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Date: 06-18-2019

Case Style: Hoag Memorial Hospital Presbyterian v. Jennifer Kent, as Director of the California Department of Health Care Services

Case Number: A153724

Judge: Petrou, J.

Court: California Court of Appeals First Appellate District, Division Three on appeal from the Superior Court, County of San Francisco

Plaintiff's Attorney: Thomas Joel Weiss and Shawn Zaman

Defendant's Attorney: Susan Marie Carson and Joshua N. Sondheimer

Description: The central question before us is whether an administrative appeal challenging the
overall legality of a Medi-Cal audit reduction encompasses a later challenge to an alleged
calculation error within that same audit for purposes of determining timeliness of the
calculation error challenge. We find it does not.
Petitioner Hoag Memorial Hospital Presbyterian (Hoag) is an acute care hospital
whose patients include beneficiaries of California’s Medi-Cal program. The California
Department of Health Care Services (the Department) prepared a Medi-Cal audit
reviewing Hoag’s cost report for fiscal year 2009, including $2,413,623 in audit
reimbursement reductions mandated by Assembly Bill (AB) 5 and AB 1183. Hoag filed
an administrative appeal that was a blanket challenge to the legality of those assembly
bills, and hence the legality of the reimbursement reductions based upon them. Over one
and one-half years later, Hoag submitted a second administrative appeal regarding an
alleged $620,903 calculation error that it requested be “incorporated” into the open
administrative appeal. Hoag alleged that if its global challenge failed, the $2,413,623
reduction should not include $620,903 stemming from an erroneous calculation of Medi-
2
Cal days subject to the reductions required by the assembly bills. The Department’s
Office of Administrative Hearings and Appeals (OAHA) dismissed the administrative
appeal of the alleged calculation error as untimely and Hoag filed a petition for writ of
administrative mandate, which was denied. As Hoag’s legal challenge to the Medi-Cal
audit reduction is a separate issue from its challenge to the alleged calculation error and
was therefore untimely, we affirm the dismissal of Hoag’s administrative appeal.
BACKGROUND
Hoag is a medical surgical acute care hospital in Newport Beach, California.
Along with other services, Hoag provides inpatient hospital services to Medi-Cal
beneficiaries.
“ ‘The Medi-Cal program [citation] represents California’s implementation of the
federal Medicaid program [citation], through which the federal government provides
financial assistance to states so that they may furnish medical care to qualified indigent
persons. [Citation.] The Department is the single state agency designated to administer
the Medi-Cal program. [Citation].’ ” (Santa Ana Hospital Medical Center v. Belshe
(1997) 56 Cal.App.4th 819, 822.)
Hospitals that provide inpatient services to Medi-Cal patients are reimbursed
either based upon a contractual payment rate or, for hospitals such as Hoag that have no
negotiated contracts (non-contract hospitals), based upon costs calculated in accordance
with regulatory formulas. (Mission Hospital Regional Medical Center v. Shewry (2008)
168 Cal.App.4th 460, 474.) Non-contract hospitals submit annual cost reports to the
Department. The Department then audits the cost reports, makes necessary adjustments
in the course of the audit, and prepares a final audit report. (Welf. & Inst. Code,
§ 14170.) The audit report may be challenged via an administrative appeal process,
further discussed below.
The Medi-Cal reimbursement available to hospitals during the relevant period of
time was reduced by the passage of AB 5 and AB 1183. (Santa Rosa Memorial Hospital,
Inc. v. Kent (2018) 25 Cal.App.5th 811, 817–819 (Santa Rosa).) AB 5, as codified,
provided for a 10% reduction in specified Medi-Cal reimbursement rates for inpatient
3
services provided by certain non-contract hospitals beginning July 1, 2008. (Id. at p.
817.) AB 1183 further reduced payments to certain non-contract hospitals for dates of
service on or after October 1, 2008 to “to the lesser of 90 percent of audited allowable
costs or a rate equal to the regional average contract rate minus 5 percent.” (Id. at p.
