Court Opinion

ID: 9410809
Source: CourtListenerOpinion
Date Created: 2023-07-24 17:04:47.538743+00
Date Added: 2024-06-11T17:21:00.276031
License: Public Domain

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.
  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.

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 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

                                  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

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 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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.,

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    FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                   OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

§ 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).)

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    FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                   OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

      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.

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 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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

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    FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                   OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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).)

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    FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                   OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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].

                                  8
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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
.

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 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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

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 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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

                                 11
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                   Opinion of the Court by Kruger, J.

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

                                  12
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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,

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    FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                   OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

§ 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).

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    FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                   OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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].)

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 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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

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 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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

                                 17
    FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                   OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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.

                                 18
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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

                                 19
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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

                                 20
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                   Opinion of the Court by Kruger, J.

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

                                  21
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                 Opinion of the Court by Kruger, J.

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

                                22
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

“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

                                 23
    FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                   OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

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.

                                 24
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                  Opinion of the Court by Kruger, J.

      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.

                                 25
 FAMILY HEALTH CENTERS OF SAN DIEGO v. STATE DEPARTMENT
                OF HEALTH CARE SERVICES
                 Opinion of the Court by Kruger, J.

                         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.

                                26
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