Title: Family Health Centers of San Diego v. State Dep't of Health Care Services

State: california

Issuer: California Supreme Court

Document:

IN THE SUPREME COURT OF 
CALIFORNIA 
 
FAMILY HEALTH CENTERS OF SAN DIEGO, 
Plaintiff and Appellant, 
v. 
STATE DEPARTMENT OF HEALTH CARE SERVICES, 
Defendant and Respondent. 
 
S270326 
 
Third Appellate District 
C089555 
 
Sacramento County Superior Court 
34-2018-80002953-CU-WM-GDS 
 
 
July 24, 2023 
 
Justice Kruger authored the opinion of the Court, in which 
Chief Justice Guerrero and Justices Corrigan, Liu, Groban, 
Jenkins, and Evans concurred. 
 
 
 
1 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE 
DEPARTMENT OF HEALTH CARE SERVICES 
S270326 
 
Opinion of the Court by Kruger, J. 
 
Federal and state Medicaid law entitles health care 
providers to government reimbursement for reasonable costs 
related to the care of Medicaid beneficiaries.  The providers 
entitled to reimbursement include federally qualified health 
centers, or FQHCs, which are nonprofit health centers that 
receive funding from the federal government to provide basic 
health care to underserved populations.  As a condition of 
participation in the FQHC program, health centers must 
provide services regardless of an individual’s ability to pay.  
They are also required to offer outreach and education to enable 
members of underserved communities to obtain the health care 
services they provide.   
In this case, an FQHC operator seeks reimbursement from 
the state Medicaid program for the costs of outreach and 
education activities aimed at Medicaid-eligible patients.  The 
State Department of Health Care Services concluded the costs 
were categorically nonreimbursable.  The Court of Appeal 
affirmed.  We conclude the Department’s conclusion rested on a 
misunderstanding of relevant legal principles governing the 
reimbursement of medical provider costs.  We therefore reverse 
and remand for further proceedings.   
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
2 
I. 
This case involves the interplay between programs 
enacted by Congress to increase individuals’ access to health 
care.  The first of these programs is Medicaid, a federal-state 
cooperative program for the provision of medical care to certain 
low-income 
populations. 
 
(42 
U.S.C. 
§§ 1396-
1,  1396a(a)(10)(A)(i); see National Federation of Independent 
Businesses v. Sebelius (2012) 567 U.S. 519, 541–542, 575 
[describing the program].)  In return for federal funding, 
participating states — which is all of them (id. at p. 542) — 
agree to reimburse health care providers for the costs of 
delivering care to enrolled program beneficiaries.  (42 U.S.C. 
§ 1396a(a)(11)(B)(ii).)     
The second program, created by section 330 of the Public 
Health Service Act, makes federal funding available to 
community-based health organizations to care for medically 
underserved populations.  (42 U.S.C. § 254b(a)(1); see also id., 
§ 254b(e).)  These organizations, knowns as “Federally qualified 
health centers” (e.g., id., §§ 13295x(aa)(4), 254c-14(a)(2)), must 
provide health care to residents of geographical areas 
designated by the federal government as lacking sufficient 
health care services, or to special populations that have been so 
designated, such as those who engage in migrant or seasonal 
agricultural work, who are homeless, or who reside in public 
housing.  (Id., § 254b(a)(1), (3)(A).)  An FQHC must provide 
“required primary health services” to all of its patients 
regardless of their ability to pay.  (Id., § 254b(a)(1)(A); see also 
id., § 254b(k)(3)(G)(iii).)  Because of the difficulties that target 
populations face in accessing health care, required primary 
health services include education of “the general population 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
3 
served by the health center regarding the availability and 
proper use of health services” (id., § 254b(b)(1)(A)(v)) as well as 
enabling services — that is, “services that enable individuals to 
use the services of the health center” — “including outreach and 
transportation services,” and language interpretation for 
limited English speakers (id., § 254b(b)(1)(A)(iv)).  Congress 
added these requirements after the Committee on Labor and 
Human Resources identified education, outreach, and other 
enabling services as “essential to health centers’ efforts to 
reduce the barriers to care” experienced by those targeted, and 
proposed the addition “to highlight the critical role that enabling 
services . . . play in the delivery of primary health services to 
underserved populations.”  (Health Centers Consolidation Act of 
1995, Sen.Rep. No. 104–186, 104th Cong., 1st Sess. (1995).) 
Although the Public Health Service Act provides some 
funding for FQHCs, it is not their only source of funding.  The 
law 
provides 
that 
FQHCs 
are 
entitled 
to 
Medicaid 
reimbursement insofar as they provide covered health services 
to Medicaid beneficiaries.  (42 U.S.C. § 1396d(a)(2)(C), (l)(2); see 
also Welf. & Inst. Code, § 14132.100, subd. (a) [adopting 
coverage for FQHC services as described by federal law].)  
Medicaid reimbursement for qualifying FQHC services is not 
optional.  Health centers must “make every reasonable effort” to 
collect state reimbursement for the costs of providing health 
services to those eligible for Medicaid or “any other public 
assistance program or private health insurance program.”  (42 
U.S.C § 254b(k)(3)(F).)  And states, for their part, are obligated 
to pay FQHCs 100 percent of the costs of providing medical 
assistance to Medicaid beneficiaries that are “reasonable and 
related to the cost of furnishing such services.”  (Id., 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
4 
§ 1396a(bb)(2).) 
 
