1

Filed 10/7/21 Family Health Centers of San Diego v. State Dept. of Health Care Services CA3

NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for 

publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication 

or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

----

FAMILY HEALTH CENTERS OF SAN DIEGO,

Plaintiff and Appellant,

v.

STATE DEPARTMENT OF HEALTH CARE 

SERVICES,

Defendant and Respondent.

C090618

(Super. Ct. No. 34-2018-

80002952-CU-WM-GDS)

This case concerns the determination of a reasonable reimbursement rate for a 

federally qualified health center (FQHC) participating in the Medi-Cal program. 

As part of a request to receive a higher reimbursement rate, plaintiff Family Health 

Centers of San Diego (Family Health) submitted a cost report detailing the reimbursable 

costs incurred by its clinics in providing covered services to Medi-Cal patients. The cost 

report also identified certain nonallowable costs pertaining to inpatient obstetric (OB) 

services provided at outside hospitals, subcontracted medical services, and subcontracted 

homeless services. Because the costs were not allowable Medi-Cal costs, Family Health 
2

eliminated them from its cost report. As part of an audit, however, defendant State 

Department of Health Care Services (the Department) determined the costs should not 

have been eliminated from the cost report. Instead, the Department reclassified the costs 

to a nonreimbursable cost center, which had the effect of disallowing a proportionate 

share of the clinics’ administrative overhead costs. Family Health filed an administrative 

appeal to dispute the audit adjustments, but, after a formal hearing, its appeal was denied. 

Family Health then filed a petition for a writ of mandate challenging the administrative 

decision, which also was denied. 

Family Health appeals the trial court’s judgment denying its petition. Family 

Health contends that the Department did not establish a proper basis for reclassifying the 

costs to a nonreimbursable cost center, and that the decision to reclassify the costs was 

not supported by substantial evidence. Family Health separately argues that a significant 

subset of the costs should not have been included in the nonreimbursable cost center 

because they were not costs at all. We affirm the judgment denying the petition.

BACKGROUND

A. Legal background

The federal Medicaid program is a cooperative federal-state assistance program 

designed to expand access to medical care for low income persons. (Department of 

Health Services v. Superior Court (1991) 232 Cal.App.3d 776, 778; 42 U.S.C. § 1396 et 

seq.) Through the program, the federal government provides financial assistance to states 

so that they may reimburse health care providers who furnish necessary medical services 

to qualified indigent persons. (Robert F. Kennedy Medical Center v. Belshé (1996) 13 

Cal.4th 748, 751; Three Lower Counties Community Health Services, Inc. v. State of 

Maryland (4th Cir. 2007) 498 F.3d 294, 297 (Three Lower Counties).) California 

participates in the Medicaid program through its California Medical Assistance Program, 

or “Medi-Cal.” (Welf. & Inst. Code, § 14000 et seq.; Robert F. Kennedy Medical Center, 

supra, 13 Cal.4th at p. 751.) The Department is the state agency responsible for 
3

administering California’s Medi-Cal program in compliance with the state Medicaid plan 

and applicable federal and state Medicaid laws and regulations. (Redding Medical 

Center v. Bontá (1999) 75 Cal.App.4th 478, 480 (Redding); Welf. & Inst. Code, § 14203; 

Cal. Code Regs., tit. 22, § 50004; 42 U.S.C. § 1396a(a)(5); 42 C.F.R. §§ 431.1, 431.10

(2021).)

Among the services covered under the Medi-Cal program are those provided by 

FQHC’s, community-based health care providers that receive federal grant funding for 

furnishing primary and specialty care services in medically underserved areas. (Three 

Lower Counties, supra, 498 F.3d at p. 297; Welf. & Inst. Code, § 14132.100, subd. (a); 

42 U.S.C. §§ 254b, 1396a(a)(15) & (bb), 1396d(a)(2)(C) & (l)(2).) The state is required 

to reimburse FQHC’s for their covered Medi-Cal services. (42 U.S.C. § 1396a(bb).) 

Thus, FQHC’s in California have two potential sources of compensation: federal grants 

for providing services not covered by Medi-Cal to medically underserved communities,

and state reimbursements for providing covered services to qualified Medi-Cal 

beneficiaries. (See Legacy Cmty. Health Servs. v. Smith (5th Cir. 2018) 881 F.3d 358, 

363; Cmty. Health Care Assn. of N.Y. v. Shah (2d Cir. 2014) 770 F.3d 129, 136; Alameda 

Health Sys. v. Ctrs. for Medicare & Medicaid Servs. (N.D.Cal. 2017) 287 F.Supp.3d 896, 

902; 42 U.S.C. § 254b(k)(3)(F); 42 C.F.R. §§ 413.5, 413.9(b) (2021).)