818.) The rate reductions in AB 5 and AB 1183 were prospectively eliminated in April
2011. (Ibid.) In 2009, a number of health care providers and hospitals, including Hoag,
initiated litigation challenging the AB 5 and AB 1183 reimbursement reductions on the
ground that they violated provisions of the Medicaid Act (42 U.S.C. § 1396 et seq.)
governing the substantive and procedural requirements the California Legislature and the
Department must follow when establishing reimbursement rates. (See Santa Rosa, supra,
25 Cal.App.5th at p. 814.)
The Department’s Audit of Hoag’s 2009 Cost Report
On April 17, 2012, the Department issued its final audit report of Hoag’s cost
report for its fiscal year ending September 30, 2009 (FYE 2009). The Department found
that AB 5 and AB 1183 required reductions totaling $2,413,623 to Hoag’s FYE 2009
reimbursement. After factoring in these reductions, interim payments to Hoag, and
several other audit adjustments, the Department determined that Hoag had been overpaid
$149,494 for Medi-Cal services provided during FYE 2009. The final audit report
notified Hoag that a party could appeal the audit decision in writing, and that “[t]he
written notice of disagreement must be received by the Department within 60 calendar
days” from receipt of the report, citing Welfare and Institutions Code, Section 14171 and
California Code of Regulations, title 22, section 51016, et seq.1
May 2012 Administrative Appeal Challenging the Legality of the AB 5 and AB 1183
Reimbursement Reductions
On May 19, 2012, Hoag began the administrative appeals process by filing a
timely Statement of Disputed Issues (SODI) contesting the legality of the AB 5 and AB
1 All further undesignated section references are to title 22 of the California Code
of Regulations.
4
1183 reimbursement reductions contained in the April 17, 2012 final audit report.
Hoag’s “Provider’s Position” set forth in the SODI was, in full, as follows: “Effective
July 1, 2008 the [Department] implemented AB 5; imposing a ten percent reduction in
Medi-Cal rates for non-contract hospitals pursuant to the California Welfare &
Institutions Codes § 14105.19 and § 14166.245. On September 30, 2008, the
[Department] implemented AB 1183; reducing the Medi-Cal reimbursement for noncontract
hospitals to equal the lesser of a ten percent reduction or to five percent below
the applicable average rate paid by the California Medical Assistance Commission,
pursuant to California Welfare & Institution Code § 14166.245. [Hoag] believes that
these Medi-Cal rate reductions are illegal because they violate federal and state laws and
regulations and provisions of the state and federal constitutions. [Hoag] is represented in
several different lawsuits that challenge the enactment and implementation of AB 5 and
AB 1183. The federal courts preliminary [sic] enjoined the application of both rate
reductions because the [Department] did not comply with the federal statutory
requirements that payments be consistent with efficiency, economy, quality of care, and
access to care pursuant to 42 U.S.C. § 1396a(a)(30)(A). The amount in dispute for
AB 5/AB 1183 is ($2,413,638).” As is evident, Hoag focused exclusively on the global
issue of the legality of the AB 5 and AB 1183 reductions and raised no issued as to
particular audit calculations. Similarly, the referenced lawsuits challenged the overall
legality of the AB 5 and AB 1183 reductions and sought to void the reductions in their
entirety. (See Santa Rosa, supra, 25 Cal.App.5th at p. 814.)
On May 29, 2012, the OAHA notified Hoag and the Department that the SODI
had “been received and accepted as a valid appeal,” and that the case would be “held in
abeyance” pending the outcome of litigation pertaining to AB 5 and AB 1183.
December 2013 Alleged Calculation Error Challenge
On December 12, 2013, over 18 months after the May 2012 SODI was submitted,
Hoag submitted a second SODI requesting that a “disputed issue be incorporated into the
open appeal.” The new issue was whether the Department erroneously included “nursery
days” (days of covered inpatient nursery care) in a calculation of the number of Medi-Cal
5
days subject to the reimbursement reductions required under AB 1183. Hoag stated that
it “disputes and appeals the Medi-Cal payment reduction calculation of $2,413,623
implemented by AB 5 and AB 1183 as it incorrectly includes Nursery Days in the
determination not in accordance with the applicable instruction and regulation.”
Specifically, Hoag alleged the Department “incorrectly includes 448 Nursery Days” in its
calculation of the $2,413,623 reimbursement, and it identified the amount in dispute
based on this new issue as $620,903. Neither Hoag’s initial SODI nor the parallel legal
challenges to the assembly bills addressed the cost calculation of eligible Medi-Cal days
under AB 1183 at issue in Hoag’s second SODI.
