Petition for Writ of Certiorari — RCJ Medical Services, Inc. v. Director
Supreme Court brief2002
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01127 4 FEB 27299
No.
—OFFICE BF Ft 6+ sep
In The
Supreme Court of the United States
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RCJ MEDICAL SERVICES, INC.,
Petitioner,
VS.
THE DIRECTOR OF THE CALIFORNIA STATE
DEPARTMENT OF HEALTH SERVICES,
Respondent.
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On Petition For A Writ Of Certiorari To The
Court Of Appeal Of The State Of California
Second Appellate District
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PETITION FOR WRIT OF CERTIORARI
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Patric Hooper
(California Bar No. 57343)
Hoorer, LuNpy & Bookman, INc.
1875 Century Park East, Suite 1600
Los Angeles, California
90067-2799
* Tel: (310) 551-8111
Fax: (310) 551-8181
E-mail: phooper@health-law.com
. Attorney of Record for Petitioner,
RC] Medical Services, Inc.,
COCKLE LAW BRIEF PRINTING CO., (800) 225-6964
OR CALL COLLECT (402) 342-2831
\DOee
QUESTIONS PRESENTED
1. Whether the approval by the United States
Department of Health and Human Services of a Medicaid
State Plan Amendment, purporting to allow a single state
Medicaid agency to delegate to another state office
administrative authority to conduct a postpayment
review of the records of a Medicaid provider, including
medical records, violates the governing federal Medicaid
regulation, 42 C.F.R. § 431.10(e) [1999], which states that a
single state Medicaid agency “must not delegate, to other
than its own officials, authority to exercise administrative
discretion.”
2. Whether, in any event, such delegation of admin-
istrative authority may be commenced prior to the “effec-
tive date” of the State Plan Amendment, approving of the
delegation under the controlling federal Medicaid regula-
tions, 42 C.F.R. §§ 430.10 and 430.20 [1999].
LIST OF PARTIES AND RULE 29.6 DISCLOSURE
The parties to the proceedings below were the Peti-
tioner, RC] Medical Services, Inc., and the Director of the
California State Department of Health Services. RC] Med-
ical Services, Inc., is a California corporation which is not
a publicly held corporation and has no stockholder which
is a publicly owned corporation.
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111
TABLE OF CONTENTS
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LIST OF PARTIES AND RULE 29.6 DISCLOSURE ....
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PETITION FOR WRIT OF CERTIORARI............
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STATUTES AND REGULATIONS ...........00c000:
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A. STATEMENT OF THE FACTS................
B.
THE COURSE OF THE PROCEEDINGS
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SUMMARY OF WHY THE AUGUST 23, 2001, DECI-
ES os dnb a hc bskne4e b000skeab o6 66
REASONS FOR GRANTING THE WRIT ...........
A. THE DECISION OF THE COURT OF APPEAL
B.
CONFLICTS DIRECTLY WITH ITS PREVIOUS
DECISION IN DOCTOR’S ON AN IMPOR-
TANT QUESTION OF FEDERAL LAW.......
THE DECISION OF THE CALIFORNIA
COURT OF APPEAL ALSO INDIRECTLY
CONFLICTS WITH THE DECISIONS OF THE
UNITED STATES COURT OF APPEALS AND
THE CALIFORNIA COURT OF APPEAL
REGARDING THE DEFERENCE TO BE
GIVEN ADMINISTRATIVE AGENCIES’
INTERPRETATIONS AND REGARDING THE
ISSUE OF THE EFFECTIVE DATE OF MEDI-
CAID STATE PLAN AMENDMENTS.........
12
TABLE OF CONTENTS - Continued
Page
C. THE IMPORTANCE OF THE FEDERAL QUES-
TIONS TO BE RESOLVED ........ccccccceees 18
ee PET eT eee TEP TUT CET OTT reer er ee 20
TABLE OF AUTHORITIES
Page
Alhambra Hospital v. Thompson, 259 F.3d 1071 (9th
oe Pree MPrrrrr rr rr yy rrr te Tr 15
Bingham v. Obledo, 147 Cal.App.3d 401 (1983)........ 17
Childrens Hospital and Health Center v. Belshe, 188
F.3d 1090 (9th Cir. 1989)......... cece cece eee ees 15
Connecticut National Bank v. Germaine, 503 U.S. 249 ~
i) ere trey rrr rrr ereTr Tyr rere ery. 16
Doctor’s Medical Laboratory, Inc. v. Connell, 69 |
Cal.App.4th 891 (1999)......... see e eee eens passim
Exeter Memorial Hospital Association v. Belshe, 943
F. Supp. 1239 (E.D. Cal. 1996), aff'd, 145 F.3d
1106 (Sth Cir. 1998)... 0. ccccssncccescsescsesssens 17
Forrest v. Trustees of Cal. State University & Colleges,
160 Cal.App.3d 357 (1984) .......... eee eee eens 15
Oregon Association of Homes v. State Department of
Human Resources, 5 F.3d 1239 (9th Cir. 1993) ...... 17
Private Industry Council v. Employment Development
Department, 57 Cal.App.4th 1290 (1997).........-.. 16
Regents Hosp. v Shalala, 522 U.S. 448 (1998).........- 20
San Lazaro Ass‘n, et al. v. Connell, et al., Nos.
00-55065, df al., Jati. 24, 2002. ....02ccvcccsevens 12, 18
Sobky v. Smoley, 855 F. Supp. 1123 (E.D. Cal. 1994) .... 13
United States ex rel. Rahman v. Oncology Associates,
Inc., 198 F.2d 502 (4th Cir. 1999)...........--0-0e- 16
Washington State Health Facilities v. State of Wash-
ington, 698 F.2d 964 (9th Cir. 1982)..........+-+--- 17
Washington State Health Facilities v. DSHS, 879 F.2d
yee. Co oer errr errr rere rrr rrr errr 17
vi
TABLE OF AUTHORITIES - Continued
Page
Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498 (1990) ..3, 12
Wileman Bros. & Elliott, Inc. v. Giannini, 909 F.2d
so B 2s 8. Pr rer re are ee 16
STATUTES
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42 UBL. & THREAD. sick en cue caeusecudeenseuunens 5
ek Vea BU ee rere 4, 10, 14
California Code of Civil Procedure § 1094.5......... 12
California Welfare and Institutions Code Section
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REGULATIONS
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42 C.ER. § 430.12(c)(1)(ii) [1999] ..................... 5
42 C.RR. & GIR DG) Lemls 6 6 canasdencbunuaceere 5
42 C.FR. § 431.10 [1999].......... os bases Sbaeeeee eae 3
42 C.FR. § 431.10(e) [1999] ......... 3, 9, 11, 12, 13, 14
Vii
TABLE OF AUTHORITIES —- Continued
Page
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42 CER. © GRU GID Tc cc ctccscscccccsccccccsccces 4
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42 C.ER. § 431.610(c) [1999] ............ eeee bins Pace
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MISCELLANEOUS re
65 Fed. Reg. 82,798-82,829 ............. cece eeeeeees 19
PETITION FOR WRIT OF CERTIORARI
Petitioner, RCJ Medical Services, Inc. (“RC]J”),
respectfully prays that a Writ of Certiorari issue to review
the opinion of the California Court of Appeal, Second
Appellate District (Division Five), filed August 23, 2001.
The California Supreme Court denied RCJ’s Petition to
Review the decision of the Court of Appeal on December
12, 2001, and the Remittitur issued December 28, 2001,
confirming that the Court of Appeal’s decision had “now
become final.”
OPINIONS BELOW
The August 23, 2001, published opinion of the Cali-
fornia Court of Appeal, Second Appellate District, is
reported at 91 Cal.App.4th 986; 111 Cal. Rptr. 2d 223 (Ct.
App.2001), and is reprinted in the Appendix at 1-38. The
August 30, 2001, order of the Court of Appeal denying
RCJ’s Petition for Rehearing is reprinted in the Appendix
at 39.
The decision of the California Supreme Court of
December 12, 2001, denying RCJ’s Petition for Review is
reprinted in the Appendix at 75. The December 28, 2001,
Remittitur is reprinted in the Appendix at 74.
The May 18, 2000, Judgment of the Superior Court of
the State of California for the County of Los Angeles in
tavor of RCJ, the Judgment which was reversed by the
California Court of Appeal’s August 23, 2001, decision, is
reprinted in the Appendix at 40-41.
The August 6, 1999, Final Decision of the Director of
the California Department of Health Services, which gave
rise to the decisions of the California Superior Court and
the California Court of Appeal, is reprinted in the Appen-
dix at 42-73.
JURISDICTION
As indicated above, the decision of the California
Court of Appeal, Second Appellate District, for which
this Petition for Writ of Certiorari is being sought, was
filed by the California Court of Appeal on August 23,
2001. The decision of the California Supreme Court deny-
ing RC]J’s Petition to Review the decision of the California
Court of Appeal was filed December 12, 2001. On Decem-
ber 28, 2001, the Court of Appeal issued a Remittitur
confirming that its August 23, 2001, decision had become
final.
The decision of the California Court of Appeal
involves questions of federal law, including whether the
implementation of a state Medicaid Plan Amendment
violates the provisions of the governing federal Medicaid
laws and regulations, which under the United States Con-
stitution, are supreme to state laws, regulations, and poli-
cies. Thus, jurisdiction exists under 28 U.S.C. § 1257.
Moreover, because the decision of the California Court of
Appeal (1) directly conflicts with another decision of the
same court on the very same issue; (2) indirectly conflicts
with the decisions of the United States Court of Appeals
for the Ninth Circuit on very similar issues; and (3)
resolves questions which have not been, but should be,
FE AS Wan ated Ma Nas TAA Ha UN ne a8
settled by this Court, jurisdiction also exists pursuant to
Rule 10 of the Rules of this Court.
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STATUTES AND REGULATIONS
This case involves the administration of the Medicaid
program, Title XVIII of the Social Security Act, 42 USC.
§§ 1396 et seq. and 42 C.FR. §§ 430.1 et seq. [1999]. The
Medicaid program is jointly administered by the federal
and state governments. Each state’s Medicaid program
must be administered pursuant to its state Medicaid plan.
See 42 U.S.C. § 1396 and 42 C.FR. § 430.10 [1999]. A
Medicaid State Plan must contain various provisions
required by the Medicaid laws and regulations. See 42
U.S.C. § 1396a(a)(1)-(65) and 42 C.F.R. §§ 431.1 et seq.
[1999]. These federal requirements are supreme to state
law requirements regarding the administration of the
Medicaid Program. See Wilder v. Virginia Hosp. Ass'n, 496
U.S. 498 (1990).
Each Medicaid State Plan must designate a single
state agency to administer or to supervise the administra-
tion of its State Plan, except that the determination of
eligibility for medical assistance under a State Plan may
be made by a local agency subject to the supervision of
the single state agency. See 42 U.S.C. § 1396a(a)(5), and 42
C.ER. § 431.10 [1999]. Appendix at 76, 79.
Under 42 C.F.R. § 431.10(e) (Appendix at 82), the
single state agency “must not delegate, to other than its
own officials, authority” to “exercise administrative dis-
cretion” in the administration of the plan.
The Medicaid statutes and regulations specify those
limited exceptions where the single state Medicaid
agency may delegate authority to other state or local
agencies, such as for purposes of determining Medicaid
eligibility (42 U.S.C. § 1396a(a)(5)), and for purposes of
establishing and maintaining health and other standards
for Medicaid providers (42 U.S.C. § 1396a(a)(9) and 42
C.F.R. § 431.610 [1999]). Appendix at 76, 84. See, also, 42
C.F.R. §§ 431.615, 431.621, and 431.630 [1999], all of which
allow the single state Medicaid agency to enter into rela-
tionships with other state agencies. However, these inter-
agency relationships must be described in the State
Medicaid Plan. For example, see 42 C.F.R. § 431.610(b) and
(c) [1999], Appendix at 84-85.
In addition to requiring each State Medicaid Plan to
describe the single state Medicaid agency’s relations with
other state and local agencies, the State Medicaid Plan
must also describe the organization and functions of the
single state Medicaid agency, itself, and its personnel and
supporting staff. See 42 U.S.C. § 1396a(a)(22) and 42 C.F.R.
§ 431.11(c) [1999]. Appendix at 77, 83.
The single state Medicaid Plan must provide for
Medicaid claims payment procedures which assure that
claims are paid on time. However, the State Plan must
also provide for procedures for prepayment and postpay-
ment claims review to ensure the proper and efficient
payment of claims and management of the Medicaid Pro-
gram. 42 U.S.C. § 1396a(a)(37) and 42 C.F.R. § 447.45
[1999], Appendix at 78, 85-89. Under 42 C.F.R. § 447.45(f),
the single state Medicaid agency must conduct the pre-
payment and postpayment reviews. There is no Medicaid
statute or regulation permitting such postpayment and
aad si eae
Sak Sal SN es A
prepayment reviews to be delegated by the single state
Medicaid agency to another state agency.
To facilitate the postpayment and prepayment
reviews required to be conducted by the single state
Medicaid agency, the state Medicaid Plan requires agree-
ments pursuant to which health care providers must
maintain certain records and must furnish those records
and other information to the single state Medicaid agency
or to the Secretary of the United States Department of
Health and Human Services (“U.S. DHHS”). See 42 U.S.C.
§ 1396a(a)(27). Appendix at 77.
State Plan Amendments must be submitted by the
single state agency and approved by U.S. DHHS when
there are material changes in the organization or policy of
the state Medicaid program. See 42 C.F.R. § 430.12(c)(1)(ii)
[1999}. Appendix at 79. Plan amendments, which do not
affect Medicaid eligibility and payment methods and
standards, become effective on the date requested by the
single state Medicaid agency if U.S. DHHS approves the
Plan Amendment. See 42 C.F.R. § 430.20(b)(3) [1999].
Appendix at 80.
¢
STATEMENT OF THE CASE
A. STATEMENT OF THE FACTS
The California Department of Health Services (“State
DHS”) is the single state Medicaid agency for California's
Medicaid program, known as the Medi-Cal program. In
the California State Medicaid Plan submitted to U.S.
DHHS in 1993, State DHS was identified as the single
state Medicaid agency for all purposes, including con-
ducting postpayment audits and reviews of providers. See
Court of Appeal decision, Appendix at 14.
On July 1, 1997, State DHS and the California Con-
troller’s Office, which is not part of State DHS, entered
into an Interagency Agreement (without amending the
State Plan) purporting to authorize the State Controller to
perform audit services relating to the Medi-Cal program.
Court of Appeal Decision, Appendix at 14.
Acting pursuant to the July 1, 1997, Interagency
Agreement, the State Controller conducted a postpay-
ment review of RCJ’s Medi-Cal claims for the period from
January 9, 1997, to October 9, 1997, and a subsequent
postpayment review for the period from October 10, 1997,
to March 26, 1998. Court of Appeal decision, Appendix at
15-16. The State Controller issued her postpayment
review findings in reports dated March 10, 1998, and May
4, 1998. RCJ then requested an administrative appeal to
challenge the determinations of the State Controller.}
On June 15 and 16, 1998, an administrative hearing
was held before an administrative law judge employed
by State DHS. Among other challenges to the Controller’s
1 The State controller’s postpayment review of RC] was not
simply a financial audit or review. Rather, the State controller
analyzed confidential medical records, interviewed physicians,
patients and their relatives, and made judgmental
determinations regarding the medical necessity of certain
laboratory tests performed by RCJ. See Final Decision of State
DHS, Appendix at 63-67. Thus, in conducting the post-
payment review, the State Controller exercised considerable
administrative discretion.
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findings, RCJ asserted at the hearing that the State Con-
troller lacked authority under the controlling federal
Medicaid laws and regulations to perform Medi-Cal post-
payment reviews. RC] argued that under the governing
federal Medicaid laws and regulations and the then-exis-
ting provisions of the State Medicaid Plan, only State
DHS, the single state Medicaid agency, could conduct
postpayment reviews of providers’ records and claims.
On August 5, 1999, the Chief Deputy Director for State
DHS issued a final agency decision granting RCJ’s appeal
in part and denying it in part. However, the State DHS
Deputy Director concluded that the State Controller had
the authority to conduct the postpayment review of the
Medi-Cal claims at issue under federal Medicaid laws
and regulations. See Final Decision of State DHS, Appen-
dix at 48-52.
State DHS issued its August 5, 1999, Final Decision
upholding State DHS’ authority to delegate audit and
review authority to the State Controller notwithstanding
the fact that the California Court of Appeal had issued a
decision in February 1999, which became final on May 26,
1999 (after the California Supreme Court denied the State
Controller’s Petition for Review), expressly holding that
the controlling federal Medicaid regulation, 42 C.F.R.
§ 431.10(e)(1) [1999] (Appendix at 82), prohibited State
DHS from “delegating to the State Controller the audit of
claims by medical services providers and the withholding
of alleged overpayments.” See Doctor’s Medical Laboratory,
Inc. v. Connell, 69 Cal.App.4th 891, 893 (1999). Appendix
at 99. In Doctor’s, the very same (but different division of
the) California Court of Appeal that issued the decision
here concluded that “the Controller could not lawfully
exercise power to audit provider payments and withhold
alleged excesses.” 69 Cal.App.4th at 897. Appendix at
106.
On December 17, 1999, after losing the issue before
the Court of Appeal in Doctor’s, State DHS submitted a
State Plan Amendment to U.S. DHHS to provide that the
State Controller’s Office performs audits of Medi-Cal
expenditures on behalf of State DHS. See December 17,
1999, transmittal letter and State Plan Amendment, copy
attached, Appendix at 91-94. State DHS specifically
requested a July 1, 1998 effective date for the State Plan
Amendment. Id.
