Opposition Brief — Maxwell-Jolly v. Independent Living Center of Southern California, Inc.

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In The

Supreme Court of the United States

DAVID MAXWELL-JOLLY, Director, California

Department of Health Care Services,

Petitioner,

Vv.

SANTA ROSA MEMORIAL HOSPITAL, et al.,

Respondents.

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Circuit

BRIEF IN OPPOSITION

MICHAEL S. SORGEN, Esa. DEAN L. JOHNSON, Esq.*

LAW OFFICES OF DEAN L. JOHNSON, INC.

MICHAEL S. SORGEN 6863 Tanzanite Dr.

240 Stockton St., Ninth Floor § Carlsbad, CA 92009

San Francisco, CA 94108 Telephone: (760) 603-0022

Telephone: (415) 956-1360 Facsimile: (866) 373-9348

Facsimile: (415) 956-6342 Email:

Email: msorgen@sorgen.net deanl johnson@gmail.com

*Counsel of Record

Counsel for Respondents

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

1. Whether those injured by a state law may

maintain an action in federal court to enjoin a state

official from enforcing that law on the ground that it

is preempted by a federal law.

2. Whether a state law reducing Medicaid reim-

bursement rates is preempted by the federal law gov-

erning such rate-setting, 42 U.S.C. § 1396a(a)(30)(A).

‘i

CORPORATE DISCLOSURE STATEMENT

CHILDREN’S HOSPITAL AT MISSION, a Cali-

fornia corporation, dba CHOC Children’s at Mission,

has no parent corporation, and no publicly-held com-

pany owns any stock in the above-named respondent.

FOUNTAIN VALLEY REGIONAL HOSPITAL

AND MEDICAL CENTER, a California corporation,

is 100% owned by OrNda Hospital Corporation, a

California corporation that is 100% owned by Tenet

HealthSystem HealthCorp, a Delaware corporation

that is 100% owned by Tenet Healthcare Corporation

(NYSE: THC), a publicly-held Nevada corporation. As

of June 30, 2010, only one company reported to the

Securities and Exchange Commission that it benefi-

cially owned more than 10% of Tenet Healthcare

Corporation’s publicly traded common stock: Franklin

Mutual Advisers, LLC (10.6%), which is not itself

a publicly-held company, but is a subsidiary of a

publicly-held company, Franklin Resources Inc.

(NYSE: BEN).

HEART HOSPITAL OF BK, LLC, a North Caro-

lina limited liability company, dba Bakersfield Heart

Hospital, is owned by Heart Hospital of BK, LLC (the

“Company”), a North Carolina limited liability com-

pany. As of September 30, 2008, HHBF, Inc., an

indirectly owned subsidiary of MedCath Corporation

(“MedCath”), held a 53.3% interest in the Company,

and the physician members held the remaining 46.7%

interest. MedCath is publicly traded on the NASDAQ

under the symbol] “MDTH.”

ill

CORPORATE DISCLOSURE STATEMENT —

Continued

HOAG MEMORIAL HOSPITAL PRESBYTERIAN,

a California corporation, dba Hoag Memorial Hospital

Presbyterian in Newport Beach, has no parent corpo-

ration, and no publicly-held company owns any stock

in the above-named respondent.

JOHN MUIR HEALTH, a California corporation,

dba John Muir Medical Center — Concord Campus

and as John Muir Medical Center — Walnut Creek

Campus, has no parent corporation, and no publicly-

held company owns any stock in the above-named

respondent.

LANCASTER HOSPITAL CORPORATION, a

California corporation, dba Lancaster Community

Hospital, is owned by Universal Health Services of

Palmdale, Inc., which is not a publicly traded. com-

pany. The stock of Universal Health Services of

Palmdale, Inc. is wholly owned by Universal Health

Services, Inc., which is a publicly traded company.

There are no publicly-held companies that own more

than 10% of the stock of Universal Health Services,

Inc.

ORANGE COAST MEMORIAL MEDICAL CEN-

TER, a California corporation, ANAHEIM MEMO-

RIAL MEDICAL CENTER, a California corporation,

and SADDLEBACK MEMORIAL MEDICAL CEN-

TER, a California corporation, have as a parent

CORPORATE DISCLOSURE STATEMENT —-

Continued

corporation MEMORIAL HEALTH SERVICES, a Cal-

ifornia corporation. No publicly-held company owns

any stock in the above-named respondents or parent

corporation.

SAN ANTONIO COMMUNITY HOSPITAL, a

California corporation, has no parent corporation,

and no publicly-held company owns any stock in the

above-named respondent.

SANTA ROSA MEMORIAL HOSPITAL, SRM

ALLIANCE HOSPITAL SERVICES, a California

corporation, dba Petaluma Valley Hospital, QUEEN

OF THE VALLEY MEDICAL CENTER, a California

corporation, and MISSION HOSPITAL REGIONAL

MEDICAL CENTER, a California corporation, dba

Mission Hospital, are all non-profit corporations. No

publicly-held company owns any stock in the above-

named respondents.

ST. HELENA HOSPITAL, a California corpora-

tion, CENTRAL VALLEY GENERAL HOSPITAL, a

California corporation, and SAN JOAQUIN COMMU-

NITY HOSPITAL, a California corporation, have as a

parent corporation ADVENTIST HEALTH SYSTEMS/

WEST, a California corporation. No publicly-held

company owns any stock in the above-named respon-

dents or parent corporation.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ..................2....0.....2... i

CORPORATE DISCLOSURE STATEMENT ...... ii

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REASONS THE PETITION SHOULD BE

DENIED

I. CERTIORARI SHOULD BE DENIED ON

THE FIRST QUESTION BECAUS™ THE

DECISIONS BELOW ARE A CORRECT

APPLICATION OF THIS COURT'S

SETTLED SUPREMACY CLAUSE JU-

PIII Ssescvacnninediscatinisccdcatnaenscants 8

A. The Courts Do Not Require That

Preemption Claims Meet The Same

Standards As Claims Under Section

PE wceacncackcaiecasicarhneisenteoeteraeies<esscencses 8

B. A Supremacy Clause Claim Does Not De-

pend On A Private Right Of Action ...... 11

C. The Committee Reports Relating To

The Boren Amendment Are Irrele-

TABLE OF CONTENTS - Continued

Page

D. Over Half Of The Medicaid Expendi-

tures In California Are Paid For With

a ee ae

E. There Is A Dearth Of Successful Su-

premacy Clause Cases Outside Of

ree a Se oe a

F. The Courts Of Appeals Have Uni-

formly Reached The Same Conclusion

Bae TIS TE oo vnccesevicccciccseccceccis.

Il. CERTIORARI SHOULD BE DENIED ON

THE SECOND QUESTION BECAUSE

THE DECISIONS BELOW ARE A COR-

RECT APPLICATION OF FEDERAL

A. The Court Of Appeals Correctly Ap-

plied 42 U.S.C. § 1396a(a)(30)(A)........

B. The Federal CMS Has Embraced The

Ninth Circuit Analysis Of 42 U.S.C.

OD RUE PUIOD co Scciccsccccceccccoccscéccscccec

C. The District Court Expressly Consid-

ered The Evidence Presented By The

Petitioner And Correctly Rejected It ....

D. The Decision Below Is Consistent

With The Other Circuits .....................

lil. THIS CASE IS A POOR VEHICLE FOR

THE COURTS REVIEW. ...........................

En hicibbccniavidenanhcanaisnapiainiesinniansaakspinta

Vii

TABLE OF AUTHORITIES

_ Page

CASES

Alaska Dep’t of Health & Soc. Servs. v. Centers

for Medicare & Medicaid Servs., 424 F.3d

ie St | 12, 21

Alexander v. Sandoval, 532 U.S. 275 (2001)............. ll

American Constr. Co. v. Jacksonville, T. & K.

W. Ry. Co., 148 U.S. 372 (1893).....00..0oo occas 28

Arkansas Dept. of Health & Human Services v.

Ahlborn, 547 U.S. 268 (2006) .0..0.000 00... ooo cec ecco. 17

Arkansas Med. Soc’y, Inc. v. Reynolds, 6 F.3d

DED CRE CP. RID vviccncnccconcecisediakinnuueee 12, 26

BellSouth Telecommunications, Inc. v. MCImetro

Access Transmission Services, Inc., 317 F.3d

by Tet, Ye 8 = = ene 17

Blum v. Bacon, 457 U.S. 132 (1982) ..........0.0000000.. 18

Cal. Ass’n of Health Facilities v. Department of

Health Servs., No. A107551, 2006 WL

3775842 (Cal. Ct. App. Dec. 26, 2006)................ oa

Cal. Ass’n for Health Servs. at Home v. De-

partment of Health Servs., 148 Cal.App.4th

FI CIGD veciscscsincenssninetinesiniuathesnesidgainageiasleiia ce enema meen 31

Cal. Hospital Ass’n v. Maxwell-Jolly, 2010 WL

3280274 (Cal. App. 1 Dist.) (2010) ..200.00 ec . 30

Cal. Pharm. Ass’n v. Maxwell-Jolly, 563 F.3d

Re Cire CRP. FI vciticcreteterscsckcccee 3, 5, 7, 10, 20

Cal. Pharm. Ass’n v. Maxwell-Jolly, 596 F.3d

Re COUR CAP. FID civviscicstcencocsicsmatiaee 20, 25, 26

Vill

TABLE OF AUTHORITIES -— Continued

Page

City of Burbank v. Lockheed Air Terminal, Inc.,

NT I gnc sccccsaccsecseeseneseceeesees.-........ 9

City of Newport v. Fact Concerts, Inc., 453 U.S.

Se EEE 10

Cort v. Ash, 422 U.S. 66 (1975) oo... .oococecocccceececeeeee. 11

Crosby v. Nat'l Foreign Trade Council, 530 U.S.

I tihlittestidaiellidb seldiciessdcucteceeccesess........, 11

CSX Transp., Inc. v. Easterwood, 507 U.S. 658

a atictenreetlgincidastsiacsseiaranacone.e..... 18

Dalton v. Little Rock Family Planning Services,

516 U.S. 474 (1996) (per curiam)... 18

Doe v. Chao, 540 U.S. 614 (2004)... 13

Equal Access for El Paso, Inc. v. Hawkins, 509

F.3d 697 (Sth Cir. 2007)....0........eccccccccccecccececcecceses.. 27

Evergreen Presbyterian M inistries, Inc. v.

Hood, 235 F.3d 908 (5th Cir. 2000)... 27

Exeter Mem'l Hosp. Ass’n v. Belshe, 145 F.3d

I ca cceicnaacoseceocece. <n. 29

Fla. Lime & Avocado Growers, Inc. v. Paul , 373

aid cscricdhccccdeoecemsinaecananevancenes...<.. 10

Gade v. Natl Solid Wastes Mgmt. Ass’n, 505

acc sn sdasstsdeeienneanctenceeoceaeesce.... 9

Golden State Transit Corp. v. City of Los Angeles,

I PU Uo scccecetesavrevececesee.... 10, 11

Hamilton-Brown Shoe Co. v. Wolf Bros. & Co.,

I I IP SD cai csnscsdeccsiicnvssesscececereeeceecesereses.... 28

TABLE OF AUTHORITIES - Continued

Page

Indep. Living Ctr. of Southern Cal., Inc. v.

Maxwell-Jolly, 572 F.3d 644 (9th Cir. July 9,

EE ONE ASAT EEL tS AB sa) 6, 14, 15

Indep. Living Ctr. of Southern Cal., Inc. v.

Shewry, 2008 U.S. Dist. LEXIS 77525

i IER IESR Mecreneea OD SHWE RS NL 5, 14, 15, 22

Lawrence County v. Lead-Deadwood Sch. Dist.

No. 40-1, 469 U.S. 256 (1985) -0000 00.00 ooo. 9,18

Legal Envtl. Assistance Found., Inc. v. Pegues,

904 F.2d 640 (11th Cir. 1990)..0000 16, 17

Long Term Care Pharmacy Alliance v. Ferguson,

362 F.3d 50 (1st Cir. 2004) 0.2... ooo 27

Methodist Hospitals, Inc. v. Sullivan, 91 F.3d

BP CPM CIR. HOOD osc cccccesccccaccocsssesenennsendecsesoane 12, 27

Minn. Homecare Ass’n, Inc. v. Gomez, 108 F.3d

ee Se MN PW i ccd iceedsciusanagecnrernrecn ee 26

Mission Hosp. Reg’l Med. Ctr. v. Shewry, 168

Cal.App.4th 460 (2008) .......0...0.0 ooo ooooooooooooooooeceeeeeee. 30

The Monrosa v. Carbon Black Export, Inc., 359

SPI WT CR ia sanvcicensccecicucvepcserrecntocecsusseesoessecssans 30

Orthopaedic Hosp. v. Belshe, 103 F.3d 1491

GE MTS. ITED caine scccdncsnaseseepnacsegracoouieecsccascersenhosscss 12

Pac. Gas & Elec. Co. v. State Energy Res.

Conservation & Dev. Comm’n, 461 U.S. 190

Rai atieduatctatetreatitene caesar ee 10

Pennsylvania Prot. & Advocacy, Inc. v.

Houstoun, 228 F.3d 423 (3d Cir. 2000) ............... 18

TABLE OF AUTHORITIES ~ Continued

Page

Pharm. Research & Mfrs. of Am. v. Walsh, 538

Nee ee aanmmeiadannoudes 17

Ray v. Atlantic Richfield Co., 435 U.S. 151

STE iidiaddcaeensiadadunditaciinandinmedaubiniascuoedaaunsesseupiatioccsestscdvcderes 9

Rite Aid of Pennsylvania, Inc. v. Houstoun, 171

ee SE ts ID iiiscdisecidensnsctccdncciaievcciens 26, 27

Shaw v. Delta Air Lines, Inc., 463 U.S. 85

PIRI bits betoicsichicadiieipaishsesbsotehehpeemiedncecethinnedodudweboieiantadeded 8,9

Verizon Maryland, Inc. v. Pub. Serv. Comm’n of

Maryland, 535 U.S. 635 (2002) ....................00.--se00s 11

Visiting Nurse Ass’n of North Shore, Inc. v.

Bullen, 93 F.3d 997 (1st Cir. 1996) ................00...... 12

Wilder v. Virginia Hosp. Ass’n, 496 U.S. 498

a ishsapeslack-cctdctns\lidadsinmiadsciniecbadumnialaientoncmmeladactaadiated 13

STATUTES

Ee ele Oe Be Ricca ccisecccvinsespsevncsicsaiminzes 12

As F Re ocvvvncsnncwevsesesceseseesovass passim

ee is Oe HI ncncntises bichinesccspinsdnesesssevisconeses 8, 10, 27

Oe Or ee Oe TI se diicintecice os cncncecanstnncdeicesecsouricbebeedutnsansiads 10

RULES AND REGULATIONS

22 California Code of Regulations

I a No ceesicanscucannnaseaenined eine 2

22 California Code of Regulations

§§ 51545(a)(30) and 51545(aX{70) ...............-- eee. 3

TABLE OF AUTHORITIES — Continued

Page

Cal. Code of Civil Procedure § 1085....................... 2, 30

Cal. Welf. & Inst. Code § 14166.245 ................0.00..0....: 3

OTHER AUTHORITIES

American Recovery and Reinvestment Act of

2009 (hereinafter “ARRA”), Pub. L. No. 111-

SEE SE See reed ie 13, 14

Black’s Law Dictionary (6th ed. 1990)....................... 19

H.R. Rep. No. 105-149, at 591 (1997) ........................ 13

Kaiser Commission on Medicaid and the Unin-

sured, American Recovery and Reinvestment

Act (AARA): Medicaid and Health Care Pro-

vistons (Mar. 2009), at http://www.kff.org/

NE PT II vd cessiscicesecscscntesscvsseceseccesess 14

Letter from Timothy Westmoreland, Director,

Health Care Finance Administration, U-S.

Dep't of Health & Human Servs., to State

Medicaid Directors, at 1 (Jan. 2, 2001), at

http://www.cms.hhs.gov/smdl/downloads/smd0

10201.pdf (last visited October 9, 2010)................. 30

INTRODUCTION

There are no grounds for review here.’ This case

involves no conflict between the decisions of Federal

courts of different circuits. Moreover, the Ninth

Circuit’s application of 42 U.S.C. § 1396a(a)(30)A) is

consistent with its plain terms and the interpretation

of that statute by the federal CMS (Centers for Medi-

care & Medicaid Services).

Even if legitimate grounds for certiorari existed,

this case would be a poor vehicle for review for at

least three reasons. First, the decision that the peti-

tioner seeks to have reviewed is based on a prelimi-

nary injunction, and not a final action. Review of such

interlocutory decisions is strongly disfavored. Second,

the rate change at issue here has not been approved,

and may never be approved, by the federal CMS.

Administrative disapproval of petitioner’s § rate

change would make the decision of this Court moot.

Third, this Court does not grant review in cases

where a reversal would not change the position of the

parties in some concrete fashion. In the instant

action, a reversal would not change the ultimate

outcome of the case because respondents can pursue

' Respondents agree with petitioner that this case involves

“substantially the same legal issues as the petitions for certiorari

pending in Maxwell-Jolly v. Independent Living Center of

Southern California, No. 09-958. . .and Maxwell-Jolly v. Califor-

nia Pharmacists Association, No. 09-1158[.]” Pet. 3. For the

reasons set forth herein, and in the other cases, the petitions in

all of these cases should be denied.

their claims in State court under a writ of mandate

(Cal. Code of Civil Procedure § 1085).

@.:

STATEMENT

A. Statutory Framework

The State pays California hospitals for the inpa-

tient services they provide to Medi-Cal beneficiaries

in one of two ways. Under one approach, the Califor-

nia Medical Assistance Commission (““CMAC”) nego-

tiates contracts with selected hospitals. This system

of reimbursement is known as the selective provider

contracting program, and the hospitals that partici-

pate in it are called “contracting” hospitals. The State

of California did not reduce the negotiated rates paid

contract hospitals; hence, those types of facilities are

not relevant to this lawsuit. Pet. App. 25.

