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Case Style: Tulare Pediatric Health Care Center v. State Department of Health Care Services
Case Number: B287876
Judge: Wiley, J.
Court: California Court of Appeals Second Appellate District, Division Eight on appeal from the Superior Court, County of Los Angeles
Plaintiff's Attorney: Xavier Becerra, Julie Weng-Gutierrez, Richard T. Waldow and Jacquelyn Y. Young
Defendant's Attorney: Erik K. Swanholt, and Adam J. Hepworth
Description: Because California participates in the federal Medicaid
program, California must pay federally qualified health centers
for their services to Medicaid beneficiaries. (42 U.S.C. §
1396a(bb)(4).) The question is how much California must pay the
counties and their clinics for providing this care. The answer is
“100 percent” of the cost of a defined list of services. (42 U.S.C. §
1396a(bb)(4), italics added.)
Tulare County runs Tulare Pediatric Health Care Center
(“Tulare Clinic”). The clinic is a federally qualified health center.
California’s Department of Health Care Services (“the State”)
refused to pay Tulare Clinic the full amount the clinic paid to a
contractor. Instead, the State paid Tulare Clinic an amount
equal to only the contractor’s underlying costs. By statute, that
was too little.
Tulare Clinic petitioned the court to require the State to
pay 100 percent of the amount Tulare Clinic paid the contractor.
The trial court rightly granted the petition, so we affirm.
We begin with the statutory backdrop, which is extensive.
Then we state the facts.
Medicaid is a federal program subsidizing state spending
on medical care for the poor. (42 U.S.C. § 1396-1; 42 C.F.R. §
430.0.) To get Medicaid funds, states must agree with the federal
government to spend the funds in accord with federally imposed
conditions. (42 C.F.R. § 430.10; see also Armstrong v. Exceptional
Child Center, Inc. (2015) 135 S.Ct. 1378, 1382.) And states must
match federal dollars with their own, at a rate set by Congress.
(42 U.S.C. §§ 1396a, 1396b.)
Federal regulations require each participating state to
adopt a “State plan” outlining how it will follow federal Medicaid
rules. (42 C.F.R. § 430.10 et seq.) States develop standards to
determine who qualifies for medical assistance under their State
plan. (42 U.S.C. § 1396a(17).)
Medicaid beneficiaries are people getting medical
assistance under a State plan.
Alongside Medicaid, a similar but independent federal
program subsidizes healthcare by awarding grants to federally
qualified health centers. This is under the aegis of the Public
Health Services Act. (42 U.S.C. § 254b.) Health centers like
Tulare Clinic qualify for grants by providing primary health
services — immunizations, prenatal care, and the like — to
medically underserved communities. (42 U.S.C. § 254b.) Some in
these underserved communities are also Medicaid beneficiaries.
(See Community Health Care Association of New York v. Shah
(2d Cir. 2014) 770 F.3d 129, 136 (Community Health).)
When Congress authorized grants for health centers under
the Public Health Services Act, it expected states to reimburse
centers for all or part of centers’ cost of treating Medicaid
beneficiaries. (See Pub.L. No. 94–63, § 330 (July 29, 1975) 89
Stat. 304; Community Health, supra, 770 F.3d at p. 136 [the
grant program for health centers was established in 1975 as
Section 330 of the Public Health Services Act, now codified at 42
U.S.C. § 254b].) Congress heard testimony that, on average,
states’ payments covered less than 70 percent of the centers’ cost
of treating Medicaid beneficiaries. (H.R.Rep. No. 101-247, 1st
Sess., p. 392 (1989), reprinted in 1989 U.S. Code Cong. & Admin.
News, p. 2118; see also Community Health, supra, 770 F.3d at p.
Congress was concerned that, because Medicaid fell short of
covering the full cost of treating its own beneficiaries, health
centers would use Public Health Services Act grants to subsidize
treatment of Medicaid patients. (H.R.Rep. No. 101-247, 1st Sess.,
pp. 392–393 (1989), reprinted in 1989 U.S. Code Cong. & Admin.
