Judge James C. Chalfant, Case Number: 22STCP00618, Date: 2024-02-15 Tentative Ruling

Chang Ho Yoo dba PCH Medical Pharmacy, v. Michelle Baass, Director of Department of Health Care Services, 22STCP00618

Tentative decision on (1) demurrer to the supplemental petition: overruled; (2) motion to strike: denied

Respondents Department of Health Care Services and Director Michelle Baass (collectively, “Department” or “DHCS”) demur to the Supplemental Petition filed by Petitioner Chang Ho Yoo (“Yoo”), doing business as PCH Medical Pharmacy (“PCH”) and formerly doing business as Midway Drugs (“Midway”) and Bell Gardens (“Bell”). Alternatively, DHCS moves to strike paragraphs 4-7 of the Supplemental Petition.

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

Petitioner Yoo (PCH) commenced this action on February 22, 2022, alleging a single cause of action for administrative mandamus. The Petition alleges in pertinent part as follows.

PCH submitted Medi-Cal bills for payment for drugs dispensed at two pharmacy locations, Midway and Bell Gardens, for a year before DHCS approved the enrollment applications for these two locations on October 27, 2017, effective August 31, 2016. Only about $37,000 was paid before the March 7, 2016 licensure of those locations by the Board of Pharmacy.

On October 10, 2019, DHCS began an audit of payments to PCH, including those that predated the Medi-Cal approval. On March 12, 2020, DHCS demanded recovery of $2,045,350, $1,791,322.75 for claims submitted for drugs dispensed at Midway and Bell Gardens prior to August 31, 2016 and the rest for alleged inventory shortages from more than three years prior to the demand for recovery.

PCH timely appealed the audit findings and the demand for recovery and a formal hearing was held in January 2021. On December 16, 2021, DHCS’s administrative law judge (“ALJ”) issued a proposed decision denying PCH’s appeal. The Chief ALJ adopted the proposed decision as the final decision on December 29, 2021.

Yoo contends that the doctrine of laches prohibits DHCS’s decision. The decision also incorrectly asserts that Midway and Bell Gardens could not bill for drugs dispensed to Medi-Cal beneficiaries before August 31, 2016, that PCH’s submissions were false or misleading, and that it improperly billed for pharmacies that were suspended as Medi-Cal providers.

The inventory shortage allegations further are unsupported. DHCS’s auditors could not find a single claim in which a beneficiary did not receive the ordered drug. Despite this fact, DHCS concluded that it could recover based on non-specific information, which is not authorized by 22 CCR section 51488.1(a). At most, DHCS demonstrated that in 2020 PCH could not provide copies of all bulk purchase orders furnished to Medi-Cal beneficiaries. This is not sufficient evidence to demonstrate that PCH did not furnish the drugs to beneficiaries for every claim.

PCH seeks (1) an order vacating and reversing the final decision and directing DHCS to rescind the demand for recovery, and (2) costs of the action.

Yoo filed a Supplemental Petition on September 12, 2023, seeking a writ of mandate following remand. The Supplemental Petition alleges in pertinent part as follows.

On November 2, 2022, the court granted a writ of mandate in this action remanding the DHCS’s decision. Supp. Pet., ¶2. It ordered the DHCS to exercise its discretion under Welfare and Institutions Code (“W&I Code”) section 14043.26(k) to consider mitigating facts based on facts already in the record. Supp. Pet., ¶2.

On August 25, 2023, the Chief ALJ issued a “Final Decision After Remand from the Superior Court” (“Remand Decision”) denying payment for services rendered at Midway and Bell before Yoo submitted enrollment application packages for them. Supp. Pet., ¶3, Ex. A. As a result, DHCS did not need to adjust its inappropriate billing practice audit finding. Supp. Pet., ¶3, Ex. A.

Mitigating facts considered by the Chief ALJ included Yoo’s contacts with his attorney, his mistaken belief about his licensing by the Board, his belief that closing on the locations would occur earlier than it actually occurred, and his general efforts to comply with the law. Supp. Pet., ¶3, Ex. A.

