Judge: James C. Chalfant, Case: 22STCP00618, Date: 2022-10-25 Tentative Ruling

Case Number: 22STCP00618    Hearing Date: October 25, 2022    Dept: 85

            C. Governing Law

            1. Medicaid/Medi-Cal

            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 has been approved by CMS, and the Legislature enacted the Medi-Cal program (Welfare and Institutions Code[4] section 14000 et seq.) to implement Medicaid and provides for medical assistance to certain low-income persons.  Orthopaedic Hospital v. Belshe, (9th Cir. 1997) 103 F.3d 1491, 1493. 

DHCS is the state agency charged with administration of the Medi-Cal program.  §§ 14063, 10721, 10740; 22 Cal. Code Regs. (“CCR”) §50004.  DHCS’s regulations in 22 CCR implement and interpret the laws it enforces and also prescribe policies for administration of the Medi-Cal program.  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.

            2. Provider Enrollment

            “In order to ensure the proper and efficient administration of the Medi-Cal program, every applicant...and every provider...shall be subject to the requirements of this article [entitled “Provider Enrollment”].  §14043.

            A “provider” is an “individual...that provides services, goods, supplies, or merchandise, directly or indirectly, to a Medi-Cal beneficiary and has been enrolled in the Medi-Cal program.”  §14043.1(o).

"Enrolled or enrollment in the Medi-Cal progra means authorized under any processes by the Department or its agents or contractors to receive, directly or indirectly, reimbursement for the provision of services, goods, supplies, or merchandise to a Medi-Cal beneficiary.  22 CCR §51000.7. 

            "Provider Number" means the unique identification number used by an applicant or provider to obtain reimbursement from the Medi-Cal program.  22 CCR §51000.20. 

To obtain reimbursement for services provided through Medi-Cal, a medical professional must enroll in the Medi-Cal program and receive a Medi-Cal “provider number” or “National Provider Identifier (NPI)”.  22 CCR §§ 51000.7, 51000.20. 

As voluntary participants, providers are subject to the statutory and regulatory conditions of the Medi-Cal program.   Cal. Assn. of Medical Products Suppliers v. Maxwell-Jolly, (2011) 199 Cal.App.4th 286, 309); Physicians & Surgeons Laboratories, Inc. v. Dep’t of Health Services, (1992) 6 Cal.App.4th 968, 984.  “In addition to any other statutory or regulatory conditions for participation in the Medi-Cal program...[a provider] shall meet the standard specified in...Section 51000.30 through 51000.55.”  22 CCR §51200(a).  “As a condition for enrollment...an applicant or provider...shall meet the Standards for Participation specified in [§14000 et seq. and 14200 et seq.], and Division 3, Title 22 California Code of Regulations....”  22 CCR §51000.30(a).  Payments for benefits under the Medi-Cal Program can be made only to providers who meet the Standards for Participation.  22 CCR §51501(b). 

In meeting the Standards for Participation, a provider shall submit a completed application package to DHCS when there is a change of ownership.  22 CCR §51000.30(a), (b).  

With inapplicable exceptions, a currently enrolled provider who is “not currently enrolled at a location where the provider intends to provide services, goods, supplies, or merchandise to a Medi-Cal beneficiary, shall submit a complete application package for...enrollment at a new location or a change in location.”  §14043.26(a)(1); Mednik v. State Dept. of Health Care Services, (2009) 175 Cal.App.4th 631, 636.  With an inapplicable exception, a provider currently enrolled in the Medi-Cal program who has submitted an application package for enrollment at a new location may submit claims for services, goods, supplies, or merchandise rendered at the new location until the application package is approved or denied.  §14043.26(k); 22 CCR §51000.30.  The provider shall be considered during that period to have been granted provisional provider status.  Id.  However, if a provider submits claims for services rendered at a new location before the application for that location is received by DHCS, the Department may deny the claim.  Id.

When a provider submits an application for enrollment of an additional location or for a change in ownership, the Department shall grant provisional provider status for a period of 12 months.  22CCR §51000.51(a).  When such a provider begins billing for services provided at an additional location using their existing provider number, the provider shall be considered to be on provisional provider status.  22 CCR §51000.51(b).

A provider shall not bill or submit claims for or on behalf of another provider who has been suspended from the Medi-Cal program, or for any services rendered in whole or in part by the suspended provider.  22 CCR §51484.

            The National Drug Code (“NDC”) of the package from which the drug is dispensed shall be used when billing Medi-Cal.  22 CCR §51513(a)(2).

            3. Recordkeeping Duties of Medi-Cal Providers

            Notwithstanding any other provision of law, every primary supplier of pharmaceuticals shall maintain accounting records to demonstrate the manufacture, assembly, purchase, or acquisition and subsequent sale, of any pharmaceuticals.  The accounting records shall include inventory records, purchase and sale journals and invoices, prescription records, bills of lading and delivery records.  §14170.8(a).  The accounting records shall be subject to audit and shall be maintained for three years from the date of sale or the date of service.  §14170.8(b).

Each provider of health care services rendered under the Medi-Cal program, or any other health care program administered by the Department or its agents or contractors, shall keep and maintain records of each service rendered under such program, the beneficiary or person to whom rendered, the date the service was rendered, and any additional information as the department may by regulation require.  §14124.1

Records required to be kept and maintained under this section shall be retained by the provider for a period of ten years from the final date of the contract period between the plan and the provider, from the date of completion of any audit, or from the date the service was rendered, whichever is later, in accordance with 42 C.F.R. section 438.3(u).  §14124.1.

Prior to 2018, section14124.1 only required providers to keep such records for three years.  In 2018, section 14124.1 was amended to extend the record retention period to ten years, consistent with the federal requirement that managed care and other health plans retain records for ten years.  Thus, as of January 1, 2018, all Medi-Cal providers are obligated to keep records of services rendered, including purchase invoices, dating as early as January 1, 2015.  AR 21.  From that date forward, all records of services rendered became subject to the ten-year retention period of section 14124.1.  AR 21.

            22 CCR section 51476 states in pertinent part:

“(a) Each provider shall keep, maintain, and have readily retrievable, such records as are necessary to fully disclose the type and extent of services provided to a Medi-Cal beneficiary.  Required records shall be made at or near the time at which the services are rendered.  Such records shall include, but not be limited to the following:

…

(5) Copies of original purchase invoices for medication...and drugs ordered for or supplied to beneficiaries.

(6) Copies of all remittance advices which accompany reimbursement to providers for services or supplies provided to beneficiaries.

(g) A provider shall make available, during regular business hours, all pertinent financial books and all records concerning the provision of health care services to a Medi-Cal beneficiary, and all records required to be made and retained by this section, to any duly authorized representative of the Department acting in the scope and course of employment . . . Failure to produce records may result in sanctions, audit adjustments, or recovery of overpayments, in accordance with Section 51458.1 of this title.”

4. Medi-Cal Audits

DHCS’s post-payment audits of Medi-Cal providers are required under both federal and state law.  §14170(a)(1); 42 C.F.R. §§ 447.45(f)(2), 456.3. 

To monitor compliance with Medi-Cal law, the Department is authorized to examine a provider’s books and records.  §14124.2.  The Department’s Audit & Investigations unit (“A&I”) is responsible for auditing the amounts paid for services provided to Medi-Cal beneficiaries to ensure that the amounts claimed are reimbursable under the applicable statutes and regulations.  §14170.  It can conduct such post-service audits either before or after the claim is paid.  §14133(b)-(c).

            During its on-site reviews of pharmaceutical providers, the Department may review the records of the provider related to the provision of Medi-Cal services to determine compliance with Medi-Cal statutes and regulations.  22 CCR §51488(a).  The Department may consider whether the Medi-Cal program was inappropriately charged in deciding that a provider has received an overpayment.  22 CCR §51488(a)(4). 

            DHCS shall recover overpayments to providers including, but not limited to, payments determined to be:...(3) for services not documented in the provider's records, or for services where the provider's documentation justifies only a lower level of payment; (4) based upon false or incorrect claims or cost reports from providers;...(6) for services prescribed, ordered or rendered by persons who did not meet the standards for participation in the Medi-Cal program at the time the services were prescribed, ordered or rendered; (7) for services not covered by the program, and ...(13) in violation of any other Medi-Cal regulation where overpayment has occurred.  22 CCR §51458.1.

            An overpayment violation occurs when a provider bills or submits a claim for or on behalf of any provider who has been suspended from participation in the California Medical Assistance Program, for any services rendered in whole or in part by any such suspended provider during the term of such suspension.  22 CCR §51484.

            DHCS shall recover overpayments from pharmaceutical providers at a 100% rate when (1) the services were not provided...and (7) the provider submits or causes to be submitted any false or misleading statement of material fact on or in connection with any claim which results in reimbursement for ingredient costs and professional fees.  22 CCR §51488.1(a).  When the quantity of drug billed is larger than the quantity of drug dispensed, the difference in the allowable cost between the quantity paid and quantity dispensed shall be recovered.  22 CCR §51488.1(a)(9).  Notwithstanding the provisions of subparagraph (a), where services have been rendered, mitigating or ameliorating facts and circumstances will be considered in determining the audit findings.  22 CCR §51488.1(b).

            Recovery shall be made for services not in conformance with new program requirements only when there has been notice of such requirements in Department bulletins or fiscal intermediary mailings.  22 CCR §51488.1(c).  All previously published Department bulletins and fiscal intermediary mailings, mailed to providers prior to the operative date of this section shall remain in effect until amended or withdrawn by the Department.  22 CCR §51488.1(c).

Each provider is required to keep records necessary to fully disclose the type and extent of services provided to a Medi-Cal beneficiary.  22 CCR §51476(a).  These records include medications prescribed, ordered for, or furnished to beneficiaries, and copies of the original purchase invoices for such medications.  Ibid.  The records must include information of each service rendered under the program, the beneficiary to whom the service was rendered, and the date the service was provided.  §14124.1.  Providers must keep such records for a period of ten years from the final date of the date of completion of any audit or from the date the service was rendered, whichever is later. §14124.1.  Failure to produce records may result in sanctions, audit adjustments, or recovery of overpayments, in accordance with Section 51458.1 of this title.  22 CCR §51476(g).

 “The Department shall recover overpayments to providers determined to be…(3) For services not documented in the provider’s records, or for services where the provider’s documentation justifies only a lower level of payment…(13) In violation of any other Medi-Cal regulation where overpayment has occurred.”  22 CCR §51458.1(a).

The Department’s final decision on an audit shall be reviewable in accordance with CCP section 1094.5. §14171(j).

            C. Statement of Facts

            1. Background

            Yoo is the owner of PCH.  AR 12.[5]  Young Kyung Cho (“Cho”) was the owner of Wellness Pharmacy, Inc. dba Midway Midway and Bell Gardens.  AR 11. 

On November 23, 2011, following a California Department of Justice investigation, DHCS temporarily suspended Midway and Bell Gardens and deactivated their provider number and NPI numbers.  AR 11, 1468, 1475.  This meant that neither Midway nor Bell Gardens could participate in Medi-Cal directly (i.e., they were prohibited from billing for or providing services to Medi-Cal recipients) or indirectly (i.e., they were prohibited from using another provider to bill DHCS on their behalf).  AR 11-12.