On that same day, December 17, 1999, U.S. DHHS
informed State DHS that it had, in fact, approved the
State Medicaid Plan to reflect that the State Controller’s
Office performs audits of Medi-Cal expenditures on
behalf of State DHS. U.S. DHHS made its approval effec-
tive July 1, 1998, as requested by State DHS. See the
December 17, 1999, transmittal letter and federal
approval, copy appended at 95-98.
In the meantime, RCJ had initiated a challenge to the
State DHS’ Final Decision by filing a Petition for Writ of
Mandate in the California Superior Court for the County
of Los Angeles on October 28, 1999, pursuant to Califor-
nia Welfare and Institutions Code Section 14171. Court of
Appeal Decision, Appendix at 19.
B. THE COURSE OF THE PROCEEDINGS BELOW
On May 19, 2000, the California Superior Court for
the County of Los Angeles issued a Judgment granting
RC]’s request for a peremptory writ of mandate setting
aside the Final Decision of State DHS “insofar as it relied
ee ee ee eee nn
upon the audit findings of the State Controller.” Appen-
dix at 40-41.
The Director of State DHS appealed the Superior
Court’s Judgment to the California Court of Appeal. On
August 23, 2001, the California Court of Appeal, Second
Appellate District, issued a decision reversing the Judg-
ment of the Superior Court. The California Court of
Appeal contended it did not have to follow the previous
decision of the Court in Doctor’s because Doctor’s had
been issued before State DHS had submitted and the
federal government had approved the December 17, 1999,
State Plan Amendment describing for the first time in the
Plan the Controller’s role in auditing Medi-Cal providers.
Appendix at 21-23.
In its August 23, 2001 decision, the Court of Appeal
concluded that U.S. DHHS’ approval of the December 17,
1999, State Plan Amendment constituted that agency’s
interpretation of the governing federal Medicaid regula-
tions and statutes. And, according to the California Court
of Appeal, even though the federal Medicaid regulation
at issue, 42 C.F.R. § 431.10(e) (which had not changed
since Doctor’s was decided), expressly prohibits the dele-
gation of administrative discretion by the single state
Medicaid agency to another state agency, the federal gov-
ernment’s approval of the State Plan Amendment was
reasonable and entitled to controlling deference.
Although the California Court of Appeal relied
heavily on the December 17, 1999, State Plan Amendment
to distinguish its holding in RCJ’s case from its previous
holding in Doctor’s and to permit State DHS to delegate
authority to the State Controller, the Court disregarded
the legal impact of the Plan Amendment's July 1, 1998,
10
effective date. Thus, even though the State Controller
audited RCJ while the State Plan indicated that only State
DHS did so and well before July 1, 1998, the effective date
of the Plan Amendment, the Court seemingly allowed the
Plan Amendment to be applied to RCJ (without expressly
deciding the issue of the legal impact of the plan amend-
ment’s effective date). Appendix at 23.
Following the denial of RC]’s Petition for Rehearing,
RCJ petitioned the California Supreme Court to review
the August 23, 2001 Opinion of the Court of Appeal. RC]
asked the California Supreme Court to determine (1)
whether the controlling federal Medicaid regulations per-
mitted State DHS to delegate to the State Controller the
authority to perform prepayment and postpayment
reviews of Medicaid providers, and (2) whether the fed-
eral government’s December 17, 1999, approval of State
DHS’ Medicaid Plan Amendment was applicable to the
postpayment review at issue in this case since the audit
had been completed prior to July 1, 1998, the effective
date of the federal approval. On December 12, 2001, the
California Supreme Court denied RCJ’s petition. Appen-
dix at 75.
*
SUMMARY OF WHY THE
AUGUST 23, 2001 DECISION IS WRONG
Single state Medicaid agencies, and only single state
Medicaid agencies, are authorized to perform postpay-
ment reviews under the controlling federal statute, 42
U.S.C. § 1396a(a)(37) (Appendix at 78), and federal regu-
lation, 42 C.F.R. § 447.45(f) (Appendix at 89-90). Unlike a
few other circumstances, neither the Medicaid statutes
0 OA CRAP REL > ile
11
nor regulations expressly permit a single state Medicaid
agency to delegate such authority to another agency.
Thus, the general regulatory prohibition of 42 C.FR.
§ 431.10(e) (Appendix at 82) prohibiting such delegation
of administrative discretion is clearly applicable, as the
California Court of Appeal decided in Doctor's.
Because the language of the controlling regulation is
plain - i.e., the single state Medicaid agency must not
delegate administrative discretion to another state agency
~ it must be applied by the Courts. The State Court of
Appeal erred here by allowing the December 17, 1999,
Plan Amendment to “trump” the plain language of the
regulation. The Court also should not have considered
“legislative history,” which purports to contradict the
plain language of the regulation.
In any event, the State Plan must describe those
agencies and personnel performing administrative duties.
42 U.S.C. § 431.11(c), Appendix at 83. At the time the
State Controller conducted the postpayment review of
RCJ, the California State Medicaid Plan specified that
postpayment reviews were done solely by State DHS. See
Doctor’s, Appendix at 14. Indeed, even after the plan was
amended retroactively in December 1999, its July 1, 1998
effective date postdated the State Controller’s audit of RCJ.
Thus, the Controller’s postpayment review of RC] was
inconsistent with the then-existing provisions of the State
Medicaid Plan and therefore void.
¢
12
REASONS FOR GRANTING THE WRIT
A. THE DECISION OF THE COURT OF APPEAL
CONFLICTS DIRECTLY WITH ITS PREVIOUS
DECISION IN DOCTOR’S ON AN IMPORTANT
QUESTION OF FEDERAL LAW.
As explained above, the very same Court of Appeal
(but a different Division and therefore a different panel of
judges) concluded in Doctor’s (Appendix at 99-107) that
the governing federal Medicaid law prohibits State DHS
from delegating postpayment review authority to the
State Controller. In doing so, the California Court of
Appeal interpreted the very same regulatory provisions
interpreted by the Court of Appeal in this case, 42 C.F.R.
§ 431.10(e).?
The wording of this federal Medicaid regulation
(and the other relevant regulations) did not change
between the date the Court issued its decision in Doctor's
and the date it issued its decision in this case. The only
relevant event that occurred between the two decisions,
according to the Court of Appeal, was the federal govern-
ment’s approval of the December 17, 1999, State Plan
2 That the federal Medicaid statutes and regulations are
supreme to state laws, rules and policies is well established. See,
e.g., Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498 (1990). Moreover,
unlike the often problematical situation where providers seek to
enforce the federal medicaid laws and regulations in federal
court, such as in the recently issued decision of the Ninth Circuit
in San Lazaro Ass‘n, et al. v. Connell, et al., Nos. 00-55065, et al.,
Jan. 24, 2002 W.L. 89073, __ F.3d ___ (9th Cir. 2002), California
statutes permit a provider to do so in state court under
California Code of Civil Procedure § 1094.5. See Court of Appeal
decision, Appendix at 20-21.
ee BAe Be
13
Amendment, which the Court construed as a dispositive
intervening interpretation by the federal agency responsi-
ble for administering the Medicaid program.
As mentioned above, this intervening event, how-
ever, may not alter the plain meaning of the governing
federal Medicaid regulation. In actuality, it is quite clear
that the Panel of Judges who decided this case simply
disagreed with the reasoning of the Panel of Judges who
decided Doctor’s, thus presenting a classic conflict of
court decisions. Because the California Supreme Court
refused to review either case, there remains a clear and
direct conflict between two Panels of the same state Court
of Appeal over the appropriate interpretation of the con-
trolling federa! Medicaid laws and regulations. Pursuant
to Rule 10(b), this Court may resolve that conflict.
Indeed, because it is difficult for providers to enforce
federal Medicaid regulations in federal court (see, fn. 2,
supra, and Sobky v. Smoley, 855 F. Supp. 1123, 1144 (E.D.
Cal. 1994) [even though 42 C.F.R. § 431.10(e) imposes a
mandatory duty on states, providers may not enforce that
right in federal court)) it is critical that state courts cor-
rectly interpret federal Medicaid laws and regulations.
14
B. THE DECISION OF THE CALIFORNIA COURT OF
APPEAL ALSO INDIRECTLY CONFLICTS WITH
THE DECISIONS OF THE UNITED STATES
COURT OF APPEALS AND THE CALIFORNIA
COURT OF APPEAL REGARDING THE DEFER-
ENCE TO BE GIVEN ADMINISTRATIVE AGEN-
CIES’ INTERPRETATIONS AND REGARDING
THE ISSUE OF THE EFFECTIVE DATE OF MEDI-
CAID STATE PLAN AMENDMENTS.
As indicated above, the California Court of Appeal in
this case treated the federal government’s approval of
State DHS’ December 17, 1999, Plan Amendment as an
“official” interpretation of the governing federal Medi-
caid laws and regulations. The Court then essentially
proceeded to give complete deference to that interpreta-
tion. In doing so, the Court ignored the basic principle of
administrative law requiring no such deference be given
when the plain language of a statute or regulation is
clear.
The controlling federal Medicaid regulation, 42 C.F.R.
§ 431.10(e), expressly provided during all periods at issue
that the single state Medicaid agency “must not delegate
to other than its own officials, authority to . . . exercise
administrative discretion in the administration or super-
vision of the plan.” While the Medicaid statutes and
regulations allow for some specific exceptions to the pro-
hibition against delegation in particular situations, they
do not specify an exception permitting the delegation of
prepayment or postpayment authority from the single
state Medicaid agency to another agency. Rather, as indi-
cated above, the governing Medicaid statute, 42 U.S.C.
§ 1396a(a)(37), and regulation, 42 C.F.R. § 445.45(f),
15
expressly require the single state Medicaid agency to
perform postpayment and prepayment reviews. There-
fore, the plain language of Section 431.10(e)(1) prohibit-
ing delegation of administrative discretion is fully
applicable here. Because the plain language is mandatory
and unambiguous, it is not subject to agency or judicial
interpretation. It must be applied and followed regardless
of whether the agency (or a court) prefers different lan-
guage.
Recently, in Alhambra Hospital v. Thompson, 259 F.3d
1071 (9th Cir. 2001), the Court of Appeals applied the
plain meaning of a Medicare regulation notwithstanding
a contrary interpretation of the regulation by U.S. DHHS.
In doing so, the Court concluded that not every USS.
DHHS reguiation is of “delphic obscurity, explicable only
through the Secretary’s oracular powers.” 259 F.3d at
1076. That is certainly true here, where the plain language
of the governing regulations prohibits the delegation of
discretionary authority by the single state Medicaid
agency to another agency.
The Ninth Circuit has also upheld the plain language _
of the Medicaid statutes even when U.S. DHHS has
approved a plan amendment based on a contrary inter-
pretation of the statute. See, for example, Childrens Hospital
and Health Center v. Belshe, 188 F.3d 1090, 1098 (9th Cir.
1989). Because the state courts are required to interpret
regulations using the same rules applicable to statutory
interpretation (see Forrest v. Trustees of Cal. State University
& Colleges, 160 Cal.App.3d 357, 362 (1984), the state court
should also have applied the plain language of the Medi-
caid regulations even if U.S. DHHS approved of a plan
amendment that was contrary to such plain language.
16
The Court of Appeal bolstered its holding in this case
by relying on so-called “legislative history” from agency
handbooks, which the Court found to be consistent with
U.S. DHHS’ interpretation of the Medicaid regulations.
However, reliance on legislative history is misplaced
when the language of a statute or regulation is clear.
Where the plain language is clear, it must be followed by
a reviewing court and may not be disturbed by “supple-
mentary information” published by the agency in the
Federal Register. See Wileman Bros. & Elliott, Inc. v. Gian-
nini, 909 F.2d 332, 336 (9th Cir. 1990).
These holdings of the Ninth Circuit are consistent
with the holdings of this Court, which has confirmed that
there is no need to consider legislative history when the
language of a statute or regulation is plain. See Connecti-
cut National Bank v. Germaine, 503 U.S. 249, 254 (1992).
~ afortunately, the State Court of Appeal decision ignores
this principle, which is fundamental to the rule of law.
The California Court of Appeal, itself, in other cases
has recognized that it must apply the plain language of a
regulation even if an agency has a “better idea,” or the
administrative agency believes the language of the regu-
lation is not consistent with good public policy. See Pri-
vate Industry Council v. Employment Development
Department, 57 Cal.App.4th 1290, 1294 (1997) [federal law
must be followed even if an agency “has a better idea.”]
See, also, United States ex rel. Rahman v. Oncology Associ-
ates, Inc., 198 F.2d 502, 514 (4th Cir. 1999), holding that the
U.S. DHHS is not excused from complying with its own
federal regulations just because it believes the language
of the regulations is not in the public interest.
17
Not only does the California Court of Appeal’s deci-
sion in this case conflict with the decisions of the Ninth
Circuit and the California Court of Appeal with respect to
the interpretation of the plain language of a federal regu-
lation, the decision also conflicts with those court deci-
sions prohibiting Medicaid actions which are not
authorized by the Medicaid State Plan. See, for example,
Exeter Memorial Hospital Association v. Belshe, 943 F. Supp.
1239, 1240 (E.D. Cal. 1996), aff'd, 145 F.3d 1106, 1109 (9th
Cir. 1998) [the Court prohibits State DHS’ action from
being implemented prior to the effective date of a state
plan amendment] and Oregon Association of Homes v. State
Department of Human Resources, 5 F.3d 1239 (9th Cir. 1993)
[state Medicaid policy invalid because it was not submit-
ted as a plan amendment to the federal government]. See,
also, Washington State Health Facilities v. State of Washing--
ton, 698 F.2d 964 (9th Cir. 1982) and Washington State
Health Facilities v. DSHS, 879 F.2d 677 (9th Cir. 1989).
In fact, the decision of the state Court of Appeal in
this case with respect to the effective date of the Plan
Amendment is also inconsistent with the California Court
of Appeal’s previous decisions. For example, in Bingham
v. Obledo, 147 Cal.App.3d 401 (1983), the California Court
of Appeal invalidated State DHS’ reliance on state regula-
tions because they were not part of the state Medicaid
plan. Here, State DHS has relied on a postpayment
review conducted by the State Controller before July 1,
1998, the effective date of the Plan Amendment permit-
ting such reviews by the State Controller.
18
C. THE IMPORTANCE OF THE FEDERAL QUES-
TIONS TO BE RESOLVED.
State DHS, the California Controller’s Office, and
U.S. DHHS have represented to various courts on various
occasions in this case and in related cases, including the
Doctor’s case, the importance of properly resolving the
question of whether the federal Medicaid laws and regu-
lations, as currently written, permit a single state Medi-
caid agency to delegate postpayment review authority to
another state agency. For example, when the State Con-
troller was unsuccessful on this issue before the Califor-
nia Court of Appeal in Doctor’s, she requested the
California Supreme Court to review the Court of
Appeal’s decision because it was a “matter of significant
public interest.” See page 4 of the State Controller’s Peti-
tion for Review in Doctor’s, filed on or about March 15,
1999. State DHS fully supported this request.
Indeed, the California State Controller, has even
appeared before the United States Congressional House
Commerce Committee’s subcommittee on oversight and
investigations urging Congress “to revise” federal Medi-
caid laws and regulations “regarding the role of the sin-
gle state agency” to “allow” the California State
Controller and other fiscal agents to perform Medicaid
audits. See “Fraud in the California Medi-Cal Program,”
dated July 18, 2000, available at www.sc.ca.gov.
In this very case, State DHS presented the California
Court of Appeal with a copy of the amicus brief of U.S.
DHHS filed in the United States Court of Appeals for the
Ninth Circuit in the case of San Lazaro Ass'n, et al. v.
Connell, et al., Case Nos. 00-55065, etc., et al. In requesting
19
permission to file its amicus curiae brief in those consoli-
dated cases, U.S. DHHS characterized the question pre-
sented as one of first impression which is significant to
the nationwide administration of the Medicaid program.
See State DHS’ Supplemental Motion for Judicial Notice
and Memorandum of Points and Authorities filed with
the California Court of Appeal on or about May 3, 2001.
Moreover, as pointed out by the California Court of
Appeal in Doctor's (Appendix at 106-107), it is critical that
the appropriate persons conduct postpayment reviews. In
this case, financial auditors from the State Controller’s
Office discussed confidential medical procedures with
patients in front of their relatives and friends to try to
determine whether laboratory testing had been ordered
and performed. See Exhibit 89 of-the administrative
record. When agencies other than the single state Medi-
caid agency conduct postpayment and prepayment
reviews, the confidentiality of sensitive medical informa-
tion will necessarily be jeopardized. This result is incon-
sistent with the strong public policy of protecting such
information. See recent discussion of the Health Insurance
Portability and Accountability Act of 1996, codified at 42
U.S.C. §§ 1320d-1320d-8 in rules issued by U.S. DHHS on
December 8, 2000, 65 Fed. Reg. 82,798-82,829.
In addition to being important to the ongoing admin-
istration of the Medicaid program, the correct resolution
of the issues presented is also critical to the application of
federal administrative law principles by state courts. The
California Court of Appeal here erroneously deferred to
the agency’s interpretation of the plain language of the
20
governing regulation rather than insisting that the plain
language controls.