Two weeks later, on December 27, the OAHA sent a notice informing Hoag and
the Department that the December 12 letter “has been accepted as an appeal of the
identified issues” and setting a formal hearing date. On January 13, 2014, counsel for the
Department sent an email to the assigned Administrative Law Judge (ALJ) asking for
clarification of the “open appeal” reference: “[t]here appears a significant gap in time
between [the May 19, 2012 SODI and the December 12, 2013 letter] where it seems
something may be missing . . . .” Two days later, the ALJ responded by email,
explaining “[a]s I look at the file, it appears that issue 1 and issue 2 are the same issue.
First an informal hearing was requested, and then a formal one.” However, less than an
hour later, the ALJ sent a follow up email, stating that “[a]ctually, it appears [Hoag] has
requested a new issue be included.” The ALJ explained that “[n]ormally, my office
would issue an order to show cause why that issue should be accepted,” but suggested
that the parties set a time to discuss the matter. Counsel for Hoag responded: “[l]ong and
short of it, we had an open appeal for Hoag’s case at the time, and we added an issue.
It’s really a math issue regarding the State’s use of Nursery days that should not have
been included in the calculation. It’s a correction of a calculation error.”
Dismissal of Hoag’s Administrative Appeals
In January 2014, the OAHA issued an order to show cause requiring Hoag to
demonstrate why its administrative appeals should not be dismissed on the grounds that:
(1) “the issue raised in the [May 2012] SODI as to the validity, legality or
6
constitutionality of AB 5 and AB 1183 is beyond the jurisdiction of this Tribunal,” and
(2) Hoag’s appeal of the issue in the December 2013 SODI “that the AB 5 and AB 1183
adjustment ‘incorrectly includes Nursery Days in the determination, (which is) not in
accordance with applicable instruction and regulation’ ” was not raised within 60
calendar days of receipt of the written notice of the audit findings and were thus waived.
The parties submitted briefing in response.
In May 2014, the administrative appeals were dismissed on the grounds stated in
the order to show cause. In rejecting Hoag’s contention that the appeal of the alleged
calculation error was timely as “just an elaboration of the same adjustment raised in the
original SODI,” the ALJ cited to section 51022(d) (providing each issue raised in a SODI
must be set forth separately) and found the issues were “clearly different issues with
different financial affects [sic], even if they [were] related to the same adjustment.
Accordingly, the issue of the calculation of the nursery days [was] a separate issue and
was not raised in a timely manner.” The ALJ rejected Hoag’s contention that it should
have been granted 30 days after the notice of deficiency to file an amended SODI since
the 30-day provision does not apply to an untimely SODI but rather to an insufficient, but
timely, SODI. (§ 51022, subd. (d).) The ALJ further explained that, under section
51022, subdivision (c), all late requests shall be denied unless the provider establishes
good cause for the late filing within 15 days of being notified of the untimeliness, and
that Hoag “was given well in excess of that amount of time to show good cause of late
filing because [Hoag] was notified of the untimeliness of its request to include the
nursery days issue on January 28, 2014, and given until April 14, 2014 [the due date of
Hoag’s reply brief on the order to show cause], to establish good cause for the lateness of
the request.”
Writ of Administrative Mandate
Hoag filed a petition for a writ of administrative mandate seeking to reverse the
ALJ’s dismissal. (Welf. & Inst. Code, § 14171, subd. (j) [“[t]he final decision of the
director shall be reviewable in accordance with Section 1094.5 of the Code of Civil
Procedure . . . .”].) The trial court denied Hoag’s petition on December 13, 2017 in
7
regards to Hoag’s appeal of the calculation issue, and affirmed “[t]he dismissal of the
[SODI] dated December 12, 2103, seeking to reduce the [$2,413,623] of the
Department’s Report on the Cost Report Review for Hoag for [FYE 2009] by $620,903
because of a claimed error in nursery days . . . .” The trial court remanded the petition to
the OAHA in regards to the issue of the legality of AB 5 and AB 1183, but ordered that it
be held in abatement pending a final resolution of Santa Rosa, supra, 25 Cal.App.5th
811. On July 31, 2018, the Santa Rosa case was issued; it affirmed the trial court’s denial
of the petition of writ of mandate, held the providers could not obtain a writ of mandate
against state officials to challenge reimbursement rates approved by a federal agency, and
rejected the contention that the AB 5 and AB 1183 reimbursement rates were invalid
under applicable procedural requirements. (Id. at p. 814.)