            On April 22, 2015, Yoo asked his attorney whether he could use PCH’s NPI number to bill for Medi-Cal prescriptions filled at Midway and Bell Gardens if he bought them.  AR 1214.  Yoo’s attorney informed him that he would need to file with the Board of Pharmacy (“Board”) Change of Ownership (“CHOW”) applications for the pharmacies if he wished the purchase them.  AR 1212.  The purchase could not close until the Board issued new permits for the pharmacies under Yoo’s name.  AR 1212.  Once the Board reviewed the applications and was prepared to approve them, it could issue a six-month temporary permit to the new owner, effective on the date of closing.  AR 1212.  The attorney cautioned that the applications should be submitted ASAP because the Board is taking more than six months to process pharmacy applications.   AR 1212.

The attorney also informed Yoo that, for Medi-Cal, he needed to submit a new provider application to enroll each pharmacy in Medi-Cal before the sale closed.  AR 1212.  Yoo should identify on each application that he intends to bill for services at each of the new pharmacies with his existing provider number while the applications are pending.  AR 1212.  The attorney confirmed with a Medi-Cal employee that the latter was unaware of any restriction on a sole proprietor’s ability to bill for services at a new location using the provider’s existing Medi-Cal number.  AR 1212.  The Medi-Cal applications should be received by DHCS on or before the closing date.  AR 1212.  At the time, Yoo thought the sale would close on December 31, 2015.  Hearing Transcript (“HT”) III, 206.

            PCH began billing DHCS for Medi-Cal services provided at Midway starting June 23, 2015, and for services provided at Bell Gardens starting July 13, 2015.  AR 12.  

On March 7, 2016, PCH closed on the purchase of Midway and Bell Gardens.  AR 12, 1498.  On April 21, 2016, Yoo obtained NPI numbers for both pharmacies.  AR 9636, 9642.

            On August 30, 2016, DHCS added Wellness Midway and Wellness Bell to its Suspended and Ineligible Provider List.  AR 12. 

On August 31, 2016, Yoo submitted Medi-Cal pharmacy provider applications for both pharmacies.  AR 12-13, 1479, 1566.  Each application stated that Yoo intended to bill for Medi-Cal services through PCH’s NPI number until DHCS processed the application.  AR 1479, 1566.

            3. The Audit

            On January 1, 2019, Yoo sold both pharmacies to JYC Company, Inc (“JYC”).  AR 13.  On February 1, 2019, DHCS received the successor liability agreements for the pharmacies.  AR 514. 

On August 28, 2019, DHCS commenced an audit of Midway through an unannounced on-site visit.  AR 323.  The Department expanded its audit to include Bell Gardens on September 9, 2019, and to include PCH on October 10, 2019.  AR 323, 514. 

Lead auditor Jinyan Li (“Li”) performed an invoice reconciliation audit whereby she sought to confirm that all three pharmacies purchased the drugs that were needed for dispensation to the Medi-Cal beneficiaries claimed.  AR 323.  The invoice reconciliation period for Bell Gardens and Midway was for the period of August 31, 2016 through July 31, 2019.  AR 324.  The invoice reconciliation for PHC was for the period of January 1, 2015 through July 31, 2019.  AR 15, 324.

            Li’s audit report explained that she first removed identified duplicate claim lines from PCH’s dispensing report.  AR 1463.  She traced PCH's payment data for the relevant period to its dispensing report.  AR 1463.  She checked any missing claims from the report against dispensing reports for Midway and Bell Gardens.  AR 1463.   She used PCH’s payment data against the CDRs for Midway and Bell Gardens to determine which of PCH's Medi-Cal claims were billed out of those two pharmacies, and she found none in 2015.  AR 1463.  She then moved PCH’s Medi-Cal claims billed out of Midway and Bell Gardens to the appropriate pharmacy’s CDR for reconciliation purposes for the service period from August 31, 2016 to July 31, 2019.  AR 1463.

            Li found 83 duplicated claim lines for 41 claims on the PCH report that were not dispensed during the relevant service period, so she deleted them.  AR 1463.  The audit did not reveal any NDC discrepancies in PCH’s dispensing report.  AR 1463.  PCH’s payment data included (1) $24,658.41 in paid Medi-Cal claims from Midway’s dispensing report in 2015, (2) $3,657,041.63 in paid Medi-Cal claims from Midway’s dispensing report in 2016-2019, (3) $250.56 in claims from Bell Garden’s dispensing report in 2015, and (4) $1,575,144.31 in paid Medi-Cal claims from Bell Garden’s dispensing report in 2016-2019.  AR 1464.

            Although Li found 184 claims in PCH's payment data were not in the dispensing reports based on some identifiers, they appeared under another combination of such identifiers and the claims were allowed.  AR 1464.

            4. Demand Letter

            On March 12, 2020, DHCS sent a letter to Yoo demanding the return of $2,045,350 in Medi-Cal overpayments.  AR 1413-14.  This amount included $253,801 based on a finding that PCH did not purchase enough inventory for 64 out of 100 drugs to fulfill the Medi-Cal claims for that period.  AR 1413-14.  For example, the auditors calculated a 686-pill shortage of Abilify, which led to overpayment of $20,747, and $39,000 in overpayment for condoms.  AR 1420-21.  An overpayment amount of $1,791,323 was for 5,184 Medi-Cal payments to Midway and Bell Gardens during their temporary suspension and before DHCS received PCH’s Medi-Cal applications for those pharmacies.  AR 1414.

            5. The Appeal

Yoo appealed to DHCS’s Office of Administrative Hearings and Appeals.  The appeal was heard by ALJ Lewis Munoz.  AR 48.

Yoo challenged the demand for repayment and the associated audit findings on the grounds that (1) the recovery of any alleged overpayment made prior to March 12, 2017 (three years before the March 12, 2020 demand letter) is barred by the doctrine of laches, and (2) the audit findings regarding PCH’s “inappropriate billing practices” and “inventory shortage” are not supported by the law or the facts. 

In its pre-hearing brief, DHCS explained that its typical methodology is to credit providers either with beginning or ending inventory.  AR 545.  Because PCH did not provide evidence of its beginning inventory, DHCS had to use the ending inventory.  AR 545.  DHCS also asserted that Yoo’s laches argument should fail because it warned PCH October 10, 2019 that it needed to provide records from January 1, 2015 thereafter, and both PCH and its suppliers provided files for that period.  AR 549. 

            6. Post-Trial Briefing

            In its post-hearing brief, DHCS stated that PCH did not submit the Medi-Cal CHOW applications for Midway and Bell Gardens until August 31, 2016.  AR 322.  The applications were approved on October 27, 2017, retroactive to August 31, 2016, meaning that PCH’s NPI could be used to bill DHCS for services provided at those locations as of that date.  AR 322.  The audit revealed 5,184 Medi-Cal paid claims of $1,791,322.75 for drugs dispensed through Midway and Bell Gardens from January 2015 through August 2016, while their temporary suspension was in effect and before DHCS received the CHOW applications from PCH.  AR 323. 

The audit also assessed $253,801 in overpayment because the pharmacies could not have had sufficient inventory for 64 of 100 drugs examined.  AR 324.  The audit identified 17,944 claims that missing from PCH's dispensing report compared to Medi-Cal payments, most of which were contained in dispensing reports from the Midway and Bell Gardens pharmacies.  AR 200-201, 329.  PCH’s dispensing report was accurate and it did not dispense the drugs for the missing paid claims.  AR 329.  Instead, PCH billed the Department for claims dispensed at Midway and Bell Gardens before PCH bought those two pharmacies in March 2016.  AR 329.

            DHCS also addressed PCH’s argument that it dispensed drugs at Midway and Bell Gardens from March 2016 through August 30, 2016 under its own brand and with trained staff.  AR 332.  While this was true, it did not waive PCH’s duty to submit new provider applications for each pharmacy.  Yoo’s 2015 emails with his attorney and his 30 years of Medi-Cal experience demonstrate that he knew that.  AR 332.

            PCH’s post-hearing brief observed that, although the audit assessed $253,801 in overpayment for insufficient inventory, DHCS now claimed $252,734.  AR 272.  PCH cited The Matter of: HealTherapy, Inc., (“HealTherapy”) (2015) Audit Appeal No.: MHP15-0615-891-PF. and its holding that CCP section 338’s three-year limitations period may at times function as a guide for the period by which the agency must initiate recoupment or offset under the doctrine of laches.  AR 269.  HealTherapy applied the precedent of Fountain Valley Reg'r Hosp. and Med. Ctr. v. Banta, (“Fountain Valley”) (1999) 75 Cal.App.4th 316, despite DHCS’s argument that delayed revisions of final reimbursement were different from recovery following an overpayment audit.  AR 269-70.[6]

            In its reply, DHCS asserted that when PCH submitted claims for Midway and Bell Gardens under its license number before the purchase or the CHOW applications, it falsely represented that PCH was dispensing those drugs from its own location.  AR 206.  This was a false statement of material fact that permitted the Department to recovery payment where Medi-Cal was inappropriately charged.  AR 206.  Li did not confirm whether Midway and Bell Gardens in fact dispensed drugs for the claims PCH filed under its own name because that was outside the audit’s scope.  AR 208.  DHCS reiterated that although Yoo knew he needed to file new Medi-Cal applications for the pharmacies, he waited until the end of August 2016 to do so.   AR 208.

            With respect to the insufficient inventory to fill orders, PCH’s argument that the DHCS did not provide enough detail about the unfilled orders misses the point.  AR 218.  The focus of the audit was not whether specific patients received the prescribed drugs, but whether PCH had the ability to fulfill all orders.  AR 219.  PCH just needed to show that it made sufficient purchases of those drugs to fill all orders, but it did do so.  AR 218. 

7. The Decision

            On December 16, 2021, the ALJ issued a proposed decision for PCH’s appeal.  AR 8-48.  At issue was whether DHCS’s demands for repayment were proper based on (1) the audit findings related to the invoice reconciliations for Midway, Bell Gardens, and PCH, and (2) the audit finding that PCH did not inform Medi-Cal when it bought Midway and Bell Gardens on March 7, 2016.  AR 12.  Beginning June 23, 2015, before the acquisition and while Midway and Bell Gardens were suspended, PCH used its NPI number to disburse drugs to Medi-Cal beneficiaries from those locations.  AR 12.  PCH first informed DHCS it would use its NPI number for both pharmacies when it filed the CHOW applications on August 31, 2016.  AR 13. 

Li’s audit found that during the period of March 7, 2016 through August 30, 2016, PCH improperly billed for disbursements from Midway and Bell Gardens totaling $1,791,322.75.  AR 14-15.  Li also determined that Medi-Cal overpaid PCH by $253,801 for inventory shortages compared to claimed disbursements.  This number later was revised to $252,734.  AR 15-16.  The total overpayment was therefore $2,044,056.75.  AR 16.

            a. Inappropriate Billing Practices

            The ALJ noted that DHCS can recover overpayments for any payments that were made “based upon false or incorrect claims” or “[i]n violation of any other Medi-Cal regulation where overpayment has occurred.  22 CCR 51458.1(a)(4), (a)(13).  AR 24. 

