California Hospital Ass'n v. Maxwell-Jolly

Participating states are required to include in their plans reimbursement methods and standards for the medical services provided. ( 42 C.F.R. § 447.252 (b) (2009); Mission Hospital, supra, 168 Cal.App.4th at p. 470.) The Medicaid Act provides detailed requirements for state plans. (See 42 U.S.C. § 1396a(a)(l)-(71).) The provision at issue in the instant appeal is subsection (a)(30)(A) of section 1396a of title 42 of the United States Code (section 30(A)), which “imposes both procedural and substantive requirements on states when they set reimbursement rates for hospital services provided to Medicaid beneficiaries. Designed to guarantee beneficiaries both high quality of care and equal access to care, section (30)(A) requires the state plan to provide ‘such methods and procedures’ relating to payment for services under the state plan as may be necessary ‘to assure that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area ....’(§ (30)(A).)” (Mission Hospital, supra, at p. 473 .)

Consequently, “any analysis of reimbursement rates on the statutory factors of efficiency, economy, quality, and access to care, must have the potential to influence the rate-setting process.” (California Pharmacists Assn. v. Maxwell-Jolly (9th Cir. 2010) 596 F.3d 1098 , 1109 (California Pharmacists), citing Independent Living Center of Southern California v. Maxwell-Jolly (9th Cir. 2009) 572 F.3d 644 , 652, fn. 9 (Independent Living); see also Orthopaedic Hospital v. Belshe (9th Cir. 1997) 103 F.3d 1491 , 1499 (Orthopaedic Hospital); Mission Hospital, supra, 168 Cal.App.4th at pp. 473-474.) Additionally, “[i]t is not justifiable ... to reimburse providers substantially less than their costs for purely budgetary reasons. [Citations.]” (Orthopaedic Hospital, supra, 103 F.3d at p. 1499, fn. 3.)

2. State Law

“California participates in the federal Medicaid program through the Medi-Cal program. (Welf. & Inst. Code, § 14000 et seq.; Cal. Code Regs., tit. 22, § 50000 et seq.)” (Mission Hospital, supra, 168 Cal.App.4th at p. 474.) The Department (defendant herein) is the state agency charged with administering Medi-Cal in accordance with the state plan. (Cal. Code Regs., tit. 22, § 50004, subd. (b)(1).) At the time the instant litigation was commenced, Sandra Shewry was the Department’s director.

B. Facts and Procedural History

In September 1995, the Department submitted a state plan amendment, “SPA 95-017,” to CMS (Centers for Medicare and Medicaid Services), which set forth a revised reimbursement methodology. The plan amendment intended to reduce the DP/NF’s reimbursement rate in the 1995-1996 rate year by changing the methodology to exclude, from the median calculation, those participating providers whose Medi-Cal patient days accounted for less than 20 percent of their total patient days (exclusion methodology or 20 percent exclusion). Although CMS notified the Department that it would not approve the amendment, according to the mandamus petition, the Department issued an emergency regulation the following month, which, in effect, incorporated the unapproved methodology for calculating the median rate for DP/NF’s into the regulation.

On April 23, 1996, CHA filed the first of three actions challenging the new regulation and the exclusion methodology based on the Department’s failure to comply with state and federal law. (California Hospital Assn. v. Belshe (Super. Ct. S.F. City and County, 1999, No. 977772) (CHA I).) On June 16, 1999, the San Francisco Superior Court agreed with CHA, ruling that the exclusion methodology, utilized by the Department for calculating the reimbursement rates for 1995-1996, violated the then existing Boren Amendment (42 U.S.C. former § 1396a(a)(13)(A)), which required state plans to provide for payment of services through the use of rates that were “ ‘reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities . . . .’ ” The trial court issued a writ of mandate and judgment in favor of CHA.

As a result of the Department’s subsequent state plan amendment, “SPA 96-011,” which similarly attempted to apply the 20 percent exclusion methodology for calculating DP/NF reimbursement rates for 1996-1997, CHA filed its second action. (California Healthcare Assn. v. Bontά (Super. Ct. S.F. City and County, 2002, No. 312880) (CHA II).) Following a brief trial, the trial court concluded that the Department was collaterally estopped under CHA I from defending the validity of the methodology used in the 1996-1997 rate year. On July 9, 2002, the trial court entered judgment for CHA and issued a writ of mandate against the Department.