Finally, the rule of law is at stake. While U.S. DHHS
and State DHS (as well as the Court of Appeal) might
believe the prohibition against the delegation of postpay-
ment review authority from the single state Medicaid
agency to another agency is ill conceived or unwise, the
Court must apply laws and regulations as written. See
Justice Scalia’s dissenting opinion in Regents Hosp. v. Sha-
lala, 522 U.S. 448, 469 (1998) [“the immediate benefit
achieved by such a practice (i.e., rewriting the laws) in a
particular case is far outweighed by the disruption of
legal expectations in all cases — disruption of the rule of
law — that government by ex post facto legislative psycho-
analysis produces.” ]%
CONCLUSION
The California Court of Appeal’s decision interpret-
ing the governing federal Medicaid laws and regulations
is inconsistent with its own previous decision in Doctor’s
and is also inconsistent with decisions of the United
States Court of Appeals for the Ninth Circuit. In order to
assure uniformity in the administration of the Medicaid
program and in the decisions of the courts, this Court is
respectfully requested to grant the petition for a writ of
3 The administration of the Medicaid program is also
threatened by the Court of Appeal’s decision ignoring the July
1, 1998, effective date of the Plan Amendment. Indeed, the
Court of Appeal’s decision renders meaningless the regulation
regarding “effective dates.”
21
certiorari to decide the important questions of law raised
by this petition.
Dated: February 27, 2002
Respectfully submitted,
Patric Hooper
Hooper, LuNpy & BOOoKMAN, INc.
Attorneys for Petitioner
App. 1
APPENDIX
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
RCJ MEDICAL
SERVICES, INC.,
B143160
Super. Ct. No. BS060056)
Filed Aug. 23, 2001)
Plaintiff and Respondent,
v.
THE DIRECTOR OF THE
STATE DEPARTMENT
OF HEALTH SERVICES,
Defendant and Appellant.
eee eee ee”
APPEAL from a judgment of the Superior Court of
Los Angeles County, David P. Yaffe, Judge. Reversed.
Bill Lockyer, Attorney General, Charlton G. Holland,
III, Senior Assistant Attorney General, John H. Sanders,
Lead Supervising Deputy Attorney General; and Patricia
L. Nagler, Deputy Attorney General, for Defendant and
Appellant.
Hooper, Lundy & Bookman, Inc., and Patric Hooper
for Plaintiff and Respondent.
App. 2
I. INTRODUCTION
This case involves a postpayment audit of a Medi-Cal
provider’s claims. Such audits are required under both
federal and state law. (42 C.F.R. §§ 447.45(f)(2), 456.3;
Welf. & Inst. Code, § 14170, subd. (a)(1).) No Medi-Cal
payments were withheld from the provider.
The State Department of Health Services (DHS)
administers Medi-Cal, the federal Medicaid program in
California. The DHS contracted with the State Control-
lers’ office (the Controller) to audit Medi-Cal payments to
providers. The Health Care Financing Administration
(HCFA), part of the United States Department of Health
and Human Services, is the federal agency responsible for
administering the Medicaid program. On December 17,
1999, the HCFA, a federal agency, specifically approved
in writing the DHS’s delegation of audit authority to the
Controller. j
This appeal is from a judgment granting a peremp-
tory writ of administrative mandate directed at defen-
dant, the Director of the DHS. The peremptory writ of
mandate requires the DHS to set aside its final decision in
the administrative appeal of RCJ Medical Services,~Inc.
(RCJ), “insofar as it relies upon the audit findings of the
State Controller. ...” RCJ contends federal Medicaid law,
and specifically the single state agency requirement, pre-
cludes the DHS’s delegation of audit authority to the
Controller.1 The question in this case is whether the
1 The question whether the controller is prohibited under
federal law from performing Medi-Cal audits or withholding
payments to providers is before the United States Court of
App. 3
HCFA’s December 17, 1999, written approval of the
DHS’s delegation of audit responsibility to the Controller
is based on a reasonable construction of the federal statu-
tory single state agency provision and the implementing
regulation. We defer to the HCFA’s construction of the
federal law that it administers as reflected in its action of
December 17, 1999. Accordingly, we reverse.
II. FEDERAL MEDICAID LAW
In 1965, Congress enacted Title XIX of the Social
Security Act (the Medicaid Act) to provide medical assis-
tance to needy persons. (42 U.S.C. § 1396 et seq.) The
purpose of the act was to provide a nationwide program
of medical assistance for low-income families and indi-
viduals. (Schweiker v. Hogan (1982) 457 U.S. 569, 571; West
Virginia University Hospitals, Inc. v. Casey (3rd Cir. 1989)
885 F.2d 11, 15, affd. (1991) 499 U.S. 83.)
A. The Medi-Cal Program and the Single State Agency
Requirement
The Second Circuit Court of Appeals described the
joint federal-state operation of the Medicaid program and
the single state agency requirement in Bethphage Lutheran
Service, Inc. v. Weicker (2nd Cir. 1992) 965 F.2d 1239, 1240
as follows: “Medicaid, 42 U.S.C. § 1396 et seq., is a
cooperative federal-state program through which the fed-
eral government provides financial assistance to the
Appeals for the Ninth Circuit in several cases including
Simonyan v. Connell (C.D.Cal. Jan. 20, 2000, No. 99-2420 RJK)
2000 WL 562861.)
App. 4
states so that the states may furnish medical, rehabilita-
tion, and other services to certain low-income persons.
Participation in Medicaid is voluntary, but participating
states must comply with certain requirements imposed by
the Medicaid Act and regulations promulgated by the
Secretary of Health and Human Services (‘the Secretary’).
For a state to qualify for federal assistance, the Secretary,
customarily acting through the Health Care Finance
Administration (‘HCFA’), must approve a State Plan for
medical assistance, 42 U.S.C. § 1396a(a), that contains a
comprehensive statement describing the nature and the
scope of the state’s program. 42 C.F.R. § 430.10 (1989).
The plan must designate a single state agency to super-
vise or administer the State Plan. 42 U.S.C. § 1396a(a)(5).”
(Accord, West Virginia University Hospitals., Inc. v. Casey,
supra, 885 F.2d at p. 15.)
1. The Federal Single State Agency Statute
The single state agency requirement is set forth in a
federal statute. Pursuant to title 42 of the United States
Code, section 1396a(a)(5)?, a state participating in the
federal Medicaid program must establish a state plan that
meets stated requirements. Among other things, the state
plan must “provide for the establishment or designation
of a single State agency to administer or to supervise the
administration of the plan. . . . “3 (Italics added.)
2 All further references to sections 1396, 1396a, or 1396b,
are to title 42 of the United States Code.
3 Section 1396a (a)(5) states in full: “A State plan for
medical assistance must — [{] . . . [{] [(a)](5) either provide for
the establishment or designation of a single State agency to
App. 5
The single state agency requirement originally
appeared in the Social Security Act of 1935 with reference
to the Title I Old-Age Assistance Program. (Stats. 1935,
ch. 531, § 2.) The single state agency language was incor-
porated into Title XIX when the Medicaid program was
enacted in 1965. (Pub.L. No. 89-97, 1965 U.S. Code Cong.
& Admin. News, at pp. 305, 371; Sobky v. Smoley (E.D. Col.
1994) 855 F.Supp. 1123, 1145.) The purposes of the single
state agency requirement have been described in various
ways. In Rolland v. Cellucci (D.Mass. 1999) 52 FSupp.2d
231, 243, the district court held: “The single state agency
mandate arose out of Congress’ desire to minimize the
improper denial of benefits and to ensure a certain level
of services and quality of care. Morgan v. Cohen, 665
F.Supp. 1164, 1177 (E.D.Pa. 1987). The mandate accom-
plishes these goals by limiting the authority to make
administrative decisions to a single state agency. 42 C.F.R.
§ 431.10(e)(1)(ii). .... [T]he ‘single state agency’ require-
ment derives from a desire to focus accountability for
plan operation, Hillburn by Hillburn v. Maher, 795 F.2d 252,
administer or to supervise the administration of the plan; or
provide for the establishment or designation of a single State
agency to administer or to supervise the administration of the
plan, except that the determination of eligibility for medical
assistance under the plan shall be made by the State or local
agency administering the State plan approved under
subchapter I or XVI of this chapter (insofar as it relates to the
aged) if the State is eligible to participate in the State plan
program established under subchapter XVI of this chapter, or by
the agency or agencies administering the supplemental security
income program established under subchapter XVI or the State
plan approved under part A of subchapter IV of this chapter if
the State is not eligible to participate in the State plan program
established under subchapter XVI of this chapter[.]”
App. 6
261 (2d Cir. 1986); 42 U.S.C. § 1396a(a)(5); 42 C.F.R.
§§ 431.1 and 431.10... .” In Sobky v. Smoley, supra, 855
F.Supp. at page 1145, Judge David F. Levi wrote, “The
legislative history of the 1965 Medicaid Act’s single state
agency requirement —- 42 U.S.C. § 1396a(a)(5) — maintains
this concentration on administrative efficiency.” (Accord
Hillburn v. Maher, supra, 795 F.2d at pp. 260-261.) Judge
Levi concluded after House and Senate amendments
were factored into the competing evidence of legislative
intent that Congress’s adoption of the single state agency
was because, “[A]dministrative efficiency appears to
have been the overriding purpose... . ” (Sobky v. Smoley,
supra, 855 F.Supp. at p. 1146.) In Fulkerson v. Commissioner,
Maine Dept. of Human Services (D. Maine 1992) 802 F.Supp.
529, 538, the district court held: “It appears that the
reason for this requirement was to assure ‘that the States
will not administer the provisions for services in a way
which adversely affects the availability or the quality of
the care to be provided’ and ‘to avoid a lack of accoun-
tability for the appropriate operation of the program.’
Hillburn v. Maher[, supra,] 795 F.2d [at p.] 261[ ] (quoting
in part S.Rep. No. 404, 89th Cong., 1st Sess. (1965),
reprinted in 1965 U.S. Code Cong. & Admin.News 1943,
2016-17), cert. denied, 479 U.S. 1046, 107 S.Ct. 910, 93
L.Ed.2d 859 (1987).”
2. The Federal Single State Agency Regulation
The HCFA regulation implementing the single state
agency requirement is found at title 42, Code of Federal
Regulations, part 431.10(e) (44 Fed.Reg. 17930 (March 23,
1979)) which states: “(e) Authority of the single State
agency. In order for an agency to qualify as the Medicaid
App. 7
agency - [{] (1) The agency must not delegate, to other
than its own officials, authority to - [{] () Exercise
administrative discretion in the administration or super-
vision of the plan, or [{] (ii) Issue policies, rules, and
regulations on program matters. ({] (2) The authority of
the agency must not be impaired if any of its rules,
regulations, or decisions are subject to review, clearance,
or similar action by other offices or agencies of the State.
({] (3) If other State or local agencies or offices perform
services for the Medicaid agency, they must not have the
authority to change or disapprove any administrative decision
of that agency, or otherwise substitute their judgment for that
of the Medicaid agency with respect to the application of
policies, rules, and regulations issued by the Medicaid
agency.” (Italics added; e.g. Reynolds v. Giuliani (S.D.N.Y.
2000) 118 F.Supp.2d 352, 358; Meachem v. Wing (S.D.N.Y.
1999) 77 FSupp.2d 431, 444-445.)
The federal single state agency regulation (42 C.ER.
§ 431.10(e)) was first published in the Federal Register in
1971. (36 Fed. Regs. 3861-3862 (Feb. 27, 1971).) It was
originally promulgated, however, in a supplement to a
federal handbook issued upon enactment of the Medicaid
Act — the United States Department of Health, Education,
and Welfare, Welfare Administration, Bureau of Family
Services, Handbook of Public Assistance Administration
(“Handbook”), Supplement D - Medical Assistance Pro-
grams Under Title XIX of the Social Security Act, D 2130
(June 17, 1966) (“Supplement D”). The purpose of the
Handbook was described as follows: “The Handbook of
Public Assistance Administration is issued by the Bureau
of Family Services and is the official medium for issuance
App. 8
of interpretations and instructions concerning require-
ments of the public assistance titles of the Social Security
Act and recommendations for the administration of State
public assistance programs. The Handbook is prepared
for use by State agencies and staff of the Federal agency
in carrying out their responsibilities for administering the
public assistance programs in accordance with the Fed-
eral Act.” (U.S. Dept. of Health, Education & Welfare,
Handbook of Public Assistance Administration, Introduc-
tion (June 12, 1963).)
Supplement D stated in part: ” .. . [{] 2. In relation-
ships with other departments of State government, the
single State agency interprets its role in such a way that it
does not delegate to other than its own officials its requi-
site ultimate authority for exercising administrative judg-
ment in the State-wide administration or supervision of
the plan. [{] 3. In the event that any rules and regulations
or decisions of the single State agency are subject to
review, clearance, or other action by other offices or agen-
cies of the State government, the requisite authority of
the single State agency is not impaired. [{] 4. In the event
that any services are performed for the single State
agency by other State or local agencies or offices, such
other agencies or offices are not authorized to, and do
not, change, disapprove, or delay action on any adminis-
trative decision of the single State agency, or otherwise
substitute their judgment for that of the agency as to the
application of policies, rules, and regulations promul-
gated by the State agency. [{] 5. Any agreements with
other public agencies or private organizations to act as
the single State agency’s agent include provisions for the
single State agency obtaining from the agent the data
App. 9
needed for program planning, evaluation, reporting, and
accounting purposes and do not in any way impair the
ultimate authority of the single State agency... . ” (U.S.
Dept. of Health, Education & Welfare, Handbook of Pub-
lic Assistance Administration, Supplement D, D-2130,
supra.)
The foregoing Supplement D provisions were trans-
ferred to the Code of Federal Regulations in 1971. (36
Fed. Regs. 3860, 3861-3862.) The 1971 regulation stated in
pertinent part: “(c) Conditions for implementing the require-
ments of paragraph (a) [state plan requirements] of this sec-
tion. (1) The State agency will not delegate to other than
its own officials its authority for exercising administra-
tive discretion in the administration or supervision of the
plan, including the issuance of pelicies, rules, and regula-
tions on program matters. [{] (2) In the event that any
rules and regulations or decisions of the single State
agency are subject to review, clearance, or other action by
other offices or agencies of the State government, the
requisite authority of the single State agency will not be
impaired. [{] (3) In the event that any services are prefor-
med [sic] for the single State agency by other State or
local agencies or offices, such agencies and offices must
not have authority to review, change, or disapprove any
administrative decision of the single State agency, or oth-
erwise substitute their judgment for that of the agency as
to the application of policies, rules, and regulations pro-
mulgated by the State agency.” (36 Fed. Regs. 3861-3862
(Feb. 27, 1971.)) The current regulation, quoted above,
mirrors the language of both Supplement D and the 1971
regulation without substantive change.
App. 10
In addition to the above-quoted language ultimately
transferred to the Code of Federal Regulations, Supple-
ment D contained a lengthy discussion of the single state
agency requirement. There has been no showing that
discussion was ever published in the Code of Federal
Regulations or the Federal Register. Therefore, that dis-
cussion does not rise to the level of a federal rule or
regulation carrying the force and effect of law. (Western
Radio Services Co., Inc. v. Espy (9th Cir. 1996) 79 F.3d 896,
901-902; St. Nicholas Apartments v. U.S. (C.D.Ill. 1996) 943
F.Supp. 966, 969; Rousseau v. City of Philadelphia (E.D.Pa.
1984) 589 FSupp. 961, 971; Usery v. Board of Education
(D.Md. 1978) 462 F.Supp. 535, 548.) Handbooks issued by
federal agencies “generally are considered to be non-
binding instructions or internal operating procedures.”
(Rousseau v. City of Philadelphia, supra, 589 F.Supp. at p.
971; U.S. v. Harvey (5th Cir. 1981) 659 F.2d 62, 65; Con-
cerned Residents of Buck Hill Falls v. Grant (3d Cir. 1976)
537 F.2d 29, 38; St. Nicholas Apartments v. U.S., supra, 943
F.Supp. at p. 969.) The Handbook has no binding force on
this court. (Burroughs v. Hills (7th Cir. 1984) 741 F.2d 1525,
1529; Rank v. Nimmo (9th Cir. 1982) 677 F.2d 692, 698-699;
U.S. v. Harvey, supra, 659 F.2d at p. 65.) It is, however,
“entitled to notice so far as it is an official interpretation
of statutes or regulations with which it is not in conflict.”
(Burroughs v. Hills, supra, 741 F.2d at p. 1529; Litton Sys-
tems, Inc. v. Whirpool [sic] Corporation (Fed.Cir. 1984) 728
F.2d 1423, 1439.) Indeed, the United States Supreme Court
has frequently cited to the Handbook as a source of
federal agency interpretation of the Medicaid Act and
other Social Security Act public assistance programs.
(See, e.g., Lukhard v. Reed (1987) 481 U.S. 368, 377 [AFDC];
App. 11
Atkins v. Rivera (1986) 477 U.S. 154, 162 [Medicaid]; Con-
necticut Dept. of Income Maintenance v. Heckler (1985) 471
U.S. 524, 531 fn. 17 [Medicaid]; Heckler v. Turner (1985) 470
U.S. 184, 190, fn. 4, 198-199 [AFDC]; Quern v. Mandley
(1978) 436 U.S. 725, 737 fn. 12 [AFDC].)
