Trial Court: Alameda County Superior Court Trial Judge: Hon. Frank Roesch (Alameda County Super Ct. No. RG09438893)
The opinion of the court was delivered by: Lambden, J.
CERTIFIED FOR PUBLICATION
Appellant California Association of Medical Products Suppliers (CAMPS) appeals from the trial court's denial of its petition for a writ of mandate and complaint for declaratory and injunctive relief. CAMPS argues the trial court should have granted its petition, in which it sought the invalidation of regulations adopted in 2004 by respondent California Department of Health Care Services (Department). The regulations set upper billing limits for providers of durable medical equipment and certain medical supplies to Medi-Cal recipients.
According to the Department, these upper billing limit regulations (UBL) close a loophole in Medi-Cal regulations, under which some providers were purchasing discounted products, or obtaining them at no cost, and billing Medi-Cal for reimbursement without taking into account the actual product purchase prices. As a result, they were able to obtain significant profits at taxpayer expense. The UBL closes this loophole by requiring providers to bill Medi-Cal based on the lesser of the usual charges made to the general public or, alternatively, the net purchase prices of the products as documented in the providers' books and records plus no more than a 100 percent markup.
CAMPS argues the Department's adoption of the UBL was outside the Department's statutory authority and violated the Administrative Procedures Act (APA) for several reasons. We conclude the Department acted within its authority and pursuant to the APA, and affirm the judgment in its entirety.
The UBL as finally adopted in 2004 targeted dispensed medical supplies, incontinence medical supplies, and durable medical equipment. At the time of its adoption, each category was governed by a different reimbursement methodology.
For dispensed medical supplies (by assistive device and sickroom supply dealers and pharmacies), reimbursement was not to exceed 23 percent of the cost of the item dispensed, as defined by the Department. (Former Welf. & Inst. Code, § 14105.2, subd. (a), Stats. 2002, ch. 1161, § 53.5.)*fn1
For incontinence medical supplies, reimbursement was "the weighted average of the negotiated contract prices within each product category, plus a markup fee equal to 38 percent of the resulting adjusted contract price." (Former § 14125; Stats. 2002, ch. 1161, § 81.)
For durable medical equipment rentals or purchases, reimbursements were to "be the usual charges made to the general public not to exceed . . . [t]he maximum reimbursements" listed, reasonable maximums for equipment reimbursed "By Report," or the lowest charge levels established pursuant to federal regulation. (Cal. Code Regs., tit. 22, § 51521.) Certain repair and services were also reimbursable. (Ibid.) According to the Department when it adopted the UBL, "[t]here [were] no specific statutory or regulatory percentage reimbursement markups for durable medical equipment; however, the maximum reimbursement rates established in regulations under [California Code of Regulations, title 22,] section 51521 for these products [were] based on their estimated acquisition cost plus no more than a 100 percent reimbursement markup."
The Department's Findings and Adoption of the UBL
In February 2003, the Department issued a notice of emergency rulemaking that it was adopting the UBL on an emergency basis pursuant to section 14043.75, and also invited public comments pursuant to the APA. Section 14043.75, enacted in 1999, allowed the Department's director to adopt emergency regulations to "prevent or curtail fraud and abuse." (Former § 14043.75; Stats. 1999, ch. 322, § 25; Stats. 1999, ch. 146, § 37) The Department also stated it was acting pursuant to section 14105.
This initial version of the UBL mandated that providers' billings to Medi-Cal for defined durable medical equipment, prosthetic and orthotic appliances, medical supplies, and incontinence medical supplies "shall not exceed an amount that is the lesser of" either "[t]he usual charges made to the general public," or "[t]he net purchase price of the item, which shall be documented in the provider's books and records, plus no more than a 100 percent markup. Documentation shall include, but not be limited to, evidence of purchase such as invoices or receipts." Providers were not to submit bills for items obtained at no cost.
The Department stated it was changing the reimbursement methodology because the previous methodology "was established under the assumption that providers operate under market conditions; i.e., they acquire retail products from legitimate distribution channels in the open market. The same assumption applies to Medi-Cal payment of the weighted average of the negotiated contract price plus a 38% markup for incontinence medical supplies. However, . . . enforcement efforts by the Department have revealed this assumption to be invalid. Certain providers have billed the Medi-Cal program at the maximum reimbursement rates for products that they obtained at substantially below the estimated acquisition cost or the weighted average of the negotiated contract price."
According to the Department, "providers' methods of billing for the acquired products end up costing the State of California more in payments than would be paid if they instead billed within the assumptions the Department used in creating the reimbursement methodology, i.e., they acquired the retail products they are billing for from legitimate distribution channels in the open market. It is the prevention of such conduct that the Department seeks to address with this regulatory proposal. [¶] In [the] proposed [California Code of Regulations, title 22,] section 51008.1, the Department adopts in regulation the requirement that billings by providers . . . must ultimately be based on the net purchase price of these products, not the estimated acquisition cost for the weighted average of the negotiated contract price which both presume operation of market conditions."