Hospitals that do not have a contract are typical-

ly referred to as “noncontract” hospitals. For over

twenty-five years (from 1982 through 2008), the State

paid noncontract hospitals based on their “allowable

costs,” and then applied two different and highly

sophisticated measures of “economy” and “efficiency”

to those costs, the rate per discharge limit and the

peer group limit. See App., infra, 1-85; 22 California

Code of Regulations (C.C.R.) §§ 51545-51555. If a

hospital’s “allowable costs” fell below the rate per

discharge limit and the peer group limit, then those

costs were fully reimbursed as the costs of an

“fe]conomically and [elfficiently [o}perated” provider

of inpatient services. See App., infra, 5, 12-13; 22

C.C.R. §§ 51545(aX(30) and 51545(a)(70). This ap-

proach — which was based on sophisticated measures

of “economy” and “efficiency” — had been approved by

the federal CMS as complying with federal law.

In 2008, without federal approval, the State

completely abandoned the sophisticated reimburse-

ment methodology described above. On February 16,

2008, the California Legislature enacted Assembly

Bill X3 5 (AB 5) in special session which, effective

July 1, 2008, imposed an across-the-board ten percent

reduction in the “allowable cost” reimbursement of all

noncontract hospitals for the inpatient services they

provide Medi-Cal recipients. Cal. Welf. & Inst. Code

§ 14166.245 (Pet. App. 25-41). Then, effective October 1,

2008, California enacted AB 1183 which further cut

the amounts paid to noncontract hospitals to the

lesser of the above-described 10% reduction or to the

applicable CMAC average contract rate less 5 per-

cent.” Cal. Welf. & Inst. Code § 14166.245 (Pet. App.

25-41).

Respondents showed that without an injunction

of both AB 5 and AB 1183 they would have lost

between 21% and 37% of their inpatient Medi-Cal

reimbursement, which translated into an annual loss

* In the instant case, respondents sought to enjoin only the

rate cut under AB 5 because the rate reduction under AB 1183

had already been enjoined by the Ninth Circuit on April 6, 2009,

in Cal. Pharm. Ass’n v. Maxwell-Jolly, 563 F.3d 847 (9th Cir.

2009). Pet. 11.

of between $40 and $55 million per year. Moreover,

respondents submitted fifteen declarations which

were virtually uncontested and unrefuted showing

that they would have to curtail or eliminate signifi-

cant programs, services, and capital expenditures as

a result of the petitioner’s draconian rate cuts.

Petitioner readily admits that both rate reduc-

tions were enacted predominantly for budgetary

reasons. Furthermore, as of October 12, 2010, neither

rate reduction had been approved by the federal

CMS.

B. Factual Background

The respondents are nineteen hospitals located

throughout California that provide services to Medi-

Cal beneficiaries.

On November 14, 2008, respondents filed a

Complaint in the Northern District of California

challenging the validity of the AB 5 and the AB 1183

Medi-Cal rate reductions, and seeking a preliminary

injunction enjoining the implementation of those rate

cuts. Respondents subsequently amended their

Complaint on December 4, 2009, primarily to add

additional plaintiffs.

On January 14, 2009, respondents filed a motion

for a preliminary injunction enjoining the application

of the AB 5 and the AB 1183 rate cuts. The district

court stayed the case in its entirety pending the

Ninth Circuit’s decision in Indep. Living Ctr. of South-

ern Cal., Inc. v. Shewry and denied respondents’ mo-

tion for a preliminary injunction without prejudice.

Plaintiffs appealed the denial of the preliminary

injunction and requested that the Ninth Circuit grant

an emergency injunction. On June 2, 2009, the Ninth

Circuit vacated and remanded the appeal because the

district court made no findings or conclusions in

support of its order denying the preliminary injunc-

tion motion.

On June 4, 2009, the district court requested

“supplemental brief[s]...explaining whether’ the

Ninth Circuit’s April 6, 2009 Order, Cal. Pharm. Ass’n

v. Maxwell-Jolly, 563 F.3d 847 (9th Cir. 2009), re-

quires the Court to enjoin the Medi-Cal reimburse-

ment rate cuts at issue in the present case.”

On June 12, 2009, respondents filed their Sup-

plemental Memorandum to Enjoin AB 5, and on June

17, 2009, the petitioner filed a response. On June 26,

2009, without deciding respondents’ motion to enjoin

AB 5, the district court continued its stay of the case

pending a hearing on the motion of plaintiffs Santa

Rosa Memorial Hospital, et al., for centralization of

this case with others in the United States District

Court for the Central District of California.

On September 9, 2009, after respondents’ request

for centralization was denied, the district court lifted

the stay and invited the respondents to file an

Amended Motion for Preliminary Injunction: “This

case is no longer stayed. Based on recent Ninth

Circuit decisions, including Independent Living

Center of Southern California, Inc. v. Maxwell-Jolly,

572 F.3d 644 (9th Cir. July 9, 2009), the Court will

allow Plaintiffs — if they so desire — to file a new brief

in support of an Amended Motion for Preliminary

Injunction.”

On November 18, 2009, after extensive briefing,

the district court granted respondents’ Amended

Motion for Preliminary Injunction of the AB 5 rate

cuts.

However, on the very next day, November 19,

2009, in response to a letter request from the peti-

tioner, the district court stayed the case again. On

November 23, 2009, respondents filed a Motion to

Vacate Stay and to Restore Preliminary Injunction,

which the district court granted on December 2, 2009.

After the court restored the preliminary injunc-

tion, the petitioner refused to reinstate the pre-AB 5

interim rates. As a result, on December 8, 2009,

respondents moved for an Order to Show Cause as to

why the petitioner should not be held in contempt for

violating the preliminary injunction Order by contin-

uing to implement and apply the ten percent reduc-

tion to the interim Medi-Cal payments to the

respondents. On December 10, 2009, the district court

issued a Clarifying Order confirming that “its prelim-

inary injunction was always intended to enjoin the

ten percent reductions in both interim and final

payments.”

A few hours after the district court issued its

Clarifying Order, the petitioner sent a letter to the

district court requesting that respondents post a bond

and that the court again stay the preliminary injunc-

tion pending the submission of evidence and argu-

ment on the amount of the bond. Respondents

objected to the petitioner’s requests. On December 16,

2009, the district court issued an order denying

petitioner’s request for a bond. Petitioner appealed.

On May 27, 2010, the Ninth Circuit issued its

decision. The Court noted that the instant appeal is

controlled by Cal. Pharm. Ass’n v. Maxwell-Jolly,

because both AB 1183 and AB 5 give “the Department

of Health Care Services no discretion to alter the rate

cuts at issue here.” Pet. App. 2. It also noted that

“(t]he Director’s attempts to distinguish Cal. Phar-

macists Association are unavailing.” Pet. App. 2.

Thus, it affirmed the district court holding “that

Plaintiffs demonstrated a likelihood of success on the

merits that the rate reductions violate 42 U.S.C.

§ 1396a(aX30XA)[.]” Pet. App. 2.

REASONS THE PETITION

SHOULD BE DENIED

I. CERTIORARI SHOULD BE DENIED ON

THE FIRST QUESTION BECAUSE THE

DECISIONS BELOW ARE A CORRECT AP-

PLICATION OF THIS COURT’S SETTLED

SUPREMACY CLAUSE JURISPRUDENCE

Petitioner argues that “review is warranted

because the Ninth Circuit's decision on this [preemp-

tion] issue conflicts with this Court’s precedent estab-

lishing limits on private rights of action against the

states.” Pet. 16. By this statement, petitioner appar-

ently is making two claims: (1) that respondents’

Supremacy Clause claim should be dismissed because

it does not meet the standards for maintaining a

private right of action under 42 U.S.C. § 1983, and

(2) that Congress did not intend to create a private

right of action under 42 U.S.C. § 1396a(aX30)(A).

Neither claim has merit.

A. The Courts Do Not Require That Pre-

emption Claims Meet The Same Stan-

dards As Claims Under Section 1983

This Court has never held that a claim for injunc-

tive relief based on federal preemption must meet the

standards for bringing an action under Section 1983.

In Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983),

several large employers brought suit against the

Acting Commissioner of the New York State Division

of Human Rights claiming that the State’s Human

Rights and Disability Benefits Laws were preempted

by the federal Employee Retirement Income Security

Act (“ERISA”). The Court held that the state legisla-

tion was preempted insofar as it prohibited practices

that were unlawful under ERISA. The Court ex-

plained,

[ijt is beyond dispute that federal courts

have jurisdiction over suits to enjoin state of-

ficials from interfering with federal rights. A

plaintiff who seeks injunctive relief from

state regulation, on the ground that such

regulation is pre-empted by a federal statute

which, by virtue of the Supremacy Clause of

the Constitution, must prevail, thus presents

a federal question which the federal courts

have jurisdiction under 28 U.S.C. § 1331 to

resolve.

463 U.S. at 96 n.14; see also Lawrence County v.

Lead-Deadwood Sch. Dist. No. 40-1, 469 U.S. 256, 259

n.6 (1985) (describing Shaw as “reaffirming the

general rule” that a plaintiff asserting preemption

under the Supremacy Clause has stated a federal

claim for injunctive relief); City of Burbank v. Lock-

heed Air Terminal, Inc., 411 U.S. 624 (1973) (enjoin-

ing a city ordinance preempted by the Federal

Aviation Act); Ray v. Atlantic Richfield Co., 435 U.S.

151 (1978) (enjoining the State of Washington’s

Tanker Law because it was preempted by the federal

Ports and Waterways Safety Act); Gade v. Nat'l Solid

Wastes Mgmt. Ass’n, 505 U.S. 88 (1992) (holding that

state licensing acts are preempted by the federal

Occupational Safety and Health Act of 1979);

Pac. Gas & Elec. Co. v. State Energy Res. Conserva-

tion & Dev. Comm'n, 461 U.S. 190 (1983); Fla. Lime

& Avocado Growers, Inc. v. Paul, 373 U.S. 132 (1963).

Petitioner’s argument fails to recognize that

preemption and Section 1983 are completely different

and separate avenues for enforcing federal law. The

remedies available under Section 1983 are far more

extensive than under preemption. Under Section

1983, a plaintiff can obtain compensatory and puni-

tive damages against state actors in their individual

capacities, compensatory damages against municipal-

ities, and attorneys’ fees. See City of Newport v. Fact

Concerts, Inc., 453 U.S. 247 (1981); 42 U.S.C. § 1988.

In contrast, a plaintiff with a preemption claim can

seek only to enforce “the proper constitutional struc-

tural relationship between the state and federal

governments.” Cal. Pharm. Ass’n v. Maxwell-Jolly,

563 F.3d 847 (9th Cir. 2009).

Indeed, several members of this Court have

stressed that preemption claims and Section 1983

serve different purposes and have different require-

ments. In Golden State Transit Corp. v. City of Los

Angeles, 493 U.S. 103 (1989), for example, Justice

Kennedy explained that even though he would have

held that the plaintiff could not bring its action under

Section 1983, nevertheless:

we would not leave the [plaintiff] without a

remedy. Despite what one might think from

the increase of litigation under the statute

in recent years, § 1983 does not provide

the exclusive relief that the federal courts

have to offer.... [PJlaintiffs may vindicate

[statutory] preemption claims by seeking de-

claratory and equitable relief in the federal!

district courts through their powers under

federal jurisdictional statutes.

Id. at 119 (Kennedy, J., dissenting) (citations omitted).

B. A Supremacy Clause Claim Does Not

Depend On A Private Right Of Action

Petitioner also suggests that Congress did not

intend to create a private right of action under 42

U.S.C. § 1396a(aX30\A). See, e.g., Cort v. Ash, 422

U.S. 66 (1975); Alexander v. Sandoval, 532 U.S. 275

(2001). That concept, however, is irrelevant because

the remedy in the instant case is supplied by the

Supremacy Clause, and does not depend upon an

implied private right of action. As this Court has

explained, “the existence of conflict cognizable under

the Supremacy Clause does not depend on express

congressional recognition that federal and state law

may conflict.” Crosby v. Nat'l Foreign Trade Council,

530 U.S. 363, 388 (2000); see also Verizon Maryland,

Inc. v. Pub. Serv. Comm’n of Maryland, 535 U.S. 635

(2002) (rejecting the assertion that a district court

could not reach the merits of a preemption claim

unless the plaintiff had demonstrated a statutory

cause of action).

C. The Committee Reports Relating To The

Boren Amendment Are Irrelevant

Petitioner cites a few sentences from Committee

reports relating to the Boren Amendment, and jumps

to the conclusion that “Congress, in repealing the

Boren Amendment, evinced a clear intent. . .to pre-

clude [all] private provider challenges|.]” Pet. 17.

Petitioner is wrong.

The Boren Amendment (42 U.S.C. § 1396a(aX13\A))

and Section 1396a(a)(30)(A) are separate and distinct

provisions of the Medicaid Act. At the time of the

Boren Amendment’s repeal, Section 1396a(a)(30)(A)

had consistently been held to impose an independent,

enforceable requirement in establishing reimburse-

ment standards for provider services. Orthopaedic

Hosp. v. Belshe, 103 F.3d 1491 (9th Cir. 1997), cert.

denied, 522 U.S. 1044 (1998); Visiting Nurse Ass’n of

North Shore, Inc. v. Bullen, 93 F.3d 997, 1004 (1st Cir.

1996), cert. denied, 519 U.S. 1114 (1997); Methodist

Hospitals, Inc. v. Sullivan, 91 F.3d 1026, 1029 (7th

Cir. 1996); Arkansas Med. Soc’y, Inc. v. Reynolds, 6

F.3d 519 (8th Cir. 1993). The Boren Amendment's

“repeal, like its enactment, modified § 13(A) alone; it

effected no change to § 30(A).” Alaska Dep’t of Health

& Soc. Servs. v. Centers for Medicare & Medicaid

Servs., 424 F.3d 931, 940-941 (9th Cir. 2005).

Petitioner’s reliance on a 1997 committee report

discussing the repeal of the Boren Amendment that

described the repeal as precluding enforcement by

providers of “any other” provision of Section 1396a,

H.R. Rep. No. 105-149, at 591 (1997), does not alter

the fact that the text of Section 1396a(a)(30)A) was

not amended in 1997. Thus, the legislative history

cited by petitioner is irrelevant. See Doe v. Chao, 540

U.S. 614, 626-627 (2004).

The legislative history cited by petitioner is also

irrelevant for two additional reasons. Because re-

spondents are not relying upon an implied private

right of action to enforce Section 1396a(a)(30)A), but

instead are relying upon the Supremacy Clause,

Congressional intent is not relevant. Also, when a

State makes the decision to participate in the Medi-

caid program, it is bound to comply with federally

imposed conditions, irrespective of whether or not the

law contains a congressionally created implied pri-

vate right of action. See Wilder v. Virginia Hosp.

Ass’n, 496 U.S. 498, 502 (1990).

D. Over Half Of The Medicaid Expendi-

tures In California Are Paid For With

Federal Dollars

Although petitioner complains of the cost to

comply with federal law (see, Pet. 20), the federal

government matches or exceeds State dollars for

Medi-Cal. The federal government paid half of Cali-

fornia’s Medi-Cal expenditures prior to October 2008,

and will pay more than half of California’s Medi-Cal

expenditures for the period of October 2008 to De-

cember 2010 pursuant to the American Recovery and

Reinvestment Act of 2009 (hereinafter “ARRA”), Pub.

L. No. 111-5, 123 Stat. 115. Under the ARRA, the

federal government is expected to spend over $11

billion on Medi-Cal for that period. Kaiser Commis-

sion on Medicaid and the Uninsured, American

Recovery and Reinvestment Act (AARA): Medicaid

and Health Care Provisions (Mar. 2009), at http://

www.kff.org/medicaid/upload/7872.pdf. In return for

this infusion of billions of federal dollars, it is only

right that the State of California be required to

comply with federal law.

E. There Is A Dearth Of Successful Su-

premacy Clause Cases Outside Of Cali-

fornia

Petitioner baldly asserts that “DHCS is aware of

over 40 Supremacy Clause lawsuits across the coun-

try that have been spurred by the Ninth Circuit's

Independent Living decisions.” Pet. 20. This state-

ment should be rejected for several reasons. The

Court has no way of knowing if the statement is

correct because petitioner did not provide any de-

tails to support it; nor does petitioner demonstrate

whether the rate at which Supremacy Clause cases

are being filed has increased, decreased, or remained

the same from prior years. Also, even though peti-

tioner claims that the Independent Living decisions

“spurred” the Supremacy Clause lawsuits, petitioner

does not and cannot establish a causal connection

between these two events. Indeed, since the Jnde-

pendent Living Center (“ILC”) decisions are based on

this Court’s settled Supremacy Clause jurisprudence,

it is unlikely that the JLC cases were an instigating

factor in any of the 40 cases cited by petitioner.

In connection with its petition for certiorari in

Independent Living Center of Southern California,

Inc. v. Maxwell-Jolly, U.S. Supreme Court Case No.

09-0958, the petitioner here submitted detailed case

information concerning the Supremacy Clause law-

suits that have been filed. Jd. at Pet. App. 211a-223a.

Based on that information, it is clear that only 14

Supremacy Clause cases were filed in federal courts

outside of California, and that injunctions were

issued in only two of those cases. Jd. Thus, there is

not an epidemic of Supremacy Clause cases outside of

California, and the results of the few lawsuits that do

exist demonstrate that States that properly follow the

mandates of federal Medicaid law (as most do, except

California) will not lose any Medicaid monies.

F. The Courts Of Appeals Have Uniformly

Reached The Same Conclusion As The

Court Below

Petitioner claims that “[rjeview is also warranted

to resolve a conflict among the courts of appeals on

this [preemption] issue.” Pet. 18. Petitioner is wrong

here too.