The Medi-Cal program uses a prospective “per-visit” rate to reimburse FQHC’s 

for services provided to qualified Medi-Cal beneficiaries. (Welf. & Inst. Code, § 

14132.100, subd. (c).) An average “per-visit” rate is determined by dividing the FQHC’s 

total “allowable” costs by the number of patient visits.1 (Three Lower Counties, supra, 

1 Although the law contemplates alternative methods of calculating an FQHC’s 

reimbursement rate, this is the method used by Family Health in connection with its 

change-in-scope-of-service request in this case. (Welf. & Inst. Code, § 14132.100, subd.

(i).) 
4

498 F.3d at p. 298; 42 U.S.C. § 1396a(bb).) The FQHC’s reimbursement is then 

calculated by multiplying the actual number of patient “visits” by the fixed per-visit rate. 

(Three Lower Counties, at p. 298; Welf. & Inst. Code, § 14132.100, subds. (c) & (g).) 

An FQHC’s “allowable” costs are determined in accordance with applicable 

Medicare cost principles, as described in part 413 of title 42 of the Code of Federal 

Regulations, and as further interpreted by the Centers for Medicare & Medicaid Services 

Publication 15-1, The Provider Reimbursement Manual (hereafter, the “PRM”). (Welf. 

& Inst. Code, § 14132.100, subds. (e)(1) & (i)(2)(B)(ii); Oroville Hospital v. Department 

of Health Services (2006) 146 Cal.App.4th 468, 472; see also Community Care 

Foundation v. Thompson (D.D.C. 2006) 412 F.Supp.2d 18, 22-23 [PRM entitled to high 

degree of deference as interpretations of Medicare regulations].) 

Medicare cost principles state that payments to providers must be based on the 

reasonable cost of covered services related to the care of beneficiaries. (42 C.F.R. §§ 

413.9(a), (b) & (c)(3) (2021); PRM §§ 2100, 2102.1, 2102.2, 2102.3, 2103 (rev. 454, 09-

12).) Reasonable cost includes all “necessary and proper” costs incurred in rendering 

services. (42 C.F.R. §§ 413.5(a), 413.9(a), (b) & (c)(3) (2021); PRM § 2100 (rev. 454, 

09-12).) Necessary and proper costs are those “that are appropriate and helpful in 

developing and maintaining the operation of patient care facilities and activities,” and are 

“usually . . . common and accepted occurrences in the field of the provider’s activity.” 

(42 C.F.R. § 413.9(b)(2) (2021); PRM § 2102.2 (rev. 454, 09-12).) Reasonable cost takes 

into account both direct and indirect costs, including, without limitation, administrative 

overhead. (42 C.F.R. §§ 413.5(c), 413.9(c)(3), 413.102, 413.134, 413.153, 413.157

(2021); PRM §§ 2102.2 (rev. 454, 09-12), 2150 (rev. 315, 12-84), 2150.2 (rev. 315, 12-

84).) 

Cost reimbursement principles require providers to maintain and produce cost 

data, based on financial and statistical records that are current, accurate, and have 

sufficient detail to determine the costs payable under the program. (42 C.F.R. §§ 413.20, 
5

413.24 (2021); PRM §§ 2300, 2304 (rev. 336, 08-86); Redding, supra, 75 Cal.App.4th at 

p. 481.) Standard accounting principles and reporting practices must be followed. (42 

C.F.R. § 413.20(a) (2021).)

It is the intent of the program to reimburse providers for all costs reasonably 

incurred in treating program beneficiaries—but only those costs. (42 U.S.C. § 

1396a(bb)(2); see Three Lower Counties, supra, 498 F.3d at p. 298; Chase Brexton 

Health Services Inc. v. Maryland Dept. of Health & Mental Hygiene (D.Md. Dec. 15, 

2006, No. MJG-03-1548) 2006 WL 6593814, at *2.) The regulations seek to avoid cost

shifting between program beneficiaries and nonbeneficiaries. (42 C.F.R. §§ 413.5,

413.9(b)(1), 413.50(b) (2021); PRM § 2102.1 (rev. 454, 09-12); Charter Peachford 

Hospital, Inc. v. Bowen (11th Cir. 1986) 803 F.2d 1541, 1544.) Thus, after determining 

what costs are allowable, the regulations require the total allowable costs to be 

apportioned between program beneficiaries and other patients so that the share borne by 

the program is based upon the services received by program beneficiaries. (Charter 

Peachford, supra, 803 F.2d at pp. 1544-1545; Visiting Nurse Assn. v. Thompson

(E.D.N.Y. 2004) 378 F.Supp.2d 75, 81; 42 C.F.R. §§ 413.50, 413.53 (2021); PRM §§

2200.1 (rev. 406, 08-98), 2202.3 (rev. 245, 01-81).)