This 
“ ‘100 
percent 
reimbursement’ ” 
requirement was enacted “to ensure that health centers . . . 
would not have to divert Public Health Service[] Act funds to 
cover the cost of serving Medicaid patients,” thus compromising 
their ability to provide care to those without any public or 
private health coverage.  (Three Lower Counties Community 
Health v. Maryland (4th Cir. 2007) 498 F.3d 294, 297; see ibid. 
[discussing substantially similar predecessor to current law].)1 
Both federal and state Medicaid law contain additional 
instructions about how to fulfill this 100 percent reimbursement 
requirement.  Under federal law, Medicaid reimbursement to 
FQHCs is based on a prospective per-visit rate that includes the 
cost of covered services by physicians or other designated health 
professionals, as well as services and supplies “incident to” those 
services.  (42 U.S.C. § 1395x(aa)(1)(A)–(B), (3); see also id., 
§§ 1396a(bb), 1396d(a)(2)(C), (l)(2).)  That rate may be adjusted 
when there are changes in the scope of services the health center 
provides.  (Id., § 1396a(bb)(3)(B).)  State law codifies the same 
payment system.  (Welf. & Inst. Code, § 14132.100, subds. (c)–
(e).)  State law further instructs that adjustments are 
“evaluated in accordance with Medicare reasonable cost 
principles.”  (Id., subd. (e)(1); see 42 U.S.C. § 1396a(bb)(2), (4) 
[identifying the Medicare reasonable cost regulations as a 
permissible basis for calculating payment amounts].)   
 
1  
This law was amended in 2000 to implement the 
prospective payment system now in place, which similarly 
requires payment of 100 percent of the costs of furnishing 
services.  (Three Lower Counties Community Health v. 
Maryland, supra, 498 F.3d at p. 298; 42 U.S.C. § 1396a(bb)(2).) 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
5 
The reference to “reasonable cost principles” is to a set of 
regulations promulgated under the federal Medicare statute.2  
(42 U.S.C. § 1395c.)  Much like the Medicaid provisions 
governing FQHCs, the Medicare statute instructs that 
payments to providers be based on the “reasonable cost” of 
covered services, taking into account “both direct and indirect 
costs of providers of services.”  (Id., § 1395x(v)(1)(A).)  The 
implementing regulation specifies that payment must be based 
on reasonable costs that are “related to the care of beneficiaries,” 
including “all necessary and proper costs incurred in furnishing 
the services.”  (42 C.F.R. § 413.9(a) (2023).)   
II. 
Plaintiff Family Health Centers of San Diego is a 
nonprofit corporation that operates multiple federally qualified 
health centers in San Diego County.   
California participates in Medicaid through the California 
Medical Assistance Program, known as “Medi-Cal,” which is 
administered by the State Department of Health Care Services 
(Department).  (Welf. & Inst. Code, §§ 14100.1, 14170, subd. 
(a)(1), 14203.)  In 2013, Family Health asked the Department 
for an increase in the per-visit Medi-Cal reimbursement rate for 
one of its clinics.  In a cost report supporting the request, Family 
Health listed “outreach” among its health care staff costs and 
later provided additional details, including job descriptions for 
 
2 
Medicare, another federal medical assistance program, 
provides payments to providers for the care of elderly persons 
and persons with disabilities.  The Medicare program is not 
relevant to this case except insofar as it has produced a body of 
agency guidance about the calculation of reasonable costs of 
care.  
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
6 
outreach staff, to a Department auditor.  One position, for 
example, was an “Outreach Worker,” who was tasked with 
providing “information and instruction” about Family Health 
resources through “street outreach” and by “meeting with people 
on 
an 
individual 
basis, 
making 
group 
presentations, 
participating in community events and developing accessibility 
as liaison for and guide to” the local Family Health clinic.  A 
“Family Resource Center” outreach worker focused on educating 
parents about the importance of early childhood development 
and Family Health resources for young children; a “Community 
Outreach Specialist” conducted “educational presentations and 
home visits” for families referred for a Childhood Lead Poisoning 
Prevention Program; a “Family Planning Health Educator” 
provided “family planning education and counseling,” focusing 
on “high risk and hard to reach” individuals who were, for 
example, homeless, substance using, or limited English 
speakers; and a “Senior” outreach worker engaged in 
“community education and outreach” to identify “senior citizens 
in need of mental health services” and to connect them to 
appropriate Family Health services.  
The auditor concluded that the salaries and benefits for 
Family Health’s outreach workers were not reimbursable “due 
to insufficient documentation demonstrating that they are 
related to services and supplies that are incident to a FQHC 
visit and a covered benefit.”  Family Health appealed, first 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
7 
through informal administrative review and then, failing that, 
through a formal administrative hearing.3  
At the administrative hearing, the Department auditor 
repeated his conclusion that the contested outreach costs were 
not reimbursable because they were not related to services and 
supplies incident to an FQHC visit.  On cross-examination, the 
Department auditor stated that he was not familiar with federal 
law requiring FQHCs to engage in outreach.  The auditor also 
acknowledged that some administrative costs — indirect costs 
not incident to a visit or covered benefit — were reimbursable 
under federal and state Medicaid law but was “not quite sure” 
why outreach was not such a cost.   
The CEO of Family Health, Fran Butler-Cohen, testified 
at length about Family Health outreach.  Family Health 
conducted outreach to try to engage with targeted populations 
in a variety of settings, including “group and organizational 
settings,” in “church[] and community service center venues,” 
“in the street, in schools, in agen[cies], [and in] business 
venues,” and, for “HIV related outreach,” in “LGBT related 
settings, such as bars, bathhouses, clubs” and “other public 
venues such as beaches and parks.”  Family Health outreach 
workers kept track of whether individuals then attended health 
 