Petitioner readily admits that “(t]he D.C., Fifth,

Eighth, and Ninth Circuits have held that private

parties may bring preemption claims under Spending

Clause statutes even if Congress did not intend to

make the statutes privately enforceable.” Pet. 18. It

also concedes that “(t]he First Circuit. . .has indicated

a willingness to allow private causes of action for

preemption based on Spending Clause statutes

even where the statute in question is not privately

enforceable.” Pet. 18 n.4. And, it acknowledges

that “[sleveral other circuits [e.g., Second, Third,

Tenth]...have held that at least some preemption

claims may be brought under non-Spending Clause

statutes regardless of whether the federal statutes

create privately enforceable rights.” Pet. 18 n.4.

The only exception the Petitioner cites is the

Eleventh Circuit, where it claims that the Court “has

squarely held that ‘the Supremacy Clause does not

grant an implied cause of action,’” citing Legal Envti.

Assistance Found., Inc. v. Pegues, 904 F.2d 640 (11th

Cir. 1990). Pet. 18, 19. However, petitioner misinter-

prets that decision and subsequent Eleventh Circuit

case law. In Pegues, the alleged violation of federal

law arose from the EPA Administrator’s interpreta-

tion of federal law, which Alabama merely followed.

The actual holding of Pegues was that “[bJoth [plain-

tiff] LEAF and the state agree that the proposed

permits comply with the federal statute and regula-

tions as they have been interpreted by the EPA....

LEAF’s real dispute, therefore, is not with the state,

but with the Administrator.” Jd. at 644 (emphasis

added). The court noted that Congress had created

an express cause of action against the federal agency,

but the plaintiffs had not relied on that cause of

action. The court therefore rejected the plaintiff’s

attempt “to bootstrap a statutory claim that should be

asserted against the Administrator into a constitu-

tional issue” of preemption. /bid. Premised as it was

on the conclusion that plaintiff was simply suing the

wrong government, Pegues does not conflict with the

decisions of the other circuits.

The Eleventh Circuit’s subsequent en banc

decision in BellSouth Telecommunications, Inc. v.

MCImetro Access Transmission Services, Inc., 317

F.3d 1270 (11th Cir. 2003), demonstrates that peti-

tioner has misread Pegues. BellSouth involved a suit

by a phone company against a state public service

commission claiming that the commission’s decision

was contrary to the Federal Telecommunications Act

of 1996. The en banc court held that, apart from any

express cause of action available under the statute,

“(flederal courts must resolve the question of whether

a public service commission’s order violates federal

law and any other federal question as well as any

related issue of state law under its pendent state

jurisdiction.” Jd. at 1278.

Moreover, this Court has repeatedly adjudicated

claims by private parties asserting preemption by

virtue of the Medicaid statute and other federal

spending statutes. In Arkansas Dept. of Health &

Human Services v. Ahlborn, 547 U.S. 268 (2006), a

Medicaid recipient sought a declaratory judgment

that a state law was preempted by the Medicaid Act,

and this Court unanimously agreed. In Pharm.

Research & Mfrs. of Am. v. Walsh, 538 U.S. 644

(2003), drug makers also brought an action asserting

preemption of a state law under the Act. See also

Dalton v. Little Rock Family Planning Services, 516

U.S. 474, 476 (1996) (per curiam) (preemption under

Medicaid); Blum v. Bacon, 457 U.S. 132, 138 (1982);

CSX Transp., Inc. v. Easterwood, 507 U.S. 658, 663

(1993); Lawrence County v. Lead-Deadwood Sch. Dist.

No. 40-1, 469 U.S. 256, 269-270 (1985); Pennsylvania

Prot. & Advocacy, Inc. v. Houstoun, 228 F.3d 423, 428

(3d Cir. 2000) (Alito, J.).

Il. CERTIORARI SHOULD BE DENIED ON

THE SECOND QUESTION BECAUSE THE

DECISIONS BELOW ARE A CORRECT AP-

PLICATION OF FEDERAL LAW

Petitioner contends that the Ninth Circuit’s ap-

plication of 42 U.S.C. § 1396a(a)(30)(A) is “atextual”

and that it “conflicts with the holdings of every other

circuit.” Pet. 22, 24. Neither claim is correct.

A. The Court Of Appeals Correctly Applied

42 U.S.C: § 1396a(a)(30)(A)

42 U.S.C. §1396a(aX30)A), the provision at

issue in this case, provides that a state plan

must...provide such methods and proce-

dures relating to the utilization of, and the

payment for, care and services available un-

der the plan...as may be necessary [1] to

safeguard against unnecessary utilization of

such care and services and [2] to assure that

payments are consistent with efficiency, econ-

omy, and quality of care and [3] are sufficient

to enlist enough providers so that care and

services are available under the plan at least

to the extent that such care and services

are available to the general population in the

geographic area.

42 U.S.C. §1396a(aX3OXA) (bracketed numbers

added).

The decision below is fully consistent with the

foregoing text. The plain language of the statute

requires that States that participate in Medicaid

“provide such methods and procedures” relating to

“the payment for” medical care and services “to

assure that payments are consistent with efficiency,

economy, and quality of care.” This language clearly

requires that reimbursement rates be based upon an

analysis of hospital costs sufficient to assure that

payments are consistent with the efficiency, economy,

and quality of care (“EEQ”) factors.

The petitioner claims that 42 U.S.C. § 1396a(aX30XA)

does not “require any type of study.” Pet. 22. However,

petitioner does not and cannot explain how it can

otherwise “assure” that its “payments are consistent

with efficiency, economy, and quality of care” without

such a study. “Assure” is defined by Black’s Law

Dictionary as “to make certain and put beyond

doubt.” Black’s Law Dictionary (6th ed. 1990). With-

out a study, petitioner cannot “make certain and put

beyond doubt” that its payments are consistent with

the EEQ factors.

Petitioner also claims that “a study would serve

no useful purpose because rates are already based on

providers’ actual costs.” Pet. 15. However, the fact

that the rate reduction is based on actual costs

doesn’t obviate the need to study the effects of that

rate reduction on the EEQ factors, nor does it mean

that the rate, as reduced, would satisfy the EEQ

requirements of Section 30(A).

Petitioner also objects to the requirement that

the study be completed prior to the enactment of the

rate reduction. This requirement exists because any

consideration of the Section 30(A) factors is meaning-

ful only if it actually impacts the rate setting process:

“any anaiysis of reimbursement rates on the statutory

factors of efficiency, economy, quality, and access to

care, must have the potential to influence the rate-

setting process.” Cal. Pharm. Ass’n v. Maxwell-Jolly,

596 F.3d 1098, 1109 (9th Cir. 2010). This is particu-

larly true in cases like the instant one where the

legislature is setting rates that cannot be changed by

the state agency: “AB 1183 gives the Department no

discretion to alter the rate cuts based on the Depart-

ment’s own analysis, and, therefore, the cuts were not

‘based on’ the Department’s consideration of the

relevant factors, but instead constituted a post hoc

rationalization for a legislative decision that had

already been made.” Cal. Pharm. Ass’n v. Maxwell-

Jolly, 563 F.3d 847, 850 (9th Cir. 2009).

B. The Federal CMS Has Embraced The

Ninth Circuit Analysis Of 42 U.S.C.

§ 1396a(a)(30)(A)

In Alaska Dep’t of Health & Soc. Servs. v. Ctrs.

for Medicare & Medicaid Servs., 424 F.3d 931 (9th

Cir. 2005), the federal CMS rejected a state rate

amendment on the ground that it was inconsistent

with the statutory requirement of efficiency, economy,

and quality of care. CMS disapproved the proposed

amendment as inconsistent with Section 30(A) be-

cause the “proposed rates would substantially exceed

the IHS [Indian Health Service] published rates” on

which federal payments have historically been based.

424 F.3d at 937. It further explained that the IHS

rates are “based on an analysis of statewide costs of

the Alaska IHS facilities” and that, while it “might

consider a request for a higher rate if supported by

data showing costs that were not considered by IHS

in setting the published rates, Alaska provided no

such data to substantiate its proposed rates.” /d.

Hence, CMS concluded that, absent such data, the

proposed rates “are not consistent with efficiency,

economy, and quality of care” under Section 30(A). Jd.

Thus, like the Ninth Circuit, CMS also requires

that rates be based on a study of the EEQ factors.

C. The District Court Expressly Consid-

ered The Evidence Presented By The

Petitioner And Correctly Rejected It

Prior to claiming that it relied on cost studies,

the petitioner repeatedly argued that it was under no

legal duty to consider cost studies when determining

Medi-Cal rates under Section 30(A). In Indep. Living

Ctr. of Southern Cal., Inc. v. Shewry, 2008 U.S. Dist.

LEXIS 77525 (2008), petitioner claimed that “neither

the Legislature, nor the Department has a duty to

consider any particular factors or to conduct any

particular studies.”

Yet, in the district court here, the petitioner

claimed that “there were three relevant studies before

the Legislature prior to the enactment of AB 5” and

that it conducted additional studies “[a}fter AB 5 was

enacted, but prior to its July 1, 2008 implementa-

tion.” Pet. 12. The District Court carefully reviewed

each of these “studies” and correctly rejected them as

not complying with the requirements of federal law.

One document the petitioner mentioned was the

Legislative Analyst’s Office (“LAO”) Report analyzing

the 2008-09 budget. According to the lower court, “the

District Court for the Central District of California

has already determined that ‘all the Legislative

Analyst’s report shows is that such a report was

prepared. Respondent has not shown that the Legis-

lature ever reviewed or considered the concerns

raised therein.’” Pet. App. 116. The lower court also

stated that “[s]imilarly, here, Defendant has presented

no evidence that the Legislature or the Department

ever reviewed or considered this report prior to

setting the rate reductions that apply to Plaintiffs.

Indeed, nowhere in the LAO Report is there any

analysis of non-contract hospital costs.” Pet. App. 116-

117.

Another document referred to by the petitioner

was the 2007 California Medical Assistance Commis-

sion (*“CMAC”) Annual Report. However, the district

court found “that this report is irrelevant” because it

“exclusively concerns contract hospitals, not the non-

contract hospitals who are Plaintiffs in this case.”

Pet. App. 17.

The third document mentioned by the petitioner

was the November 2005 analysis by the Department

concerning a similar reimbursement rate reduction in

2004-2005. However, according to the lower court, the

“Defendant presented no evidence that the Depart-

ment or the Legislature actually reviewed it” and

“lelven if they did, this document does not consider

the impact of AB 5 on non-contract hospital costs.”

Pet. App. 17-18.

Relying upon the declarations of two Department

employees, Liu and Wong, petitioner also contended

that “the Department used the four-month period

between the enactment and implementation of AB 5

to determine whether the reimbursement reductions

satisfied the requirements of § 30(A).” Pet. App. 18.

According to the district court, “William Liu

declares that the Department conducted an analysis

of the impact of (Cal. Welf. & Inst. Code] section

14166.245 prior to its implementation.” Pet. App. 18.

However,

the document submitted to support this

claim merely consists of annual estimates of

recoupment collected by the PIRL program

and percentages of total reimbursement for

noncontract hospitals between 1999 and

2005. This document does not support the

contention that the Director relied on re-

sponsible cost studies when adjusting the re-

imbursement rates at issue to determine

whether these reimbursement rate reduc-

tions were consistent with efficiency, econo-

my, quality of care, and access.

Pet. App. 18-19.

The district court also noted that Gary Wong had

declared that “the Department analyzed whether the

reduced reimbursement payments would be reason-

able relative to hospitals’ costs prior to implemen-

tation.” Pet. App. 19. The court observed that Wong

supports his claim by pointing to only two

documents. The first is the November 2005

Analysis that the Court has already found

inadequate to show that the Department

complied with its statutory obligations. . .The

second is a one-page, handwritten, summary

comparison of how audited allowable costs

compared to reported costs for unidenti-

fied noncontract hospitals between 2002

and 2005. ..This document is clearly inade-

quate to show the Department relied on

responsible cost studies to determine that

the ten percent reduction was consistent

with efficiency, economy, quality of care, and

access.

Pet. App. 19.

Based on the foregoing, the lower court concluded

that “the Liu and Wong declarations and attached

exhibits are not sufficient to show the Department

complied with federal requirements.” /d.

Thus, the district court carefully reviewed all of

the information that the petitioner presented with

respect to the EEQ factors, and correctly rejected it

for the reasons set forth above.

D. The Decision Below Is Consistent With

The Other Circuits

In Cal. Pharm. Ass’n v. Maxwell-Jolly, 596 F.3d

1098, 1107 (9th Cir. 2010), the Ninth Circuit explicit-

ly examined the approach used in other circuits and

concluded that its “approach is consistent with that of

our sister circuits, where in the context of legislative,

as opposed to agency, rate-setting, they too have

focused on ensuring that the legislative body had-

information before it so that it could properly con-

sider efficiency, economy, quality of care, and access

to services before enacting rates.”

The decisions cited by petitioner are irrelevant

for a variety of reasons.

The Eighth Circuit decision in Minn. Homecare

Ass'n, Inc. v. Gomez, 108 F.3d 917 (8th Cir. 1997) is

not factually similar to the instant case because it

involved an increase by three percent in reimburse-

ment rates, rather than the substantial rate cuts at

issue here. Although the agency in Gomez did not

provide any formal Section 30(A) analysis to the

legislature, lobbyists “actively participated in

the. . legislative session.” Jd. at 918. As a result, “the

legislature adequately considered § 30(A) when it

raised reimbursement rates[.]” Cal. Pharm. Ass’n v.

Maxwell-Jolly, 596 F.3d 1098 (9th Cir. 2010). See also

Arkansas Med. Soc’y, Inc. v. Reynolds, 6 F.3d 519, 530

(8th Cir. 1993) (holding that a state agency “must

consider the relevant factors of equal access, efficien-

cy, economy, and quality of care as designated in

[Section 30(A)] when setting reimbursement rates.”)

The Third Circuit decision in Rite Aid of Pennsyl-

vania, Inc. v. Houstoun, 171 F.3d 842 (3d Cir. 1999), is

also not factually similar because it involved the

application of rates that even the federal CMS (for-

merly HCFA) had noted were too high: “Pennsylvania

had good reason to revise these rates. For several

years prior to 1994, the HCFA had been advising the

Department that its reimbursement rates were high,

given, among other reasons, changes in the drug mar-

ketplace.” Jd. at 847. The Third Circuit did not, how-

ever, find the mandates of Section 1396a(a)(30)(A) to

be unessential. It noted that the agency’s “process of

decisionmaking” must be “reasonable and sound,” and

that an agency “may not act arbitrarily and capri-

ciously.” Id. at 852-853.

The Fifth and Seventh Circuit cases cited by

petitioner are not relevant because they address only

the “equal access” prong of Section 1396a(a)(30)(A),

and do not address the EEQ requirements. In Ever-

green Presbyterian Ministries, Inc. v. Hood, 235 F.3d

908 (5th Cir. 2000), the Fifth Circuit considered only

“the question whether recipients’ access will be im-

paired.” Jd. at 934. Similarly, in Methodist Hospitals,

Inc. v. Sullivan, 91 F.3d 1026, 1029 (7th Cir. 1996),

the Seventh Circuit reviewed the requirements of

42 U.S.C. § 1396a(aX(30) only in connection with the

question of “equal access” and not EEQ. Id. at 1028-

1029.

Contrary to petitioner’s claim, the First Circuit

never has addressed the EEQ issue because it con-

cluded that Section 1396a(aX30)A) could not be

enforced through Section 1983. See Long Term Care

Pharmacy Alliance v. Ferguson, 362 F.3d 50, 59-60

(1st Cir. 2004).

* The Fifth Circuit decision in Equal Access for El Paso, Inc.

v. Hawkins, 509 F.3d 697 (5th Cir. 2007) is also irrelevant

because it considered only whether 42 U.S.C. § 1396a(aX30)A)

conferred individual private mghts that are enforceable under

Section 1983, and never reached the application of the EEQ

factors.

Thus, there is no conflict in the Courts of Appeals

with respect to the meaning and application of the

EEQ requirement, and thus no grounds for review.

Ill. THIS CASE IS A POOR VEHICLE FOR THE

COURT’S REVIEW

There are a number of reasons why this case is a

poor vehicle for the Court’s review.

First, the opinion of which petitioner seeks

review is an order sustaining a preliminary injunc-

tion, a posture that “of itself alone furnishe[s] suffi-

cient ground” for denying review. Hamilton-Brown

Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 258

(1916). Review of such interlocutory decisions is

strongly disfavored because “many orders made in

the progress of a suit become quite unimportant by

reason of the final result, or of intervening matters.”

American Constr. Co. v. Jacksonville, T & K. W. Ry.

Co., 148 U.S. 372, 384 (1893).

Second, this matter is not ripe for review because

petitioner’s rate changes have not been approved by

the federal CMS. AB 5 was enacted on February 6,

2008, and instructed petitioner to “promptly seek any

necessary federal approvals for the implementation of

this section.” Independent Living Center of Southern

California, Inc. v. Maxwell-Jolly, U.S. Supreme Court

Case No. 09-0958, Pet. App. 160a. Also, federal law.

requires that “all plans receive approval by the fed-

eral government before they may be implemented,

and that all amendments to plans must also be

federally approved.” Exeter Mem’l Hosp. Ass’n uv.

Belshe, 145 F.3d 1106 (9th Cir. 1998). Despite these

legal requirements, petitioner implemented the AB 5

rate cuts on July 1, 2008, without federal approval.

Furthermore, petitioner has intentionally stalled

the federal review process. Petitioner submitted its

state plan amendment to CMS on September 30,

2008, approximately three months after it imple-

mented the AB 5 rate cuts. Independent Living Center

of Southern California, Inc. v. Maxwell-Jolly, U.S.

Supreme Court Case No. 09-0958, Pet. App. 187a-

210a. In December 2008, CMS responded with a

nineteen-page request for additional information. Id.

at Resp. App. la-20a. That letter concluded by ex-

plaining that the request for additional information

“has the effect of stopping the 90-day clock with

respect to CMS taking further action on this State

plan submittal” and stating that a “new 90-day clock

will not begin until we receive your response to this

request for additional information.” Id. at Resp. App.