In general, cost data must be based on an approved method of cost finding, the 

process used to determine the total costs of services rendered through the assignment of 

direct costs and apportionment of indirect costs. (Redding, supra, 75 Cal.App.4th at p. 

481; 42 C.F.R. § 413.24(b)(1) (2021); PRM §§ 2300, 2302.7, 2306, 2307 (rev. 336, 08-

86).) The federal regulations provide guidance on cost finding methods and principles. 

(42 C.F.R. § 413.24(d) (2021).) 

In this case, the Department applied the cost finding methodology described in 

subdivision (d)(7) of part 413.24 of title 42 of the Code of Federal Regulations, which

provides, in relevant part: “The costs that a provider incurs to furnish services to freestanding entities with which it is associated are not allowable costs of that provider. Any 
6

costs of services furnished to a free-standing entity must be identified and eliminated 

from the allowable costs of the servicing provider, to prevent . . . payment to that 

provider for those costs. This may be done by including the free-standing entity on the 

cost report as a nonreimbursable cost center for the purpose of allocating overhead costs 

to that entity. If this method would not result in an accurate allocation of costs to the 

entity, the provider must develop detailed work papers showing how the cost of services 

furnished by the provider to the entity were determined. These costs are removed from 

the applicable cost centers of the servicing provider. (42 C.F.R. § 413.24(d)(7) (2021).)

The PRM gives examples of how to allocate indirect costs associated with 

nonallowable cost centers, such as a gift or coffee shop. (PRM § 2328(D) (rev. 414, 05-

00).) It provides: “Where cost centers are maintained for these functions . . . , the cost 

should be carried forward for cost finding and receive an allocable share of general 

service costs. After the allocation is made, the total cost of these functions must be 

excluded in determining reimbursable costs. . . . Where the costs (direct and allowable 

share of general service costs) attributable to any nonallowable cost area are so 

insignificant as to not warrant establishment of a nonreimbursable cost center, these costs 

may be adjusted on the Adjustments to Expenses worksheet of the cost reporting forms.” 

(PRM § 2328(D), (rev. 414, 05-00).)

The statutory scheme requires the Department to audit cost reports submitted in 

connection with a requested adjustment to a per-visit rate based on a change in the scope 

of services. (Welf. & Inst. Code, §§ 14132.100, subd. (i)(2)(B)(i), (i)(3)(C), 14170.) The 

purpose of the audit is to substantiate and adjust the FQHC’s actual, allowable costs per 

visit based on the Medicare reasonable cost principles. (Welf. & Inst. Code, §§

14132.100, subd. (i)(2)(B)(i), (ii), (i)(3)(C); Cal. Code Regs., tit. 22, §§ 51016, subd. 

(a)(2), (6), 51021.) 

If the FQHC disagrees with the audit findings, an administrative appeal procedure 

is available to review any disputes. (Welf. & Inst. Code, § 14171; Cal. Code Regs., tit. 
7

22, § 51017 et seq.) At an appeal hearing, the Department has the burden of producing

evidence sufficient to make a prima facie case that the audit findings were correctly 

made. Once the Department has presented such a prima facie case, the burden shifts to 

the provider to demonstrate, by a preponderance of the evidence, that its position 

regarding the disputed issues is correct. (Cal. Code of Regs., tit. 22, § 51037, subd. (i).)

B. Factual and procedural background

On or about December 1, 2014, Family Health submitted a request to adjust its 

prospective per-visit reimbursement rate based on a change in the scope of services for 

the fiscal period ending June 30, 2014. Family Health included a consolidated cost report 

for eight FQHC clinics as well as a separate home office cost report.

