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Health Law Perspectives, December 2008
December 2, 2008

Court Invalidates Payment Freeze for Non-contracted Medi-Cal Hospitals

By Felicia Y Sze

On November 20, 2008, the Third District Court of Appeal issued a landmark decision inMission Hospital Regional Medical Center v. Shewry (Mission). This case overturns the Medi-Cal non-contract hospital rate freeze enacted in section 32 of Senate Bill (“SB”) 1103 of 2004, valued at about $50 million. It also establishes that providers have the right to seek enforcement of the procedural and substantive requirements of the Medicaid Act, including 42 U.S.C. sections 1396a(a)(13)(A) (“Section 13(a)”) and 1396a(a)(30)(A) (“Section 30(A)”), in state court through a writ of mandate. This case reinforces precedent that the state must provide notice and comment of rate changes and assure that “payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area. . . .” It is likely the first case invalidating a rate change based on Section 13(a).

In 2004, the California Legislature, as part of a delayed budget adoption influenced by a budget shortfall, enacted a freeze on the Medi-Cal rates paid to hospitals which did not have in effect a contract with the Department of Health Care Services (a CMAC contract) for inpatient services. SB 1103 consisted of one sentence until July 27, 2004 when the Assembly struck the bill’s single sentence, replacing it with 38 sections totaling 168 pages relating to health care, and declaring the bill to be an urgency measure. Section 32 of the newly expanded bill contained the rate freeze. On July 28, 2004, the Assembly passed SB 1103. The next day, July 29, the Senate passed SB 1103. The Governor approved SB 1103 on August 16, 2004. The bill became effective that day and applied retroactively to July 1, 2004.

On behalf of a group of over 100 hospitals, HLB filed a petition for writ of mandate, asserting that the rate freeze violated the federal Medicaid Act by: (1) failing to provide any notice and comment period prior to the implementation of the freeze as required by Section 13(a), (2) failing to provide “such methods and procedures” relating to payment for services as may be necessary to assure that payments met the efficiency, economy, quality and equal access standard as required by Section 30(A), and (3) implementing the rate freeze retroactively based solely on financial reasons, in violation of the constitutional prohibition on retroactive impairments of contract.

The trial court found that the plaintiffs had standing to bring the case. However, the trial court rejected the plaintiffs’ argument that the rate freeze violated section 13(a) on the basis that section 13(a) applied to actions by the Department of Health Care Services, not actions by the Legislature. However, the trial court did determine that the rate freeze could not be applied retroactively to services performed before section 32 was enacted.

The Mission court determined that Section 13(a) created a mandatory duty on the State, both the Department of Health Care Services and the Legislature, to provide for a “public process” for determining rates of payment prior to the implementation of a rate change. That public process is required to provide for: (1) publication of the proposed rates, the methodologies underlying the rates and the justifications for the proposed rates, (2) a reasonable opportunity for providers, beneficiaries and their representatives and other concerned State residents to review and comment on the proposed rates, methodologies and justifications and (3) publication of the final rates, the methodologies underlying those rates and the justifications for those rates. (Likewise, the court noted that pursuant to 42 C.F.R. section 447.205, the State must publish “any significant proposed change in its methods and standards for setting payment rates” before the change occurs in a state register or certain newspapers of large circulations.)

Mission determined that Section 13(a) was applicable to state legislative action, and did not implicate the Legislature’s power to adopt or waive its own rules when it considers new state law or due process principles. The court stated that “by agreeing to participate in the Medicaid program, the state subjected itself under the supremacy clause to comply with all federal Medicaid laws.” While the court acknowledged that the legislative process is generally a public process which satisfies the objections of the notice requirements, it found that the enactment of SB 1103 within three days did not satisfy the notice requirements of SB 1103. The court was unable to infer from the evidence that the proposed section 32 was made public in such a way that providers were given a reasonable opportunity to review and comment on the proposal. Indeed, even the Department of Health Care Services did not have notice prior to the enactment of section 32. The court also rejected the Department of Health Care Services’ argument that its after-the-fact notice was sufficient. On this basis, the Mission court held that section 32 was invalid for failure to comply with Section 13(a).