20a. Finally, the letter stated that “[iJn accordance

with our guidelines to all State Medicaid Directors

dated January [2], 2001, we request that you provide

a formal response to this request for additional in-

formation within ninety (90) days of receipt.” Ibid.

It has now been over 24 months since CMS sent

that letter and respondents are informed by CMS

that, as of October 12, 2010, petitioner had still not

responded. Under the guidelines referenced in the

CMS letter, when a State does not respond to a re-

quest for additional information within 90 days, CMS

“will initiate disapproval action on the amendment.”

Letter from Timothy Westmoreland, Director, Health

Care Finance Administration, U.S. Dep’t of Health &

Human Servs., to State Medicaid Directors, at 1 (Jan.

2, 2001), at http://;www.cms.hhs.gov/smdl/downloads/

smd010201.pdf (last visited October 9, 2010).

Due to petitioner’s extraordinary delay in re-

sponding to CMS’s request for additional information,

it is unclear if and when approval or disapproval of

the AB 5 rate reduction will occur. If CMS disap-

proves the rate reduction, which appears likely based

on its guidelines, then the issues in this case will

become moot. This uncertainty makes this case an

extraordinarily poor vehicle to address petitioner’s

claims.

Third, this Court does not grant review in cases

unless a reversal would change the position of the

parties in some concrete fashion. See The Monrosa v.

Carbon Black Export, Inc., 359 U.S. 180, 183 (1959).

In this case, a reversal would not change the ultimate

outcome of the case because respondents can seek the

relief they want in State court by pursing a writ of

mandate (Cal. Code of Civil Proc. § 1085). Indeed, the

California courts have consistently compelled State

officials to comply with provisions of the Medicaid

Act, including the very statutory provision at issue in

the instant case, 42 U.S.C. § 1396a(aX30)A). See,

e.g., Cal. Hospital Ass’n v. Maxwell-Jolly, 2010 WL

3280274 (Cal. App. 1 Dist.) (2010); Mission Hosp.

Reg’l Med. Ctr. v. Shewry, 168 Cal.App.4th 460 (2008),

rev. denied (Cal. 2009); Cal. Ass’n for Health Servs. at

Home v. Department of Health Servs., 148 Cal.App.4th

696 (2007); Cal. Ass’n of Health Facilities v. Depart-

ment of Health Servs., No. Al107551, 2006 WL

3775842 (Cal. Ct. App. Dec. 26, 2006).

CONCLUSION

For the reasons set forth above, the petition for a

writ of certiorari should be denied.

Dated: October 27, 2010

Respectfully submitted,

MICHAEL S. SORGEN, Esq. DEAN L. JOHNSON, Esq.*

LAW OFFICES OF DEAN L. JOHNSON, INC.

MICHAEL S. SORGEN 6863 Tanzanite Dr.

240 Stockton St., Ninth Floor Carlsbad, CA 92009

San Francisco, CA 94108 Telephone: (760) 603-0022

Telephone: (415) 956-1360 Facsimile: (866) 373-9348

Facsimile: (415) 956-6342 Email:

Email: msorgen@sorgen.net deanl johnson@gmail.com

*Counsel of Record

Counsel for Respondents

App. 1

22 CCR § 51545. Definitions

(a) The following definitions are applicable to

Article 7.5 only unless otherwise specified in another

section:

(1) Administrative Adjustment (AA) means the

adjustment to a provider’s PIRL in response to a

provider’s administrative adjustment request (AAR).

(2) Administrative Adjustment Request (AAR)

means the provider’s request for changes to the PIRL,

which includes both the all-inclusive rate per dis-

charge limitation (ARPDL) and peer grouping rate

per discharge limitation (PGRPDL).

(3) Aligned ARPDs means the modified ARPDs

which have been adjusted to estimate their value as

of a common fiscal period ending for the purpose of

computing the 60th percentile for the PGRPDL.

(4) All-Inclusive Rate Per Discharge (ARPD)

means the per discharge dollar limit on Medi-Cal

reimbursable costs prior to the application of the peer

grouping inpatient reimbursement limitation (PIRL).

The ARPD excludes return on owner’s equity, dispro-

portionate share payments and reductions for third-

party liability (TPL), as referenced in applicable parts

of 42 CFR, Part 413 and HCFA Publication 15-1.

(5) All-Inclusive Rate Per Discharge Limitation

(ARPDL) means a Medi-Cal inpatient reimbursement

limit (MIRL) which is the all-inclusive rate per dis-

charge (ARPD) multiplied by the number of Medi-Cal]

discharges. The ARPDL excludes return on owner’s

App. 2

equity, disproportionate share payments and reduc-

tions for TPL, as referenced in applicable parts of 42

CFR, Part 413 and HCFA Publication 15-1.

(6) Allowable Rate Per Discharge (ARPD)

means all-inclusive rate per discharge (ARPD).

(7) Atypical Case means Cost Outliers or Day

Outliers.

(8) Base Period shall be for fiscal periods which

begin on or after the effective date of Sections 51545

through 51557, the FPE immediately prior to the

settlement period.

(9) Base Year means Base Period.

(10) Burden of Going Forward means the re-

sponsibility of a party to be the first one to present its

evidence with respect to a particular issue.

(11) Burden of Proof means the responsibility of

proving, by a preponderance of the evidence, the

existence or nonexistence of each fact which is essen-

tial to demonstrate that a party’s position regarding a

disputed issue is correct.

(12) Case Mix means the mix in terms of the

diagnosis related groups (DRGs) of the Medi-Cal

patients served by the provider.

(13) Case Mix Index means an index that

measures the average level of health care needed by a

provider’s Medi-Cal patients.

App. 3

(14) Charitable Research Hospital means a pro-

vider which accepts catastrophically ill patients by

referral only, has over 33 percent of their Gross

Operating Expense (GOE) as charity care, over 1 per-

cent of their GOE for research and has no obstetrics

or nursery.

(15) Children’s Hospital means in accordance

with Section 14087.2 of the W&I Code, those hospi-

tals where 30 percent of the infants and children

served by the single institution qualify for Medi-Cal

payment systems and the institution serves primarily

children.

(16) Contract Services Costs means costs re-

lated to services provided that are covered by a

contract with the Department for care of Medi-Cal

inpatients, per W&I Code Section 14081.

(17) Contract Hospital means a provider that

contracts with the Department, based on negotiations

with the California Medical Assistance Commission

(CMAC) in accordance with W&I Code Section 14081.

(18) Cost Outliers means those patients who

have extraordinarily higher inpatient costs as identi-

fied by the cost outlier formulas in Section 51551.

(19) Cost Report means a report required by the

Department and completed by the provider to deter-

mine the Medi-Cal Program’s share of the provider’s

reasonable costs in accordance with applicable parts

of 42 CFR, Part 413 and HCFA Publication 15-1.

App. 4

(20) County Appropriations means the amount

appropriated to the provider from the county general

fund or other county sources for operating deficits or

other operating needs. If a county hospital repays the

county any portion of the appropriations, the repay-

ment must be abated against current fiscal period

appropriations.

(21) Customary Charges, as specified in appli-

cable parts of 42 CFR, Part 413 and HCFA Publica-

tion 15-1, means those uniform charges allowed by

Medi-Cal which are listed in a provider’s established

charge schedule which is in effect and applied con-

sistently to most patients and recognized for program

reimbursement.

(22) Crossover Patients means hospital in-

patients who are eligible for both Medi-Cal and

Medicare.

(23) Current Fiscal Settlement Period means

the provider’s accounting year for which a peer group

inpatient reimbursement limitation (PIRL) is being

determined.

(24) Day Outliers means those patients whose

stay in the hospital is extraordinarily longer as

identified by the day outlier formulas in Section

51551.

(25) Department means the California State

Department of Health Services.

(26) Depreciation and Amortization means those

amounts which represent portions of the depreciable

App. 5

or amortizable asset’s cost or other basis which is

allocable to a period of operation.

(27) Diagnosis Related Group (DRG) means a

group identified by certain clinically coherent types of

patients who should have similar resource consump-

tion within each of the universe of DRGs used in the

Medicare Prospective Payment System (PPS), in

accordance with applicable parts of 42 CFR, Part 413

and HCFA Publication 15-1.

(28) Discharge means the termination of lodg-

ing and a formal release of an inpatient by a provider.

Deaths are counted as inpatient discharges. See

Medi-Cal Discharge.

(29) Disproportionate Share Hospital means a

provider whose Medicaid inpatient utilization rate (as

defined in Section 1923(b)\(2) of the Social Security

Act) is at least one standard deviation above the

mean Medicaid inpatient utilization rate for pro-

viders receiving Medicaid payments in the State, or

where the providers’s low income utilization rate (as

defined in Section 1923(b)(3) of the Social Security

Act) exceeds 25 percent.

(30) Economically and Efficiently Operated Pro-

viders means providers whose costs do not exceed the

PIRL except for those costs that are otherwise found

allowable by an AA or Formal Appeal process.

(31) Employee Benefits means the direct oper-

ating costs related to employee benefits consisting of

FICA; State Unemployment Insurance (SUI) and

App. 6

Federal Unemployment Insurance (FUI); vacation,

holiday, and sick leave; group health insurance; group

life insurance; pension and retirement; workers’

compensation insurance; other payroll related em-

ployee benefits; and, other non-payroll related em-

ployee benefits.

(32) Employee Benefits Index means the factor

resulting from the adjusted comparison of settlement

period employee benefits expense to prior period

employee benefits expense.

(33) Exempt Reimbursement means reimburse-

ment not included in, or subject to limitation by the

PIRL. These costs are limited to return on owner’s

equity and disproportionate share payments.

(34) Extraordinary and Unusual Events means

an event of a sudden, unexpected, or unusual nature;

e.g., avalanche, floods, earthquakes or other similar

events whose circumstances are unavoidable regard-

less of the level of prudence exercised by the provider.

(35) Factor Input Price means the same as the

Input Price Index.

(36) Final Peer Group Inpatient Reimburse-

ment Limitation (PIRL) Settlement means a Depart-

mental determination of liabilities owed resulting

from a PIRL calculation based upon data audited or

otherwise considered true and correct by the Depart-

ment for the final settlement fiscal period, pursuant

to the W & IL_Code Section 14170.

App. 7

(37) Fiscal Period Ending (FPE) means the last

day of a provider’s fiscal period. A fiscal period is an

accounting period established by the provider. The

fiscal period is generally a twelve (12) consecutive

month period; however, in some instances may be less

than or exceed twelve (12) months.

(38) Fixed Costs means an operating expense or

a class of operating expenses as a class, that does not

vary with patient volume. Fixed costs are not fixed in

the sense that they do not fluctuate or vary, but

fluctuate or vary from causes independent of patient

volume.

(39) Food Service Expense means those ex-

penses for services and supplies related to the food

service categories of: kitchen, dietary, and cafeteria.

(40) Formal Appeal means the provider’s appeal

of the Department’s decision on an AAR concerning a

final PIRL calculation.

(41) Formula Relief means changes in the

ARPD that will carry forward into the next fiscal

period’s ARPD calculation.

(42) Gross Operating Expense (GOE) means the

total operating expenses of the provider. This includes

all expenses incurred in conducting the ordinary

major activities of the provider inclusive of daily

hospital services, ancillary services, research, educa-

tion, general services, fiscal services and administra-

tive services, including the physician professional

component.

App. 8

(43) Initial Base Period means the last fiscal

period for each provider ending prior to the effective

date of Sections 51545 through 51557.

(44) Input Price Index (IPI) means the weighted

computation resulting in the reimbursable change in

the prices of goods and services purchased by the

providers (except for pass-throughs). The IPI shall

consist of a market basket classification of goods and

services purchased by providers, a corresponding

set of market basket weights derived from each

provider’s own mix of purchased goods and services,

and a related series of price indicators.

(45) Interim Payment Rate means the rate paid

to a provider, expressed as a percentage, derived by

the PIRL divided by provider’s charges.

(46) Interest on Working Capital means a cost

representing all interest incurred on borrowings for

working capital purposes or interest on an unpaid tax

liability.

(47) Interest, All Other means a cost represent-

ing all interest incurred for borrowings other than

interest on working capital.

(48) Leases and Rents Costs means costs repre-

senting lease and rental expenses relating to occupy-

ing or using buildings, leasehold improvements and

fixed assets not owned by the provider and not direct-

ly assignable to another cost center.

(49) Length of Stay Outliers means Day Out-

liers.

App. 9

(50) Licenses and Taxes Costs means costs

representing all license expenses and all taxes (other

than tax on income).

(51) Malpractice Insurance (Hospital and Pro-

fessional) Costs means costs representing liability

insurance expenses, including premiums paid for

physicians, the deductibles paid on claims, or the

actuarially determined cost of self-insurance.

(52) Maximum Inpatient Reimbursement Limi-

tation (MIRL) means the lowest of the following:

(A) Customary charges.

(B) Allowable costs determined by the Depart-

ment, in accordance with applicable Medicare stan-

dards and principles of cost based reimbursement, as

specified in applicable parts of 42 CFR, Part 413 and

HCFA Publication 15-1.

(53) Medi-Cal Discharges means those dis-

charges where the inpatient services provided were

covered by Medi-Cal for a Medi-Cal eligible bene-

ficiary. This includes deaths, and eligible beneficiaries

whose Medi-Cal covered services were paid in full or

in part by third parties, if Medi-Cal was also billed

for the services. Late paid claims where the patients’

statistics were not included in the cost or audit report

used to derive the PIRL and well newborns shall not

be counted as Medi-Cal discharges. However, a well

newborn whose mother is not eligible for Medi-Cal

shall be counted as a discharge if the newborn is

App. 10

eligible for Medi-Cal. Medicare crossover patients are

not counted as Medi-Cal discharges if Medi-Cal paid

only for any applicable deductibles and co-payments.

(54) MIRL Reimbursement Rate Per Discharge

means the per discharge reimbursement amount

under the MIRL, which has not been reduced for

third-party liability, excluding any one-time relief,

return on owner’s equity and any disproportionate

share payments. It is calculated by dividing the MIRL

by the number of Medi-Cal discharges.

(55) New Hospital means any hospital:

(A) Which has a complete new physical plant

that is less than three years of age and is not on the

same or an adjacent property as the old physical

plant; or

(B) Under new ownership, or resuming opera-

tions for the first time after a 12-month period (i.e.

was closed for at least 12 months prior to being

reopened under new ownership); or

previous ownerships for less than three years.

(56) New Service means an additional service

developed and implemented by a Medi-Cal provider,

to furnish and maintain quality inpatient hospital

care to a patient population inclusive of Medi-Cal

recipients.

App. 11

(57) Newborn means an infant born in the hos-

pital or delivered outside the hospital and admitted to

the hospital shortly after birth.

(58) Noncontract Hospital means a _ provider

that does not have a negotiated contract with the

Department to provide medical care for Medi-Cal

beneficiaries, pursuant to W & I Code Section 14081.

(59) Noncontract Service Costs means costs

related to services provided to Medi-Cal inpatients,

which are excluded from the provider’s contract with

the Department.

(60) Non-Pass-Through Costs means costs

which are subject to the hospital cost index, as found

in Section 51549.

(61) OSHPD means the Office of Statewide

Health Planning and Development.

(62) One-Time Relief means changes in the

ARPDL which only affect the settlement period and

are not carried forward into the next settlement

period ARPDL.

(63) OSHPD Accounting and Disclosure System

means a uniform accounting and disclosure system

(64) Outliers means Cost Outliers and Day

Outliers.

(65) Partial Period Contracting Hospital means

a contract hospital with a contract which covers only

a partial fiscal period.

App. 12

(66) Partially Contracting Hospital means a

contract hospital with a contract that does not in-

clude all Medi-Cal covered services.

(67) Pass-Through Costs means cost categories

for purposes of the ARPDL that are not subject to the

hospital cost index. The categories are limited to:

depreciation, rents, leases, interest, property tax,

license fees, utilities and malpractice insurance, as

defined in Section 51549.

(68) Per Diem means a daily rate paid for

hospital services provided to Medi-Cal beneficiaries.

(69) Peer Group means a group of hospitals

with similar characteristics that are grouped together

for purposes of determining reimbursement limita-

tions.

(70) Peer Grouping Inpatient Reimbursement

Limitation (PIRL) means the lowest of the following:

(A) Customary charges.

(B) Allowable costs determined by the Depart-

ment, in accordance with applicable Medicare stand-

ards and principles of cost based reimbursement, as

specified in applicable parts of 42 CFR, Part 413 and

HCFA Publication 15-1.

(D) PGRPDL.

If a provider is exempt from the peer group

limits, the Medi-Cal reimbursement limitation will be

App. 13

the lowest of (A), (B) or (C), identified above. All

references to PIRL include MIRL.

(71) Peer Grouping Rate Per Discharge Limita-

tion (PGRPDL) means a Medi-Cal inpatient reim-

bursement limit. The PGRPDL excludes return on

owner’s equity, disproportionate share payments and

reductions for third-party liability. The PGRPDL is

the 60th percentile ARPD of each provider’s peer

group multiplied by the provider’s number of Medi-

Cal discharges.

(72) Pharmacy Expense means those expenses

for services and supplies related to the pharmacy. The

cost of drugs dispensed to inpatients are also included

in this category.

(73). Primary Health Service Hospital means a

provider that is either (1) located outside of a stan-

dard metropolitan statistical area, and located at

least 15 miles from another licensed acute care hospi-

tal, and has 60 or fewer acute care beds; or (2) is

located at least 20 miles from any other licensed

acute care hospital, and has 60 or fewer acute care

beds; or (3) be the only licensed acute care hospital in

the county, and has fewer than 100 acute care beds as

defined by Health and Safety Code Section 1339.9.

(74) Prior Fiscal Period means the most recent

fiscal period ending prior to the period in which a

PIRL is being determined.

(75) Productive Hours means the total paid

hours less hours not on the job. Hours not on the job

App. 14

include: vacation time; sick time; holidays; and other

paid time off.