3  
An informal hearing may precede a formal hearing to 
clarify or resolve facts and issues in dispute.  Unlike the formal 
hearing — which is conducted before an administrative law 
judge, must comply with a variety of procedural requirements, 
and results in a final decision — the informal review process is 
conducted by a hearing auditor and does not itself lead to a final 
decision of the Department.  (Health & Saf. Code, § 100171; Cal. 
Code Regs., tit. 22, § 51016, subd. (a) (7), (8), (9), (11).)   
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
8 
center medical appointments, as well as whether those 
appointments were covered by Medi-Cal or other insurance.  She 
emphasized the difficulties target populations faced in accessing 
care and described examples of federal and state guidance that 
characterized outreach as an allowable administrative cost 
under Medicaid and Medi-Cal.  
Family Health also presented testimony from Kelly 
Hohenbrink, an expert in health industry finance and, 
specifically, in federally qualified health center audits.  
Hohenbrink testified that because outreach is a requirement of 
participation in the FQHC program, outreach costs were 
“reasonable and related to the cost of furnishing services” under 
applicable federal law; health centers would not be able to care 
for patients at all if they lost their health center status for 
failure to comply with the requirement.   
After the hearing, the administrative law judge (ALJ) 
issued a proposed order finding that Family Health was not 
entitled to reimbursement for its outreach costs.  The ALJ relied 
for this conclusion on the Provider Reimbursement Manual 
issued by the federal Centers for Medicare & Medicaid Services, 
which offers informal guidance on the application of Medicare 
reasonable cost principles.  (Centers for Medicare & Medicaid 
Services, The Provider Reimbursement Manual, Part 1, 
Foreword (Provider Manual).)4  Citing the sections of the 
 
4  
Provider 
Manual 
available 
at 
 [as of July 24, 2023].   
 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
9 
Provider Manual relating to a provider’s advertising costs, the 
judge concluded that Family Health’s outreach was a form of 
nonreimbursable advertising because it was designed “to bring 
new patients into the facilities.”  
The Chief Administrative Law Judge (Chief ALJ) initially 
adopted the judge’s proposed order as the agency decision, but 
then issued a new decision after granting Family Health’s 
motion for reconsideration.  The Chief ALJ concluded that 
Family Health did not present sufficient evidence to meet the 
“fundamental reimbursement standard” that outreach was 
“related to the care of beneficiaries”; instead, Family Health 
conducted outreach “to attract new patients and increase 
patient utilization of services.”  Pointing to the Provider Manual 
guidance on advertising, the Chief ALJ concluded that the 
manual “specifically excludes Medicaid reimbursement” for 
these activities. 
Family Health filed a petition for writ of administrative 
mandamus in the superior court to challenge the Department’s 
ruling.  The superior court denied the petition, agreeing with the 
Department 
that 
Family 
Health’s 
outreach 
was 
not 
“appropriate and helpful” to patient care but instead merely 
sought to attract new patients, which made it nonreimbursable 
advertising.   
The Court of Appeal affirmed.  The court explained that 
Family Health’s “outreach efforts involve going into public 
spaces such as on the street, at schools, business venues, 
 