A provider shall not bill on behalf of a provider who has been suspended.  22 CCR §51484.  The record established that PCH billed on behalf of suspended providers during the period of June 23, 2015 through March 5, 2016 (for Midway) and July 13, 2015 through March 5, 2016 (for Bell Gardens).  AR 26.  PCH did not dispense pharmaceuticals to beneficiaries; the suspended providers did.  AR 26.  This violated 22 CCR 51484.

Yoo did not enroll the newly purchased Midway and Bell Gardens into the Medi-Cal program until August 31, 2016.  AR 27.  PCH billed for the then unenrolled providers Midway and Bell Gardens from March 7 through August 31, 2016.  AR 27.  Per Bhatt v. Dept. of Health Services for the State of California, (“Bhatt”) (2005), 133 Cal .App.4th 923, 931-32, the law is clear that providers rendering services to Medi-Cal recipients must be enrolled as Medi-Cal providers.  AR 27. 

Yoo acknowledged that PCH’s billing for Midway and Bell Gardens when they were suspended was inappropriate.  AR 26.  Yoo did not think it was inappropriate for PHC to bill for disbursements after March 7, 2016 when he purchased those pharmacies.  AR 26-27. 

DHCS can recover an overpayment from PCH because it violated “other Medi-Cal regulations where an overpayment has occurred” -- namely (1) PCH billed on behalf of suspended providers which is prohibited by regulation and (2) PCH submitted “[f]alse or incorrect claims” for services rendered by persons (Midway and Bell Gardens) who did not meet the standards for participation in the Medi-Cal program at the time they provided services.  AR 27.

Li calculated the overpayment by comparing PCH’s dispensing report to Medi-Cal payment date to determine if there were any missing claims and if any Medi-Cal claims were paid for pharmaceuticals dispensed under a different NDC.  AR 27.  She discovered 59 claims for Midway and five claims for Bell Gardens dispensed during January 1, 2015 through March 6, 2016, before Yoo purchased those pharmacies.  AR 28.   Between March 6 and August 31, 2016, Li found 3347 claims for pharmaceuticals dispensed by Midway and 1773 claims for pharmaceuticals dispensed by Bell Gardens.  AR 28.  Li found that DHCS was entitled to recover a total overpayment of $1,791,322.75.  AR 28.  The ALJ concluded that DHCS had made a prima facie case.  AR 28.

            Yoo asserted that section 14043.26(k) permits the Department to deny a claim if a provider submits a claim at a new location before submitting an application for that location, but that provision does not require denial.  AR 28.  He argued that since the claim was not denied when it was submitted, the Department cannot revisit the issue.  AR 29.  The ALJ agreed with DHCS that this argument confuses its authority to deny a claim with its authority to recover overpayments for inappropriate billings.  AR 29.  Yoo presented no evidence that DHCS knew or acquiesced in PCH’s billing for pharmaceuticals dispensed at Midway or Bell Gardens before August 31, 2016.  AR 29.  DHCS’s auditor emphasized that it would have denied PCH’s claims for pharmaceuticals dispensed at these locations prior to August 31 if it had known.  AR 29.

            Yoo asserted that he had a mistaken belief he could bill for Medi-Cal services at those locations because he had a license from the Board to own and operate them.  AR 29-30.  The ALJ cited Yoo’s 30 years of experience and his attorney’s 2015 emails which informed Yoo that he needed to file a new provider application for each pharmacy as required by section 14043.26(a)(1).  AR 30.  As a result, Yoo’s claim that he was mistaken fails.  AR 30.

            Yoo cited 22 section 51488.1(b), which provides that, when a service has been rendered, mitigating fact or ameliorating facts and circumstances will be considered in determining the audit findings.  AR 30-31.  The ALJ found that 22 section 51488.1(b) did not apply because PCH billed for pharmaceuticals that it did not dispense; Midway and Bell Gardens did.  Thus, PCH cannot avail itself of this provision because it did not provide the services.  AR 31.  Moreover, the record did not establish any facts or circumstances in mitigation.  AR 31.

            b. Invoice Reconciliation

            22 CCR section 51476(a) requires all Medi-Cal providers to keep, maintain, and have readily retrievable records necessary to fully disclose the type and extent of services provided to a Medi-Cal beneficiary, including purchase orders for medication and drugs supplied to beneficiaries.  AR 31-32.  Section 14124.1 requires all providers to keep such records for ten years.  AR 32.  Li’s invoice reconciliation revealed shortages in PCH’s inventory for 64 of the 100 drugs reviewed by NDC, amounting to an overpayment of $252,734.  AR 32.  The purpose of her audit was to confirm that PCH had sufficient documentation of its inventory (purchase invoices and reports from licensed wholesale suppliers) to support its billings for payment by the Medi-Cal program.  AR 32. 

The record established the validity of the audit methodology, which compared the purchase history to the disbursement history during the relevant period.  AR 32.  The audit focused on the 100 NDCs for which PCH received the highest reimbursement.  AR 32.  PCH’s dispensing reports showed the drugs dispersed to both Medi-Cal and non-Medi-Cal patients.  AR 32.  PCH’s purchase history reports showed PCH’s purchases of drugs from wholesalers.  AR 32.  Li then reviewed the CDR and Frequency Distribution Report to determine the quantity of pharmaceuticals paid for by DHCS for each of the 100 NDCs.  AR 32-33. 

Li’s methodology determined the Medi-Cal percentage of drugs distributed to payors, multiplied the Medi-Cal percentage by the total quantity of drugs purchased to find the total Medi-Cal drugs that should be in the inventory, found a Medi-Cal inventory shortage by subtracting this number from the quantity billed by PCH to Medi-Cal, divided this shortage from the total quantity of drugs paid by Medi-Cal to obtain a percentage of Medi-Cal claims not supported by PCH’s purchases, and multiplied this percentage by the total amount Medi-Cal paid to calculate the overpayment.  AR 33-34.  The ALJ found that this evidence established a prima facie case of a $252,734 overpayment for 64 of the 100 NDCs reviewed.  AR 34.

PCH argued that DHCS’s findings were flawed because the Department cannot identify a single claim where a beneficiary did not receive a particular pharmaceutical.  AR 34.  DHCS told PCH that it was not feasible to identify the specific beneficiaries who did not receive the medication due to the inventory shortage given the number of claims involved in the audit.  AR 35.  PCH therefore argued a methodology that does not use a claim-by-claim review or probability sampling is an estimate for which it was entitled to some adjustment to account for a margin of error.  AR 35. 

The ALJ rejected this argument because the audit did not rely on a sample or an estimate; it used all data for the 100 NDCs during the relevant period to identify the precise number of units lacking from PCH’s inventory.  AR 36.  The ALJ noted that the invoice reconciliation was not intended to determine if a particular patient did not receive their pharmaceutical but rather to determine whether the records show that PCH purchased sufficient inventory to cover its billings and dispensations.  AR 36.

PCH also argued that the audit assumed that drug shortages are distributed between Medi-Cal and non-Medi-Cal patients on the same percentage that drugs were distributed to payors/beneficiaries.  AR 36.  Yet, there was no empirical evidence for this assumption and a DHCS auditor (Mr. Yaghmour) simply testified that this is a fair way of recovering an overpayment because PCH had a high Medi-Cal utilization rate.  AR 37.  PCH argued that some adjustment was necessary for error.  AR 37.  

The auditors responded that they took a Medi-Cal percentage of the shortage instead of concluding that all of the inventory shortage was for Medi-Cal dispensations.  AR 37.  The Department also pointed out that PCH failed to present any evidence of error that required adjustment.  AR 38.  The ALJ agreed, again relying on the purpose of the audit to determine whether PCH purchased sufficient inventory to cover its billings and dispensations.  AR 38.

PCH also believed the invoice reconciliation methodology was flawed because the auditors insisted that the pharmaceuticals counted on the purchase records must match the complete NDC on the bills.  AR 38-39.  Yet, the last two digits of the NDC pertains only to the packaging of the drugs and Yoo testified that his pharmacists were unconcerned with package size.  AR 39-40. 

The ALJ rejected this argument, noting that the correct NDC is crucial to a Medi-Cal pharmacist’s billing practices and is mandated by 22 CCR section 51513(a)(2).  AR 39.  An incorrect NDC impacts DHCS’s ability to obtain a federal share and can result in patients receiving an incorrect drug or dosage, and PCH’s haphazard practice of filling a prescription using an NDC number different from the complete NDC number raises integrity issues and is a submission of a false and misleading statement entitling the Department to recover an overpayment for incorrectly billed NDCs under 22 section 51488.1(a)(7).  AR 40-41.

c. Laches

            The ALJ addressed PCH’s attempt to establish the doctrine of laches through equitable borrowing as discussed in Fountain Valley, supra, 75 Cal.App.4th.  AR 42.  The facts of Fountain Valley did not present a similar situation to the instant case.  AR 44.  Fountain Valley concerned the revision of a final reimbursement settlement from a cost report nine years later whereas the audit in this case concerned PCH’s improper or unsupported billing practices.  AR 44.  Courts attempting to extend the borrowing rule have been routinely struck down.  See Fahmy v. Medical Board, (1995) 38 Cal.App.4^th 810, 817-18 (physician license revocation cannot borrow statute of limitations for medical malpractice).[7]  AR 44.

PCH failed to prove unreasonable delay.  The audits of the three pharmacies began in August through October 2019 and were completed in March 2020.  AR 45.  The audits covered claims beginning January 1, 2015, four and a half years from the date the audit began and just over five years before the demand letters.  AR 45.  PCH was obligated to retain the records for the audits for ten years and there was no unreasonable delay.  AR 45. 

Nor did PCH show prejudice because it and its third-party suppliers produced dispensing reports and some purchase records dating to 2015.  AR 46.  PCH relied on the COVID pandemic but failed to present any evidence how the pandemic affected its pharmacy business.  AR 46-47.  Moreover, any prejudice suffered by PCH was of its own making because it could not produce sufficient documentation to support its billings.  AR 47.  The ALJ denied the appeal.  AR 48.

            On December 29, 2021, the Chief ALJ adopted the ALJ’s proposed decision as DHCS’s final decision.  AR 7.

            E. Analysis

Petitioner Yoo (PCH) raises three issues: (1) DHCS’s recovery of overpayments is barred by laches; (2) PCH is not guilty of inappropriate billing; and (3) PCH is not guilty of an inventory shortage.

1. Laches

The CCP statutes of limitations relate only to actions or special proceedings in courts, not administrative acts and proceedings.  Little Company of Mary Hospital v. Belshe, (1997) 53 Cal.App.4th 325, 329; Robert F. Kennedy Medical Center v. Dept. of Health Services, (1998) 61 Cal.App.4th 1357, 1362.  There is no requirement in the Medi-Cal statutes or regulations requiring DHCS conduct post-payment, post-service audits within a particular period. 