The Mission decision also clarified the State’s duty to comply with Section 30(A), which imposes both “procedural and substantive requirements on states when they set reimbursement rates for hospital services provided to Medicaid beneficiaries.” The court reinforced that “when the state seeks to modify its reimbursement rates, it must consider efficiency, economy, quality of care, and equality of access, and it must rely on responsible cost studies as a basis.” The Third Appellate District emphasized that it is “not justifiable . . . to reimburse providers substantially less than their costs for purely budgetary reasons,” reinforcing the standard established in Orthopaedic Hospital v. Belshe(9th Cir. 1997) 103 F.3d 1491, an historic HLB victory for hospitals. The Mission court was explicit that its reasoning regarding standing to bring a section 13(a) claim and the ability to enforce the Medicaid Act under supremacy clause principles using a writ of mandate was equally applicable to claims seeking to enforce Section 30(A). This is the precise legal theory currently being asserted in various lawsuits challenging the ten percent Medi-Cal fee-for-service rate reductions.

The Mission court also rejected the State’s argument that the hospitals did not have standing to bring a writ of mandate. The court determined that a petitioner need only show a “beneficial interest” to bring a writ of mandate — that is, “some special interest to be served or some particular right to be preserved or protected over and above the interest held in common with the public at large.” The decision distinguished this “beneficial interest” from the enforceable “right” required to sue in federal court under 42 U.S.C. section 1983. The court ruled that the hospitals had established a beneficial interest by demonstrating that they had an interest in challenging section 32 and enforcing the Medicaid Act that is above the interest held by the public at large.

The Department of Health Care Services has until December 5, 2008, to request reconsideration from the Third Appellate District. The Mission decision will become final on December 22, 2008. Thereafter, the Department of Health Care Services has until December 30, 2008 to request hearing by the California Supreme Court.

For additional information, please contact Lloyd Bookman or Byron Gross in Los Angeles at 310.551.8111; Felicia Sze in San Francisco at 415.875.8500; or Cary Miller in San Diego at 619.744.7300.


Update: Non-Contract Hospital Inpatient Service Payment Reductions from Medi-Cal Managed Care Plans

The Department of Health Care Services (DHCS) recently issued a series of All Plan Letters to Medi-Cal managed care plans to establish rates of payments from those managed care plans to non-contracted hospitals for emergency and poststabilization services. The rates for emergency services are retroactive to January 1, 2007 and the rates for post-stabilization services are retroactive to November 1, 2008.

The impetus for the establishment of non-contracted emergency service rates for Medi-Cal managed care plans was the passage of Section 6085 of the Deficit Reduction Act by Congress in 2005, commonly referred to as the “Rogers Amendment.” Section 6085 stated that, effective January 1, 2007, any provider of emergency services that did not have in effect a contract with a Medicaid managed care entity must accept as payment in full the amounts that the provider could collect if the beneficiary received medical assistance through the Medicaid fee-for-service program. Section 6085 further stated that in a state where rates paid to hospitals are negotiated by contract and not publicly released, the payment amount for emergency services would be the “average contract rate that would apply” for general acute care or tertiary hospitals.

On March 16, 2007, DHCS issued an All Plan Letter, advising Medi-Cal managed care programs to pay out-of-plan/network hospitals the regional average CMAC rate for general acute care hospitals for inpatient services on an interim basis until DHCS establishes the final rates for reimbursement. In early 2008, DHCS began workgroup meetings with providers and plans in an effort to inform its decision making on the appropriate Rogers Amendment rate.

Separate from those workgroup meetings, the California State Legislature enacted new rates of payment from Medi-Cal managed care plans to non-contracted hospitals in the Budget Trailer Bill (BTB). Specifically, the BTB established that noncontracted hospitals must accept as payment in full for emergency inpatient services from Medi-Cal managed care plans a “regional average per diem contract rate for tertiary hospitals and for all other hospitals[.]” The BTB mandated that this regional average per diem contract rate be derived from the unweighted average contract per diem rates that are publicly available on June 1 of each year, trended forward, based on the geographic regions in the California Medical Assistance Commission’s Annual Report to the Legislature. Supplemental payments are not included in this calculation. The Legislature mandated that DHCS publish this rate on or before October 1, 2008, and every year following on October 1. The BTB defined a “tertiary hospital” as a children’s hospital, or a Level I or II trauma center.