(76) Productive Salaries means the total direct

payroll costs for productive hours related to a given

classification.

(77) Professional Fees means fees for profes-

sional services consisting of medical (therapist and

others); consulting and management fees; legal:

audits; registry nurses and contracted services.

(78) Provider means an institution in California

that furnishes inpatient hospital services to Medi-Cal

beneficiaries.

(79) Purchased Services means costs related to

services purchased from outside contractors.

(80) Rate Per Discharge means ARPD.

(81) Reasonable Costs means _ reimbursable

costs as defined by 42 CFR, Part 413 and HCFA

Publication 15-1.

(82) Recalculated Final PIRL Settlement means

a final PIRL settlement which has been recalculated.

(83) Reimbursable Costs means those costs that

are reimbursed as determined by the PIRL.

(84) Replacement Service means a newly im-

plemented service which replaces another service in

whole or in part.

App. 15

(85) Rural Hospitals means consistent with Sec-

tion 1188.855 of the Health and Safety Code, an acute

care hospital which meets the criteria within peer

group six (rural hospitals) as defined in the report

entitled, “Hospital Peer Grouping for Efficiency Com-

parison” dated December 20, 1982.

(86) Salaries and Wages means the direct oper-

ating costs related to salaries and wages, consisting

of: management and supervision; technicians and

specialists; registered nurses; licensed vocational

nurses; aides and orderlies; clerical and other admin-

istrative; environmental and food services; non-

physician medical practitioners; and other salaries

and wages. Those salaries and wages related to

students from the medical education centers as well

as ".ysicians are not included here.

(87) Salary and Wage Index means the factor

which is defined as part of the calculations in Section

51549(b)(2)(A)1.

(88) Second Level Appeal means Formal Appeal.

(89) Service Intensity means changes in the

character of the services provided to each patient

including but not limited to: changes in applicable

technology; qualitative and quantitative changes in:

personnel; supplies; drugs; and other materials.

Service intensity does not include changes in the

types of patients and illnesses treated.

App. 16

(90) Settlement Fiscal Period means the pro-

vider’s accounting period for which a PIRL settlement

is being or has been conducted.

(91) Sixtieth Percentile means the point at

which sixty percent (60%) will be below in any given

group arrayed in order.

(92) Sixtieth Percentile ARPD means the max-

imum reimbursement per discharge under the

PGRPDL system. It is the sixtieth percentile rate per

discharge for each peer group.

(93) Sole Community Hospital is defined in 42

USC, Section 1395ww(d)(5\C iii).

(94) Student and Physician Professional Fees

means fees charged for the professional services

provided to patients by hospital-based physicians and

students. These do not include those fees related to

the education, research and administrative duties

performed by the hospital-based physicians.

(95) Student and Physician Salaries and Wages

means the compensation (exclusive of in-service

education), of students in teaching programs and

physicians including such items as research, educa-

tion program activities, general hospital administra-

tion, patient care and supervision.

(96) Tentative PIRL Settlement means the De-

partment’s determination of liabilities owed, resulting

from a PIRL or MIRL calculation using unaudited

cost report data provided by a provider.

App. 17

(97) Third-Party Liability (TPL) means amount

owed for hospital inpatient services on behalf of a

Medi-Cal eligible beneficiary by any payor other than

Medi-Cal.

(98) Total Hospital Gross Revenue means the

amount of total charges for services rendered to all

patients.

(99) Total Medi-Cal Gross Revenue means the

amount of charges to Medi-Cal for services rendered

to Medi-Cal eligible patients.

(100) Total Paid Hours means the sum of the

productive hours and the vacation time, sick time,

holidays, and other paid time off for all employee

classes related to daily hospital services, ancillary

services, general services; fiscal services; and admin-

istrative services.

(101) Utilities means the direct expenses, ex-

cluding telephone and telegraph expenses, incurred

in the operation of the hospital plant and equipment,

such as, but not limited to: electricity, gas and water.

(102) Variable Costs means operating costs that

vary or fluctuate with changes in patient volume.

(103) Volume Adjustment means the adjust-

ment for changes in patient volume that applies to

the provider specific all-inclusive rate per discharge

for a given fiscal period.

(104) Well Newborn means those newborns who

have no major medical problems who are not counted

App. 18

as Medi-Cal discharges. This includes newborns

classified in Medicare PPS DRGs 372 and 373.

(105) Working Capital means the difference

between total current assets and total current liabili-

ties.

22 CCR § 51546. Reimbursement Limits

(a) For provider fiscal periods beginning on or

after the effective date of this Section, reimbursement

for in-state hospital inpatient services provided to

Medi-Cal program beneficiaries not fully covered by a

negotiated contract as allowed in W&I Code Section

14081, shall be the least of the following four items

except as stated in (b), (d), (f), (g), and (h) for each

provider:

(1) Customary charges.

(2) Allowable costs determined by the Depart-

ment, in accordance with applicable Medicare stan-

dards and principles of cost based reimbursement, as

specified in applicable parts of 42 Code of Federal

Regulations (CFR), Part 413 and HCFA Publication

15-1.

(3) All-inclusive rate per discharge limitation

(ARPDL).

(4) The peer grouping rate per discharge limita-

tion (PGRPDL).

App. 19

(b) The following adjustment shall be made to

items (1) and (4) above:

(1) Providers shall also be reimbursed for dis-

proportionate share payments if applicable.

(2) The least of the four items listed in (a)(1)-(4)

above shall be reduced by the amount of third-party

liability.

above may be increased only by an AA or appeal.

(d) New hospitals and rural hospitals shall

be exempt from the provisions of this Article relating

to the MIRL and PIRL. New and rural hospitals shall

be reimbursed in accordance with the lesser. of sub-

sections (a)(1) or (a)(2) above, and subject to any

limitations provided for under federal law and/or

regulation.

(e) Each provider shall be notified of the

ARPDL and PGRPDL at the time of tentative and/or

final PIRL settlements. If only a final PIRL settle-

ment is issued, it shall take the place; of both the

tentative and final PIRL settlement.

(f) Payments for Medicare covered services pro-

vided to Medicare/Medi-Cal crossover patients shall

not be subject to the limitations specified in this

Section. These services shall be reimbursed only for

the Medicare deductibles and co-insurance amounts.

The deductibles and co-insurance amounts shall not

exceed the state reimbursement maximums. State

reimbursement maximums shall be the interim rate

App. 20

times charges after consideration of the Medicare

payment.

(g) Payment for skilled nursing facility services

shall be made in accordance with Section 51511.

(h) Payment for intermediate care facility ser-

vices shall be made in accordance with Section 51510.

22 CCR § 51547. Methods of Payment

(a) The methods of payment for inpatient hos-

pital services under the MIRL shall include the fol-

lowing:

(1) An ARPD that shall be retrospectively

established for each provider’s tentative and final

settlement fiscal period. The ARPD shall:

(A) Apply to all non-contract Medi-Cal inpatient

covered services provided by the provider during its

settlement fiscal period. It shall be based upon the

statistics included in the providers Medi-Cal cost or

audit report.

(B) Be updated annually to reflect reimbursable

changes in factor input prices, service intensity,

technology, productivity, patient volume, and other

items as allowed through the AA and appeals process.

(2) An interim payment rate based upon an

actual or projected reimbursable cost to charge ratio.

(A) The current interim payment rate shall be

based on the lower of the following:

App. 21

1. The latest tentative settlement fiscal period

for which a final settlement has not been issued.

2. The latest final (which also includes recalcu-

lated finals) settlement fiscal period.

(B) Interim payment rates calculated under (A)

may use data from settlements that have been pre-

viously issued if needed to determine the lower of 1.

and 2. above.

have cost experience on which to base a determina-

tion of an interim rate of payment. In such cases, the

Department will use the following methods to deter-

mine an appropriate rate:

1. Ifthere is a provider or providers comparable

in substantially all relevant factors to the provider for

which the rate is needed, the Department will base

an interim rate of payment on the reimbursable costs

and customary charges of the comparable provider.

2. If there are no substantially comparable

providers from whom data are available, the Depart-

ment will determine an interim rate of payment

based on the budgeted or projected reimbursable

costs and customary charges of the provider.

3. Under either method, the Department will

review the provider’s cost and charge experience and

adjust the interim rate of payment in line with the

provider’s cost and charge experience.

App. 22

4. The Department may prohibit increases in

the accommodation rates, as defined in applicable

parts of 42 CFR, Part 413 and HCFA Publication

15-1, charged by the provider if the Department proj-

ects that such increases would cause their interim

payments to exceed the PIRL.

5. Newly established providers may appeal

their interim rate if it is based upon the criteria in

(aX(2)(C)1. through 4., in accordance with the AAR

procedures specified in Section 51550.

22 CCR § 51548. Overpayments

(a) Interim payment rate adjustments and re-

covery of overpayments to providers shall be made at

tentative or final settlement based upon the applica-

tion of this Article.

(1) Such overpayments shall be collected and

such interim payment rates shall be adjusted

whether or not appeals of any audit, MIRL or PIRL

for the current or any prior fiscal period have been

filed by the provider.

(2) Interim payment rates calculated after the

effective date of Article 7.5, Sections 51545 through

51557, and applied to services provided after the

effective date of this regulation, shall comply with

Sections 51547 and 51548 even if the actual settle-

ment upon which the new interim rate is based, is not

subject to this regulation.

App. 23

22 CCR § 51549. Reimbursement Formula

(a) A hospital cost index (HCI) shall be estab-

lished for each provider. This index shall consist of

an input price index (IPI) and shall contain an allow-

ance for changes in scientific and technological ad-

vancement, service intensity and productivity. The

allowance shall be called the Service Intensity,

Productivity, Scientific and Technological Advance-

ment Factor (SIPTF).

(1) The HCI shall be calculated to account for

actual changes in the IPI after the close of each

provider’s accounting period.

(2) The HCI shall be multiplied by the non-

pass-through portion of the provider’s MIRL reim-

bursement rate per discharge (tentative or final) for

the prior fiscal period to determine the non-pass-

through portion of its ARPD for the settlement fiscal

period.

(A) The prior period shall always be the base

period for each settlement.

(B) For the initial base period only, the non-

pass-through portion of the ARPD shall be calculated

as follows:

1. Step 1, add the amount of TPL for the initial

base period to the MIRL (lowest of 51536(a)(1)-(3))

which includes amounts reimbursed under the AA

and appeals process for the initial base period.

App. 24

2. Step 2, recalculate Medi-Cal discharges for

any initial base period in accordance with the defini-

tion of Medi-Cal discharges contained in Section

51545.

a. The Department shall notify the provider of

the revised count of Medi-Cal discharges for the

initial base period.

b. The provider may file an AAR on the count of

Medi-Cal discharges for the initial base period only

and only as it is used in the settlement period MIRL.

The AAR must be filed within 60 days of notification

of the number of Medi-Cal discharges for the initial

base period.

c. The provider may file an appeal on the De-

partment’s response to the AAR in accordance with

Section 51552.

3. Step 3, divide the result of step 1 by the

result of step 2.

4. Step 4, multiply the percentage of non-pass-

through costs for the initial base period by the result

of step 3.

5. Use the result of step 4 in place of the

PNPARPD in the ARPD formula in subsection (3)

below.

App. 25

(3) The ARPD shall be calculated as follows:

ARPD = PASPD + NPARPD.

= PASPD + (PNPARPD * HCI)

= (TPTC/THD) + (PNPARPD * ((AIPI *

CMAF) + SIPTF))

Where ARPD = All-inclusive Rate Per Discharge.

PASPD = Pass through per discharge =

TPTC/THD

TPTC = Total pass through costs in the settle-

ment fiscal period

THD = Total hospital discharges in the settle-

ment fiscal period.

NPARPD = Non-Pass-through All-inclusive Rate

Per Discharge.

NPARPD = PNPARPD * HCI

PNPARPD = Prior year Non-Pass-through por-

tion of the MIRL reimbursement rate per dis-

charge which is,

((PMIRL — (PMCDIS * (PTPTC/PTHD))/PMCDIS)

Where:

PMIRL = Prior fiscal period MIRL.

PMCDIS = Prior fiscal period number of

Medi-Cal discharges.

App. 26

PTPTC = Prior fiscal period total pass

through costs.

PTHD = Prior fiscal period total hospital dis-

charges

HCI = Hospital Cost Index =

((AIPI) ** (Days/730))* CMAF) + (SIPTF.

**(days/730))

If the prior or settlement fiscal period is long

(over 370 days) or short (under 360 days). If both

fiscal periods are over 359 days and under 371 days

HCI = (AIPI * CMAF) + SIPTF. |

Where:

AIPI = Adjusted Input Price Index.

SIPTF = Allowance for Service Intensity, Produc-

tivity, and Scientific and Technological advance-

ment Factor.

Days = Sum of days in the current and prior fis-

cal periods.

CMAF = Case mix adjustment factor.

* = Multiplication.

** = Exponentiation.

(4) An annual allowance for service intensity,

productivity and scientific and technological advance-

ment shall be added to the allowable increase in the

non-pass-through portion of the ARPD, as detailed

in the formulas in this section. This allowance shall

be in addition to reimbursement for pass-through

App. 27

categories and shall be the net amount of changes

for scientific and technological advancement, produc-

tivity improvement and service intensity, if any

(excluding case mix), as recommended annually by

the prospective payment assessment commission for

the Medicare PPS for all FPEs during the PPS effec-

tive dates of the recommended allowance.

(5) The pass-through categories are those hos-

pital cost categories which, for purposes of tentative

and final settlement, are not subject to the HCI.

(6) Each pass-through category is listed below:

(A) Depreciation.

(B) Rents and Leases.

(D) Property Taxes and License Fees.

(E) Utility Expenses.

(F) Malpractice Insurance.

(b) An IPI shall be established to compute the

reimbursable change in the prices of goods and ser-

vices purchased by the providers (except for pass-

throughs). The IPI shall consist of a market basket

classification of goods and services purchased by

providers, a corresponding set of market basket

weights derived from each provider’s own mix of

purchased goods and services, and a related series of

price indicators.

App. 28

(1) Weights corresponding to market basket

categories shall be derived and updated for each

settlement fiscal period. These weights shall. be

computed using the latest available information from

each provider’s Medi-Cal cost report. If information

from this source is not sufficient to establish a hos-

pital specific weight for a particular market basket

category, the Department shall assign a weight based

on information from the United States National

Hospital Input Price Index published by the Depart-

ment of Health and Human Services, or other availa-

ble sources.

(2) The IPI shall be calculated after the close of

each hospital’s FPE, to account for actual and/or

estimated changes in the:

(A) Hospital specific wage and benefit rates.

1. The index for allowable changes in wages

shall be computed as follows:

Salary and Wage Index (SWI) = CLSA/ACSA.

Where:

CLSA = Summation of (PYHx * CYHRx) for all x.

ACSA = Summation of all Actual Prior Fiscal

Period Salaries for all x categories.

x = The following categories:

a. Technicians and Specialists.

b. Registered Nurses.

c. LVNs.

App. 29

d. Aides and orderlies.

e. Clerical and other administrative.

f. Environmental and food service.

PYHx = Prior Fiscal Period Productive Hours.

CYHRx = Current (Settlement) Fiscal Period

Hourly Rate = CYSx/CYHx.

CYSx = Current (Settlement) Fiscal Period salary

Expense for each category.

CYHx = Current (Settlement) Fiscal Period pro-

ductive Hours.

2. The Employee Benefits Index (EBI) shall be

computed as follows:

EBI = (PYHT * CYBR)/PYB.

Where:

PYHT = Prior Year (Prior Fiscal Period) Paid La-

bor Hours for All Labor Categories.

CYBR = Current Year (Settlement Fiscal Period)

Benefit Rate = CYB/CYHT.

PYB = Prior Year (Prior Fiscal Period) Benefits

Costs.

CYB = Current Year (Settlement Fiscal Period)

Benefits costs.

CYHT = Current Year (Settlement Fiscal Period)

Labor Hours for All Labor Categories.

App. 30

3. The SWI and EBI shall be annualized for any

provider which has a short or long (under 360 or over

370 days) prior or current fiscal period.

(a) The SWI shall be adjusted using the foliow-

ing formula:

ASWI = SWI ** (730/Days).

ASWI = Adjusted SWI.

Where Days = Total days in the current and prior

fiscal periods.

(b) The EBI shall be adjusted using the follow-

ing formula:

AEBI = EBI ** (730/Days).

Where:

AEBI = Adjusted EBI.

Days = Total days in the current and prior fiscal

periods.

the ASWI = SWI and AEBI = EBL.

(B) Price indicators for other non-pass-through

categories.

categories:

1. Salary and wages.

2. Benefits.

3. Professional fees, medical.

App. 31

4. Professional fees, other.

5. Food.

6. Drugs.

7. All other non-pass-through costs.

(D) The non-pass-through costs “all other” cate-

gory shall be weighted using the following weights for

purposes of calculating the price indicator:

[See Table In Original]

(E) The weights for the seven market basket

categories shall be the percentage of costs for each

category as calculated from the Medi-Cal cost report.

(F) Each market basket weight shall be multi-

plied by the corresponding price indicator. The results

will be summed to obtain the unadjusted non-pass-

through price index.

(G) The price indicators for items under (C) (3

‘through 7) will be established for the end of each

calendar quarter (March 31, June 30, September 30

and December 31). Any FPE other than on a calendar

quarter shall use the price indicators under (C) above

for the quarter in which the provider’s FPEs.

1. The following five market basket categories

and price indicators to be used in developing each

provider’s IPI are shown in the following table.

Non-Pass-Through Market Basket Classification

(Excluding Wages and Benefits)

{See Table In Original]

App. 32

2. The price index shall be 1.0 + the percentage

increase in each service category as measured by the

price indicator, expressed as a proportion.

(3) The formula for the hospital IPI shall be:

IPI = (PX1 * PGE1) + (PX2 * PGE2) + (PX3 *

PGE3) + (PX4 * PGE4) + (ASWI * PGE5) +

(AEBI * PGE6) + (PXO * PGE7)

Where:

IPI = Input Price Index.