As for Yoo’s contacts with the attorney, counsel advised Yoo he needed to submit an application package to DHCS before using PCH’s existing National Provider Identifier (“NPI”) number to bill for services rendered at Midway and Bell. Supp. Pet., ¶3, Ex. A. Because Yoo deliberately ignored this advice, and this potential mitigating fact did not merit an adjustment. Supp. Pet., ¶3, Ex. A.

As for mistaken belief, Yoo thought that coming into ownership of a new location inherently entitled him to use an existing NPI number to bill for services rendered at the new location. Supp. Pet., ¶3, Ex. A. No reasonably prudent person who read his counsel’s April 27, 2015 email would think so. Supp. Pet., ¶3, Ex. A. Yoo conceded that he did not really read that email. Supp. Pet., ¶3, Ex. A.

Yoo also believed that escrow on the new locations would close on December 31, 2015. Supp. Pet., ¶3, Ex. A. It instead closed on March 7, 2016. Supp. Pet., ¶3, Ex. A. Assuming arguendo that Yoo’s mistaken belief that ownership of the locations would be sufficient, he began using PCH’s NPI in June 2015, six months before he believed escrow would close. Supp. Pet., ¶3, Ex. A.

As for Yoo’s general efforts to comply with the law, Yoo ignored advice from his counsel when he began billing for services at Midway and Bell in June and July 2015. Supp. Pet., ¶3, Ex. A. This was one year before he submitted an application to DHCS and seven to eight months before obtaining a pharmacy permit for the locations. Supp. Pet., ¶3, Ex. A. He received advice to submit application packages on or before the closing date of the escrow transaction, but he instead submitted the application six months later. Supp. Pet., ¶3, Ex. A.

Based on these findings, DHCS exercised its discretion under W&I Code section 14043.26(k) to deny payment for services rendered at Midway and Bell before the submission of an application package. Supp. Pet., ¶3, Ex. A.

The Supplemental Petition alleges that the Chief ALJ’s Remand Decision was in excess of her authority. Supp. Pet., ¶4. It unilaterally established a Medi-Cal policy of “Deterring Providers’ Non-Compliance with Medi-Cal Laws and Regulations, and the High Risk of Failing to Detect and Respond to Providers’ Inappropriate Claiming.” Supp. Pet., ¶4. This violated applicable rule-making procedure, and converted a discretionary decision to a mandatory denial of payment to any provider prior to submitting an enrollment application for that location. Supp. Pet., ¶4.

DHCS is only authorized to take remedial action through a Medi-Cal audit and appeal process, not punitive measures. Supp. Pet., ¶5. DHCS has acknowledged that, pursuant to 22 CCR section 51488.1(b), when a provider has actually dispensed drugs to Medi-Cal beneficiaries pursuant to their doctors’ orders, DHCS must consider mitigating and ameliorative factors during an audit. Supp. Pet., ¶5. It failed to do so. Supp. Pet., ¶5.

The court directed DHCS not to penalize PCH as if it billed for services furnished by suspended providers. Supp. Pet., ¶5. The Remand Decision found PCH’s conduct to be more than inadvertent or negligent, which is not supported by the evidence and findings. Supp. Pet., ¶5.

The Remand Decision focused on the fact that PCH billed for pharmacy products dispensed from Midway and Bell for over a year before submitting applications for Medi-Cal enrollment at those locations. Supp. Pet., ¶6. Yoo did not know about the practice until the administrative hearing. Supp. Pet., ¶6. He acknowledged that PCH should not have done so and dropped his claim for $37,000. Supp. Pet., ¶6.

Yoo only seeks relief for bills for pharmacy products dispensed at Midway and Bell between March 7 and August 31, 2016, which is the period after the Pharmacy Board had licensed the two locations and before Yoo submitted their Medi-Cal enrollment applications. Supp. Pet., ¶6.

