Judge: William Y. Wood, Case: 37-2022-00051579-CU-WM-NC, Date: 2024-05-16 Tentative Ruling

SUPERIOR COURT OF CALIFORNIA,

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SOUTH BUILDING TENTATIVE RULINGS - May 15, 2024

05/16/2024  01:30:00 PM  N-29 COUNTY OF SAN DIEGO

JUDICIAL OFFICER:William Y Wood

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Civil - Unlimited  Writ of Mandate Motion Hearing (Civil) 37-2022-00051579-CU-WM-NC QUALITY-CARE PHARMACY VS. DEPARTMENT OF HEALTH CARE [IMAGED] CAUSAL DOCUMENT/DATE FILED:

Petitioner Quality-Care Pharmacy's petition for writ of mandate (ROA # 1) is denied.

On December 20, 2022, Petitioner filed a petition for writ of mandate against Respondent Department of Health Care Services. ROA # 1. Petitioner seeks a writ of mandate ordering Respondent to set aside its Final Decision in its entirety. Id. at Prayer for Relief, ¶ 1. Respondent administers the Medi-Cal program and conducted an audit of Petitioner for the time period of January 1, 2015 through October 31, 2018.

Opening Brief (ROA # 26), 4:5-7. On August 7, 2019, Respondent issued an overpayment demand in the amount of $2,848,144 following the audit. Id. at 4:7-8. By stipulation, the overpayment demand was reduced by $304,226.51 to $2,543,917.49. Administrative Record (AR), 1611-1613.

On June 20, 2022, Administrative Law Judge Camhy issued a Final Decision in favor of the Respondent in the amount of $2,543,917.49. AR 6-36.

Petitioner seeks administrative mandamus on the basis that the audit was conducted pursuant to an unreliable methodology based on faulty assumptions such that the decision must be set aside in its entirety with a determination of no entitlement to any recovery of overpayment. Opening Brief (ROA # 26), 4:16-19.

Standard of Review In reviewing a Medi-Cal overpayment administrative appeal decision on writ of mandate, the trial court applies a de novo standard of review on questions of law. Hi-Desert Medical Center v. Douglas (2015) 239 Cal.App.5th 717, 730. On factual issues, the Court's standard of review is substantial evidence. Id. The Court reviews the administrative record to determine whether the findings are supported by substantial evidence. Id..; Code Civ. Proc., § 1094.5(c). The Court does not reweigh the evidence, but rather indulges all presumptions and resolves all conflicts in favor of the administrative decision. Family Health Centers of San Diego v. State Department of Health Care Services (2021) 71 Cal.App.5th 88, 97.

The administrative law judge's findings are accorded 'with a strong presumption as to their correctness and regularity.' Id. The administrative agency's interpretation of the laws it enforces may be entitled to deference, but 'the court is the ultimate arbiter of the interpretation of the law.' Id. Substantial evidence is not synonymous with 'any' evidence. Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873. It is evidence 'of ponderable legal significance, ... reasonable in nature, credible, and of solid value.' Id., emphasis in original.

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3110411 CASE NUMBER: CASE TITLE:  QUALITY-CARE PHARMACY VS. DEPARTMENT OF HEALTH CARE  37-2022-00051579-CU-WM-NC When the trier of fact concludes that a party's burden of proof was not met, in order to obtain a reversal, an appellant's evidence must have been 'uncontradicted and unimpeached and [] of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a finding.' Sonic Manufacturing Technologies, Inc. v. AAE Systems, Inc. (2011) 196 Cal.App.4th 456, 465-466 (quoting In re I.W. (2009) 180 Cal.App.4th 1517, 1527-1528. However, 'the testimony of a witness which has been rejected by the trier of fact cannot be credited on appeal unless, in view of the whole record, it is clear, positive, and of such a nature that it cannot rationally be disbelieved.' In re Marriage of Whitman (2023) 98 Cal.App.5th 456, 484 (quoting In re Marriage of Grimes & Mou (2020 45 Cal.App.5th 406, 422.

