Judge James C. Chalfant, Case 21STCP03538 2022-10-11 Tentative Ruling

Petitioner Hospital Hospital Association, Ltd., doing business as Huntington Hospital (“Hospital”), seeks a writ of administrative mandamus to compel Respondent Michelle Bass, in her official capacity as Director of the California Department of Health Care Services (“DHCS” or “Department”) to set aside the decision and reverse the adverse audit finding against Hospital, and preclude the Department from seeking to recoup Medi-Cal Electronic Health Records (“EHR”) Incentive Program payments (“EHR payments” or “HER Program payments”) made to Hospital.

The court has read and considered the moving papers, opposition, and reply, and renders the following decision.

Petitioner Hospital filed the Petition on October 25, 2021, alleging a single cause of action for administrative mandamus. The Petition alleges in pertinent part as follows.

Hospital is a 619-bed, general acute-care, non-profit hospital, and a Medi-Cal provider. Hospital registered for the EHR Incentive Program by submitting an attestation for Program Year 2011 on December 5, 2011. DHCS used the attestation to calculate Hospital’s aggregate HER payment amounts and issue EHR Program payments from 2012 to 2014.

On July 11, 2016, DHCS issued a Notice of Medi-Cal EHR Incentive Program audit. On June 2, 2017, DHCS issued a decision stating that it had overpaid Hospital by $667,625 because the calculation of the Hospital’s EHR payment share included unpaid Medicaid days.

Hospital appealed the decision, and an informal hearing was held on October 11, 2017. The hearing auditor issued a report denying the appeal on January 24, 2018.

Hospital then requested a formal hearing to challenge the audit findings on the grounds that (1) DHCS failed to demonstrate that it had the legal authority to make the audit adjustment; (2) if it did have such authority, DHCS’s adjustment was not consistent with the controlling federal statute and regulation governing the formula for determining EHR Program payments; and (3) even if the adjustment was valid, DHCS is precluded by the doctrine of laches from recouping the EHR Incentive Program overpayment.

The Office of Administrative Hearings (“OAH”) held an administrative hearing on December 16, 2019. On February 8, 2021, an Administrative Law Judge (“ALJ”) issued a proposed decision that disagreed with the first two arguments but agreed that laches barred recoupment of the overpayment.

On May 18, 2021, the Chief ALJ notified Hospital that she had rejected the Proposed Decision. The Chief ALJ issued a final decision on August 25, 2021, denying the appeal in its entirety and concluding that Hospital had not demonstrated all the elements for laches.

Hospital seeks a writ of administrative mandate setting aside the final decision, reversing the audit finding, and precluding DHCS from seeking to recoup the EHR Incentive Program payments for the fiscal period in question.

On October 28, 2021, Hospital served Director Bass with the Petition and Summons.

An aggrieved Medi-Cal provider may seek administrative mandamus review of an audit decision. Welfare & Institutions Code §14171(j); CCP §1094.5. Topanga Ass’n for a Scenic Community v. County of Los Angeles, (“Topanga”) (1974) 11 Cal.3d 506, 514-15. The pertinent issues under CCP section 1094.5 are whether (1) the respondent proceeded without jurisdiction, (2) there was a fair trial, and (3) there was a prejudicial abuse of discretion. CCP §1094.5(b). An abuse of discretion is established if the respondent has not proceeded in the manner required by law, the decision is not supported by the findings, or the findings are not supported by the evidence. CCP §1094.5(c).

CCP section 1094.5 does not on its face specify which cases are subject to independent review, leaving that issue to the courts. Fukuda v. City of Angels, (1999) 20 Cal.4th 805, 811. In determining whether DHCS’s administrative audit findings are supported by the evidence, the court reviews the administrative record to determine whether the agency’s findings are supported by substantial evidence. Family Health Centers of San Diego v. Department of Health Care Services, (2021) 71 Cal.App.5^th 88, 96.

“Substantial evidence” is relevant evidence that a reasonable mind might accept as adequate to support a conclusion (California Youth Authority v. State Personnel Board, (“California Youth Authority”) (2002) 104 Cal.App.4th 575, 585) or evidence of ponderable legal significance, which is reasonable in nature, credible and of solid value. Mohilef v. Janovici, (1996) 51 Cal.App.4th 267, 305, n.28. The petitioner has the burden of demonstrating that the agency’s findings are not supported by substantial evidence in light of the whole record. Young v. Gannon, (2002) 97 Cal.App.4th 209, 225.

The trial court considers all evidence in the administrative record, including evidence that detracts from evidence supporting the agency’s decision. California Youth Authority, supra, 104 Cal.App.4th at 585. “‘[T]he test of substantiality must be measured on the basis of the entire record, rather than by simply isolating evidence which supports the board and ignoring other relevant facts of record which rebut or explain that evidence.’ [Citations.]” Martori Brothers Distributors v. Agricultural Labor Relations Bd., (1981) 29 Cal.3d 721, 727 (italics added.)” Gerawan Farming, Inc. v. Agric. Labor Relations Bd., (2018) 23 Cal.App.5th 1129, 1162. The standard is met if there is relevant evidence in the record which a reasonable mind might accept in support of the findings. Id. (citation omitted). If there is a plausible basis for the decision, the fact that contrary findings may be equally reasonable, or even more so, is of no moment. Id.

The agency’s decision at the hearing must be based on a preponderance of the evidence. Board of Medical Quality Assurance v. Superior Court, (1977) 73 Cal.App.3d 860, 862. The hearing officer is only required to issue findings that give enough explanation so that parties may determine whether, and upon what basis, to review the decision. Topanga, supra, 11 Cal.3d at 514-15. Implicit in CCP section 1094.5 is a requirement that the agency set forth findings to bridge the analytic gap between the raw evidence and ultimate decision or order. Id. at 515.

Questions of law are reviewed de novo. Duncan v. Dep't of Pers. Admin., (2000) 77 Cal.App.4th 1166, 1174. This includes whether the agency applied the proper legal standard in evaluating the matter. Carmona v. Division of Industrial Safety, (1975) 13 Cal.3d 303, 310. When the issue presented is on undisputed facts and one of law, the court exercises independent judgment. Bostean v. Los Angeles Unified School Dist., (1998) 63 Cal.App.4th 95, 107.

An agency is presumed to have regularly performed its official duties (Evid. Code §664), and the petitioner therefore has the burden of proof. Steele v. Los Angeles County Civil Service Commission, (1958) 166 Cal.App.2d 129, 137. “[T]he burden of proof falls upon the party attacking the administrative decision to demonstrate wherein the proceedings were unfair, in excess of jurisdiction or showed prejudicial abuse of discretion.” Afford v. Pierno, (1972) 27 Cal.App.3d 682, 691.

The Medicaid program is a federal/state program authorized under title XIX of the Social Security Act whereby states provide health care to individuals who qualify for Medicaid benefits if they are aged, blind, or disabled, and their income and resources are insufficient to meet the costs of health care. 42 U.S.C. §1396a. The Secretary of the United States Department of Health and Human Services (“HHS”) is responsible for administering Medicaid and has delegated that authority to the Centers for Medicare and Medicaid Services (“CMS”). See 42 U.S.C. §§ 1301(a)(6), 1396-1; Arkansas Dept. of Health & Human Servs. v. Ahlborn, (2006) 547 U.S. 268, 275.

To qualify for the program, a state must submit a state plan, and that state plan must be approved by CMS. Douglas v. Indep. Living Ctr. Of So. Cal., Inc., (2012) 565 U.S. 606, 610-11. An approved state plan authorizes the state to implement the Medicaid insurance program within that state, including the creation of standards for its implementation. 42 U.S.C. §1396(a)(1), (13). Such a plan must comply with the provisions of applicable federal Medicaid law. 42 U.S.C. §1396(a)(5); 42 Code of Federal Regulations (“C.F.R.”) §§ 430.10, 431.10.

California's state plan for the implementation of Medicaid has been approved by the federal government. The Medi-Cal program implements Medicaid and provides for medical assistance to certain low-income persons. Orthopaedic Hospital v. Belshe, (9th Cir. 1997) 103 F.3d 1491, 1493. California enacted Welfare and Institutions Code (“W&I Code”) section 14000 et seq. to implement the State Plan.

DHCS is the California agency authorized to administer Medi-Cal. §§ 14063, 10740; California Code of Regulations (“CCR”) §50004(b)(1). In implementing the Medi-Cal program, DHCS must comply with federal and state statutes. Olszewski v. Scripps Health, (“Olszewski”) (2003) 30 Cal.4th 798, 804; American Federation of Labor v. Unemployment Ins. Appeals Bd., (1996) 13 Cal.4th 1017, 1042. DHCS also must comply with California’s state plan. See Douglas v. Indep. Living Ctr. of So. Cal., Inc., supra, 565 U.S. at 610-11.

W&I Code sections 14105(a), 14124.5, and 10725 authorize DHCS’s director to adopt policies, rules, and regulations necessary to implement and interpret Medi-Cal. Included in this rulemaking authority is the authority to set rates. Ibid. DHCS has created health and non-health standards in title 22 CCR for providers who service Medi-Cal beneficiaries.

DHCS's relationship with Medi-Cal providers is in the nature of a contract which incorporates regulations of the Medi-Cal program. Paramount Convalescent Center, Inc. v. Department of Health Care Services, (“Paramount”) (1975) 15 Cal.3d. 489; California Medical Association v. Lackner, (1981) 117 Cal.App.3d 552.

On February 17, 2009, in response to the economic recession, Congress enacted the American Recovery and Reinvestment Act of 2009 (“ARRA”), amending titles XVIII (the Medicare Act) and XIX (the Medicaid Act) of the Social Security Act. ARRA established the EHR Incentive Program for providers to promote the expanded use and integration of EHR systems under the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”). 42 C.F.R. §495.300. One Incentive Program was offered to providers through Medicare, and another was offered to states through Medicaid. The Medicaid EHR Incentive Program is codified at 42 U.S.C. section 1396b(t). The primary goals of the EHR Incentive Programs are: (1) standardizing the electronic capture of information such as patient demographics or clinical orders and results; (2) improving quality at the point of care; and (3) using clinical decision support and patient self-management tools as vehicles to improve the quality, safety, and efficiency of treatments.

CMS implemented the EHR Incentive Programs through a rulemaking process, culminating in parts 412, 414, 422, and 495 of title 42 C.F.R. (“Final Rule”). Through the Final Rule, CMS clarified that each state is responsible for developing a state plan to determine the provider’s eligibility for the EHR incentive payment and approve, process, and make timely payments using a process approved by CMS. 42 C.F.R. §495.312; see 42 U.S.C. §1396a(a)(4)(A). The state plan must include a process to ensure that all hospital calculations and hospital payment incentives are consistent with federal requirements, and a methodology for verifying such information. 42 C.F.R. §495.332(d)(6).

A hospital is eligible for the Medicaid EHR Incentive Program if at least 10% of its patient volume is attributable to individuals receiving Medicaid assistance and the hospital demonstrates meaningful use of EHR technology for all payment years. 42 U.S.C. §1396b(t)(6)(C).

The hospital must submit a signed attestation for each of the four program years it participates in the EHR Incentive Program. 42 U.S.C. §§1396b(t)(5), 1395ww(n)(2); 42 C.F.R. § 495.310(g); 75 Fed. Reg. 44314, 54122–23 (July 28, 2010). Each attestation requires the provider to acknowledge that the state “may elect to verify and/or audit all information provided … both prior to payment being issued and after payment has been made.” 42 C.F.R. § 495.40; AR 1550.

