for the injunction. (See Opening Brief, p.12.) In the event that this tentative ruling becomes the final ruling of the Court, Petitioners are directed to prepare a formal judgment, incorporating the Court's ruling herein verbatim or attaching it as an Exhibit; submit it to opposing counsel for approval as to form; and thereafter submit it to the Court for signature and entry of judgment in accordance with Rule of Court 3.1312.
Page 5 of 5