Business Law

Family Health Centers of San Diego v. State Department of Health Care Services (Oct. 7, 2021, C090618) __ Cal.App.5th __ [2021 WL 5037621], ordered partially published Oct. 29, 2021

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Federally qualified health center must report nonreimbursable costs that “materially” relate to clinic operations to allocate overhead costs.

Family Health Centers of San Diego (Family Health) is a federally qualified health center (FQHC) that provides services to qualified Medi-Cal beneficiaries and nonbeneficiaries. The Department of Health Care Service (DHCS) reimbursed Family Health for all costs reasonably incurred in treating beneficiaries using a prospective “per-visit” rate, which is determined by dividing the total allowable costs by the number of patients seen in the previous period. Allowable costs include both the direct cost of services and the indirect cost of providing those services, such as administrative overhead. Once allowable costs are determined, the total must be apportioned between program beneficiaries and other patients, so that only costs reasonably incurred in treating beneficiaries are reimbursed.

Family Health requested a reimbursement rate increase, but an audit was triggered when it eliminated from its cost report nonallowable costs associated with subcontracted medical and homeless services. The DHCS auditor determined that, under 42 C.F.R. 413.24(d)(7), these costs had to be reported as nonreimbursable, which had the effect of disallowing a proportionate share of administrative overhead costs. Family Health filed an administrative appeal, but both the administrative law judge (ALJ) and the Chief ALJ upheld the DHCS auditor’s decision. Family Health then filed a petition for writ of administrative mandate, which the trial court denied. Family Health appealed.

The Court of Appeal affirmed. The court rejected Family Health’s contention that the ALJ erred by using a “materiality” standard. The court reasoned that a materiality standard comported with the regulatory objective of apportioning total costs between beneficiaries and nonbeneficiaries so that costs associated with serving nonbeneficiaries are not reimbursed. The court also rejected Family Health’s argument that there was no substantial evidence supporting the ALJ’s finding of a material connection between Family Health and the excluded costs. Family Health’s contracts with outside facilities ensured significant interaction with those facilities, including orientation; ongoing staff meetings and consultations; and regular data collection, evaluation, and reporting requirements. Additionally, Family Health had failed to present detailed work papers justifying an alternative cost allocation. 

The bulletin describing this appellate 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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