Filed 9/30/19 Hazel Hawkins Memoral Hospital v. Kent CA1/4

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

HAZEL HAWKINS MEMORIAL HOSPITAL,

Plaintiff and Appellant,

v.

JENNIFER KENT, as Director, etc.,

Defendant and Respondent.

A151841

(City & County of San Francisco

Super. Ct. No. CPF-15-514656)

Hazel Hawkins Memorial Hospital (the hospital) appeals the denial of its petition for a writ of administrative mandate, which challenged an order by an administrative law judge (ALJ) upholding the findings of an auditor for the California Department of Health Care Services (the department). The auditor found that the hospital violated regulations governing Medi Cal reimbursement by combining its costs for maternity, labor and delivery, and nursery care into one cost center and claiming reimbursement for Medi Cal patients’ share of such costs at a single, blended per diem rate. The hospital insists that it may combine those costs because it provides all such care in a single labor, delivery, recovery, and postpartum (LDRP) unit, and because the audits section in another field office of the department has accepted the use of that method by other hospitals. The regulations, however, require that the costs of routine care, which includes maternity and nursery care, be reimbursed on a per diem basis, and that the costs of ancillary services, defined to include labor and delivery services, be reimbursed on a different basis (which is explained below). Commingling the two in this case results in the ancillary services being reimbursed at a higher rate than the regulations permit. Despite the apparent inconsistency with the other office’s acceptance of the hospital’s approach, we agree with the ALJ and the lower court that this apportionment method violates the controlling regulations, and so the judgment must be affirmed.

Factual and Procedural History

1. Regulations governing Medi Cal cost finding and cost apportionment

California participates in the federal-state Medicaid program (42 U.S.C., § 1396 et seq.) by funding health care for the indigent through Medi Cal (Welf. & Inst. Code, §§ 14000–14194). Medi Cal regulations limit service providers’ reimbursement to those costs “permitted by applicable Medicare standards and principles of reimbursement.” (Cal. Code of Regs., tit. 22, § 51536, subds. (a)(2) & (b)(4).) These standards and principles appear in title 42, part 413 of the Code of Federal Regulations and in the Centers for Medicare & Medicaid Services Provider Reimbursement Manual (manual).

As a noncontracting Medi Cal service provider, the hospital must submit to the department an annual cost report. That report identifies its costs, allocates them among various cost centers, and apportions the costs assigned to each cost center between Medi Cal patients and other patients. The hospital is reimbursed for the costs apportioned to care for Medi Cal patients. The regulations refer to the process of allocating costs to cost centers as “cost finding” and to the process of determining the share of each center’s costs attributable to care for Medi-Cal patients (and thus reimbursable) as “cost apportionment.”

The basic conceptual unit in that two-stage process is the cost center—“[a]n organizational unit, generally a department or its subunit, having a common functional purpose for which direct and indirect costs are accumulated, allocated, and apportioned.” (Manual, § 2302.8.) The regulations distinguish between revenue-producing and non-revenue-producing cost centers. The hospital uses a “step-down” method of cost finding to allocate the costs of its non-revenue-producing centers to its revenue-producing centers. (Id., § 2306.1.)

When cost finding is complete, the costs allocated to revenue-producing centers are apportioned between the cost of services for Medi Cal beneficiaries and the cost of services for other patients “so that the share borne by [Medi Cal] is based upon actual services received by . . . beneficiaries.” (42 C.F.R. § 413.53(a).) The hospital uses the departmental method of apportionment, which distinguishes between ancillary centers and routine centers. The former “provide direct identifiable services to individual patients” (Manual, § 2302.10), while the latter provide room and board and nursing services to many patients. The manual defines ancillary services to include “laboratory, radiology, drugs, delivery room (including maternity labor room), operating room . . . , and therapy services,” as well as other services “for which charges are customarily made in addition to a routine service charge.” (Id., § 2202.8, italics added.) Routine services are those included in “a daily service charge—sometimes referred to as the ‘room and board’ charge,” such as “regular room, dietary and nursing services,” minor supplies, social services, and items “for which a separate charge is not customarily made.” (Id., § 2202.6.)