In November 2003, CHA filed the current and third action. On June 7, 2006, CHA filed an amended petition for writ of mandate (the petition), challenging the utilization of the 20 percent exclusion methodology for the rate years following the last state court judgment, from 2001 through 2006. CHA alleges that, despite the fact that the trial court has twice found the 20 percent exclusion methodology to be unsupported, arbitrary and capricious, the Department has continued to use the same inapt methodology, which has dubiously remained part of California Code of Regulations, title 22, section 51511. CHA further alleges that for the 2004—2005 rate year, the Department also arbitrarily imposed a freeze on DP/NF reimbursement rates. CHA argues that the rate freeze was imposed for purely budgetary reasons without consideration of the costs hospitals incurred in providing DP/NF services to Medi-Cal beneficiaries. According to the petition, “[p]rior to enacting the relevant statute and amending the state plan, no studies or analyses were conducted by the Legislature or [the Department] to determine whether the DP/NF rates resulting from the reimbursement freeze would be consistent with efficiency, economy[,] and quality of care[,] or with the cost[s] of providing the services impacted by the rate reduction.”

Denying the petition for a writ of mandate, the trial court ruled on November 14, 2008, that CHA failed to establish a beneficial interest in seeking writ relief, and that section 30(A) did not impose any ministerial duties on the Department. The court found in favor of the Department and the instant appeal followed.

A. Standard of Review

This appeal involves the denial of a traditional writ of mandamus under Code of Civil Procedure section 1085. “In traditional mandamus actions, the agency’s action must be upheld upon review unless it constitutes an abuse of discretion. [Citation.] ‘When reviewing the exercise of discretion, “[t]he scope of review is limited, out of deference to the agency’s authority and presumed expertise: ‘The court may not reweigh the evidence or substitute its

Moreover, “ ‘[b]ecause “trial and appellate courts perform the same function in mandamus actions, an appellate court reviews the agency’s action de novo.” [Citation.]’ [Citation.]” (O.W.L. Foundation v. City of Rohnert Park, supra, 168 Cal.App.4th at p. 586.)

B. Standing

“There are two essential requirements to the issuance of a traditional writ of mandate: (1) a clear, present and usually ministerial duty on the part of the respondent, and (2) a clear, present and beneficial right on the part of the petitioner to the performance of that duty. [Citation.]” (California Assn. for Health Services at Home v. State Dept. of Health Services (2007) 148 Cal.App.4th 696 , 704 [ 56 Cal.Rptr.3d 102 ] (California Assn.).)

“In this section, we discuss the second prong of the test for eligibility to seek mandate, [CHA’s] interest in the Department’s performance of [that] duty. The first prong, the existence of a duty, goes to the merits of . . . [CHA’s] arguments, which we discuss in subsequent sections.” (Mission Hospital, supra, 168 Cal.App.4th at p. 478.)

The Department urges us to affirm the judgment, asserting that CHA has no beneficial interest in enforcing federal law because there is no ministerial duty under section 30(A) to act in the manner suggested by CHA. Citing Sanchez v. Johnson (9th Cir. 2005) 416 F.3d 1051 (Sanchez), the Department argues that section 30(A) does not create a right enforceable by CHA. In Sanchez, the Ninth Circuit addressed the “narrow question” (Independent Living, supra, 572 F.3d at p. 653) of “whether developmentally disabled recipients of Medicaid funds and their service providers have a private right of action against state officials to compel the enforcement of a federal law governing state disbursement of such funds.” (Sanchez, supra, 416 F.3d at p. 1053.) There, the court held that section 30(A) does not create any federal “right” enforceable under section 1983 of title 42 of the United States Code. (Sanchez, at p. 1068.)

To the extent the Department seeks to equate standing in the instant case with that required to seek relief under section 1983 of title 42 of the

A beneficially interested party is one who has a “special interest over and above the interest of the public at large.” (California Assn., supra, 148 Cal.App.4th at p. 706.) “The beneficial interest standard is so broad, even citizen or taxpayer standing may be sufficient to obtain relief in mandamus. ‘[W]here a public right is involved, and the object of the writ of mandate is to procure enforcement of a public duty,’ a citizen is beneficially interested within the meaning of Code of Civil Procedure section 1086 if ‘he is interested in having the public duty enforced.’ [Citation.]” (Mission Hospital, supra, 168 Cal.App.4th at p. 480.)