In Supplement D, the federal agency interpreted the
single state agency requirement as follows: “The require-
ment for a single State agency means that one State
agency is designated by the State as the ‘single State
agency’ and is authorized to maintain in operation for the
State an approved State plan. The State has a choice- of
administering the plan through the State agency directly or
through its political subdivisions under State agency supervi-
sion. [J] Once the single State agency is established or
designated it is the agency of the State government that
represents the State in its dealings with the Federal agency on
all aspects of the medical assistance plan and its opera-
tion. It is the agency of the State government responsible
for: obtaining the statutory authority necessary to submit
a plan meeting all Federal requirements; preparing the
State plan and establishing policies for the operation of
the program; assuring that it can carry out the plan in all
political subdivisions; obtaining the State funds or the
State-local funds (as the case may be); meeting all audit
requirements; and being accountable to the [Federal agency]
for the proper and efficient administration of the program. [{]
The provision for a ‘single State agency’ is not designed
to set aside the relationships with the Governor and other
officers of the State or with other departments of the State
government that are normal and proper within the State.
The agency designated as the ‘single State agency’ is still
subject to the ordinary legislative processes, executive
App. 12
supervision, and budget and audit procedures in the
State. Other agencies and offices of State government, such as
the State fiscal officer and the State civil service agency, may
perform services for the single State agency that are essential
to the operation of the plan. Another agency or authority of
government in the State, however, may not be authorized in the
plan, or permitted in practice, to substitute its judgment for
that of the ‘single State agency’ in administrative decisions
involving the application of the policies, rules, and regulations
promulgated by the State agency. Similarly, if local agencies
administer the plan, the ‘single State agency’ must see that
the authority of such agencies to make administrative
decisions under the medical assistance law is not impaired
by the action of other agencies or officials of State or local
governments. [{] . . . [{] The ‘single State agency’ is responsi-
ble for any services that are preformed [sic] by other agencies in
the program under the plan. This does not mean that the State
agency takes over or directs such services. The agency, however,
must take such steps as may be necessary in the State to assure
that the services, as performed in the medical assistance pro-
gram, meet the Federal requirements. ...” (U.S. Dept. of
Health, Education & Welfare, Handbook of Public Assis-
tance Administration, Supplement D - Medical Assis-
tance Programs Under Title XIX of the Social Security
Act, D-2140 (June 17, 1966), italics added.)
B. The State Plan
A state must submit to the HCFA for approval a plan
describing the nature and scope of its Medicaid program
and establishing, among other things, a plan for reim-
bursing providers. (§ 1396a(a); 42 C.F.R. § 430.10; Wilder v.
Virginia Hosp. Assn. (1990) 496 U.S. 498, 502; Children’s
App. 13
Hospital and Health Center v. Belshe (9th Cir. 1999) 188 F.3d
1090, 1098.) The state plan also must provide for postpay-
ment review of provider claims. (§ 1396a(a)(37); 42 C.F.R.
§§ 447.45(c)(1) & (f)(2), 456.3.) The HCFA is authorized to
make payments to states whose medical assistance plans
meet the requirements of the federal statute. (§ 1396;
Morris v. Williams (1967) 67 Cal.2d 733, 738-739; Palumbo
v. Myers (1983) 149 Cal.App.3d 1020, 1025, 197 Cal.Rptr.
214.) Judge Levi has succinctly held: “The [HCFA’s]
approval of the State plan is a necessary precondition to
the State’s entitlement to federal funds. (. . . §§ 1396,
1396b(a).)” (Exeter Memorial Hospital Assn. v. Belshe
(E.D.Cal. 1996) 943 F.Supp. 1239, 1240, affd. (9th Cir. 1998)
145 F.3d 1106, 1109.) As the California Supreme Court
observed in Reese v. Kizer (1988) 46 Cal.3d 996, 998, “To
assure the continued availability of federal funds for
these programs|[, including Medi-Cal,] the state must
operate plans which conform to the governing federal
statutes and regulations.” Under HCFA regulations,
amendments to state plans must conform to the following
regime: “The plan must provide that it will be amended
whenever necessary to reflect — [{] (i) Changes in Federal
law, regulations[,] policy interpretations, or court deci-
sions; or [{] (ii) Material changes in State law, organiza-
tion, or policy, or in the State’s operation of the Medicaid
program....” (42 C.F.R. § 430.12(c).) HCFA regional staff
review state plans and plan amendments. (42 C.FR.
§ 430.14.) The HCFA Regional Administrator has the
authority to approve state plans and plan amendments.
(42 C.F.R. § 430.15(b).) Pursuant to title 42 of the Code of
Federal Regulations, part 430.15(a)(1), “Determinations as
to whether State plans (including plan amendments and
App. 14
administrative practice under plans) originally meet or
continue to meet the requirements for approval are based
on relevant Federal statutes and regulations.”
Ill. BACKGROUND
The underlying facts are undisputed. California sub-
mitted its state Medicaid plan to the HCFA in 1993. The
state plan identified the DHS as the single state Medicaid
agency for all purposes including auditing payments to
providers.
On July 1, 1997, the DHS and the Controller entered
into an interagency agreement “for the purpose of
increasing the State’s auditing ability to identify and
recover California Medical Assistance Program (Medi-Cal
Program) overpayments. ...” The interagency agreement
authorized the Controller “to perform audit services
relating to the Medi-Cal Program,” including, in the
event of an overpayment, to send a repayment demand to
the provider together with a copy of the audit report. The
Controller was not authorized as DHS’s representative to
withhold payments to providers. However, if the Control-
ler initiated a withhold “under its own [state law] author-
ity,” it was required to notify the DHS.4
4 The Interagency Agreement set forth the Controller’s
responsibilities as follows: “1. [The Controller] will perform
audit services relating to the Medi-Cal Program. . . . These
services will include audits as detailed in the Scope of Work
designed to identify overpayments made under the Medi-Cal
Program to providers. [{] 2. The [Controller] will notify DHS
Audits & Investigations prior to onsite reviews of Medi-Cal
providers. This will reduce duplication of effort by both
App. 15
Acting under the interagency agreement, the Control-
ler conducted a review of RCJ’s Medi-Cal claims for the
agencies. [{] 3. [The Controller’s] audits will be finalized in
audit reports and draft audit reports will be submitted to the
[DHS] at least 15 days prior to issuance. [{] 4. If the audit
identifies an overpayment of Medi-Cal funds, a demand for
repayment will be sent to the provider with a copy of the audit
report. The demand will provide information to the provider
regarding appeal rights. Copies of the audit report and demand
for repayment shall be sent to Audits & Investigations and the
DHS Office of Administrative Hearings & Appeals. [J] 5. As a
representative of DHS, [the Controller] will not initiate a
withhold of a provider’s reimbursement in the amount
identified by the audit. [{] 6. However, if [the Controller]
initiates a withhold under its own authority, [the Controller]
will not issue notices of withhold with the audit report and
demand notice. Also, [the Controller] will notify DHS when it
initiates payment withholds for Medi-Cal providers. This will
facilitate DHS’s ability to track Medi-Cal reimbursement
disposition and to respond to provider inquiries concerning
payment. [{] 7. [The Controller] will be responsible for the
resolution of the audit findings identified in their audits,
through and including the administrative appeal process before
DHS Office of Administrative Hearings and Appeals (OAHA)
under Welfare and Institutions Code section 14171, including
legal representation if needed. [{] 8. [The Controller] will
designate the following state member as [the Controller’s]
contact person for purposes of this agreement:... . ”
Exhibit A to the Interagency Agreement entitled “Scope of
Work” stated: “A. [The Controller] will target its audits for the
following program issues using trend analysis based on Medi-
Cal expenditures and historical patterns: [{] 1. Some non-
institutional providers with high volume of selected products
engage in unlawful or excessive practices; [J] 2. Some non-
institutional providers with high volume of selected products
are incorrectly billing for products or services that should be
billed at a lesser reimbursement rate; [{] 3. Some Pharmacy and
DME providers are billing Medi-Cal for unsupported quantities
App. 16
period from January 9, 1997, to October 9, 1997, and a
subsequent review for the period from October 10, 1997,
to March 26, 1998. The Controller issued final audit over-
payment findings in reports dated March 10, 1998, and
May 4, 1998. RCJ requested an administrative appeal.
On July 1, 1998, the DHS and the Controller entered
into an amended interagency agreement. Under the
amended interagency agreement, the Controller retained
authority to audit Medi-Cal claims by providers and to
send repayment demands. However, with respect to the
power to withhold payments from a provider, the July 1,
1998, amended interagency agreement provided, “Only
DHS may initiate a withhold of a provider’s Medi-Cal
funds during a review, audit, or investigation.” The pres-
ent case involves only an overpayment determination.
The Controller did not withhold any funds from RCJ.
On February 1, 1999, Division Seven of the-Court of
Appeal for this appellate district issued its opinion in
Doctor’s Medical Laboratory, Inc. v. Connell (1999) 69
of products; and/or, [{] 4. Some non-institutional providers are
reimbursed improperly and recovery is warranted under title
22, California Code of Regulations, section 51458.1 [{] B. In
performing audits for DHS, [the Controller] will document their
results in audit reports. [The Controller] will collect and retain
sufficient evidence to substantiate all audit findings and
recommendations. [{] C. The [Controller] will ensure that audit
reports are clear, accurate, and meet all of the statutory and
regulatory requirements of an audit of Medi-Cl Providers. Ata
minimum, the audit reports will include a description of the
scope of the audit, a reference to Medi-Cal authority, and the
methodology used. [{] D. Specifically, [the Controller] will
abide by the following: [specified Welfare and Institutions Code
sections and California regulations].”
ea ee ee
App. 17
Cal.App.4th 891, 896-898. In Doctor’s, the Controller with-
held payments to a provider. Our Division Seven col-
leagues held the Controller could not lawfully exercise
the power to audit or to withhold Medi-Cal payments to
providers. (Ibid.) The California Supreme Court denied
review. The remittitur issued on May 26, 1999.
By letter dated March 19, 1999, after the Doctor's
decision was filed, the DHS asked the HCFA to review
the July 1, 1998, amended interagency agreement and to
“confirm our opinion about the allowability of the [inter-
agency agreement] activities under the Medicaid pro-
gram.” By letter dated on or about March 24, 1999, Sally
Richardson, Director, Center for Medicaid and State
Operations, HCFA, responded to the DHS’s request. Ms.
Richardson’s letter, written on behalf of the HCFA, con-
cluded that the amended interagency agreement was
“fully compliant with federal single State agency require-
ments.” Further, Ms. Richardson concluded, “[W]Je see
nothing in [the Interagency Agreement] that gives [the
Controller] discretionary authority that would violate the
single State agency requirements at 42 CFR 431.10.”°
5 Ms. Richardson’s letter states in full: “I am writing in
response to your March 19 letter concerning the interagency
agreement (IA) between the [DHS] and the [Controller] under
which the [Controller] conducts audits of Medi-Cal payments to
providers. You enclosed a copy of that IA, and asked that we
advise whether the specific [Controller] functions performed
under it in fact are consistent with DHS’ responsibilities as
California’s single State agency for purposes of Medicaid
program administration. [{] The Medicaid program's single
State agency requirements are found in section 1902(a)(5) of the
Social Security Act, and at 42 CFR 431.10. The requirement that
each State designate a single State agency to administer or
App. 18
On April 1, 1999, an administrative law judge issued
a proposed decision in RCJ’s appeal. On June 7, 1999, the
supervise the administration of the program dates to enactment
of the Social Security Act in 1935, where it appears with
reference to the Title I Old-Age Assistance Program. The same
wording was incorporated into Title XIX when the Medicaid
program was enacted in 1965. The intent in both instances was
to ensure that there be a single agency in each State accountable
to the federal government for administration of the program in
compliance with federal law and policy. [{] Regulations at 42
CFR 431.10 require that: ‘.... ’ [quoting the regulation} [{]
California’s approved Title XIX State Plan designates the DHS
as the single State agency responsible for administering that
Plan. The DHS organization chart vests responsibility for fraud
and abuse, internal and external audits, and quality control in
the Audits and Investigations Division. The Chief of the
Medical Review Branch, Audits and Investigations, is the DHS
contact point for purposes of the subject IA. Under the IA, the
[Controller] is to perform audits on behalf of DHS to identify
overpayments made to providers under the Medi-Cal program.
The Scope of Work states that the IA is ‘for the purpose of
increasing the State’s auditing ability to identify and recover
California Medical Assistance Program (Medi-Cal Program)
overpayments and to provide federal matching funds for [the
Controller] audit services to the Medi-Cal Program.’ The
[Controller] must notify DHS Audits and Investigations when it
initiates a review, audit or investigation of a Medi-Cal provider.
If the [Controller] identifies an overpayment, it is to write the
provider describing the overpayment, request repayment, and
describe the provider’s administrative appeal rights. We
understand that such letters instruct the provider to either make
payment to the DHS Payment Systems Division, Recovery
Section for repayment purposes, if the provider agrees with the
overpayment determination or, in the event the provider
disagrees with the [Controller’s] determination, file an appeal
with the DHS Office of Administrative Hearings and Appeals.
The IA requires the [Controller] to transmit to DHS Audits and
Investigations a copy of each audit report and demand letter,
App. 19
DHS rejected the proposed decision. On August 5, 1999,
following a review of the administrative record, the DHS
issued its final decision. On October 28, 1999, RCJ filed its
writ petition in the trial court.
On December 17, 1999, the DHS submitted a state
plan amendment to the HCFA. The amended state plan
provided in relevant part, “The State Controller’s Office
will perform audits of Medi-Cal expenditures on behalf
of DHS and will submit its findings and recommenda-
tions to DHS for appropriate action.” The DHS requested
and make all related working papers available to DHS for
review upon request. In addition, the IA specifies that the
[Controller] will make referrals only to Audits and
Investigations, and not directly to DHS Recovery, DHS Office of
Administrative Hearings and Appeals, or any law enforcement
or other agency. [{] With respect to the fraud referral process,
the IA specifies that the [Controller] may recommend to the
DHS that it initiate a withhold action when the [Controller]
‘collects evidence of potential fraud or willful misrepresen-
tation during an investigation’ (Scope of Work, paragraph 10).
Federal regulations at 42 CFR 455.23 authorize such withholds
by the State Medicaid agency. The IA stipulates that the
[Controller] will not make independent fraud referrals to law
enforcement agencies, and that DHS will exercise its discretion
as the Medicaid single State agency when making such referrals.
{{] Based upon our review of the IA, the pertinent section of the
California State Plan, and the applicable federal regulations, we
conclude that the IA is fully compliant with federal single State
agency requirements. The fact that DHS vests Medi-Cal audit
functions in Audits and Investigations does not preclude DHS
from augmenting its own audit resources through an
appropriate arrangement with the [Controller]. The IA itself
states that ‘DHS will exercise its authority as the Medicaid
single state agency,’ and we see nothing in it that gives the
[Controller] discretionary authority that would violate the
single State agency requirements at 42 CFR 431.10.”
App. 20
an effective date of July 1, 1998. Also on December 17,
1999, the HCFA approved the state plan amendment with
an effective date of July 1, 1998, as requested. The HCFA’s
letter signed by Karen Fuller, stated in relevant part:
“(The state plan amendment] amends the State plan to
reflect the fact that the State Controller’s Office performs
audits of Medi-Cal expenditures on behalf of the Depart-
ment of Health Services (DHS). [J] Our review of [the
state plan amendment] was conducted in accordance with
the requirements of section 1902(a)(5) of the Social Secu-
rity Act (the Act) and the regulatory provisions at 42 CFR
431.10 and 431.11.”
On May 19, 2000, the trial court issued the peremp-
tory writ of mandate in this case. As noted above, the
court directed the DHS to set aside its final decision in
RCJ’s administrative appeal “insofar as it relies upon the
audit findings of the State Controller. ... ”
IV. DISCUSSION
A. Private Right of Action
The DHS contends RCJ has no “private right of
action” to enforce the single state agency requirement
embodied in the federal statute (§ 1396a(a)(5)) and its
implementing regulation (42 C.F.R. § 431.10(e)). The DHS
discusses federal decisional authority concerning
whether a health care provider may bring an action under
title 42 of the United States Code, section 1983, to chal-
lenge state practices under the Medicaid Act. (See Wilder
v. Virginia Hospital Assn., supra, 496 U.S. at p. 501; Sobky v.
Smoley, supra, 855 F.Supp. at pp. 1130-1133.) Those deci-
sions are inapposite. RC] does not seek to enforce a
App. 21
private right of action under title 42 of the United States
Code, section 1983, or otherwise. Rather, RCJ seeks judi-
cial review of a final administrative decision arising from
a Medi-Cal audit pursuant to Code of Civil Procedure
section 1094.5. Welfare and Institutions Code section
14171, subdivision (j), specifically authorizes such
review.® RCJ’s writ of mandate pursuant to Code of Civil
Procedure section 1094.5 is the proper means by which a
Medi-Cal provider may challenge an individual audit
decision. (Welf. & Inst.Code, § 14171, subdivision (j);
Florence Western Medical Clinic v. Bontaé& (2000) 77
Cal.App.4th 493, 502-503, fn. 8; Frankel v. Kizer (1993) 21
Cal.App.4th 743, 750.) The DHS does not contend the
issue presented here is beyond the scope of the issues
that may be raised upon judicial review pursuant to
Welfare and Institutions Code section 14171, subdivision
(j).
B. Doctor’s Medical Laboratory, Inc. v. Connell Is Not Con-
trolling
RCJ, by its writ petition, sought to set aside the
DHS’s final decision in this case, as “refusing to abide
by” the Court of Appeal decision in Doctor’s Medical
Laboratory, Inc. v. Connell, supra, 69 Cal.App.4th at pages
6 Welfare and Institutions Code section 14171 provides in
pertinent part: “(a) The director shall establish administrative
appeal processes to review grievances or complaints arising
from the findings of an audit... . [{] . . . [{] (j) The final decision
of the director shall be reviewable in accordance with Section
1094.5 of the Code of Civil Procedure within six months of the
issuance of the director’s final decision.”