The calculation of each hospital’s Medicaid EHR incentive payment is linked to the size of the Medicaid population it serves. The Medicaid share for a Medicaid provider shall be calculated in the same manner as the Medicare share under 42 U.S.C. section 1395ww(n)(2)(D), except that the numerator shall be the amount equal to “the number of inpatient-bed-days (as established by the Secretary)[1] which are attributable to individuals who are receiving medical assistance” under the Medicaid Act. 42 U.S.C. §1396b(t)(5)(C).[2]

As set forth in CMS’s regulations, the calculation of a hospital’s Medicaid share is equal to a fraction in which the numerator is the sum (for a 12-month period) of “(A) the estimated number of acute-care inpatient-bed-days which are attributable to Medicaid individuals, and (B) “the estimated number of acute-care inpatient-bed-days which are attributable to individuals enrolled in a managed care organization, a pre-paid inpatient health plan, or a pre-paid ambulatory health plan.” 42 C.F.R. §495.310(g)(2)(i).

The denominator for the Medicaid share fraction is the product of (A) the estimated total number of acute-care inpatient-bed-days for the eligible hospital during such period, and (B) the estimated total amount of the eligible hospital’s charges during such period, not including any charges attributable to charity care, divided by the estimated total amount of the hospital’s charges during such period. 42 C.F.R. § 495.310(g)(2)(ii).

The aggregate EHR Incentive Program payment amount – the overall amount over four payment years – for a Medicaid provider is calculated as the overall hospital ERH amount multiplied by the Medicaid share. 42 C.F.R. §495.310(g); 42 U.S.C. §1396b(t)(5)(B). In no case shall the payments exceed the (1) overall hospital EHR Incentive Program amount for the provider multiplied by (2) the Medicaid share for such provider. 42 U.S.C. §1396b(t)(5)(A)(i).

States participating in the Medicaid EHR Incentive Program are required to establish a process for ensuring that payments made under the program were consistent with the federal requirements. 42 C.F.R. § 495.312. The state’s process for determining hospital eligibility and the processes for approving, processing, and making timely payments to hospitals must be approved by CMS.

California developed its state plan for the EHR Incentive Program, the “State Medi-Cal Health Information Technology Plan” (“SMHP”), “to ensure that all hospital calculations and hospital payment incentives are made consistent with [federal] requirements.” 42 C.F.R. § 495.332; §14046. CMS approved the SMHP on September 30, 2011. §14046.

Under the SMHP, providers must submit a signed attestation for each of the four program years in which they decide to participate in the program. See 42 U.S.C. §§ 1396b(t)(5), 1395ww(n)(2); 42 C.F.R. §495.310(g). As for the federal fiscal year, each program year begins on October 1 and ends on September 30. AR 1239 (75 Fed. Reg. 44451 (July 28, 2010)). Based on the attestation, DHCS then calculates the aggregate payment and distributes 50% of the aggregate payment to satisfy the milestone for Program Year 1, 30% for Program Year 2, and 10% for Program Years 3 and 4 each. 42 C.F.R. §495.310(g)(1)(iii).

DHCS created a State Level Registry (“SLR”) through which hospitals are required to register to participate in the EHR Incentive Program. The application was designed to give eligible hospitals a streamlined application for federally funded incentives through an “easy-to-use” website. AR 4. An eligible hospital’s Medicaid EHR payment was calculated by the SLR using the information input by the hospital as part of the registration and eligibility process. DHCS provided a “Hospital Workbook” designed to help participating hospitals understand what information to input in the SLR. AR 981. The Workbook includes instructions for what data sources from the as-filed Medicare cost reports should be used for each required element. For “Total Medicaid Inpatient Bed Days,” the data sources cited are (1) CMS 2552-96: Worksheet S-3 part I, column 5, sum of lines 1, 2, 6-10 and (2) CMS 2552-10: Worksheet S-3 part I, column 7, sum of lines 1,2, 8-12. AR 981. The data elements include all Medicaid days, whether or not the hospital received payment for those days.

In 2012, CMS released FAQ 7649, which addressed whether a hospital could include “zero pay” Medicaid eligible days. AR 1495. CMS explained that the hospital could not do so because the Medicaid share must be calculated in the same way as the Medicare share. AR 1495. The CMS Stage 1 final rule therefore reads that only days that would count as inpatient-bed-days for Medicare purposes would count for the Medicaid formula. AR 1495. It further specified that this calculation “requires the inclusion of only paid inpatient-bed-days.” AR 1495.

In 2016, HHS’s Office of the Inspector General (“OIG”) sought to determine whether state agencies made EHR Program payments to providers in accordance with federal requirements. AR 1476. In September 2016, after reviewing EHR payments for 64 California hospitals, OIG released a report finding that California had made incorrect Medicaid EHR Program payments. AR 1469, 1473. The report explained that federal regulations and CMS guidance require that unpaid Medicaid bed-days be excluded from the incentive payment calculation and from the Medicaid bed-days-only portion of the Medicaid share component of that calculation. AR 1481. Despite this, California had paid 30 hospitals for unpaid Medicaid bed-days. AR 1482. The report also noted that federal regulations require providers to retain documentation to support incentive payment calculations for at least six years following the date of attestation. AR 1481.

The OIG’s report recommended that DHCS refund the federal government $22,043,234 in net overpayments that DHCS made to the 61 hospitals audited by the agency and adjust any remaining incentive payments to account for the incorrect calculations. In the wake of the OIG report, hospitals throughout California received DHCS reports alleging that they received Medicaid EHR Program overpayments.

Section 14046.1(b)(5) requires that California’s SMHP establish an audit and appeals process. DHCS needs to conduct these audits to comply with Chapter 4 of the SMHP, which requires post-payment audits of patient volume and payment data to (1) validate patient numbers, (2) review the attestation, (3) verify that the incentive fund calculations and payments were correct, and (4) compare disbursement ratios by fiscal year and actual disbursements through the SLR payment database. AR 951, 954; §§ 14170, 10722; 75 Fed. Reg. 44314, 44515 (July 28, 2010).

The EHR Program payments are 100% federally funded. 75 Fed. Reg. 44482 (July 28, 2010); §14046.6 (“Notwithstanding any other law, and only when all necessary federal approvals have been obtained, this article shall be implemented only to the extent federal financial participation is available.”) As such, the audits serve a dual purpose of conducting adequate oversight of the EHR Incentive Program and ensuring that federal funds are expended in a manner that impedes waste, fraud, or abuse of federal taxpayer money. 42 U.S.C. §1396b(t)(9); 75 Fed. Reg. 1843, 1947 (January 13, 2010).

Once an audit is complete, DHCS issues an audit report identifying disallowances (overpayments of federal monies that DHCS is required to recoup) or additional allowances (underpayments) that will be corrected through audit adjustments. 42 C.F.R. §§ 413.5(b)(2), 495.368(a)(2) (“The State must take corrective action in the case of improper EHR payment incentives to Medicaid providers”).

Hospital is a 618-bed acute care hospital. See AR 2.[3] In November 2001, Hospital entered a Health Care Information System Software Agreement with Medical Information Technology, Inc. (“Meditech”). AR 1528-42.

On December 5, 2011, Hospital submitted its initial application and attestation for enrollment in the EHR Incentive Program. See AR 5. Hospital reported a total of 22,456 Medi-Cal inpatient bed days for 2011. See AR 5. Hospital submitted this data according to the instructions provided by DHCS in both the Workbook and the SLR portal. AR 1809-15. As part of its application, Hospital signed an agreement with DHCS that it can audit all information provided by Hospital or someone acting on its behalf before and after any payment is made. See AR 1550.

DHCS used Hospital’s attestation for 2011 to establish Hospital’s aggregate EHR payment amount of $3,201,969. See AR 5. Hospital received 50% of the payment in the first year, 30% in 2012, and 10% in each of 2013 and 2014, and provided attestations each year. See AR 5.

On May 5, 2014, CMS approved California’s audit procedure for EHR incentive payments. AR 1509.

On July 11, 2016, DHCS sent Hospital a Notice of Medi-Cal EHR Incentive Program audit, per W&I Code section 14170 and 42 C.F.R. sections 495.366 and 495.368. See AR 6. An auditor reviewed information from DHCS’s paid claims reports and from a list of additional paid inpatient bed days submitted by Hospital. See AR 6. The auditor found that the number of paid Medi-Cal inpatient bed days was 18,731, or 4,041 less than the number Hospital included in its attestation. See AR 6.

On June 2, 2017, DHCS informed Hospital of its audit report’s adjustments of EHR Program overpayments of $667,625 for the year 2011. AR 1652. In that year, Hospital had overreported total discharges by 116, Medi-Cal discharges by 38, and Medi-Cal inpatient days by 4,041. AR 1655. DHCS notified Hospital that it would have to return the overpayment. AR 1652. The notice informed Hospital of its right to appeal under W&I Code section 14171. AR 1653.

Hospital invoked its right to appeal. AR 1653. After an informal hearing, the hearing auditor denied the appeal. Hospital then requested a formal OAH hearing. Hospital and DHCS later stipulated that Hospital’s total number of Medi-Cal inpatient bed days is 18,731 and that the total reduction to the aggregate Incentive Program payment and resulting overpayment is $624,136. See AR 6. The parties agree that Hospital included 3,725 unpaid bed days in its attestation. See AR 6.

OAH held the appeal hearing on December 16, 2019. AR 1676. Pertinent testimony is as follows.

Raul Ramirez (“Ramirez”) is the Chief of DHCS’s Office of Health Information Technology. AR 1687-88.

DHCS staff was available to clarify any of the language in the attestation that confused a hospital. AR 1719-20. Hospital providers had to sign the attestation that permitted DHCS to audit any information provided at its discretion every year. AR 1720. A user guide also informed hospitals of the authority to conduct post-payment audits. AR 1720. The SMHP also references auditing requirements. AR 1720.

John Goeders (“Goeders”) is Hospital’s Vice President of Strategic Planning and Revenue Cycle. AR 1803-04.

Goeders submitted Hospital’s attestation for the Medi-Cal EHR Incentive Program on November 30, 2011. AR 1809. He referred to the SMHP and the Workbook for information on how to fill the attestation form. AR 1809-10. If the SMHP asked for information from Hospital’s cost report, Goeders submitted it directly from the cost report. AR 1810.

The Workbook identifies which data field the DHCS will use to calculate a hospitals’ qualification for any EHR incentive payments. AR 1811-12. Goeders did not recall any guidance documents that distinguished between paid and unpaid Medicaid inpatient-bed-days. AR 1811-12. CMS cost report instructions asked for the total number of inpatient-bed-days and total number of discharges. AR 1813.

To the best of Goeder’s knowledge, the CMS worksheets ask that a hospital include unpaid days in the calculation when they say to include “Medicaid eligible days for which no payment was received.” AR 1815. Goeder did not recall if he had any reason to believe that unpaid days would be excluded from the calculation, but the clear direction of the worksheet would not leave him with any doubt. AR 1815.

Hospital switched its EHR system to Cerner in 2014, but the decision actually was made in 2011 because Meditech had become clunky and unreliable for clinicians. AR 1829. Several clinicians had complained that Meditech did not give them the information they needed to care for patients. AR 1830. A functioning, comprehensive EHR system allowed for better “bedside decision support.” AR 1831-32. Cerner also had quality and monitoring tools and Meditech did not have. AR 1834. DHCS was not part of Hospital’s decision to move to Cerner. AR 1830.

DHCS announced the audit in 2016. AR 1816. The audit report received in 2017 excluded the unpaid days from the reimbursement calculation, a reduction of about $667,000. AR 1816-17. Hospital has conceded all other minor adjustments. AR 1817.

The adjustment has impacted Hospital’s budget and capital plan. AR 1817-18. There could be strategic initiatives or refurbishment projects that are no longer in the budget because of the adjustment. AR 1818.