The Remand Decision attributed the inappropriate billing to Yoo’s ignorance and failure to follow the advice of counsel in various emails. Supp. Pet., ¶7. These emails concerned the Medi-Cal enrollment process and the Pharmacy Board licensure process. Supp. Pet., ¶7. They informed Yoo that he could bill for products from Bell and Midway after the Pharmacy Board had licensed the two locations and he had submitted their Medi-Cal enrollment applications. Supp. Pet., ¶7.

Yoo intended to only bill for that time. Supp. Pet., ¶7. He thought the Medi-Cal applications would be submitted by March 7, 2016 and takes responsibility for the fact that this happened five months later. Supp. Pet., ¶7. The Medi-Cal auditor conceded that there would have been no overpayment for drugs dispensed after March 7, 2016 if the applications were submitted on that date. Supp. Pet., ¶7. Upholding the Remand Decision would allow Medi-Cal to not pay for products dispensed to Medi-Cal beneficiaries, which would render 22 CCR section 51488.1(b) meaningless. Supp. Pet., ¶7.

The Supplemental Petition seeks an order vacating the Remand Decision and its demand for recovery for the overpayment for drugs furnished at Midway and Bell between March 7 and August 31, 2016. Supp. Pet. Prayer for Relief, ¶1.

On February 23, 2022, Yoo served Respondent Baass with the Petition and Summons.

On October 25, 2022, this court granted the Petition in part, directing DHCS to consider mitigating circumstances under 22 CCR section 51488.1(a).

The judgment was entered on November 2, 2022 and a writ of mandate was issued on November 8, 2022.

On September 12, 2023, Yoo filed the Supplemental Petition and served DHCS by e-mail.

On October 13, 2023, DHCS filed a declaration of its intent to file a demurrer and of entitlement to an automatic 30-day extension of the deadline.

Demurrers are permitted in administrative mandate proceedings. CCP §§ 1108, 1109. A demurrer tests the legal sufficiency of the pleading alone and will be sustained where the pleading is defective on its face.

Where pleadings are defective, a party may raise the defect by way of a demurrer or motion to strike or by motion for judgment on the pleadings. CCP §430.30(a); Coyne v. Krempels, (1950) 36 Cal.2d 257. The party against whom a complaint or cross-complaint has been filed may object by demurrer or answer to the pleading. CCP §430.10. A demurrer is timely filed within the 30-day period after service of the complaint. CCP §430.40; Skrbina v. Fleming Companies, (1996) 45 Cal.App.4th 1353, 1364.

A demurrer may be asserted on any one or more of the following grounds: (a) The court has no jurisdiction of the subject of the cause of action alleged in the pleading; (b) The person who filed the pleading does not have legal capacity to sue; (c) There is another action pending between the same parties on the same cause of action; (d) There is a defect or misjoinder of parties; (e) The pleading does not state facts sufficient to constitute a cause of action; (f) The pleading is uncertain (“uncertain” includes ambiguous and unintelligible); (g) In an action founded on a contract, it cannot be ascertained from the pleading whether the contract is written, is oral, or is implied by conduct; (h) No certificate was filed as required by CCP sections 411.35 or 411.36. CCP §430.10.

A demurrer tests the sufficiency of a pleading, and the grounds for a demurrer must appear on the face of the pleading or from judicially noticeable matters. CCP §430.30(a); Blank v. Kirwan, (1985) 39 Cal.3d 311, 318. The face of the pleading includes attachments and incorporations by reference (Frantz v. Blackwell, (1987) 189 Cal.App.3d 91, 94), but it does not include inadmissible hearsay. Day v. Sharp, (1975) 50 Cal.App.3d 904, 914.

The sole issue on demurrer for failure to state a cause of action is whether the facts pleaded, if true, would entitle the plaintiff to relief. Garcetti v. Superior Court, (“Garcetti”) (1996) 49 Cal.App.4th 1533, 1547; Limandri v. Judkins, (1997) 52 Cal.App.4th 326, 339. The question of plaintiff’s ability to prove the allegations of the complaint or the possible difficulty in making such proof does not concern the reviewing court. Quelimane Co. v. Stewart Title Guaranty Co., (1998) 19 Cal.4th 26, 47.

