CALIFORNIA ASSOCIATION OF NURSING HOMES, SANITARIUMS, REST HOMES AND HOMES FOR THE AGED, INC., Plаintiff and Appellant, v. SPENCER W. WILLIAMS, as Administrator, etc., Defendant and Respondent.
Civ. No. 12230
Third Dist.
Feb. 24, 1970
Petitions of both parties for rehearing were denied March 24, 1970
4 Cal. App. 3d 800
Wilke, Fleury, Sapunor & Hoffelt and Richard H. Hoffelt for Plaintiff and Appellant.
Howard J. DeNike as Amicus Curiae on behalf of Plaintiff and Appellant.
Thomas C. Lynch, Attorney General, and Walter J. Wiesner, Deputy Attorney General, for Defendant and Respondent.
OPINION
FRIEDMAN, J.—At issue in this appeal is the validity of an administrative regulation prescribing the standards which determine the level of state payments for the care of Medi-Cal patients in nursing and convalescent homes.
Petitioner is an association of state-licensed nursing and convalescent homes. At the commencement of this action respondent Spencer Williams held the office then entitled Administrator of the Health and Welfare Agency, now called Secretary of the Human Relations Agency. The Director of Health Care Services is the official currently directing the Medi-Cаl program.1 Petitioner filed this declaratory relief and mandamus action in the
The basic features of the Medi-Cal program were described in some detail in Morris v. Williams (1967) 67 Cal.2d 733 [63 Cal.Rptr. 689, 433 P.2d 697]. Suffice it to say here that Title XIX of the Social Security Act (Public Law 89-97, 1965) authorized federal financial support to states which adopted conforming medical assistance programs. The California Legislature responded with the enactment of legislation establishing the Medi-Cal program. (Stats. 1965, Second Ex. Sess., ch. 4;
As presently framed, the Medi-Cal legislation reposes administrative responsibility in the Director and Department of Health Care Services (
Inasmuch as sections 14104 and 14105 call for regulations covering rates of payment for health services, the issues will be better viеwed in the light of the Government Code provisions establishing procedures for the adoption of regulations. With inapplicable exceptions, regulations adopted by state agencies must be filed with the Secretary of State and published in the California Administrative Code. (
The challenged regulation is section 51511 of title 22, California Administrative Code. Since its original adoption in June 1966 it has been amended five times, the current regulation representing its sixth version. The original regulation and all later mutations were purportedly adopted as “emergency” regulations. For present purposes it will be adequate to set out in the margin
Aside from the fixed ceiling on per diem payments, the challenged regulation does not on its face establish a standard for reimbursing nursing and convalescent homes. Rather, it incorporates by reference the contents of a statement or document entitled “State Schedule of Maximum Allowances, Section II, Part C, Long-Term Care Facilities.” The Schedule of Maximum Allowances appears nowhere in the California Administrative Code. It takes the form of a pamphlet published by the State Department of Finance, bearing the issue date of Fеbruary 1, 1967, but declaring an effective date of July 1, 1966. By fixing reimbursement in accordance with the Schedule of Maximum Allowances in effect at the time services are provided, regulation 51511 evidences a design to incorporate future changes in reimbursement standards adopted by the Department of Finance. Pending this appeal, the Department issued a new version of the Schedule of Maximum Allowances dated August 1, 1969.
In summary, the Schedule of Maximum Allowances issued by the Department of Finance declares its application to all medical care and rehabilitation programs operated by the state, with certain exceptions of no moment here. It provides for fixed levels of payment according to a schedule of specified rates or, alternatively, an individualized rate as shown by costs statements submitted by the particular nursing home. The individualized rate is determined by compounding two kinds of costs: departmental, i.e., primarily administrative and operating expenses, and nondepartmental, i.e., taxes, insurance and capital-related costs. Actual departmental costs are limited by three factors: (a) an assumed bed occupancy level of 90 percent, (b) administrative costs not exceeding 15 percent of operating costs, and (c) a scale of departmental cost ceilings, expressed in fixed dollar amounts and varying with the number of beds in the facility.6 Nondepart-
The daily rate established by the rate schedule or the combination of the particular facility‘s departmental and nondepartmental costs as provided in the Schedule of Maximum Allowances is, in turn, subject to the $14 ceiling presently fixed by Regulation 51511 (fn. 5, supra).