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.  A claim by a public agency may be barred by the doctrine of laches if the requirements of unreasonable delay and resulting prejudice are met.  See Lent v. California Costal Comm’n, (“Lent”) (2021) 62 Cal. App. 5^th 812, 837-38; Malaga County Water District v. State Water Resources Board, (2020) 58 Cal.App.5th 447, 463; Robert F. Kennedy Medical Center v. Belshe, (1996) 13 Cal.4th 748, 760; The defense of laches applies to mandamus claims as well as other claims.  Schellinger Brothers v. City of Sebastopol, (2009) 179 Cal.App.4th 1245, 1267-68.  Laches has been applied specifically to DHCS 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.  The petitioner may demonstrate both elements with evidence in the administrative record.  Id. at 323-24.  Alternatively, “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.

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, the Department 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 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).

a. The Three-Year Statute of Limitations in CCP Section 338 May Not Be Borrowed in This Case

PCH contends that DHCS’s recovery of an inappropriate billing overpayment is barred by laches because unreasonable delay is established as a matter of law and DHCS has not justified the lengthy delay.  

According to PCH, DHCS boxed itself in by asserting that Medi-Cal mistakenly paid PCH prior to August 31, 2016 for drugs dispensed to Medi-Cal beneficiaries at Midway and Bell Gardens under section 14043.26(k) and demanding recovery of the mistaken payment/statutory liability of $1,791,323 for the first time on March 12, 2020.  AR 1413-21.  If DHCS had filed a civil lawsuit on March 12, 2020 instead of trying to recover the overpayment administratively, the lawsuit would have been barred by the three-year limitations period of CCP section 338(a) (statutory liability) and (d) (mistaken payment).  Because DHCS proceeded administratively, these limitations periods do not directly apply.  Yet, the circumstances are analogous, and the three-year limitations period should be borrowed to establish a reasonable recovery period under laches.  Pet. Op. Br. at 11-12; Reply at 7.

The ALJ addressed PCH’s attempt to rely on Fountain Valley’s equitable borrowing, concluding that the situations were not similar.  AR 42, 44.  Fountain Valley concerned the revision of a final reimbursement settlement from a cost report nine years later whereas the audit in this case concerned PCH’s improper or unsupported billing practices.  AR 44.  The ALJ noted that trial courts attempting to extend the borrowing rule after Fountain Valley have been routinely struck down.  See Fahmy v. Medical Board, (1995) 38 Cal.App.4^th 810, 817-18 (physician license revocation cannot borrow statute of limitations for medical malpractice).  AR 44.  The ALJ concluded that PCH was obligated to retain the records for the audits for ten years and there was no unreasonable delay.  AR 45. 

PCH describes the ALJ’s conclusion as a distinction without a difference.  While the facts might differ somewhat from Fountain Valley, the differences do not weaken the analogy.  Nor does the fact that in 2018 the Legislature imposed a ten-year record-retention requirement on Medi-Cal providers weaken the analogy to the three-year limitations period of CCP 338(a) and (d), as suggested by State DHCS.  AR 45.  Just because records must now be retained for ten years under section 14121.4 does not mean that DHCS can wait ten years to recover mistaken Medi-Cal payments and statutory liabilities.  Moreover, section 14170.8(b) still provides for a three-year Medi-Cal record-retention requirement for pharmacies.  The Legislature also has continued to impose a three-year statute of repose for Medi-Cal audits of cost reports under section 14170, deeming cost report and other data to be true and correct if not audited within three years.  Finally, the current version of Medi-Cal provider agreements continues to impose a three-year record retention requirement.  Pet. Op. Br. at 12 (citation omitted).

PCH notes that, under CCP section 338(a) the three-year limitations period runs from the date the statutory liability arises.  To the extent that section 14043.26(k) created a statutory liability for PCH billing for drugs dispensed at Midway and Bell Gardens between January 1, 2015, and August 30, 2016, a separate liability arose each time a claim was submitted.  Thus, DHCS was required to seek recovery three years after each claim between January 1, 2018 and August 30, 2019.  DHCS did not begin to seek recovery until March 12, 2020.   Pet. Op. Br. at 13.

CCP section 338(d), on the other hand, allows for a reasonable discovery period before a claim based on mistake accrues.  Actual discovery is not required; constructive notice triggers the running of the three years.  Bank of New York Mellon v. Citibank, N.A., (2017) 8 Cal.App.5th 935, 956.  Discovery occurs when a party has reason to discover the basis for a claim.  Pedro v. City of Los Angeles, (2014) 229 Cal.App.4th 87, 105 (“the word ‘discovery’ as used in Code of Civil Procedure section 338, subdivision (d) ‘is not synonymous with actual knowledge.’”).  Pet. Op. Br. at 13.

DHCS was on notice of billing irregularities at Midway and Bell Gardens in November 2011 when the former owner of the two pharmacies was placed on temporary suspension.  AR 1468-77.  On August 30, 2016, the temporary suspension was converted to an indefinite suspension.  Thus, the Department was aware of problems at Midway and Bell Gardens long before Yoo acquired them.  Reply at 6-7.

Yoo submitted his Medi-Cal enrollment applications for the two pharmacies on August 31, 2016.  AR 1479, 1566.  The applications reflect Yoo’s ownership and operation of the two pharmacies as a result of first leasing and then buying them on March 7, 2016.  See AR 1498, 1520-21, 1526, 1535, 1605-06, 1610, 1620-21.  In his two August 31, 2016 applications, Yoo notified the Department that he would be billing for drugs dispensed at Midway and Bell Gardens using his PCH Medi-Cal provider number pending final approval for the enrollment at the two new locations.  In fact, the application materials included Yoo’s records showing that he obtained his own NPI for each pharmacy on April 21, 2016.  AR 9636-37, 9642-43.  NPI’s are issued by CMS to providers, including pharmacies, under 45 C.F.R. section 162.412.  These documents and circumstances clearly placed DHCS on constructive notice of the facts it needed to conduct an audit.  The Department therefore had three years from August 31, 2016, at the latest, to demand repayment of any mistaken payments under CCP section 338(d).  Pet. Op. Br. at 13-14.

PCH contends that borrowing CCP section 338 also bars recovery of overpayment for the inventory shortage.  Because the Department’s audit findings do not identify specific claims or patients and only assess an aggregate overpayment covering more than four and a half years, PCH was not able to identify the dates of the payments DHCS concluded were overpayments due to a lack of purchase records.  However, the vast majority of the payments pre-dated March 12, 2017 – three years before the Department’s demand for recovery of the overpayment.  Pet. Op. Br. at 6, 17-18.

Rather than limiting the audit period to three years, DHCS chose to expand it to four years, seven months, beginning on January 1, 2015.  The ALJ attempted to defend this decision by relying on section 14124.1’s retroactive application of a ten-year record retention requirement that went into effect on January 1, 2018.  AR 32.  In doing so, he essentially ignored the record-retention requirement of section 14170.8(b), which imposes only a three-year record retention for the inventory and purchasing records of pharmacies.  This statute supports a three-year borrowing period for audits, not a four-plus year period.  Pet. Op. Br. at 18.

PCH is incorrect.  The burden-shifting presumption only applies where “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.”  Fountain Valley, supra, 75 Cal.App.4th at 324.  The determination of whether to borrow a statute of limitations rests on the strength of the analogy between it and the case at bar.  Id. at 325; Brown v. State Personnel Bd., (1985) 166 Cal.App.3d 1151, 1159–60.  Fountain Valley cautioned that “[b]ecause 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 the Department in rendering an original final reimbursement settlement.”  Id. at 325, n. 8.

The Department correctly argues (Opp. at 20-21) that the facts are not sufficiently analogous to Fountain Valley.  The audit was not an attempt to reopen a previously conducted audit years later; it was an original audit.  Moreover, the audit in Fountain Valley was a cost report audit which statutorily must be completed within three years.  Id. at 320.   There is no statute or regulation limiting the Department’s ability to complete audits of Medi-Cal pharmaceutical providers.  Finally, as the ALJ noted, the audit in this case involves claims properly subject to post-payment audits, which were completed within the statutory ten-year record retention period of section 14124.1.  Therefore, the analogy is too weak to support equitable borrowing for laches, and the borrowing rule does not apply.[8]

PCH replies that, even if the facts differ from Fountain Valley, the three-year limitations period still should be borrowed.  Fountain Valley’s footnote eight does not mean that laches is only applicable where a Medi-Cal final settlement is revised, not to the delay in issuing an original final reimbursement settlement.  During the period at issue in Fountain Valley, hospitals were reimbursed under a complex cost reimbursement process which involved the audit of cost reports.  Pharmacies do not file cost reports and are reimbursed -- as are most other types of non-institutional providers -- based on the claims they submit.  Reply at 7-8.

PCH contends that its original submission of claims is the functional equivalent of the original submission of a cost report.  The subsequent revision of the claims through an audit is the equivalent of a revised settlement.  In both situations, the Department made original payments that were allegedly mistaken and had to be revised.  In both situations, the Department sought to recover the resulting overpayments and would be subject to the three-year limitations period of CCP section 338(a) if the Department sought recovery in a court action.  Thus, the cases are analogous for purposes of borrowing three-year limitations period.  Reply at 7-8.

Not so.  As PCH notes, hospital cost reports are governed by an express three-year statute of repose.[9]  It therefore made sense to borrow a three-year limitations period for an audit in Fountain Valley.  Moreover, Fountain Valley involved an audit resulting in a revised reimbursement settlement nine years after the fact.  CCP section 338’s limitations period may not be borrowed in this case.

b. HealTherapy

On November 3, 2015, DCFS issued a decision in HealTherapy.  Pet. Op. Br. Ex. A.  In that matter, the provider had a contract with a county to provide therapeutic horseback riding services, a component of specialty mental health services.  Ex. A p. 2.  An audit from December 2011 through February 2012 determined that many of HealTherapy’s patient charts during 2007 through 2010 lacked sufficient information to demonstrate that HealTherapy’s horse therapy services were medically necessary.  Ex. A, pp. 2-3.  On May 31, 2013, DHCS issued its final report assessing an overpayment of $1,903,731.  Ex. A, p. 4.  Relying on Fountain Valley, DHCS held that the three-year limitations period of CCP section 338 could be borrowed for laches for claims against the provider, but not the county which expressly had contractually agreed to repay the amount.  Ex. A, p. 12.  The Department then held that any action to recover the overpayment from the provider was barred as “untimely under the principle of laches.”    Ex. A, p. 12.

            In this case, the ALJ concluded that PCH could not rely on HealTherapy to show that CCP section 338’s statute of limitations should be borrowed because Government Code (“Govt. Code”) section 11425(a)(7) precludes reliance on an administrative decision as precedent unless the agency designates and indexes the decision as precedent and DHCS never designated HealTherapy as a precedential decision.  AR 47.

