Business Law

Dignity Health v. Local Initiative Health Care Authority of Los Angeles County (Jan. 9, 2020, B288886) __ Cal.App.5th __ [2020 WL 103353]

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State-set rates apply to out-of-network inpatient poststabilization care.

Local Initiative Health Care Authority of Los Angeles County (LA Care) operates a managed care plan that provides health coverage under Medi-Cal, California’s Medicaid program. Dignity Health operates Northridge Hospital, which did not have an inpatient service contract with LA Care during the relevant time period. Dignity provided inpatient poststabilization services to LA Care patients and sought reimbursement from LA Care at its full rates. LA Care paid Dignity at lower state-set rates known as “All Patient Refined Diagnosis Related Group” (APR-DRG). Dignity sued, alleging that LA Care’s failure to pay its full rates breached an implied contract and violated Health and Safety Code sections 1262.8 and 1371.4. Dignity moved for summary judgment, arguing that the inpatient treatment constitutes “managed care inpatient days,” which is exempt from APR-DRG rates under Welfare and Institutions Code section 14105.28, subdivision (b)(1)(B) (section 14105.28). LA Care also moved for summary judgment, contending that federal law and section 14105.28, as construed by the Department Health Care Services (DHCS), require payment of APR-DRG rates for out-of-network poststabilization services to managed care patients. 

The trial court granted summary judgment for LA Care. The court ruled that federal regulations require Medicaid managed care plans to pay state-set rates for out-of-network poststabilization services. The court also deferred to the DHCS interpretation of section 14105.28—that in-network services alone are excluded from APR-DRG rates—because in-network services already have contracted rates. Dignity appealed.

The Court of Appeal affirmed on a different basis. First, the court determined that the term “managed care inpatient days” in the section 14105.28 exemption from APR-DRG rates is ambiguous. That phrase reasonably could mean either (1) any inpatient services for which a managed care plan is financially responsible, as Dignity contended, or (2) care provided under a contract between a managed care plan and an in-network provider, as LA Care contended. However, the court concluded that the legislative history and text of section 14105.28 and former Welfare and Institutions Code section 14091.3 reveal the Legislature’s intent that state-defined rates, which previously applied under former section 14091.3, now apply under the new APR-DRG methodology. Thus, the trial court correctly court determined that the “managed care inpatient days” exclusion in section 14105.28 applied only to in-network care, and therefore out-of-network inpatient poststabilization care is subject to APR-DRG rates. The court did not decide whether federal law requires the same outcome or whether DHCS’s interpretation must be given deference.

The bulletin describing the California Supreme Court’s decision was originally prepared for the California Society for Healthcare Attorneys (CSHA) by H. Thomas Watson and Peder K. Batalden, 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 or

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