All Internet citations in this opinion are archived by year, 
docket 
number, 
and 
case 
name 
at 
. 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
10 
beaches, and parks to attract new patients from its audiences 
within the general public, provide counseling regarding 
eligibility for services, and make medical appointments for 
services.”  (Family Health Centers of San Diego v. State Dept. of 
Health Care Services (2021) 67 Cal.App.5th 356, 368 (Family 
Health Centers).)  The court acknowledged that “[s]uch services 
may benefit the recipient by increasing awareness of care 
available through [Family Health] and making the recipient feel 
more comfortable seeking care.  And, such activities are 
required as part of [Family Health’s] role as a FQHC grant 
recipient.”  (Ibid.)  But the court concluded that it “was not an 
abuse of discretion to find that such activities had the purpose 
and effect of bringing in new patients and increasing utilization 
of [Family Health’s] facilities, making them akin to advertising” 
that was not a reimbursable cost according to Provider Manual 
guidance.  (Id. at p. 369.) 
We granted Family Health’s petition for review.  In our 
review we employ the same standards as the trial court and the 
Court of Appeal.  We consider whether the Department 
“proceeded without, or in excess of, jurisdiction; whether there 
was a fair trial; and whether there was any prejudicial abuse of 
discretion.  Abuse of discretion is established if the 
[Department] has not proceeded in the manner required by law, 
the order or decision is not supported by the findings, or the 
findings are not supported by the evidence.”  (Code Civ. Proc., 
§ 1094.5, subd. (b).)  “In determining whether the agency 
complied with the required procedures and whether the agency’s 
findings are supported by substantial evidence, the trial court 
and the appellate courts essentially perform identical roles.  We 
review the record de novo and are not bound by the trial court’s 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
11 
conclusions.”  (Environmental Protection Information Center v. 
California Dept. of Forestry & Fire Protection (2008) 44 Cal.4th 
459, 479.)  On “ ‘purely legal’ ” questions, we exercise 
independent judgment and a decision “must ‘be reversed if based 
on erroneous conclusions of law.’ ”  (County of San Diego v. State 
of California (1997) 15 Cal.4th 68, 109.)  Here, we conclude the 
Department’s decision denying Family Health reimbursement 
for any of its outreach and education costs is based on erroneous 
conclusions of law, so we reverse and remand for further 
proceedings. 
III. 
A. 
The framework for Medicaid reimbursement of FQHCs 
comprises an interlocking series of federal and state statutory 
and regulatory provisions.  The federal Medicaid statute makes 
clear that, to avoid diverting FQHC grant moneys for the care of 
patients entitled to Medicaid assistance, states are obligated to 
pay FQHCs 100 percent of the costs of providing medical 
assistance to Medicaid beneficiaries, so long as the costs are 
“reasonable and related to the cost of furnishing such services.”  
(42 U.S.C. § 1396a(bb)(2).)  The Medicaid statute further 
instructs that in applying this standard, states may use 
reasonable cost principles developed under Medicare law.  (Id., 
§ 1396a(bb)(2), (4).)  Following this suggestion, California law 
expressly incorporates those regulations for purposes of 
determining how much FQHCs are owed for the care of Medicaid 
beneficiaries.  (Welf. & Inst. Code, § 14132.100(e)(1), citing 42 
C.F.R. pt. 413.)  
Thus, by virtue of federal permission and state command, 
the Medicare reasonable cost regulations form the centerpiece 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
12 
of our inquiry in this case.  But much like the “reasonable and 
related” requirement set out in the Medicaid statute itself, the 
regulations are cast at a relatively high level of generality.  The 
regulations explain that provider payments must be based on 
the “reasonable cost” of covered services “related to the care of 
beneficiaries,” including “all necessary and proper costs 
incurred in furnishing the services.”  (42 C.F.R. § 413.9(a) 
(2023).)  “Necessary and proper costs” are defined as “costs that 
are appropriate and helpful in developing and maintaining the 
operation of patient care facilities and activities.  They are 
usually costs that are common and accepted occurrences in the 
field of the provider’s activity.”  (Id., § 413.9(b)(2).)  The 
regulations further specify that “[r]easonable cost includes all 
necessary and proper expenses incurred in furnishing services, 
such as administrative costs, maintenance costs, and premium 
payments for employee health and pension plans.”  (Id., 
§ 413.9(c)(3).) 
 
The level of generality in these instructions is intentional:  
In the Medicare program, the same reasonable cost standard 
applies to a wide variety of provider types, ranging from 
hospitals to home health agencies.  (42 C.F.R. § 413.1(a)(2)(i), 
(iii) (2023).)  The regulations thus acknowledge that the “costs 
of providers’ services vary from one provider to another and the 
variations generally reflect differences in scope of services and 
intensity of care.  The provision in Medicare for payment of 
reasonable cost of services is intended to meet the actual costs, 
however widely they may vary from one institution to another.”  
(Id., § 413.9 (c)(2).) 
 
The Medicare regulations contain no specific instructions 
for the evaluation of any particular cost, much less do they 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
13 
directly answer the question whether an FQHC’s costs of 
outreach and education can qualify as “reasonable and related” 
costs of care.  They simply tell us, in general terms, that 
reasonable costs related to the care of beneficiaries include 
“costs that are appropriate and helpful in developing and 
maintaining the operation of patient care facilities and 
activities”; that such costs may include both direct and indirect 
costs of care, such as administrative costs; and that they are 
usually the sort of costs that are “common and accepted” in the 
provider’s field.  Nothing in the language of the regulations 
clearly precludes reimbursement of an FQHC’s expenditures on 
education and outreach services, which are not only common 
and accepted activities among FQHCs, but also listed among the 
very “primary health services” that such institutions must 
provide to the populations they serve.  (See 42 U.S.C. 
§ 254b(b)(1)(A)(iv)–(v).) 
 
In the agency decision on review, the Chief ALJ 
acknowledged that Medicaid funding may be used for some 
outreach activities, citing informal federal agency guidance 
indicating that outreach may be appropriate and helpful in 
providing care to Medicaid and Medicaid-eligible patients.  In 
its State Medicaid Manual, for instance, the federal Centers for 
Medicare & Medicaid Services (CMS) identifies “Medicaid 
outreach (methods to inform or persuade recipients or potential 
recipients to enter into care through the Medicaid system)” as 
an example of an administrative cost that is reimbursable under 
the Medicaid program.  (CMS, State Medicaid Manual, Part 4, 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
14 
§ 4302.2, subd. (G)(2), p. 4-312.)5  A 1994 State Medicaid 
Director Letter likewise reiterates that Medicaid outreach as 
described in the State Medicaid Manual is “necessary for the 
proper and efficient administration of the State plan” for 
providing services covered by Medicaid.  (Letter from Sally K. 
Richardson, Director, Medicaid Bureau, Health Care Financing 
Administration (now called CMS), to State Medicaid Directors, 
Dec. 20, 1994, p. 2.)6   
 
The Chief ALJ in this matter, however, determined that 
this guidance concerning outreach activities did not resolve the 
question whether outreach conducted by Family Health was 
“reasonably related, directly or indirectly, to patient care.”   To 
answer that question, the Chief ALJ turned to the Medicare 
 