News, pp. 2118–2119.) This practice compromised centers’ ability
to care for those without any public or private coverage
whatsoever, who were the very people Congress sought to help
when it passed the Public Health Services Act. (See ibid.) So
Congress amended Medicaid rules to require states to pay health
centers 100 percent of their costs for a defined list of services.
(H.R.Rep. No. 101-247, 1st Sess., p. 393 (1989), reprinted in 1989
U.S. Code Cong. & Admin. News, p. 2119; see also Three Lower
Counties Community Health Services, Inc. v. Maryland (4th Cir.
2007) 498 F.3d 294, 297–298 (Three Lower Counties).)
This situation has created a complex payment structure:
one funding source is a combination of federal and state funding,
while another is solely federal. That is, a combination of federal
and state funds support care for patients who are Medicaid
beneficiaries. But federal funds alone support care for patients
without any health coverage, because those monies come from
Public Health Services Act grants, which are strictly federal in
origin. (See Alameda Health System v. Centers for Medicare &
Medicaid Services (N.D.Cal. 2017) 287 F.Supp.3d 896, 902.)
This scheme continues to the present day, with a
modification for administrative purposes. The modification was
in 2000, when Congress adopted a “prospective payment system”
to relieve health centers from the burden of providing new cost
data every year. (Three Lower Counties, supra, 498 F.3d at p.
298.) Under this new system, health centers that become
federally qualified after 2000, including Tulare Clinic, receive
Medicaid payment equal to “100 percent of the costs of furnishing
[defined] services” during their first year. (42 U.S.C. §
1396a(bb)(4).) In later years, payment is increased by a set
percentage and is adjusted only to account for changes in the
scope of the centers’ services. (42 U.S.C. § 1396a(bb)(3).)
Federal law gives states different ways of determining “100
percent of the costs of furnishing [defined] services” in the initial
year. One option — the one pertinent here — is to determine the
costs according to “the regulations and methodology” for centers
federally qualified before 2000. (42 U.S.C. § 1396a(bb)(4).) That
method requires states to pay “an amount (calculated on a per
visit basis) that is equal to 100 percent of the average of the costs
of the center . . . of furnishing such services during fiscal years
1999 and 2000 which are reasonable and related to the cost of
furnishing such services.” (42 U.S.C. § 1396a(bb)(2).)
California incorporated these rules into its Medicaid
program, which is Medi-Cal. (Welf. & Inst. Code, §§ 14063,
14132.100, subd. (i)(3).) The Department of Health Care Services
administers Medi-Cal and audits payments to health centers.
(Welf. & Inst. Code, §§ 14100.1, 14170, subd. (a)(1).)
Here are some facts.
Tulare County operates Tulare Clinic, which is a federally
qualified health center. Tulare County staffed the clinic by
contracting with Dr. Prem Kamboj, who agreed to provide
necessary personnel to run the clinic. Tulare agreed to pay
Kamboj $106 per patient visit, whether it was Kamboj personally
or some other individual who provided the care.
In 2011, Tulare Clinic submitted a cost report to the State.
The purpose was to set the clinic’s rate under the prospective
payment system. Tulare Clinic incorporated Kamboj’s fee of $106
per patient visit. The clinic then added up its other costs, like
office and printing supplies and so forth, and calculated its total
cost to be $167.85 per patient visit.
This $167.85 rate apparently was a bargain. The preceding
rate had been $226 per patient visit. Tulare County previously
ran a different health center that provided the same services as
Tulare Clinic, but it cost 35% more than Tulare Clinic’s cost per
patient visit. At oral argument all counsel embraced this fact.
The State’s lawyer admitted this fact placed Tulare County in a
“sympathetic” light, presumably because the county’s actions
seemed like good government at work.
Even though Tulare County’s new arrangement seemed to
be a more efficient arrangement than its old system, the State
audited Tulare Clinic’s 2009 to 2010 fiscal year expenses. No one
disputes Tulare Clinic indeed paid Kamboj $106 per patient visit.