CHA is a beneficially interested party. It has an interest in challenging the amendments to the state plan and enforcing the Medicaid Act that is above the interest held by the public at large. CHA seeks the enforcement of public duties imposed on the Legislature and the Department by the Medicaid laws. Namely, CHA is interested in having its members compensated for the medical services they provide in accordance with the laws and rules established by Congress for the Medicaid program. These interests are sufficient to satisfy the beneficial interest prerequisite for obtaining writ relief.

We conclude CHA has standing to enforce the Department’s duties under state and federal law to the extent such duties are clearly and presently compelled by such laws. (California Assn., supra, 148 Cal.App.4th at p. 707.)

We now turn to examine the duties CHA seeks to enforce.

C. Mandamus Lies to Enforce Section 30(A)

The primary question presented is whether section 30(A) imposes certain duties on behalf of the Department when establishing reimbursements

The Department argues that CHA seeks to constrain its discretion by compelling the use of a different methodology to establish reimbursement rates to DP/NF’s. The Department insists there is no clear, present, and ministerial duty set forth in section 30(A). Although the Department acknowledges that section 30(A) establishes that a state plan must set forth “ ‘methods and procedures’ ” for setting reimbursement rates, it contends this provision is “infused with discretion.” Pursuant to this discretion, the Department contends there is nothing in section 30(A) or its enabling regulations that requires a state to consider provider costs in any particular fashion when establishing its “ ‘methods and procedures,’ ” or that it conduct a study or analysis regarding the rate-setting formula set forth in the state plan.

The Department, citing Sanchez, supra, 416 F.3d 1051 , argues that section 30(A) is “ill-suited to judicial remedy[ since] [t]he interpretation and balancing of the statute’s indeterminate and competing goals would involve making policy decisions for which this court has little expertise and even less authority.” (Sanchez, at p. 1060.) According to the Department, the “duty” CHA seeks to enforce is not “unmixed with discretionary power or the exercise of judgment” (Unnamed Physician v. Board of Trustees (2001) 93 Cal.App.4th 607 , 618 [ 113 Cal.Rptr.2d 309 ]), because “it requires [the Department] to exercise [its] discretion by balancing the competing interests.”

The fact that an agency’s decision is subject to its broad discretion does not mean mandate is unavailable to aggrieved parties as a matter of law. “Although administrative actions enjoy a presumption of regularity, this presumption does not immunize agency action from effective judicial review.” (California Hotel & Motel Assn. v. Industrial Welfare Com. (1979) 25 Cal.3d 200 , 212 [ 157 Cal.Rptr. 840 , 599 P.2d 31 ], fns. omitted.) It is well settled that mandamus will lie to correct an abuse of discretion by a public official or agency. (Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525 , 540 [ 28 Cal.Rptr.2d 617 , 869 P.2d 1142 ]; Common Cause v. Board of Supervisors, supra, 49 Cal.3d at p. 442.) “Although traditional mandamus will not lie to control the discretion of a public official or agency, that is, to force the exercise of discretion in a particular manner, “. . . [it] will lie to correct abuses of discretion, and will lie to force a

Contrary to the Department’s assertion, CHA does not seek to “control” its discretion in making ratemaking decisions. Rather, CHA seeks to correct an abuse of discretion resulting from the Department’s failure to consider adequately the competing goals established under section 30(A). Namely, CHA asserts that the Department, in implementing the 20 percent exclusion and rate freeze methodologies, failed to balance efficiency, economy, and quality of care, as well as the effect of the providers’ costs on these statutory factors.

We now address whether the Department, in implementing the challenged methodologies, complied with the statutory factors set forth in section 30(A).

D. Exclusion Methodology

1. Collateral Estoppel

Before addressing the merits of CHA’s claim that the Department’s 20 percent exclusion methodology violated state and federal law, we address its argument that the Department should be collaterally estopped from defending the validity of this methodology, in light of the trial court decision in CHA I, which found this method to be arbitrary and capricious.

“Collateral estoppel, one of two aspects of the res judicata doctrine, precludes the relitigation of an identical issue necessarily decided in previous litigation. [Citation.]” (Huber v. Jackson (2009) 175 Cal.App.4th 663 , 677 [ 96 Cal.Rptr.3d 346 ].) “Courts traditionally have applied the doctrine of collateral estoppel only if several threshold requirements are fulfilled.” (Chacon v. Litke (2010) 181 Cal.App.4th 1234 , 1250 [ 105 Cal.Rptr.3d 214 ].) Specifically, collateral estoppel precludes relitigation of an issue where (1) the same issue was actually and necessarily decided in a prior case; (2) the prior action resulted in a final judgment on the merits; and (3) the party to be estopped was a party to the prior action, or in privity with a party. (Lucido v. Superior Court (1990) 51 Cal.3d 335 , 341, 343 [ 272 Cal.Rptr. 767 , 795 P.2d 1223 ].) The claim that the prior litigation establishes the invalidity of the 20 percent exclusion methodology founders upon the first of these requisites.