5  
State 
Medicaid 
Manual 
available 
at 
 [as of July 24, 2023]. 
6  
This general view is also echoed in informal Department 
guidance:  a 2004 manual regarding Medi-Cal Administrative 
Activities, which stated that outreach is a reimbursable 
administrative activity when it informs “eligible or potentially 
eligible individuals about Medi-Cal programs and services and 
how to access them” (Dept. of Health Care Services, California 
School-Based MAA Manual (June 2004) § 5, Activity Codes: 
Descriptions and Examples, Code 4, Initial Medi-Cal Outreach, 
p. 5-5); and a 2011 Department memorandum regarding claims 
for 
reimbursement 
under 
a 
County-Based 
Medi-Cal 
Administrative Activities program, which stated that the “cost 
of providing general outreach to the local community is an 
integrated part” of a federally qualified health center’s per-visit 
rate (Administrative Claiming Local and School Services 
Branch, mem. to Local Governmental Agency Coordinators for 
the County Based Medi-Cal Administrative Activities Program, 
Sept. 22, 2011). 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
15 
Provider Reimbursement Manual, which contains more specific 
guidance on a wide variety of issues related to calculating and 
reimbursing Medicare costs.  The Court of Appeal did the same, 
concluding the Department did not abuse its discretion in its 
decision by relying on the manual.  (Family Health Centers, 
supra, 67 Cal.App.5th at p. 360.)  Now, before this court, the 
parties’ arguments likewise center on the meaning of the 
Provider Manual and the guidance it offers. 
Though we, too, will consider the Provider Manual, we 
should be clear about the role the manual plays in the analysis.  
The manual is an informal guidance document; it does not “have 
the force and effect of law.”  (Shalala v. Guernsey Memorial 
Hospital (1995) 514 U.S. 87, 99; see Tulare Pediatric Health 
Care Center v. State Dept. of Health Care Services (2019) 41 
Cal.App.5th 163, 175; Provider Manual, supra, Foreword [the 
manual “provides guidelines and policies” to implement 
Medicare reasonable cost regulations “but it does not have the 
effect of regulations”].)7  But interpretations in “a non-binding 
administrative manual” are at least entitled to consideration to 
the extent they have the “ ‘power to persuade.’ ”  (Georgia v. 
Public.Resource.Org, Inc. (2020) ___ U.S. ___, ___ [140 S.Ct. 
1498, 1510]; cf. Atrium Med. Center v. Dept. of Health & Human 
Serv. (6th Cir. 2014) 766 F.3d 560, 571 (Atrium Medical Center) 
[collecting 
cases 
concerning 
the 
deference 
owed 
to 
interpretations in the Provider Manual].)  And the Provider 
Manual offers guidance in a highly technical area governed by a 
 
7  
The parties do not argue that the Provider Manual is 
entitled to greater deference as an agency’s interpretation of its 
own regulations.  (See Kisor v. Wilkie (2019) ___ U.S. ___, ___ 
[139 S.Ct. 2400, 2414].)   
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
16 
large and complex regulatory scheme.  While the Medicare 
reasonable cost regulation speaks at a relatively high level of 
generality, the manual sets out a series of more specific 
instructions.  Because these more specific instructions reflect 
the accumulated experience of the responsible agency, 
discussions about the proper interpretation and application of 
Medicare reasonableness principles often center on the Provider 
Manual, as they have in this case.  (Cf., e.g., Atrium Medical 
Center, at p. 571 [noting that, “practically speaking, . . . courts 
tend to defer to statutory interpretations found in the [Provider 
Manual] regardless of which rule” of deference they apply].) 
We therefore turn to the Department’s reading of the 
Provider Manual, while keeping firmly in view the statutory and 
regulatory provisions underlying the informal agency guidance.   
B. 
The Provider Manual contains guidance on a wide variety 
of subjects related to calculating and reimbursing Medicare 
costs.  In the decision on review, the Department relied on the 
Provider Manual’s provisions regarding advertising costs, 
concluding that those provisions categorically prohibited 
outreach activities that attracted new patients and increased 
their use of health center services.  Although it is unclear that 
the manual’s discussion of advertising was written in 
contemplation of the type of activities at issue in this case, we 
likewise focus on those provisions for the value of the guidance 
they may offer in this context.   
Advertising is among the topics covered in a chapter on 
costs related to patient care.  (Provider Manual, supra, Chapter 
21.)  Tracking the reasonable cost regulations, the manual 
describes general principles for reimbursement of patient care 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
17 
costs, stating that reimbursement must be based on the 
reasonable cost of covered services that are “related to the care 
of beneficiaries.”  (Id., § 2100.)  Costs related to patient care 
“include all necessary and proper costs which are appropriate 
and helpful in developing and maintaining the operation of 
patient care facilities and activities” and “are usually costs 
which are common and accepted occurrences in the field of the 
provider’s activity.”  (Id., § 2102.2.)   
The Provider Manual’s guidance on advertising costs 
likewise tracks the reasonable cost regulations.  The guidance 
states 
that 
the 
allowability 
of 
advertising 
costs 
for 
reimbursement purposes “depends on whether they are 
appropriate and helpful in developing, maintaining, and 
furnishing covered services” and on “the facts and circumstances 
of each provider situation.”  (Provider Manual, supra, § 2136.)  
“To be allowable, [advertising] costs must be common and 
accepted occurrences in the field of the provider’s activity.”  
(Ibid.) 
The manual goes on to distinguish between allowable and 
unallowable costs of advertising.  The cost of advertising is 
allowed when it “is primarily concerned with the presentation of 
a good public image and directly or indirectly related to patient 
care.”  (Provider Manual, supra, § 2136.1.)  This may include 
advertising information about visiting hours or the cost of 
“informational listings of providers” in a general resource, for 
example, a “telephone directory” or “ ‘yellow pages,’ ” or a 
directory of similar facilities.  (Ibid.)  Costs are allowed for 
advertising that apprises other health providers of “the 
availability of the provider’s covered services” and serves a 
purpose “related to patient care” because such contacts “make 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
18 
known what facilities are available” to provide needed health 
care services.  (Ibid.)  Allowable costs include the production and 
distribution of “informational materials” for health providers 
that “primarily refer to the provider’s operations” and 
“contribute to an understanding of the role and function of the 
facility as a provider of covered health care in the community.”  
(Ibid.) 
The manual contrasts the costs of “public relations 
activity” (allowable) with the cost of “advertising to the general 
public which seeks to increase patient utilization of the 
provider’s facilities” (not allowable).  (Provider Manual, supra, 
§ 2136.2.)   Here, the Department determined that Family 
Health’s outreach and education costs were categorically 
nonreimbursable because their purpose was to attract new 
patients and increase utilization of Family Health’s facilities.  
(See Family Health Centers, supra, 67 Cal.App.5th at p. 369.)8   
No one disputes that Family Health’s outreach and 
education activities may increase patient utilization of its 
 