The ultimate facts alleged in the complaint must be deemed true, as well as all facts that may be implied or inferred from those expressly alleged. Marshall v. Gibson, Dunn & Crutcher, (“Marshall”) (1995) 37 Cal.App.4th 1397, 1403. This rule does not apply to allegations expressing mere conclusions of law, or allegations contradicted by the exhibits to the complaint or by matters of which judicial notice may be taken. Vance v. Villa Park Mobilehome Estates, (“Vance”) (1995) 36 Cal.App.4th 698, 709.

For all demurrers filed after January 1, 2016, the demurring party must meet and confer in person or by telephone with the party who filed the pleading for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer. CCP §430.31(a). As part of the meet and confer process, the demurring party must identify all of the specific causes of action that it believes are subject to demurrer and provide legal support for the claimed deficiencies. CCP §430.31(a)(1). The party who filed the pleading must in turn provide legal support for its position that the pleading is legally sufficient or, in the alternative, how the complaint, cross-complaint, or answer could be amended to cure any legal insufficiency. Id. The demurring party is responsible for filing and serving a declaration that the meet and confer requirement has been met. CCP §430.31(a)(3).

“[A] demurrer based on a statute of limitations will not lie where the action may be, but is not necessarily, barred. [Citation.] In order for the bar of the statute of limitations to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred.” State ex rel. Metz v. CCC Information Services, Inc., (2007) 149 Cal.App.4th 402, 413.

If a demurrer is sustained, the court may grant leave to amend the pleading upon any terms as may be just and shall fix the time within which the amendment or amended pleading shall be filed. CCP §472a(c). However, in response to a demurrer and prior to the case being at issue, a complaint or cross-complaint shall not be amended more than three times, absent an offer to the trial court as to such additional facts to be pleaded that there is a reasonable possibility the defect can be cured to state a cause of action. CCP §430.41(e)(1).

On August 31, 2016, DHCS received the Medi-Cal change of ownership applications for Midway and Bell. RJN Ex. 1, p. 10. It approved the applications retroactive to that August 31, 2016 date on October 27, 2017. RJN Ex. 1, p. 10.

During DHCS’ audit of Midway and PCH, it concluded that PCH had received payment for 5,184 Medi-Cal claims fulfilled at Midway and Bell when they were suspended, unenrolled, and ineligible. RJN Ex. 1, p. 10. DHCS demanded recovery of $1,791,322.75 in overpayment for these inappropriate billing practices. RJN Ex. 1, pp. 10-11. An administrative hearing upheld the DHCS’ actions. RJN Ex. 1, p. 11.

This court’s trial decision on the Petition ruled that DHCS had conflated the definitions of a “provider” of pharmacy services and a “physical location.” RJN Ex. 1, p. 22. PCH had always billed at Midway and Bell on its own behalf, not on behalf of a suspended provider. RJN Ex. 1, p. 22.

DHCS was authorized to deny a claim for pharmaceuticals dispensed at a new location before an application for that location had been submitted. RJN Ex. 1, p. 23. However, W&I Code section 14043.26(k) allows DHCS to exercise discretion whether it should deny PCH’s submission of bills prior to August 31, 2016. RJN Ex. 1, pp. 25. DHCS’ December 2021 decision instead assumed that it was required to recover the overpayments under 22 CCR section 51488.1. RJN Ex. 1, p. 25.

Under 22 CCR section 51488.1(b), where services have been rendered, mitigating or ameliorating facts and circumstances shall be considered. RJN Ex. 1, p. 28. This discretion includes the ability to consider the claims false under 22 CCR section 51488.1(a)(7) because DHCS did not know the service was not rendered at that location. RJN Ex. 1, p. 27. However, this falsity did not obviate the need to exercise discretion. RJN Ex. 1, p. 27.

In remanding the matter, the court directed DHCS to exercise its discretion under W&I Code section 14043.26(k) and consider mitigating facts under 22 CCR section 51488.1(b) as to improper billing. RJN Ex. 1, p. 33.