App. 22
896-898, 81 Cal.Rptr.2d 829 (Doctor’s). RCJ contends Doc-
tor’s controls the resolution of this case. We respectfully
disagree. In Doctor’s, a Medi-Cal provider sought a writ
of mandate to compel the Controller to release approxi- -
mately $3 million in payments that had been withheld.
(Doctor’s, supra, 69 Cal.App.4th at p. 893.) The provider
alleged the Controller’s refusal to pay the claims had led
to its insolvency. (Id. at p. 895.) The Court of Appeal
found the 1997 Interagency Agreement improperly autho-
rized the Controller “to perform audits to identify over-
payments to providers, and to take corrective action,
presumably withholding sums believed to constitute
overpayment.” (Id. at p. 895.)
We need not address the DHS’s disagreement with
our Division Seven colleagues’ conclusions. The Doctor’s
opinion was filed on February 1, 1999. On March 24, 1999,
the HCFA, by process of Ms. Richardson’s letter,
expressed approval of the Controller’s audit authority.
On December 17, 1999, well after the Doctor’s opinion was
filed, the HCFA approved the use of the Controller as the
audit agency effective July 1, 1998. In Doctor’s, the Court
of Appeal did not confront, nor could our Division Seven
colleagues have confronted, the subsequent December 17,
1999, federal agency approval of the Controller’s contrac-
tual authority to audit Medi-Cal payments to providers.
The December 17, 1999, HCFA approval happened
entirely after the Doctor’s opinion was filed. The HCFA’s
approval of the delegated audit authority is squarely
presented in this case. Moreover, as discussed below, we
conclude we must defer to the HCFA’s construction of the
federal statutory and regulatory law that it administers as
reflected in its December 17, 1999, action.
ee en Fe ny ae a ee ee Se a are
App. 23
RCJ contends the HCFA’s action is immaterial
because the Controller audited it before the HCFA
expressed its approval. We disagree. By its writ petition,
RCJ sought to set aside the DHS’s final decision because
it relied on the Controller’s audit. At the time the DHS
issued its final decision, the HCFA had by letter
expressed its opinion that the delegation of audit author-
ity to the Controller was fully compliant with federal
single state agency requirements. Moreover, at the time
the trial court issued its order directing the DHS to set
aside its final decision to the extent it relied on the
Controller’s audit, the HCFA had in addition approved
the state plan amendment effective July 1, 1998. Under
these circumstances, we conclude, the federal agency’s
interpretation of its own regulation was squarely pre-
sented.
C. The HCFA’s Construction of the Federal Law that it
Administers is Entitled to Deference
1. Congress has not Specifically Addressed the Pre-
cise Question at Issue
RCJ does not specifically contend nor do we conclude
that the HCFA’s regulation is an impermissible construc-
tion of the federal statutory single state agency require-
ment. RCJ asserts in general terms that the language of
the federal statute and regulation is clear, unambiguous,
and mandatory. RCJ contends the plain language and
“obvious” meaning Of the federal statute (§ 1396a(a)(5))
and the implementing regulation (42 C.E.R. § 431.10(e))
prohibit the DHS from delegating audit authority to the
Controller; further, the HCFA’s conclusion to the contrary
App. 24
contradicts the federal law and therefore is not entitled to
any deference. We disagree.
The United States Supreme Court explained the stan-
dard to be applied on review of an administrative
agency’s construction of a statute which it administers in
Chevron, U.S.A., Inc. v. Natural Resources Defense Council,
Inc. (1984) 467 U.S. 837, 842-845: “When a court reviews
an agency’s construction of [a] statute which it adminis-
ters, it is confronted with two questions. First, always, is
the question whether Congress has directly spoken to the
precise question at issue. If the intent of Congress is clear,
that is the end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed
intent of Congress. If, however, the court determines
Congress has not directly addressed the precise question
at issue, the court does not simply impose its own con-
struction on the statute, as would be necessary in the
absence of an administrative interpretation. Rather, if the
statute is silent or ambiguous with respect to the specific issue,
the question for the court is whether the agency's answer is
based on a permissible construction of the statute. [Fn.9.]....
[{] ‘The power of an administrative agency to administer
a congressionally created . . . program necessarily
requires the formulation of policy and the making of
rules to fill any gap left, implicitly or explicitly, by Con-
gress.’ [Citation.] If Congress has explicitly left a gap for
the agency to fill, there is an express delegation of author-
ity to the agency to elucidate a specific provision of the
statute by regulation. Such legislative regulations are
given controlling weight unless they are arbitrary, capri-
cious, or manifestly contrary to the statute. Sometimes,
the legislative delegation to an agency on a particular
App. 25
question is implicit rather than explicit. In such a case, a
court may not substitute its own construction of a statu-
tory provision for a reasonable interpretation made by
the administrator of an agency. [{] We have long recog-
nized that considerable weight should be accorded to an
executive department’s construction of a statutory
scheme it is entrusted to administer, and the principle of
deference to administrative interpretations ‘has been con-
sistently followed by this Court whenever decision as to
the meaning or reach of a statute has involved reconciling
conflicting policies, and a full understanding of the force
of the statutory policy in the given situation has
depended upon more than ordinary knowledge respect-
ing the matters subjected to agency regulations.’ [Cita-
tions.] ‘ . . . If this choice represents a reasonable
accommodation of conflicting policies that were commit-
ted to the agency’s care by the statute, we should not
disturb it unless it appears from the statute or legislative
history that the accommodation is not one that Congress
would have sanctioned.’ [Citation.]” (Fns. omitted, italics
added; accord, Garfield Medical Center v. Belshé (1998) 68
Cal.App.4th 798, 807-808.) Simply stated, once a court
determines, after reviewing the legislation, that Congress
did not directly address the precise question at issue, the
pertinent question is whether the administrative con-
struction in the form of a regulation is reasonable. (Chev-
ron U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
supra, 467 U.S. at p. 845; accord, Alexander v. Sandoval
(2001) ___ U.S. ___, __ [121 S.Ct. 1511, 1518].) As the
United States Supreme Court further held in Chevron
U.S.A., Inc., “The court need not conclude that the agency
construction was the only one it permissibly could have
App. 26
adopted to uphold the construction, or even the reading
the court would have reached if the question initially had
arisen in a judicial proceeding. [Citations.]” (Chevron
U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
supra, 467 U.S. at p. 843, fn. 11; Zenith Radio Corp. v.
United States (1978) 437 U.S. 443, 450.)
We consider the language of the federal statute. We
find Congress has not directly addressed the precise
question at issue; however, the statutory language plainly
suggests that a state Medicaid agency may delegate func-
tions to another state agency. Because we are considering
a federal statute, we follow rules of statutory construc-
tion enunciated by the United States Supreme Court. In
Kaiser Aluminum & Chemical Corp. v. Bonjorno (1990) 494
U.S. 827, 835, quoting from Consumer Product Safety
Comm'n v. GTE Sylvania (1980) 447 U.S. 102, 108, the
United States Supreme Court held: “The starting point for
interpretation of a statute ‘is the language of the statute
itself. Absent a clearly expressed legislative intention to
the contrary, that language must ordinarily be regarded
as conclusive.’” The United States Supreme Court has
noted that “the statutory language controls its construc-
tion” (Ford Motor Credit Co. v. Cenance (1981) 452 U.S. 155,
158, fn. 3) and that “ ‘[t]here is, of course, no more per-
suasive evidence of the purpose of a statute than the
words by which the [L]egislature undertook to give
expression to its wishes.’ ” (Griffin v. Oceanic Contractors,
Inc. (1982) 458 U.S. 564, 571.) In interpreting a statute, the
United States Supreme Court has noted: “” ‘In expounding
a statute, we must not be guided by a single sentence or
member of a sentence, but look to the provisions of the
whole law, and to its object and policy.’ [Citations.] Our
App. 27
objective in a case such as this is to ascertain the congres-
sional intent and give effect to the legislative will.” (Phil-
brook v. Glodgett (1975) 421 U.S. 707, 713.) On another
occasion, the court stated, “We do not, however, construe
statutory phrases in isolation; we read statutes as a
whole.” (United States v. Morton (1984) 467 U.S. 822, 828,
fn. omitted.) Further, in interpreting a statute, the
Supreme Court has emphasized the importance of avoid-
ing: “absurd results” (United States v. Turkette (1981) 452
U.S. 576, 580); “ ‘an odd result’ ” (Public Citizen v. U.S.
Department of Justice (1989) 491 U.S. 440, 454); or ” unrea-
sonable results whenever possible.” (American Tobacco Co.
v. Patterson (1982) 456 U.S. 63, 71.) Moreover, the Supreme
Court has noted, “Judicial perception that a particular
result would be unreasonable may enter into the con-
struction of ambiguous provisions, but cannot justify dis-
regard of what Congress has plainly and intentionally
provided.” (Commissioner of the Internal Revenue v. Asphalt
Products Co., Inc. (1987) 482 U.S. 117, 121.) In Griffin v.
Oceanic Contractors, Inc., supra, 458 U.S. at p. 571, the
court stated: “Nevertheless, in rare cases the literal appli-
cation of a statute will produce a resuit demonstrably at
odds with the intentions of its drafters, and those inten-
tions must be controlling. . . . [Citations.]” When a statute
is unambiguous, its language cannot “be expanded or
contracted by the statements of individual legislators or
committees during the course of the [legislative]
process.” (West Virginia Univ. Hospitals, Inc. v. Casey,
supra, 499 U.S. at pp. 98-99.)
As noted above, section 1396a(a)(5) requires that a
state Medicaid plan “provide for the establishment or
designation of a single State agency to administer or to
App. 28
supervise the administration of the plan. ...” It is clear the
federal statute does not specifically address the question
whether a state Medicaid agency can delegate audit
responsibility to another state agency. It does expressly
provide, however, that the designated single state agency
will administer or supervise the administration of the state
plan. The use of the disjunctive means the terms “admin-
ister” and “supervise” must be given separate meanings
except where the context dictates otherwise. (Reiter v.
Sonotone Corp. (1979) 442 U.S. 330, 339; F.C.C. v. Pacifica
Foundation (1978) 438 U.S. 726, 739-740.) To “administer”
means “to manage the affairs of” the state Medicaid
program. (Oxford English Dict. (2d ed. CD-ROM 1994).)
To “supervise” means “[t]o oversee,” “to have the over-
sight of, superintend the execution or performance of (a
thing)... . ” (Ibid.) Here, under the plain language of
section 1396a(a)(5), the DHS is authorized to supervise the
administration of the state Medicaid program; that is, to
oversee the execution or performance of the program.
The federal statute’s use of the word “supervise,” which
means something other than administer, plainly suggests
that entities other than the single state agency may be
involved in the administration of the program under the
Medicaid agency’s supervision. Further, as discussed
above, the legislative purpose of the single state agency
requirement was both to avoid a diversity of operating
standards within a state and to ensure that one agency
would be accountable to the federal government for the
operation of Medicaid program and compliance with fed-
eral law. (Sobky v. Smoley, supra, 855 F.Supp. at pp.
1145-1146; Hillburn v. Maher, supra, 795 F.2d at p. 261.) The
language of section 1396a(a)(5) is consistent with that
App. 29
purpose; it requires a Medicaid agency to administer or
Supervise the administration of the state program
(§ 1396a(a)(5)), thereby ensuring consistent operating
standards and accountability to the federal government.
We conclude, therefore, that although Congress did not
speak to the precise question at issue in this case, the
statutory language does plainly suggest that a state Medi-
caid agency may delegate functions to another state
agency. As the United States District Court for the Dis-
trict of Rhode Island held in King v. Sullivan (1991) 776
F.Supp. 645, 656-657, “Section 1396a(a)(5) requires that a
State Plan provide for a single state agency ‘to administer
or to supervise the administration of the plan.’ 42 U.S.C.
§ 1396a(a)(5) (1988) (emphasis added). The statute does
not require states to use only one agency to carry out
every task that is part of the State Plan. See 42 C.FR.
§ 431.10(e)(3) (1990)... . ”
2. The HCFA’s Regulation is a Permissible Con-
struction of the Federal Statute
We turn to the HCFA’s implementing regulation. As
discussed above, where, as here, Congress has not
directly addressed the precise issue, the question for a
state court is whether the federal agency’s answer is
based on a permissible construction of the statute. (United
States v. Morton, supra, 467 U.S. at p. 834; Chevron, U.S.A.,
Inc. v. Natural Resources Defense Council, Inc., supra, 467
U.S. at p. 843.) We conclude the implementing regulation
is a permissible construction of the federal statute.
As noted above, the HCFA interpreted the federal
statutory single state agency requirement in title 42 of the
App. 30
Code of Federal Regulations, part 431.10 as follows: “(e)
Authority of the single State agency. In order for an
agency to qualify as the Medicaid agency - [{] (1) The
agency must not delegate, to other than its own officials,
authority to — [{] (i) Exercise administrative discretion in
the administration or supervision of the plan, or [{] (ii)
Issue policies, rules, and regulations on program matters.
{{] (2) The authority of the agency must not be impaired
if any of its rules, regulations, or decisions are subject to
review, clearance, or similar action by other offices or
agencies of the State. [J] (3) If other State or local agen-
cies or offices perform services for the Medicaid agency,
they must not have the authority to change or disapprove
any administrative decision of that agency, or otherwise
substitute their judgment for that of the Medicaid agency
with respect to the application of policies, rules, and
regulations issued by the Medicaid agency.” The HCFA’s
regulation is consistent with both the language and legis-
lative purpose of the federal statute. The implementing
regulation requires that the state Medicaid agency retain,
and not delegate, its ultimate authority to “[e]xercise
administrative discretion in the a ministration or supervi-
sion of the [state] plan.” (42 C.F.R. § 431.10(e)(1)(i), italics
added.) It further requires that the state Medicaid agency
retain, and not delegate, it [sic] authority to “[iJ]ssue
policies, rules, and regulations on program matters.” (42
C.F.R. § 431.10(e)(1)(ii).) Under the regulation, if another
entity performs services for a single Medicaid agency, it
“must not have the authority to change or disapprove
any administrative decision of that agency, or otherwise
substitute [its] judgment for that of the Medicaid agency
with respect to the application of policies, rules, and
App. 31
regulations issued by the Medicaid agency.” (42 C.FR.
§ 431.10(e)(3).). The regulation ensures that the single
state agency will retain administrative discretion in the
supervision of the Medicaid program and will remain
accountable to the government of the United States for
the state’s administration of the program and compliance
with federal Medicaid law. We conclude the HCFA’s con-
struction of the federal statutory single state agency
requirement in title 42 of the Code of Federal Regula-
tions, part 430.10(e), is a permissible and reasonable one.
3. Application of the Regulation to the Circum-
stances of this Case was not Plainly Erroneous or
Inconsistent with the Regulation
RCJ contends that the HCFA’s application of its own
regulation to the circumstances of this case is plainly
erroneous or its reasoning is inconsistent with the regula-
tion. We disagree.
The United States Supreme Court has held that a
federal agency’s interpretation of its own regulation is
controlling unless it is “ ‘plainly erroneous or inconsis-
tent with the regulation.’ ” (Robertson v. Methow Valley
Citizens Council (1989) 490 U.S. 332, 359, quoting Bowles v.
Seminole Rock & Sand Co. (1945) 325 U.S. 410, 414; Auer v.
Robbins (1997) 519 U.S. 452, 461; Martin v. Occupational
Safety and Health Review Com. (1991) 499 U.S. 144, 150-151;
Udall v. Tallman (1965) 380 U.S. 1, 16.) To paraphrase the
Supreme Court in a case involving the Department of
Health and Human Services: “[W]e must defer to the
[HCFA’s] interpretation [of its own regulation] unless an
‘alternative reading is compelled by the regulation’s plain
App. 32
language or by other indications of the [HCFA’s] intent at
the time of the regulation’s promulgation.’ [Citation.]”
(Thomas Jefferson University v. Shalala (1994) 512 U.S. 504,
512; Christensen v. Harris County (2000) 529 U.S. 576, 588
[deference to agency’s interpretation of regulation unwar-
ranted where interpretation contradicted plain and clear
language of regulation].)” The lower federal courts have
held the HCFA’s interpretation of Medicaid regulations is
entitled to great weight and deference. (New York Dept. of
Social Services v. Dubline (1973) 413 U.S. 405, 421; Visiting
Nurse Association of North Shore, Inc. v. Bullen (1st Cir.
1996) 93 F.3d 997, 1002; North Carolina v. United States
Dept. of Health and Human Servs. (4th Cir. 1993) 999 F.2d
767, 769-770; Folden v. Washington State Dept. of Social and
Health Servs. (9th Cir. 1992) 981 F.2d 1054, 1058; Missouri
Dept. of Social Servs. v. Sullivan (8th Cir. 1992) 957 F.2d
542, 544; Citizens Action League v. Kizer (9th Cir. 1989) 887
F.2d 1003, 1007; Garfield Medical Center v. Belshé, supra, 68
Cal.App.4th at p. 808; Dept. of Health Services v. Superior
Court (1991) 232 Cal.App.3d 776, 782; Frank v. Kizer (1989)
213 Cal.App.3d 919, 924; see Eisenberg v. Myers (1983) 148
Cal.App.3d 814, 822.) As the United States Court of
Appeal for the Seventh Circuit held in Indiana Assn. of
Homes for the Aging Inc. v. Indiana Office of Medicaid Policy
and Planning (7th Cir. 1995) 60 F.3d 262, 266, the HCFA’s
interpretation of its own regulations “is of controlling
7 The United States Supreme Court’s recent decision in
United States v. Mead Corporation (2001) __ U.S. __, ___ [121
S.Ct. 2164, 2170] does not change this standard of review. Mead
Corporation involved a tariff classification by the United States
Customs Service. No federal agency interpretation of its own
regulation was at issue in Mead Corporation.