On February 8, 2021, the ALJ issued a proposed decision barring DHCS from recovery of the overpayment. AR 90, 113. The ALJ concluded that DHCS (1) had the legal authority to make the challenged audit adjustment and (2) correctly excluded unpaid inpatient bed days from the calculation of Hospital’s aggregate Medicaid EHR payment. AR 90. However, DHCS was precluded by the equitable doctrine of laches from recouping the EHR overpayment. AR 90.

By a notice dated May 18, 2021, the Chief ALJ advised the parties that she had rejected the ALJ’s proposed decision and that a different decision would be issued. See AR 2.

On August 25, 2021, the Chief ALJ issued a final decision that affirmed the audit determination of $624,136 and finding that DHCS is not barred by laches from recovery. AR 22.

The Chief ALJ explained that Congress created the EHR Incentive Program in 2009 as part of the HITECH Act, which in turn was part of ARRA, and was designed to stimulate the economy in the 2008 recession. AR 3. One EHR Incentive Program was offered to providers through Medicare, and another was offered to states through Medicaid. AR 3. California developed the SMHP to implement the EHR Incentive Program in September 2011. AR 3. The SMHP was submitted to CMS for approval on September 9, 2011, and it was approved by CMS on September 30, 2011. AR 3-4. On October 2, 2011, the SMHP was added it to the W&I Code, and DHCS immediately began accepting applications in order to promote the economic stimulus envisioned by ARRA and the HITECH Act. AR 3-4.

DHCS also developed the SLR, which is an online portal that allowed providers to register for the Medi-Cal EHR Incentive Program and prepare the necessary workbook and attestations for application to the program. AR 4. DHCS issued a Quick Start Guide with the SLR. AR 4. The Quick Start Guide identified the cells in the provider's annual Medi-Cal cost report that should be used to import data into their attestation to determine the total aggregate EHR incentive. AR 4.

Neither the SLR nor Quick Start Guide instructed providers to exclude unpaid bed days. AR 4. A “Medicaid unpaid bed day” refers to a patient occupying a hospital bed for a day where that bed day was billed to Medicaid and Medicaid did not reimburse the hospital for the service. AR 4. Neither CMS nor DHCS apparently realized that the identified cells would include unpaid bed days for hospitals participating in the Disproportionate Share Hospital (“DSH”) program. AR 4.

CMS subsequently realized its error. In response to a comment to proposed 42 C.F.R. section 44500, CMS stated that the criteria for determining Medicaid eligible days for EHR payments is not the same as for determining Medicaid eligible days for Medicare DSH. The latter incudes unpaid days “while the EHR incentive payment calculation requires the inclusion of only paid inpatient-bed days.” 75 Fed. Reg. 44500 (July 28, 2010) AR 7.

In October 2012, CMS released an FAQ that clarified the issue by stating that cost reports include all acute inpatient days and that Medicare and Medicaid do not include unpaid inpatient-days for the EHR Incentive Programs. AR 7. CMS warned hospitals that they needed to correct DSH hospital data. AR 4-5, 6-7. By that time, many hospitals had submitted their initial attestations. AR 5. DHCS suspected that there was a high likelihood that these hospital attestations had inflated the claimed aggregate incentive amount. AR 5.

The federal HHS’s OIG is authorized to conduct and supervise audits and investigations relating to the ERH Incentive Programs under the purview of HHS. 42 U.S.C. §1396u-6(c)(2). AR 7. In September 2016, the OIG concluded that 61 of 64 California hospitals received either underpayments or overpayments, resulting in a net overpayment of $22,043,234. AR 8. Of these, 30 hospitals’ overpayment were from the improper inclusion of unpaid Medicaid bed days in the attestation. AR 8. The OIG recommended that California refund the $22,043,234 made to the 61 hospitals. AR 8.

DHCS disputed the amounts but agreed that incorrect incentive payments had been made. AR 8. DHCS advised the OIG that it had deferred audits of the attestations until after payment to avoid “unacceptable delay.” AR 8.

ON December 5, 2011, Hospital submitted its initial application and attestation for the Medi-Cal EHR Incentive Program. AR 5. Hospital reported 22,456 Medi-Cal inpatient bed days, which included unpaid beds. AR 5. In making this calculation, Hospital used the Workbook, which contains a DHCS form similar to an Excel spreadsheet. AR 5. DHCS calculated that Hospital was entitled to an aggregate of $3,201,969, which it received over the next four years. AR 5.

DHCS developed a strategy for auditing the EHR incentive payments that authorized pre- and post-payment audits. AR 6. The strategy was submitted to CMS in 2013 and approved by CMS on May 5, 2014. AR 6. DHCS understood it did not have the authority to conduct audits until CMS approved the strategy. AR 6.

DHCS gave notice that it would audit Hospital’s Year 1 attestation on July 11, 2016. AR 6. Once it determined that the number of Medicaid inpatient bed days was 4,041 less than the estimate, DHCS reduced the aggregate incentive payment by $667,625. AR 6. Since then, the parties have stipulated that at least 316 of those days should be re-added. Therefore, only $624,136 is at issue as an overpayment. AR 6.

The Chief ALJ noted that DHCS’s relationship with Hospital is in the nature of a contract and that the case involves the proper interpretation and application of applicable laws and contract provisions. AR 8.

The Chief ALJ concluded that DHCS should exclude unpaid inpatient-bed days. AR 9. 42 U.S.C. section 1396b(t)(5)(C) provides the methodology for Medicaid EHR payments, which may not exceed an overall amount multiplied by the Medicaid share. AR 9. The Medicaid share is calculated generally in the same manner as Medicare share, but the formula for the Medicare share set forth in 42 U.S.C. section 1395ww(n)(2)(D) differs in the formula for calculating the inpatient bed days. AR 9. 42 U.S.C. section 1396b(t)(5)(C) calls for an amount equal to the number of inpatient bed days (as established by the Secretary) which are “attributable to individuals who are receiving medical assistance under this subchapter....” AR 9-10. 42 C.F.R. section 495.310(g)(2) contains similar language that the Medicaid share is equal to a fraction the numerator of which is the sum of the number of acute-care in-patient bed days “attributable to Medicaid individuals” and the number of such days for those enrolled in a managed care organization, a pre-paid inpatient health plan, or a pre-paid ambulatory health plan. AR 10-11.

While courts interpret laws based on their plain meaning whenever possible, there is an ambiguity in the statute and regulation, respectively, in the phrases “attributable to individuals who are receiving medical assistance under this subchapter” and “attributable to Medical individuals”. AR 11. The phrases may mean only those receiving Medicaid assistance in the transaction under scrutiny or alternatively include those for whom the transaction was billed to Medicaid but denied for payment. AR 11. Neither the statute nor the regulation has language specifically including or excluding unpaid bed days from the calculation. AR 11.

The construction of a statute by those in charge of administering it carries significant weight in its interpretation. AR 12. The Preamble to CMS’s Final Rule expressly states that “the EHR incentive payment calculation requires the inclusion of only paid inpatient-bed days.” 75 Fed. Reg. 44500 (July 28, 2010). AR 13. CMS’s guidance in the FAQ also unambiguously provides that only paid inpatient Medicaid days should be used to calculate Medicaid hospital incentive payments. AR 13. Although Hospital argues that the FAQ exceeds the enabling statute and is an underground regulation, that is not true where the statute is ambiguous and interpreted by the agency. AR 13. In any event, the Chief ALJ would reach the same interpretation without the FAQ. AR 13. The Chief ALJ found that Congress intended to exclude unpaid Medicaid bed days from the calculation of Hospital’s EHR payments. AR 13.

As to the authority to conduct an audit, Hospital asserted that the word “estimated” in 42 C.F.R. section 495.310(g)(2), which is not used in Medicare calculations, indicates that DHCS lacks authority to reconcile “estimates” with audited data at a later time without clear statutory authorization. AR 14. The Chief ALJ stated that there is a difference between an audit to reconcile an estimate with actual data and an audit to correct an overestimate based on a mistake. AR 14. Hospital relied on incorrect CMS and DHCS instructions and reported both paid and unpaid bed days in its initial attestation; DHCS corrected the error. AR 14.

Moreover, statutory authority for the audit is clear. W&I Code section 14046.1 required the DHCS to adopt as approved by CMS and required the SMHP to have audit procedures. W&I Code §14046.1(b)(5). AR 15. SMHP section 4.3 directs DHCS’s Financial Audit Branch to audit hospitals participating in the EHR program. AR 15. Because the CMS approved the SHMP, it authorized the use of audits to assess the overpayment. AR 15. Hospital has provided no authority that California cannot adopt and audit process unless expressly authorized to do so by federal law. AR 15.

The Chief ALJ acknowledged that administrative proceedings can apply equitable remedies against administrative agencies, provided that doing so would not nullify a strong rule of policy. Lenz v. McMahon, (1989) 49 Cal.3d 393. AR 15-16. Hospital contended that DHCS’s opportunity to audit its EHR attestation began when it was submitted. AR 16. However, the hastily promulgated EHR Incentive Program began before the federal government authorized states to begin auditing. AR 16. DHCS received CMS’s approval of its authority to conduct audits on May 5, 2014 and provided notice to Hospital of the audit on July 11, 2016, two years and 66 days later. AR 16. DHCS released its findings on June 2, 2017, less than one year after starting the audit. AR 16. Only three years and 28 days elapsed from DHCS’s first opportunity to audit and its completion, not the five and a half years alleged by Hospital. AR 16.

Courts have held that equitable borrowing of a statute of limitations may occur where there is no statute of limitations, but a closely analogous limitations period has passed. AR 18-19. When equitable borrowing occurs, the passage of the analogous limitations period does not bar the action, but unreasonable delay is presumed and the burden shifts to the agency to prove both that the unreasonable delay should be excused and that the party asserting laches did not suffer prejudice. AR 17. Hospital’s attempt to analogize its audit with Fountain Valley Regional Hospital & Medical Center v. Bonta, (1999) 75 Cal.App.4^th 316, where the agency attempted to recover “revised final reimbursement settlements” more than nine years after the audits had been finalized fails because the situations are too dissimilar. AR 19-20. This case involves an audit of an attestation for a newly established program in which some aspects of program integrity and audit authority were not in place until significantly after the money was distributed. The burden of proof on unreasonable delay did not shift to DHCS. AR 20.

Hospital also failed to show prejudice from the delay. Hospital’s description of what it planned to do with the money – Hospital improvements or maintenance -- was too vague. AR 20. DHCS’s recovery of the overpayment at any point would have deprived Hospital of resources to conduct improvements or maintenance. AR 20. Nothing suggested that the recovery now will have any special impact of a broken construction contract, capital losses on an abandoned project, interest rate differentials, or even a clear indication that Hospital had a project on which it would spend the money. AR 20-21. Goeders’ testimony established the burden of repayment on hospitals in general, but nothing about particular burdens in this instance. AR 21.

The Chief ALJ awarded DHCS its post-stipulation audit determination of $624,136. AR 22.

Petitioner Hospital raises three issues: (1) DHCS does not have authority to conduct post-payment audits; (2) DHCS erred in interpreting the statute and regulation to exclude unpaid Medi-Cal bed days; and (3) the doctrine of laches prohibits DHCS from collecting the overpayment. As DHCS argues (Opp. at 11), the first two issues are questions of law reviewed de novo and the third issue, laches, is reviewed for substantial evidence.

Hospital argues that DHCS should be barred under the doctrine of laches from recouping any Medicaid EHR Incentive Program payments because DHCS unreasonably delayed in performing a post-payment review of Hospital’s payments and Hospital was prejudiced by that delay. Pet. Op. Br. at 14.