2

 

In the clinic cost report, Family Health identified certain costs that were not 

allowable under Medi-Cal because they were associated with nonreimbursable services, 

namely: (1) $732,637 in physician salaries and benefits related to inpatient hospital OB 

services; (2) $2,766,253 in subcontracted medical services; and (3) $924,953 in 

subcontracted homeless services. Because these costs were not allowable, Family Health 

excluded them from its clinic cost report. 

During its audit, however, the Department determined that excluding the 

nonallowable costs from the cost report was not the proper approach. Rather, because the 

costs had a substantive, material connection to clinic operations, the Department 

determined they should remain in the cost report in a nonreimbursable cost center, 

thereby absorbing a proportionate share of the clinics’ total overhead costs. The net 

effect of this change was to reduce Family Health’s total allowable costs and reduce its 

adjusted per-visit reimbursement rate. Based on the audit, the Department set a per-visit

2 Because the clinic sites are classified as a consolidated group, a single per-visit 

rate was calculated and applied to all the clinic sites. 
8

rate of $207.55, an increase from the preexisting rate of $182.06, but lower than the rate 

of $221.52 sought by Family Health. 

Family Health appealed the Department’s cost adjustments, contending the 

disputed amounts were appropriately excluded from its clinic cost report. After a formal

administrative hearing, the administrative law judge (ALJ) issued a proposed decision 

upholding the Department’s audit findings. The Chief ALJ subsequently adopted the 

proposed decision as the final administrative decision. 

Thereafter, Family Health filed a petition for writ of mandate seeking review of 

the administrative decision. The superior court denied the petition and entered judgment 

in favor of the Department. This appeal followed. 

DISCUSSION

I

Standard of Review

“When reviewing the denial of a petition for writ of administrative mandate under 

Code of Civil Procedure section 1094.5, we ask whether the public agency committed a 

prejudicial abuse of discretion. ‘Abuse of discretion is established if the [public agency] 

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.’ [Citations.]” (County 

of Kern v. State Dept. of Health Care Services (2009) 180 Cal.App.4th 1504, 1510.)

In determining whether the administrative findings are supported by the evidence, 

the scope of our review is the same as the trial court. (Hi-Desert Medical Center v. 

Douglas (2015) 239 Cal.App.4th 717, 730.) We review the entire administrative record 

to determine whether the agency’s findings are supported by substantial evidence. (Ibid.; 

Code Civ. Proc., § 1094.5, subd. (c).) “ ‘We do not reweigh the evidence; we indulge all 

presumptions and resolve all conflicts in favor of the [agency’s] decision. Its findings 

come before us “with a strong presumption as to their correctness and regularity.” 

[Citation.] We do not substitute our own judgment if the [agency’s] decision “ ‘ “is one 
9

which could have been made by reasonable people. . . .” [Citation.]’ ” ’ [Citations.]” 

(California Youth Authority v. State Personnel Bd. (2002) 104 Cal.App.4th 575, 584; 

accord, Oak Valley Hospital Dist. v. State Dept. of Health Care Services (2020) 53 

Cal.App.5th 212, 224.) If a finding is supported by substantial evidence, we may not 

disregard or overturn it merely because a contrary finding would have been equally or 

more reasonable. (Boreta Enterprises, Inc. v. Department of Alcoholic Beverage Control

(1970) 2 Cal.3d 85, 94; Boling v. Public Employment Relations Bd. (2018) 5 Cal.5th 898, 

912.)

The interpretation of a regulation or a statute is, of course, a question of law. 

While an administrative agency’s interpretation of the laws it is charged with enforcing 

may be entitled to deference, the court is the ultimate arbiter of the interpretation of the 

law. (Spanish Speaking Citizens’ Foundation, Inc. v. Low (2000) 85 Cal.App.4th 1179, 

1214; McCormick v. County of Alameda (2011) 193 Cal.App.4th 201, 207-208; Yamaha 

Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 7-8, 12, 14; Villanueva 

v. Fidelity National Title Co. (2021) 11 Cal.5th 104, 122-123.)

Family Health, as the party challenging the administrative decision, bears the 

burden of demonstrating there was a prejudicial abuse of discretion. (Elizabeth D. v. 

Zolin (1993) 21 Cal.App.4th 347, 354.)

II

Use of “Materiality” Standard

This case involves the question of how costs of certain nonreimbursable services 

should be treated in the Family Health clinics’ Medi-Cal cost report, namely, whether the

costs should be directly eliminated, as Family Health proposed in its cost report, or 

reclassified into a nonreimbursable cost center, as the Department determined in its audit. 