Hoag timely appealed the portion of the judgment affirming the dismissal of the
administrative appeal contained in the December 2013 SODI.
DISCUSSION
I. Standard of Review
The appellate scope of review from a judgment on a petition for writ of mandate is
the same as that of the trial court. (Department of Corrections & Rehabilitation v. State
Personnel Board (2015) 238 Cal.App.4th 710, 716 (State Personnel Board).)
“ ‘When reviewing the denial of a petition for writ of administrative mandate
under Code of Civil Procedure section 1094.5, we ask whether the public agency
committed a prejudicial abuse of discretion.’ ” (Hi-Desert Medical Center v. Douglas
(2015) 239 Cal.App.4th 717, 730 (Douglas).) Abuse of discretion is established if the
Department “has not proceeded in the manner required by law, the order or decision is
not supported by the findings, or the findings are not supported by the evidence.” (Civ.
Code, § 1094.5.) “If a question of law is presented, we undertake a de novo review of the
[Department’s] ruling.” (State Personnel Board, supra, 238 Cal.App.4th. at pp. 716–717;
see also Douglas, supra, 239 Cal.App.4th 717, 730 [“ ‘[a]s to questions of law, appellate
courts perform essentially the same function as trial courts in an administrative mandate
proceeding, and the trial court’s conclusions of law are reviewed de novo. [Citation]’ ”].)
8
Furthermore, we “also recognize that courts show deference to an administrative body’s
reasonable construction of relevant statutory provisions within its field of expertise.”
(State Personnel Board, supra, 238 Cal.App.4th at p. 717.)
As this matter before us presents purely legal issues, we review de novo the
dismissal of Hoag’s administrative appeal regarding the alleged calculation error.
II. The Dismissal of Hoag’s Administrative Appeal of the Calculation Error Was
Not an Abuse of Discretion
The parties do not dispute the dates and central issue – Hoag filed its first
administrative appeal challenging the legality of the AB 5 and AB 1183 reductions in
May 2012 and then, in December 2013, sought to add its administrative appeal of an
alleged calculation error in the AB 1183 adjustment on the basis that it could be
“incorporated” into the timely filed original administrative appeal.
We find no abuse of discretion in the dismissal of Hoag’s administrative appeal of
the alleged calculation error issue. Hoag did not request a hearing on the issue within 60
days of receipt of the Department’s audit report as the appeal of the alleged calculation
error does not relate back to the date of the initial administrative appeal concerning the
legality of reductions taken pursuant to AB 5 and AB 1183. (See § 51022.) The OAHA
notice stating “acceptance” of Hoag’s calculation error administrative appeal does not
affect the timeliness determination.
A. The Calculation Error Administrative Appeal was Separate and Distinct
from the Administrative Appeal Challenging the Lawfulness of AB 5 and AB
1183
Section 14171, subdivision (a), of the Welfare and Institutions Code provides that
the director of the Department “shall establish administrative appeal processes to review
grievances or complaints arising from the findings of an audit” and the Department did
so. (§ 51016, et seq.) Under the administrative appeals process, a provider “may request
a hearing for any disputed audit or examination finding” according to the process set
forth in section 51022. (§ 51022, subd. (a).) To request a hearing, “[a] written request
9
shall be filed with the Department within 60 calendar days of the receipt of the written
notice of the audit or examination findings.” (§ 51022, subd. (a)(1).) The written request
is known as the “Statement of Disputed Issues” (SODI) and may be amended at any time
during the 60-day period following receipt of the written notice of the audit. (§ 51022,
subds. (a)(2), (d).)
Hoag’s May 2012 SODI challenged the lawfulness of the $2,413,623 Medi-Cal
reimbursement reduction made pursuant to AB 5 and AB 1183. In this SODI, Hoag
specifically “disputes and appeals the Medi-Cal payment reduction of ($2,413,623)
implemented by AB 5 and AB 1183” and stated that it “believes that these Medi-Cal rate
reductions are illegal because they violate federal and state laws and regulations and
provisions of the state and federal constitutions.”