PCH argues that the Department’s decision not to designate HealTherapy as precedent does not mean that it can act inconsistently from one decision to the next.  “It is a bedrock principle of administrative law that an agency must ‘treat like cases alike.’”  Longstanding administrative law principles hold that an agency must be consistent.  University of Texas M.D. Anderson Cancer Center v. United States Department of Health and Human Resources, (5^th Cir. 2021) 985 F.3d 472.  DHCS has taken inconsistent positions on the legal issue of laches without supplying an adequate rationale, which constitutes an abuse of discretion.  In any event, PCH HealTherapy’s reasoning is far superior to the ALJ’s reasoning.  Pet. Op. Br. at 15; Reply at 8-9.

The court does not agree.  The ALJ correctly found that HealTherapy has no precedential value.  See Govt. Code §§ 11425.10(a)(7), 11425.60(a).  There also is no inconsistency because HealTherapy is distinguishable.  HealTherapy was an audit concerning reimbursement of claims based on medical necessity, not an audit of inappropriate billing or inventory shortages.  More important, HealTherapy’s analysis of the borrowing issue was perfunctory at best.  See Ex. A, p. 12.  In contrast, the ALJ correctly noted that HealTherapy relied on Fountain Valley, a case involving the revision of a final reimbursement settlement from a cost report nine years after-the-fact, whereas the audit in this case did not concern a cost report or the same length of time.  See AR 44.  The ALJ further noted that courts attempting to extend the borrowing rule have been routinely struck down.  See Fahmy v. Medical Board, supra, 38 Cal.App.4^th at 817-18 (physician license revocation cannot borrow statute of limitations for medical malpractice).  AR 44.   DHCS is not required to borrow CCP section 338 simply because HealTherapy did.

c. Unreasonable Delay

Since the borrowing rule does not apply, PCH must prove that the Department unreasonably delayed the audit and that PCH suffered prejudice from the Department’s delay. 

DHCS commenced the audit of Midway on August 28, 2019.  AR 323.  The Department expanded its audit to include Bell Gardens on September 9, 2019, and further expanded it to include PCH on October 10, 2019.  AR 323, 514.  The audits covered claims beginning January 1, 2015, four and a half years from the date the audit began and just over five years before the demand letters issued on March 12, 2020.  AR 45.  The ALJ found that PCH was obligated to retain the audited records for ten years and there was no unreasonable delay.  AR 45.

PCH notes that (a) DHCS was on notice of billing irregularities at Midway and Bell Gardens when the former owner of the two pharmacies was placed on temporary suspension in November 2011 (Reply at 6-7), and (b) Yoo notified the Department in his August 31, 2016 applications that he would be billing for drugs dispensed at Midway and Bell Gardens using his PCH Medi-Cal provider number pending approval for the enrollment at these two new locations.  These general facts did not place DHCS on constructive notice that it needed to conduct an audit of PCH’s operation of Midway and Bell Gardens.  As PCH argues, it is a separate provider from the previous owner of the two pharmacies, and irregularities in Wellness Pharmacy, Inc./Cho’s operation of them could not notify DHCS of problems with Yoo’s operation.  DHCS did not know, and was not on notice, that from January 1, 2015 to August 31, 2016 PCH was billing for Medi-Cal drugs provided from the new locations without submitting an application to do so.  There was no unreasonable delay in the Department’s audit.  Opp. at 21-22.

d. Prejudice

The ALJ found that PCH did not show prejudice because it and its third-party suppliers were able to produce dispensing reports as well as some purchase records dating back to 2015.  AR 46.  PCH relied on the COVID pandemic as an excuse for its failures but failed to present any evidence how the pandemic affected its business.  AR 46-47.  Any prejudice suffered by PCH was of its own making because it could not produce sufficient documentation to support its billings.  AR 47. 

PCH correctly argues that the mere fact that it was able to produce some purchase records for the audit back to January 2015 does not mean that it did not suffer prejudice.  PCH contends that, if the demand for recovery had been issued within three years, there would have been a greater likelihood of finding additional purchase records.  Pet. Op. Br. at 18.[10]

This general statement – which concerns only the inventory shortage issue -- is not a showing of prejudice.  Prejudice may be shown in a DHCS recoupment action with evidence that records were lost, that testimony is not available, or where the provider’s budgeting decisions made long ago have been disrupted and caused the provider to have to forego or delay planned improvement projects.  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).  PCH has made no such showing.

Moreover, “because the final reimbursement settlement generally will give rise to a provider’s liability for repayment of Medi-Cal moneys, the Department’s delay in reaching a final reimbursement settlement does not result in the withholding of moneys from the provider.  Instead, the provider generally will reap the benefit of the interest-free use of government funds to which the provider is not entitled.”  Robert F. Kennedy Medical Center v. Belsche, supra, 13 Cal.4th at 759-60; see §14171.  PCH had the use of $2,044,056.75 of Medi-Cal funds without interest and has not been prejudiced by that fact. 

Finally, the Department correctly notes that, if PCH has suffered any prejudice, it was only due to its failure to maintain and produce sufficient documentation to support his billings during the audit period and the delay in submitting applications to provide services at unenrolled, suspended provider locations.  Opp. at 22-23.  PCH has failed to meet its burden of showing prejudice.

2. Inappropriate Billing

a. PCH Did Not Bill or Receive Payment for a Suspended Provider

DHCS argues that the record shows that PCH improperly billed under PCH’s NPI for services provided to Medi-Cal beneficiaries by two suspended and deactivated pharmacies (Midway and Bell Gardens).  22 CCR §§ 51458.1(a)(4), (a)(6), (a)(13), 51488.1(a)(7), 51501(b), 51451.  For a provider to participate in the Medi-Cal program, it must meet the standards for participation, including being enrolled as a Medi-Cal provider.  22 CCR §51501(b).  Midway and Bell Gardens were suspended from participating in the Medi-Cal program and lacked an active NPI from November 23, 2011 to August 30, 2016.  AR 69. 

A provider shall not bill or submit claims for or on behalf of another provider who has been suspended from the Medi-Cal program for any services rendered in whole or in part by the suspended provider during the period of suspension.  22 CCR §51484.  The Department argues that PCH unlawfully billed the Department for drugs dispensed at its suspended pharmacy locations.  AR 69.  Specifically, PCH billed on behalf of the suspended providers during June 23, 2015 through March 5, 2016 (for Midway) and July 13, 2015 through March 5, 2016 (for Bell Gardens).  Yet, PCH did not dispense the drugs to beneficiaries during these time periods; Midway and Bell Gardens did.  AR 69.  Opp. at 11-12.

DHCS argues that the auditors tested the accuracy and completeness of PCH’s dispensing report by comparing its dispensing report against Medi-Cal payment data to determine if there were any missing claims.  AR 323.  The Department’s audit identified there were claims were missing from PCH’s dispensing report.  AR 329.  The majority of the missing claims submitted by PCH were contained in the dispensing reports for Bell Gardens and Midway.  AR 200-01, 329.  The audit revealed that PCH billed the Department using PCH’s NPI number for claims from two suspended Medi-Cal providers, Bell Gardens and Midway, before PCH acquired those pharmacies.  Ibid.  Therefore, the ALJ properly found that PCH improperly billed Medi-Cal for drugs dispensed by suspended providers.  22 CCR §51484.  Opp. at 12.

The court agrees with PCH that, contrary to DHCS’s analysis, Yoo did not bill directly or indirectly for drugs furnished by a suspended provider.  When DHCS suspects fraud or abuse, it may temporarily suspend from Medi-Cal the provider, not the physical location.  DHCS suspended Wellness Pharmacy, Inc., the previous provider, which had been doing business at the address of Midway and Bell Gardens pharmacies.  See AR 1468-77.  As a suspended provider, Wellness Pharmacy, Inc. and its owner Cho were prohibited from billing or receiving payment from Medi-Cal for drugs dispensed at these two pharmacy locations.  See §14043.61(a).  Pet. Op. Br. at 7.

The controlling Medi-Cal statute, section 14043.26(k), expressly allows a “currently enrolled” provider (PCH) to submit claims for services dispensed at a new location for which an application has been submitted.  Once Yoo (PCH) began leasing the pharmacies and eventually purchased them, he was permitted to dispense drugs at Midway and Bell Gardens after submitting the applications.  PCH submitted applications for the Midway and Bell Gardens locations on August 31, 2016. 

PCH submitted bills for drugs dispensed at Midway and Bell Gardens prior to August 31, 2016.  PCH began submitting bills for Medi-Cal drugs it dispensed at Midway on June 23, 2015.  PCH began submitting bills for Medi-Cal drugs it dispensed at Bell Gardens on July 13, 2015.  AR 12.  However, PCH only billed for drugs dispensed after Yoo became the lessee/owner of the two pharmacies.  For these billings, Yoo used his existing Medi-Cal provider number for PCH to bill for drugs dispensed at his direction and by his employees at the two pharmacies he initially leased and then purchased from Cho.  PCH did not bill directly or indirectly on behalf of Wellness Pharmacy, Inc. or Cho.  PCH, not Wellness Pharmacy, Inc. or Cho, received payment for the drugs dispensed at those locations.  The fact that the drugs were dispensed by PCH employees at the locations of Midway and Bell Gardens does not constitute billing for a suspended provider.  The suspended former owner had nothing to do with the dispensing or the billing of drugs at either pharmacy during this period.  The Medi-Cal auditor admitted at the hearing that if Yoo had submitted the applications for the new locations on March 7, 2016, there would have been no problem with PCH’s billing between that date and August 31, 2016 because the applications would have been pending.  HT II, 34: 8-13.  Pet. Op. Br. at 7.

As PCH argues, once PCH leased the operations of Midway and Bell Gardens, Yoo was allowed to use his then-existing provider number at PCH pharmacy to bill for drugs dispensed by his employees at a different pharmacy location.  Yoo did so prior to submitting a Medi-Cal provider enrollment application for the two new locations.  The situation would have been different if Yoo did not have an existing Medi-Cal provider number and had used someone else’s Medi-Cal provider number to bill for drugs dispensed by his employees at Midway and Bell Gardens.   Reply at 2-3.

In ruling differently, the ALJ confused the definition and meaning of a “provider” of pharmacy services with the “physical location” or dba of a pharmacy owner.  A “provider” is an individual, partnership, corporation, etc. that provides services, goods, etc. to a Medi-Cal beneficiary.  §14043.1(o).  The “location” of the provider is the physical street address or cite within a city where the services, goods are furnished.  See §14043.1(j).  Pet. Op. Br. at 7.

In sum, there is a difference between a provider and a location.  PCH operated out of three locations during the pertinent period and Wellness Pharmacy, Inc. and Cho did not operate there at all.  Therefore, PCH did not violate 22 CCR section 51484.  PCH always dispensed Medi-Cal drugs on its own behalf at the Midway and Bell Gardens locations, billed on its own behalf, and never dispensed or billed for suspended providers Wellness Pharmacy, Inc. or Cho.