The BTB also established that non-contracted hospitals must accept as payment in full for poststabilization services following an emergency admission, payment amounts “consistent” with 42 C.F.R. section 438.114. 42 C.F.R. section 438.114 does not establish any clear payment amount for poststabilization services. 42 C.F.R. section 438.114 also refers to a Medicare regulation, 42 C.F.R. section 422.113, which sets forth that a managed care plan is financially responsible for poststabilization services if those services are: (1) pre-approved, (2) provided within one hour of a request to the managed care plan for pre-approval or (3) are not preapproved if the plan does not respond to a request for pre-approval within 1 hour, the plan cannot be contacted or the plan representative and the treating physician cannot reach an agreement concerning the patient’s care and a plan physician is not available for consultation. The Medicare regulations also include a provision at 42 C.F.R. section 422.214 which requires that a non-contracted emergency service provider must accept as payment in full the amounts that provider would have received through fee-for-service Medicare. These federal regulations may require Medi-Cal managed care plans to pay emergency services providers for inpatient poststabilization services at the amounts the providers would have received under fee-for-service Medicare.

The BTB mandated that DHCS publish emergency service rates retroactive to January 1, 2007. The BTB mandated that Medi-Cal managed care plans that have been paying non-contracted hospitals pursuant to DHCS’s March 16, 2007, All Plan Letter would be required to make reconciliations and adjustments for hospital payments made since January 1, 2007, based on DHCS’s published rates. The BTB suspended Title 28, California Code of Regulations, section 1300.71′s interest provisions for 30 days to allow plans to have 60 days to make the reconciliations and adjustments interest-free.

On October 2, 2008, DHCS issued another All Plan Letter establishing payment rates from Medi-Cal managed care plans to non-contracted hospitals for inpatient emergency services. In that letter, DHCS established the following payment rates:

1/1/07-6/30/08
  Non-Tertiary Tertiary
Other $1,291 $1,779
San Francisco/Bay Area $1,594 $2,468
Southern California $1,158 $1,804
7/1/08-6/30/09
  Non-Tertiary Tertiary
Other $1,411 $1,944
San Francisco/Bay Area $1,771 $2,742
Southern California $1,283 $1,998

On November 10, 2008, DHCS issued yet another All Plan Letter establishing payment rates from Medi-Cal managed care plans to non-contracted hospitals for post-stabilization services. Specifically, DHCS announced that non-contracted hospitals must accept as payment in full for poststabilization services the Medi-Cal fee-for-service payment amounts for general acute care inpatient services. DHCS referred to the new hospital inpatient fee-for-service rates in the BTB, namely, the lesser of (1) the hospital’s cost based interim payment rate minus ten percent or (2) the regional average per diem contract rate for tertiary or non-tertiary hospitals, listed above, minus five percent. (DHCS acknowledged that the exemptions in the BTB for certain hospitals from certain inpatient fee-for-service rate cuts for small and rural hospitals and for specified hospitals in open health facility planning areas do apply to poststabilization payments.) DHCS announced that this rate would be retroactive to November 1, 2008.

HLB is assessing the legality of the BTB and the various All Plan Letters. We will continue to follow these developments and assess the impact of these acts on providers.

Please contact Lloyd A. Bookman in Los Angeles at 310.551.8185 or Felicia Y Sze in San Francisco at 415.875.8503 or to receive future updates related to this issue.