A claim by a public agency may be barred by the doctrine of laches. See L ent v. California Costal Comm’n, (“Lent”) (2021) 62 Cal. App. 5^th 812, 838. A claim is barred by the laches where the plaintiff is guilty of unreasonable delay in commending litigation plus either the plaintiff acquiesces to the defendant’s alleged wrongful act, or the defendant is prejudiced by the delay. Johnson v. City of Loma Linda, (2000) 24 Cal.4th 61, 68; Conti v. Board of Civil Service Commissioners, (1969) 1 Cal.3d 351, 359-360. Laches may bar a claim by a public administrative agency if the requirements of delay and prejudice are met. Robert F. Kennedy Medical Center v. Belshe, (1996) 13 Cal.4th 748, 760; Lent, supra, 62 Cal.App.5^th at 837. The defense applies fully to mandamus claims as well as other claims. Schellinger Brothers v. City of Sebastopol, (2009) 179 Cal.App.4th 1245, 1267-68. The doctrine of laches has been applied to DCHS audit determinations against healthcare providers concerning Medi-Cal payments. See Fountain Valley Regional Hospital & Medical Center v. Bonta, (“Fountain Valley”) (1999) 75 Cal.App.4th 316, 323.

The laches elements of unreasonable delay and resulting prejudice may be met in two ways. Id. at 323. For the first, the petitioner may demonstrate both elements with evidence in the administrative record. Id. at 323-24. For the second, “the element of prejudice may be ‘presumed’ if there exists a statute of limitations which is sufficiently analogous to the facts of the case, and the period of such statute of limitations has been exceeded by the public administrative agency in making its claim.” Id. at 324. In such a situation, the limitations period is “borrowed” from the analogous statute of limitations and the burden of proof shifts to the administrative agency to (1) show that the delay was excusable and (2) rebut the presumption that such delay resulted in prejudice to the opposing party. Ibid; Lent, supra, 62 Cal. App.5^th at 838.

Hospital argues that it has met its burden for the defense of laches. The undisputed facts show that more than five years passed between Hospital’s submission of its Medicaid EHR Incentive Program attestation in December 2011 and DHCS’ notification to Hospital in July 2016 that it would audit Hospital’s Medicaid EHR payments. The Chief ALJ found that DHCS was not able to begin an audit until the May 5, 2014 date when its “audit strategy” was formally approved by CMS. Assuming that is true, more than three full years passed between DHCS’s first ability to audit Hospital’s Medicaid EHR payments and its audit findings. Pet. Op. Br. at 14.

Hospital contends that Fountain Valley establishes that it is appropriate to borrow a three-year statute of limitations for purposes of laches in a DHCS recoupment action after a Medi-Cal reimbursement audit. See 75 Cal. App.4^th at 325-26. Given that more than three years passed after DHCS’s audit authority was approved by CMS and the audit results, it should be presumed that Hospital was prejudiced by DHCS’s delay and there is no evidence in the record sufficient to overcome that presumption. Pet. Op. Br. at 14-15.

The Chief ALJ’s decision asserted that equitable borrowing of a three-year statute of limitations for laches is not appropriate because Medicaid EHR Incentive Program payments differ from the more general Medi-Cal payments at issue in Fountain Valley. However, the Chief ALJ offered no persuasive basis for drawing this distinction. The assertion that EHR Incentive Program payments are so materially different than other types of Medi-Cal payments that they must be subject to different timing rules is belied by the fact that EHR Incentive Program audit determinations are subject to the same DHCS appeal process as other Medi-Cal audit determinations. Pet. Op. Br. at 15.

Moreover, the discrete nature of EHR Incentive Program payments, including the specific requirements that make a hospital eligible for such payments, should have made it easier for DHCS to retrospectively review Hospital’s Medi-Cal EHR Incentive Program payments. Accordingly, it is reasonable under Fountain Valley to presume that Hospital was prejudiced by DHCS’s more than three-year delay in finalizing the audit. Pet. Op. Br. at 15-16.

In Fountain Valley, DHCS attempted to recover mistaken payments for “final reimbursement settlements” based on the hospital’s unaudited Medi-Cal cost reports for the relevant fiscal years. 75 Cal.App.4^th at 320-22. Nearly ten years after the final reimbursement settlement, DHCS issued revised final reimbursement settlements based on a calculation error, seeking to recover a total of $1,265,440. Id.

The Fountain Valley court noted that either the three or four-year limitations period under CCP section 337 and 338, respectively, potentially could be borrowed. Id. The court held that the borrowing rule for periods of limitation should be applied, if factually appropriate, when DHCS seeks to revise its final reimbursement settlements. Id. at 325. The court explained that this borrowing would shift the burden of proof to DHCS to show its delay is excusable and that the presumption of prejudice is overcome. Id. at 325. The court also cautioned: “Because this case involves revised final reimbursement settlements, our decision should not be construed to mean that statutory periods of limitation may be borrowed when a hospital claims that the doctrine of laches should be applied to a delay by [DHCS] in rendering an original final reimbursement settlement.” Id. at 324, n. 8 (emphasis in original).

DHCS correctly argues that the facts concerning the Medicaid EHR Incentive Program audit are significantly distinguishable from those relied upon in Fountain Valley to borrow the statutes of limitations in CCP sections 337 and 338. Opp. at 18.

DHCS must comply with federal Medicaid law in implementing the Medi-Cal program (Olszewski, supra, 30 Cal.4th at 804), and it could not initiate an audit of any participating hospitals until CMS’s May 5, 2014 approval of the SMHP audit procedure for EHR payments. AR 1509. As noted by the Chief ALJ, the EHR Incentive Program was a newly established program in which the audit authority was not in place until a time significantly after the money was distributed. AR 20. After receiving CMS’s approval, DHCS notified Hospital on July 11, 2016 that it intended to audit its Year 1 attestation. DHCS then conducted the audit and issued its final audit report on June 2, 2017. AR 1651-70. Only three years and 28 days elapsed from DHCS’s first opportunity to conduct an audit and its completion, not the five and a half years alleged by Hospital (AR 16), a point which it now apparently concedes (Reply at 7).

Given the little more than three-year delay, the four-year statute of limitations in CCP section 337 is of no aid to Hospital; only the three-year statute in CCP section 338 could help. The Medicaid EHR Incentive Program payments to Hospital were not reimbursement settlements for costs incurred; they were incentive payments as part of a newly established federal grant program. Hospital signed attestations acknowledging that post-payment audits could be performed, and federal regulations require providers receiving EHR incentive payments to retain documentation supporting payment calculations for at least six years following the date of attestation. 42 C.F.R. §495.40(c); 77 Fed. Reg. 53968, 54112 (Sept. 4, 2012); AR 1481. Equitable borrowing does not apply because the facts and statutory program are not sufficiently analogous to Fountain Valley.

Hospital acknowledges that a different type of Medi-Cal payment was involved in Fountain Valley but argues that there is nothing fundamentally different about the type of audit activity at issue in the two cases. In each situation, DHCS made an initial determination of Medi-Cal payments owed to a provider and then commenced an audit to review those determinations years after the fact. The same set of statutory rules governed the audit process and the resulting administrative appeals of the audit determinations. See W&I Code §14171. There is no valid, logical reason why the same equitable principles should not be applied for two audits subject to the same set of administrative appeal rules. Reply at 7.

It is not the appeal process that must be similar, but rather the payment. As DHCS argues, the $2.5 million EHR Incentive Program payment received by Hospital was not a reimbursement for Medi-Cal costs expended and services performed, but rather supplemental money paid out over four years to incentivize Hospital to adopt and use electronic health records. Opp. at 20. There is less equitable reason for concern in a delay in auditing an incentive payment than a reimbursement of costs and services.[4] Additionally, Hospital fails to address the Chief ALJL’s other reasons for distinguishing Fountain Valley, including the newness of the EHR Incentive Program, Hospital’s acknowledgement in the attestation that it may be audited post-payment, and its regulatory duty to maintain payment records for six years.

Hospital has not shown an unreasonable delay and equitable borrowing does not apply to shift the burden of proof to DHCS to excuse the delay.

Hospital argues that, even if equitable borrowing does not apply, it still should prevail on its laches claim because it affirmatively demonstrated that it was prejudiced by the delay. Goeders, Hospital’s former Chief Financial Officer (“CFO”), testified that DHCS’s recoupment action disrupted budgeting decisions that had been made long ago by management and caused the facility to have to forego or delay improvement projects that had been planned. AR 1817-19. These kinds of factors have been recognized as constituting prejudice for laches purposes. See, e.g., Fountain Valley, supra, 75 Cal. App.4^th at 326 (lack of finality can prejudice hospital’s financial planning and rational allocation of its resources); see also City of Palmdale v. State Bd. of Equalization, (2012) 206 Cal. App.4^th 329, 340 (prejudice where cities received monies and made budgetary decisions dependent on that revenue years earlier). Accordingly, Hospital made a showing of prejudice from the way DHCS handled the audit. Pet. Op. Br. at 16.

Hospital ignores the fact that it must show both unreasonable delay and prejudice. Even if there was prejudice, laches does not bar DHCS from recoupment of ERH payments without an unreasonable delay.

“[W]e had anticipated being able to keep the moneys that had been received… when the surprises come up or we’re just not doing as well as we expect, it has to come from somewhere…we have a capital plan that…we wish to execute upon, but to the extent that we fall short in our … operations, and this is a hit to our operational performance, then something gets cut.” (AR 1817-18.

The Chief ALJ found, and the court agrees, that Goeders’ testimony established the burden of repayment on hospitals in general, but nothing about any particular burden in this case. AR 21. Hospital’s description of what it planned to do with the money – facility improvements or maintenance -- was simply too vague. AR 20. DHCS’s recovery of the overpayment at any point would have deprived Hospital of resources to perform improvements or maintenance. There is no evidence that recoupment of those monies from Hospital now will have any special impact of a broken construction contract, capital losses on an abandoned project, interest rate differentials, or even the existence of a specific project. AR 20-21. Hospital fails to provide concrete details how its budget and specific improvements/maintenance were affected.

Hospital argues that California law does not require such an evidentiary showing. Prejudice may be established for laches where a party “has changed his position in a way that would not have occurred if the [other party] had not delayed.” See Lent, supra, 277 Cal. App.5^th at 837. Goeders’ testimony that the facility had to forego improvement projects and repairs because of the delayed audit is evidence of “ponderable legal significance” that reasonably supports a conclusion of prejudice. Reply at 8-9.

The court disagrees. “Substantial evidence” is relevant evidence that a reasonable mind might accept as adequate to support a conclusion California Youth Authority, supra, 104 Cal.App.4th at 585) or evidence of ponderable legal significance which is reasonable in nature, credible and of solid value. Mohilef v. Janovici, supra, 51 Cal.App.4th at 305, n. 28. General statements of prejudice are not substantial evidence. Hospital fails to meet its burden of showing prejudice.

Hospital contends that DHCS lacked authority to audit Medicaid EHR Incentive Program payments because there is nothing in the federal statute or regulations governing those payments that expressly authorizes post-payment review. See 42 U.S.C. §1396b(t)(5)(B); see also 42 C.F.R. § 495.310(g)(2). Pet. Op. Br. at 10.

Hospital argues that the statutory scheme indicates that Congress did not contemplate states conducting after-the-fact review of EHR Incentive Program payments because the calculation of a hospital’s aggregate Medicaid EHR Incentive Program payment is based on “estimates”. The common meaning of an “estimate” is “a rough or approximate calculation.” Merriam-Webster Dictionary, https://www.merriam-webster.com. The fact that Medicaid EHR payments are based only on estimates suggests that Congress did not intend that they later be reconciled with actual data through a post-payment audit. DHCS does not have a right to perform an after-the-fact review and reconciliation of certain health care program payments absent specific statutory authorization to conduct such reviews. See County of Los Angeles v. Shalala, (“County”) (D.C. Cir. 1999) 192 F.3d 1005. Pet. Op. Br. at 10.