Because PCH never billed for a suspended provider, the ALJ erroneously stated that PCH billed for pharmaceuticals “on behalf of these suspended providers during the Period of June 23,2015 through March 5, 2016 (for Wellness Midway) and July 13, 2015 through March 5, 2016 (for Wellness Bell) (AR 26), and that PCH “did not dispense” but billed “for the services of others (Wellness Midway and Wellness Bell that were suspended, and Midway Drugs and Midway Bell that were not enrolled in the Medi-Cal program)”.    AR 31. 

b. DHCS May Recover Payments That Were Not Required to Be Denied Initially

With an inapplicable exception, a provider currently enrolled in the Medi-Cal program who has submitted an application for enrollment at a new location may submit claims for services, goods, supplies, or merchandise rendered at the new location until the application package is approved or denied.  §14043.26(k); 22 CCR §51000.30.  The provider shall be considered during that period to have been granted provisional provider status.  Id.  However, if a provider submits claims for services rendered at a new location before the application for that location is received by DHCS, the Department may deny the claim.  Id.

The ALJ rejected Yoo’s defense that, while section 14043.26(k) permits the Department to deny a claim if a provider submits a claim at a new location before submitting an application for that location, the Department cannot revisit the issue after the claim was submitted and paid.  AR 29.  The ALJ ruled that this argument confuses DHCS’s authority to deny a claim with its authority to recover overpayments for improper billings.  AR 29.  Yoo presented no evidence that DHCS knew about or acquiesced in PCH billing for pharmaceuticals dispensed at Midway or Bell Gardens before August 31, 2016.  AR 29.  DHCS’s auditor emphasized that it would have denied PCH’s claims for pharmaceuticals dispensed at these locations prior to August 31 if it had known.  AR 29.

PCH argues that, while DHCS paid PCH for the drugs dispensed at Midway and Bell Gardens prior to August 31, 2016, the auditors insisted that they were required to treat the payments as overpayments.  Their primary argument was that they were required to do so because PCH’s billings were for a suspended provider.  This argument is both factually and legally wrong and thus cannot support recovery of the sums paid.  Pet. Op. Br. at 8.

As stated ante, the ALJ erroneously concluded that PCH billed for pharmaceuticals “on behalf of these suspended providers during the Period of June 23,2015 through March 5, 2016 (for Wellness Midway) and July 13, 2015 through March 5, 2016 (for Wellness Bell) (AR 26), and that PCH “did not dispense” but billed “for the services of others (Wellness Midway and Wellness Bell that were suspended, and Midway Drugs and Midway Bell that were not enrolled in the Medi-Cal program)”.    AR 31. 

Nonetheless, this erroneous ground for recovery of overpayment does not address DHCS’s authority to recover for overpayment on other grounds.  Section 14043.26(k) permits the Department to deny a claim for pharmaceuticals dispensed at a new location before an application for that location has been submitted, and the ALJ correctly concluded that the Department has authority to do so because it had no reason to know that PCH made claims for drugs dispensed at Midway and Bell Gardens before August 31, 2016.  Where a claim can be denied on a particular ground, a mistaken or erroneous payment for that claim may be recovered on the same ground. 

c. Section 14043.26(k) Requires DHCS to Exercise Its Discretion

Section 14043.26(k) expressly permits a provider currently enrolled in Medi-Cal at one location to submit an application for Medi-Cal enrollment at a new location until the application package for the new location(s) is approved or denied, and Yoo did so.  He was enrolled as a provider at PHC and on August 31, 2016 submitted applications for enrollment at two new locations, Midway and Bell Gardens.   Thus, PCH was entitled to receive Medi-Cal payments from August 31, 2016 until the applications were approved on October 27, 2017.  AR 13.

PCH also billed for drugs dispensed at Midway and Bell Gardens before Yoo submitted the August 31, 2016 enrollment applications for the two new locations.  Section 14043.26(k) addresses such pre-submission billing and states that DHCS “may deny the claim.” (emphasis added).  Section 15 specifies that “[s]hall is mandatory and may is permissive”.  In section 14043.26(k), the Legislature chose the word “may,” not “shall,” to determine the consequence for billing at new locations before an enrollment application is filed.  PCH concludes that DHCS had no mandatory responsibility to deny PCH payment for bills submitted prior to the date Yoo submitted enrollment applications for the two locations.  Pet. Op. Br. at 7-8.

DHCS argues that it is required to recover payments based upon false or incorrect claims for services by persons who did not meet the standards for participation in the Medi-Cal program at the time the services were provided.  22 CCR §51458.1(a)(7) (“section 51458.1”).  PCH submitted false claims and false statements of material fact to the Department because it failed to disclose that it was submitting claims with its NPI number for drugs dispensed at the Bell Gardens and Midway Drugs locations.  AR 206.  When submitting its claims, PCH falsely represented that all the billed drugs were dispensed at his PCH location in Long Beach.  These actions constitute a submission of false or misleading statement of material facts for which the Department is required to recover the monies for all claims improperly billed.  §51488.1(a)(7).  Opp. at 14.

The Department relies on the testimony of auditor Firas Yaghmour (“Yaghmour”).  HT II p. 94.   Yaghmour testified that PCH’s claims were false and misleading because the Department did not know the service was not being rendered at PCH’s Long Beach location.  As such, the Department would not know where to go to observe the dispensings.  HT II p. 103.  The lack of sufficient inventory also means that the claims billed were false and misleading and the services were not rendered.  HT II p. 117.  Even if the drugs were actually received by PCH patients from 2015 to August 30, 2016, the Department was harmed because the claim does not comply with the requirement that it be notified when using NPI to bill for another location.  HT II p. 132.

DHCS argues that PCH’s contention that section 14043.26(k) does not require the Department to deny payment is insufficient to overcome the Department’s interpretation of its own regulation (§51488.1(a)(7)).  An administrative agency’s construction of its own regulation is entitled to great weight, and a court will not substitute its judgment for that of the administrative body if there appears to be a reasonable basis for it.  O’Connor v. State Teachers’ Retirement System, (1996) 43 Cal.App.4th 1610, 1620.  A “court is more likely to defer to an agency’s interpretation of its own regulation than to its interpretation of a statute, since the agency is likely to be familiar with regulations it authored and sensitive to the practical implications of one interpretation over another.” Yamaha Corp. of America v. State Bd. of Equalization, (“Yamaha”) (1998) 19 Cal.4th 1, 12.)  Thus, the Department’s decision to recover improper payments is within its sound discretion and is also required to maintain the fiscal integrity of the Medi-Cal program.  Opp. at 14-15.

PCH replies (Reply at 1-2) that an agency’s interpretation of the meaning and legal effect of a statute is contextual; “its power to persuade is both circumstantial and dependent on the presence or absence of factors that support the merit of the interpretation.”  See Yamaha, supra, 19 Cal.4th at 3.  “[T]he ultimate interpretation of a statute is an exercise of the judicial power conferred upon the courts by the Constitution and, in the absence of a constitutional provision, cannot be exercised by any other body.”  Id. at 4.  Yamaha rejected the notion that an agency’s interpretation of two regulations not embodied in a formal regulation and based on nothing more than an auditor’s interpretation which became the agency’s litigating position was entitled to deference.  Id. at 9-10.  PCH contends that the ALJ’s decision is based on DHCS’s interpretations of Medi-Cal statutes and regulations that are mere litigating positions.  These interpretations are inconsistent with and unauthorized by the statutes and regulations at issue.  Reply at 2.

The court agrees with PCH.  Section 14043.26(k) expressly gives DHCS discretion to deny PCH payment for bills submitted prior to August 31, 2016 for Medi-Cal drugs dispensed at Midway and Bell Gardens, but does not require it to do so.  The meaning of section 14043.26(k) is plain, and DHCS does not contend otherwise.  Under section 14043.26(k), DHCS had discretion, but was not required, to deny payment for bills submitted where PCH failed to inform the Department of a new location.

The regulation upon which DHCS relies, section 51488.1(a)(7), provides that the Department shall recover pharmaceutical overpayments from providers “where the provider submits...any false or misleading statement of material fact on or in connection with any claim which results in reimbursement...not allowed under the regulations....”  Insofar as PCH submitted false or misleading statements, DHCS’s regulation cannot trump section 14043.26(k), which requires the Department to exercise its discretion whether PCH’s submission of bills prior to August 31, 2016 should be denied. 

An agency decision is an abuse of discretion only if it is “arbitrary, capricious, entirely lacking in evidentiary support, unlawful, or procedurally unfair.”  Kahn v. Los Angeles City Employees’ Retirement System, (2010) 187 Cal.App.4th 98, 106.  In applying this deferential test, a court “must ensure that an agency has adequately considered all relevant factors, and has demonstrated a rational connection between those factors, the choice made, and the purposes of the enabling statute.”  Western States Petroleum Assn v. Superior Court, (1995) 9 Cal.4th 559, 577.  Mandamus will not lie to compel the exercise of a public agency’s discretion in a particular manner.  American Federation of State, County and Municipal Employees v. Metropolitan Water District of Southern California, (2005) 126 Cal.App.4th 247, 261.  It is available to compel an agency to exercise discretion where it has not done so.  Los Angeles County Employees Assn. v. County of Los Angeles, (1973) 33 Cal.App.3d 1, 8.

DHCS can be compelled to exercise its discretion under section 14043.26(k) and has not done so, wrongly concluding that it is required to compel repayment.  The Department’s interpretation of section 51488.1 as compelling it to recover these payments because PCH’s billings were false or misleading statements is inconsistent with section 14043.26(k).  The Department’s view apparently is that all claims for services rendered at a new location before the application for that location is received by DHCS are false or misleading.  Yet, section 14043.26(k) expressly gives the Department discretion to pay them anyway.  Additionally, DHCS’s argument that section 51488.1(a)(7) compels it to deny PCH’s claim is merely a litigating position not entitled to deference.

d. DHCS May Recover Overpayment for Violation of Section 14043.26(k) or for False and Misleading Statements Under Section 51488.1(a)(7)

The Department’s regulations require a provider to submit an application to the Department when there is a change of ownership (22 CCR §51000.30(a), (b)), and for enrollment at a new location.  §14043.26(a)(1); Mednik v. State Dept. of Health Care Services, supra, 175 Cal.App.4th at 636.  A provider currently enrolled in the Medi-Cal program who has submitted an application package for enrollment at a new location may use its existing NPI to bill for services rendered at the new location until the application package is approved or denied.  §14043.26(a).  If a provider submits claims for services rendered at a new location before the application for that location is received by the Department, the Department may deny the claim.  §14043.26(k).  DHCS shall recover overpayments from pharmaceutical providers at a 100% rate when the provider submits or causes to be submitted any false or misleading statement of material fact on or in connection with any claim which results in reimbursement for ingredient costs and professional fees.  §51488.1(a)(7).

The ALJ found that PCH’s claims for drugs dispensed at Midway and Bell Gardens were false and misleading, thus allowing recovery under section 51458.1(a)(7).  AR 24.  The auditors asserted that when PCH submitted claims for Midway and Bell Gardens under its license number before the purchase or the CHOW applications, it falsely represented that PCH was dispensing those drugs from its location in Long Beach.  AR 206.  This was a false statement of material fact that permitted the Department to recovery payment where Medi-Cal was inappropriately charged.  AR 206.