The dispositive issue here—i.e., whether the methodology used by the Department in setting reimbursement rates, whereby it excluded from its median cost study those facilities with less than 20 percent Medi-Cal days, complies with the statutory mandates of section 30(A), is not the same issue

The Ninth Circuit found “nothing remarkable in holding that the final body responsible for setting Medicaid reimbursement rates must study the impact of the contemplated rate reduction on the statutory factors of efficiency, economy, quality of care, and access to care prior to setting or adjusting payment rates.” (California Pharmacists, supra, 596 F.3d at p. 1107.) The court “emphasize[d] that the State need not follow ‘any prescribed method of analyzing and considering [the section 30(A)] factors.’ [Citations.]” (Ibid.) Rather, “ ‘Congress intended payments to be flexible within a range; payments should be no higher than what is required to provide efficient and economical care, but still high enough to provide for quality care and to ensure access to services.’ [Citation.] The only way to ensure that Congress’s intent is realized is for the State to study the impact of the contemplated rate change on the statutory factors prior to setting rates.” (Ibid.) The Ninth Circuit further explained that it “in no way . . . mean[t] to suggest that the State is proscribed from setting or adjusting reimbursement rates. We simply reaffirm that if it does so, it must comply with federal law.” (Ibid.)

The Department points out—and we recognize—that Orthopaedic Hospital, Independent Living, and California Pharmacists are distinguishable from the instant case, in that none of these cases involved a writ of mandate. However, we find this distinction to be one without a difference. Whatever the form of remedy sought, the purpose in each case is to compel the Department to comply with the requirements set forth in section 30(A). Moreover, the injunctions at issue in Independent Living and California Pharmacists are not functionally different from the writ relief requested in the

CMS’s approval of the exclusion methodology does not compel a contrary conclusion. While CMS’s approval of the state plan is required (Mission Hospital, supra, 168 Cal.App.4th at pp. 469-470 & fn. 1), nothing in the record suggests that CMS independently evaluated the adequacy of the proffered reimbursement rate. Moreover, although CMS approval is required to obtain federal assistance, such approval, in and of itself, cannot be deemed to exempt the Department from complying with section 30(A). To hold otherwise would render section 30(A) to be superfluous, which established rules of statutory construction expressly disfavor. (Alianto Properties, Inc. v. City of Half Moon Bay (2006) 142 Cal.App.4th 572 , 591 [ 48 Cal.Rptr.3d 340 ] [noting fundamental rule of statutory construction that court will not adopt construction rendering provision ineffective or superfluous].)

The Ninth Circuit has recently reiterated that “any analysis of reimbursement rates on the statutory factors of efficiency, economy, quality, and access to care, must have the potential to influence the rate-setting process. [Citations.]” (California Pharmacists, supra, 596 F.3d at p. 1109.) Thus, in order to comply with section 30(A)’s requirements, when the state seeks to modify reimbursement rates “it must: (1) ‘rely on responsible cost studies, its own or others’, that provide reliable data as a basis for its rate setting,’ [citation]; and (2) study the impact of the contemplated rate change(s) on the statutory factors prior to setting rates, or in a manner that allows those studies to have a meaningful impact on rates before they are finalized.” (California Pharmacists, supra, 596 F.3d at p. 1115.) Because the Department did neither with respect to the exclusionary methodology, we reverse the judgment denying CHA’s petition for writ of mandate.

E. Rate Freeze Methodology

CHA contends the Department also violated section 30(A) when it enacted the rate freeze methodology without considering the statutory factors of efficiency, economy, quality, and access to care prior to implementing this methodology.

Although CHA challenged the rate freeze in its writ petition, the trial court’s analysis appears to have been confined to the exclusion methodology. Indeed, while the trial court noted that CHA challenged “two separate payment limitations,” it nevertheless addressed only the exclusion methodology.

