Business Law

Oak Valley Hospital District v. State Dept. of Health Care Services (Aug. 8, 2020, C085869) _ Cal.App.5th _ [2020 WL 4581286]

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DHS must reimburse Medi-Cal providers for employees’ in-house treatments.

The Department of Health Services (DHS) administers California’s Medi-Cal program and reimburses Medi-Cal hospital service providers for allowable costs. The Center for Medicare and Medicaid Services issues the Medicare Provider Reimbursement Manual, which governs what payments are owed.  Section 2144.4 of the Manual allows reimbursement for the cost of providing in-house services to hospital employees through self-insurance programs. Under section 2162.7 of the Manual, hospitals with non-qualifying self-insurance programs are entitled to reimbursement only for payments from their fund, which must be based on the reasonable cost of the services provided.

Oak Hospital District and Ridgecrest Regional Hospital provide health benefits to their employees through non-qualifying self-insurance programs that allowed the employees to obtain medical services in-house or from third-party providers. Third-party claims administrators reviewed all claims, then paid approved claims from accounts funded by the hospitals.  The hospitals included the cost of these in-house and third-party-approved claims in their cost reports to DHS.  The DHS reimbursed them for third-party provider costs, but not for in-house services. The DHS’s decisions were upheld in formal administrative proceedings, but the hospitals successfully petitioned for writs of administrative mandate reversing the administrative decisions.  DHS appealed. 

The Court of Appeal affirmed, holding Medi-Cal providers are entitled to reimbursement for the costs of providing in-house medical services for their own employees through self-insurance programs. The court rejected DHS’s argument that in-house costs were categorically nonallowable. The court found nothing in Manual section 2162.7 distinguishing claims paid for in-house services from those paid to third parties. Additionally, the costs for in-house services were not inherently unreasonable. The hospitals incurred actual costs by providing services that were not otherwise reimbursed. The court also rejected DHS’s argument that Manual sections 332, 332.1, and 2144.4 support categorical denial. Sections 332 and 332.1 apply only when the patient is billed directly; they do not apply to the reimbursement of hospital self-insurance plans. Moreover, there were no “unrecovered costs” triggering section 2144.4 because the hospitals were entitled to reimbursement under section 2162.7.

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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