8  
Family Health argues that the final agency decision’s 
reliance on section 2136.2 was misplaced because its outreach 
activities do not constitute advertising.  Family Health 
emphasizes that the outreach at issue involved individual 
interactions 
directed 
toward 
specific 
populations, 
not 
promotional material directed to the “general public” (Provider 
Manual, supra, § 2136.2).  It is unclear, however, whether 
person-to-person communications are categorically exempt from 
restrictions on the reimbursability of certain advertising costs.  
We need not decide that issue here.  Even if Family Health’s 
outreach activities are not strictly the sort of advertising 
contemplated in the Provider Manual, section 2136 may be 
considered to the extent it provides relevant, albeit nonbinding, 
guidance. 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
19 
services.  The same is necessarily true of any FQHC that 
engages (as it must) in outreach and education activities — 
qualified health centers are required, as a term of their 
participation in the federal health center program, to offer both 
basic health services to underserved populations and to engage 
in education and outreach to enable members of these 
populations to avail themselves of the care the centers provide.  
(42 U.S.C. § 254b(a)(1), (b)(1)(A)(iv)–(v).)  Indeed, the controlling 
statute defines these required education and outreach activities 
as part of the “primary health services” FQHCs provide to the 
communities they serve.  (See id., § 254b(b)(1)(A)(iv)–(v).)  We are 
not convinced, however, that these statutorily mandated 
services must be treated as nonallowable costs of advertising 
merely because they may lead to increased utilization of an 
FQHC’s services. 
Although the manual does describe advertising costs as 
unallowable when they involve “advertising to the general 
public which seeks to increase patient utilization of the 
provider’s facilities” (Provider Manual, supra, § 2136.2), the 
remainder of the manual’s advertising provisions make clear 
that an increase in patient utilization alone is not disqualifying.  
After all, other forms of advertising the manual describes as 
allowable may also increase patient utilization.  For instance, 
the manual treats as allowable the costs of providing 
information about providers and services related to patient 
care — information that presumably tends to facilitate patient 
utilization of those providers and services.  The manual likewise 
treats advertising that presents a good public image and informs 
the public about available services as allowable, even though 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
20 
such advertising would also presumably tend to increase patient 
utilization of the provider’s facilities. 
The lesson we draw from reading the relevant manual 
guidance in full is that reimbursement is not prohibited for all 
forms of advertising that are aimed at the public or that tend to 
increase patient utilization.  The distinction the manual draws 
appears to be a different one.  As one court has put it, “One can 
readily glean from the [Provider Manual’s] less than definitive 
guidance that providers walked a fine line between ‘education’ 
and ‘marketing.’ ”  (Interim Healthcare, Inc. v. Spherion Corp. 
(Del.Super.Ct. 2005) 884 A.2d 513, 569.)  That is, the manual 
distinguishes between advertising designed to facilitate access 
to available health care services — an educational goal related 
to patient care — and advertising designed to encourage use of 
the provider’s facilities over other facilities offering the same or 
similar services — a goal aimed at whether that care will 
generate revenue for the provider. 
This understanding finds support in other aspects of the 
Provider Manual’s guidance.  For example, costs are allowed for 
advertising to other medical professionals to “make known” 
information necessary to “providing for patient care” (Provider 
Manual, supra, § 2136.1) — an educational purpose — but not 
to solicit facility use by practitioners not employed by the 
provider (id., § 2136.2), an effort more closely related to 
attracting market share.  Likewise, in the context of patients 
who elect a home health service when leaving a hospital, an 
agency’s costs of persuading patients to request its services over 
those of other agencies are unallowable “patient solicitation” 
(id., § 2113.2), whereas its costs of “[s]erving as an educational 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
21 
resource” on available services related to patient care, are 
allowable (id., § 2113.4(A)). 
This understanding also makes sense of Provider Manual 
section 2136.2 in its broader statutory and regulatory context.  
Again, the overarching statutory and regulatory instruction is 
to cover the reasonable cost of services related to the care of 
beneficiaries.  (42 U.S.C. § 1396a(bb)(2); 42 C.F.R. § 413.9(a) 
(2023).)  The Provider Manual’s general provisions reflect this 
directive, reiterating that the costs of services “related to the 
care of beneficiaries” (Provider Manual, supra, § 2100) are 
reimbursable and “include all necessary and proper costs which 
are appropriate and helpful in developing and maintaining the 
operation of patient care facilities and activities” (id., § 2102.2).  
A narrower definition of unallowable advertising, one that does 
not encompass information provided to support access to care, 
comports with these mandates, and is consistent with the State 
Medicaid Manual and other informal guidance that treats 
outreach as reimbursable when it informs or persuades 
potential Medicaid beneficiaries to enter into care.  
Although case law applying the Provider Manual’s 
advertising guidance is limited, it reinforces the distinction 
between advertising that educates potential beneficiaries about 
needed care and advertising designed to generate revenue.  
Thus, in one case involving television advertisements for a 
convalescent care facility, the court upheld disallowance of 
advertising costs after finding the ads, which targeted 
caregivers and appeared to urge them to refer patients to the 
provider’s facility, were an attempt to increase patient levels at 
the facility and reach the provider’s goal of full capacity.  
(Convalescent Care, Inc. v. Department of Medical Assistance 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
22 
Services (2002) 59 Va.Cir. 123, 126; see also Gosman v. U.S. 
(1978) 215 Ct.Cl. 617, 628 [upholding disallowance when 
advertising was “intended to increase the general occupancy of 
the facilities”].)  In another case, the court found disallowance 
was reasonable when the design of an advertisement promoted 
use of the provider’s facilities over those of its competitors.  
(Superior Home Health Care, Inc. v. Secretary of HHS (6th Cir., 
Oct. 13, 1999, No. 98-6254) 1999 U.S.App. Lexis 26251 at p. *9.)  
By contrast, the costs of television and radio advertisements 
that promoted an alcohol treatment facility were allowable 
when they were “ ‘appropriate and helpful’ ” to the operation of 
the facility and a “ ‘common and accepted’ ” tool in persuading 
those in need of care to obtain it.  (Advanced Health Systems, 
Inc. v. Schweiker (D.Colo. 1981) 510 F.Supp. 965, 969.)  In that 
case, the court observed that “ ‘solicitation which motivates an 
alcoholic to seek treatment does not become unrelated to his 
care simply because it motivates him to seek treatment at the 
provider’s facility rather than not at all.’ ”  (Ibid.)  
These are admittedly nuanced distinctions.  Apparently 
recognizing as much, the Provider Manual indicates that the 
task of differentiating allowable advertising costs from 
unallowable ones may require close examination of the facts and 
context.  The manual notes that it may be necessary to 
scrutinize a provider’s advertising to determine whether the 
“specific objective” of the activity is allowable.  (Provider 
Manual, supra, § 2136.2; see also id., § 2136.1 [whether the 
provider is “primarily concerned” with presenting a good public 
image related to patient care].)  And if the costs of advertising 
“for any purpose” are not clearly allowable or unallowable, they 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
23 
“may be allowable if they are related to patient care and are 
reasonable.”  (Id., § 2136.1.)   
Ultimately, as we have emphasized, the binding authority 
governing reimbursement for provider services requires the 
“reasonable cost” of covered services to be “related to the care of 
beneficiaries,” and to include “all necessary and proper costs 
incurred in furnishing the services.”  (42 C.F.R. § 413.9(a) 
(2023).)  No provision of the Provider Manual’s informal 
guidance is reasonably read to mean that an FQHC’s costs of 
outreach and education are categorically nonreimbursable 
under the applicable statutes and regulations merely because 
the outreach and education are designed to increase patient 
access to, and therefore utilization of, the basic health services 
an FQHC has agreed to provide, at low or no cost, to members 
of underserved communities.   
C. 
 