PCH argues that its claims for payment for drugs dispensed at Midway and Bell Gardens were not false or misleading.  Yoo testified that he believed PCH was entitled to be paid for drugs dispensed at Midway and Bell Gardens beginning March 7, 2016 because both pharmacies had been licensed in his name by the Board by that date.  He acknowledged that he should not have been paid for drugs dispensed prior to March 7, 2016 when he only leased the pharmacies.  AR 26.  PCH contends that the ALJ’s dismissal of Yoo’s position because the pharmacies were not enrolled in his name until August 31, 2016 ignores the fact that an existing enrolled provider at one location can bill and be paid for drugs dispensed at new locations under section 14043.26(k).  Pet. Op. Br. at 8-10.

PCH argues that emails between Yoo and his healthcare lawyer, Nina Marsden, Esq. (“Marsden”) support Yoo’s understanding.  AR 1212-14.  On April 22, 2015, when Yoo was contemplating buying Midway and Bell Gardens, he asked Marsden whether he could use his current provider number at PCH to bill for drugs dispensed at Midway and Bell Gardens.  Five days later, Marsden advised Yoo that he would first have to obtain licenses in his name from the Board.  She further advised him that he would have to submit Medi-Cal enrollment applications for Midway and Bell Gardens.  While the applications were pending, Yoo was required to advise Medi-Cal on each enrollment application that he intends to bill for services at the new location using his existing provider number.  Finally, Marsden contemplated that “Medi-Cal applications should be received by Medi-Cal on or before the desired closing date of the [purchase] transactions[s].”  AR 1212.  Yoo thought the transactions were going to close on December 31, 2015 but the closing was delayed until February 7, 2016.  HT III, p. 206.     Pet. Op. Br. at 10.[11]

DHCS responds that Yoo did not submit the applications to enroll at Midway and Bell Gardens until August 31, 2016.  AR 322.  Therefore, the services billed on behalf of Midway and Bell Gardens prior to August 31, 2016 were improper because they violated applicable Medi-Cal laws and regulations.  Opp. at 12-13. 

DHCS argues that Yoo was clearly wrong in his belief that he was entitled to receive payment for drugs dispensed at Midway and Bell Gardens beginning March 7, 2016 simply because the Board had licensed the pharmacies in his name.  The Board’s licensing action did not grant Yoo any Medi-Cal privileges.  Yoo also knew as early as April 27, 2015 that he needed to submit new provider applications to enroll both Midway and Bell Gardens as new locations if he wished to use PCH’s NPI for them.  AR 332; HT II, p. 225.  He admitted, that as a Medi-Cal provider of over 30 years, that he was responsible for being familiar and complying with the applicable Medi-Cal regulations, including participation requirements.  AR 332; HT II, 196-97.  Yet, he did not submit the required Medi-Cal applications at the time of his purchase of Midway Drugs and Bell Gardens.  DHCS concludes that any Medi-Cal claims submitted prior to August 31, 2016 by the Midway and Bell Gardens pharmacies under PCH’s NPI number were improper.  22 CCR §51000.30; §14043.26(k).  Opp. at 13.

DHCS is correct. Yoo asked his attorney on April 22, 2015 whether he could use PCH’s NPI number to bill for Medi-Cal prescriptions filled at the pharmacies if he bought them.  AR 1214.  His attorney expressly informed him that he would need to file CHOW applications for the pharmacies to the Board if he wished the purchase them.  AR 1212.  The attorney also informed Yoo that, for Medi-Cal, he needed to submit a new provider application to enroll each pharmacy in Medi-Cal before the sale closed.  AR 1212.  Marsden explained that Yoo should identify on each application that he intends to bill for services at each of the new pharmacies with his existing provider number while the applications are pending.  AR 1212.  She added that Medi-Cal applications should be received by DHCS on or before the closing date.  AR 1212. 

Thus, Yoo knew that he had to file applications to use his provider number at the Midway and Bell Gardens locations before PCH did so.  Once the applications were in place, he could use his existing NPI to bill for services rendered at Midway and Bell Gardens until the applications were approved or denied.  §14043.26(a).  But he knew or should have known that submitting claims for services rendered at a new location before the application for the was received by the Department could result in denial of the claim.  See §14043.26(k). 

As a result, DHCS was entitled to deny the claims submitted before August 31, 2016 in the exercise of its discretion under section 14043.26(k).  DHCS could also consider the claims to be false under section 51488.1(a)(7) because, as Yaghmour testified, the Department did not know the service was not being rendered at PCH’s location and would not know where to go to observe the dispensings.  HT II p. 103.  This falsity cannot interfere with the Department’s duty to exercise its discretion, however.

e. Mitigation

DHCS shall recover overpayments from pharmaceutical providers at a 100% rate when the provider submits or causes to be submitted any false or misleading statement of material fact on or in connection with any claim which results in reimbursement for ingredient costs and professional fees.  §51488.1(a)(7).  Notwithstanding the provisions of subparagraph (a), where services have been rendered, mitigating or ameliorating facts and circumstances will be considered in determining the audit findings.  §51488.1(b).

The ALJ found that section 51488.1(b) did not apply because PCH billed for pharmaceuticals that it did not dispense; Midway and Bell Gardens did.  PCH cannot avail itself of this provision where it did not provide the services.  AR 31.  Moreover, the record did not establish any facts or circumstances in mitigation.  AR 31.

PCH argues that the circumstances fit squarely within section 51488.1(b).  The ALJ was incorrect that PCH did not dispense the drugs and section 51488.1(b) is triggered where drugs are actually dispensed.  The Department’s auditors expressly found that drugs were dispensed to Medi-Cal beneficiaries at Midway and Bell Gardens during periods when Yoo leased and then owned the pharmacies.  AR 1463-64.  This fact may not be ignored when considering mitigating and ameliorating circumstances.  Pet. Op. Br. at 9.

Because drugs ordered by the beneficiaries’ doctors were actually dispensed, the beneficiaries received needed medications for which Medi-Cal would have been required to pay if the beneficiaries had been forced to go to some other pharmacy.  If DHCS is permitted to recover the payments made to PCH, it will have paid nothing for the drugs provided to Medi-Cal beneficiaries giving it an unjustified windfall.  PCH, on the other hand, will have incurred labor and the costs of purchasing the drugs dispensed for which no compensation will be received.  Because the drugs were actually dispensed to Medi-Cal beneficiaries by Yoo’s employees at the Midway and Bell Gardens locations, section 51488.1(b) requires DHCS’s auditors to consider mitigating or ameliorating circumstances.  Pet. Op. Br. at 5, 9.

DHCS disagrees, arguing that Li did not confirm whether Midway and Bell Gardens in fact dispensed drugs for the claims PCH filed under its own name because that was outside the audit’s scope.  AR 208.  She confirmed only that PCH allowed suspended, unenrolled pharmacies to dispense drugs, in direct contravention of the Medi-Cal program strict enrollment rules.  AR 208.  Moreover, PCH cites no evidence that the drugs were in fact dispensed to Medi-Cal beneficiaries.  See Advanced Choices, Inc. v. State Dept. of Health Services, (2010) 182 Cal.App.4th 1661, 1673 (DHCS was entitled to recover overpayment where pharmacy failed to present evidence that “it actually provided services to Medi-Cal beneficiaries”).  Opp. at 15.  

PCH responds that it did not have to submit evidence of drugs being dispensed at Midway and Bell Gardens during the period at issue because the auditors’ workpapers clearly show such dispensing.  See AR 1463-66.  For example, Li reports that she reviewed the actual dispensing reports for Midway and Bell Gardens pharmacies for the service period of January 1, 2016 to July 31, 2019.  AR 1464.  There was never an issue at the hearing whether these dispensing reports accurately reflected the drugs dispensed to Medi-Cal patients at Midway and Bell Gardens.  Thus, there was no reason for PCH to offer additional evidence of such dispensing.  Reply at 4.

The court need not decide whether PCH proved that the drugs were dispensed to Medi-Cal beneficiaries at Midway and Bell Gardens.  Li testified that issue was not within the scope of her audit and DHCS cannot now argue that PCH failed to prove that fact.  The court must assume that PCH dispensed all the drugs to Medi-Cal beneficiaries for which it claimed payment.

DHCS adds that, even if PCH proved that it provided the drugs to Medi-Cal beneficiaries, the application of mitigating circumstances is unwarranted.  The undisputed evidence established that Yoo was a long-term Medi-Cal provider who knew that he was required to submit new Medi-Cal applications for Bell Gardens and Midway.  Therefore, there are no mitigating facts for the Department to consider.  Opp. at 15.

This may or may not be true.  Section 51488.1(b) provides: “Notwithstanding the provisions of subparagraph (a), where services have been rendered, mitigating or ameliorating facts and circumstances will be considered in determining the audit findings.”  The regulation clearly requires DHCS to consider mitigating facts or circumstances where the services have been rendered.  The ALJ’s statement that the record did not establish any facts or circumstances in mitigation is unsupported.  See AR 31.  Potential mitigating facts include Yoo’s contacts with his attorney, his mistaken belief about his licensing by the Board, his belief that closing would occur earlier than it actually occurred, and his general effort to comply with the law.  DHCS was obligated to consider whether there are mitigating facts under section 51488.1(b) and failed to do so.  

3. The Inventory Shortage

The DHCS auditors performed an invoice reconciliation of PCH’s drug purchases during the audit period of January 1, 2015 to July 31, 2019.  They concluded that PCH was not able to produce records of purchases in 2020 showing that the quantity of 64 of 100 categories of drugs purchased during this four-year, seven-month period equaled or exceeded the quantity dispensed to patients.  AR 1420.[12] The issue presented by PCH is whether the audit finding of a shortage of purchase records supports the assessment of an overpayment of $253,801 under Medi-Cal audit regulations. 

a. The Authority

PCH argues that the controlling Medi-Cal pharmacy audit regulation section 51488.1 lists 15 bases for recovering Medi-Cal pharmacy overpayments, not one of which allows recovery for “inventory shortages.”  Section 51488.1(a)(9) is the only basis for recovering for “quantity discrepancies”, and it provides that when the quantity of drug billed is larger than the quantity of drug dispensed, the difference in the allowable cost between the quantity paid and quantity dispensed shall be recovered.  Hence, section 51488.1(a)(9) requires recovery of an overpayment where the quantity of drugs billed is greater than the quantity dispensed.  PCH argues that the auditors adjusted the quantity billed by PCH to the quantity dispensed at Midway and Bell Gardens and assured that there was no discrepancy between the two.  AR 1463-64.  Thus, section 51488.1(a)(9) does not support the auditors’ recovery based on the audit finding.  Pet. Op. Br. at 5-6, 16; Reply at 5-6.  DHCS does not disagree and PCH is correct that section 51488.1(a)(9) does not provide DHCS with authority to recover based on the audit finding of inventory shortage. 