App. 33
weight unless plainly erroneous or inconsistent with the
regulation.” As the United States Court of Appeals for the
First Circuit explained in Visiting Nurse Association of
North Shore, Inc. v. Bullen, supra, 93 F.3d at page 1002: “As
a federal agency charged with administering the Medi-
caid program . . . HCFA plainly is entitled to [Chevron
U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
supra, 467 U.S. at pp. 842-843] deference in its interpreta-
tions of the [Medicaid] Act and the implementing regula-
tions. [Citations.] Indeed, when a federal agency has
promulgated and published a regulation pursuant to its
own enabling statute, we review its interpretation of that
regulation under a standard even ‘more deferen-
tial .. . than that afforded under Chevron’ to the-agency’s
interpretation of the Statute. [Citations.] ‘[P]rovided an
agency's interpretation of its own regulation does not
violate the Constitution or a federal statute, it must be
given “controlling weight unless it is plainly erroneous or
inconsistent with the regulation.” ’ [Citations.]”
RCJ does not specifically challenge the December 17,
1999, state plan amendment. However, that under federal
law, when, as here, a state plan or amendment has been
reviewed and approved by the HCFA, a party challenging
its legality must show that the provisions at issue are
“ “arbitrary, capricious, an abuse of discretion, or other-
wise not in accordance with law’ before [a court] will find
them substantively invalid.” (Concourse Rehabilitation &
Nursing Center, Inc. v. DeBuono (1999) 179 F.3d 38, 44;
Pinnacle Nursing Home v. Axelrod (2d Cir. 1991) 928 F.2d
1306, 1313; California Hospital Assn. v. Schweiker (C.D. Cal.
1982) 559 F.Supp. 110, 116.) In Indiana Assn. of Homes for
App. 34
the Aging Inc. v. Indiana Office of Medicaid Policy and Plan-
ning, supra, 60 F.3d at page 266, the United States Court of
Appeals for the Seventh Circuit held: “Indiana’s amended
[Medicaid] plan was approved by HCFA and is accord-
ingly a product of state and federal agency action. [Cita-
tion.] ‘A trial court, therefore, must review the plan with
the deference accorded federal agency actions.’ [Cita-
tions.] ‘This deference entitles the . . . plan to a presump-
tion of regularity, but does not prevent the court from a
thorough, probing, in-depth review.’ [Citations.] In con-
ducting this review, the court ‘shall hold unlawful and set
aside agency action, findings and conclusions found to
be . . . arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law’ or ‘without obser-
vance of procedure required by law.’’ [Citation.]” ‘Our
state courts have recognized that the HCFA’s approval of
California’s Medicaid plan is entitled to deference unless
“palpably erroneous.” (Garfield Medical Center v. Belshe,
supra, 68 Cal.App.4th at p. 808; Eisenberg v. Myers, supra,
148 Cal.App.3d at p. 822.)
We find the HCFA’s construction of its own regula-
~tion—as reflected in Ms. Richardson’s March 24, 1999,
letter and the December 17, 1999, approval of the state
plan amendment as allowing the DHS to delegate audit
responsibility to the Controller is entitled to deference.
RCJ contends the single state agency regulation (42 C.F.R.
§ 431.10(e)(3)) specifically prohibits the DHS from dele-
gating any administrative discretion to another state
agency unless expressly authorized to do so by another
regulation as, for example, with respect to eligibility
ee ee ee ee ee
App. 35
determinations (42 C.F.R. § 431.10(c)).8 We disagree. The
HCFA has, from the inception of Medicaid until the pres-
ent time, interpreted the regulation at issue as allowing a
single state Medicaid agency to delegate responsibilities
to another state agency. The HCFA has permitted such
delegation so long as the single state Medicaid agency:
supervises the other agericy; remains responsible for that
agency’s actions; and remains accountable to the federal
government for the administration of the state Medicaid
plan. (U.S. Dept. of Health, Education & Welfare, Hand-
book of Public Assistance Administration, Supplement D
- Medical Assistance Programs Under Title XIX of the
8 Title 42, Code of Federal Regulations, part 431.10(c)
States: “Determination of eligibility. [J] (1) The plan must
specify whether the agency that determines eligibility for
families and for individuals under 21 is — [{] (i) The Medicaid
agency; or [{] (ii) The single State agency for the financial
assistance program under title IV-A (in the 50 States or the
District of Columbia), or under title I or XVI (AABD), in Guam,
Puerto Rico, or the Virgin Islands. [{] (2) The plan must specify
whether the agency that determines eligibility for the aged,
blind, or disabled is — [{] (i) The Medicaid agency; [{]} (ii) The
single State agency for the financial assistance program under
title IV-A (in the 50 States or the District of Columbia) or under
title I or XVI (AABD), in Guam, Puerto Rico, or the Virgin
Islands; or [{]] (iii) The Federal agency administering the
supplemental security income program under title XVI (SSI). In
this case, the plan must also specify whether the Medicaid
agency or the title IV-A agency determines eligibility for any
groups whose eligibility is not determined by the Federal
agency. [{] (d) Agreement with Federal or State agencies. The
plan must provide for written agreements between the
Medicaid agency and the Federal or other State agencies that
determine eligibility for Medicaid, stating the relationships and
respective responsibilities of the agencies.”
App. 36
Social Security Act, D 2140 (June 17, 1966).) In the HCFA’s
view, a regulation expressly authorizing a state Medicaid
agency to delegate audit authority to another state agency
is not required. As noted above, the current single state
agency regulation (42 C.FR. § 431.10(e)) states that the
state Medicaid agency may rely on other state agencies’
services provided that it does not delegate its authority,
i.e., its ultimate authority: to “[e]xercise administrative
discretion in the administration or supervision of the
plan”; or to “[i]ssue policies, rules, and regulations on
program matters.” (42 C.F.R. § 431.10(e)(1)(i) & (e)(1)(ii)).
In addition, title 42, Code of Federal Regulations part
431.10(e)(2) states, “The authority of the [state Medicaid]
agency must not be impaired if any of its rules, regula-
tions, or decisions are subject to review, clearance, or
similar action by other offices or agencies of the State.”
Another state entity performing services for the state
Medicaid agency must not have the authority: “to change
or disapprove” the state Medicaid agency’s administra-
tive decisions. (42 C.F.R. § 431.10(e)(3).) Further, the other
entity must not have the authority to substitute its judg-
ment for that of the state Medicaid agency “with respect
to the application of policies, rules, and regulations
issued by the Medicaid agency.” (Ibid.)
Moreover, it is undisputed the DHS has not dele-
gated to the Controller any authority to issue policies,
rules, or regulations on Medi-Cal program matters. Nor
do we find that the Controller reviews or takes similar
action with respect to the DHS’s rules, regulations, or
decisions. Further, RCJ has not pointed to, and we have
not found, any evidence in the record that the Controller
has been given authority to change or disapprove any
App. 37
administrative decision by the DHS. Instead, the Control-
ler undertakes, on DHS’s behalf, required postpayment
reviews of provider claims. RCJ also has not pointed to,
and we have not found, any evidence in the record that
the Controller’s office has the authority to substitute its
judgment for that of the DHS with respect to the applica-
tion of policies, rules, and regulations issued by the DHS.
Nor has the DHS delegated to the Controller any author-
ity to exercise discretion in the administration or supervi-
sion of the statewide Medicaid plan. The interagency
agreement does not have any bearing on the ultimate
authority of the DHS to exercise administrative judgment
in the statewide administration »r supervision of the
Medi-Cal program as conductec under the state plan.
What the DHS has delegated to tne Controller is only the
authority to conduct postpayment audits of Medi-Cal
provider claims. The DHS has authorized the Controller
to: perform audit services including audits designed to
identify overpayments to providers; “target its audits for
[specified] program issues using trend analysis based on
Medi-Cal expenditures and historical patterns”; docu-
ment results in “clear, accurate” audit reports meeting
“all of the statutory and regulatory requirements of an
audit of Medi-Cal providers”; abide by specified state
codes and regulations; “collect and retain sufficient evi-
dence to substantiate all audit findings and recommenda-
tions”; issue repayment demands; send repayment
demands to providers with a copy of the audit report;
provide information to the provider regarding appeal
rights; and take responsibility for the resolution of audit
findings through and including the administrative appeal
process. The DHS remains ultimately responsible for
App. 38
postpayment audits of Medi-Cal providers. The DHS
supervises the Controller’s services. The Controller must
notify the DHS’s Audits and Investigations Division
“prior to onsite reviews of Medi-Cal providers.” The
Controller must provide draft audit reports to the DHS at
least 15 days prior to issuance. The Controller must send
copies of an audit report and demand for repayment to
the DHS Audits and Investigations Division and Office of
Administrative Hearings and Appeals. Given these cir-
cumstances, the HCFA could reasonably conclude that, as
authorized by title 42 Code of Federal Regulations part
431.10(e)(3), the DHS has simply contracted with the
Controller to perform required postpayment audits. The
HCFA’s conclusion that the delegation of audit respon-
sibilities to the Controller is fully compliant with federal
single state agency requirements is not plainly erroneous
or inconsistent with the regulation. Therefore, it is enti-
tled to and will be accorded controlling weight.
V. DISPOSITION
The trial court’s judgment granting a peremptory
writ of mandate is reversed. Defendant, the Director of
the California Department of Health Services, is to
recover its costs on appeal from plaintiff, RCJ Medical
Services, Inc.
CERTIFIED FOR PUBLICATION
TURNER, P.J.
We concur:
GRIGNON J.
ARMSTRONG, J.
7 —
PRR te a TR he?) Ve ite
App. 39
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION: 5
DATE: August 30, 2001
Patric Hooper
Hooper Lundy & Bookman, Inc.
1875 Century Park East
Suite 1600
Los Angeles, CA 90067-2104
RCJ Medical Services, Inc.
vV.
The Director of the State Department of Health Services
B143160
Los Angeles County No. BS060056
THE COURT:
Petition for rehearing denied.
App. 40
HOOPER, LUNDY & BOOKMAN, INC.
PATRIC HOOPER (SBN 57343)
1875 Century Park East, Suite 1600
Los Angeles, California 90067-2799
Tel: (310) 551-8165
Fax: (310) 551-8181
Attorneys for Petitioner
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
RCJ MEDICAL SERVICES, ) Case No. BS 060056
INC. dba )
AMERICAN NETWORK __ ) [PROPOSED] JUDGMENT
LABORATORY, ) GRANTING PEREMPTORY
) WRIT OF MANDATE
Petitioner,
(Filed May 18, 2000)
V.
THE DIRECTOR OF |
THE STATE, ETC.
Respondent.
~~ ee”
Petitioner’s Motion for a Peremptory Writ of Man-
date in this matter came on regularly for hearing before
the Honorable David P. Yaffe, Judge presiding in Depart-
ment 86 of the within Court, on May 2, 2000. Petitioner,
RCJ Medical Services, Inc., was represented by Patric
Hooper of Hooper, Lundy & Bookman, Inc., and respon-
dent Director of the State Department of Health Services,
was represented by Patricia L. Nagler, Deputy Attorney
General.
One Se
App. 41
The Court having considered all of the pleadings and
the written and oral argument of counsel, and having
issued the tentative decision which is reflected in its
Minute Order of May 2, 2000, and which constitutes its
Statement of Decision,
IT IS HEREBY ORDERED, ADJUDGED AND
DECREED that a peremptory writ of mandate be issued
requiring the respondent, the Director of the State
Department of Health Services to set aside her Final
Decision in this case insofar as it relies upon /s/ DPY
amdito—vord the audit findings of the State Controller.
/s/ DPY whict-gavetisetothetinatadministrative ceci=
storr-under-review.
IT IS FURTHER ORDERED that plaintiff shall recover
its costs of suit in the amount of $
DATED: May 18, 2000
By: /s/ Judge David P. Yaffe
DAVID P. YAFFE
Judge of the Superior Court
App. 42
BEFORE THE DEPARTMENT OF HEALTH SERVICES
STATE OF CALIFORNIA
ADMINISTRATIVE HEARINGS
In the Matter of:
AMERICAN NETWORK
LABORATORY (RC]J
Medical Services, Inc.
PROVIDER NO. LAB87216F
DATE REPORTS ISSUED
March 10, 1998 & May 4, 1998
Appeal No.
SR8-0298-550-RC
SR8-0398-644-RC
FINAL DECISION
ee
SUMMARY
The appeal is granted in part and denied in part.
The Office of the State Controller has the authority to
audit Medi-Cal claims, as long as it complies with federal
Medicaid laws and regulations, as well as California
Medi-Cal laws and regulations.
The Office of the State Controller may use a valid
statistical and extrapolation methodology during its audit
process to help determine the amount of an overpayment
to a provider, but should disallow payment only at the
lower limit of the 95 percent confidence interval.
Evidence introduced into the record supports the
conclusion that a laboratory provider should not perform
tests where there is no name of the referring physician on
the requisition form. In addition, a provider cannot insu-
late itself from possible financial consequences by relying
a ye ee PP ee
oe a ae Te ee ee ee ee eee
~~ n
— oe ee
App. 43
on alleged arrangements made by independent contrac-
tors with medical clinics and/or doctors regarding the
requesting of laboratory tests.
Where sufficient evidence is produced to establish
that a provider billed for services in excess of what was
ordered by a physician, or did not perform tests that were
ordered, audit adjustments taken by the Controller will
be upheld.
Where a preponderance of the evidence shows that
no eligible Medi-Cal beneficiary received the service that
was billed for, payment for the service in question must
be disallowed.
PROCEEDINGS
This matter was heard before Robert L. Carisoza,
Administrative Law Judge for the Department of Health
Services, on June 15 and 16, 1998, in Los Angeles, Califor-
nia. The representatives present were:
Geoftrey F. Margolis, Esq., for the Office of the State
Controller (Controller); and
Patric Hooper, Esq., for American Network Labora-
tory (Provider).
The Names of other persons in attendance are a
matter of record. At the conclusion of the formal hearing
the administrative record was held open for the submis-
sion of written closing arguments. After receipt of these
closing arguments, the formal administrative record was
closed effective December 9, 1998.
ee
App. 44
A Proposed Decision was signed by the Administra-
tive Law Judge on April 1, 1999, and was mailed to the
parties and to the deputy Director and Chief Counsel for
the Department of Health Services with a request for
comments. Comments were received from the Controller
and from the department of Health Services.
On May 28, 1999, the Provider’s counsel notified the
Office of Administrative Hearings and Appeals that the
published appellate decision in Doctor’s Medical Labora-
tory, Inc. v. Connell (1999) 69 Cal.App.4th 891 (“the Connell
decision”) had become final, and asked that the appeal be
granted in its entirety based upon the decision. Further
briefing on the applicability of the decision was submit-
ted by both parties.
On June 7, 1999, the Proposed Decision was timely
rejected, and the parties were given notice that the pri-
mary reason for so doing was to consider the effect of the
finality of the Connell decision. The Provider’s counsel
waived further briefing on this issue. Subsequently, the
parties and the Department of Health Services were given
the opportunity to submit additional briefing on the
question of the propriety of payment for services not
received by a Medi-Cal beneficiary, and all three submit-
ted additional comments in response to this request.
Based upon a review of the entire record, including
the transcript, pursuant to Government Code section
11517(d), this constitutes the Final Decision of the
Department of Health Services.
~
App. 45
ISSUES
1. Whether the Office of the State Controller has
authority to audit Medi-Cal claims.
2. Whether the sampling and extrapolation meth-
odology and findings used by the Controller in both of its
audits are valid.
For Audit #1:
3. Whether finding #1 is proper in concluding that
alleged referring physicians did not actually refer
patients to the Provider.
4. Whether finding #2 is correct in concluding that
laboratory tests were not ordered by referring physicians
or not performed by the Provider.
5. Whether finding #3 is proper in concluding that
services were not provided to the claimed beneficiaries,
and therefore, the Provider should reimburse the Medi-
Cal program.
6. Whether finding #4 is correct in concluding that
laboratory tests were not ordered.
For Audit #2:
7. Whether finding #1 is correct in concluding that
laboratory tests were not ordered by referring physicians
or were not performed by the Provider.
8. Whether finding #2 is proper in concluding that
services were not provided to the claimed beneficiaries,
and therefore, the Provider should reimburse the Medi-
Cal program.
App. 46
STIPULATION
During the course of the hearing the parties stipu-
lated that the following exhibits would be treated as
direct evidence: exhibits 44, 47, 55, 58, 84, 89, 94, and 97.
BACKGROUND FACTS
A preponderance of the oral and documentary evi-
dence introduced into the administrative record during
the course of the hearing established the following:
\
I
The Provider is a general clinical laboratory licensed
by the State of California, and certified by the Depart-
ment to perform diagnostic services for eligible benefici-
aries of the Medi-Cal program. Within the scope of this
licensing and certification, the Provider performed var-
ious laboratory services in the Los Angeles area during
the period January 1997 through March 1998, for which
the Provider was reimbursed by the Medi-Cal program.