The regulations require that the costs of ancillary centers and routine centers be apportioned in distinct ways: “[T]he ratio of beneficiary charges to total patient charges for the services of each ancillary department is applied to the cost of the department; to this is added the cost of routine services for program beneficiaries, determined on the basis of a separate average cost per diem for general routine patient care areas . . . , taking into account, in hospitals, a separate average cost per diem for each intensive care unit, coronary care unit, and other intensive care type . . . unit[].” (42 C.F.R. § 413.53(a)(1)(i).) Reimbursement for the costs of each ancillary department is thus based on the so-called “charge ratio” of Medi Cal patient charges to total patient charges for that department. (Ibid.) “After each revenue-producing center’s ratio is determined, the cost of covered services rendered to beneficiaries . . . is computed by applying the individual ratio for the center to the cost of [that] center . . . .” (Manual, § 2202.9.) Thus, if charges to Medi-Cal patients equal half of an ancillary cost center’s total charges, the hospital is reimbursed for half the costs allocated to that center in the cost-finding process.

Reimbursement for routine costs is based on a per diem charge for each unit, on the theory “that all patients in each separate [care] area are receiving similar services.” (Manual, § 2203.) A hospital receives one per diem rate for general routine care and separate per diem rates for its nursery and for each of its special care units (also known as “intensive care–type units” ). (See id., § 2202.6.)

Finally—and crucially for present purposes—section 2203 of the manual specifies that “[t]he cost of those items and services specifically classified as routine in [section] 2202.6 are always considered routine service costs, and the costs of those specifically classified as ancillary in [section] 2202.8 are always considered ancillary service costs for purposes of Medicare reimbursement.”

The standard cost report form lists three cost centers relevant here: “Adults and Pediatrics” (hereinafter General Routine Care), “Nursery,” and “Labor Room and Delivery Room.” General Routine Care and Nursery are routine cost centers; Labor Room and Delivery Room is an ancillary center. Applying the above rules, a provider must apportion the costs of its General Routine Care and Nursery centers by multiplying each center’s per diem rate by the number of days Medi Cal patients spent in the unit. It must apportion the costs of its labor and delivery center by calculating the ratio of Medi Cal patient charges to total charges for the center and applying that ratio to the center’s total costs.

2. Facts and procedural history of this case

The hospital records all costs for its LDRP unit in one account. For cost-finding purposes in fiscal years before 2012, the department’s auditors directed the hospital to allocate the costs of the LDRP unit among the standard cost centers in two different ways. From 2006 through 2009, the hospital added the number of deliveries in the labor-and-delivery cost center to the numbers of patient discharges from the General Routine Care and Nursery cost centers and used the ratio of those figures to allocate the costs of the LDRP unit among the three cost centers. In 2010, an auditor determined that the costs of the LDRP unit should be allocated among the three cost centers based not on deliveries and discharges, but on a charge ratio, i.e., on each cost center’s proportional share of total patient charges. This change affected only cost finding (i.e., how the costs of the LDRP unit are allocated among cost centers), not how the costs allocated to each center are apportioned between Medi Cal and non-Medi Cal patients.

The hospital sought review of the 2010 audit adjustments, triggering the same administrative process later used in this case. At an informal hearing on the 2010 dispute, a hearing auditor invited the hospital’s consultant to suggest a new method of allocating the LDRP unit’s costs. The consultant proposed a method used by two of his other hospital clients: allocate all LDRP costs to a single cost center and then use a single per diem rate to apportion that center’s costs between Medi Cal and non-Medi Cal patients. The hearing auditor rejected that proposal. The hospital sought a formal hearing, but an ALJ held that he lacked jurisdiction to rule on the proposal, as it did not involve an audit adjustment to the 2010 cost report.

