Plaintiff California Healthcare & Rehabilitation Center and more than 20 similar California based skilled nursing facilities operate subacute units. Subacute units provide services to patients requiring less intensive services than those provided in an acute care hospital but more intensive than those provided to general patients in skilled nursing facilities. In addition to the general subacute services provided, plaintiffs also provide ancillary services including physical therapy, speech therapy, occupational therapy, and certain medical supplies.
Plaintiffs participate in Medicare and Medi-Cal programs and have received payments from both. Under California Code of regulations, title 22, sections 51005 and 50761, Medi-Cal is mandated to be the payor of last resort, meaning a facility has to seek reimbursement from other coverage, including Medicare, before seeking reimbursement from Medi-Cal.
“Medi-Cal has a different payment process than Medicare does. Medi-Cal generally pays an all-inclusive, facility-specific, per-diem rate to [skilled nursing facilities]. The per-diem rates are calculated based on actual costs that the facility reported to the Department. Medicare, on the other hand, pays facilities on a per-item basis. If [a skilled nursing facility] patient has both Medi-Cal and Medicare, and Medi-Cal makes a payment on a per-diem basis and Medicare makes a payment on a per-item basis, there may be double payment for the same ancillary services.
Plaintiffs filed a petition for traditional writ of mandate pursuant to Code of Civil Procedure section 1085 and a complaint for declaratory relief pursuant to section 1060, alleging the State Department of Health Care Services and Michelle Baass (in her capacity as Director of DHS) violated a ministerial duty and adopted a regulation in violation of the Administrative Procedure Act (Gov. Code, § 11340 et seq.) by utilizing an overpayment formula based on the amount Medicare paid plaintiffs for ancillary services instead of on the amount Medi-Cal overpaid for those services.
The trial court sustained the Department’s demurrer without leave to amend, finding plaintiffs’ claim was not cognizable in a traditional writ of mandate proceeding and, alternatively, that plaintiffs failed to state a claim the Department violated a ministerial duty or adopted an underground regulation. Separately, the trial court denied plaintiffs’ motion to compel discovery of various documents the Department utilizes while training its employees because it found the documents were privileged.
The Court of Appeal reversed the judgment of dismissal and affirmed the trial court’s order denying plaintiffs’ motion to compel in the published case of Cal. Healthcare & Rehabilitation Center v. Baass – C098043 (March 2025).
Plaintiffs’ petition alleges the Department uses an overpayment formula it adopted contrary to law and in contravention of its ministerial duties and requests a declaration stating so, as well as an injunction against the Department from utilizing the overpayment formula in the future.
State agencies must adopt regulations following the procedures established in the Administrative Procedure Act. These procedures, among other things, require state agencies to provide the public with notice of proposed regulations (Gov. Code, §§ 11346.4, 11346.5), give interested parties an opportunity to comment on proposed regulations (Gov. Code, § 11346.8), and respond in writing to submitted written comments (Gov. Code, §§ 11346.8, 11346.9). Regulations wrongly adopted outside these procedures are known as underground regulations and are void. (Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 572-573 (Tidewater); see Cal. Code Regs., tit. 1, § 250, subd. (a)(1).)
Determining whether the Department’s purported overpayment formula is lawful and complies with its ministerial duties is an issue reserved for traditional writ of mandate proceedings that review the propriety of quasi-legislative acts and ministerial determinations. (See California Water Impact Network v. Newhall County Water Dist. (2008) 161 Cal.App.4th 1464 at p. 1483.) Accordingly, plaintiffs’ petition is cognizable under section 1085.
Plaintiffs argue the petition sufficiently provides they did not need to exhaust their administrative remedies, as well as states a claim under sections 1085 and 1060 because the Department’s use of the overpayment formula violated a ministerial duty and constituted an underground regulation.
The Court of Appeal agreed that plaintiffs had no administrative remedies to exhaust and that they stated a claim the overpayment formula constitutes an underground regulation.