But the State did not accept what Tulare Clinic actually paid as
Tulare Clinic’s actual cost. Instead, it demanded Kamboj’s
records so it could determine his costs. This is akin to demanding
cost records from the subcontractor water company that
resupplies the clinic’s water cooler.
The State’s auditor concluded, in some instances, Kamboj’s
costs were less than $106 per visit. Apparently, the State’s
reasoning was the Kamboj’s costs had to be less, because “the
doctor is providing more than just one-on-one professional
services to patients. He’s providing his staff. He’s providing his
medical assistants . . . , doctors from his private practice, and, of
course, the contract doesn’t say that, but he’s providing any
specialists and physicians to the clinic, and he’s charging a
hundred and six dollars per visit to the County.”
In other instances, the State faulted Kamboj because he
could not support his cost claims with documentation.
As a result, the State made seven audit adjustments that
reduced Tulare Clinic’s cost of “Physician Services Under
Agreement” from $2,308,058 to $1,696,095. These adjustments,
and others not on appeal, reduced California’s payment rate to
Tulare Clinic to $120.98 per patient visit.
Tulare Clinic petitioned the trial court to require the State
to set aside the adjustments to the clinic’s costs and to recalculate
its payment rate accordingly. The trial court granted the
petition, finding 42 United States Code section 1396a(bb)
required the State to accept the Tulare Clinic’s cost of paying
Kamboj $106 per patient visit.
The trial court correctly determined the State must accept
Tulare Clinic’s cost of paying Kamboj $106 per patient visit.
First we review the standard of review. On this appeal, the
question is whether the State has proceeded as required by a
federal Medicaid statute, state Medi-Cal statute, and state
regulation mandating implementation of California’s State plan.
No facts are disputed; the question is solely one of statutory
interpretation. Thus, we independently review the trial court’s
decision. (Cassidy v. California Bd. of Accountancy (2013) 220
Cal.App.4th 620, 627.)
We do not defer to the State’s interpretation of the federal
statute at issue: 42 United States Code section 1396a(bb), which
we will call subdivision (bb). (Orthopaedic Hospital v. Belshe (9th
Cir. 1997) 103 F.3d 1491, 1495 [state agencies’ interpretation of
federal statutes get no deference].)
The State contests this point. It wants deference. It notes
the Centers for Medicare and Medicaid Services, a federal agency
entitled to deference in interpreting federal Medicaid law, has
approved California’s State plan, which implements subdivision
(bb). (Community Health Center v. Wilson-Coker (2d Cir. 2002)
311 F.3d 132, 137–138 [explaining the deference owed to the
Centers for Medicare and Medicaid Services].) Therefore,
according to the State, by “approv[ing] of California’s
interpretation and application of” subdivision (bb), the federal
agency has somehow imbued the State with the deference owed
to the Centers.
This argument fails. The federal Centers may have
approved the State plan as a general matter, but there is no sign
it approved the State’s application of the State plan to Tulare
Clinic, or even the State’s application of the State plan in similar
We do not defer to the State’s interpretation of state law
because we do not defer to agency interpretations that are clearly
erroneous, as the State’s interpretation is here. (Bonnell v.
Medical Bd. (2003) 31 Cal.4th 1255, 1265.)
We thus independently review this question of statutory
Now we decide the merits: federal law requires the State
pay Tulare Clinic 100 percent of the $106-per-patient-visit sum
that Tulare Clinic paid Kamboj. In other words, the State must
make Tulare County whole on this score. California’s Medi-Cal
statute is consistent with this federal requirement.
The plain language of subdivision (bb) requires states to
pay centers’ full cost. It provides, “In any case in which an entity
first qualifies as a Federally-qualified health center . . . after
fiscal year 2000, the State plan shall provide for payment for
services . . . furnished by the center . . . that is equal to 100
percent of the costs of furnishing such services.” (42 U.S.C. §
1396a(bb)(4).) The method for determining 100 percent of the
costs at issue requires states to pay “an amount (calculated on a
per visit basis) that is equal to 100 percent of the average of the
costs of the center . . . of furnishing such services . . . which are
reasonable and related to the cost of furnishing such services.”