In the final administrative decision on review, the Chief 
ALJ stated that the auditor reasonably concluded that Family 
Health outreach was “too attenuated” from the care of 
beneficiaries to qualify for reimbursement.  The Chief ALJ 
reasoned that the purpose of Family Health outreach was 
“patient recruitment” and that the outreach was therefore a 
categorically unallowable advertising cost according to the 
Provider Manual. 
For the reasons we have explained, the Chief ALJ was 
mistaken.  The administrative findings here did not reveal 
unallowable revenue-driven interests behind Family Health’s 
outreach activities.  Rather, the Chief ALJ’s decision referenced 
activities that were apparently related to increasing patient 
awareness of and access to Family Health services, and that 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
24 
included making “new patients ‘comfortable enough to seek 
care.’ ”  Nothing in the cited sections of the Provider Manual, or 
in the underlying statutory or regulatory provisions, establishes 
that 
the 
costs 
of 
such 
activities 
are 
categorically 
nonreimbursable.  And the Chief ALJ did not appear to consider 
the significance of other governing factors, such as whether the 
outreach activities were necessary and proper in the context of 
furnishing FQHC services, and common and accepted among 
FQHC providers.  Because the Chief ALJ did not review the 
Department’s audit determination “in the manner required by 
law,” and the administrative “decision is not supported by the 
findings,” her ruling was an abuse of discretion.  (Code Civ. 
Proc., § 1094.5, subd. (b).)   
In its briefing before this court, the Department now 
concedes that Family Health outreach may have qualified for 
reimbursement to the extent that it provided “information to the 
public about the provider’s services.”  But the Department 
contends that the Chief ALJ was justified in finding insufficient 
evidence to meet that standard, given the “limited evidence” 
Family Health presented on the point.9   
 