Analysis There were a total of four audit categories: (1) Petitioner did not have purchase invoices consistent with, and that matched, the quantity of drugs claimed to have been dispensed (inventory reconciliation) and was thus overpaid; (2) payment on claims where Petitioner had no documentation of performing the services claimed; (3) payment on claims where Petitioner charged for prescriptions not picked up by the customer ('file only' claims); and (4) claims where Petitioner was overpaid by billing prescription medication under higher-priced National Dispensing Codes (NDC) that did not match the NDC for the medication actually dispensed.

Petitioner is challenging only the first audit category.

Petitioner argues that the audit was improper due to data corruption resulting from a change in software systems and due to the theft of its back-up records. Petitioner argues that it presented ample evidence regarding the corruption of the data establishing that the dispensing report was corrupted because it contained prescriptions entered whether or not they were dispensed and billed. This corruption, argues Petitioner, rendered the data relied upon by the Department unreliable.

ALJ's Findings On June 8, 2022, Administrative Law Judge Abraham Camhy issued a Decision finding, in relevant part (pertaining to the issue of inventory reconciliation at issue in this writ): - Petitioner's position is not correct because the discrepancies are not due to data corruption; - Petitioner's position is not correct because the requirement to maintain records is not excused; - Respondent's audit methodology is not improper; - The discrepancy was not due to a reduction in inventory; and - Mitigating circumstances do not justify adjusting the claim.

Petition (ROA # 1, Exhibit 1 (hereinafter referred to as ALJ Decision).

The ALJ found that despite the conversion of Pharmacy's records to a different computer system and the theft of the back-up data, the Dispensing Report data received from the pharmacy remained reliable and suitable for the purpose of conducting the audit.

The ALJ supported each of the findings as follows: As to finding #1, the ALJ considered the fact that the Pharmacy did not subpoena a witness from the company that conducted its data conversion to testify as to how the data conversion may have impacted the Pharmacy's ability to generate an accurate distribution report. The ALJ found that the absence of that evidence causes Pharmacy's 'other evidence on this issue to be viewed with distrust.' ALJ Decision, p. 20:7.

The ALJ considered testimony from the pharmacist in charge who testified for the Pharmacy and found Calendar No.: Event ID:  TENTATIVE RULINGS

3110411 CASE NUMBER: CASE TITLE:  QUALITY-CARE PHARMACY VS. DEPARTMENT OF HEALTH CARE  37-2022-00051579-CU-WM-NC that this 'witness has no particular expertise in data-base management or data conversion and may be inclined to understand the effects of the data-base conversion in a way that best supports Pharmacy's position in this case.' Id. at 20:16. The ALJ determined that it 'seems improbable that a company that sells and implements software systems for pharmacies would perform a critical data conversion without making its own back-up and without thoroughly testing the data immediately following any conversion. It is equally improbable that a pharmacy that relies on its data for billing and patient safety would put its data at risk by not using a reputable and responsible company to conduct its data conversion.' Id. at 20:16.

The ALJ considered the argument that the data was widely corrupted but found that to be inconsistent with the unrefuted testimony from the Department's auditor that Pharmacy's distribution report matches the Department's claims data in all but approximately 90 of several hundred thousand instances. Id. at 20:26. The ALJ determined that these facts have a tendency in reason, within the meaning of Evidence Code section 780, to disprove Pharmacy's assertion and testimony that 'the distribution report was not sufficiently reliable to use in the Department's audit.' Id. at 20:28-21:1. The ALJ found that while it is certainly possible that Pharmacy's distribution report data was corrupted when it changed software systems, it appeared to be 'considerably more likely that the distribution report data was sufficiently reliable to be used in conducting the Department's audit of [Pharmacy].' Id. at 21:5.

Therefore, applying the preponderance of the evidence standard under Evidence Code section 115, the ALJ found the data to be accepted as reliable for the purpose of this case.