County does not stand for the proposition cited by Hospital. In County, the District of Columbia Circuit Court of Appeals interpreted language in a Medicare statute that reimburses qualifying hospitals with supplemental “outlier payments” for bearing a disproportionate share of atypical costs for patients whose hospitalization would be extraordinarily costly or lengthy. Id. at 1008-09. A hospital qualifying for these outlier payments is a Disproportionate Share Hospital (“DSH”). The statute provided a four-prong formula for making supplemental outlier payments to DSHs. The clause at issue in County, 42 U.S.C. §1395ww(d)(5)(A)(iv), provided that “[t]he total amount of the additional payments made under this subparagraph for discharges in a single year may not be less than 5 percent nor more than 6 percent of the total of payments projected or estimated to be made [based on certain DRG payment rates] in that year.” Id. at 1009.

HHS’s Secretary traditionally interpreted subparagraph 1395ww(d)(5)(A)(iv) to mean that she must establish fixed thresholds at the start of each fiscal year beyond which a DSH would qualify for outlier payments at levels likely to result in totals between five and six percent of the total certain group payments projected for that year. Id. If the Secretary overestimated the length of hospitalization for these group costs, the outlier payment would be less than 5% and, if she underestimated the length of hospitalization, the outlier payments could be more than the 6% of estimated total payments. Id.

Because the outlier payments for fiscal years 1985-86 amounted to less than 5% of projected group payments, some DSHs petitioned the Secretary for retroactive reimbursements to satisfy the difference, arguing that subparagraph 1395ww(d)(5)(A)(iv) does not just instruct the Secretary to estimate outlier thresholds; it affirmatively commands her to retroactively recalibrate the thresholds if they are not at least equal to the 5% statutory target. Id. at 1010.

The court concluded that the subparagraph’s reference to “payments made” was ambiguous about whether it meant payments that were actually made. It could mean that the total payments actually made may not be less than 5% as the hospitals argued, or it may just as plausibly reflect a forward-looking command as to how outlier thresholds should be structured each fiscal year. Id. at 1013-14. The court deferred to the Secretary’s reasonable interpretation as articulated in her final rule for the subparagraph to conclude that her interpretation -- which evinced greater fidelity to the statute and harmonized the four subparagraphs -- and was correct. Id. at 1017-19.

Thus, County upheld the Secretary’s conclusion that she was not required to reconcile actual outlier thresholds with her estimates under subparagraph 1395ww(d)(5)(A)(iv). It did not hold that the Secretary (or a state agency) has no authority to conduct an after-the-fact audit without express statutory authorization.

Moreover, the premise of Hospital’s argument is false. In conducting the post-payment audit, DHCS was not reconciling an estimated value with actual data. Rather, it was correcting an error of including unpaid bed days in Hospital’s EHR Incentive Program payment calculations. Hospital points to no portion of the Medicaid EHR Incentive Program statute that prevents an audit to correct payment errors. It is true that the statute does not expressly authorize an audit, but it does require DHCS to demonstrate that California uses federal funds for the purposes of administering EHR Incentive Program payments, including conducting oversight of the program and routine tracking of meaningful use attestations and reporting mechanisms. 42 U.S.C. §1396b(t)(9). DHCS cannot oversee the program and track hospital attestations without the ability to audit.

DHCS also has express California statutory authority for a post-payment audit of EHR Incentive Program payments to correct errors. Under federal law, a state must submit a state plan to qualify for the EHR Incentive Program and that state plan must be approved by CMS. Douglas v. Indep. Living Ctr. Of So. Cal., Inc., (2012) 565 U.S. 606, 610-11. To obtain CMS’s approval, the state plan must comply with applicable Medicaid law. 42 U.S.C. §1396(a)(5); 42 C.F.R. §§ 430.10, 431.10. Under California law, DHCS expressly is required to adopt a state plan approved by CMS for implementing the EHR Incentive Program that establishes audit procedures. W&I Code §14046.1(b)(5). The SMHP has been approved by CMS. Chapter 4 of the SMHP, entitled “California Audit Strategies,” requires DHCS’s Financial Audits Branch to audit hospitals participating in the EHR program. AR 951. Section 4.3.3, entitled “Post Payment Reviews/Audits,” requires DHCS to review attestations and supporting documentation, and to verify that “the incentive fund calculations and payments were correct.” AR 954. DHCS may follow its own SMHP approved by CMS to audit payments.

Finally, Hospital’s relation with DHCS is in the nature of a contract. Paramount, supra, 15 Cal.3d. at 489. In applying for and receiving EHR payments, Hospital submitted four separate annual attestations to DHCS, each acknowledging that DHCS may conduct pre- and post-payment audits on all information provided on Hospital’s behalf. AR 1550. Hospital points to no reason why this is not an enforceable contract provision.

DHCS did not abuse its discretion in conducting a post-payment audit of Hospital’s EHR payments.

In evaluating the unpaid bed days issue, it is worth describing the Medicare program and the concept of Medicare and Medicaid fractions as explained by the Supreme Court in interpreting the Medicare DSH statute. See Becerra v. Empire Health Foundation, for Valley Hosp., (“Becerra”) (2022) 142 S.Ct. 2354. The Medicare program provides government assistance to over 64 million elderly or disabled Americans. Id. at 2359. Medicare Part A provides coverage for inpatient hospital treatment, as well as associated physician and nursing services. Id. The Medicare program provides the hospital a fixed reimbursement rate for treating each Medicare patient regardless of the hospital’s costs. Id.

Congress’ DSH adjustment gives hospitals serving an “unusually high percentage of low-income patients” enhanced Medicare payments. Id. (citation omitted). To calculate a hospital’s DSH payment, HHS adds together two statutorily described factions: the Medicare fraction and the Medicaid fraction. Id. These two fractions are designed to capture two different low-income populations served by the hospital. The Medicare fraction is the proportion of a hospital’s Medicare patients who have low incomes, and the Medicaid fraction is the portion of a hospital’s patients not entitled to Medicare but who have low incomes as identified by their eligibility for Medicaid. Id. As a highly general statement, the Medicare fraction is a measure of a hospital’s senior (or disabled) low-income population, and the Medicaid fraction is a measure of a hospital’s non-senior (except for disabled) low-income population. Id.

In calculating the Medicare fraction, in general the numerator is the number of hospital patient days attributable to Medicare patients who are poor. Id. at 2360. The denominator is the number of hospital patient days attributable to all Medicare patients. Id. Hence, the Medicare fraction is the fraction of Medicare hospital patient days that are attributable to poor Medicare patients. See id.

Similarly, the Medicaid fraction’s numerator is the number of hospital patient days attributable to non-Medicare patients who are poor. Id. The denominator is the total number of hospital patient days. Id. The Medicaid fraction is a measure of a hospital’s non-Medicare low-income patient days. Id. The Medicaid fraction has a larger denominator (all patient days) than the Medicare fraction denominator (Medicare patient days). This makes the Medicaid fraction smaller than the Medicare fraction, which apparently is attributable to the fact that the Medicare DHS statute is focused on Medicare and Medicaid has its own DHS statute. Id., n. 1.

The high court then considered whether the Medicare fraction’s reference to individuals “entitled to [Medicare Part A] benefits” meant all those qualifying for Medicare, regardless of whether they receive Medicare payments for a hospital stay. Id. at 2356. The court held that the ordinary meaning of the fraction descriptions “does not exactly leap off the page”, adding that “when a statute is ‘addressed to specialists, [it] must be read by judges with the minds of the specialists.” Id. at 2362 (citation omitted). The high court agreed with HHS that “entitled to benefits” means just what it means throughout the Medicare statute -- qualifying for benefits – and does not mean an absolute right to payment. Id. Hence, both paid and unpaid inpatient days are counted in the Medicare fraction. This interpretation, in which everyone who qualifies for Medicare benefits is counted in the Medicare fraction and no one who qualifies for those benefits is counted in the Medicaid fraction, is consistent with the text, context, and structure of the DSH statute, and accords the statutory purpose of capturing, through two separate measurements, two different segments of a hospital’s low-income patient population. Id. at 2362, 2368.

As DHCS notes (DHCS Supp. Br. at 6), this case does not concern the DHS statutes for Medicare or Medicaid. Rather, it concerns the Medicaid EHR Incentive Program in 42 U.S.C. section 1396b(t)(5)(C) (“section 1396b(t)(5)(C)”). The two sets of statutes serve different policy purposes. The DHS Medicare and Medicaid statutes seek to compensate hospitals for the burden of serving disproportionate numbers of low-income patients. The Medicare and Medicaid EHR Incentive Program statutes seek to provide incentives for electronic record-keeping to hospitals treating Medicare and Medicaid patients. Nonetheless, the high court’s Becerra discussion is useful because the EHR Incentive Payment statutes also rely on Medicare and Medicaid fractions.

The Medicaid ERH Incentive Payment statute provides for incentive payments to encourage the adoption and use of EHR technology by hospital Medicaid providers. §1396b(t)(1). The statute provides a cap of such incentive payments involving the product of the hospital’s overall EHR amount times the Medicaid share, with limitations on the amount paid in specific years of the four-year payment period. §1396b((t)(5)(A).

“The Medicaid share computed under this subparagraph, for a Medicaid provider for a period specified by the Secretary, shall be calculated in the same manner as the Medicare share under section 1395ww(n)(2)(D) of this title for such a hospital and period, except that there shall be substituted for the numerator under clause (i) of such section the amount that is equal to the number of inpatient-bed-days (as established by the Secretary) which are attributable to individuals who are receiving medical assistance under this subchapter and who are not described in section 1395ww(n)(2)(D)(i) of this title. In computing inpatient-bed-days under the previous sentence, the Secretary shall take into account inpatient-bed-days attributable to inpatient-bed-days that are paid for individuals enrolled in a Medicaid managed care plan (under subsection (m) or section 1396u-2 of this title).” (emphasis added).

CMS’s implementing regulation states that the calculation of a hospital’s Medicaid share for the Medicaid EHR Incentive Payment is equal to a fraction in which the numerator is the sum (for a 12-month period) of “(A) the estimated number of acute-care inpatient-bed-days which are attributable to Medicaid individuals, and (B) “the estimated number of acute-care inpatient-bed-days which are attributable to individuals enrolled in a managed care organization, a pre-paid inpatient health plan, or a pre-paid ambulatory health plan.” 42 C.F.R. §495.310(g)(2)(i) (emphasis added).

The parties agree that section 1396b(t)(5)(C)’s reference to “this subchapter” is to Medicaid. Opp. at 14; Reply at 3. CMS defines “bed days” as “adult or pediatric beds . . . maintained for lodging inpatients.” 50 Fed. Reg. 35646, 35683 (Sept. 3, 1985). The parties also agree that the term “unpaid bed days” is not defined and does not appear in the EHR Incentive Program statutes. Opp. at 14; Reply at 3.

The Chief ALJ found that an “unpaid bed day” refers to a patient occupying a hospital bed for a day where the hospital receives no Medicaid reimbursement for that service. See AR 4. The Chief ALJ’s decision concluded that section 1396(t)(5)(C) and 42 C.F.R. section 495.310(g)(2) are ambiguous about whether unpaid inpatient-bed-days are included in the phrases “attributable to individuals who are receiving medical assistance under this subchapter” and “attributable to Medical individuals”. AR 11. The phrases may mean only those receiving Medicaid assistance in the transaction under scrutiny or alternatively include those for whom the transaction was billed to Medicaid but denied for payment. AR 11. Neither the statute nor the regulation has language specifically including or excluding unpaid bed days from the calculation and therefore the statute and regulation are ambiguous. AR 11.

The parties’ dispute requires interpretation of a statute which, in the words of the Supreme Court “does not exactly leap off the page” and must be read by judges with the minds of the specialists.”

