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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2011
- **Citation:** 562 U.S. 1177

## Text

No. 10-283

3n The
Supreme Court of the United States

°

DAVID MAXWELL-JOLLY, Director, California
Department of Health Care Services,

Petitioner,
v.

SANTA ROSA MEMORIAL HOSPITAL, et al.,
Respondents.

SJ

On Petition For Writ Of Certiorari
To The United States Court Of Appeals

For The Ninth Circuit
BRIEF IN OPPOSITION
.

MICHAEL 8S. 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

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964
OR CALL COLLECT (402) 342-2831

i
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).

PP
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.”

ili

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

iv

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.

v

TABLE OF CONTENTS

Page
QUESTIONS PRESENTED ..............0..000000000.00... i
CORPORATE DISCLOSURE STATEMENT ...... ii
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REASONS THE PEITSION © SHOULD BE
EE circnsinnbuculsenmenictdieniiintsnnsiniidbaRAdurahcadatiidesies 8

I. CERTIORARI SHOULD BE DENIED ON
THE FIRST QUESTION BECAUSE THE
DECISIONS BELOW ARE A CORRECT
APPLICATION OF THIS COURT'S
SETTLED SUPREMACY CLAUSE JU-
EE SUPE TEIED Sictarniecscccscesteesisimicsinienttunese 8

A. The Courts Do Not Require That
Preemption Claims Meet The Same
Standards As Claims Under Section

IS ealisieckeciibesicdgsiche sles tons Jatiarchsieenibasnninciis 8
&. 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-

vi

TABLE OF CONTENTS - Continued

Page

D. Over Half Of The Medicaid Expendi-
tures In California Are Paid For With
gg EES n snare

E. There Is A Dearth Of Successful Su-
premacy Clause Cases Outside Of
SESE See OO IO PENA A ERE

F. The Courts Of Appeals Have Uni-
formly Reached The Same Conclusion
a He GS BI retcnnsvniesicisiccsccesccuss

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.
I a a aateileie

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 .....................

Ill. THIS CASE IS A POOR VEHICLE FOR
THE COURT'S REVIEW ....................cc0000

I bacapesnrnepinunncraxsnensioeusnneeessvesanentinses

13

14

15

18

18

21

Vil

TABLE OF AUTHORITIES
. Page

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

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

OBL CRE Cale. BID csi ccecccoceeccscsnuteisas eee 12, 21
Alexander v. Sandoval, 532 U.S. 275 (2001)............. 11
American Constr. Co. v. Jacksonville, T. & K.

W. Ry. Co., 148 UB. BUR Ca ccc cceeecsctna cee 28
Arkansas Dept. of Health & Human Services v.

Ahiborn, 647 U.S. BEB (BOGE) ...cccccccccssscescccccsceccscess 17
Arkansas Med. Soc’y, Inc. v. Reynolds, 6 F.3d

BID (BER Car. BBD ovcsiccicccsavecssckchissisuumnenie 12, 26
BellSouth Telecommunications, Inc. v. MCImetro

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

ABTS CLAGR Che. BOD cccccsccsstesnsiccssncscennnueaaeeaeee 17
Blum v. Bacon, 457 U.S. 132 (1982) .............0..0......0.. 18

Cal. Ass’n of Health Facilities v. Department of
Health Servs., No. A107551, 2006 WL
3775842 (Cal. Ct. App. Dec. 26, 2006).................... 31

Cal. Ass’n for Health Servs. at Home v. De-
partment of Health Servs., 148 Cal.App.4th

GBS CBT) occeincesvessicesssinsicisiccssaseusntancnanbensaeamnnee ae 31
Cal. Hospital Ass’n v. Maxwell-Jolly, 2010 WL

3280274 (Cal. App. 1 Dist.) (2010) ......0.... ee. 30
Cal. Pharm. Ass’n v. Maxwell-Jolly, 563 F.3d

BET CORR Che. BOD ncctikcscctcsscntomencanie 3, 5, 7, 10, 20

Cal. Pharm. Ass’n v. Maxwell-Jolly, 596 F.3d
BOOS CE Cie. BTID sek sheceiciciicticnacenntsantaaee 20, 25, 26

vill

TABLE OF AUTHORITIES — Continued

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

Ee 9
City of Newport v. Fact Concerts, Inc., 453 U.S.

aT aatnasinbouarenvunsabesanosies 10
Se i MEE BPE, GUD CBOE) cc cccnccocasccsccaccecconcsscecess 11

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

EEE li 2 Ee 11
CSX Transp., Inc. v. Easterwood, 507 U.S. 658

ARS OE a 18
Dalton v. Little Rock Family Planning Services,

516 U.S. 474 (1996) (per curiam) ........................0.. 18
Doe o. Chao, 540 U.S. 614 (2O04)......ccccccccccccssessseseess 13
Equal Access for El Paso, Inc. v. Hawkins, 509

IE EN, SI as vc cscnncovenevesnccatansesesssnessece 27
Evergreen Presbyterian Ministries, Inc. ov.