For 2012, the hospital prepared its cost report using the method it had proposed in 2010. It added a line to the cost-report form for an “LDRP” cost center, allocated all costs of the LDRP unit to that center, and used a single per diem rate to apportion those costs between Medi Cal and non-Medi Cal patients. The auditor rejected that approach. She reallocated all costs from the LDRP cost center to the three standard centers based on the ratio of charges for the three types of care. (See fn. 7, ante.) The costs allocated to each center were then apportioned between Medi Cal and non-Medi Cal patients using the standard methods described above. The audit adjustments reduced the hospital’s reimbursement by $267,444.

The hospital challenged the adjustments. After an informal hearing, a hearing auditor denied its appeal. The hospital demanded a formal hearing before an ALJ, at which the auditor and the hospital’s accountant testified. The auditor explained that she made the adjustments because the regulations bar commingling costs for routine and ancillary care in one cost center, as different methodologies are used to apportion the two types of costs between Medi Cal and non-Medi Cal patients. The hospital consultant described the LDRP unit and opined that combining all its costs in one cost center maximizes the accuracy of cost finding by avoiding the need to allocate those costs among standard cost centers using the proxy of charge ratios. A charge-ratio-based approach is inaccurate, he testified, because hospitals’ nominal charges are not set in a free market and bear little relationship to the payments hospitals actually accept for their services, or to the true costs of the services. Finally, he described how the audits section of another office of the department has approved the use of an identical LDRP cost center by his clients Hi-Desert Medical Center and Desert Valley Hospital.

The ALJ denied the appeal. His decision states that the hospital’s approach “has some merit” but concludes that combining routine and ancillary costs in one cost center violates the regulations, as such costs must be reimbursed in different ways. The ALJ rejected the hospital’s claim that the ratio of departments’ charges has no relationship to the relative intensity of their services. “[A]s intensity of services increases, so too should charges . . . even if the correlation is inexact.” As to the two other hospitals’ use of LDRP cost centers, the ALJ was “not swayed by anecdotal evidence of . . . claimed inconsistent treatment by the department [of] other hospitals.” “[W]hile this tribunal admittedly has some concern whether the department is being consistent and uniform in its treatment of hospitals with LDRP units,” he wrote, he found “that the evidence introduced by the department . . . for the purpose of establishing compliance with applicable Medicaid standards and principles of reimbursement, as set forth in federal regulations and prescribed in [the manual], establishes that the auditor’s findings and subsequent adjustments were reasonable and consistent with the purpose of determining the reasonable costs for reimbursement for providing services to Medi Cal beneficiaries at [the hospital]; the department is entitled to deference.”

The hospital sought a writ of administrative mandate (Code Civ. Proc., § 1094.5). The trial court denied its petition in an order stressing the distinction between cost finding and cost apportionment. The court viewed the ALJ as having “ruled as a matter of law that the hospital was not permitted to aggregate all of the costs of the LDRP.” Relying exclusively on its own reading of the regulations, the court held that this ruling was correct. The hospital has timely appealed from the denial of its petition.

Discussion

Because this administrative mandamus proceeding involved no vested rights, we review the ALJ’s order directly, using the same standard of review as the trial court. (Hi Desert Medical Center v. Douglas (2015) 239 Cal.App.4th 717, 730; Pacific Coast Medical Enterprises v. Department of Benefit Payments (1983) 140 Cal.App.3d 197, 207–209.) The ALJ’s opinion rests at least in part on the conclusion that the regulations bar the hospital’s approach. If that holding is correct, the order must be upheld without regard to whether the ALJ deferred excessively to the auditors as the hospital contends. We review de novo whether the regulations bar the hospital’s approach as a matter of law. (Hi Desert Medical Center, supra, at p. 730.)

We agree that the regulations do bar the hospital’s approach. The regulation defining the departmental method of cost apportionment states that “the ratio of beneficiary charges to total patient charges for the services of each ancillary department is applied to the cost of the department; to this is added the cost of routine services for program beneficiaries, determined on the basis of a separate average cost per diem for general routine patient care areas,” and another “separate average cost per diem for each . . . intensive care type inpatient hospital unit[].” (42 C.F.R. § 413.53(a)(1)(i); accord, Manual, § 2200.1, subd. (A).) Section 2202.8 of the manual defines ancillary services to specifically include “delivery room (including maternity labor room) . . . services.” Section 2203 of the manual specifies that “[t]he cost of those items and services specifically classified as routine in [section] 2202.6 are always considered routine service costs, and the costs of those specifically classified as ancillary in [section] 2202.8 are always considered ancillary service costs for purposes of Medicare reimbursement.” (Italics added.)