Although the date on which Hoag received the April 17, 2012 audit report is not
clear from the record, Hoag necessarily received it by May 19, 2012, the date it submitted
its first SODI. Under the 60-day time limit, Hoag had, at most, until July 18, 2012 to
dispute the results of the audit by filing a SODI specifically listing “each issue as are in
dispute” and “setting forth [its] contentions as to those issues and the estimated amount
each issue involves.” (§ 51022, subds. (a)(2), (d).) Instead, Hoag filed a second SODI
challenging the alleged calculation error by letter dated December 13, 2013 requesting
that an additional “disputed issue be incorporated into the open appeal.” Hoag identified
the new issue as “Issue #2” and stated that it “disputes and appeals the Medi-Cal payment
reduction calculation of ($2,413,623) implemented by AB 5 and AB 1183 as it
incorrectly includes Nursery Days in the determination not in accordance with the
applicable instruction and regulation,” and that the Department incorrectly includes “448
Nursery Days,” valued at $620,903, in its overall $2,413,623 reimbursement reduction.
Hoag argues that because it filed an administrative appeal challenging the legality
of the Department’s finding that AB 5 and AB 1183 required a $2,413,623 adjustment, it
should be permitted to belatedly appeal a separate issue contesting a specific $620,903
adjustment calculation that constituted a portion of the total $2,413,623 adjustment. It
asserts that, “[u]nder Section 51022, a Provider does not appeal ‘issues,’ it appeals ‘any
10
disputed audit or examination finding’ ” and contends that the calculation challenge was
“only elaborating on” the earlier challenge to the lawfulness of the AB 5 and AB 1183
reductions. In so doing, Hoag ignores the clear statutory requirements that administrative
appeals of Medi-Cal audits must be specific as to each contested issue and ignores the
reality that the “math issue” was a completely new and distinct challenge.
Welfare and Institutions Code section 14171, subdivision (e)(1), provides that the
administrative appeal of a Medi-Cal audit is initiated by a “timely and specific statement
of disputed issues by the provider.” (Italics added.) The regulations governing the
administrative appeals process are consistent with this mandate. Section 51022 of the
California Code of Regulations, title 22, requires that a provider submit a SODI that
“shall be specific as to each issue as are in dispute, setting forth the provider’s
contentions as to those issues and the estimated amount each issue involves” in order to
“request a hearing for any disputed audit or examination finding.” (§ 51022, subds. (a),
(d).) This requirement of issue specificity ensures that the Department has notice and an
opportunity to investigate and resolve providers’ grievances and complaints.
The cases cited by Hoag are inapposite to the case before us and do not suggest
that a provider, after timely appealing an audit finding, may add a separate and distinct
issue to its appeal without complying with the 60-day timeliness requirement. (See
Kaiser Foundation Hospitals v. Belshe (1997) 54 Cal.App.4th 1547, 1556 fn. 4 [hospital
could not request a hearing to examine disputed audit findings where there was no
adjustment in the amount claimed by the hospital]; Coastal Community Hospital v.
Belshe (1996) 45 Cal.App.4th 391, 394–395 [administrative appeals process does not
permit hospitals to appeal Department’s decision to accept their cost reports as filed,
rather than perform an audit, because the “pre-acceptance review” of the costs reports did
not constitute an “audit or examination” that would trigger a right of appeal]; Palmdale
Hospital Medical Center v. Department of Health Services (1990) 8 Cal.App.4th 1306,
1316 [court held that there are different review processes and provisions for review of
“the findings of an audit or examination [citation] and the determination of a tentative or
final settlement based on those findings.” ]
11
On the contrary, courts have recognized that section 51022 mandates a provider to
timely identify issues in order to commence the administrative appeal process. (See
County of San Joaquin v. Belshe (1995) 35 Cal.App.4th 6, 10 [under sections 51017 and
51022, a provider’s appeal from the settlement of an audit “must specify the disputed
issues in writing. [Citations]. Only these issues will be reviewed.”]; Mission Community
Hospital v. Kizer (1993) 13 Cal.App.4th 1683, 1688 [under section 51022, “[i]f a
provider is dissatisfied with audit findings, the provider may appeal by filing a statement
of disputed issues within 60 days of the receipt of the written audit findings”].)