Hood, 235 F.3d 908 (5th Cir. 2000).............0.......... 27
Exeter Mem'l Hosp. Ass'n v. Belshe, 145 F.3d

is saetnancnawnniidone’ 29
Fla. Lime & Avocado Growers, Inc. v. Paul, 373

EP 10
Gade v. Nat'l Solid Wastes Mgmt. Ass’n, 505

Teen ne es sssnusessussenunvscnmiactis 9
Golden State Transit Corp. v. City of Los Angeles,

I a cicacnecteasedseseuvescsoeess 10, 11

Hamilton-Brown Shoe Co. v. Wolf Bros. & Co.,
al sonnsinemesnnesnincecuene 28

ix

TABLE OF AUTHORITIES — Continued

Page
Indep. Living Ctr. of Southern Cal., Inc. v.
Maxwell-Jolly, 572 F.3d 644 (9th Cir. July 9,
SARE N TD EE See SF Kos A aT 6, 14, 15
Indep. Living Ctr. of Southern Cal., Inc. v.
Shewry, 2008 U.S. Dist. LEXIS 77525
CN x nsniccinsabedtentnindabiiicecsceensteasetiemeemean 5, 14, 15, 22
Lawrence County v. Lead-Deadwood Sch. Dist.
Moe. BO-2, GBD UBB. BEG CIGD veces vnevecccoccsscoscncscess 9,18
Legal Envtl. Assistance Found., Inc. v. Pegues,
904 F.2d 640 (11th Cir. 1990)..........................- 16, 17
Long Term Care Pharmacy Alliance v. Ferguson,
ee A Te Ce Gee. sre iccccnitntien . vccceeepncinnacacencne 27
Methodist Hospitals, Inc. v. Sullivan, 91 F.3d
Ie te Ft I cette treater 12, 27
Minn. Homecare Ass’n, Inc. v. Gomez, 108 F.3d
Or ee ea Be eis ceiaidcceantiecnsuneers coats 26
Mission Hosp. Reg’l Med. Ctr. v. Shewry, 168
Ce Gir IE ehiceicitricisiescekccecenssadeusaesntlnges 30
The Monrosa v. Carbon Black Export, Inc., 359
i Se OD cocickn de nccnavens obcauauesinde seusobdccebassoananearanan 30
Orthopaedic Hosp. v. Belshe, 103 F.3d 1491
CE es NO eaiitccaieaPcebil a eas a nasena ren 12

Pac. Gas & Elec. Co. v. State Energy Res.
Conservation & Dev. Comm’n, 461 U.S. 190
“Geeta ae ale Tc eat Seen ae Pa Uoutcaoaceeael 10

Pennsylvania Prot. & Advocacy, Inc. v.
Houstoun, 228 F.3d 423 (3d Cir. 2000) .................. 18

x

TABLE OF AUTHORITIES ~ Continued

Page
Pharm. Research & Mfrs. of Am. v. Walsh, 538
NEE LE a eae BI et 17
Ray v. Atlantic Richfield Co., 435 U.S. 151
RRR RAMI ida aT EOP iS SEPA Ee MOR ERC 9
Rite Aid of Pennsylvania, Inc. v. Houstoun, 171
Fe es I erinstoninoepedecesesisiniaipesasionnes 26, 27
Shaw v. Delta Air Lines, Inc., 463 U.S. 85
Pi ciusseenscidicbensnbeanniintanseecasdsncuiadeaentescdansnnunsicntieal 8,9
Verizon Maryland, Inc. v. Pub. Serv. Comm’n of
Maryland, 535 U.S. 635 (2002) ................ceeeeeeeeeeees 11
Visiting Nurse Ass’n of North Shore, Inc. v.
Bullen, 93 F.3d 997 (1st Cir. 1996) ........................ 12
Wilder v. Virginia Hosp. Ass’n, 496 U.S. 498
(ROE Ne Se orepreey sca ater sD cay se nw Fs: Se PE Sere 13
STATUTES
BD UF a. Be BI sn ccccivecencsicesisesiaseouseseieass 12.
RR eR | | nee passim
I Ea Ta IIE iciccneps ke ceccncsesececeuenamcesnmenscexadeund 8, 10, 27
Oe re. IE accictitcs ci ccceinipincnntdnsnnionsiicdetna pemteswadetniien 10