In the administrative decision, the ALJ concluded that the answer to this question turns

on the strength, or materiality, of the connection between the nonreimbursable services

and the clinics’ onsite operations. If the clinics provided “material” support for the 
10

nonreimbursable services, then, the ALJ concluded, a portion of the clinics’ indirect 

(overhead) costs properly should be allocated to such services by means of a 

nonreimbursable cost center. 

On appeal, Family Health argues the ALJ erred by using a “materiality” standard, 

which it contends is both impermissibly subjective and legally unsupported. 

As a preliminary matter, we conclude that Family Health has forfeited this 

argument by failing to raise it below. “ ‘ “[I]t is fundamental that a reviewing court will 

ordinarily not consider claims made for the first time on appeal which could have been 

but were not presented to the trial court.” ’ ” (Kashmiri v. Regents of University of 

California (2007) 156 Cal.App.4th 809, 830.) “ ‘Appellate courts are loath to reverse a 

judgment on grounds that the opposing party did not have an opportunity to argue and the 

trial court did not have an opportunity to consider. [Citation.] In our adversarial system, 

each party has the obligation to raise any issue or infirmity that might subject the ensuing 

judgment to attack. [Citation.] Bait and switch on appeal not only subjects the parties to 

avoidable expense, but also wreaks havoc on a judicial system too burdened to retry cases 

on theories that could have been raised earlier.’ [Citation.]” (Ibid.; accord, Fair Political 

Practices Com. v. Californians Against Corruption (2003) 109 Cal.App.4th 269, 281.)

In this case, Family Health challenged the sufficiency of the evidence to support 

the materiality findings, but it did not raise any challenge to the materiality standard

itself, and it offers no reason for its failure to do so. Accordingly, we conclude Family 

Health has forfeited the issue.

But even if the argument were not forfeited, we still would reject the claim on the 

merits. The ALJ did not err in using a “materiality” standard when assessing whether the 

nonreimbursable services bore a sufficient connection to clinic operations to require an 

allocation of overhead costs.

As discussed, payments to providers must be based on the reasonable cost of 

services related to the care of Medi-Cal beneficiaries. (Redding, supra, 75 Cal.App.4th at 
11

p. 481.) Under the regulations, reasonable cost includes all necessary and proper 

expenses incurred in furnishing covered services to beneficiaries, including both direct 

and indirect costs. (42 C.F.R. §§ 413.5(a), 413.9(b) & (c)(3) (2021); PRM § 2102.2 (rev. 

454, 09-12).) Although the regulations may not use the term “material,” the objective of 

the regulations is to apportion the total allowable costs of a provider between program 

beneficiaries and other patients so that the costs with respect to individuals covered by 

the program will not be borne by individuals not so covered, and the costs with respect to 

individuals not so covered will not be borne by the program. (Redding, at p. 481; 42 

C.F.R. §§ 413.9(b)(1), 413.50(b), 413.53(a) (2021); PRM §§ 2102.1 (rev. 454, 09-12), 

2202.3 (rev. 245, 01-81).) Thus, the regulations are focused on the connection between a

provider’s costs and its reimbursable services.

Where a provider has engaged in both reimbursable and nonreimbursable services, 

the regulatory scheme requires the Department to determine how much of the provider’s 

costs, both direct and indirect, should be allocated to the nonreimbursable services to 

avoid cost shifting between program beneficiaries and other patients. The ALJ’s 

references to materiality simply carry out this inquiry, asking whether the 

nonreimbursable services bore a sufficient (i.e., significant or material) connection to the 

clinics’ onsite activities such that a portion of the clinics’ overhead costs properly should 

be allocated to them. We find this approach entirely consistent with the regulatory costfinding methodology. (See, e.g., PRM § 2328(D) (rev. 414, 05-00) [where nonallowable 

costs are “insignificant,” they need not be carried forward to a nonreimbursable cost 

center].) Indeed, Family Health’s expert, Kelly Hohenbrink, used a materiality 

standard—or, more precisely, an immateriality standard—when opining that there was an 

insufficient basis to allocate a portion of the clinic overhead to the nonreimbursable

subcontractor activities.

We do not find the concept of “materiality” to be impermissibly vague or 

subjective. It is a widely used and well understood term, especially in the context in 
12

which it was used. Thus, we conclude the ALJ’s focus on materiality was not an abuse of 

discretion.