Before bringing suit, petitioner resorted to the administrative remedy provided by
In the trial court and in their original briefs on appeal, the parties raised three basic issues: (1) whether Regulation 51511 violates the statutory mandate requiring rеimbursement for health services at rates based on reasonable costs; (2) whether, like public utilities, nursing and convalescent homes are constitutionally entitled to rates supplying a reasonable financial return on their investments; (3) whether, assuming invalidity of the administratively fixed reimbursement standard, the nursing and convalescent homes are entitled to reimbursement at a higher rate applied retroactively to March 1, 1966, the commencement of the Medi-Cal program.
Preliminary inquiry led this court to believe that the appeal might turn on sufficiency of the Medi-Cal agency‘s administrative procedures, that is, that the trial court might have erred in sustaining Regulation 51511 in the face of an administrative record which prevented meaningful judicial review. We requested and received supplemental briefs on this and allied questions.
We have concluded that the adoption and repeated аmendment of the regulation are characterized by serious procedural vices which prevent meaningful judicial review and frustrate any attempt to pass upon its substantive compliance with the “reasonable cost” standard.
Propriety of Regulation Adoption Procedure
California decisions on judicial review of administrative regulations reveal three kinds of inquiry: first, whether the agency has statutory authority to adopt a regulation of the kind under scrutiny; second, whether the action is arbitrary or entirely lacking in evidentiary support, third, whether the agency has complied with statutory procedures.8 The agency‘s action comes before the court with a presumption of correctness and regularity, which places the burden of demonstrating invalidity upon the assailant.9
Petitioner‘s principal complaint has been the regulation‘s alleged violation of the statutory standard for reimbursement based upon the “reаsonable cost” of the services. (
A statute calling for the adoption of administrative orders upon public notice and hearing implies that the evidence supporting the order be disclosed and made part of a hearing record with opportunity for refutation.11 In Rivera v. Division of Industrial Welfare, supra, 265 Cal.App.2d
Generally, an administrative agency, directed to fix rates or price levels after a hearing, may not base its decision upon evidence outside the record and not made available for rebuttal by the affected parties.12 In part the demand is implied from statutes calling for public hearing as an assurance of fairness. In part it derives from the ineluctable need for an administrative record as the basis of effective judicial review.13 In some cases effective review entails examination of the administrative findings in order to test the legal principles employed by the agency and to discern the sufficiency of the evidence.14 In other cases the need is for the transcribed oral testimony and the documentary exhibits.15
As succinctly as possible, United States v. Chicago, M., St. P. & P. R.R. Co., supra, 294 U.S. at page 511 [79 L.Ed. at p. 1032], states why an administrаtive record is the sine qua non of judicial review: “We must know what a decision means before the duty becomes ours to say whether it is right or wrong.”
In promulgating the regulations directed by the Medi-Cal legislation, the administrator was bound by the Government Code provisions fixing “basic minimum procedural requirements” for the adoption and amendment of
The record on appeal and the briefs of counsel point to no assemblage of evidence upon which the agency based its regulation. In the brief span of 30 months—from the regulation‘s original adoption in June 1966 through its fifth amendment in January 1969—the enacting agency invoked the emergency adoption procedure six times. Possibly these “emergencies” were viewed as occasion for dispensing with the establishment of a supporting evidentiary record.16 On the assumption that the regulation‘s adoption and five later amendments were accompanied by hearings, the nature of these hearings remains unrevealed. Neither in the superior court nor on appeal has the Medi-Cal administrator declared whether such hearings were held; what, if anything, happened at these hearings; what, if any, evidence, was offered or accepted as the basis for its determination of “reasonable costs.” The presumption of regularity cannot supply the lack of a hearing. (Interstate Commerce Com. v. Louisville etc. R.R. Co., supra, 227 U.S. at pp. 93-94 [57 L.Ed. at p. 434].)