(42 U.S.C. § 1396a(bb)(2).) The statute is clear: the State must
pay 100 percent of the center’s costs for the defined services. We
effectuate this plain meaning. (Bonnell v. Medical Bd., supra, 31
Cal.4th at p. 1261.)
Instead of adhering to subdivision (bb), the State tries to do
exactly what Congress sought to avoid: pay a health center less
than the center’s full cost of treating Medicaid beneficiaries,
creating a risk this clinic will use Public Health Services Act
grant funds to subsidize Medicaid beneficiaries. (See H.R.Rep.
No. 101-247, 1st Sess., pp. 392–393 (1989), reprinted in 1989 U.S.
Code Cong. & Admin. News, pp. 2118–2119.) Due to this
problem, Congress changed the law to include the 100-percent-ofcosts
requirement. The State cannot shirk its responsibility to
pay health centers’ full costs.
State law is in accord. The Welfare and Institutions Code
allows the State to establish a payment rate for new health
centers “that is equal to 100 percent of the projected allowable
costs to the [federally qualified health center] of furnishing [the
health center’s] services during the first 12 months of operation. .
. . The projected allowable costs for the first 12 months shall be
cost settled and the prospective payment reimbursement rate
shall be adjusted based on actual and allowable cost per visit.”
(Welf. & Inst. Code, § 14132.100, subd. (i)(3)(C).) Like
subdivision (bb), the Welfare and Institutions Code creates a
clear mandate to pay health centers their full costs.
The State defends its adjustments on the ground that
subdivision (bb) requires costs to be “reasonable.” (42 U.S.C. §
1396a(bb)(2).) This defense fails. The authorities relied on by
the State either do not support its narrow understanding of
“reasonable,” or they do not apply at all.
At the core of the State’s argument is California’s State
plan. The State uses the State plan as the first link in a chain of
authorities, which the State claims supports its interpretation of
The State’s argument proceeds in several steps. First, the
State contends the State plan requires it to determine the
reasonableness of costs according to the principles in 42 Code of
Federal Regulations part 413 (“part 413”)—a federal regulation of
Medicare, not Medicaid. Medicare is a federal program that
subsidizes health insurance for the elderly and disabled. (42
U.S.C. § 1395c.) Next, the State argues part 413 incorporates 42
Code of Federal Regulations parts 405 and 415, also Medicare
regulations. The State says 42 Code of Federal Regulations part
415, in turn, requires application of the Centers for Medicare and
Medicaid Services’ Medicare Provider Reimbursement Manual.
Finally, the State contends the Medicare Provider
Reimbursement Manual limits costs to “the contractor’s [that is,
Kamboj’s] reasonable costs, rather than the payments made by”
There are three fatal problems with this argument.
The first fatal problem with the State’s argument is that
the record does not include California’s State plan. The Tables of
Authorities in the State’s briefs do not mention the State plan.
When the State quotes the State plan, it cites a portion of the
trial court’s opinion that quotes the plan rather than the plan
itself. Neither party addresses which version of the State plan
controls. There is a version of the State plan on the State’s
website, but it is unclear if it is the relevant version.
The trial court said the “parties agree that California’s May
1, 2006 ‘State Plan Amendment Prospective Payment
Reimbursement’ is the operative ‘[S]tate plan,’” and then
immediately quotes from the State plan’s Attachment 4.19-B.
The first page of Attachment 4.19-B accessible from the State’s
website shows an approval date of May 1, 2006. (Department of
Health Care Services, State Plan Amendment – Prospective
Payment Reimbursement, Attachment 4.19(B)
But other pages have different approval dates;
notably, the page containing the section quoted by the trial court
shows an approval date of February 28, 2012. (Ibid.) Even if we
assumed the trial court quoted the plan correctly, we would still
have no understanding of the quoted portions’ surrounding
context. Because the State plan is not in the record, and because
the parties provide no guidance on how we can locate the relevant
version, we cannot properly consider the State’s argument.