F. Extra-record Evidence

Lastly, CHA argues that the trial court erred in considering evidence outside of the administrative record. Although CHA’s briefs fail to articulate the challenged evidence, from our review of the record on appeal it appears that, at least in the trial court, CHA challenged the declaration of Sandra Yien, which set forth the Department’s rationale for the exclusion methodology, to wit: “A major rationale for the 20 percent methodology was that the costs of DP/NFs that provided less than 20 percent of their total days of care to Medi-Cal beneficiaries did not represent the typical costs incurred for taking care of Medi-Cal beneficiaries. . . . Low-utilization Medi-Cal facilities tend to focus their business on treating private pay patients and Medicare patients.”

In determining whether extra-record evidence is admissible, a court must decide the threshold issue of whether the administrative action under review is quasi-legislative or ministerial. (Western States Petroleum Assn. v. Superior Court (1995) 9 Cal.4th 559 , 575-576 [ 38 Cal.Rptr.2d 139 , 888 P.2d 1268 ] (Western States Petroleum).) Our Supreme Court has stated: “ ‘The appropriate degree of judicial scrutiny in any particular case is perhaps not susceptible of precise formulation, but lies somewhere along a continuum with nonreviewability at one end and independent judgment at the other.’ [Citation.] Quasi-legislative administrative decisions are properly placed at that point of the continuum at which judicial review is more deferential; ministerial and informal actions do not merit such deference, and therefore lie toward the opposite end of the continuum.” (Ibid.)

“An unbroken line of cases holds that, in traditional mandamus actions challenging quasi-legislative administrative decisions, evidence outside the administrative record (extra-record evidence) is not admissible. (Western States Petroleum, supra, 9 Cal.4th at p. 574 . . . .) However, the Supreme Court said in Western States Petroleum that since ‘informal actions’ are not entitled to judicial deference, ‘we will continue to allow admission of extra-record evidence in traditional mandamus actions challenging ministerial or informal administrative actions if the facts are in dispute.’ ([Id.] at p. 576.) The court was persuaded by commentators who pointed out that ‘the administrative record developed during the quasi-legislative process is usually

Here, we are called upon to review amendments to the state plan, which unquestionably involved quasi-legislative action. (See California Optometric Assn. v. Lackner (1976) 60 Cal.App.3d 500 , 505 [ 131 Cal.Rptr. 744 ] [quasi-legislative action where Director of Health adopted regulations establishing Medi-Cal rates]; see also Wood v. Public Utilities Commission (1971) 4 Cal.3d 288 , 292 [ 93 Cal.Rptr. 455 , 481 P.2d 823 ] [regulatory commission adoption of rules governing service and fixing rates quasi-legislative in nature]; Building Code Action v. Energy Resources Conservation & Dev. Com. (1980) 102 Cal.App.3d 577 , 584 [ 162 Cal.Rptr. 734 ] [energy commission’s adoption of regulations was quasi-legislative proceeding].) “The court in Western States Petroleum did not define the characteristics of an ‘informal’ agency action, but the commentators it cited (Western States Petroleum, supra, 9 Cal.4th at p. 575) indicate ‘informal’ actions are those that do not involve a hearing: ‘When a CCP § 1085 ordinary mandamus proceeding is brought to challenge an administrative decision made without a hearing, if the facts are in dispute, a reviewing court is not limited to the record of the agency’s proceedings. In the absence of a hearing, the record documenting the agency’s action will not provide an adequate basis for judicial review. In such a case a reviewing court may hear extra-record evidence.’ (2 Kostka & Zischke, Practice Under the Cal. Environmental Quality Act (Cont.Ed.Bar 2003) Judicial Review, § 23.52, pp. 969-970.)” (Carrancho v. California Air Resources Board, supra, 111 Cal.App.4th at p. 1269; see also Friends of the Old Trees v. Department of Forestry & Fire Protection (1997) 52 Cal.App.4th 1383 , 1390-1391 [ 61 Cal.Rptr.2d 297 ].)

In the instant case, the challenged state plan amendments involved an administrative hearing, as well as a developed administrative record. Thus, the informal action exception does not apply here. In any event, having independently reviewed the entire record on appeal, we conclude that any error by the trial court in considering extra-record evidence was harmless. (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780 , 800-802 [ 16 Cal.Rptr.3d 374 , 94 P.3d 513 ].)

he judgment is reversed and remanded to the trial court for proceedings consistent with this opinion.

Appellant is entitled to its costs on appeal.

Ruvolo, R J., and Rivera, J., concurred.

A petition for a rehearing was denied August 20, 2010, and the opinion was modified to read as printed above. Respondents’ petition for review by the Supreme Court was denied November 23, 2010, SI86829.