III

Reclassification of Inpatient OB Services

In its audit, the Department determined that clinic staff were providing material 

support for nonreimbursable inpatient hospital OB services. As a result, the Department 

reclassified the costs of such services to a nonreimbursable cost center, resulting in the

disallowance of a proportionate share of clinic overhead costs. The ALJ held that the 

Department correctly applied the cost-finding methodology to determine the overhead 

costs associated with the nonreimbursable services. 

Family Health argues there is no substantial evidence in the record to support the 

ALJ’s finding of a material connection between the inpatient OB services and the clinics’

onsite operations and, therefore, the Department’s audit adjustments improperly 

disallowed substantial amounts of overhead costs that have no relationship to the 

inpatient OB services. We disagree. Substantial evidence supports the Department’s 

decision to reclassify the costs into a nonreimbursable cost center. Such evidence 

includes the opinion of the Department’s auditor, James Conklin, as well as the testimony 

of Family Health’s own witnesses. 

In conducting the audit, Conklin reviewed the hospital contract and concluded that 

the agreement demonstrated a material connection between the inpatient OB services and

clinic operations. Under the contractual arrangement, clinic physicians and staff would 

provide prenatal and postpartum care at the clinic, while clinic physicians would deliver

the babies at the hospital. However, the contract conferred on Family Health the 

responsibility to “manage” the labor, delivery, and postpartum care required for 

hospitalized patients, an arrangement that tracked with Conklin’s general knowledge 

about how FQHC’s typically provide labor and delivery services. In addition, Conklin 

noted that Family Health provided and paid for call scheduling to notify physicians when 
13

they were needed at the hospital. Based on Family Health’s contractual arrangement with 

the hospital, Conklin testified that inpatient OB services were part of the continuity of 

care provided by the clinics, and that the clinics materially supported the inpatient labor 

and delivery services. This, in Conklin’s opinion, required a proportional allocation of 

clinic overhead costs. 

Family Health argues that Conklin’s opinion was based on conjecture and 

speculation, but Family Health’s witnesses supported Conklin’s opinion. Fran ButlerCohen, Family Health’s chief executive officer, confirmed the interconnected nature of

the clinics and the inpatient OB services and acknowledged that much of the support for 

hospital deliveries is done at the clinic level. 

Kelly Hohenbrink, Family Health’s expert witness, testified that inpatient OB 

activity is essentially a “wholly owned activity” of the health center and, based on that, 

he agreed with the auditor that “elimination of the cost [from the cost report] was not 

appropriate.” He unequivocally testified that “some portion of overhead” should be 

allocated to the inpatient OB activity. Likewise, in its administrative hearing briefs, 

Family Health conceded that inpatient OB services should absorb a “reasonable portion 

of overhead.” Family Health merely argued that the Department’s nonreimbursable cost 

center approach was not an appropriate methodology for achieving an accurate allocation 

of overhead pertaining to the OB services. Instead, Hohenbrink and Family Health

argued, the “most accurate” result would be achieved by directly eliminating a reasonable 

amount of overhead from the home office cost report. 

The Department’s auditor rejected Family Health’s proposal to adjust the home 

office cost report, concluding that the documentation submitted was not sufficient to 

support the change. The ALJ (and the trial court) agreed with the Department, noting 

that (1) the inpatient OB services were part of the clinics’ care continuum; (2) the costs of 

such services were reported by Family Health on the clinic cost report, not the home 

office cost report; and (3) Family Health failed to submit “detailed work papers” to 
14

support an alternative costing methodology. The ALJ’s reasoning was sound and the 

finding is supported by substantial evidence. Indeed, the evidence shows that at the time 

of the administrative hearing, Family Health continued to report the inpatient OB service 

costs at the clinic level. And Family Health has made no attempt in its briefs to show it 

provided sufficient detail to support an alternative costing methodology. 

In addition, before the audit was finalized, Ricardo Roman, Family Health’s chief 

financial officer, sent the Department an e-mail in which he agreed with the 

reclassification of inpatient OB services to a nonreimbursable cost center in the clinic 

cost report. Roman subsequently testified at the hearing that his e-mail did not accurately 

convey the position of Family Health. The ALJ, however, found Roman’s testimony at 

the hearing “not credible.” When applying the substantial evidence standard, we do not 

reexamine the credibility of witnesses. (Doe v. Regents of University of California

(2016) 5 Cal.App.5th 1055, 1073.) Thus, although not dispositive, Roman’s e-mail is 

additional evidence that bolsters the ALJ’s finding. 