I]
Relying on statutory authority and an interagency
agreement with the Department of Health Services
(Department), the Controller initially conducted a review
of the Provider’s Medi-Cal claims for medical testing
services which were submitted during the period January
9, 1997, through October 9, 1997. The purpose of this
review was to determine the Provider’s compliance with
the applicable provisions of the Medi-Cal program gov-
erning the performance of laboratory services. This report
App. 47
concluded that the Provider had been overpaid!
$1,296,801.00 by the Medi-Cal program for the services
rendered. This overpayment amount was calculated
using a statistical extrapolation methodology which pro-
jected the findings of the 110 random sample items
reviewed to the entire population of 10,857 items. The
Controller issued its findings resulting from this review
in a final report dated March 10, 1998. The Provider filed
a timely appeal from the findings of this report by letter
dated March 19, 1998. Thereafter, the Controller con-
ducted a follow-up review of the Provider’s Medi-Cal
claims submitted for medical testing services which were
performed during the period of October 10, 1997, through
March 6, 1998. This report concluded that the Provider
had been overpaid $164,766.00 by the Medi-Cal program
for the services rendered. The Controller issued its find-
ings resulting from this review in a final report dated
May 4, 1998. The Provider filed a timely appeal from the
findings of this report on May 6, 1998. These two appeals
were subsequently consolidated for hearing and decision.
FINDINGS OF FACT AND
DETERMINATION OF ISSUES
I
The relationship of the Department of Health Ser-
vices (Department) with Medi-Cal providers is in the
nature of a contract, the terms of which include and are
1 Throughout this decision, references to “payment” are to
authorization for payment, regardless of the current status of
the cash; that is, this decision adjudicates legal ownership of the
funds, not their physical possession.
App. 48
limited by the laws and valid regulations applicable to
the Medi-Cal program (Paramount Convalescent Center, Inc.
v. Department of Health Care Services (1975) 15 Cal.3d 489;
California Medical Association v. Lackner (1981) 117
Cal.App.3d 552). The Controller conducted an audit of
the Provider’s records in reliance on California Govern-
ment Code sections 925.6, 926.15, and 12410, and pur-
suant to an interagency agreement between the
Controller and the Department. The issues in this appeal
involve questions of the proper interpretation and appli-
cation of those laws, regulations, and contract provisions.
CONTROLLER’S AUTHORITY TO
AUDIT MEDI-CAL CLAIMS
II
The first issue raised by the Provider concerns the
authority of the Controller to audit Medi-Cal claims
under either federal or state law.
In summary, the Provider contends that federal medi-
caid law and regulations prohibit the Controller from
conducting Medi-Cal audits as the Department is the
single state agency designated to administer the Medicaid
program in California. In addition, the Provider argues,
California law does not authorize the Controller to audit
Medi-Cal claims, but designates the department as the
responsible state agency to carry out that function.
These same questions were previously raised and
have been addressed by the United States District Court
for the Central District of California in the case of Health
Line Clinical Laboratory, Inc.; and RC] Medical Services, Inc.,
v. Kathleen Connell, Controller of the State of California, et al.,
&
i
App. 49
Case No. CV-98-1620-RJK. The court in that case held that
the Controller must comply fully with all federal Medi-
caid laws and regulations, as well as with all applicable
Welfare and Institutions Code and California Code of
Regulations sections, as it agreed to do in the interagency
agreement with the Department, and as required under
federal law. If the court had agreed with the Provider’s
contentions as set forth above, it would have issued a
different ruling. Since it did not, it is safe to conclude that
the court accepted that the Controller can audit Medi-Cal
providers as long as it follows federal Medicaid law and
regulations, as well as California’s Medi-Cal laws and
regulations.
The Provider also argues that the appeal must be
granted based on the Connell decision, supra, in which the
Court of Appeal for the Second Appellate District stated
that “[t]he Controller could not lawfully exercise power
to audit provider payments and withhold alleged
excesses.” (69 Cal.App.4th at 897). The Provider argues
that the Department is bound by the Connell decision and
must reverse the overpayment disallowance based on the
Controller’s alleged lack of authority.
In order to determine the impact of the Connell deci-
sion on this administrative matter, it is critical to observe
what was and was not before the court in that case. The
Provider filed the action to challenge the Controller’s
“withhold” (refusal to disburse) of moneys otherwise
payable to the Provider. No audit report or audit findings
2 it is also noted that the federal court expressly kept itself
apprised of the progress of this administrative action, and
refused to interfere with its completion.
App. 50.
were in front of the trial court, nor was complete evi-
dence presented as to how the Controller functions as an
agent of the Department in connection with the Medi-Cal
audit function. The Department was not a party. The
Controller based her argument on the constitutional and
statutory authority of her office, since the withhold was
taken under that authority, which is separate and apart
from the audit function performed pursuant to the inter-
agency agreement with the Department.
Although, later on in the Connell litigation, the Con-
troiler’s status as an agent of the Department was argued,
that status, and how it relates to the Controller’s author-
ity to audit, was never squarely at issue before the Court
of Appeal, since no trial court record had been made
concerning any audit.
It is unquestionable that the Court of Appeal, in
ruling The Controller’s withhold contrary to federal
requirements, and ordering it to be dissolved, did include
in its discussion references to audit authority. However,
such references were not based on a fully developed
record, and relate to something that was not factually
before the court. Further, the court did not, and had no
reason to, discuss the Controller’s audit authority stand-
ing alone. It was only the authority to “audit... and
withhold” that was at issue.
With all due respect for the opinion of the Court of
Appeal, its very brief discussion of this subject, based on
an incomplete record, does not appear to be a dispositive
pronouncement concerning the Controller’s authority to
audit, with the audit leading to an independent evalua-
tion of the case by an Administrative Law Judge of the
App. 51
Department of Health Services, and a Final Decision of
the Department. The court of Appeal was not aware that
the coordination of audit resources between the Depart-
ment and the Controller is pursuant to an interagency
agreement that has now been found to be fully in compli-
ance with federal requirements by the responsible federal
agency. The record in this administrative case contains a
copy of a letter dated March 24, 1999, from Sally K.
Richardson, Director, Health Care Financing Administra-
tion, stating that the use of Controller’s audit resources,
in the manner specified in the interagency agreement, to
increase the state’s ability to identify and recover over-
payments, is consistent with California’s Medicaid State
Plan and applicable federal law. The letter specifically
approves the use of federal matching funds by the Con-
troller for audit purposes.
It is also notable that the Court of Appeal for the first
Appellate District upheld, albeit without specific com-
ment on the subject, an overpayment determination made
by the Department after a Controller’s audit. In Taye v.
Coye (1994) 29 Cal.App.4th 1339, the Court of Appeal
accepted the decision resulting from the Department’s
administrative process as a proper decision, notwith-
standing the Controller’s involvement as an agent of the
Department.
The oblique, indirect way in which the Court of
Appeal for the Second District commented on the ques-
tion of the Controller’s audit authority, and the fact that
the First District has accepted that authority in a pub-
lished decision, seen together, create substantial uncer-
tainty in the law, and deprive the Provider’s argument,
that this appeal must be granted, of a firm foundation.
App. 52
The Department, having entered into an inter-agency
agreement with the Controller that has been approved by
both state and federal control agencies, believes that the
Controller, as the Department’s agent, properly con-
ducted the underlying audit. For the reasons stated, it is
concluded that the Department and the Controller should
have the opportunity to defend that authority before a
court.
EXTRAPOLATION METHODOLOGY
Ill
The second issue to be addressed deals with the
validity of the sampling and extrapolation methodology
used by the Controller.
The Provider first contends that the Controller does
not have the authority to use sampling and extrapolation
methodologies to perform postservice, prepayment
audits. This question was not specifically addressed by
either court in the cases cited above. However, title 22,
California Code of Regulations, section 51159, authorizes
the Department to perform postservice prepayment
audits to review for program coverage, and payments to
providers may be withheld or reduced if the service
rendered was inappropriate. In addition, section 51458.2
of the same regulations authorizes the Department to
utilize probability sampling to extrapolate the amount to
be recovered from a provider.
Based on the two regulations referenced above, it is
found that the Controller, as the Department's agent, can
use probability sampling to extrapolate the amount to be
recovered from the Provider. As to the specific funds
App. 53
disallowed by the Controller pursuant to its sampling
and extrapolation methodologies, a determination must
be made as to whether the specific methodologies used to
calculate the amount of the overpayment were valid.
IV
The Controller used the identical statistical meth-
odology in audit #1 and #2. The method is called the ratio
method of estimation, and was taken from Herbert
Arkin’s book, Handbook of Sampling for Auditing and
Accounting, 3rd Edition. The sample selected for audit #1
was a systematic random sample of 110 items from a
universe of 10,857, using two random starting points with
every 200th item selected. Once the sample items were
selected, each was reviewed to determine if payment
should be allowed or disallowed. If an item was disal-
lowed it was disallowed for one of four specific reasons,
as will be discussed below. Once all sample items were
reviewed, allowed and disallowed amounts were totaled.
The sample error rate was found to be 60.94 percent with
respect to audit #1. When extrapolated to the entire uni-
verse, the point estimate for audit #1 was found to be an
overpayment of $1,296,801, with a precision of 14.43 per-
cent or margin of error of plus or minus $187,191, at a
confidence level of 95 percent. For audit #2, the point
estimate was found to be $164,766, with a precision factor
or margin of error of plus or minus $81,225.
Experts from both sides testified that the methodol-
ogy used to select the random sample was appropriate.
The Controller’s witness further testified that the extrap-
olation from the sample was proper and that the findings
App. 54
were accurate. The Controller’s expert opined that she
could have made the sample and extrapolation tighter
but was not consulted prior to the Controller’s audit. She
felt, however, that using the upper limit would still be
appropriate. Although the Provider’s expert opined that
the extrapolation regarding one finding should not have
been done, but instead a complete audit of all claims
within that finding should have been undertaken, this
tribunal concludes that the Controller’s methodology was
proper and that its findings were accurate. The Control-
ler’s randomly selected sample represented the entire
universe, and therefore, a more in-depth analysis of one
finding would not have added to the validity of the
Controller’s findings.
It is found that the Controller’s sampling methodol-
ogy, and extrapolation were appropriate methods, and
that the findings were accurate. The Provider argued that
using the point estimate is less accurate and reliable than
using the lower limit of the precision factor. As the Con-
troller’s expert testified, the issue is not one of accuracy,
but one of whether one wishes to err in favor of prevent-
ing overpayment, or in favor of ensuring that overpay-
ment demands are not overstated. It has been the
longstanding interpretation of the Department that the
number which more conservatively estimates the over-
payment rate, that is, the lower limit of the 95 percent
confidence interval, should be used. There is no rational
basis for deviating from that interpretation simply
because the Controller’s auditors conducted the audit.
Therefore, when calculating the Provider’s overpay-
ment, the lower limit shall be used. Consequently, the
maximum overpayment to the Provider for audit #1 can
a OR
App. 55
only be $1,109,610, which is the point estimate of
$1,296,801 minus the margin of error of $187,191. The
maximum overpayment to the Provider for audit #2 can
only be $83,541, using the same formula.
V
The next issue deals with finding #1 of audit #1, and
concerns the question of whether alleged referring physi-
cians actually referred patients to the Provider.
The Controller contends that the Provider billed for
laboratory tests that were never requested, according to
the referring physician indicated on the laboratory requi-
sition. Of the 110 sample items, 20 were referred by a Dr.
Herrera. When Dr. Herrera was interviewed by the Con-
troller’s auditors, he denied ever having treated any of
the 20 patients, and denied requesting any lab tests from
the Provider. In addition, he denied having worked at
Clinica Santa Maria, where these 20 patients were alleged
to have been treated by Dr. Herrera. Finally, he denied
having signed a comprehensive master panel agreement
with the Provider, and denied having signed an applica-
tion to obtain a Medi-Cal provider number.
Dr. Herrera testified and confirmed the above state-
ments. In addition, he testified that Dr. Villamizar was
the medical director of Clinica Santa Maria. Although Dr.
Herrera worked for Dr. Villamizar at Los Angeles Special-
ist Medical Management, he did not work for him at
Clinica Santa Maria.
The Provider argues that whether Dr. Herrera states
he was actually associated with Clinica Santa Maria is not
App. 56
important. The Provider contends that evidence pre-
sented by the Controller establishes that Dr. Herrerra was
in fact associated with this clinic, and this is confirmed by
statements made by medical personnel at the clinic to the
Controller auditors. Given these circumstances, the Pro-
vider had no basis or reason for concluding that Dr.
Herrera was “secretly” not associated with the clinic, anc
therefore, the Provider was required to perform those
tests ordered on the requisition sheets it received from
Clinica Santa Maria. As a consequence, since the Provider
is required to perform tests only at the written request of
an authorized person, and the Provider did so in the
present matter, the laboratory services must be deemed to
be covered Medi-Cal services even if Dr. Herrera testifies
now that he is not associated with the clinic.
VI
Title 22, California Code of Regulations, section
51311, entitled “Laboratory, Radiological and Radio-
isotope Services” provides in pertinent part:
“Examinations, tests . . . ordered by a licensed
practitioner, within his scope of practice . . . for
prevention, diagnosis and treatment of illness or
injury are covered... ”
In addition, section 51458.1 of those same regulations
provides:
“(a) The Department shall recover overpay-
ments to provider including, but not limited to,
payments determined to be:
ee ey ee ee ene
App. 57
(11) For services not ordered or prescribed,
when an order or prescription is required... . ”
The “written request . . . of an authorized person” is
required before laboratory tests can be performed. Title
42, Code of Federal Regulations, section 493.1105. This
request often times is in the form of a “test requisition
form.” To be valid, this form must meet certain require-
ments such as those set forth in the federal regulation.
Section 493.1105 provides that the test requisition should
contain the patient’s name; the name and address of the
authorized person requesting the test and, where applica-
ble, a contact person to enable the reporting of imminent
life-threatening laboratory results or panic values; the
tests to be performed; the date of specimen collection;
and any additional information relevant and necessary to
assure accurate and timely testing and reporting of test
results.
Exhibit 24 was presented, which relates to the first
sample patient under this finding. Exhibit 24 is a requisi-
tion form from Clinica Santa Maria. It contains a patient
name and address, the name, address, and telephone
number of the clinic, the date and time the specimen was
received by the lab, the tests requested to be performed,
but no name of the authorized person requesting the
tests. In addition, this exhibit contains a client identifica-
tion number which allegedly refers to the person authori-
zing the tests to be performed. There is no name of any
contact person in order to clarify the request, or to report
life-threatening laboratory results or panic values. Exhibit
25 presented for the second sample patient contained
exactly the same type of information reported as exhibit
24. _
App. 58
It is concluded that the name of the authorized per-
son requesting lab tests is required on the test requisition
form before a laboratory can perform those tests. A clinic
is not a physician. Requiring the name of the authorizing
physician to appear on the lab form protects both the
clinical laboratory and the requesting physician. It pro-
tects the clinical laboratory from subsequent claims that
the tests it performed were not requested or were not
requested by an authorized person. It protects the physi-
cian from false allegations by clinical laboratories that a
physician authorized requested tests. If the physician’s
name is not there, then that physician did not authorize
any tests to be performed.
In this case, the alleged requesting physician, who is
identified on the test requisition form only by a typed
client number and not by name, claims never to have
worked at the medical clinic, nor to have requested any
tests for any of the patients. In addition, this physician
claims never to have signed any comprehensive panel
agreement with the Provider. On the other hand, the
Provider claims to have an arrangement with this: physi-
cian who was given a client identification number. The
arrangement was that when the physician ordered a
Comprehensive Panel he meant a specific list of tests of
which the provider had knowledge. The Provider sup- |
plied the clinic with preprinted forms identifying the |
physician by a client identification number, and the clinic
by name and address.
A careful review of the documents submitted into
evidence which contain the physician’s signature was
conducted by the Administrative Law Judge, and he
found that the signatures on the comprehensive panel
lll
App. 59
agreement with the Provider and the application for
Medi-Cal provider number are not the signature of Dr.
Herrera. The Administrative Law Judge’s credibility find-
ing in this regard will not be disturbed.
The first question to be answered for this issue is not
whether Dr. Herrera did or did not request lab work from
the Provider, but whether, based upon the lab requisition
forms the Provider received from Clinica Santa Maria, the
Provider had any reason to believe that these requisitions
were valid requests for lab tests. On their face, the lab
requisitions appear to be valid requests for tests.
Although there is no name of the person authorizing the
tests, the Provider has been told by an independent con-
tractor that client ID # 183 is Dr. Herrera, who works at
Clinica Santa Maria.
During the course of the administrative hearing, evi-
dence was presented which established that the Provider
had agreements with four independent? contractors.
According to these agreements, each independent con-
tractor was assigned a territory where he or she would
create a place into operation a sales marketing plan, and
would be paid up to a 30 percent commission on the net
collected sales it brought into the Provider’s business
each month. For example, for each comprehensive panel
that was referred to the Provider, and subsequently paid
for, the independent contractors would receive anywhere
from $120.00 to $130.00. These independent contractors
3 This is the term used by the Provider. However, the record
reflects that one was the owner of a clinic that referred business
to the laboratory, and some were owners of the laboratory.
(Transcript 6-15-1998, p. 14; 6-16-1998, p. 128.)
App. 60
established the arrangements with referring physicians
and/or clinics, and set up the accounts with the Provider.
Once these arrangements were made, and the account set
up, the Provider’s couriers would pick up the specimens
from the clinics. The Provider would supply the physi-
cians and clinics with the preprinted lab requisition forms
with their client identifications number. When the Pro-
vider later received one of these forms, along with the
specimens, it would perform the requested tests, report
the findings back to the client, and bill Medi-Cal if appli-
cable.
