Opinion
B224191
02-09-2012
COUNTY OF LOS ANGELES, Petitioner and Appellant, v. CALIFORNIA DEPARTMENT OF HEALTH CARE SERVICES, Respondent.
Andrea Sheridan Ordin, County Counsel, Richard K. Mason, Assistant County Counsel, Anita D. Lee, Deputy County Counsel, for Petitioner and Appellant. Kamala D. Harris, Attorney General, Douglas M. Press, Assistant Attorney General, Jennifer M. Kim and Carmen D. Snuggs, Deputy Attorneys General, for Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Los Angeles County Super. Ct. No. BS118281)
APPEAL from a judgment of the Superior Court of Los Angeles County. David P. Yaffe, Judge. Affirmed.
Andrea Sheridan Ordin, County Counsel, Richard K. Mason, Assistant County Counsel, Anita D. Lee, Deputy County Counsel, for Petitioner and Appellant.
Kamala D. Harris, Attorney General, Douglas M. Press, Assistant Attorney General, Jennifer M. Kim and Carmen D. Snuggs, Deputy Attorneys General, for Respondent.
The County of Los Angeles (County) appeals from the trial court's judgment denying its petition for an administrative writ that challenged the accounting principles used by respondent California Department of Health Care Services (the Department) when it audited the County's Medi-Cal cost estimate for certain overhead expenses. We affirm the judgment.
FACTS AND PROCEDURAL HISTORY
Because the County is challenging an administrative decision that was initially upheld by an administrative law judge, our statement of facts comes from the administrative record.
1. General Background and Applicable Regulations
The State of California's Medi-Cal program uses federal Medicaid and state funds to provide healthcare to the poor. To receive matching federal funds, California must agree to comply with applicable Medicaid laws and adopt a state plan setting forth the policies and methods used to set payment rates. (California Assn. for Health Services at Home v. Dept. of Health Services (2007) 148 Cal.App.4th 696, 700-701.)
California's state plan provides that healthcare facilities treating Medicaid patients be reimbursed their reasonable and allowable costs as determined by the methodology for the Medicare program set out at sections 405.2460 through 405.2470 of title 42 of the Code of Federal Regulations, as well as by the principles set out in Circular A-87 from the federal Office of Management and Budget (OMB 87). Between them, these regulations establish accounting principles and guidelines to be used in estimating, allocating, and reimbursing Medicaid funds, including the requirement of periodic audits to reconcile allocated funds with actual, allowable costs in order to determine whether healthcare providers were overpaid or underpaid.
The Medicare Act (42 U.S.C. § 1395 et seq.) is a federally insured program covering healthcare services for the elderly and disabled.
We discuss these regulations in more detail in part 1 of the Discussion.
The County operates various hospitals and clinics that treat Medi-Cal patients. These facilities call on other County agencies to provide nonhealthcare support services, and the costs of those overhead services are then billed to the County healthcare providers. Those costs are allowed under Medicaid rules and are referred to as indirect costs.
In connection with the fiscal year 2000-2001, the County estimated its indirect overhead costs by a method that was based on actual costs from the 1997-1998 fiscal year. The Department audited that report and recalculated the amounts by a method that factored in corrections to previous years' estimates by the amount of the actual costs incurred during those years, along with predictions of cost increases or decreases in the coming years.
Although the state's fiscal year runs from July 1 of one year to June 30 of the next, for ease of reference we will hereafter refer to only the second year when referring to a relevant fiscal year. For instance, when we refer to the 2001 fiscal year, we mean the fiscal year that ended on June 30, 2001.
Twelve different County healthcare facilities (the providers) filed a consolidated administrative appeal to challenge the Department's use of that different accounting method, contending that the figure the County used was more accurate, and that the Department's new method would not reimburse them for their actual allowable indirect costs. An administrative law judge ruled against the County, and that decision was adopted by the Department's director as his final decision. The County then filed an administrative mandate petition (Code Civ. Proc., § 1094.5) in the superior court to overturn the Department's ruling. The trial court denied that petition.
2. Evidence From the Administrative Proceeding
As part of the Medi-Cal funding process, the County prepares a document called a Countywide Cost Allocation Plan that includes estimated indirect costs and also reconciles past estimates with actual costs once the actual costs are determined. In 1999, the County prepared a cost allocation plan that included cost estimates for the 2001 fiscal year based on the actual costs incurred during the 1998 fiscal year. Earlier estimates for the 1998 fiscal year were, in turn, based on actual costs incurred during the 1995 fiscal year. By way of a 1999 letter agreement, the California State Controller's office approved the County's cost allocation plan for 2001 on a "fixed with carry-forward" basis, an accounting term that we describe below. Even though the County prepared estimates of its actual indirect costs, through the end of 2000 it was reimbursed on either a flat or per diem rate or on a percentage of charges basis. Because this payment method did not cover the County's costs, a new payment method based on the County's actual allowable costs took effect for 2001.