In its Return dated August 29, 2023, DHCS asserted that it had complied with the writ by considering the mitigating facts in the record as they relate to the inappropriate billing issue raised in the Petition. RJN Ex. 2. The Return attached the Chief ALJ’s final decision after remand. RJN Ex. 2, Ex. A.

DHCS demurs to Yoo’s Supplemental Petition and alternatively moves to strike Paragraphs 4-7.

The parties e-mailed each other as to the issues raised in this demurrer in September and October 2023. Gunn Decl., ¶2. The parties disputed whether a supplemental petition was the appropriate method to raise the claims therein. Gunn Decl., ¶2. Yoo refused to withdraw the Supplemental Petition and file a new petition. Gunn Decl., ¶3. DHCS has met its meet and confer obligations.

Once a judgment has been entered, the trial court loses its unrestricted power to change the judgment. Graven v. Crout, (1985) 163 Cal.App.3d 779, 782.

A court issuing a writ of mandate retains jurisdiction to make any order necessary to its enforcement. CCP §§ 1097, 1105; County of lnyo v. City of Los Angeles, (“County of Inyo”) (1977) 71 Cal.App.3d 185, 205; see also, Professional Engineers in Cal. Govt. v. State Personnel Bd., (1980) 114 Cal.App.3d 101, 109. This authority is codified in CCP section 1097, which provides in part that when a peremptory writ has issued and is disobeyed, the court “may make any orders necessary and proper for the complete enforcement of the writ.” This enforcement power is also an inherent power of the court. Kings v. Woods, (1983) 144 Cal. App.3d 571, 578. Thus, where the writ remands the matter to an agency with directions to proceed in a certain manner, and the agency’s return states that the court’s mandate has been carried out, a petitioner may challenge the validity of that claim. CCP §1097.

A supplemental petition is not directly authorized in the CCP. A supplemental complaint – defined as a complaint alleging material facts occurring after an earlier complaint was filed – is specifically authorized. CCP §464(a). The CCP provisions concerning complaints constitute the rules of practice for mandamus. CCP §1109. Hence, the requirements of CCP section 464 with respect to a supplemental complaint apply to a supplemental petition for mandamus. CCP section 464(a) expressly requires a motion to file a supplemental complaint, and there is case authority for a motion for leave to file a supplemental petition for mandamus. See Giannini Controls Corp. v. Superior Court, (1966) 240 Cal.App.2d 142, 151 (supplemental petition sought by noticed motion should have been permitted). There is authority that the motion for leave to file a supplemental petition may be either oral or written. City of Carmel-by-The-Sea v. Board of Supervisors, (“Carmel-by-the-Sea”) (1982) 137 Cal.App.3d 964, 971.

A supplemental petition is permitted in mandamus only after the mandated party has filed a return advising the court and parties of its compliance. Pollak v. State Personnel Board, (“Pollak”) (2001) 88 Cal.App.4^th 1394-95 (supplemental petition challenged board’s order for reduced penalty imposed after remand); Carmel-by-The-Sea, supra, 137 Cal.App.3d at 971 (petition may challenge a return in several ways, including a supplemental petition); Kensington University v. Council for Private Postsecondary, etc. Education, (“Kensington”) (1997) 62 Cal.App.4^th 27, 39 (supplemental petition considered only after administrative body’s final decision).

The court’s review of a return is limited to determining whether the agency cured the deficiencies identified in the writ. Nat’l Parks & Conservation Ass’n v. County of Riverside, (1999) 71 Cal.App.4^th 1341, 1351-52. The court must resolve any doubts in favor of the agency’s finding and decision. Id. The failure to challenge the scope of writ arising from facts in existence before judgment are precludes a challenge in post-judgment proceedings concerning compliance with the writ. Ballona Wetlands Land Trust v. City of Los Angeles, (“Ballona Wetlands”) (2011) 201 Cal.App.4^th 455, 481. The court may not consider any newly asserted challenges arising from the same material facts in existence at the time of the prior judgment because consideration of those issues that were, or could have been, raised in the litigation leading to the return. See Town of Atherton v. Cal. High-Speed Rail Auth., (2014) 228 Cal.App.4^th 314, 354 (holding that petitioner’s argument in second lawsuit regarding validity of alternatives analysis in a revised EIR was barred by collateral estoppel because the court had already rejected petitioner’s same argument in the first case).