In sum, we conclude there is substantial evidence in the record to support the 

finding of a material connection between clinic operations and the nonreimbursable

inpatient OB services, resulting in the need for an allocation of overhead costs. Applying 

the relevant cost-finding methodology, the Department properly reclassified the costs to a 

nonreimbursable cost center in the clinic cost report. (42 C.F.R. § 413.24(d)(7) (2021).) 

To the extent Family Health contends the auditor’s nonreimbursable cost center 

approach has resulted in a disproportionate allocation of overhead costs, we are unmoved. 

First, as the record shows, cost finding “is not an exact science.” Second, if Family 

Health believed the auditor’s approach resulted in an inaccurate allocation of costs, it was 

incumbent on Family Health to provide “detailed work papers” to demonstrate that an 

alternative cost-finding procedure (such as discrete costing) would provide a more 

accurate allocation. (42 C.F.R. § 413.24(d)(7) (2021).) As the ALJ and the trial court

found, Family Health failed to meet that burden. 
15

IV

Journal Entries

In addition to the costs for inpatient OB services, the Department reclassified into 

a nonreimbursable cost center $3,691,206 in subcontractor costs, consisting of 

$2,766,253 in medical subcontractor costs and $924,953 in homeless services costs. 

Family Health argues that approximately $1.3 million of that amount ($913,210 for 

medical subcontractors and $436,640 for homeless services) was improperly reclassified 

because the figures were derived from accounting “journal entries” and did not represent 

true “costs.” We are unpersuaded. There is substantial evidence to support the ALJ’s 

finding that the reclassified amounts in question were, in fact, costs.

Contrary to Family Health’s contention, Conklin testified that he did not use the 

journal entries as part of his audit reclassification. He only used actual cost figures pulled 

directly from Family Health’s cost report. Conklin testified that there was no basis for 

noncost journal entries to be included in a cost report, and there was nothing in Family 

Health’s cost report to suggest that any of the reported costs were not actual costs. 

The cost report and audit working papers support Conklin’s testimony. In its cost 

report, Family Health identified and then eliminated $2,766,253 in “Other Costs” related 

to “Outside Sub-Contractors—Medical,” and $924,953 in “Non-reimbursable Costs” 

related to “Outside Sub-Contractors—HOMELESS.” Family Health has never explained 

why it included such amounts in its cost report if, as Family Health now contends, they 

were nothing more than fictitious accounting entries. Family Health’s own expert

(Hohenbrink) testified that there is no reason for noncost journal entry amounts to be 

included in a cost report. 

That Family Health also recorded the amounts in its accounting journals proves 

nothing, since the journals should provide a complete record of all the provider’s 

financial transactions, both revenues and expenses. Such evidence certainly does not 

prove that the auditor must have improperly included noncost journal entries in his audit 
16

adjustments. The evidence is to the contrary. Family Health specifically identified and 

then directly eliminated the costs from its cost report. The elimination of those costs is 

what triggered the audit. 

Further, the argument that the amounts were eliminated because they represent a 

“duplication” of costs in the cost report, as Hohenbrink testified, makes little sense. If the 

costs were “doubl[ed] up on the cost [report],” then Family Health’s adjustment to its 

cost report would have been twice as large, because it would need to eliminate both the 

original cost—which Family Health admits was not allowable—and the duplicated cost.

This obviously did not occur.

On this record, the ALJ appropriately rejected Family Health’s journal entries 

argument.

V

Homeless Services Costs

Family Health argues there is no substantial evidence to support the Department’s 

reclassification of $924,953 in homeless services costs. However, Family Health’s 

discussion of the issue in its opening brief is patently deficient. The argument takes up 

only one-half of a page of its brief, includes no citations to the record or legal authority, 

and fails to discuss any evidence favorable to the other side and show why it is lacking. 

(In re S.C. (2006) 138 Cal.App.4th 396, 408; Singh v. Lipworth (2014) 227 Cal.App.4th 

813, 817; Paulus v. Bob Lynch Ford, Inc. (2006) 139 Cal.App.4th 659, 685; Foreman & 

Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881; State Water Resources Control Bd. 

Cases (2006) 136 Cal.App.4th 674, 749; Cal. Rules of Court, rule 8.204(a)(1)(B) & (C).) 