Along with the cost allocation plan, the County also prepared a cost determination model for 2001. The cost model includes four different figures: total indirect costs, roll forward amount, adjustments, and claimable costs. The parties stipulated to the meaning and effect of these four figures. Indirect costs for the 2001 cost model were either negative or positive numbers that showed the amount a particular provider was either overcharged or undercharged in the 1998 fiscal year. The roll forward line reconciled the estimated amount for 1998 with the actual net costs that year, and recorded any correction necessary to bring the estimated costs to the actual amount. Figures on the adjustment line reflect the belief that the actual costs in 2001 will be either higher or lower than those in 1998 based on anticipated fluctuations in certain costs. To calculate the roll forward amount for 2001, the actual cost of indirect services obtained by a healthcare facility in 1998 is reduced by the sum of the indirect costs, which are based on fiscal year 1995 costs, and the adjustments line in the cost model from the 1998 fiscal year. The claimable cost line is the sum total of the indirect cost, roll forward, and adjustment lines.
However, according to auditor Allen Dervi of the Department, the cost model is nothing more than an accounting model used for predictive purposes when allocating Medi-Cal funds. The County was able to recoup from the state any underpayments based on its true actual costs at a later time, according to Dervi. Likewise, the County would have to return any overpayments it received.
As for making the allocation estimates, Dervi testified that using the claimable cost figure gave a better picture and generally provided a better estimate than the indirect cost figure did. Dervi testified that the indirect cost figures listed in the 2001 cost model were still based on 1998 actual costs that were used as an estimate for 2001. Claimable costs provide a better estimate, he said, because that figure factored in the roll forward and adjustment figures. When Dervi audited the County's 2001 cost model, he discovered that the County had reported its costs based on figures from the cost model's indirect cost line, which resulted in the County reporting more than $1.6 million in interest charges for 1999-2001 that were not allowable Medi-Cal costs. After consulting with his supervisor, meeting with a County official, and reviewing certain state and federal guidelines, he determined that the County should have reported its costs based on the figures in the cost model's claimable costs line, not as indirect costs.
The County contended that the indirect costs line on its 2001 cost model was more accurate because those figures were based on actual costs, albeit ones from an earlier period. Three expert witnesses testified for the County. The first was Judy Wong, who was manager of the County Health Services Administration's Medi-Cal reimbursement section. The second was Steven Tremblay, who worked for accounting firm Ernst & Young in its fraud investigation and government contract teams. Tremblay's expertise was limited to the OMB 87 form, which described Medi-Cal accounting procedures, and on the workings of cost allocation plans. The third was Robert Oehlman, a self-employed healthcare financial consultant for healthcare facilities that participated in the Medicare and Medicaid programs.
According to Tremblay, the roll forward line was inaccurate because his review of the 2001 cost model showed large swings in both overpayments and underpayments. The same is true, the County contends, of later years' cost models included as exhibits by the Department. Tremblay also testified that the roll forward's line only purpose was to correct past errors, and had nothing to do with making numbers in a current year more accurate. Wong gave similar testimony.
Oehlman testified that reimbursement under Medicaid was governed by Medicare reimbursement principles, and that using the claimable cost figure was inconsistent with those principles because it represented future expectations, resulted in less than full reimbursement to healthcare providers, and shifted Medicaid costs on to non-Medicaid patients. Oehlman also testified that use of the claimable cost figure was particularly inappropriate for 2001 because that was the first year of the switch from reimbursement on a flat or per diem rate basis to reimbursement based on actual costs. Tremblay supported that contention. Tremblay testified that the roll forward figure was intended to correct past errors that the County never had to pay for because under the old system it was reimbursed on a primarily flat-rate basis. Applying the roll forward figure to correct for what was at heart a hypothetical overpayment to the County would cause the County to pay back money it never received, Tremblay said. Oehlman and Tremblay both believed that if the claimable cost figure remained in place for 2001 that the County would never catch up in future years for the loss it would incur. Wong testified that the County would be reimbursed about $5.2 million less for 2001 if the claimable cost figure were used instead of the indirect cost total.
3. The Administrative and Trial Court Rulings
The administrative law judge found that OMB 87 and the California State Controller's letter agreement with the County expressly allowed the Department to audit the County's cost reports using the claimable costs line. To the extent any Medicare regulations might conflict with that, the administrative law judge found, those regulations did not apply because Medicare reimbursed retrospectively after actual costs were already known. The administrative law judge also rejected the County's argument that it was wrong to use the claimable cost line at least in 2001, the first year of the switch to cost-based reimbursement, because the County's cost model and cost allocation plan were merely projections and the County would eventually be reimbursed for any underpayments.