The Department relies on (1) its mandate in section 51488.1(a)(3) and (a)(4) to recover overpayments made to a provider for services not documented in the provider’s records and for payments made based upon false or incorrect claims, (2) its right in section 51488.1(a)(1)(A) to recover 100% of the dispensing fee for drugs when the services billed were not provided, and (3) its right to on-site reviews of pharmacy provider records related to the provision of Medi-Cal services to determine compliance with Medi-Cal statutes and regulations.  §§ 14124.1.  The Department concludes that PCH was required to keep records to substantiate the billings submitted for drugs dispensed, and the Department’s inventory shortage finding and demand for recovery is amply supported by these audit regulations.  Opp. at 18-19.

PCH replies that none of the statutes or regulations cited by the Department authorize DHCS to recover an overpayment from a pharmacy provider due to a shortage of purchase receipts.  The Department believes it has implicit authority to assess and recover an overpayment when the number of purchase receipts from pharmacy suppliers does not equal the total Medi-Cal drug payments.  PCH knows of no authority that the Department has implied authority to assess and recover such overpayments.  Reply at 6.  The court agrees.  The provisions cited by the Department do not aid its authority in this case. 

The ALJ stated that the purpose of Li’s invoice reconciliation audit was to confirm that PCH had sufficient documentation of its inventory (purchase invoices and reports from licensed wholesale suppliers) to support its billings for payment by the Medi-Cal program.  AR 32.  Li’s audit revealed shortages in PCH’s inventory for 64 of the 100 drugs reviewed by NDC, amounting to an overpayment of $252,734.  AR 32.  In support of this overpayment, the ALJ relied on the authority of 22 CCR section 51476 (“section 51476”), which requires all Medi-Cal providers to keep, maintain, and have readily retrievable records necessary to fully disclose the type and extent of services provided to a Medi-Cal beneficiary, including purchase orders for medication and drugs supplied to beneficiaries.  AR 31-32. 

Each provider is required to keep records necessary to fully disclose the type and extent of services provided to a Medi-Cal beneficiary.  §51476(a).  These records include medications prescribed, ordered for, or furnished to beneficiaries, and copies of the original purchase invoices for such medications.  Ibid.  The records must include information of each service rendered under the program, the beneficiary to whom the service was rendered, and the date the service was provided.  §14124.1.  Providers must keep such records for a period of ten years from the final date of the date of completion of any audit or from the date the service was rendered, whichever is later. §14124.1.  A provider’s failure to produce records may result in sanctions, audit adjustments, or recovery of overpayments, in accordance with section 51458.1.  §51476(g).

PCH argues that section 51476 does not by itself set forth any recovery standard for the failure to produce records during a Medi-Cal audit.  PCH acknowledges that section 51476(g) states that the failure to produce records may result in “recovery of overpayments, in accordance with Section 51458.1 of this title.”  PCH argues that 22 CCR section 51458.1 (“section 51458.1”) is not specific to pharmacies and is subordinate to section 51488.1, which does not authorize recovery of an overpayment based on the audit finding at issue.  Pet. Op. Br. at 16-17.

The court agrees that section 51476 does not itself set forth any standard for recovery of any overpayment based on a failure to produce records.  But section 51476(g) expressly refers to the standard in section 51458.1, and section 51458.1(a) provides: “The Department shall recover overpayments to providers determined to be…(3) For services not documented in the provider’s records, or for services where the provider’s documentation justifies only a lower level of payment…(13) In violation of any other Medi-Cal regulation where overpayment has occurred.” 

Hence, a provider’s failure to have sufficient documentation of its inventory (purchase invoices and reports from licensed wholesale suppliers) to support its billings for payment by the Medi-Cal program is a violation of section 51458.1(a)(3) because the drug services are not adequately documented.  Such a failure also is a violation of section 51458.1(a)(13) if it results in an overpayment because it violates the documentation requirements of section 51476.

PCH’s argument that section 51458.1 is not specific to pharmacies is irrelevant because it applies to all providers and PCH’s argument that section 51458.1 is subordinate to section 51488.1 is inaccurate.  Section 51458.1(b) merely provides that, if section 51458.1 conflicts with the provisions of sections 51488 or 51488.1, the latter shall prevail.  PCH points to no conflict between section 51458.1’s recovery of overpayments based on inadequate documentation and section 51488.1’s list of 15 bases for recovering Medi-Cal pharmacy overpayments.  The two provisions supplement each other and do not conflict in this particular case.

Thus, DHCS had authority under sections 51476 and 51458.1 to assess an overpayment where PCH did not have sufficient documentation of its inventory (purchase invoices and reports from licensed wholesale suppliers) to support its billings for payment by the Medi-Cal program.

b. The Methodology

The ALJ found that the record established the validity of the audit methodology which compared the purchase history to the disbursement history during the relevant period.  AR 32.  The audit focused on the 100 NDCs for which PCH received the highest reimbursement.  AR 32.  PCH’s dispensing reports showed the drugs dispersed to both Medi-Cal and non-Medi-Cal patients.  AR 32.  PCH’s purchase history reports showed PCH’s purchases of drugs from wholesalers.  AR 32.  Li then reviewed records to determine the quantity of pharmaceuticals paid for by DHCS for each of the 100 NDCs.  AR 32-33. 

Li’s methodology determined the Medi-Cal percentage of drugs distributed to payors, multiplied the Medi-Cal percentage by the total quantity of drugs purchased to find the total Medi-Cal drugs that should be in the inventory, found a Medi-Cal inventory shortage by subtracting this number from the quantity billed by PCH to Medi-Cal, divided this shortage from the total quantity of drugs paid by Medi-Cal to obtain a percentage of Medi-Cal claims not supported by PCH’s purchases, and multiplied this percentage by the total amount Medi-Cal paid to calculate the overpayment.  AR 33-34.  The ALJ found that this evidence established a prima facie case of a $252,734 overpayment for 64 of the 100 NDCs reviewed.  AR 34.

PCH argued to the ALJ that the auditors’ findings were flawed because the Department did not identify a single claim where a beneficiary did not receive a particular pharmaceutical.  AR 34.  DHCS told PCH that it was not feasible to identify the specific beneficiaries who did not receive the medication due to the inventory shortage given the number of claims involved in the audit.  AR 35.  PCH therefore argued that a methodology that does not use a claim-by-claim review or probability sampling is an estimate for which it was entitled to some adjustment to account for a margin of error.  AR 35.  The ALJ rejected this argument because the audit did not rely on a sample or an estimate; it used all data for the 100 NDCs during the relevant period to identify the precise number of units lacking from PCH’s inventory.  AR 36.  The ALJ noted that the invoice reconciliation was not intended to determine if a particular patient did not receive their pharmaceutical but rather to determine whether the records show that PCH purchased sufficient inventory to cover its billings and dispensations.  AR 36.

PCH now reiterates this argument by contending that the ALJ’ findings are not patient or claim-specific, or even year-specific.  The audit results simply showed that in 2020 PCH could not produce purchase records for a relatively small percentage of the total drugs dispensed between January 1, 2015 and July 31, 2019.  The auditors did not show which specific claims were affected by this shortage.  PCH contends that DHCS created an irrebuttable presumption that the quantity of drugs billed was greater than the quantity dispensed without any legal support.  Pet. Op. Br. at 5, 16.

PCH argues that, if DHCS presumes that this shortage of records means that some drugs might not have been dispensed to Medi-Cal patients for whom the Department was billed and made payment, the presumption must be rejected.  Section 51488.1(a)(1) provides that overpayments shall be recovered for services (drugs) billed and not provided and DHCS was required to make patient and claim-specific findings for such a recovery.  Otherwise, PCH is deprived of the opportunity to show that a particular Medi-Cal patient did receive the prescribed medication on the day indicated.  Pet. Op. Br. at 17; Reply at 5.

PCH concludes that the ALJ’s inventory shortage finding is invalid because it fails to identify the Medi-Cal beneficiaries for whom purchase records are lacking.  The methodology of the auditors deprived PCH of the opportunity to show that the drugs ordered were dispensed to the particular beneficiaries.  The ALJ’s only response to this obvious flaw was that it was not feasible for the auditors to identify specific beneficiaries or claims due to the number of beneficiaries and claims involved in the audit.  AR 35.  This attempt to shift the burden of proof to a provider without giving the provider the information necessary to refute the presumption denied PCH due process and is tantamount to an irrebuttable presumption which only the Legislature can create through statute.  See Griffiths v. Superior Court, (2002) 96 Cal.App.4th 757, 776-79.  Pet. Op. Br. at 6, 17.

PCH proceeds from an erroneous assumption.  As the ALJ found, the purpose of the Department's invoice reconciliation audit was not to determine if any particular patient received his or her prescribed medication, but to determine whether PCH had sufficient records to show that it purchased sufficient inventory to cover its billings.  AR 32-33, 126, 219.  The evidence demonstrated that PCH failed to substantiate sufficient purchases to support the drugs it claims to have dispensed.  AR 218.  Consequently, PCH’s criticism of the Department’s audit methodology is not well taken.  Opp. at 17-18.

The auditors’ employed a valid methodology in determining the accuracy of Petitioner’s inventory records and PCH does not show otherwise.  See AR 33-34, 75.  PCH wrongly insists that the Department’s methodology was improper because it created a presumption that drugs were not provided by using not using claim and patient specific data.  The Department’s methodology, however, allocates a precise number of units lacking from PCH’s inventory and does not need to include patient or claim specific information.  AR 36, HT I, pp. 95-96, 109-11, 116, 123-25, 131-32.  As DHCS argues, this methodology does not violate PCH’s due process rights or create an irrebuttable presumption by shifting the burden to prove that drugs were dispensed because it is based on PCH’s responsibility as a Medi-Cal provider to maintain proper records.  PCH had an appeal hearing at which it could have demonstrated that the auditors were wrong.  See Millman v. Inglish, (C.D. Cal. August 22, 2010), 2010 WL 11545312 at *12 (plaintiffs disputing audit methodology received due process through post-audit-and-withhold evidentiary hearing).  Opp. at 17-18.[13]

As DHCS concludes, PCH was notified of the audit on August 28, 2019 -- less than three months after the end of the audit period -- and was informed that it must provide records dating back to January 1, 2015.  AR 549.  PCH and its wholesaler suppliers were able to provide purchase records during the audit that went back to January 2015.  PCH’s inability to produce sufficient documentation to support its inventory for Medi-Cal claims billed supports the ALJ’s determination of a $253,801 overpayment and is not an abuse of discretion.  Opp. at 17.

F. Conclusion

The Petition is granted in part.  DHCS failed to exercise its discretion under section 14043.26(k), wrongly concluding that it is required to compel repayment because PCH’s billings were false or misleading statements under section 51488.1(a)(7).  Additionally, because PCH dispensed all of the drugs to Medi-Cal beneficiaries for which it claimed payment, the Department was obligated to consider mitigating circumstances for its determination of false or misleading statements under section 51488.1(a)(7).  A writ shall issue compelling DHCS to exercise its discretion under section 14043.26(k) and to consider mitigating facts under section 51488.1(b).  In all other respects the Petition is denied.

PCH’s counsel is ordered to prepare a proposed judgment and writ of mandate, serve them on the Department’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 and writ along with a declaration stating the existence/non-existence of any unresolved objections.  An OSC re: judgment is set for December 1, 2022 at 9:30 a.m.