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Northeast Medical Services, Inc. v. California Department of Health Care Services

United States District Court, E.D. California

December 19, 2019

NORTHEAST MEDICAL SERVICES, INC., Plaintiff,
v.
CALIFORNIA DEPARTMENT OF HEALTH CARE SERVICES, HEALTH AND HUMAN SERVICES AGENCY; JENNIFER KENT, DIRECTOR OF THE DEPARTMENT OF HEALTH CARE SERVICES, and STATE OF CALIFORNIA, Defendants.

          ORDER GRANTING IN PART DEFENDANTS' MOTION TO DISMISS AND STAYING PLAINTIFF'S CLAIMS FOR DECLARATORY RELIEF

          JOHN A. MENDEZ, UNITED STATES DISTRICT JUDGE

         In August 2019, North East Medical Services, Inc. filed its complaint against the California Department of Health Care Services, the Department director in her official capacity, and the State of California (collectively “Defendants”). Compl., ECF No. 1. Defendants filed a motion to dismiss each of Plaintiff's four causes of action. Mot. to Dismiss, ECF No. 15; see also Memorandum in support of Mot. to Dismiss (“Mot.”), ECF No. 16. Defendants argue the failure to exhaust administrative remedies makes dismissing the case prudent and that Eleventh Amendment sovereign immunity makes it necessary. Mot. at 9-14. Plaintiff opposes Defendants' motion, contending neither exhaustion nor sovereign immunity applies here. Opp'n at 3-15, ECF No. 23.

         The Court finds the Eleventh Amendment bars Plaintiff's claims for injunctive relief. Moreover, the Court finds that imposing an exhaustion requirement is warranted and would promote the most efficient use of judicial resources. The Court therefore DISMISSES Plaintiff's claims for injunctive relief and STAYS its claims for declaratory relief pending resolution of the state administrative proceedings.[1]

         I. BACKGROUND

         Plaintiff is a federally-qualified health center (“FQHC”). Compl. ¶ 1. As an FQHC, Plaintiff provides primary care services to poor and medically-underserved populations in the San Francisco area. Compl. ¶ 13. FQHCs are entitled to recover the reasonable cost of ambulatory services that they provide to Medicaid beneficiaries. Compl. ¶ 22. State Medicaid programs approximate this cost and compensate FQHCs through fixed, per-visit fees. Id.

         Federal and state law also allow FQHCs to be compensated for the reasonable cost of their services through subcontracts with Medicaid managed care organizations (“MCO's”). Compl. ¶3. Pursuant to this allowance, Plaintiff entered a subcontract with an MCO called the San Francisco Health Plan (“SFHP”). Id. Under this subcontract, Plaintiff agreed to provide services covered by California's Medicaid program to SFHP's Medicaid beneficiaries. See Compl. ¶ 2. In turn, SFHP agreed to pay Plaintiff “not less than” what it would pay non-FQHC providers for the same services. Compl. ¶¶ 2, 33. Plaintiff also alleges this subcontract included a “physician incentive plan, ” in which SFHP agreed to make “special payments” to Plaintiff for the “physician/provider risks” it incurred under the subcontract. Compl. ¶¶ 35-37.

         When an FQHC's reasonable cost of care exceeds the amount paid by an MCO, federal law requires the state's Medicaid program to make up the difference. Id. This supplemental payment is known as a “wraparound payment.” Id. Plaintiff received wraparound payments from the Department of Health Care Services for the FQHC services it rendered from 2008-2016. See Compl. ¶ 4. In 2013, however, the Audits and Investigative Branch of the Department began to investigate the propriety of those payments. Compl. ¶ 45. The Department ultimately concluded that Plaintiff failed to adequately show it “properly allocated the income received from SFHP between FQHC and non FQHC services.” Compl. ¶ 51. Viewing all of Plaintiff's SFHP-derived income as compensation for the reasonable cost of its FQHC services, the Department found SFHP had, in fact, fully compensated Plaintiff. Compl. ¶¶ 51, 53. It notified Plaintiff that the Department would have to “recoup” the “FYE 2015 Supplemental wrap payments” Plaintiff previously received. Id. When the Department overpays a FQHC, it recoups past payments by offsetting or withholding funds from current and future reimbursements. Compl. ¶ 8.

         II. OPINION

         A. Judicial Notice

         Under Federal Rule of Evidence 201, a district court may take judicial notice of a fact that is “not subject to reasonable dispute because it can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b)(2). It is well-established that “a court may take judicial notice of matters of public record.” Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). “Matters of public record” include records from administrative proceedings. United States v. 14.02 Acres of Land More or Less in Fresno County, 547 F.3d 943, 955 (9th Cir. 2008).

         Defendants request the Court judicially notice five documents:

1. North East Medical Services' Complaint in this case;
2. North East Medical Services' Request for Administrative Hearing;
3. Notice of Formal Hearing issued by the Office of Administrative ...

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