The trial court found that the new accounting method resulted in a more accurate projection of actual costs, and that any underpayment to the County could be recouped in subsequent fiscal years. The court ordered supplemental briefing on the issue whether use of the new method would result in an actual reimbursement shortfall for 2001, and, after considering the issue, found that there was no evidence the County had incurred any such loss. The trial court then entered judgment for the Department.
STANDARD OF REVIEW
Because this case does not involve a vested, fundamental right, we apply the same standard of review as the trial court. (Donley v. Davi (2009) 180 Cal.App.4th 447, 456.) The trial court (and on appeal, this court) determines whether: (1) the agency acted without, or in excess of, jurisdiction; (2) there was a fair hearing; and (3) the agency abused its discretion. (Code Civ. Proc., § 1094.5, subd. (b); McAllister v. California Coastal Com. (2008) 169 Cal.App.4th 912, 921-922 (McAllister).) The agency abuses its discretion if it did not proceed as required by law, its decision is not supported by the findings, or its findings are not supported by substantial evidence. (McAllister, at p. 921; see also Fukuda v. City of Angels (1999) 20 Cal.4th 805, 816, fn. 8.)
We presume the agency's decision was supported by substantial evidence, and the County bears the burden of showing that the evidence was insufficient. We examine the entire record and consider all relevant evidence, even evidence unfavorable to the agency's ruling. Even so, it is for the agency to weigh the conflicting evidence and we may reverse only if no reasonable person could have reached the same conclusion based on that evidence. (McAllister, supra, 169 Cal.App.4th at p. 921.) Although we defer to the agency's factual determinations and resolve all doubts and inferences in its favor, we exercise independent judgment on pure questions of law. (Id. at pp. 921-922.)
Both parties argued below that this was the correct standard of review for the trial court. On appeal, the Department contends that we should exercise our independent review of the trial court's findings, but does not explain or cite authority for why that standard of review applies. The Department does not explain its change of position, and does not address why it now apparently believes the County had a vested fundamental right to the use of a particular accounting procedure. We therefore deem the issue waived (Dominguez v. Washington Mutual Bank (2008) 168 Cal.App.4th 714, 727), but also hold in the alternative that no fundamental right is involved here. (See JKH Enterprises, Inc. v. Department of Industrial Relations (2006) 142 Cal.App.4th 1046, 1060-1061 [fundamental vested rights are usually constitutional in nature or arise from contract rights; decisions that have only economic impact are not usually considered fundamental].)
DISCUSSION
1. Using the Claimable Cost Line as a Projection of Actual Costs
During the administrative proceeding and the mandate action, the County's dispute with the Department was two-fold. First, is the claimable cost line proper when estimating future allocations for indirect costs? Second, does use of the claimable cost line result in reimbursement that does not cover the County's actual allowable indirect costs? We briefly explain the basis of the first contention, but as set forth below, conclude that the County has conceded on appeal the Department's right to use the claimable cost line as of 2002.
We begin with the state's Medi-Cal plan, which provides that the amount of reasonable and allowable costs shall be determined in accordance with the Medicare reimbursement methodology found at sections 405.2460 through 405.2470 of title 42 of the Code of Federal Regulations, and by the cost principles in OMB 87.
Section D.1. of OMB 87's submission requirements for indirect cost plans provides: "Each State will submit a plan to the Department of Health and Human Services for each year in which it claims central service costs under Federal awards. The plan should include (a) a projection of the next year's allocated central service cost (based either on actual costs for the most recently completed year or the budget projection for the coming year), and (b) a reconciliation of actual allocated central service costs to the estimated costs used for either the most recently completed year or the year immediately preceding the most recently completed year."
Section G.3. of OMB 87's "Other Policies" provides that "[a]llocated central service costs are usually negotiated and approved for a future fiscal year on a 'fixed with carry-forward' basis. Under this procedure, the fixed amounts for the future years covered by agreement are not subject to adjustment for that year. However, when the actual costs of the year involved become known, the differences between the fixed amounts previously approved and the actual costs will be carried forward and used as an adjustment to the fixed amounts established for a later year. The 'carry forward' procedure applies to all central services whose costs were fixed in the approved plan."
The County stipulated that the roll forward line on the 2001 cost model "(i) reconciles the estimated amount [from the 1998 cost model] with the actual net costs for that year, and (ii) records any correction necessary to bring estimated costs to the actual amount." This very nearly squares with the two requirements just set forth, and the County concedes in its opening appellate brief that the roll forward figure "effectuates what is known as the 'carry forward.' " The County also concedes in its appellate reply brief that it is not improper for the Department to use the claimable cost figure in future years. Instead, the County argues, use of that figure was wrong for only 2001 because it resulted in a $5.2 million loss that will never be recovered. We therefore hold that there was substantial evidence to support the administrative finding that use of the claimable cost line is allowed under the applicable Medicaid regulations, and that the Department did not abuse its discretion by doing so.