(Ritschel v. City of Fountain Valley (2006) 137 Cal.App.4th 107,
122–123 [appellants have the burden of preparing a record
showing trial court error, and courts reject arguments
unsupported by an adequate record].)
The second fatal problem with the State’s argument is
ambiguity about whether the portion of the State plan quoted by
the trial court applies to health centers, like Tulare Clinic, that
became federally qualified after 2000. The trial court quotes
Attachment 4.19-B, Paragraph D.2.(a) of the State plan, which
apparently provides, “Beginning on January 1, 2001, the
prospective payment reimbursement rate for [a federally
qualified health center] was equal to 100 percent of the average
reported cost-based reimbursement rate per visit for fiscal years
1999 and 2000 for the [federally qualified health center], as
determined in accordance with cost reimbursement principles for
allowable costs explained in 42 C.F.R. Part 413, as well as
Generally Accepted Accounting Principles.” (Tulare Pediatric
Health Care Center v. Cal. Dept. of Health Care Services (Super.
Ct. L.A. County, 2018, No. BS166705) at p. 6 [quoting the State
Medicaid Plan, Attachment 4.19-B, Paragraph D.2.(a)].) On its
face, this provision simply appears to describe how costs were
determined in the past. A description of past practice would not
seem to govern the present controversy.
Still, there is some reason to believe the principles in part
413 should be used to determine the reasonableness of costs for
new centers. The trial court quoted other language from the
State plan that suggests the method of Paragraph D.2.(a) should
be applied to all centers. Other Medi-Cal rules reference
reasonable cost principles set forth in part 413, suggesting the
Medi-Cal scheme generally intends to incorporate those
regulations. (See, e.g., Welf. & Inst. Code, § 14132.100, subd.
(e)(1) [providing that, if a health center applies for a rate change
based on a change in its scope of services, the rate change “shall
be evaluated in accordance with Medicare reasonable cost
principles, as set forth in Part 413.”].) And Tulare Clinic
concedes the applicability of part 413 on appeal.
Yet even if we accept that part 413 applies, we encounter
the third fatal problem with the State’s argument: part 413
undermines rather than supports the State’s position. For
instance, part 413 includes the principle that Medicare should
pay enough to cover the costs of its own beneficiaries, but not so
much that it covers the cost of those who are not beneficiaries.
(42 C.F.R. § 413.5(a).) This principle echoes Congress’s mandate
that states must fully reimburse health centers for the cost of
Medicaid beneficiaries. The State violates this mandate by
failing to pay Tulare County the full $106 the County pays to
Kamboj for each patient visit.
The State highlights part 413’s focus on actual costs: the
part provides reasonable cost is “cost actually incurred, to the
extent that cost is necessary for the efficient delivery of the
service,” and “actual costs of providing quality care.” (42 C.F.R.
§§ 413.13, 413.9.) Similarly, the approach outlined in part 413
should “result in meeting actual costs of services to beneficiaries
as such costs vary from institution to institution.” (42 C.F.R. §
413.5; italics added.) These provisions also cut against the State.
The actual cost incurred by Tulare Clinic was the $106 per
patient visit paid to Kamboj.
Part 413 uses broad and inclusive phrases when outlining
reasonable costs. It requires payment of “[a]ll necessary and
proper expenses of an institution in the production of services.”
(42 C.F.R. § 413.5.) It later defines “[n]ecessary and proper costs”
as “costs that are appropriate and helpful in developing and
maintaining the operation of patient care facilities and
activities.” (42 C.F.R. § 413.9(b)(2).) This broad wording also
favors paying Tulare Clinic the full $106 per patient visit that
Tulare Clinic paid to Kamboj.
There is only one narrow exception where part 413 directs
payment based on the costs of a contractor rather than the costs
of a provider. (42 C.F.R. § 413.17.) That exception is when the
provider and contractor are related by common ownership or
control. (42 C.F.R. § 413.17.) This exception makes sense
because, when parties are related, the amount a provider pays a
contractor may reflect internal accounting or non-pecuniary
considerations rather than the value of a service. But when a
provider and contractor are not related, the amount a provider
pays a contractor presumably represents the amount the provider
had to pay to induce the contractor to provide services.
