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Tulare Pediatric Health Care Center v. State Department of Health Care Services

California Court of Appeals, Second District, Eighth Division

October 16, 2019

TULARE PEDIATRIC HEALTH CARE CENTER, Petitioner and Respondent,
v.
STATE DEPARTMENT OF HEALTH CARE SERVICES et al., Defendants and Appellants.

          APPEAL from a judgment of the Superior Court of Los Angeles County, No. BS166705 Amy D. Hogue, Judge.

          Xavier Becerra, Attorney General, Julie Weng-Gutierrez, Senior Assistant Attorney General, Richard T. Waldow, Supervising Deputy Attorney General, and Jacquelyn Y. Young, Deputy Attorney General, for Defendants and Appellants.

          Foley & Lardner, Erik K. Swanholt, and Adam J. Hepworth for Petitioner and Respondent.

          WILEY, J.

         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.

         I

         We begin with the statutory backdrop, which is extensive. Then we state the facts.

         A

         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. 136.)

         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 ...


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