The hospital nonetheless seeks to assign to one cost center all costs incurred in its LDRP unit, including costs of labor room and delivery room services, and to treat all such costs as routine, thereby claiming reimbursement on a per diem basis. That approach violates the unambiguous requirement that “the costs of [services] specifically classified as ancillary in [section] 2202.8 are always considered ancillary service costs for purposes of Medicare reimbursement.” (Manual, § 2203.) The regulations squarely forbid treating the costs of delivery room and labor room services as routine costs for purposes of reimbursement.

The hospital suggested below that the LDRP unit might qualify as a special care unit (see 42 C.F.R. § 413.53; Manual, § 2202.7) and that this would enable the hospital to commingle routine and ancillary costs in that unit. But as the trial court noted, section 2202.7, subdivision (II)(A) of the manual provides: “To be considered an intensive care type unit,[ ] the unit must furnish services to critically ill patients. . . . Excluded as intensive care type units are . . . maternity labor rooms.” On appeal, the hospital does not refute or even acknowledge that point. Moreover, even if its LDRP unit could qualify as a special care unit, that designation would affect only the rate of reimbursement for the costs of routine care provided in that unit. “In recognition of the extraordinary care furnished to intensive care, coronary care, and other special care [patients], the costs of routine services furnished in these units are separately determined.” (Manual, § 2202.6, italics added.) The regulations would still require the hospital to allocate the costs of ancillary services provided to patients in the LDRP unit to the appropriate ancillary cost centers, and to apportion those costs using the method required for ancillary costs. (Manual, § 2203.)

More broadly, the hospital insists that cost finding is flexible, and its overriding goal is accuracy. It argues that the most accurate way to allocate the costs of care provided in its LDRP unit is to assign those costs to one cost center reflecting the unit’s consolidated layout and unitary staffing, whereas allocating the costs among standard cost centers introduces imprecision by requiring the use of proxies that do not correlate perfectly with the intensity or cost of different patients’ care. In response, the department points out that a blended per diem rate also entails imprecision: A Medi Cal beneficiary and another patient might each spend the same number of days in an LDRP unit, yet require very different services that generate different costs. In all events, the hospital’s argument is more properly directed to the administrative agencies with authority to modify the regulations. The argument does not support the contention that the current regulations have been misapplied.

The hospital’s final argument, expressed in various ways, turns on the apparent fact that the department’s Rancho Cucamonga office has accepted cost reports from two other hospitals treating their LDRP units as single cost centers. Among other things, the hospital argues that this demonstrates that auditors do have the flexibility to approve this method of cost apportionment. However, the record contains considerable evidence tending to indicate that the acceptance in those cases simply reflects an oversight on the part of the auditors. The ALJ expressed “some concern” over the lack of consistency. The trial court found that the evidence “unmistakably shows” an inconsistency that was “very troubling because it shows that: 1) the hospital is being treated differently, and for [fiscal year ending] 2012 less favorably, than two other similarly situated Medi-Cal providers and 2) [the department] has not complied with the mandates of the Medicare regulations and [manual] for those other two providers with LDRPs.”

We need not explore the reasons for the apparent inconsistency further because we agree with the trial court that such an “inequity,” although troubling, provides no justification for disregarding the explicit provisions of the regulations in this case. Whether or not some rectification is appropriate as to the other hospitals—a matter not before us—the auditor’s findings and conclusions in this case are compelled by the explicit provisions of the federal regulations and the manual. The trial court properly denied the petition to set aside the ALJ’s approval of the audit report.

Disposition

The judgment is affirmed.

POLLAK, P. J.

WE CONCUR:

STREETER, J.

TUCHER, J.