Family Health Centers of S.D. v. State Dept. of Health Care Services, 532 P.3d 721

Background

Family Health Centers of San Diego (an FQHC) sought Medi‑Cal reimbursement for outreach and education staff costs used to engage underserved, Medicaid‑eligible populations.
Department of Health Care Services disallowed the outreach costs as categorically nonreimbursable advertising under guidance in the Medicare Provider Reimbursement Manual; administrative review and superior court upheld that denial.
Family Health presented job descriptions, testimony, and tracking data showing outreach informed underserved individuals about available services and whether they subsequently obtained Medi‑Cal‑covered care.
The Chief ALJ and Court of Appeal relied on the Provider Manual’s advertising provisions to treat outreach that increases utilization as unallowable.
The California Supreme Court held the Department misapplied the governing legal standard (Medicare "reasonable cost" principles) and the Provider Manual cannot categorically exclude FQHC outreach that is "reasonable and related" to beneficiary care; it reversed and remanded for reconsideration under the correct standard.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether outreach/education costs of an FQHC are categorically nonreimbursable as advertising under Medicare/Medi‑Cal cost rules	Outreach is a statutorily required FQHC activity and thus is "reasonable and related" to furnishing services and should be reimbursed	Outreach that attracts new patients and increases utilization is advertising and therefore nonallowable under the Provider Manual	Reversed — outreach is not categorically nonreimbursable; must be evaluated under Medicare reasonable‑cost principles (related to care, necessary/proper, common/accepted)
Proper role and weight of the Medicare Provider Reimbursement Manual	The Manual is nonbinding guidance and must be read consistently with statutes/regulations; it cannot override the reasonable‑cost standard	The Manual’s advertising guidance justified categorical disallowance here	The Manual is persuasive but not controlling; provisions must be read in context and cannot be applied to categorically bar statutorily required outreach that relates to beneficiary care
Sufficiency of evidence that Family Health’s outreach was related to patient care	Family Health offered job descriptions, witness testimony, and tracking showing outreach educated target populations and led to Medi‑Cal visits	The record lacked evidence that outreach primarily provided information about services rather than recruiting patients	Court found Chief ALJ applied wrong legal test; remanded for Department to reexamine reimbursability under correct legal standard and the actual evidence

Key Cases Cited

National Federation of Independent Business v. Sebelius, 567 U.S. 519 (U.S. 2012) (background on structure of federal Medicaid program)
Three Lower Counties Community Health v. Maryland, 498 F.3d 294 (4th Cir. 2007) (discussing Congress’s intent that states pay 100% of reasonable costs to FQHCs)
Shalala v. Guernsey Mem. Hosp., 514 U.S. 87 (1995) (administrative manuals lack force of law)
Atrium Med. Ctr. v. Dep’t of Health & Human Servs., 766 F.3d 560 (6th Cir. 2014) (courts often defer to Provider Manual interpretations as persuasive)
Advanced Health Sys., Inc. v. Schweiker, 510 F. Supp. 965 (D. Colo. 1981) (advertising costs promoting entry into treatment can be allowable where they are appropriate and helpful to patient care)
Kisor v. Wilkie, 139 S. Ct. 2400 (2019) (framework for deference to agency interpretations of ambiguous regulations)