PX1 = Price Index for Medical Professional Fees.

PX2 = Price Index for Other Professional Fees.

PX3 = Price Index for Food Costs.

PX4 = Price Index for Drug Costs.

ASWI = Adjusted Salary and Wage Index.

AEBI = Adjusted Employee Benefit Index.

PXO = Price Index for Other Costs.

PGE1 = Proportion of non-pass-through GOE

which is for Medical Professional Fees for the

prior fiscal period.

PGE2 = Proportion of non-pass-through GOE

which is for Other Professional Fees for the prior

fiscal period.

PGE3 = Proportion of non-pass-through GOE

which is for Food Costs for the prior fiscal period.

PGE4 = Proportion of non-pass-through GOE

which is for Drug Costs for the prior fiscal period.

App. 33

PGE5 = Proportion of non-pass-through GOE

which is for Salary and Wages for the prior fiscal

period.

PGE6 = Proportion of non-pass-through GOE

which is for Employee Benefits for the prior fiscal

period.

PGE7 = Proportion of non-pass-through GOE

which is for Other Costs for the prior fiscal period.

non-pass-through GOE = GOE minus total of all

pass-through costs for the prior fiscal period.

(4) Providers that do not supply the data needed

to calculate the IPI, shall have an IPI equal to the

hospital market basket increase as calculated by

HCFA, for the closest corresponding time period. For

hospitals with short FPEs, the closest corresponding

time period shall be the one with the closest mid-

point.

provider’s non-pass-through portion of the ARPD for

the settlement fiscal period if the number of annual-

ized total hospital discharges in the provider’s set-

tlement fiscal period differs from the number of

annualized total hospital discharges in its prior fiscal

period. The volume adjustment is used to allocate

fixed costs on a per discharge basis. Provider fiscal

periods (both settlement and prior) under 360 or over

370 days shall be annualized to a 365 day period

based on the following formula:

ATHD = (365/DFP) * THD.

App. 34

Where:

ATHD = Annualized total hospital discharges.

DFP = Days in fiscal period.

THD = Total hospital discharges.

(1) The volume adjustment shall be calculated

using the following formula which adjusts the rate

per discharge for estimated changes in average costs

resulting from changes in volume.

VOLUME ADJUSTMENT FORMULA

AIPI = IPI * VAF

Where:

AIPI = Allowable change in the prior year non-

pass-through portion of the ARPD after volume

adjustment, expressed as a proportion. This is

the adjusted IPI, which has not been annualized

and does not include any CMAF or SIPTF.

IPI = Hospital Input Price Index.

[See Illustration In Original]

VAF = Volume Adjustment Factor

DIS[P] = Total hospital discharges in the prior

fiscal period (annualized if needed).

VC = Variable cost as a proportion of total cost for

the prior fiscal period.

* = Multiplication.

App. 35

DIS[F] = Total hospital discharges in the settle-

ment fiscal period (annualized if needed).

(2) Each provider’s total costs, except for pass-

through costs, shall be divided into the fixed and

variable components shown in the following table.

Data from the provider’s Medi-Cal cost report or in

the event it is unavailable, other direct report of

expenses, shall be used to estimate the percentage of

a provider’s cost which varies with volume. A fixed to

variable cost ratio of 50:50 shall be used when suffi-

cient data from the provider are not available.

CLASSIFICATION OF FIXED AND VARIABLE

COSTS

[See Table In Original]

(3) <A provider may submit additional data on

the classification of fixed and variable costs for review

by the Department with the AAR. If these alternative

classifications and/or data are accepted by the De-

partment, the provider shall continue to:

(A) Utilize these accepted classifications of fixed

and variable costs in all FPEs.

(B) Submit to the Department, along with their

filed cost report, any required data on fixed and

variable costs necessary to do the alternative calcula-

tions for all subsequent FPEs. If the provider fails to

supply the data with the cost report, they shall have

their interim payments reduced by 20 percent. If the

data has not still been supplied 60 days after the 20

App. 36

percent reduction in interim payments begins, the

provider shall have their interim payments reduced

by 100 percent until the data are supplied. The

provider shall be given 30 days advance notice to

supply the required data before any reductions in

interim payments are applied under this subsection.

(4) All providers must supply the data items for

each FPE necessary to do the PIRL calculations. The

data must be supplied as part of each provider’s

Medi-Cal cost report.

(d) Summary of ARPDL formula for provider

with full settlement and full prior fiscal periods:

(1) ARPDL = MCDIS *

(2) ((RENTS + LIC + PTAX + DEP + LEAS +

INT + UTL + MPI) / THD) +

(3) ((CPMIRL —(PMCDIS * (TPTCPP / PTHD))) /

PMCDIS) *

(4) (((((PX1 * (MPFP / (GOEPP — TPTCPP))) +

(5) (PX2 * ( OPFP/(GOEPP — TPTCPP))) +

(6) (PX3 * (FOODP /(GOEPP — TPTCPP))) +

(7) (PX4 * (DRUGP /(GOEPP — TPTCPP))) +

6 6

(8) (S@YH(k]*CYHR{(k]YS(PYH[k]*PYHR{k]))*

k=1 k=1

(9) (SWP/(GOEPP — TPTCPP))) +

(10) ((PYHT * CYBR)/ PYB) *

App. 37

(11) (PYB/(GOEPP — TPTCPP))) +

(12) (PXO * (OTCP/(GOEPP — TPTCPP)))) *

(13) (DIS[p] + (VC * (DIS[f] — DIS[p])) YDIS[f])) *

n m

(14) ((SDRGCLi]JYMCDISK(SDRGPGj]YPMCDIS))) +

i=] j=l

(15) (STA+ PI +SD)))

Where:

ARPDL = All-Inclusive Rate Per Discharge Limi-

tation.

MCDIS = Medi-Cal discharges in the settlement

fiscal period.

RENTS = Rental costs for the settlement fiscal

period.

LIC = License fees for the settlement fiscal period.

PTAX = Property Tax expenses for the settlement

fiscal period.

DEP = Total allowable depreciation expenses for

the settlement fiscal period.

LEAS = Lease expenses for the settlement fiscal

period.

INT = Allowable Interest expense for the settle-

ment fiscal period.

UTL = Allowable utility expenses for the settle-

ment fiscal period.

App. 38

MPI = Total Malpractice Insurance costs for the

settlement fiscal period.

THD = Total hospital discharges for the settle-

ment fiscal period.

PMIRL = MIRL (Lowest of rate, costs and charges)

for the prior fiscal period.

PMCDIS = Medi-Cal discharges in the prior fiscal

period.

TPTCPP = Total allowable pass-through costs for

the prior fiscal period.

PTHD = Total hospital discharges for the prior

fiscal period.

PX1 = Price index for medical professional fees.

MPFP = Allowable Medical Professional Fees for

the prior fiscal period.

GOEPP = Gross Operating Expenses (GOE) for

the prior fiscal period.

PX2 = Price index for Other Professional Fees.

OPFP = Allowable Other Professional Fees for

the prior fiscal period.

PX3 = Price Index for Food costs.

FOODP = Allowable food costs for the prior fiscal

period.

PX4 = Price Index for Drug costs.

DRUGP = Allowable costs for Drugs for the prior

fiscal period.

App. 39

PYH[k] = Prior fiscal period hours paid for em-

ployee classification k.

CYHR{(k] = Settlement Fiscal Period Hourly

Wage rate for employee classification k.

PYHR{(k] = Prior fiscal period Hourly Wage Rate

for employee classification k.

SWP = Allowable costs for salaries and wages for

the prior fiscal period.

PYHT = Prior fiscal period paid hours.

CYBR = Settlement fiscal period hourly benefits

rate.

PYB = Prior fiscal period benefits.

PXO = Price Index for Other Costs.

OTCP = Other allowable costs for the prior fiscal

period.

DIS[p] = Total hospital discharges for the prior

fiscal period.

VC = Variable cost proportion for the prior fiscal

period.

DIS[f] = Total hospital] discharges for the settle-

ment fiscal period.

DRGC[i] = DRG weight for patient i in the set-

tlement fiscal period.

n = Number of DRG weights in the settlement

fiscal period.

DRGP{j] = DRG weight for patient j in the prior

fiscal period.

App. 40

m = Number of DRG weights in the prior fiscal

period.

MCDISP = Medi-Cal discharges in the prior fiscal

period.

STA = Adjustment factor for Scientific and Tech-

nological Advancement.

PI = Adjustment factor for Productivity Im-

provement.

SI = Adjustment factor for Service Intensity.

Lines 2 through 15 are the ARPD = All-Inclusive

Rate Per Discharge.

Line 2 is the PASPD = Pass-through cost per

discharge. |

Line 3 is the PNPARPD = Prior fiscal period Non-

pass through MIRL Reimbursement Rate Per Dis-

charge.

Lines 4 through 12 are the IPI = Input Price

Index.

Lines 4 through 13 are the AIPI — Adjusted Input

Price Index.

Lines 4 through 15 are the HCI = Hospital Cost

Index.

Line 8 is the SWI = Salary and Wage Index.

Line 10 is the EBI = Employee Benefits Index.

Line 13 is the VAF = Volume Adjustment Factor.

App. 41

Line 14 is the CMAF = Case Mix Adjustment

Factor.

Line 15 is the SIPTF = Allowance for Service

Intensity, Productivity, and Scientific and Techno-

logical Advancement Factor.

22 CCR § 51550. Administrative Adjustment Process

(a) A provider may request an AA to the ARPDL

or PGRPDL established for that provider if the pro-

vider’s cost based allowable reimbursement for the

settlement fiscal period as defined by the lower of

Sections 51546(aX(1) and (aX2), exceeds or are ex-

pected to exceed the PIRL by over $ 100. Expected to

exceed only refers to the settlement period being

issued and not any future settlement fiscal periods.

The burden shall be on the provider to estimate,

using the PIRL settlement information provided by

the Department and any other information they may

have, if they will expect to exceed the PIRL by over

$ 100.

(b) Items that are not subject to an AA or appeal

include the following:

(1) The use of Medicare standards and princi-

ples of reimbursement.

(2) The reimbursement amounts determined in

Section 51546(a\1) and (a2).

(3) The method for determining the IPI.

App. 42

(4) The use of all-inclusive reimbursement

rates.

(5) The use of a volume adjustment formula.

(6) Disproportionate share payments (these are

not reduced by application of the PIRL).

(7) Data reported on the cost report which has

been audited or reviewed by the Department are

considered true and correct pursuant to W&I Code

Section 14170. Data that was incorrectly transferred

from the providers’ Medi-Cal cost or audit report and

used to calculate the MIRL is subject to appeal.

(8) The methodology used to calculate the

interim rate.

(9) Any prior fiscal period issues.

(10) Higher costs due to low occupancy.

(11) Items not reimbursed as part of the Medi-

Cal cost report process as determined in Section

51546(a)(1) and (aX2).

(12) Increased costs. Only the cause for the

increased costs may be appealable, and then only if it

is otherwise an appealable item.

(13) Any issue raised in a previous formal

appeal for which a decision was made by the Depart-

ment for the same provider. The only exception is to

incorporate into the settlement fiscal period PIRL the

prior decision in the same manner as it was previ-

ously decided by the Department. These only include

App. 43

decisions made for FPEs affected by Sections 51545

through 51557. This does not include issues with-

drawn by the provider and thus not determined on

their merits in the formal decision.

(14) Increases in average length of stay.

(15) Changes in the Cost-Based Reimbursement

System as determined under Section 51546(a)(1) and

(aX(2).

(16) Increased costs incurred by entering into a

contract which did not contain reasonable cost in-

crease limitations.

(17) Increases due to increased costs or charges

of a related party.

(18) Any issues involving labor cost increases

except for those allowed in Section 51551(b).

(19) New services.

ARPDL but not PGRPDL) items may be resolved

through an AA under the procedures in Section

51551:

(1) Changes in Medi-Cal case mix and outliers.

(2) Inappropriate calculation of fixed and vari-

able costs.

(3) An error in the calculations.

(4) Determination of whether or not a provider

is exempt from the ARPDL.

App. 44

(5) Extraordinary and unusual events.

(6) Labor costs as allowed under Section

51551(b).

(7) Other causes of cost increases for costs

which were economically and efficiently incurred for

the necessary care of Medi-Cal inpatients, that are an

increase on a per-discharge basis over the prior fiscal

period and are not listed under (b) as not being sub-

ject to an AAR.

(8) The interim rate as it may be affected by

changes resulting from items appealed under (1)

through (7) above.

(d) If a provider’s cost based reimbursement

(lower of Section 51546(a)(1) and (a)(2)) exceeds both

the ARPDL and the PGRPDL, the providers’ AAR and

any subsequent appeal of the AA, must address both

limitations in order to obtain relief for both limita-

tions. If only the ARPDL is appealed, no further

appeal rights will exist for the PGRPDL at any later

date, except for an AAR on a tentative PIRL settle-

ment that is issued later as a final PIRL settlement.

(e) The procedures for requesting an AA of an

ARPDL shall be as follows:

(1) A request for an AA of the ARPDL or

PGRPDL, which the Department deems acceptable,

shall be submitted within 90 days after notification of

that limitation. These AARs must be postmarked or

hand delivered on or before the 90th day after the

postmark on the settlement notification letter. No

App. 45

extensions shall be granted. If a settlement letter

from the Department contains settlements for more

than one fiscal period, 120 days shall be allowed to

file the AAR.

(2) The AAR shall be submitted in writing to

the Department and shall specifically and clearly

identify each issue, the total dollar amount involved

for each issue and the dollar amount of overlap

among each issue. If the Department determines that

additional data are needed, the provider shall have

60 days after notification of the Department’s request

to supply it to the Department. No extension shall be

granted.

(3) The AAR need not be formal, but it shall be

in writing and specific as to each issue in dispute,

setting forth the provider’s specific contentions as to

those issues and the estimated amount each issue

involves. If the Department determines that the

request for any issue fails to state the specific

grounds upon which objection to the specific issue is

based, including the estimated dollar amount in-

volved, the provider shall be notified that is does not

comply with the requirements of this regulation and

the issue cannot be accepted. If an issue is not ac-

cepted on this basis, the provider may not submit this

issue as a formal appeal.

(4) All AARs must be signed by an employee of

the provider authorized by the provider to do so or by

an authorized representative.

App. 46

(A) Ifthe AAR is signed by an authorized repre-

sentative, a signed statement of such authorization

for each FPE must accompany the AAR signed by an

appropriate employee of the provider.

(B) Each AAR must have a declaration attesting

to the validity of all statements contained in the AAR.

The declaration shall be signed by an appropriate

employee of the provider or an authorized representa-

tive.

(5) For each issue other than those covered by

one of the specific formulas in this section the pro-

vider must demonstrate either (A), (B) or all parts of

(A) Data that was incorrectly transferred as

specified in Section 51550(b)(7).

(B) An error was made in the rate calculation.

ment are being requested were:

1. Economically and efficiently provided for the

necessary care of Medi-Cal inpatients.

2. Not already included in the ARPDL and/or

PGRPDL, whichever limitation(s) is being appealed.

3. Not overlapped with any other AAR issue, or

if there were, all such overlap must be used to reduce

any additional reimbursement which would otherwise

have been granted.

App. 47

(6) The request shall contain all the appropriate

data to allow the Department to determine if relief is

needed and to do the relief calculation.

(A) This may include, but is not limited to:

1. All internal/external reports concerning each

issue;

2. All material presented to the hospitals’

Governing Board concerning this issue;

3. Medical records for Medi-Cal patients;

4. Bank statements and canceled checks;

5. All financial statements;

6. Copies of contracts.

7. Copies of proposed and/or actual budgets.

8. The provider’s suggested calculation for relief

(for each issue specifically listed under Section 51551

below, the formula in regulation must be used).

(B) All data submitted must be accompanied by

one or more statements attesting that the data are

true and correct signed by an individual with

knowledge of the submitted data. More than one

statement may be required if more than one data

source is utilized.

Department.

App. 48

(7) One-time relief may be granted for extra-

ordinary and unusual events.

(A) The criteria for one-time relief is any item

which occurred in one FPE and is not normally

expected to apply to all future FPEs and therefore the

ARPDL is not adjusted each future FPE for this

issue.

(B) Formula relief shall only be granted for

issues which are expected to carry on to every FPE.

hours per discharge shall be one-time relief for the

first two FPEs and then formula relief during the

third FPE.

(8) The following steps are required by the

Department for calculating relief:

(A) The provider shall clearly identify each

issue and the estimated dollar amount of relief for

each issue.

(B) The provider shall identify the specific

cause of the increased costs.

bursement is already included in the ARPDL due to

this issue (such as pass-throughs) and/or overlap from

other AAR issues.

(D) The Department shall review the providers’

figures on (A) and make any necessary corrections.

App. 49

(E) The Department shall determine whether to

grant one-time or formula relief.

(9) If data or other items requested by the De-

partment for evaluation of an AAR are not supplied

within 60 days, the Department shall suspend fur-

ther consideration of this issue. If the requested data

are not supplied within 120 days, the Department

shall deem the AAR rejected for all issues for which

the Department requested data or other items, and

the provider shall be precluded from raising the

issue(s) in a formal appeal.

(10) The provider shall be notified of the De-

partment’s decision in writing within 90 days of

receipt of the provider’s written request for an AA, or

within 60 days of receipt of any additional documen-

tation or clarification which was required by the

Department, whichever is later. The request for an

AA shall be deemed denied if no decision is issued

within these time frames. The Department shall

notify providers of such denials.

(11) A change in cost based reimbursable costs

as defined in Section 51546(a\(1) and (a)(2), whether

or not as a result of an audit appeals process, shall

result in a redetermination of the PIRL, and shall not

give rise to any additional appeal rights.