The Department stated it was "not aware of any cost impacts that a representative private person or business would necessarily incur in reasonable compliance with the emergency action." It made an "initial determination that the regulations would not have a significant statewide adverse economic impact directly affecting business," and "determined that the regulations would not significantly affect" the creation or elimination of jobs, the creation of new businesses or elimination of existing businesses, or the expansion of businesses currently doing business within the State of California. The Department "determined that the regulations would affect small business."
In February 2003, the Department prepared other documents that contained additional relevant information. In its "Finding of Emergency," the Department stated that its investigations "reveal exploitation of the Medi-Cal reimbursement system by providers who employ non-market practices to obtain [supplies and appliances] at substantially below cost and then bill Medi-Cal at the maximum reimbursement rates. In order to protect the fiscal integrity of the Medi-Cal program against such potentially fraudulent practices, immediate action is needed to establish in regulations that the amount providers may bill and be reimbursed by Medi-Cal is tied to the net purchase price of the products."
In its "Initial Statement of Reasons," the Department stated the UBL was necessary to combat fraud and abuse, which occurred "when providers bill the Medi-Cal program for items they did not actually purchase or purchased at significantly below market rates, or bill in amounts that represent more than a 100 percent markup over their net purchase for the products, irrespective of their usual charges to the general public. The Department believes such billings can result in unnecessary costs to the Medi-Cal program and are outside sound fiscal or business practices." It was "the prevention of such abusive billing conduct, outside the assumptions, that the Department seeks to address with this regulatory proposal." By linking billings to the actual net purchase price and allowing up to a 100 percent markup, "a provider who acquires a product for nothing, usually under non-market conditions, will receive no reimbursement from Medi-Cal. For the majority of providers who are within the market-place assumptions, however, Medi-Cal reimbursement will not change, as their net purchase price equals or exceeds the estimated acquisition cost or the weighted average of the negotiated contract price."
The Department did not expect the UBL to affect many providers. The UBL's 100 percent markup was "intended to be at a level that will not impact the reimbursement markup, as no currently established reimbursement markup exceeds 100 percent. For example, the allowable reimbursement markup for medical supplies is 23 percent [citation]. For incontinence medical supplies, it is the weighted average of the negotiated contract price plus 38 percent [citation]. There are no specific statutory or regulatory percentage reimbursement markups for durable medical equipment . . . however, the maximum reimbursement rates established in regulations ([Cal. Code Regs., tit. 22,] § 51521) for these products are based on their estimated acquisition cost plus no more than a 100 percent reimbursement markup. Thus, in regulations, there are established maximum Medi-Cal reimbursement markups for all these product types."
The Department's "Economic and Fiscal Impact Statement" made summary statements and did not estimate whether the UBL would have an economic impact on the private sector. It stated, "Medi-Cal is a voluntary program for both providers and beneficiaries," and indicated the change had no fiscal effect on the state government or federal funding of state programs.
Comments at the Public Hearing and in Writing
The Department held a public hearing regarding the UBL pursuant to the APA in April 2003. A number of statements made at the hearing were representative of the issues raised about the UBL.
Jeffrey Galvin, counsel for Shield Healthcare (Shield), argued the UBL improperly conflicted with the statutory provisions regarding reimbursement for incontinence and dispensed medical supplies. Also, he said, there was no substantial evidence that the UBL was reasonably necessary to effectuate the purpose of Welfare and Institutions Code section 14043.75. The Department had offered only "very vague references" to abuses found in unspecified enforcement efforts that did not "justify major changes to the reimbursement rules," and had not produced any documents supporting the proposed rules in response to a Public Records Act request, leaving unanswered questions about the extent of the problem and the need for such "sweeping change."
Furthermore, Galvin contended, the 100 percent markup rate was "arbitrary and capricious," made without any sort of study or analysis, and "might be entirely inappropriate for very inexpensive medical supplies . . . that might have a very low net purchase price." The definition of "net purchase price" was too ambiguous to apply consistently.
Galvin also disagreed with the Department's determination that there would not be a significant statewide economic impact resulting from the UBL. He said Medi-Cal reimbursements to large providers "may" decrease under the UBL "because, for example, with respect to medical supplies, a 100 percent markup on net purchase price may be less than the 23 percent markup of cost that is currently set forth in the statute." Since net purchase price excluded inventory costs, "larger providers, such as Shield, will cease warehousing product and shift those costs to out-of-state manufacturers or distributors," resulting in a loss of jobs in California. Providers would incur "major" costs "developing inventory tracking systems, accounting methods, and software to track net purchase price," for which there was no ready-made software for the task.
Galvin contended there could be other more reasonable alternatives to the Department's vaguely defined problem. For example, "[i]f the Department is really concerned about the underground economy in medical supplies and medical equipment, it might require certification with claims submission that product was acquired through legitimate channels in the open market."