The Court is persuaded that finding #1 is supported by substantial evidence.

As to finding #2, the ALJ determined that if Pharmacy's records were corrupted as a result of a data conversion or its backup records were stolen, the result would not be any different in this case, except to the extent that such might be considered 'a mitigating or ameliorating fact or circumstance,' under section 51488.1, subdivision (b). Id. at 21:9-19. The mitigating factor is analyzed in finding # 5 below.

As to finding #3, the ALJ considered the audit methodology proposed by Pharmacy which would require examining each claim, totaling the amount dispensed on all the claims, and then comparing that to Pharmacy's wholesale purchase invoices. This review of a claim-by-claim (or sometimes referred to by the parties as a line-by-line) review would require hundreds if not thousands of hours and would not address one of the fundamental concerns in this case, the source of the drugs distributed (Pharmacy fills approximately 80,000 to 100,000 prescriptions and generates approximately 16-19 million dollars in sales annually). (Reporter's Transcript ('RT') v.3 at 119:8-18; 13120:18-21; see also Provider's Post Hearing Brief, 1 :11-1:14.) Id. at 22:3-5.

The ALJ determined that the Department's audit methodology of using Pharmacy's dispensing report, verified by its consistency with the Department's own records, was a reasonable exercise of its authority to determine the manner and form of the audit, under Welfare and Institutions Code section 14170, and sufficiently reliable to support the findings. Id. at 22:14-15. The ALJ further found that using the Medi-Cal ratio as a proxy for allocating the documented wholesale purchases is a reasonable method of allocating the shortfall (if the shortfall is to be allocated), as it does not favor the Medi-Cal program over other payment sources and allows the Pharmacy some credit for the purchases for which it has invoices. Id. at 22:14-19.

Pharmacy concedes that there is no legal authority that limits the discretion of the Department to determine the methodology to be applied in conducting audits, a method should be utilized that avoids the examination of corrupted and faulty data like a line-by-line method. Pharmacy argues that this is an exceptional case that should have required such an analysis. While this may be an exceptional case that could have benefited from a line-by-line audit, the fact that the Department did not conduct such an audit is not evidence that the Department was acting outside its authority under Welfare and Institutions Code section 14170 or that the methodology utilized was not sufficiently reliable to make a prima facie case that its findings are correct, under California Code of Regulations, title 22, section 51037.

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3110411 CASE NUMBER: CASE TITLE:  QUALITY-CARE PHARMACY VS. DEPARTMENT OF HEALTH CARE  37-2022-00051579-CU-WM-NC Further, the ALJ noted that nothing prevented Pharmacy from hiring an independent auditing company to perform a prescription by prescription and invoice by invoice review of its records and offering that evidence at the hearing. Id. at 22:20-26.

As to finding #4, the ALJ considered evidence establishing that the total dollar value of the Medi-Cal share of the inventory shortage during the audit period was calculated by the auditor to be $2,433,189.00 and found this to be a reasonable calculation because Medi-Cal represented approximately half of Pharmacy's total prescription drug sales (the total dollar value of sales to all payment sources that is not supported by invoices is likely in excess of four-million dollars). Id. at 23:10-15.

The ALJ reviewed the Pharmacy's tax filings and found that Pharmacy began the audit period with an inventory valued at approximately $420,000 and at the close of 2018, two months after the end of the audit period, Pharmacy's tax documents reflect an inventory valued at approximately $998,000. Id. at 23:16-22. This established that the difference between Pharmacy's documented purchases and dispensements is not accounted for by a corresponding reduction in inventory during the audit period.

The ALJ noted that while Pharmacy documented some larger purchases prior to the audit period, Pharmacy did not document the starting and ending inventory for each drug. Thus, without documents to show the inventory at the start or the end of the audit period, the ALJ found the 'documentation of large purchases is insufficient to overcome the weight of the other evidence.' Id. at 23:23-26.