App. 50

22 CCR §51551. Specific Administrative Adjust-

ment Issues

(a) AAs for year-to-year changes in case mix

and/or outliers under the ARPD (not the PGRPD)

shall be resolved in the following manner:

(1) The case mix adjustment factor (CMAF)

shall be calculated using the following steps:

(A) The provider shall supply a listing for every

Medi-Cal discharge that occurred during both the

settlement fiscal period and the prior fiscal period,

sorted in admission date order, and shall include as a

minimum:

1. The patient’s last name and first initial.

2. Medi-Cal I.D. Number.

3. The admission date.

4. The discharge date.

5. The principal diagnosis code.

6. The total amount of billed charges.

7. The DRG number.

8. The DRG weight. The same set of DRG

groups and weights must be used for both settlement

fiscal period and prior fiscal period data. If charges

for a newborn were billed together with its mother,

the newborn(s) and the mother must be listed sepa-

rately on this listing, each with their own DRG and

weight.

App. 51

9. The sum of the cost weights and the number

of Medi-Cal DRG discharges on the list. The number

of Medi-Cal DRG discharges on the list must equal or

exceed the number of audited Medi-Cal discharges.

The listing must include all Medi-Cal patients, which

includes newborns that are not counted as Medi-Cal

discharges.

(B) The sum of the cost weights for each FPE

shall be divided by their respective number of Medi-

Cal discharges (not the number of patients in the

listing) to obtain the average DRG weight for each

fiscal period.

weight shall be divided by the prior fiscal period

average DRG weight to obtain the CMAF.

(D) DRG cost weights used in this Section may

be any set used by Medicare during any part of either

the settlement or prior fiscal period.

The Department may also publish a set of Medi-

Cal or California specific DRG cost weights, day

outlier cutoffs and classifications as an option for the

providers to use.

(E) Once a case mix adjustment index is grant-

ed, each subsequent fiscal period ARPDL shall in-

clude a CMAF (even if the adjustment is negative)

and the provider shall supply all required data neces-

sary to do the CMAF calculation to the Department

within 9 months after the end of each subsequent

FPE. Failure to do so will result in a 20 percent

App. 52

reduction to the provider’s current interim payments.

If the data is not received within 12 months of the

end of the FPE, the interim payment-reduction shall

be increased to 100 percent, resulting in an interim

payment rate of zero percent. If a provider does not

supply the data prior to the issuance of the final

settlement, the CMAF shall be calculated so as to

remove the affect of all previous CMAFs by com-

pounding the previous CMAFs and applying the

result to decrease the settlement fiscal periods ARPD.

The provider shall not be eligible for a CMAF for any

fiscal period. However, if the tentative PIRL settle-

ment is issued within 6 months of the end of the FPE

and the case mix data has not yet been supplied, then

a CMAF of 1.0 shall be used for the tentative PIRL

settlement only.

(F) For noncontract hospitals, the DRG weights

shall be modified by one of the following two methods:

1. All DRG weights for all patients transferred

to other acute care hospitals after being stabilized

will be multiplied by 0.4 (a 60 percent reduction).

2. All DRG weights for patients transferred to

other acute care hospitals after being stabilized shall

be adjusted as follows:

a. For each patient transferred list the charges

from the hospital they were transferred to.

b. Divide each patient’s charges at the pro-

vider’s hospital by the patient’s total charges (which

includes charges from both the hospital they were

App. 53

transferred to and the hospital they were transferred

from).

c. Multiply the result of (b) for each patient by

their DRG weight to obtain a new weight to use in

the CMAF calculation.

3. The provider shall choose which option it will

use. If the provider fails to specify an option in their

AAR, the Department shall use option 1.

4. Qutlier calculations for these providers shall

be adjusted by using the costs and days for the pa-

tients while they are at both providers, and using the

same allocation formula 1-3 above.

(2) Additional reimbursement shall be granted

to approximate a hospital’s increases, on a per dis-

charge basis, in the marginal cost of care beyond

specified thresholds that are already reimbursed for

in the ARPDL, including the CMAF. AARs for addi-

tional reimbursement due to outliers (both cost and

day outliers) shall be determined as follows:

(A) If the provider has received a CMAF for the

settlement fiscal period, then the outlier relief shall

be calculated by:

1. The hospital shall also include on the listing

required under (a)(1A) above the following addi-

tional items:

a. The length of stay for each patient.

b. The outlier cutoffs, in terms of both days and

costs, as determined in accordance with Medicare

App. 54

prospective payment rules and regulations for the

applicable time period of each individual patient.

However, whenever the Medicare formula uses a cost-

to-charge ratio, the hospital specific cost-to-charge

ratio shall be used. If the provider elects to use an

alternative set of DRG weights published by the

Department to calculate their CMAF, then the corre-

sponding set of alternative outlier cutoffs must be

used for each patient.

c. If a patient qualifies as a day outlier under

the Medicare prospective payment definitions, or

using the alternative cutoff when the alternative

DRG weights are used, then the amount of allowable

outlier payments shall also be listed. This amount

shall be the MIRL divided by the number of Medi-Cal

patient days, times 80 percent, multiplied by the

number of days over the day outlier threshold for

each patient.

d. For patients that do not qualify as a day

outlier, but do qualify as a cost outlier, the amount of

costs over the threshold shall be listed and shall be

calculated as follows:

(1) The outlier cost cutoff shall be the greater

of:

(A) A fixed dollar amount (adjusted for area wage

levels) as defined in 42 CFR, Part 412.80(a)(iiA) for

the appropriate service period.

(B) 1.5 multiplied by the ARPD multiplied by

the DRG weight for the patient.

App. 55

(2) The total costs for each patient shall be the

overall Medi-Cal cost to charge ratio calculated from

the cost report multiplied by the charges for each

patient.

(3) The amount over the cost outlier thresholds,

which is step (2) minus step (1), shall be multiplied by

0.80.

e. The cost to charge ratio is determined from

the cost report for both the settlement and prior fiscal

period.

2. If a patient qualifies as both a day and cost

outlier, they shall be treated only as a day outlier.

3. Sum the amounts calculated in (2)(A)1.c. and

d. above and divide by the respective number of Medi-

Cal discharges for each FPE.

4. Relief shall be calculated by subtracting the

prior fiscal period result of 3. from the settlement

fiscal period result of 3.

5. Once an outlier adjustment, in conjunction

with a CMAF, has been granted, it shall be included

in all subsequent settlements even if it is a negative

adjustment. Data necessary to do the outlier calcula-

tion shall be submitted each FPE within 9 months of

the end of the FPE or current interim payments shall

be reduced by 20 percent. If the data is not received

within 12 months of the end of the FPE, the interim

payments reduction shall be increased to 100 percent,

resulting in an interim payment rate of zero percent.

App. 56

(B) If a provider has not elected a case mix

adjustment index, then relief for outliers shall be

calculated as follows:

1. Providers shall provide lists containing

the number of patients for every length of stay for

both the settlement fiscal period and the prior fiscal

period. For newborns not counted as separate Medi-

Cal discharges, their days shall be added to their

mother’s.

2. The settlement fiscal period and prior fiscal

period mean lengths of stay for all Medi-Cal patients

shall be calculated by dividing total Medi-Cal patient

days (including nursery days) by Medi-Cal discharges

for each respective fiscal period.

3. Calculate the standard deviation of the length

of stay for all patients in the prior fiscal period.

4. Compute 1.94 standard deviations of the

mean length of stay in the prior fiscal period and add

the result to the mean length of stay in the prior

fiscal period.

5. Round the result in 4. above down to the next

whole number to establish the outlier threshold to be

used for both prior and settlement fiscal periods.

6. List the patients who exceeded the result of

5. above in either the settlement or prior fiscal period.

Include in the list the patient’s name, admission date,

discharge date, length of stay and charges.

App. 57

7. Calculate the amount of day outlier pay-

ments by:

a. Subtracting the result of 5. above from the

length of stay of each patient whose stay exceeded the

outlier threshold each FPE.

b. Sum the total days calculated in a. above for

each FPE.

c. Divide the number from b. above by the

number of Medi-Cal discharges in each respective

FPE.

d. Subtract the prior fiscal period result of c.

above from the settlement fiscal period result of c.

e. Multiply the result of d. above by the number

of settlement fiscal period Medi-Cal discharges.

f. Calculate a per diem rate by dividing the

settlement fiscal period MIRL by the total number of

patient days (including newborn days).

g. Relief is calculated by multiplying the result

of 7.e. above by the result of 7.f. above.

8. For patients who do not qualify as a day

outlier, additional relief shall be provided as a cost

outlier as follows:

a. For both the prior fiscal period and settle-

ment fiscal period, the provider shall provide a listing

of the number of patients by charge category (in

either $ 100 or $ 200 increments) in order to calculate

the mean and standard deviation.

App. 58

b. Calculate the mean charge per discharge and

standard deviation for both FPEs.

c. Convert the means and standard deviations

to costs per discharge, by using the allowable cost to

charge ratio from the cost report for each respective

FPE.

d. Calculate the increase in the cost per dis-

charge by dividing the settlement fiscal period mean

cost per discharge by the prior fiscal period mean cost

per discharge.

e. Calculate the prior fiscal period cost outlier

cutoff by adding 1.94 standard deviations to the mean

cost per discharge.

f. The prior fiscal period charge cutoff shall be

the result of step e. above divided by the prior fiscal

period allowable cost to charge ratio from the cost

report.

g. Calculate the settlement fiscal period charge

outlier cutoff by multiplying the results of d. above by

the result of f.

h. For each FPE, list the following items for

each Medi-Cal patient, in admission date order, over

the charge threshold as calculated in g. above:

(1) Last name and first initial.

(2) Admission date.

(3) Length of stay.

————e a ee re

App. 59

(4) Charges.

(5) Amount of charges over the threshold.

(6) Costs over the threshold, which is (5) multi-

plied times the cost to charge ratio from the cost

report. Enter zero in this column for any patient who

is a day outlier.

i. Sum the items under (6) above for both the

prior and settlement fiscal periods (separately).

j. Adjust prior fiscal period costs to settlement

fiscal period costs by multiplying the prior fiscal

xeriod item i. above result times the result of d.

above.

k. Divide the results of prior fiscal period j.

above and settlement fiscal period j. above by the

respective number of Medi-Cal discharges each FPE.

|. Subtract the prior fiscal period result of k.

above from the settlement fiscal period result of k.

above.

m. Multiply the result of 1. above (minimum of

zero) by the settlement fiscal period number of Medi-

Cal discharges.

n. Add the result of m. above to the MIRL and

divide by the settlement fiscal period net cost of

covered services.

o. Multiply the lesser of the result of d. above

or 1.0 by the result of n. above to calculate the addi-

tional amount of relief fur cost outliers who do not

App. 60

qualify as day outliers. This cannot exceed the

amount of the MIRL liability.

(b) AAs for changes in labor costs shall be

resolved in the following manner:

(1) Relief from the SWI and EBI can be granted

if, and only if, the basis is due to labor/benefit cost

increases per discharge resulting from either the new

adherence to existing requirements imposed by

government regulations, rules, and/or statutes or the

adherence to new requirements imposed by govern-

ment regulations, rules, and/or statues. This includes

new rules and new adherence to rules imposed by the

Joint Commission on Accreditation of Health Organi-

zations. The adherence to the regulations, rules,

and/or statutes must be necessary to legally render

the provided services to Medi-Cal recipients.

(2) The Department will be authorized to grant

relief if the provider meets the criteria for relief. Any

relief granted shall be based upon an analysis of labor

costs both prior and subsequent to the effective date

of adherence to the requirements. Any request for

relief will require the following:

(A) A summation of the governmental require-

ments necessitating the increase in labor costs;

(B) Additional hours and staff required to ad-

here to the governmental requirements. The request

will specify:

1. The exact title(s) of the added staff:

App. 61

2. The appropriate employee cost category; and

3. The number of hours and hourly rates for

each added or deleted staff member.

hire or transferred from another employee classifica-

tion; and

(D) The appropriate pages of the Medi-Cal cost

report reflecting the additional costs associated with

the increased hours.

(3) A separate request shall be rendered for

each affected cost center. The cost centers for appeal

purposes shall be the exact same cost centers as

disclosed in the provider’s Medi-Cal cost report as

audited by the Department. Relief may be granted

only for those cost centers that incurred the expenses

as the result of governmental requirements.

(4) The Department shall evaluate the submit-

ted data to determine any changes in the following

areas for each affected cost center:

(A) Labor hours per discharge;

(B) Labor costs per discharge;

cations that resulted in labor cost increases or de-

creases.

(5) The unit measure of change shall be the

ARPD. Any relief granted shall be on a per discharge

basis by adjusting the ARPD to incorporate the

App. 62

increased, if any, labor costs per discharge which

were not reimbursed in the ARPD and which do not

overlap with any other issues. Any adjustments

necessitated by the application of relief shall impact

the base rate per discharge and will be carried for-

ward into future settlements.

(6) The only basis for relief under Subsection (b)

of 51551 shall be:

(A) Increased employee hours per discharge; or

(B) The requirement to employ more expensive

labor, e.g., replace Aides with Registered Nurses.

(7) Requests for relief on the basis of increased

patient acuity will be deferred to Section 51551(a).

Patient acuity or service intensity shall not be enter-

tained under Section 51551(b).

(8) Relief sought on the basis of labor disputes

shall not be granted. Labor disputes are inclusive of,

but not limited to, strikes, arbitration, and/or labor

issues where employees in an organized, collective, or

unified movement refrained from physically reporting

to perform their routine duties or physically reported

but refrained from performing their routine duties.

(9) Relief shall not be granted under 51551(b)

as the result of circumstances created when the

provider switched to or from nursing services instead

of salaried personnel.

App. 63

ing relief for any ARPDL issues not otherwise speci-

fied in this regulation:

(1) The provider shall clearly identify the issue

and estimated dollar amount of relief.

(2) The provider shall determine what is the

specific underlying cause of the increased costs. If the

underlying cause of the increased costs is not clearly

stated, the AAR shall not be accepted by the Depart-

ment.

(3) The provider shall calculate what reim-

bursement, if any, is already included in the ARPDL

due to this issue (such as pass-throughs or case mix

covering a new service) and shall also calculate any —

overlap between this and other AA issues.

(4) The Department shall review and correct if

necessary, the provider’s calculations in steps 1

through 3 above.

(5) The Department shall subtract any overlap

with other issues from the amount determined in

steps 1 through 3 above.

(6) The Department shall determine if relief is

“one-time” or “formula.”

App. 64

22 CCR § 51552. AA Formal Appeals Process

(a) A provider may appeal the Department’s

decision on the AAR for a final PIRL settlement only.

There shall be no appeal on an AAR for a tentative

PIRL settlement. The appeal shall be filed and con-

ducted in accordance with the applicable procedural

requirements of Article 1.5, except as modified by this

section, including the following:

(1) The appeal shall be submitted within 30

days after notification of the Department’s decision

on the AAR.

(2) The provider shall present its issues and

evidence first at the hearing, as they shall have the

burden of going forward.

(3) The provider has the burden of proof of

demonstrating by a preponderance of the evidence,

that the provider’s position regarding disputed issues

is correct.

(4) In order to demonstrate that it is entitled to

relief from the PIRL and that the AA decision should

be overturned, the provider has the burden of demon-

strating by a preponderance of the evidence that the

Department’s AA decision is inconsistent with the

applicable regulatory provisions and that the provid-

ers alternative is consistent with the applicable

regulatory provisions.

(5) If the Department’s AA decision is proved,

by a preponderance of evidence, inconsistent with the

applicable regulatory provisions, and the provider has

App. 65

not proved by a preponderance of the evidence that

its position is consistent with the applicable regu-

latory provisions, then the Administrative Law Judge

(ALJ) may fashion whatever relief is necessary to

obtain consistency with the applicable regulatory

provisions.

(6) Items that are not subject to an AA, as

specified in Section 51551, shall not be subject to

appeal.

(7) The provider shall be paid at the PIRL

initially determined by the Department pending

determination of a formal appeal.

(8) Any underpayments, identified in the appeal

decision, shall be repaid to the provider, together with

interest computed at the legal rate of interest begin-

ning the later of the date the payment is received by

the Department or the date the appeal is formally

accepted by the Department.

(9) The evidence to be submitted by the pro-

vider at a formal appeal hearing that was not pro-

vided to the Department nor specifically and

individually identified as available to the Depart-

ment, during the AA process excluding oral testimony,

must be submitted to the Department 30 days before

the scheduled date of the hearing. The only exception,

is when a hearing is scheduled within 45 days from

the date notice is given. In this latter case, evidence

must be submitted 15 days before the scheduled date

of the hearing. Failure to submit this information

App. 66

within the specified time frames shall result in its

exclusion from the formal appeal hearing and record.

(10) Recalculation of the PIRL due to an appeal

decision shall not give rise to any further appeal

rights.

(11) If results of an audit appeal of the cost

report or any prior fiscal period PIRL, AA or appeal,

change data used in the settlement fiscal period

PIRL, the PIRL shall be recalculated. The recalcula-

tion shall not give rise to further appeal rights.

(12) If an issue in an AAR is not accepted

pursuant to Section 51550(e)(2) and (e)(3), the ALJ

may only consider the evidence that was presented in

the AAR and not any additional information or testi-

mony. If the ALJ determines that the issue should

have been accepted, the issue shall be remanded for a

response to the merits.

(13) Only those issues that were clearly identi-

fied in a timely filed AAR, including an estimated

dollar amount for each issue may be accepted as

issues on a formal appeal.

22 CCR § 51553. Peer Grouping

(a) Hospital reimbursement shall, unless ex-

empted from or modified by the provisions of this

section, be payable at no more than the 60th percen-

tile aligned ARPD of the peer group to which the

hospital! is assigned by the Department. This limit is

App. 67

the Peer Group Rate Per Discharge Limitation

(PGRPDL). The peer groups shall be based on a

classification of hospitals as determined in the 1991

Hospital Peer Grouping Report published by the De-

partment, that combines individual hospitals in a

unit on the basis of similar or common character-

istics. The following peer group classifications will be

used:

(1)

(2)

(3)

(4)

tals.

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

University Teaching Hospitals.