We therefore consider the issue forfeited and affirm on that basis.3

3 Even if we were to treat the argument as properly presented, the argument lacks 

merit. The record indicates that nearly half of Family Health’s homeless services costs 

stemmed from services provided by Family Health staff inside Family Health’s clinics. 
17

VI

Medical Subcontractor Costs

Family Health also argues the evidence was insufficient to find a material 

connection between the nonreimbursable subcontracted medical services and its clinics’

onsite operations. We conclude, however, that substantial evidence supports the 

Department’s reclassification of the subcontracted medical costs.

Conklin testified that during his audit he reviewed 30 to 40 contracts looking for 

indications of the relationship between Family Health and its subcontractors. He 

discovered that most of the contracts used the same standard language. As a result, 

Conklin focused his testimony on two “representative” sample contracts. But this does 

not undermine the strength of his testimony about the other contracts, all of which were 

admitted into the administrative record. 

Based on his review of the contracts, Conklin testified that the language of the 

contracts demonstrated significant interaction between subcontractors and clinic staff, 

including periodic staff meetings; data collection, coordination, and reporting; and 

substantive communications tied to program implementation. We agree.4

For example, Family Health’s contract with Motiva Associates provides that 

(1) Family Health will provide orientation and ongoing consultation to ensure the 

subcontractor’s ability to fulfill its duties under the agreement; (2) the subcontractor will 

The record demonstrates a material connection between the services and clinic resources, 

and therefore the Department properly reclassified the costs to a nonreimbursable cost 

center to absorb a portion of the clinic overhead. Family Health failed to meet its burden 

to show that an alternative cost-finding procedure would have provided a more accurate 

allocation. 

4 Family Health argues that Conklin’s testimony is not substantial evidence because 

he uses “weasel words” to hedge his testimony. However, the Department did not rely 

solely on Conklin’s testimony; it also presented the contracts, which speak for 

themselves. 
18

provide routine written progress reports to Family Health; (3) the subcontractor shall 

cooperate with Family Health in the development and implementation of an evaluation 

program; (4) the subcontractor will attend and participate in regional meetings, plus

additional meetings as necessary to address program issues; (5) the subcontractor will 

communicate with Family Health’s “care coordination” team on an ongoing basis about 

treatment services; and (6) the subcontractor will work with Family Health staff to ensure 

timely collection, evaluation, and reporting of required data. Family Health’s contracts 

with Home Start Inc., delibrainy LLC, UCSD Shiley Eye Center, St. Vincent de Paul 

Village, Inc., and the YMCA of San Diego County—Childcare Resource Service, contain

virtually identical provisions. In some instances, the contracts provided that 

subcontractor services would be performed at Family Health clinics. 

Standard contracts relating to HIV prevention services likewise required 

subcontractors to (1) submit monthly reports; (2) meet with Family Health staff monthly 

or as otherwise “deemed necessary and appropriate”; (3) participate in annual site visits 

by Family Health staff; (4) advise Family Health of all press releases and media events 

related to the contracted services; and (5) assist project evaluation through the collection 

and reporting of data to Family Health program staff. 

Another (third) set of standardized contracts, all of which involve the San Diego 

State University Research Foundation, contain similar provisions relating to meetings and 

communications with Family Health staff, data collection, and reports. Such contracts

required Family Health to “maintain close liaison” with the subcontractor to assure a 

“well integrated effort.” 

Witnesses for Family Health confirmed that it complied with its contractual 

obligations. Thus, the record supports an inference that the contractually-required 

interactions occurred, supporting Conklin’s testimony that there was a significant or 

material connection between the subcontractors and Family Health clinics. 
19

Family Health argues that because the level of interaction between subcontractors

and clinic staff was not quantified, it was too imprecise to support a finding of 

“materiality.” Not so. Although such evidence would have been helpful, it was not 

necessary to demonstrate a material connection to clinic operations and resources. For 

example, the contracts involving San Diego State University Research Foundation clearly 

show that a substantial percentage of the subcontractor’s total compensation was related 

to matters involving collaboration and communication with clinic staff. 

The evidence was sufficient to find that clinic staff provided material support for 

the nonreimbursable subcontractor activities. Based on such evidence, the Department 

properly reclassified the medical subcontractor costs to a nonreimbursable cost center. 

And Family Health failed to present detailed work papers to justify an alternative costfinding procedure. (42 C.F.R. § 413.24(d)(7) (2021).) Accordingly, we affirm.

DISPOSITION

The judgment denying the petition for writ of mandate is affirmed. The 

Department shall recover its costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1) & 

(2).)

 KRAUSE , J.

We concur:

 MURRAY , Acting P. J.

 HOCH , J.