As the parties agree (Pet. Supp. Br. at 2; Resp. Supp. Br. at 2), state courts follow the “rules of statutory construction enunciated by the United States Supreme Court” when interpreting federal statutes. RCJ Medical Services, Inc. v. Bonta, (2001) 91 Cal.App.4th 986, 1006; Kilroy v. Superior Court, (1997) 54 Cal.App.4^th 793, 801.

According to the high court’s rules of interpretation, the starting point is the language of the statute itself. “Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive.” Kaiser Aluminum & Chemical Corp. v. Bonjorno, (1990) 494 U.S. 827, 835 (citation omitted). “[W]hen deciding whether the language is plain, the Court must read the words ‘in their context and with a view to their place in the overall statutory scheme.’” King v. Burwell, (2015) 576 U.S. 473, 486 (citation omitted).

The court must not be guided by a single sentence or phrase, but look to the entirety of the law’s provisions, its object, and policy. Griffin v. Oceanic Contractors, Inc., 91982) 458 U.S. 564, 571. The objective is to ascertain Congress’ intent and give effect to its legislative will. Philbrook v. Glodgett, 1975) 421 U.S. 707, 713. The court should avoid absurd results in interpreting a statute. United States v. Turkette, (1981) 452 U.S. 576, 580. “Judicial perception that a particular result would be unreasonable may enter into the construction of ambiguous provisions, but cannot justify disregard of what Congress has plainly and intentionally provided.” Commissioner of the Internal Revenue v. Asphalt Products Co., Inc., (1987) 482 U.S. 117, 121. In rare cases the literal application will produce a result demonstrably at odds with Congress’ intent, and that intent must control. West Virginia University Hospitals, Inc. v. Casey, (1991) 499 U.S. 83, 98-99.

Where ambiguity still remains, the court should consider “reason, practicality, and common sense.” Id. at 1084. This requires consideration of the statute’s purpose, the evils to be remedied, public policy, and contemporaneous administrative construction. MCI, supra, 28 Cal.App.5^th at 643. The enactment must be given a reasonable and commonsense interpretation consistent with the apparent purpose and intent of the lawmakers, practical rather than technical in nature, and which, when applied, will result in wise policy rather than mischief or absurdity. Lungren v. Deukmejian, (1988) 45 Cal. 3d 727, 735.

The key language in section 1396b(t)(5)(C) is that the Medicaid share shall be calculated in the same manner as the Medicare share under section 1395ww(n)(2)(D) of this title for such a hospital and period, except that there shall be substituted for the numerator under clause (i) of such section the amount that is equal to the number of inpatient-bed-days (as established by the Secretary) which are attributable to individuals who are receiving medical assistance under this subchapter and who are not described in section 1395ww(n)(2)(D)(i) of this title.[5]

42 U.S.C. section 1395ww(n)(2)(D) (“section 1395ww(n)(2)(D)”) provides the calculation of the Medicare share, stating that the numerator of the Medicare fraction shall be the sum of (I) the estimated number of inpatient-bed-days (as established by the Secretary) which are attributable to individuals with respect to whom payment may be made under Part A; and (II) the estimated number of inpatient-bed-days (as so established) which are attributable to individuals who are enrolled with a Medicare Advantage organization under part C....”

Thus, section 1395ww(n)(2)(D) calculates the Medicare fraction with a numerator that is the sum of the Secretary’s estimated Medicare Part A (hospitalization for seniors or disabled) inpatient-bed-days and the Secretary’s estimated Medicare part C (hospitalization for private Medicare Advantage plans) inpatient-bed-days. 1395ww(n)(2)(D)(i). The denominator is the product of total estimated inpatient-bed-days and the fraction that is the hospital’s estimated total charges minus charity care divided by total charges. 1395ww(n)(2)(D)(ii). As a general approximation, the Medicare fraction is the ratio of estimated Medicare inpatient-bed-days to total estimated inpatient bed days.

Section 1396b(t)(5)(C) requires the Medicaid share to be calculated in the same manner as the Medicare share except that the numerator of the Medicaid fraction of the EHR Incentive Program payment formula includes inpatient-bed-days “attributable” to patients “receiving medical assistance”[6] from the Medicaid program who are not described in the Medicare EHR share of 42 U.S.C. section 1395ww(n)(2)(D)(i). By definition, these inpatient-bed-days are for Medicaid patients (low income and not disabled) who are not Medicare patients (senior or disabled). This provision prevents a hospital from obtaining Medicaid ERH payments for Medicare patients; the Medicare EHR Incentive Program statute governs the EHR incentive payments for Medicare patients.

Hospital contends that the Chief ALJ is simply wrong that the phrase “attributable to individuals who are receiving medical assistance under [Medicaid]” is ambiguous. The plain language is clear and does not in any way indicate that unpaid days should be excluded from the EHR payment calculation. As such, there is no reason to look to any extrinsic sources, including agency interpretations or regulatory guidance. Pet. Op. Br. at 12.

Hospital first contends that the phrase “receiving medical assistance under Medicaid” refers to all types of Medicaid assistance. It does not suggest that “medical assistance” is limited to only certain kinds of Medicaid benefits such as inpatient hospital care; it covers all types of Medicaid benefits. Hospital then argues that the common definition of “attributable” is “able to be considered a quality or characteristic of the person, thing, group, etc., indicated.” See Dictionary.com available at https://www.dictionary.com/browse/attributable. As a result, the phrase “receiving medical assistance under [Medicaid]” has a straightforward meaning. The plain meaning of section 1396b(t)(5)(C)’s language is that the Medicaid share of the EHR Incentive Program payment calculation includes all inpatient-bed-days associated with (i.e., attributed to) Medicaid beneficiaries. Reply at 3-4.

Hospital concludes that section 1396(t)(5)(C)’s inclusion of all acute-care inpatient-bed-days “attributable” to individuals who are receiving Medicaid necessarily encompasses all inpatient-bed-days for any person who is designated or classified as a Medicaid beneficiary or enrolled in a Medicaid managed care organization. The statute makes no distinction between paid and unpaid inpatient bed days attributable to Medicaid patients. Thus, there is no basis in the plain language of section 1396(t)(5)(C) to exclude unpaid inpatient days from a hospital’s Medicaid share when calculating payments under the statutory formula. Pet. Op. Br. at 11.

Hospital argues that 42 C.F.R. section 495.310(g)(2) is consistent with section 1396b(t)(5)(C) in stating that the numerator of the Medicaid share is the “estimated number of acute-care inpatient bed-days which are attributable to Medicaid individuals.” 42 C.F.R. §495.310(g)(2). Just like section 1396b(t)(5)(C), the regulation does not indicate that inclusion of Medicaid inpatient bed-days in the calculation is dependent on whether Medicaid paid services that were rendered on those days. Pet. Op. Br. at 11-12

In support of its conclusion, Hospital relies on Cabell Huntington Hosp., Inc. v. Shalala, (“Cabell”) (4th Cir. 1996) 101 F.3d 984. In Cabel, the Fourth Circuit Court of Appeals considered a challenge to Medicare reimbursement calculations for DSHs. Id. at 985. The court noted that low-income Medicare patients generally have poorer health and are costlier to treat than high-income Medicare patients and Congress authorized DSH payments to hospitals that treat a disproportionate share of low-income patients. Id. at 985-86.

As the high court in Becerra had done, the Cabel court explained that the Medicare formula for DSH payments is the sum of two fractions that count the number of low-income patients served by the hospital: the Medicare fraction and the Medicaid fraction. Id. at 986. Cabel required interpretation of the Medicaid fraction, which counts patients who are not entitled to Medicare benefits but who qualify for Medicaid. Id.

“[The Medicaid fraction’s numerator] is the number of the hospital’s patient days for such period which consist of patients who (for such days) were eligible for medical assistance under a State plan approved under [the Medicaid program], but who were not entitled to benefits under part A of [the Medicare program], and the denominator of which is the total number of the hospital’s patient days for such period.” §1395ww(d)(5)(F)(vi)(II) (emphasis added).

The Cabel court stated that it was required to interpret whether the emphasized language means that DSH payments should account for only those inpatient hospital days actually paid by the state’s Medicaid program (as the Secretary argued) or should include all inpatient hospital days for patients who qualify for Medicaid but who may have exceeded the number of days covered under West Virginia’s Medicaid plan (as the hospitals argued). Id. at 986-87. This was a question of practical importance because, if the Secretary was correct, hospitals serving large numbers of Medicaid patients who overstay their state-imposed limit will receive neither Medicaid nor Medicare DSH payments for those additional hospital days. Id. at 987. Thus, the court was required to interpret the phrase “eligible for medical assistance under a State [Medicaid] plan.” Id.

Under the Medicaid scheme, certain patients must be covered for certain specified services, but outside the mandatory category states have considerable discretion to set income and status requirements for who will be covered, what services are covered, and the duration of coverage. Id. The definition of “medical assistance’ in 42 U.S.C. section 1396d(a) lists 25 types of services which may be covered. Patients may be eligible for Medicaid in a particular state but not be paid for a particular medial expense because of state restrictions for that service. Id. Thus, there is a clear difference between eligibility for, and entitlement to, Medicaid payments. Id.

The Secretary’s interpretation of section 1395ww(d)(5)(F)(vi)(II) that DSH payments should take account of only those inpatient hospital days actually paid by the state’s Medicaid program would require the court to read the word “eligible” to mean the same as “entitled”. The subparagraph’s plain language, as well as the canon of statutory construction that the same words in two different Medicare subsections should be interpreted to have the same meaning, means that “eligible” has a different meaning than “entitled”. Id. at 988.

The phrase “medical assistance” is defined as “payment of part or all of the cost” of the 25 listed types of medical care. 42 U.S.C. §1395d(a). The potential covered services include inpatient hospital services as well as numerous other services. Id. at 989. The Secretary argued that “eligible for medical assistance” cannot include hospital days that are unpaid by the state Medicaid plan because the Medicaid statute defines “medical assistance” as “payment.” The Secretary reasoned that if medical assistance is a payment, then an otherwise Medicaid-eligible patient who has exhausted his coverage for inpatient hospital care is no longer “eligible for medical assistance” because he can no longer receive payment for inpatient services. Id.

“The Secretary fails to account, however, for the fact that inpatient hospital care is only one of twenty-five services listed in § 1396d(a) that are potentially available to a Medicaid-eligible individual… As long as he continues to meet the income, resource, and status requirements, a Medicaid patient who has exceeded his day limit in a West Virginia hospital, for example, is still eligible for payment of a number of the other twenty-four categories of medical services like outpatient hospital services, rural health clinic services, and X-rays...Thus he remains ‘eligible for medical assistance’ as the statute defines that term…” Id.

The Cabel court concluded that “eligible for medical assistance under a State plan” refers to patients who meet the income, resource, and status qualifications of a particular state’s Medicaid plan whether or not they are actual receiving payment for a particular service for a particular duration of coverage. Id. A patient who has exhausted Medicaid inpatient hospital coverage and is no longer entitled to payment for it remains eligible for Medicaid payment for a host of other services. Thus, the plain meaning of section 1395ww(d)(5)(F)(vi)(II) is that hospital days need not be paid by a particular state Medicaid plan to be counted in the Medicaid fraction for the DSH calculation. Id.