2. Whether Use of the Claimable Cost Line Results in Under-reimbursing the County for Its 2001 Costs
In accordance with the Medicare principles made applicable to Medicaid reimbursement, the state's Medi-Cal plan requires reimbursement at "100 percent of reasonable and allowable costs for Medicaid services . . . ." The County contends that using the claimable cost line in 2001 resulted in a $5.2 million reimbursement loss for that year. The Department disputes the factual basis for this contention, but also contends that the amount of the County's loss, if any, was not at issue because the cost allocation plan and cost model involved nothing more than an estimate to be adjusted later and the present dispute does not involve a reimbursement claim.
We agree with the Department that the issue of any actual under-reimbursement of indirect costs was not part of the administrative proceeding. The parties stipulated that the only issue raised in the administrative hearing was whether the providers were "required to report the 'claimable cost' figure [on the cost allocation plan for 2001] for purposes of reporting general county overhead costs or whether the Providers can use the 'indirect cost' figure [instead]." Determining the amount of any actual loss is not part of that stipulation.
When the County's Judy Wong tried to testify about a chart the County prepared in order to show that it was reimbursed $5.2 million less as a result of the Department's use of the claimable cost line, counsel for the Department objected that the testimony was irrelevant because the amount of actual reimbursement was not at issue. The administrative law judge agreed that he did not "need to know how it is going to come out to decide which line is used," but said the testimony might be helpful in resolving that issue. Because the administrative law judge could not say whether that evidence might be helpful to his analysis, he initially overruled the objection. Wong started to testify about the chart, which she said was based on electronically running the Department's 2001 audit and replacing the claimable cost figure with the indirect cost figure. The difference between the two was $5.2 million she said. The Department objected again because the chart was merely a conclusory graph that lacked foundation. The administrative law judge agreed, and disallowed the document. Wong gave no more testimony on the amount of any alleged actual loss, and the Department did not question her on the subject.
When resolving this issue, the administrative law judge made no findings as to whether the County suffered an actual loss in any amount. Instead, when it came to discussing the propriety of using the claimable cost line in the 2001 transition year from flat-rate to actual costs reimbursement, he found that the cost model was nothing more than a predictive tool that had no bearing on the amount of actual reimbursement.
This is consistent with the state of the evidence on the issue. Under the Medicaid/Medi-Cal rules, the County is entitled to reimbursement for its actual and reasonable allowable costs. Wong testified to nothing more than the assertion that use of the claimable cost line created an "impact" and made a "difference" of $5.2 million. She did not testify that the $5.2 million figure represented actual and reasonable allowable costs, either in sum, or by reference to discrete categories, only that the total amount received was less. The trial court found that there was no evidence of any loss, a finding we would affirm based on this state of the evidence. However, as the County correctly points out, we review the findings of the administrative law judge, not those of the trial court.
The need for an agency to make adjudicatory findings is implicit in Code of Civil Procedure section 1094.5 because findings are necessary in order to permit judicial review of agency action. (Respers v. University of Cal. Retirement System (1985) 171 Cal.App.3d 864, 871.) The findings must be sufficient to bridge the analytic gap between the raw evidence and the ultimate decision. (Ibid.) The proper method of attacking administrative findings is to ask for a rehearing or for additional or clearer findings. If those procedures are not available, then a defect in the findings can be corrected in a mandate action. (McMillan v. American Gen. Fin. Corp. (1976) 60 Cal.App.3d 175, 185, fn. 13.)
The administrative record does not show that the County ever complained that the administrative law judge failed to make a finding on the issue of the amount of any reimbursement shortfall. Even though the County's writ petition sets forth several alleged defects in the administrative findings, the failure to reach this issue is not one of them. Nor has the County raised the failure to make such a finding as an issue on appeal. Given the language of the stipulated issue for the administrative hearing, the administrative law judge's comments on the matter when it came up at the hearing, and the County's failure to ever contend that the administrative law judge failed to make a finding as to the amount, if any, of a reimbursement shortfall caused by the Department's use of the claimable cost line, we conclude that the issue was not raised and is therefore not properly before us.
At oral argument, counsel for the County acknowledged that she was aware of no decisional authority that would allow us to reach issues beyond the terms of the stipulation, and both parties agreed that a remand to determine the amount of any actual reimbursement would not be proper.
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DISPOSITION
The judgment is affirmed. Respondent shall recover its appellate costs.
RUBIN, J.
WE CONCUR:
BIGELOW, P. J.
FLIER, J.