In response to this court‘s specific inquiry, the Attorney General has conceded that the Medi-Cal administrator “did not create a formal administrative record containing the evidence upon which he relied in adopting the regulation.” He argues, nevertheless, that there was substantial compliance with procedural demands, because petitioner and its members were party to
Administrative agencies have wide latitude in fashioning procedures and pursuing their methods of inquiry. (Federal Communications Com. v. Pottsville Broadcasting Co. (1940) 309 U.S. 134, 143 [84 L.Ed. 656, 662, 60 S. Ct. 437].) Procedural elasticity cannot be stretched into disregard of the law‘s public hearing demand. Private negotiations with selected members or representatives of an affected industry are no substitute for public hearings. There is a public interest in having the law obeyed. Directed by law to hold public hearings, government officials may not resort to invitational gatherings with selected members of an affected business. The participating firms and associations, however immediately affected, cannot waive the public‘s right of participation. Moreover, the assemblage of an amorphous mass of documents or reports utterly fails to identify the evidence which the Medi-Cal administrator considered and that which he did not. For all that appears here, he may have ignored the collection of documents and reports later placed in evidence in the trial court. In a curious inversion of roles, the assailant of the regulation, not its proponent, has presented the only evidence by which to measure its substantive validity. The administering agency has never revealed an evidentiary basis for its action. The claim of substantial compliance is untenable.17
The administrator‘s failure to assemble an evidentiary record is compounded by his attempt to incorporate by reference the publication of the State Department of Finance known as the Schedule of Maximum Allowances. The administrator asserts that his rate-fixing power includes authority to adopt the standards developed by the state fiscal agency. The assertion does not respond to statutory procedural demands for a public hearing at which evidence to support the proposed regulation is received, made available for rebuttal, weighed and considered by the law‘s designated agent and compiled in an identifiable record as the basis for judicial review. The Schedule of Maximum Allowances appears to be the result of ex parte studies by staff personnel of the Department of Finance. The Attorney General is frank in stating: “Insofar as the establishment of maximums [i.e., rate ceilings] are concerned, this was action taken by the Director of Finance.” To put the matter bluntly, Regulation 51511 is the product of the Department of Finance, not of the Medi-Cal agency. The latter‘s adoption of the former‘s fiat without independent consideration of the underlying evidence
Compliance with the public hearing demand precludes promulgation in the inner chambers of government offices, whether of the administering or fiscal agency. In Olive Proration etc. Committee v. Agricultural etc. Com., supra, the agency completed its hearings and then, without notice to the parties, received and considered a field survey and report made by the Department of Finance. The court invalidated the procedure, declaring (17 Cal.2d at p. 210): “The parties were not apprised that this survey was being made or of the result of it until after the last order of the commission was promulgated. As a result they were denied all right of cross-examination with respect thereto and also of an opportunity to make a counter showing in rebuttal. Under such circumstances, the statutory requirement of a hearing was not met. [Citations.] Only evidence which the opposite party has an opportunity to refute at the hearing may be relied upon as the basis of a finding. [Citation.]”
There is no procedural barrier prohibiting the enacting agency from adopting by reference a set of standards issued by another agency if supporting evidence is made available at a public hearing, opportunity for refutation is given, the pro and con evidence considered and the evidentiary material assembled in an identifiable record. On the other hand, an attempt to embody by reference future modifications of the incorporated material without additional hearings would have dubious validity. (See Olive Proration etc. Committee v. Agricultural etc. Com., supra, 17 Cal.2d at p. 209.)
The state‘s appropriation for administrative expenses of the Medi-Cal program during the 1966-1967 fiscal year was accompanied by the following legislative declaration: “... provided, that any rule or regulation adopted
Contrary to the administrator‘s contention, these provisos do not authorize the Department of Finance to adopt supervening regulations establishing rates for health care services; nor do they permit the Director of Health Care Services to incorporate the promulgations of the Department of Finance without compliance with the public hearing process. The Medi-Cal legislation, in sections 14104 and 14105, enjoins the Director of Health Care Services, no one else, to adopt regulations establishing these rates. In the enactment of these regulations he, no one else, is to receive and consider the evidence which will permit compliance with the statutory standard of “reasonable cost.” The provisos attached to the annual appropriations empower the Department of Finance to defer the effective date of a rate-fixing regulation pushing current expenditures above available funds. Beyond authorizing postponement, they do not repose conflicting or overriding power in the fiscal agency.
Recognizing the procedural deficiencies which characterize the promulgation process, the petitioner nursing homes nevertheless maintain their claim that Regulation 51511 fails to meet the statutory standard of “reasonable cost.” They call our attention to the set of 61 documentary exhibits which they—not the Medi-Cal agency—introduced at the administrative hearing held in response to their petition. The same 61 exhibits were introduced in the superior court by stipulation. The nursing homes urge us to measure the substantive validity of the regulation, including the Schedule of Maximum Allowances, against this assemblage of evidence.
That kind of action would overstep the judicial function by a wide margin. The function is quite restricted. “As to the quasi-legislative acts of administrative agencies, ‘judicial review is limited to an examination of the proceedings before the officer to determine whether his action has been arbitrary, capricious, or entirely lacking in evidentiary support, or whether he has failed to follow the procedure and give the notices required by law.‘” (Pitts v. Perluss, supra, 58 Cal.2d at p. 833, quoting from Brock v. Superior Court, supra, 109 Cal.App.2d at p. 605; see also Rivera v. Division of Industrial Welfare, supra, 265 Cal.App.2d at p. 594.) Without identification of the evidence forming the basis of the agency‘s action, a reviewing court can neither affirm nor deny the existence of evidentiary
The failure of the Medi-Cal administrator to hold hearings establishing an evidentiary record underlying Regulation 51511 thwarts judicial review of the regulation‘s compliance with the “reasonable cost” standard and constitutes a substantial failure to comply with the procedural demands of the Administrative Procedure Act. It follows that the current regulation and its predecessors are invalid.20 The administrator has as yet failed to comply with the statutory mandate to adopt a regulation establishing rates of payment for nursing home services. We next consider the effect of that failure.