Major (non-university) Teaching Hospitals.

Large Teaching Emphasis Hospitals.

Medium/Small Teaching Emphasis Hospi-

Extremely Large Sized Hospital.

Large Sized Hospitals.

Moderately Sized Hospitals.

Medium Sized Hospitals.

Moderately Small Sized Hospitals.

Very Small Sized Hospitals.

Acute Psychiatric Hospitals.

Alcohol-Drug Rehabilitation Hospitals.

Combination Psychiatric/Alcohol/Drug Reha-

bilitation Hospitals.

(14)

Psychiatric Health Facilities.

App. 68

(15) Psychiatric Teachering Hospitals.

(16) Psychiatric Children’s Hospitals.

(17) Moderate Alcohol-Drug Rehabilitation Em-

phasis Hospitals.

(18) Moderate Psychiatric Emphasis Hospitals.

(19) State Hospital — Veterans Home.

(20) State Hospital —- Mental Health.

(21) State Hospital - Developmental Services.

(22) Children’s Hospitals.

(23) Crippled Children’s Hospitals.

(24) Rehabilitation Hospitals.

(25) Large Rehabilitation Emphasis Hospitals.

(26) Respiratory Specialty Hospitals.

(27) Student Health Centers.

(28) Charitable Research Hospitals.

(29) Rural Hospitals.

(30) Specialty Teaching Hospitals.

(31) Prepaid Health Plan Hospitals.

(32) Prepaid Health Plan — Psychiatric/Alcohol-

Drug Rehabilitation Hospitals.

(33) Prepaid Health Plan — Teaching Emphasis.

(34) Eye Hospitals.

App. 69

(35) Women Hospitals.

(36) Dental/Outpatient Hospitals.

(b) The Department may review and change the

number and definitions of peer groups and the peer

group placement of individual providers.

(1) Providers shall be notified of all such re-

views and resultant changes to the peer groups.

(2) For purposes of peer group placement, li-

cense beds shall be average licensed beds excluding

any beds in suspense, in accordance with Section

1271.1 of the Health and Safety Code.

(3) All peer group assignments will be for all

FPEs between July lst and June 30th for each fiscal

year.

PGRPDL shall consist of new hospitals, rural hos-

pitals, sole community hospitals, children’s hospitals,

crippled children’s hospitals, charitable research hos-

pitals, primary health service hospitals and hospitals

in peer groups with less than five Medi-Cal providers.

(d) Providers with less than 15 Medi-Cal dis-

charges in any FPE that covers over 360 days, shall

be exempt from the PGRPDL for that FPE only.

(e) The peer group 60th percentile ARPD for

each July 1-June 30 FPE shall be calculated by:

(1) Obtaining the ARPD for each provider for

the FPE during the state’s fiscal pericd (or use the

App. 70

latest available if one is not yet available for the

selected time period).

(2) Using actual or estimated rates of inflation,

align the ARPD for each hospital to a July 1 to June

30 FPE.

(3) Locating the 60th percentile, by multiplying

0.6 times one more than the number of ARPDs in the

peer group.

(4) Starting from the bottom of a list of ARPDs,

ordered from the lowest ARPD at the bottom, up to

the highest ARPD at the top, count up the number of

ARPDs using the result of (3) above.

(5) Interpolate if necessary.

(f) The 60th percentile ARPD shall be updated

quarterly.

(g) Once a final PIRL settlement is issued for a

provider, the 60th percentile ARPD established in

that provider’s FPE shall not change, even though

the final PIRL settlement may be reissued as a

“recalculated final PIRL settlement” as a result of

any appeal as well as other reasons for recalculation.

22 CCR § 51554. Peer Group Administrative Ad-

justments

(a) A provider may request an AA of the reim-

bursement limits specified in this section and their

App. 71

peer group placement at the time of tentative and

final PIRL settlement.

(1) The request shall be made within 90 days

after notification of the reimbursement limits and

shall be made in accordance with the procedures

specified in Section 51550.

(2) The burden of proof shall be on the provider

to prove that the additional reimbursement sought

meets all of the requirements under Section 51550

and that except where a specific formula in Section

51555 exists, the provider’s cost per discharge of the

item being appealed, exceeds the 60th percentile cost

per discharge of the item being appealed.

(3) In addition to the items listed under Section

51550(b), the following items shall not be subject to

an AA of the PGRPDL:

(A) The use of hospital peer groups.

(B) The use of 60th percentiles and the methods

used to compute them.

(D) Costs associated with strikes, other labor

stoppages or slow downs.

(E) The addition of new services.

(F) Costs due to low occupancy.

(G) Difference in the type, nature, or scope of

items or services available whether or not provided,

App. 72

between the provider and other providers in its peer

group since differences in the actual services needed

to be rendered are accounted for in the CMA as

specified in Section 51555.

(H) Any other issue that is not a difference

between the provider and other providers in their

peer group.

(4) A provider may appeal the Department's

decision on the AA for final PIRL settlements only.

The appeal shal] be in accordance with Section 51552.

—

22 CCR § 51555. Peer Group Specific Administra-

tive Adjustment Issue

(a) Differences in case mix (including outliers)

between the provider and other providers in its peer

group shall be determined for the PGRPDL using the

following formula, but subject to reduction for over-

lapping issues as specified in Section (d) below:

MARD=PGL * CMA

Where: MARD=Maximum Allowable Rate per

Discharge under the PGRPDL.

CMA=Case Mix Adjustment, which is the pro-

viders case mix index divided by the peer group 60th

percentile case mix index.

PGL=Peer Grouping reimbursement Limit per

discharge (60th percentile ARPD for the peer group if

no adjustments have been made).

App. 73

(1) Case mix indexes shall be based on DRGs

and shall be computed using OSHPD patient dis-

charge data for providers. Providers with an ARPD

CMAF shall use data they are required to supply for

the ARPD CMAF. However, the set of DRG weights

used must be consistent for all providers in the peer

group and shall be determined by the Department for

each FPE.

(2) Providers shall be allowed to submit more

accurate patient discharge data for their hospital.

Any such patient discharge data must be submitted

with the AAR. The data cannot be used until it is

verified by the Department. The Department shall

not accept data that it determines may not accurately

reflect the provider’s Medi-Cal patients.

(3) If OSHPD patient discharge data does not

correspond with all provider’s FPE, the closest FPE

shall be used. Indices will be developed for a calendar

year and for a July 1-June 30 FPE. The period which

most closely corresponds to the providers FPE shall

be used. Calendar year data shall be used for FPEs

from October 1 through March 31 inclusive. July 1

through June 30 fiscal period data shall be used for

all other FPEs.

(4) CMAs may be applied to any provider with a

case mix index greater than the 60th percentile case

mix index of its peer group.

(5) In addition to case mix relief, a provider shall

be granted relief for outliers if the provider’s outlier

relief per discharge is greater than the computed

App. 74

60th percentile outlier relief per discharge for all pro-

viders in the provider’s peer group. The methodology

used shall be as follows:

(A) Using OSHPD patient discharge data, and

Medicare criteria for DRG outlier relief as specified in

42 CFR, Part 412, compute the total outlier relief for

all providers in each peer group (using the same

formula as listed in Section 51551-ARPD case mix

and outliers). However, the cost outlier cutoff shall

-not vary within any one FPE worth of data.

(B) Convert the results under (1) above to

outlier relief per-Medi-Cal discharge.

lowest at the bottom up to the highest at the top, and

by counting up from the bottom to the n + 1 provider

(n = # of providers in the peer group), compute the

60th percentile outlier relief per discharge for each

peer group.

(D) If the requesting providers’s outlier relief

per discharge is greater than the 60th percentile

outlier relief per discharge, the providers MARD

shall be increased by the difference of the two figures.

(6) These formulas shall be subject to the fol-

lowing limitations:

(A) Only those providers with 30 or more Medi-

Cal discharges shall be included in the calculation

of the 60th percentile outlier and case mix index

per discharge. However, providers with under 30

App. 75

Medi-Cal discharges may still receive relief using the

formulas in this Section.

(B) Providers whose Medi-Cal discharge count

per their OSHPD patient discharge data has more

than a 50 percent variance from the appropriate

Medi-Cal discharge figure from the cost report, after

adjusting for well newborns who are included in the

OSHPD patient discharge data but not counted as

Medi-Cal discharges, shall be excluded from the 60th

percentile calculation. Cost report figures shall be

adjusted to estimate the calendar or fiscal period

OSHPD data.

more than a 10 percent variance in Medi-Cal dis-

charge figures (OSHPD patient discharge data vs.

Medi-Cal cost report), or under 30 Medi-Cal dis-

charges, the provider shall be required to submit its

own data for use in the calculation. Such data must

be for all Medi-Cal patients and include the patient’s

last name, ICD-9 primary diagnosis code, admission

data, discharge date, DRG number, charges, patient’s

age, and OSHPD disposition code. The list shall be in

admission date order.

(D) Providers may submit additional data to

replace the OSHPD data. Any such data must be

supplied with the AAR. Providers must supply a list

in admission date order, containing each Medi-Cal

patient’s last name, ICD-9 code, admission date,

discharge date, DRG number, charges, patient’s age,

and OSHPD disposition code.

App. 76

(7) For noncontracting hospitals that do not

keep a patient for the full episode of care, the CMA

formula will be modified by one of the following

formulas:

(A) Use only 40 percent of the appropriate DRG

case mix weight for patients treated by noncontract

hospitals, or

(B) 1. Track each patient’s record to the contract

hospital they were transferred to, and

2. Sum the charges from both providers, and

3. Apply the percent of total charges from the

noncontract hospital to the DRG weight.

(b) Differences in labor costs, caused by factors

such as differences in location, between the provider

and other providers in its peer group shall be cal-

culated using the following formula, subject to reduc-

tion for overlapping issues as specified in Section (d)

below:

MARD = (LRCAF * WRR * PGL) + ((1-WRR) *

PGL)

Where:

MARD = Maximum Allowable Rate Per Dis-

charge under PGRPDL

LRCAF = Labor Related Cost Adjustment Factor,

which is the minimum of (WI / PGWI), (HWR /

PGWR) and (HWD / PGWD).

App. 77

WRR = Wage Related Reimbursement Proportion

of PGRPD (and ARPD) Reimbursement limitation for

this hospital, which is: (TWRC / GOE) * (36LIMIT —

%PASS * NETCOST)) / (36LIMIT *%NON).

PGL = Peer group limit, which is the 60th per-

centile ARPD.

WI = The wage and benefit index for the area in

which the hospital is located.

PGWI = Peer group 60th percentile WI.

HWR = Hospital aligned wage and benefit rate

per hour.

PGWR - Peer group 60th percentile HWR.

HWD = Hospital aligned wage related items per

discharge.

PGWD = Peer Group 60th percentile HWD.

TWRC = Total wage related costs (sum of wages,

benefits, and professional fees).

GOE = Gross operating expenses.

36LIMIT = Maximum reimbursement under

MIRL (lesser of costs, charges, and the ARPD multi-

plied by the number of Medi-Cal discharges).

%PASS = Proportion of GOE which are pass

throughs from Report E, Part IJ, Line 3.

NETCOST = The lesser of net cost of covered

services and charges.

App. 78

FNON = 1 —-%PASS, which is the proportion of

GOE which are not-pass-through costs.

NOTE: * = Multiplication

(1) The labor adjustment formula starts by de-

termining the portion of the MIRL that was allowed

for Wage Related Reimbursement (WRR). Only this

amount is adjusted by the minimum of:

(A) A ratio based on an area (Metropolitan

Statistical Area (MSA)) index developed by the De-

partment of Health and Human Services, calculated

using aligned average hourly rates for all hospital

employees. The provider’s area index is divided by the

peer group 60th percentile wage index.

(B) A ratio based on comparing the provider’s

aligned hourly rate to the 60th percentile aligned

hourly rate of the peer group.

aligned wage related items per discharge to the 60th

percentile aligned wage related items per discharge

for the peer group.

(2) The first ratio is calculated as follows:

(A) Use Medi-Cal cost report data to determine

the statewide average employee composition among

all employee classifications.

(B) Adjust the wage and benefit rates for each

provider to the adjusted rate using the statewide

distribution of employees.

App. 79

for each provider using OSHPD disclosure data. The

alignment factors shall be a Department estimate of

increases in salary levels.

(D) Sum the adjusted wages and benefits for

each MSA and statewide.

(E) Sum productive hours by MSA and state-

wide.

(F) Divide the sum of wages and benefits by the

sum of productive hours for each MSA and the

statewide totals.

(G) Divide each MSA average hourly wage rate

(Step 4.) by the statewide average to obtain an MSA

index.

(H) Assign the index for each MSA to all hos-

pitals in the MSA.

(I) Determine the 60th percentile index for each

Peer Group.

(J) Divide the hospital’s area index by the 60th

percentile index of its peer group.

(3) The second ratio (in (A)2. above) is calcu-

lated by:

(A) Total the wages and benefits for all em-

ployees for each provider.

(B) Divide (A) above by the corresponding total

productive hours for each provider.

App. 80

employee hourly wage and benefit costs, and align the

data in (B) above to a common FPE for all providers.

(D) Align all of the results of (C) above ordered

from lowest at the bottom to the highest at the top for

each peer group.

(E) Count (0.6 * (nm + 1)) places up from the

bottom of the list in each peer group to find the 60th

percentile.

1. N is the number of hourly rates in the peer

group.

2. Interpolation will be used whenever (0.6 * (N

+ 1)) is not a whole number.

(4) The last ratio is calculated by:

(A) Total the wages and benefits for all employees

for each provider.

(B) Using Department estimates of rates of

increase in employee hourly wages and benefit costs,

align the data in (A) above to a common FPE for all

providers.

of total hospital discharges.

(D) For each peer group, order from lowest at

the bottom to the highest at the top the results of (C)

above.

App. 81

(E) Count (.6 * (mn + 1)) places up from the

bottom of the list in each group to find the 60th

percentile.

1. N is the number of wage and benefit rates

per discharge in the peer group.

2. Interpolation will be used whenever (.6 * (n +

1)) is not a whole number.

provider and other providers in its peer group shall

be resolved using the method specified in this subsec-

tion. Approval by the OSHPD of a capital expenditure

shall be evidence of the need for the capital expendi-

ture; however, such approval shall not, per se, compel

additional reimbursement. The following methods

shall be used to calculate relief under this issue:

(1) Using data from the Medi-Cal cost report,

compute relief by:

(A) Removing the 60th percentile capital cost

per discharge from the 60th percentile allowable rate

per discharge.

(B) Computing the allowable provider Medi-Cal

capital expense per discharge subject to the limita-

tions in (E) below, and

(B) above.

(D) The resulting figure from (C) above will be

used in place of the 60th percentile rate per discharge,

App. 82

but to avoid overlap with any other issue, this ad-

justment shall be made last.

(E) The result of (1)(B) above shall be subject to

the following adjustments:

1. A hospital which has had a change of owner-

ship (CHOW) on or after July 18, 1984 must submit

data showing what its capital costs would have been

had the CHOW not occurred except for any additional

costs allowed under the Deficit Reduction Act of 1984.

This capital cost amount shall be used when com-

puting the provider’s capital per discharge figure

above.

2. Ifa provider has had its capital costs reduced

by Medicare, the provider’s capital expense per

discharge (CEPD) shall be reduced by the Medicare

capital cost reduction percentage.

The formula for relief would then be:

MPGRPD = (PGRPD — 60th percentile CEPD) +

(X * hospital CEPD)

Where: X = 1 minus the Medicare payment

reduction percentage

3. If a provider’s capital expense per discharge

is above the 60th percentile, it shall not be entitled to

automatic relief. The provider must still prove that

the capital expenses are necessary for the care of

Medi-Cal patients.

(d) Providers which are eligible for any multiple

adjustments under Sections 51554 through 51555

App. 83

shall have relief computed using the following meth-

odologies:

(1) For providers which are eligible for case

mix, labor and capital adjustments, relief shall be

computed as follows:

MPGRPD = MAX(CMA,LRCAF\MIN ((CMA*(WI/

PGWI), (HWD/PGWD))) * WRR * PGRPD) + (CMA *

(1 —- CRC — WRR) * PGRPD) + CEPD

Where: CRC = Capital related cost percentage

(CEPD/GOE)

MIN= Minimum of the items in parentheses

MAX= Maximum of the items in parentheses

If the provider’s CEPD has been modified per

Section 51555(cX2), that revised figure shall be sub-

stituted into the formula above.

(2) For providers which are entitled to a CMA

but whose capital and/or labor costs per discharge are

below the 60th percentile, those cost components

shall not be adjusted by the CMAF. The formula for

relief shall be:

MPGRPD = ((PGRPD — 60th percentile CEPD —

60th percentile labor per discharge) * CMA) + hospi-

tal CEPD + hospital labor per discharge

(A) This formula shall be modified to remove

only those costs (labor and/or capital) which are below

the 60th percentile limit.

App. 84

(B) A provider’s reimbursement, pursuant to

the above, shall not be adjusted below the 60th per-

centile rate per discharge.

(3) All other multiple adjustments shall have

their overlapping relief calculated using the basic

PGARPDL principles.

(e) Differences in costs between the provider

and other providers in its peer group due to extra-

ordinary events beyond the provider’s control such

as fire, earthquake, flood, or similar unusual occur-

rences with substantial cost effects shall be an ap-

pealable item;

(f) Differences in costs between the provider

and other providers in its peer group caused by other

items or circumstances affecting provider costs which

meet all of the following criteria:

(1) The item is a difference, on a per discharge

basis, between the hospital and the 60th percentile of

the peer group.

(2) The item can be measured or estimated for

all providers in the peer group.

(3) The costs were necessary for the provision of

quality medical care to Medi-Cal beneficiaries.

(4) There is no overlap with other issues or the

overlap can be measured.

(g) Relief for any issue shall be reduced for any

overlap between issues.

App. 85

(h) Any additional reimbursement granted pur-

suant to this section shall not result in a recalculation

of the 60th percentile limit under Section 51553.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.