The existence of a return is a condition precedent to the three means of challenging the agency’s action. “Where, as here, the writ remands the matter...and the return states that the court’s mandate has been carried out, the petitioner may challenge the validity of that claim” by a new petition, a supplemental petition, or a motion to compel compliance. Carmel-by-the-Sea, supra, 137 Cal.App.3d at 971. To conclude that a petitioner may challenge anything other than the return’s compliance with the judgment and writ would raise serious issues about the judgment’s finality and scope of the writ. See Graven v. Crout, supra, 163 Cal.App.3d at 782; Ballona Wetlands, supra, 201 Cal.App.4^th at 481.

In the writ, this court directed DHCS to exercise its discretion under W&I Code section 14043.26(k) and consider mitigating facts under 22 CCR section 51488.1(b) as to improper billing. RJN Ex. 1, p. 33. In August 2023, DHCS asserted via the Return that it had considered the mitigating facts in the record as they relate to the inappropriate billing issue. RJN Ex. 2. The Remand Decision discussed four potential mitigating factors but found that none of them merited an adjustment to the DHCS’ inappropriate billing practice audit finding. Supp. Pet., ¶3, Ex. A.

Yoo asserts that his Supplemental Petition is an appropriate method to challenge the Remand Decision, relying on Carmel-by-the-Sea, which held that, when a writ remands a matter to the administrative body with directions to proceed in a certain manner, and the return states that the court's mandate has been carried out, the petitioner may challenge the validity of that claim via supplemental petition. 137 Cal. App. 3d at 971-72. Yoo asserts this is what the Supplemental Petition does. It alleges that the Remand Decision is invalid because the Chief ALJ’s decision was arbitrary and capricious. Supp. Pet., ¶4. Opp. at 4.

While the issue is not free from doubt, and one can argue that DHCS’s compliance with the writ and the adequacy of the Chief ALJ’s decision after remand are two separate issues, Yoo’s Supplemental Petition is permissible. It is the validity of the return that is at issue in a supplemental petition. See Carmel-by-the-Sea, supra, 137 Cal. App. 3d at 971-72. DHCS’s Return is based on the Chief ALJ’s decision. The court’s writ required DHCS to consider mitigating facts when issuing the Remand Decision. RJN Ex. 1, p. 33. Although Yoo asserts that she failed to do so (Supp. Pet., ¶5), the Remand Decision clearly includes discussion of four mitigating factors: 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. Supp. Pet., ¶3, Ex. A.

The Supplemental Petition alleges that the Chief ALJ erred because she exceeded her authority, the administrative record does not support her findings, and her decision enables Medi-Cal to pay nothing for products dispensed to its beneficiaries. Supp. Pet., ¶¶ 4-7. These are all challenges to the merits of the Chief ALJ’s Remand Decision. Opp. at 3. An agency’s abuse of discretion on remand still concerns the validity of the return. The matter would be no different if Yoo had made a motion to compel compliance with the writ based on the Chief ALJ’s abuse of discretion, which would be permissible. The demurrer to the Supplemental Petition is overruled.[2]

The demurrer to the Supplemental Petition is overruled and the motion to strike is denied. DCHS has already answered.

[1] DHCS requests judicial notice of the court’s judgment granting the Petition (RJN Ex. 1) and DHCS’s Return to the Writ of Mandate (RJN Ex. 2). The court need not judicially notice either document; it is always free to review earlier filings in the current action.

[2] DHCS moves to strike Paragraphs 4-7 of the Supplemental Petition as legally improper. Mot. at 11-12. The motion is made on the same basis as the demurrer – it is improper to challenge the Chief ALJ’s Remand Decision in a Supplemental Petition – and is denied for the same reasons.