Laura McIlvaine, also representing Shield, said the definition of "net purchase price" was ambiguous, and emphasized providers' possible shift of the costs of things such as warehousing back to the manufacturers so they would become a reimbursable part of the net purchase price, which could have an adverse effect on California business by eliminating warehouse related jobs in California.
McIlvaine also said large volume providers like Shield "often purchase at lower rates than other providers. The savings are offset by other costs related to inventory management, which do not show on the invoice, and they certainly do not appear to be accounted for in the regulation." McIlvaine submitted several photographs of Shield's Valencia, California, warehouse and invoices to show the substantial inventory affected by the UBL.
Patricia Steck of Apria Healthcare said the proposed UBL would penalize providers who purchase through legitimate channels, and require providers create a unique business operation to cost inventory. She questioned why the Department should benefit from discounts obtained by providers as the result of volume purchases or prompt payments, which were "a result of good business practices."
Jan Sterling of Sterling Medical Marketing, Inc. characterized the UBL as a "radical change from what is currently applied in health care reimbursement in general," because providers were reimbursed "on a usual and customary charge less some sort of negotiated discount." He said the UBL could affect his company's private sector pricing, and also impact a beneficiary's access to product because reduced margins would result in less products being available.
Finally, John Wright of InvaCare Corporation, a manufacturer, urged the Department to look at the "labor intensity involved in the delivery process of these goods and services to the beneficiaries." He said that "[b]ecause of the variety of convoluted contracts, which include such things as base, incentive, and prompt pay discounts, finance charges . . . , and extended payment terms," it was "extremely convoluted" to try to establish net price for products. He had received "several" calls from providers asking him to modify or take them off contracts, and to "increase their costs in order to have a higher net so that they can make more money in the transaction" under the UBL.
The record also contains 12 pieces of correspondence received by the Department during the 45-day comment period regarding the proposed UBL. The concerns expressed were consistent with those stated at the hearing.
The Department's Proposed Amendments to the UBL
In February 2004, the Department issued a notice of its consideration of amendments to the UBL. The proposed amendments excluded rented durable medical equipment and prosthetic and orthotic appliances, defined a "custom wheelchair," and further defined "net purchase price."*fn2
The Department received four comments on these amendments during the 15-day comment period. They criticized the definition of "net purchase price" as unclear regarding what constituted "price reductions guaranteed by any contract," and argued labor costs should be included and after-the-fact discounts excluded; and criticized the UBL's application to custom wheelchairs.
The Department's Responses to Comments and Final Adoption of the UBL
In March 2004, the Department issued a "Final Statement of Reasons," including two addendums addressing the comments received, and a "Statement of Determinations."
The Department's final statement of reasons repeated much of its initial statement of reasons. It also clarified the definition of "net purchase price" and further specified the costs that were not allowed to be included in its calculation, allowed the inclusion of labor costs for assembly of custom wheelchairs in certain circumstances, and excluded rented durable medical equipment.
The Department's first addendum addressed comments received during the initial 45-day comment period. The Department asserted the UBL did not contradict statutory reimbursement rates for incontinence medical supplies and dispensed medical supplies, and did not exceed the Department's statutory authority because Welfare and Institutions Code section 14043.75 authorized its director to, "adopt . . . or amend additional measures to prevent or curtail fraud or abuse." The Department also asserted that California Code of Regulations, title 22, section 51520, subdivision (b) harmonized any differences between Welfare and Institutions Code sections 14043.75 and 14125 (regarding reimbursement for incontinence supplies) specifically by providing that "reimbursement for incontinence medical supplies shall be the amount billed in accordance with [California Code of Regulations, title 22,] section 51008.1, not to exceed the amount provided in . . . section 14125."
Regarding comments that it did not comply with the APA by its vague references to fraud and abuse, the Department stated it "routinely reviews the billing practices of Medi-Cal providers" and "conducts audits of providers' accounting and billing practices," that the UBL was "based on the findings of those reviews and audits," and that it "must prevent and address fraudulent and abusive billings of providers." The Department did not "believe" implementation of the UBL would reduce services to beneficiaries. Regarding contentions that the UBL would cause providers administrative nightmares tracking actual purchase prices, the Department stated that "[s]ound business practices, as well as existing regulations ([Cal. Code Regs., tit. 22,] § 51476) requires providers to retain documentation of purchases."
Regarding comments that the 100 percent markup limit was unsupported by evidence of reasonable necessity, and was arbitrary and capricious, the Department stated that the markup was well in excess of the markups for medical supplies, and the Department "believed" it was fair and equitable to providers.
Regarding comments that it should consider alternatives like a method of purchase certification, the Department stated that it considered alternatives and determined the UBL was necessary to achieve specific anti-fraud and abuse objectives. The Department' system did not allow for certification, and it did not "believe" certification would achieve its objectives.
Regarding comments that the UBL would cause such business changes as the passing of costs back to the manufacturer and the loss of jobs, the Department stated that it could not afford to allow fraudulent and abusive billings to continue, that participation in the Medi-Cal program was voluntary, and that it "believed" ...