Hospital acknowledges that there is a slight difference between the phrase “eligible for medical assistance” in the Medicare DSH statute considered by Cabel and section 1396(t)(5)(C)’s “receiving medical assistance” but argues that Cabel’s reasoning applies. Cabel makes clear that a patient who qualifies for Medicaid assistance generally can still be eligible for, or be receiving, other Medicaid benefits even when not covered under Medicaid for a particular day of a hospital stay. There is a presumption that Congress is aware of judicial interpretations of statutes when it enacts similar language in later statutes. See Lorillard v. Pons, (1978) 434 U.S. 575, 580–81. Given Cabell, if Congress wanted unpaid bed days to be excluded from the calculation of Medicaid EHR payments, the statute would say “receiving Medical assistance under this chapter for inpatient hospital care” and not refer to people “receiving medical assistance under” Medicaid generally. Hospital concludes that, as noted by Cabell, Congress’s specific choice of words must be respected, and DHCS’s proffered interpretation of the statute does not do that. Pet. Op. Br. at 11, n. 1; Reply at 5; Pet. Supp. Br. at 5-6.

Hospital also relies on Becerra, in which the high court interpreted the DHS Medicare statute phrase “entitled to [Medicare Part A] benefits” to mean all those qualifying for the program, regardless of whether they receive Medicare payments for a part or all of a hospital stay. 142 S.Ct. at 2368. Hospital concludes that Becerra further supports the point that, depending on the statutory language, a patient’s general status as a beneficiary of a government health program is a separate question from whether the program covers the actual hospital services received by that patient. Reply at 5, n. 1.

Comparison of the two statutes is fruitful. In the Medicare DHS statute, the Medicaid fraction’s numerator “is the number of the hospital’s patient days for such period which consist of patients who (for such days) were eligible for medical assistance under a State plan….” §1395ww(d)(5)(F)(vi)(II) (emphasis added).

Section 1396b(t)(5)(C) requires: “The Medicaid share…shall be calculated in the same manner as the Medicare share under section 1395ww(n)(2)(D)…except that there shall be substituted for the numerator… the amount that is equal to the number of inpatient-bed-days (as established by the Secretary) which are attributable to individuals who are receiving medical assistance under this subchapter….” Pursuant to this sentence, the numerator of the Medicaid fraction of the EHR Incentive Program payment formula includes inpatient-bed-days (as established by the Secretary) that are “attributable” to patients “receiving medical assistance” from the Medicaid program.

The salient differences between the two Medicaid statute’s numerators is (1) section 1396b(t)(5)(C) states that “[t]he Medicaid share…shall be calculated in the same manner as the Medicare share under section 1395ww(n)(2)(D) …except that there shall be substituted for the numerator...”, (2) the difference between “eligible for medical assistance” and “receiving medical assistance”, and (3) section 1396b(t)(5)(C)’s requirement that the Secretary establish the number of inpatient-bed-days.

Hospital argues that section 1396b(t)(5)(C) has a plain meaning. Its reference to “attributable to” means “associated with”. Therefore, the plain meaning of inpatient-bed-days “attributable to” eligible Medicaid patients includes all inpatient-bed-days associated with Medicaid beneficiaries, paid or unpaid. Reply at 1, 3-4.

DHCS argues that Hospital’s plain meaning argument that inpatient-bed-days attributable to eligible Medicaid patients includes unpaid inpatient bed days fails because section 1396(t)(5)(C) does not mention unpaid bed days, much less authorize their inclusion for EHR payment calculations. When interpreting a statute, courts “may neither insert language which has been omitted nor ignore language which has been inserted.” Prang v. Amen, (2020) 58 Cal.App.5th 246, 254.

DHCS’s argument is untenable. Section 1396b(t)(5)(C) need not mention unpaid bed days if they are included in the statute’s reference to inpatient-bed-days. The term “inpatient bed days” is broader than either paid or unpaid bed days and may encompass both.

DHCS argues that Hospital ignores the fact that both Medicaid and Medicare have EHR Incentive Program chapters and hospitals participating in both the Medicare and Medicaid EHR programs may not claim duplicate payments. See §1396b(t)(5)(C); see also 75 Fed. Reg. at 44501 (July 28, 2010). As a result, bed days eligible for payment under Medicare Part A may not be used in the numerator of the Medicaid share. 42 C.F.R. §495.310(g)(2)(iii).

DHCS concludes that section 1396b(t)(5)(C)’s phrase “attributable to” accounts for this prohibition on double-counting. The Medicaid share is the number of inpatient-bed-days attributable to individuals who are receiving medical assistance under Medicaid. If a patient is enrolled in both Medicaid and Medicare, the patient cannot be receiving a service from Medicaid that is partially or fully covered by Medicare. DHCS interprets section 1396b(t)(5)(C) to mean that the Medicaid fraction numerator shall be equal to the number of inpatient bed days attributable to patients who are receiving a Medicaid service and not receiving Medicare for the same service. This means that both the Medicaid and Medicare numerator calculations require inclusion of only paid inpatient-bed-days. Opp. at 14.

DHCS contends that, when read in the context of the entire statute, Hospital’s interpretation of section 1396b(t)(5)(C) in which both paid and unpaid bed days are counted contradicts Congress’s intent to prohibit duplicate Medicare and Medicaid payments. The variances in language in the Medicaid and Medicare chapters of the EHR Incentive Programs do not distinguish different kinds of services (paid versus unpaid) and instead distinguish between different categories of beneficiaries, such as those enrolled in Medicare Part A. §1395ww(n)(2)(D)(i)(I). Opp. at 14-15.

The court disagrees. As Hospital argues (Pet. Supp. Br. at 3), there is no prohibition on duplicate payments under both the Medicaid and Medicare EHR Incentive Programs. CMS has expressly stated that hospitals may receive incentive payments from both Medicare and Medicaid contingent on meaningful use and other requirements under both programs. 75 Fed. Reg. at 44499. See also id. (EHR incentive payments...are not subject to the same limits as payments for...Medicaid...including Medicaid upper payment limits and disproportionate share hospital limits”). DCHS’s citation to a required selection of either the Medicare or Medicaid EHR Incentive Program is directed to “EPs”, which are providers that are not qualified hospitals. Compare 75 Fed. Reg. at 44498 and 44499.

Hospital acknowledges that the purpose of the Medicaid share in the Medicaid EHR Incentive Program statute is to provide a measure of the volume of inpatient care a hospital furnishes to Medicaid patients. See 75 Fed. Reg. at 44498. Accordingly, section 1396b(t)(5)(C) ensures that no patients who have health care coverage through Medicare are counted for purposes of the Medicaid share. This is accomplished through the clause stating that the Medicaid share does not include individuals who are “described in section 1395ww(n)(2)(D)(i)”. §1396b(t)(5)(C). The individuals described in section 1395ww(n)(2)(D)(i) are those “with respect to whom payment may be made under [Medicare] Part A” or “enrolled with a Medicare Advantage organization under [Medicare] Part C.” §1395ww(n)(2)(D)(i)(1)&(2). Thus, the individuals described in the Medicare statutes do not factor into the incentive payment calculation under the Medicaid statute. Pet. Supp. Br. at 3.

Hospital concludes that the purpose of section 1396b(t)(5)(C)’s cross-reference to the language in the Medicare EHR Incentive Payment Program statute is to ensure that only Medicaid patients, and not Medicare patients, factor into the Medicaid payment calculation. As a result of the fact that Medicare patients are carved out of the calculation of the Medicaid share of the Medicaid EHR Incentive Payment Program calculation, there is no risk of the kind of duplicative counting even when unpaid Medicaid days are included. Pet. Supp. Br. at 3.

The court agrees. For purposes of section 1396b(t)(5)(C)’s phrase “the number of inpatient-bed-days...attributable to individuals who are receiving medical assistance under [Medicaid]”, Cabel and Becerra stand for the proposition that a beneficiary’s eligibility for Medicaid services must be distinguished from entitlement to those services.[7] Individuals entitled to such benefits are all those who qualify for the program regardless of whether they are receiving Medicaid payments for an entire hospital stay. Thus, section 1396b(t)(5)(C)’s reference to patients “receiving medical assistance” from the Medicaid program is a reference to patients who qualify, and are eligible for, Medicaid generally. It does not refer to a particular service such as hospital inpatient services.

Thus, DHCS is incorrect in arguing that section 1396b(t)(5)(C)’s phrase “attributable to individuals who are receiving medical assistance” is a prohibition on duplicative Medicare and Medicaid EHR incentive payments and is inconsistent with counting both paid and unpaid bed days. Cabel and Becerra show that the mere fact that a service is not covered (unpaid bed day) does not mean that the individual is not receiving medical assistance under Medicaid. The individual may be receiving Medicaid assistance and not have a covered bed day. Section 1396b(t)(5)(C)’s reference to inpatient-bed-days attributable to individuals who are receiving medical assistance under Medicaid is not a prohibition on double counting.

DHCS argues that Hospital’s interpretation ignores section 1396b(t)(5)(C)’s parenthetical that “the number of inpatient-bed-days” will be “established by the Secretary.” DHCS further argues that Hospital’s interpretation is inconsistent with the intent and objective of the EHR Incentive Program. Opp. at 13, 17.

Hospital responds that the parenthetical’s direction that the Secretary define what is an “inpatient bed day” is a separate issue from whether a patient is “receiving medical assistance under” Medicaid. The parenthetical “established by the Secretary” does not plainly indicate that the Secretary shall establish what is an “inpatient-bed-day” for purposes of the EHR payment calculation. Rather, the parenthetical only directs the Secretary to define what constitutes an “inpatient-bed-day”. Hospital notes that the Secretary’s authority to define what an inpatient-bed-day is not a subject of dispute.[8] Reply at 5-6.

Hospital contends that the purpose of the “inpatient bed day” language is to ensure that only days associated with hospital care are included in the incentive payment calculation, as opposed to lower levels of care like outpatient services. See Becerra, 142 S.Ct. at 2365 (“If Congress ‘does not alter the fundamental[s]’ of a statutory scheme ‘in vague terms or ancillary provisions,’ then it ordinarily does not do so in parentheticals either.”) (citations omitted). Pet. Supp. Br. at 4.

Despite Hospital’s argument, the parenthetical in section 1396b(t)(5)(C) may entitle the Secretary to determine the number of inpatient-bed-days attributable to individuals who are receiving medical assistance under Medicaid. The court acknowledges, however, that the proper grammar for that interpretation would be for the parenthetical to come at the end of the statute: “the number of in-patient-bed-days which are attributable to individuals who are receiving medical assistance under [Medicaid] (as established by the Secretary)”.

Analysis of this issue requires a deeper dive into the language of sections 1395ww(n)(2)(D) and 1396b(t)(5)(C). Section 1396b(t)(5)(C) requires that “[t]he Medicaid share…shall be calculated “in the same manner as the Medicare share” except that the numerator shall substitute the number of inpatient-bed-days (as established by the Secretary) which are attributable to individuals who are receiving medical assistance under Medicaid.

Section 1395ww(n)(2)(D) states that for the Medicare EHR Incentive Program the numerator of the fraction for Medicare share shall be the sum of (I) the estimated number of inpatient-bed-days (as established by the Secretary) which are attributable to individuals with respect to whom payment may be made under Part A; and (II) the estimated number of inpatient-bed-days (as so established) which are attributable to individuals who are enrolled with a Medicare Advantage organization under part C....” Thus, the numerator of the Medicare share fraction requires the Secretary to estimate the inpatient-bed-days of Medicare-covered individuals. That estimate should be for paid bed days only; it does not seem likely that the Secretary would estimate unpaid inpatient-bed-days for this numerator fraction. Moreover, the parties do not dispute that there is no Medicaid EHR Incentive Program payment for unpaid bed days. See AR 4. Thus, section 1395ww(n)(2)(D) expressly requires the Secretary – in a parenthetical -- to establish the estimated number of inpatient-bed-days, and the Secretary has done so by excluding unpaid bed days.