It appears that the Provider is attempting to insulate
itself from. having any responsibility or obligation to ver-
ify the arrangements made by its independent contrac-
tors. It has created an incentive for its independent
contractors to bring in as much business as possible, yet
is trying to place itself in a situation where it can rely on
the arrangements made by the independent contractors,
receive payment for tests it performs, and not be respon-
sible if the tests it performs have never been requested by
an authorized physician, or if the alleged patient was
never seen by a physician or at a clinic. The Provider
cannot create the environment for potential dishonesty to
occur, but absolve itself of any responsibility by relying
on the word of the independent contractors. The Medi-
Cal program is not responsible for the error in judgment
or the bad business practices engaged in by the Provider.
4 These types of arrangements may be illegal (See People v.
Duz-Mor Diagnostic Laboratory, Inc. (1998) 68 Cal.App.4th 654),
but this argument was not raised during the course of the
administrative hearing.
App. 61
If the Provider wants to rely on the arrangements made
by the independent contractors without any further veri-
fication of their authenticity, then the Provider should be
prepared to suffer the consequences, i.e., to be found
liable for overpayments to the Medi-Cal program if the
independent contractor’s business proves inadequately
supported.
The appeal on this issue is denied.
VI
The next issue concerns finding #2 relating to specific
laboratory tests that were not ordered by the referring
physicians or were not performed.
The Controller contends that the Provider billed the
Medi-Cal program for laboratory tests that were in excess
of those ordered by the referring physicians, as well as
for some that were not performed by the laboratory. The
auditors analyzed the lab requisitions, the physician com-
prehensive panel agreements, and the test results, and
compared this information to the Provider’s billings to
the Medi-Cal program. The test results indicate whether a
test was performed or not. The test results, if any, were
then compared with what was paid to the Provider. The
Provider was paid, in many instances, for a test it did not
perform either because there are no test results for a lab
procedure that was paid for, or because the test results
show a “QNS” which means quantity was not sufficient
to run the test. In other instances, the physicians did not
order a specific test, yet the Provider was paid for per-
forming such a test.
App. 62
The parties agreed to present evidence on four sam-
ples under this finding. The first sample was # 53. This
sample relates to a hepatitis panel, a thyroid study and
several other tests that were paid for by Medi-Cal, but
when the test results are reviewed for that patient on that
date of service, there are no test results for a hepatitis
panel or thyroid study, etc., because of QNS. That is,
there was insufficient blood sample to run the tests. The
Controller’s auditor testified that she followed the same
process in the other three samples and the results were
the same, except that some tests billed for were never
ordered, while other tests were performed by another
laboratory.
The Provider is not entitled to payment for tests that
it did not perform for whatever reason, for tests per-
formed by another laboratory, or for tests never ordered.
(Title 22, Cal. Code Regs. §51458.1(4).) The appeal on this
issue is denied.
VIII
The next issue involves finding #3 which deals with
services not provided to the claimed beneficiary. This
issue will be discussed below, together with finding #2 of
audit #2, which presents the same reason for the overpay-
ment demand.
IX
The next issue relates to finding #4 which deals with
tests that were never ordered by a physician.
App. 63
The Controller contends that the Provider billed
Medi-Cal for laboratory tests that were not supported by
the referring physician’s medical records. In two cases,
the physician medical records disclosed that the labora-
tory tests were never ordered for the dates of service in
question.
For the first sample, exhibits 64 and 65 were
reviewed. The auditor compared the lab requisition form
of the Provider with the medical records of the physician
for the patient for which the lab tests were performed.
The lab requisition indicated a specific date of service
while the medical records for that patient on that same
date do not indicate any visit by the patient to the physi-
cian. The medical chart also does not indicate that any
tests were ordered on that specific date nor does the
patient chart contain any test results relating to that date.
In addition, other documents indicate that one of the
patients in question was actually incarcerated during the
entire time period covered by the audit, and remained in ©
custody as of June 11, 1998. Although this evidence is
hearsay, it may be used to corroborate the direct testi-
mony of the auditor.
A careful review of exhibit 64, relating to the first
sample, indicates that this is a lab test request from client
#250, FHC Medical Center. Client #250 is Dr. Malabanan,
who works at FHC Medical Center. This lab request indi-
cates a comprehensive panel 1 should be performed.
Exhibit 12 introduced by the Controller indicates that Dr.
Malabanan worked for FHC Medical Center, and did
have a valid agreement with the Provider regarding com-
prehensive/master panels. Lab results from the tests per-
formed by the Provider are included in exhibit 64.
App. 64
The next sample involves exhibits 62, 63, and 97.
Again, the lab requisition is from client #250, Dr. Mal-
abanan, and requests that a comprehensive panel 1 be
performed. The test results are included in this exhibit.
The lab request (exhibit 62) was compared with the medi-
cal chart (exhibit 63) for the specific patient and date of
service in question. Again it was found that the patient
chart indicates that: 1) the patient was not seen by the
doctor on the date in question, 2) there were no lab tests
ordered by the physician for the date in question, and 3)
no test results were found in the patient medical chart for
that date of service. Exhibit 97 is the signed statement of
the Medi-Cal beneficiary that she did not have blood
drawn from any physician in the last few years, and has
never lived at the address indicated on exhibit 62.
In connection with these sample cases, the Provider
had in its files what appeared to be valid lab requisitions
from a physician with whom it had a valid agreement.
The lab requisitions requested the Provider to perform
the indicated test panels. The Provider performed the
tests and the test results are included in the exhibits.
The Controller disallowed both of these examples on
the basis that the tests were never ordered by the physi-
cian. The evidence supports this conclusion. The physi-
cian’s file was devoid of any evidence that anyone had
been seen in connection with the laboratory requests at
issue, there was no evidence the services had been
ordered, and there was no evidence the results had been
received. The Provider failed to rebut the prima facie case
made by this absence of any support for its documents.
App. 65
In addition, the Controller has made the case that no
Medi-Cal beneficiary received the services in question,
since there was no evidence that the patient was seen or
had blood drawn on the date in question.
Where there is no evidence that the physician who
supposedly ordered the laboratory test saw the benefici-
ary-patient, and no evidence that he ordered the tests at
issue, the Medi-Cal program is not required to pay for
tests of which only the Provider has any documentation.
As has been discussed above, the requirement to pay for
laboratory services is conditioned on the existence of a
valid order from a person authorized to make one. As is
further discussed below, it is also conditioned on the
receipt of the service by a Medi-Cal beneficiary. Neither
was proven to exist in these cases. The appeal is denied
as to this finding.
X
The next issue deals with audit #2, finding #1 which
is similar to finding #2 of the first audit, i.e. test were not
ordered by the referring physician or were not per-
formed. Two samples were presented on this issue.
Dr. Dix was called as a witness by the Controller and
he testified regarding this specific finding. Exhibit 69 is
his signed statement. Dr. Dix testified that he worked for
Divine Health Care which was primarily a personal
injury clinic. Due to his patients’ conditions he would
only order a CBC and electrolytes, and generally would
not order any comprehensive panels for any of his
patients. He would usually just prescribe physical ther-
apy for his patients. While working at Divine Health Care
App. 66
he ordered fewer than five lab tests, and to his knowl-
edge he has not referred any lab work to the Provider.
The Controller submitted exhibits 69. 70, and 71 with
respect to the first sample. Exhibit 70 is the lab requisition
from Divine Health Care, and this form contains the
name of Dr. Dix. The requisition requests that a compre-
hensive panel be done. The Provider performed the tests,
and the results are contained in the exhibit. The Control-
ler disallowed all tests of this sample because they were
not ordered by Dr. Dix.
With respect to his first sample, it is the determina-
tion of this tribunal that the appeal must be denied. The
Provider did not have a comprehensive panel agreement
with Dr. Dix, who was the medical director of Divine
Health care. Therefore, when the Provider received this
lab requisition from Dr. Dix requesting a comprehensive
panel, it should have contacted Dr. Dix to clarify what
tests he wanted performed. Instead, the Provider relied
upon an agreement it had with a Dr. Adhami, who was
somehow allegedly associated with Divine Health Care,
and performed the tests he and the Provider had agreed
to. Dr. Dix testified that he did not know a Dr. Adhami.
The Provider performed tests that were not ordered by
the referring physician. As a consequence, the appeal on
this sample must be denied.
Exhibits 72, 73, and 74 were submitted regarding the
second sample. Dr. Hsu, the referring physician in this
sample, does not have an agreement with the Provider,
but does use the Provider. He will only order specific
tests. The Controller’s review of the patient chart, the lab
requisition, and the lab results indicated that the Provider
LSM Apes £07) Wa Least 8
App. 67
billed for tests that were not ordered by the physician,
and not performed by the Provider. The evidence submit-
ted supports the conclusion of the Controller on this
sample item. The Provider was paid for tests that were
not ordered or were not performed. The appeal on this
sample is denied.
As the appeals on both samples were denied, the
appeal on this entire issue must be denied.
XI
The last issue deals with finding #2 of audit #2 which
is the same as finding #3 in audit #1. The Controller
contends that the Provider billed Medi-Cal for services
that were not provided to the beneficiaries indicated on
the Provider’s laboratory requisition forms. In connection
with the first audit period, eight beneficiaries were inter-
viewed by the Controller’s auditors and they all signed
statements that they had never been to nor received
medical services from the medical clinics that were desig-
nated on the Provider’s lab requisitions. In addition, they
all stated that they had never lived at the addresses
indicated on the lab requisitions. Exhibit 39 lists the eight
Medi-Cal beneficiaries that were interviewed and they
were designated as sample #’s 102, 104, 98, 57, 47, 110,
106, and 100. In connection with the second audit period,
four beneficiaries were interviewed by the Controller’s
auditors and all four said they did not receive the medical
services in question.
The Controller disallowed all of the services associ-
ated with these samples because they were never pro-
vided to the named beneficiaries. In some cases, there is
App. 68
evidence that the service was provided to a patient, but
that patient was someone other than the person whose
Medi-Cal number appeared on the billing. The Controller
argues that the Provider may not bill Medi-Cal for these
services pursuant to title 22, California Code of Regula-
tions, section 51470, which provides that:
“(a) A provider shal! not bill or submit a claim
to the Department . . . for Medi-Cal benefits not
provided to a Medi-Cal beneficiary. ... ”
The Controller states that the regulation is clear and
unambiguous, not subject to any exception for providers
who do not personally deal with program beneficiaries.
Provider argues that it is not responsible for verify-
ing that a Medi-Cal beneficiary was actually seen at a
clinic or by a specific physician. The Provider should be
allowed to rely, it argues, on the physician order forms
requesting the performance of certain tests, because it has
no way of knowing whether a Medi-Cal beneficiary was
seen at a clinic or by a physician. The Provider’s position
is that section 51470 may not be applied to deny payment
to a provider who has no personal contact with the bene-
ficiary, and has no obligation to verify the beneficiary’s
identity.
Input was received from the Department on this
issue. The Department likened the laboratory requisition
for services which did not benefit any program benefici-
ary to a forged instrument of title or counterfeit currency.
The innocent> holder in due course of the inherently
> The Controller did not rule out the possibility that these
cases involved beneficiary fraud, where neither the clinic nor
cette Sn PER nie Tees erat.
Becht Siars Ratan yes
App. 69 “
worthless paper has recourse only against the person
from whom he obtained it. He cannot force another
equally innocent party (e.g., a bank) to accept it as having
value, once its valueless nature is discovered.
The regulation at issue is a part of the Department's
effort to comply with federal requirements related to the
Medi-Cal program. Section 1903(a)(1) of the Social Secu-
rity Act (codified at 42 U.S.C.A. § 1396b(a)(1)) specifies
that a state may receive federal funds for program bene-
fits to the extent they constituted “medical assistance
under the State plan.” Section 1903(u) (42 U.S.C.A.
§ 1396b(u)) requires a denial of federal sharing in “erro-
neous excess payments” (erroneous payments above a
tolerance level for error) made by a state Medicaid
agency. One of the two definitions of the term “erroneous
excess payments” is “payments under the State plan with
respect to ineligible individuals and families.”
This requirement is echoed in title 42, Code of Fed-
eral Regulations, section 431.812(d), which specifies that,
as part of its quality control effort, the state Medicaid
agency must “identify erroneous payments resulting
from — (1) Ineligibility for Medicaid.”
From reviewing this basic federai requirement that
all Medicaid expenditures must be for covered services to
eligible beneficiaries, no exception appears for services
rendered in erroneous reliance on a referring provider's
false information concerning the issue of whether a cov-
ered, eligible beneficiary was in fact the subject of the
the laboratory was aware that the patient was not the
beneficiary, so this is one possible explanation.
App. 70
referred service. The federal definitions of proper and
erroneous Medicaid expenditures are as straightforward
as the state regulation at title 22, California Code of
Regulations, section 51470. It therefore appears that the
Controller’s interpretation of section 51470 as an absolute
prohibition of payment is correct.® Similarly, the Depart-
ment’s input correctly states that the laboratory's posi-
tion, in the event that it is a totally innocent recipient of a
requisition for services that will not benefit a legitimate,
eligible individual, is like that of the person who tries to
put a counterfeit $100 bill in his bank account. It is not
the fault of the bank that the bill is worthless, and the
bank owes the depositor no compensation. Just so, the
Medicaid agency, having received nothing of value (and
nothing which may be paid for with federal funds), owes
the Provider no compensation for a service to a person
who is not eligible for benefits.
XII
Once it has been determined that the Provider may
not be reimbursed with Medi-Cal funds for a service not
rendered to an eligible Medi-Cal beneficiary, the question
becomes one of whether the Controller met its burden of
proving that this lack of an eligible patient occurred in
the sample cases at issue. The issue must be proven
through competent direct evidence, because the
6 Although there are Medi-Cal services which are not
subject to federal sharing, and thus would not be found by
federal requirements, there has been no suggestion that this is
true of any of the services at issue in this case.
‘
:
CNA Sak al 8 call a aN hilt its sir dling
App. 71
Provider’s counsel objected to the use of hearsay to sup-
port any finding (Government Code § 11513(d)).
Of the twelve cases the Controller presented on this
issue, only hearsay was presented on eight. The appeal
must be granted to the extent the Overpayment deter-
mination rests on the eight sample cases unsupported by
direct evidence.
The beneficiary testified in each of the other four
cases.
The first beneficiary who testified (relating to case
#137) was C.L. (Transcript 6-15-98, Pp. 96 et seq.). C.L.
credibly testified that she did not visit the physician who
supposedly ordered laboratory tests on her behalf, nor
did she receive any medical care at the clinic in question
on the date in question. She also testified that she does
not live, and has not lived, at the address shown on the
laboratory requisition.
Beneficiary S.S. then testified relating to case #100
(Transcript 6-15-98, pp. 102 et seq.). S.S. attempted to
testify that she did not receive the services in question,
but her testimony is somewhat confusing and unclear due
to her limited command of English and her illiteracy.
The third witness, A.L., testified in relation to case #
97 (Transcript 6-15-98, pp. 110 et seq.). This witness credi-
bly testified that she did not receive any medical services
through the physician who allegedly ordered laboratory
services on her behalf, and did not go to the clinic where
the physician allegedly did so. She also testified that she
has never lived at the address attributed to her on the
laboratory requisition.
App. 72
The fourth witness, S.C., attempted to testify in sup-
port of the Controller’s case # 110 (Transcript 6-15-98, pp.
117 et seq.). However, the Administrative Law Judge
found that S.C did not have sufficient command of the
English language to testify without an interpreter.”
It is concluded that the Controller presented suffi-
cient evidence to prevail on cases 137 and 57. C.L. and
A.L. both testified with sufficient clarity and credibility to
support the allegation that they did not receive the ser-
vices at issue. No evidence was presented to show that
any other eligible beneficiary received them in their
stead. Because the evidence presented in support of cases
100 and 110 was not sufficient, the appeal is granted as to
the portion of the overpayment represented by those
cases.
ORDER
The Office of the State Controller has the authority to
audit Medi-Cal providers, and may use probability sam-
pling to extrapolate the amount to be recovered from the
Provider.
The Provider’s appeal is granted in part as to Issues
#5 and #8. As to those issues, the appeal is denied as to
that portion of the overpayment determination which is
supported by direct testimony, and granted in the
remainder. The controller is directed to recalculate that
7 The Controller made a late request for an interpreter, but
one could not be secured in the time remaining before the
hearing.
App. 73
portion of the overpayment determination consistent
with the substance of this Decision.
The appeal is denied in all other respects.
The Controller is also ordered to recalculate the over-
payment to the Provider consistent with the views
expressed in this Decision by using the lower limit of the
95 percent confidence interval.
Pursuant to the authority duly vested in me, I hereby
adopt the foregoing as the Final Decision of the Depart-
ment of Health Services.
This Final Decision is signed on August 6, 1999 and
shall be effective immediately.
/s/ Joseph P. Munso
Joseph P. Munso
Chief Deputy Director
“as
App. /4
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
JOSEPH A. LANE, CLERK
DIVISION 5
Los Angeles County Superior Court
111 North Hill Street
Los Angeles, CA 90012
RC] Medical Services, Inc
¥
The Director of the State Department of
Health Services
B143160
Los Angeles County No. BS060056
***REMITTITUR***
I, Joseph A. Lane, Clerk of the Court of Appeal of the
State of California, for the Second Appellate District, do
hereby certify that the attached is a true and correct copy
of the original
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