OIG Issues Report on Provider Relationships and MR Services

By David Hatch

The Department of Health and Human Services, Office of Inspector General (“OIG”), recently released a report regarding “Provider Relationships and the Use of Magnetic Resonance (MR) Under the Medicare Physician Fee Schedule” (the “Report”). As the title suggests, the Report analyzed Medicare MR claims data to ascertain, among other things, whether there were indications that physicians were more likely to order MR services when such services were what the OIG defined as “connected services.” For purposes of the Report, “connected services” were any services in which the physician or the physician’s group was connected through a common medical practice or other business relationship (i.e., financial relationship) (each a “Connected Relationship”) to one or more of the parties involved in providing the technical component of the service ordered. Significantly, some of the statistical data reviewed by the OIG tended to suggest that a physician’s Connected Relationships had an influence on whether or not a physician would order MR services. In addition, the OIG noted that the number of parties involved in providing and billing for MR services reduces the transparency of MR transactions (i.e., makes it more difficult to understand the interplay of the financial relationships, including common ownership interests and compensation arrangements, and other transactions, between the parties). In conclusion, the OIG explained that this lack of transparency “warrants continued attention to ensure that services are reasonable, necessary and compliant with Medicare statutes and regulations.”

The most significant OIG findings were (i) high utilization levels of a small group of physicians that order MR accounted for a disproportionate amount of Medicare claims, and (ii) a higher proportion of the high utilizing physicians had Connected Relationships with the entity or entities that were involved in performing the MR services than did the lower utilizing physicians. Specifically, the OIG noted that a mere 5% of “High User” doctors accounted for 40% of the MR charges billed to Medicare. Further, the data indicated that High User doctors were more likely than the other doctors in the study to have a Connected Relationship with the provider of the test. Out of all the services billed to Medicare where the ordering doctor had a Connected Relationship with the provider of the MR service, 55% were ordered by High User doctors. In comparison, of all the services billed to Medicare where there was no Connected Relationship with the provider of the MR services, only 33% were ordered by High User doctors. Thus, the empirical data seemed to indicate that a physician’s Connected Relationships may influence the physician’s ordering patterns and utilization rates for MR services.

Although the Report did not announce any change in the OIG’s position, or recommend any new statutes or regulations to address the issues identified, it indicates that utilization patterns of diagnostic services continues to be a matter of concern for the OIG. The Report compliments the efforts of the Center for Medicare & Medicaid Services (“CMS”) to rein in costs related to ancillary services, including MR services. These developments include the following:

  • In final provisions in the 2008 Physician Fee Schedule, CMS broadened the application of the Medicare “anti-markup” provisions that prohibit physicians from profiting from diagnostic tests unless certain requirements are met.
  • In the 2008 Physician Fee Schedule, CMS cited a number of concerns regarding the in-office ancillary services exception, under the Stark law, which exception permits a physician to self-refer ancillary services to their own practices, and solicited comments regarding changes that should be made to that exception.
  • In the 2009 Physician Fee Schedule, CMS proposed to require physicians or physician groups that perform diagnostic tests to substantially comply with the Independent Diagnostic Testing Facility (“IDTF”) regulations, including the requirement that the practice would be subject to survey by Medicare and restrictions on sharing space and equipment with another provider.

The Report may lead to further proposals to restrict the ability of physicians to make referrals to entities in which they have financial interests, so providers involved in the ordering, provision, billing, leasing and operation of MR and other diagnostic services and equipment should be prepared for more changes in the future.

For further information, please contact David Henninger or David Hatch in our Los Angeles office at 310. 551.8111, or Stephen Phillips in our San Francisco office at 415. 875.8500, or Stephen Treadgold in our San Diego office at 619.744.7300.


HLB Calendar

December 4 Los Angeles County Bar Association Healthcare Law Section Managed Care Update. HLB Attorney Daron Tooch is a panel member on a wide ranging discussion of managed care issues along with regulators and health plan representatives.
December 4, 11 CHA Compliance Seminar, Costa Mesa, Sacramento. HLB Attorneys are lead faculty for this seminar, covering the OIG’s 2009 Work Plan; Self-Disclosure and the OIG protocol; Stark, Gainsharing and AB 55; Adverse Events; Form 990 and other Current Tax-Exempt Issues; Responsible Patient Discharge; Attorneys presenting include Lloyd Bookman, John Hellow, David Henninger Stephen Phillips, Stephen Treadgold, Mark Johnson.
For media inquiries, please contact Barrett McBride at 916.456.5855.