9  
Although it acknowledges that some forms of FQHC 
outreach may be reimbursable, the Department argues that 
outreach or education that takes place in a public place such as 
a beach — as opposed to a location intended for certain 
underserved populations, such as a homeless shelter — 
constitutes prohibited advertising to the general public.  We are 
unpersuaded.  The location and scope of the outreach may be 
relevant in determining whether its primary purpose is to 
educate underserved persons about available, low- or no-cost 
options for health care or else to generate revenue for the 
facility, but it is not alone dispositive.  
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
25 
We are not persuaded by the Department’s contention.  
First, as we have explained, the Chief ALJ did not apply the 
relevant standard, so she could not have found that Family 
Health supplied insufficient evidence to meet it.  Second, the 
Department’s description of the evidence is not a fair 
characterization of the record.  Though the Department now 
claims that Family Health “made no effort” to show how its 
outreach activities were related to patient care, Family Health 
presented extensive evidence and argument on this point.  
Through documentary evidence and witness testimony, Family 
Health asserted, for example, that outreach staff provided 
education and information about available Family Health 
services to medically underserved populations who faced 
obstacles accessing care; that Family Health kept track of 
whether, after being contacted, the individuals received medical 
care at a Family Health clinic and whether clinic services were 
covered by Medi-Cal or other assistance; that federal law 
required Family Health to conduct outreach because it enabled 
the populations served to access medical care; and that federal 
and state guidance characterized the type of outreach Family 
Health engaged in as an allowable administrative cost 
necessary to delivering Medicaid services.   
The bottom line is this:  Although the Chief ALJ may have 
alluded to the sufficiency of the evidence, the Chief ALJ’s review 
of that evidence rested on a mistaken understanding of the 
relevant legal principles as they relate to an FQHC’s outreach 
and education activities.  We therefore direct the Court of 
Appeal to remand the matter for the Department to reconsider 
the reimbursability of Family Health’s outreach and education 
costs under the applicable cost principles. 
FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT 
OF HEALTH CARE SERVICES 
Opinion of the Court by Kruger, J. 
 
26 
CONCLUSION 
We reverse the judgment of the Court of Appeal with 
directions to remand the matter to the Department for further 
proceedings consistent with this opinion.  
 
 
 
 
 
 
 
 
     KRUGER, J. 
 
We Concur: 
GUERRERO, C. J. 
CORRIGAN, J. 
LIU, J. 
GROBAN, J. 
JENKINS, J. 
EVANS, J. 
 
 
See next page for addresses and telephone numbers for counsel who 
argued in Supreme Court. 
 
Name of Opinion  Family Health Centers of San Diego v. State 
Department of Health Care Services 
__________________________________________________________  
 
Procedural Posture (see XX below) 
Original Appeal  
Original Proceeding 
Review Granted (published) XX 67 Cal.App.5th 356 
Review Granted (unpublished)  
Rehearing Granted 
__________________________________________________________  
 
Opinion No. S270326 
Date Filed:  July 24, 2023 
__________________________________________________________  
 
Court:  Superior  
County:  Sacramento 
Judge:  Steven M. Gevercer 
__________________________________________________________   
 
Counsel: 
 
Douglas Cumming Medical Law, Douglas S. Cumming; Murphy, 
Campbell, Alliston & Quinn and George E. Murphy for Plaintiff and 
Appellant. 
 
Hanson Bridgett, Kathryn E. Doi; Law Office of Regina M. Boyle and 
Regina M. Boyle for Avenal Community Health Center, Eisner Health, 
Golden Valley Health Centers, Innercare, La Maestra Community 
Health Centers, Neighborhood Healthcare, Open Door Community 
Clinic, Ravenswood Family Health Network, Shasta Community 
Health, TrueCare and WellSpace Health as Amici Curiae on behalf of 
Plaintiff and Appellant. 
 
DJR García and Deborah J. Rotenberg for California Primary Care 
Association as Amicus Curiae on behalf of Plaintiff and Appellant. 
 
Xavier Becerra and Rob Bonta, Attorneys General, Michael J. Mongan, 
State Solicitor General, Janill L. Richards, Principal Deputy State 
 
 
Solicitor General, Cheryl L. Feiner, Assistant Attorney General, 
Joshua Patashnik, Deputy State Solicitor General, Niromi W. Pfeiffer, 
Gregory D. Brown, Marianne A. Pansa and Kevin L. Quade, Deputy 
Attorneys General, for Defendant and Respondent. 
 
 
Counsel who argued in Supreme Court (not intended for 
publication with opinion): 
 
George E. Murphy 
Murphy, Campbell, Alliston & Quinn 
2220 Douglas Boulevard, #240 
Roseville, CA 95661 
(916) 400-2300 
 
Joshua Patashnik 
Deputy State Solicitor General 
600 West Broadway, Suite 1800 
San Diego, CA 92101 
(619) 738-9628