In sum, we find that Hoag was required to set forth each issue it was appealing,
including its contentions as to each issue and the estimated amount of each issue, within
the 60-day time frame set forth in section 51022. We reject Hoag’s contention that its
administrative appeal of the legality of the “finding” of the $2,413,623 reduction
mandated by AB 5 and AB 1183 included the separate challenge to the alleged $620,903
adjustment calculation error as the contentions underlying the two challenges are
completely distinct, as are the amounts at issue. (See § 51022, subd. (d) [a SODI “shall
be specific as to each issue as are in dispute, setting forth the provider’s contentions as to
those issues and the estimated amount each issue involves”].) Therefore, we find the ALJ
properly exercised discretion in dismissing the administrative appeal of the alleged
calculation error as untimely.
B. The OAHA Notices Accepting Hoag’s Administrative Appeals do not
Determine the Timeliness Issue
The OAHA notified Hoag that the May 19, 2012 SODI “has been received and
accepted as a valid appeal.” The OAHA also notified Hoag that its December 12, 2013
letter “has been accepted as an appeal of the identified issues.” Neither letter makes any
statement regarding timeliness. Hoag argues that these receipt notifications constitute an
implicit concession regarding timeliness because the Department’s “acceptance of the
two appeal letters was authoritative,” and “[t]here is nothing in the appeal regulations in
title 22 which authorizes the hearing officer to revoke the Department’s acceptance of the
appeal.”
12
Hoag has not provided to us, and did not provide to the trial court, any legal
authority in support of its position that an OAHA notice accepting an administrative
appeal constitutes a determination of timeliness or precludes the presiding ALJ from
making a timeliness determination. Hoag simply refers to Welfare and Institutions Code
section 14171(g), which states that “a provider who prevails in an appeal of a disallowed
payment shall be entitled to interest at the rate [calculated] . . . . commencing on the date
the appeal is formally accepted by the department or the date payment is received by the
department, whichever is later.” (Italics added). This provision addresses interest
calculations, not timeliness. Therefore, we reject Hoag’s contention that the notices
constitute a final determination of the timeliness of its appeal of the alleged calculation
error issue.
III. Hoag Has Waived Any Good Cause Argument for its Delay
Under section 51022, subdivision (c), all late SODIs “shall be denied and the audit
. . . findings deemed final unless the provider establishes in writing good cause for late
filing within 15 calendar days of being notified of the untimeliness of its request.”
Hoag was given approximately two and one-half months, far more than 15 days, to
respond to the order to show cause regarding dismissal for lack of timely filing. In
contrast to the good cause arguments that Hoag now attempts to assert, including that it
would be unreasonable to expect it to immediately “audit the audit” upon its receipt,
Hoag responded to the order to show cause by asserting to the ALJ it was just “an
independent and simple calculation error in the same audit finding.” Hoag did not raise
any justification for the late filing and instead took the position that it was timely
because: (1) it was not subject to the 60-day requirement of section 51022, subdivision
(a), as it related to the same “finding” that was at issue in its challenge to the lawfulness
of the AB 5 and AB 1183 reductions; (2) the Department “explicitly accepted” its second
SODI by issuing the December 19, 2013 notice; and (3) it should have been granted an
additional 30 days under section 51022, subdivision (d)(1), to file an amended SODI.
These are substantive issues that we have addressed, and rejected, above.
13
Therefore, Hoag has waived its good cause for delay argument for failure to make
that argument in the administrative proceedings below. (See City of Pleasanton v. Board
of Administration (2012) 211 Cal.App.4th 522, 541 [court found that employee waived
arguments not presented in administrating proceeding, noting that “[t]he courts have
consistently held that parties may not advance new theories in the courts that were not
presented to the administrative agency”]; NBS Imaging Systems, Inc. v. State Board of
Control (1997) 60 Cal.App.4th 328, 337 [trial court erred in granting petition for writ of
mandate based on a theory that was never presented during administrative proceeding
because “the hearing officer and the board had no opportunity to evaluate the . . . import
of these tardy assertions and the superior court had no authority to consider them”].)

Outcome: The judgment is affirmed. The Department is entitled to recover its costs on
appeal.

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