In conducting the audit, the ALJ considered evidence establishing that 'Department began with and maintained its presumption that Pharmacy's starting inventory was the same as its ending inventory' and found this approach, 'which is actually more favorable to [Pharmacy] than the facts might otherwise support, to be within its audit authority and consistent with the Department's power to 'maintain adequate controls to ... ensure responsibility and accountability in the expenditure of federal and state funds.'' Welf. & lnst. Code,§ 14170, subd. (a)(1). Id. at 24:2-8.

As to finding #5, the ALJ considered three mitigating factors: (a) the lack of documentation was due to data corruption resulting from a change in software systems; (b) the lack of documentation was due to the theft of its back-up records; and (c) the Department's records show that the patients received medication of the same name and form for which Pharmacy claimed payment.

As to (a), the ALJ found that the assessment did not result from 'incorrect data in [Pharmacy's] dispensing report in finding that the data was not materially corrupted by a data transfer and was sufficiently reliable for the purpose of the audit.' Id. at 25:1-3. The ALJ relied upon testimony by the auditor, the Pharmacy's employee and Pharmacy's tax returns which the Court finds to constitute substantial evidence supporting this finding.

The Court finds that the ALJ's finding the data was not materially corrupted by a data transfer and was sufficiently reliable for the purpose of the audit.is supported by substantial evidence.

As to (b), the ALJ noted that 'while not unsympathetic to the fact that Provider pharmacy had its back-up data stolen, it cannot be said that the loss of that data was without fault on the part of Provider.' Id. at 25:1-3. This is because the records showed that Pharmacy's place of business was subject to three prior burglaries (October 2016, December 2016 and April 2017). The ALJ found that '[a]fter three burglaries, Provider was taking an unreasonable risk in not having back-up data stored off-site. While Provider was in the process of transferring its data off-site, this is something that reasonably should have been done even before the first burglary in 2016 and most certainly should have been done immediately following the third break-in in 2017.' Id. at 25:20-24.

The ALJ found that Pharmacy did not act with reasonable care towards meeting its obligations to 'keep, maintain, and have readily retrievable' its records, as required by California Code of Regulations, title 22, section 51476. Id. at 25:25-28.

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3110411 CASE NUMBER: CASE TITLE:  QUALITY-CARE PHARMACY VS. DEPARTMENT OF HEALTH CARE  37-2022-00051579-CU-WM-NC The Court finds that the ALJ's finding that the theft of the back-up data is not a mitigating or ameliorating fact or circumstance is supported by substantial evidence.

As to (c), the ALJ found that even if patients received medication of the same name and form for which Pharmacy billed the program, it would not justify changing the assessment because Pharmacy's wholesale invoices did not match up with its distribution report (the distribution report substantially aligned with Department's records as well as Pharmacy's own source documentation). Pharmacy was unable to document where it obtained the drugs it appears to have distributed. Id. at 26:6-11.

The Court finds that the ALJ's findings that the mitigating and ameliorating facts and circumstances presented do not justify reducing the assessment is supported by substantial evidence.

In conclusion, Pharmacy failed to present uncontradicted and unimpeached evidence to the ALJ such that this Court can find that the ALJ's findings are not supported by substantial evidence. In applying the standard set forth in Family Health Centers of San Diego v. State Department of Health Care Services, supra, 71 Cal.App.5th at 97, the Court has indulged all presumptions and resolved all conflicts in favor of the administrative decision and finds that the ALJ's findings are supported by substantial evidence.

Thus, the writ is denied.

This minute order constitutes the Court's order. No party is required to submit a proposed order after hearing.

This is the tentative ruling for an appearance hearing (in person or remote) at 1:30 p.m. on Thursday, May 16, 2024. If no party appears at the hearing, this tentative ruling will become the order of the Court as of May 16, 2024. If the parties are satisfied with the Court's tentative ruling or do not otherwise wish to argue the motion, they are encouraged to give notice to the Court and each other of their intention not to appear, though this notice is not required.

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