Section 1396b(t)(5)(C) requires that the Medicaid share be calculated in the same manner as the Medicare share, except that the numerator shall substitute the number of inpatient-bed-days – again as established by the Secretary – attributable to Medicaid recipients. The reference to the Secretary establishing the number of inpatient-bed-days reasonably can be interpreted to mean that the Secretary shall establish estimated bed days just as must be done for the Medicare statute. If so, the estimated bed days should not include unpaid days. Even if this interpretation is not a plain meaning, at a minimum the statute is ambiguous. In the words of Becerra, the statutory meaning “does not exactly leap off the page” and “must be read by judges with the minds of the specialists.”

The Secretary is that specialist. She, through CMS,[9] has adopted regulations which exclude unpaid bed days from the calculation. The regulations state that the calculation of a hospital’s Medicaid share for the Medicaid EHR Incentive Payment statute is equal to a fraction in which the numerator is the sum (for a 12-month period) of “(A) the estimated number of acute-care inpatient-bed-days which are attributable to Medicaid individuals, and (B) “the estimated number of acute-care inpatient-bed-days which are attributable to individuals enrolled in a managed care organization, a pre-paid inpatient health plan, or a pre-paid ambulatory health plan.” 42 C.F.R. §495.310(g)(2)(i) (emphasis added). By referring to estimates, CMS meant that the Secretary would include only paid bed days in the estimate.

Thus, the Secretary has interpreted the ambiguous section 1396b(t)(5)(C) not to include unpaid bed days in the Medicaid share. As DCFS argues, when a statute provides the Secretary with authority to act, courts will defer to the Secretary’s interpretation of the statute unless it is arbitrary and capricious. See Atkins v. Rivera, (1986) 477 U.S. 154, 158, 162 (phrase “except to the extent prescribed by the Secretary” entitled Secretary to impose period to compute income); Schweiker v. Gray Panthers, (1981) 453 U.S. 34, 44 (phrase “as determined in accordance with standards prescribed by the Secretary” was delegation of substantive authority and the Secretary’s definition had not just weight, but legislative effect).

CMS’s guidance confirms that both the statute and regulation should be interpreted to exclude unpaid bed days from the Medicaid share.

The Chief ALJ concluded that that excluding unpaid Medicaid days from the Medicaid EHR Incentive Program payment calculation is supported by the Secretary’s Preamble which instructed that the EHR Program “requires the inclusion of only paid inpatient-bed days.” AR 9-12.

When an agency promulgates a final rule, it must “incorporate in the rules adopted a concise general statement of their basis and purpose, 5 U.S.C. §553(c), a statement commonly known as the preamble. Based on this congressional command, ‘it does not make sense to interpret the text of a regulation independently from its’ preamble.” Halo v. Yale Health Plan, Director of Benefits & Records Yale University, (2d Cir. 2016) 819 F.3d 42, 52. Thus, courts recognize that the preamble “is evidence of an agency's contemporaneous understanding of its proposed rules” and “may aid in achieving a ‘general understanding’ of the statute.” Wyoming Outdoor Council v. U.S. Forest Service, (D.C. Cir. 1999) 165 F.3d 43, 53.) Opp. at 15-16, n. 3.

On July 28, 2010, after the notice and comment period was complete, the Secretary, through CMS, issued the Final Rule implementing the HITECH Act. In the Preamble, CMS responded to a question whether the criteria for determining Medicaid eligible days in the Medicaid EHR Program differs from the DSH Program, which reimburses hospitals for their disproportionate share of uninsured Medicaid cost. 75 Fed. Reg. at 44500. CMS made the following response: “The criteria for determining Medicaid eligible days and Medicaid managed care days for Medicare DSH and Medicaid managed care days for EHR Incentive Program payments are not the same. Medicare DSH includes unpaid days, while the EHR Incentive Program payment calculation requires the inclusion of only inpatient-bed days.” Id. (emphasis added).

As DHCS argues (Opp. at 15-16), the Preamble is significant for discerning Congress’s intent in section 1396b(t)(5)(C). Deference to administrative implementation is required when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law and the agency interpretation was promulgated in the exercise of that authority. United States v. Mead Corp., (2001) 533 U.S. 218, 226–27. Courts “look to the preamble ... to which ‘deference is ... clearly in order.’” Fidelity Federal Sav. and Loan Ass'n v. de la Cuesta, (1982) 458 U.S. 141, 158 (ambiguity was dispelled by the preamble accompanying and explaining the regulation); see also United States v. United Healthcare Insurance Company, (9th Cir. 2016) 848 F.3d 1161, 1177 (“the statements CMS made in the preamble...merit deference...because they represent the agency's interpretation of its own regulation” and “represent[] the agency's considered judgment after notice and comment”). Even if “a preamble is not binding[,] statements of purpose in a statute’s preamble can be illuminating if a statute is ambiguous.” Briggs v. Eden Council for Hope & Opportunity, (1999) 19 Cal.4th 1106, 1118.

Hospital argues that the Preamble’s language does not clearly address the unpaid days issue. The Preamble indicates only that paid “Medicaid managed care days” are included in the EHR payment calculation. This is significant because Medicaid managed care days differ from Medicaid fee-for-service days, and they are discussed in separate sub-sections of the Medicaid EHR payment regulation. See 42 C.F.R. § 495.310(g)(2)(i)(A) & (B). Pet. Op. Br. at 12-13.

The court does not agree. It is true that CMS stated that the criteria for determining both Medicaid eligible days and Medicaid managed care days for Medicare DSH are not the same as Medicaid managed care days for EHR Incentive Program payments. However, CMS also clearly stated that Medicare DSH includes unpaid bed days whereas the Medicaid EHR Incentive Program payment calculation requires the inclusion of only inpatient-bed days. CMS’s Preamble is not binding. But it clarifies, to the extent necessary, that 42 C.F.R. section 495.310(g)(2)(i)’s reference to “estimates” means that the Secretary will include only paid bed days in the estimate.

Hospital further contends that, if the Preamble excludes unpaid days from the Medicaid EHR payment calculation, it cannot be relied upon as an extrinsic aid to contradict the plain language of the regulation. “[A] preamble does not create law; that is what a regulation’s text is for....[W]hen the preamble to [a] rulemaking is inconsistent with the plain language of the regulation, it is invalid.” Texas Children’s Hospital v. Burwell, (D.D.C. 2014) 76 F.Supp.3d 224, 237. Pet. Op. Br. at 13, n. 2.

This is true, but the Preamble only states more clearly what is set forth in 42 C.F.R. section 495.310(g)(2): the EHR Incentive Program payment calculation requires the inclusion of only paid inpatient-bed days.

In October 2012, CMS issued FAQ 7649 (“FAQ”) reiterating the exclusion of unpaid bed days. AR 1495. The FAQ explained that “Section 1903(t)(5)(C) of the Act[10] requires the Medicaid share to be calculated ‘in the same manner as the Medicare share.’ In all ways possible, the Medicaid hospital incentive calculation is similar to Medicare….Per the cost report instructions, all acute inpatient days must be paid….Medicare does not include unpaid days as acute inpatient days, so following the same manner for Medicaid means using only paid days as well.” AR 1495. “By using only paid inpatient Medicaid days, the Secretary has ‘established’ how she counts the number of inpatient bed days per statutory authority.” AR 1495.

Hospital notes that the FAQ was made public in October 2012, years after section 1396b(t)(5)(C) was enacted and after many hospitals, including Hospital, submitted their Medicaid EHR payment Year 1 attestations. See AR 93. An after-the-fact agency gloss on legislation cannot be viewed as an indicator of legislative intent. Pet. Op. Br. at 13.

DHCS argues that the FAQ is an interpretive rule derived from the 2010 Final Rule. “Interpretative rules are those that clarify a statutory....term, remind parties of existing statutory duties...and explain something the statute...already required.” Mendoza v. Perez, (D.C. Cir. 2014) 754 F.3d 1002, 1021. The FAQ is valid because the notice-and-comment requirement does not apply to interpretative rules. Perez v. Mortgage Bankers Ass'n, (2015) 575 U.S. 92, 96.

The court agrees that the FAQ is not legislative history for section 1396b(t)(5)(C). But it is interpretive guidance for the statute. Since it is consistent with 42 C.F.R. § 495.310(g)(2)(i)(A) & (B), it does not create a legal standard beyond the plain language of the enabling statute that is required to be adopted through a formal notice and comment process consistent with the federal Administrative Procedure Act (“APA”). See, e.g., Children’s Hosp. of the King’s Daughters, Inc. v. Azar, (4th Cir. 2018) 896 F.3d 615, 620-21. Pet. Op. Br. at 13, n. 2.

Section 1396b(t)(5)(C) is ambiguous and CMS has interpreted the statute to mean that unpaid inpatient-bed-days are not included in the Medicaid share for purposes of the Medicaid EHR Incentive Program. CMS has done so in 42 C.F.R. section 495.310(g)(2)(i), the Preamble, and the FAQ. Hospital does not challenge the regulation and the court defers to CMS in concluding that unpaid bed days are not included in the Medicaid Incentive Program payment.

The Petition is denied. DHCS’s counsel is ordered to prepare a proposed judgment, serve it on Hospital’s counsel for approval as to form, wait ten days after service for any objections, meet and confer if there are objections, and then submit the proposed judgment along with a declaration stating the existence/non-existence of any unresolved objections. An OSC re: judgment is set for November 29, 2022 at 1:30 p.m.

[1] The Secretary defines “inpatient bed days” as only paid bed days and excludes unpaid bed days from consideration for EHR incentive payment calculations. 75 Fed. Reg. 44498, 44500 (July 28, 2010).

[2] 42 U.S.C. section 1396b(t)(5)(C) provides:

[3] Reference to the Chief ALJ’s findings do not prove the underlying fact, but the citations reflect undisputed facts.

[4] Hospital notes that DHCS seeks to bolster the lack of prejudice by noting that Hospital and purchased and implemented an EHR system well before the Medicaid EHR Incentive Program was created. Therefore, according to DHCS, Hospital “cannot claim that it adopted, implemented or upgraded its existing EHR system in reliance on receiving the EHR incentive payments in question.” Opp. at 20, n. 4. Hospital argues that DCHS misunderstands the purpose of the EHR Incentive Program, which is not to reimburse a hospital for purchasing an EHR system, but to serve as an incentive to use EHR technology. See 75 Fed. Reg. 44314, 4480 (July 28, 2010). Reply at 9.

The court agrees. The Medicaid EHR Incentive Program is an incentive program, not a reimbursement program. Therefore, it is irrelevant when Hospital purchased its EHR technology.

[5] The denominators for calculating the Medicare share under section 1395ww(n)(2)(D) and for the Medicaid share under section 1396(t)(5)(C) are the same and are not in dispute. See Resp. Supp. Br. at 5, n. 2.

[6] “Medical assistance” is defined as the “payment of part or all of the cost of the . . . care and services or the care and services themselves, or both,” as specified in Section 1396d, including “any other medical care, and any other type of remedial care recognized under State law, specified by the Secretary.” 42 U.S.C. §1396d(a)(30).

[7] Becerra conceptually complicates matters further by stating that the Medicaid statutes consistently use the word “eligible” and the Medicare statutes consistently use the order “entitled”, but the statutes use them in the same way. 142 S.Ct. 2354. at 2368.

[8] The determination of what is an inpatient bed day involves the distinction between inpatient and outpatient hospital care. See, e.g. Centers for Medicare Services, “Are You a Hospital Inpatient or Outpatient”, https://www.medicare.gov/sites/default/files/2018-09/11435-Are-You-an-Inpatient-or-Outpatient.pdf. Reply at 6, n. 2.

[9] CMS is the federal agency responsible for Medicaid, and the Secretary oversees the work of CMS.” Mission Hospital Regional Medical Center v. Shewry, (2008) 168 Cal.App.4th 460, 493, n. 2. For ease of discussion, courts often refer to these entities collectively as the Secretary. Ibid.

[10] Section 1903(t)(5)(C) was codified at 42 U.S.C. section 1396b(t)(5)(C).