California Healthcare & Rehabilitation Center v. Baass

California Healthcare & Rehabilitation Center v. Baass (Feb. 11, 2025, C098043) __ Cal.App.5th __ [2025 WL 751429]

Department of Health Care Services’ Medi-Cal overpayment formula may be void as an unlawful underground regulation.

A group of skilled nursing facilities challenged the Department of Health Care Services’ (DHCS) formula for calculating Medi-Cal reimbursement overpayments. Some patients who are covered by both Medi-Cal and Medicare may receive both general subacute services and ancillary services. Medi-Cal pays facilities an all-inclusive per-diem rate while Medicare pays on a per-item basis, which may result in duplicate payments. The facilities filed a petition for traditional (as opposed to administrative) writ of mandate and a complaint for declaratory relief, arguing that DHCS violated a ministerial duty and adopted a reimbursement regulation in violation of the Administrative Procedure Act (APA) (Gov. Code, § 11340 et seq.) by utilizing an overpayment formula based on the amount Medicare paid for ancillary services instead of the amount Medi-Cal overpaid for those services.  They asserted that DHCS’s formula was an unlawful underground regulation because it was adopted in violation of APA requirements.  The trial court sustained DHCS’s demurrer without leave to amend, ruling the plaintiffs’ claim was not cognizable in a writ of mandate proceeding and that plaintiffs failed to state a claim that DHCS adopted an underground regulation.

The Court of Appeal reversed and remanded for further proceedings. The court explained that a writ of mandate applies to challenge an agency’s quasi-legislative decision to formulate a rule that applies to all future cases, holding that agencies are required to follow the APA when adopting regulations. An agency policy is a regulation subject to the APA if (1) the agency intends its rule to apply generally, such that it declares how a certain class of cases will be decided; and (2) the rule implements, interprets, or makes specific the law enforced or administered by the agency, or governs the agency’s procedure. Here, plaintiffs adequately alleged that the DHCS reimbursement rule applied generally to calculate Medi-Cal reimbursement overpayments for all ancillary services using the entirety of the Medicare reimbursement as the Medi-Cal reimbursement overpayment regardless whether the contracted Medi-Cal per diem rate fully compensated the facilities for the actual cost of the services provided to particular patients. Plaintiffs also adequately alleged that the challenged rule implemented overpayment laws that the DHCS administers. And plaintiffs had sufficiently pleaded that the overpayment formula constitutes an underground regulation because the DHCS had not complied with the APA before utilizing the overpayment formula. Finally, the court held that the facilities did not need to exhaust any administrative remedies before challenging the DHCS overpayment formula as an unlawful underground regulation.

The bulletin describing this appellate decision was originally prepared for the California Society for Healthcare Attorneys (CSHA) by H. Thomas Watson, Peder K. Batalden, and Lacey Estudillo at the appellate firm Horvitz & Levy LLP, and is republished with permission.

For more information regarding this bulletin, please contact H. Thomas Watson, Horvitz & Levy LLP, at 818-995-0800.

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