The related party rule of part 413 does not apply here. On
an audit adjustment not at issue on this appeal, the
administrative law judge found Tulare Clinic and Kamboj were
not related. The State did not challenge that finding at the trial
court, nor does it challenge the finding on appeal. Tulare Clinic
discusses the related party rule at length in its briefing. The
State does not even attempt to reply.
The exception does not apply. The general rule does: part
413 directs payment based on the costs of a provider rather than
the costs of a contractor. The State must pay 100 percent of the
$106 sum that Tulare County paid.
The State’s alternative theory, which we reject, suggests
the State can reduce payment to a center based solely on the
ground that the center pays a contractor more than the
contractor’s underlying expenses. Under this theory, the State
might acknowledge that Tulare Clinic actually paid Joe’s
Photocopier Rental Place $50 per month to rent the photocopier.
But the State would want to see Joe’s records to see how much
Joe was paying for the machine. This approach would prevent
centers from ever hiring contractors. And, in many cases, it may
be more efficient for a center to hire a contractor to provide some
services, like water delivery or photocopying, than for the center
to do that work itself. This is true even when the contractor
turns a profit, as every successful business must.
The State notes 42 Code of Federal Regulations part 413.9
provides, “Reasonable cost of any services must be determined in
accordance with regulations establishing the method or methods
to be used, and the items to be included.” (42 C.F.R. §
413.9(b)(1).) The State uses this sentence as a vehicle to attempt
to bring in every other Medicare rule that might favor its case. It
claims the sentence justifies reference to 42 Code of Federal
Regulations parts 405 and 415, and 42 Code of Federal
Regulations part 415 requires application of the Medicare
Provider Reimbursement Manual.
The State plan’s reference to part 413 does not allow the
State to apply any Medicare regulation it sees fit. If the drafters
of the State plan intended reasonable costs to be determined
according to all Medicare regulations, it would have said so.
Instead, those drafters specified part 413.
The State cites Oroville Hospital v. Dept. of Health Services
(2006) 146 Cal.App.4th 468 (Oroville Hospital) for the proposition
that allowable costs are determined in accordance with Medicare
standards and the Medicare Provider Reimbursement Manual.
But Oroville Hospital involved a hospital and a regulation that
expressly applies Medicare standards and the Provider
Reimbursement Manual to hospital inpatient services. (Id. at p.
492; Cal. Code Regs., tit. 22, § 51536.) That regulation does not
appear to apply to federally qualified health centers. (Cal. Code
Regs., tit. 22, § 51536.)
The State warns that we risk creating “an untenable
situation where ‘reasonable costs’ are determined by the provider
and only the provider because the provider is the entity that
contracts with other medical professionals.” According to the
State, the result will be excessive contractor costs, courtesy of
taxpayer dollars. Not so.
First, on this record the contract between Kamboj and
Tulare Clinic was an arms-length deal. When health centers
bargain with contractors, they will likely negotiate vigorously to
keep their costs down. That will limit contractor payment to the
minimum necessary to get the contractors’ services. As we
already have noted, Tulare Clinic is charging Tulare County 35
percent less than its predecessor. Both Tulare County and
Tulare Clinic has incentives to economize, and this incentive
structure seems to be working. The State’s fear of excessive
contractor costs seems unfounded here.
Second, the State has ample ways to attack health center
costs that indeed are unreasonable. Our decision in this case
does not change that. But the State cannot reduce payment
based on regulations that do not apply, with no other showing of
unreasonableness. That is what the State seeks to do here.
Congress recognized states tend to shortchange health
centers. That tendency means some health centers are forced to
subsidize Medicaid beneficiaries with unrelated grant money.
Other health centers, denied full funding, may simply close and
leave underserved communities without affordable care.
Congress’s remedy was to require states to pay “100 percent” of
centers’ costs for a defined list of services. (42 U.S.C. §
1396a(bb)(4).) The State must comply with Congress’s mandate.
Outcome: The judgment is affirmed. Costs to Tulare Clinic.