RULES AND REGULATIONS

22 California Code of Regulations
i ccdaiomdcoenemniensegl e

22 California Code of Regulations
$§ 51545(a)(30) and 51545(a)(70) ........... ee. we

xi

TABLE OF AUTHORITIES — Continued

Page
Cal. Code of Civil Procedure § 1085........... cmaumuia 2, 30
Cal. Welf. & Inst. Code § 14166.246 ...........................:3
OTHER AUTHORITIES
American Recovery and Reinvestment Act of
2009 (hereinafter “ARRA”), Pub. L. No. 111-
SRS ae EY Se eememepe e 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-
visions (Mar. 2009), at http://www.kff.org/
Rg yg Lee eee 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.

2

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]lconomically and [el}fficiently [o]perated” provider

3

of inpatient services. See App., infra, 5, 12-13; 22
C.C.R. §§ 51545(a\(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.

4

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

5

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

6

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.”

7

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
“(tlhe 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(aX30)A)[.]” Pet. App. 2.

*

8

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(a)(30)(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

9

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,

[i]t 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);

10

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

11

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).

12

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,

13

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.

14

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,

15

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

16

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 s-me 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 Envii.
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 “[b]oth [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

17

asserted against the Administrator into a constitu-
tional issue” of preemption. Jbid. 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. uv.
MClImetro 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

18

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

19

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(aX30XA) (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.

20

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 analysis 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).

21

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.” Id.
Hence, CMS concluded that, absent such data, the
proposed rates “are not consistent with efficiency,
economy, and quality of care” under Section 30(A). Id.

Thus, like the Ninth Circuit, CMS also requires
that rates be based on a study of the EEQ factors.

22

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

23

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

24

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

25

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.” Jd.

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.

26

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.” Id. 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

27

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(a)(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(a)(30)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(a)(30)A)
conferred individual private rights that are enforceable under
Section 1983, and never reached the application of the EEQ
factors.

28

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 fer 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

29

federally approved.” Exeter Mem’! 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.” Jd. 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

30

“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(a\(30)(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),

31

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. A107551, 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, EsqQ.*
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) Interes: 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.

(C) ARPD limitation.

(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

(C) Which has operated under present and all
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
designed by OSHPD.

(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.

(C) ARPDL.
(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 physicians are not included here.

(87) Salary and Wage Index means the factor
which is defined as part of the calculations in Section
5154¢£ “»)(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)(5XC)(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. |

(c) Amounts determined under (a)(3) or (a)(4)
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 afier 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.

(C) When newly-established providers do not
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
(aX2)(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.

(C) Interest.

(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 follow-
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.

(c) Ifthe SWI and EBI are not annualized, then
the ASWI = SWI and AEBI = EBI.

(B) Price indicators for other non-pass-through
categories. _

(C) Market basket weights for the following
categories:

1. Salary and wages.
2. Benefits.
3. Professional fees, medical.

App. 31

Professional fees, other.
Food.
Drugs.

ss PF

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 * PGES) +
(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 Selary 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.

(c) A volume adjustment shall be made to the
provider’s nori-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) (((PMIRL —(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(@PYH[k]*CYHR(k]/S(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) ((SDRGCiiJYMCDISM(SDRGP{jJYPMCDIS))) +
i=1 j=1

(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.

= 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(a)(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.

(c) Issues involving the following MIRL (or
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
(C) below:

(A) Data that was incorrectly transferred as
specified in Section 51550(b)(7).

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

(C) All costs for which additional reimburse-
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;
Bank statements and canceled checks;
All financial statements;

Copies of contracts.

le ce ee oe

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.

(C) All data submitted may be audited by the
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.

(C) Relief for allowable increases in employee
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.

(C) The provider shall calculate what reim-
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.

(C) The settlement fiscal period average DRG
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. Outlier 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) Ifthe 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)(ii)(A) 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)l.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 CMAP, 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385015_0645%3A03. Public record. Not legal advice.