Retroactive Entitlement and Payment for Past Services
The nursing homes claim entitlement to a retroactive regulation establishing rates covering all services since the program‘s inceptiоn on March 1, 1966. One theory underlying this claim is constitutional. Petitioner points out that the advent of publicly financed medical care has impelled a huge increase in the number and capacity of proprietary nursing homes, simultaneously making them economically dependent on publicly assisted patients and on the state‘s business.21 Charging economic compulsion, petitioner
compares its members with public utilities, which are constitutionally entitled to service rates which are just and reasonable from an investor‘s standpoint. (See Federal Power Com. v. Hope Natural Gas Co. (1944) 320 U.S. 591, 603 [88 L.Ed. 333, 345, 64 S.Ct. 281].) Thus petitioner deduces a constitutional demand for a rate structure supplying both operating expenses and a reasonable return on invested capital. It protests the concept which, it claims, has colored the position of the Medi-Cal administrator, that of historic cost without any provision for retroactive adjustment to meet actual cost. It points out that the аctual costs of private nursing home care (including a return on risk capital) vary widely. Petitioner contends that “reasonable cost” cannot be artificially pegged at a level below actual cost.
The public utility analogy fails. Unlike public utilities, nursing homes are under no legal compulsion to serve all customers. If they are under economic pressure to accept state business, it is because they undertook the risks of a business burdened with that characteristic. Government is under no constitutional mandate to eliminate the economic perils involved in doing business with it. The Medi-Cal program seeks to subsidize needy patients, not to insulate suppliers from business risks. Here the state is not regulating the rate which the entrepreneur may charge his customers; rather, it is fixing the price it is willing to pay as one of the customers, albeit the largest. Legal compulsion to accеpt all state-supported patients might indeed evoke a “constitutional right.” (See United States v. New York Central R.R. Co. (1929) 279 U.S. 73, 78 [73 L.Ed. 619, 620, 49 S.Ct. 260].) There is no such compulsion here. The law gives nursing homes liberty to price themselves out of the Medi-Cal market, as some (so the Attorney General informs us) have done.
An alternative theory for the claim of retroactive entitlement is contractual. A statute fixing government payments may amount to an offer which, when accepted by performance, culminates in a contract between the government and the offeree. (County of San Luis Obispo v. Gage (1903) 139 Cal. 398, 406-407 [73 P. 174].)
Sections 14104 and 14105 (fns. 3 and 4, supra) do not express a statutory offer. They fix no scale of payment, but only a standard, i.e., reasonable cost, for an administrative regulation fixing a rate or rate formula. Despite the standard‘s verbal simplicity, its expression in a regulation involves “highly technical matters requiring the assistance of skilled and trained experts and economists and the gathering and study of large amounts
Despite rejection of constitutional and contractual theories of entitlement, the nursing homes have a right to have the statute obeyed. The Medi-Cal legislation calls for a regulation establishing rates or a rate formula for nursing home care. Such a regulation does not now exist. The Director of Health Care Services is now obliged to adopt one. The nursing homes are entitled to a writ of mandate compelling him to perform this duty as one enjoined upon him by law. (County of Los Angeles v. Riley (1942) 20 Cal.2d 652, 662 [128 P.2d 537].)
At that point a very practical problem arises, that of establishing rates or a rate formula retroactively covering services back to the March 1, 1966, inception date. The invalid orders of the past do not estop the Director after the remand or control him in reconsidering the entire problem in the light of all the information available to him. (St. Joseph Stock Yards Co. v. United States (1936) 298 U.S. 38, 63-64 [80 L.Ed. 1033, 1047-1048, 56 S.Ct. 720]; Delta Air Lines, Inc. v. Civil Aeronautics Board (1960) 280 F.2d 636, 639 [108 App.D.C. 88]; see 2 Davis, Administrative Law Treatise, § 18.08, pp. 598-599.) On review the courts may correct his error of law and on remand he is bound to enforce the legislative policy committed to his charge. (Federal Communications Com. v. Pottsville Broadcasting Co., supra, 309 U.S. at pp. 145-146 [84 L.Ed. at pp. 663-664].)
Aside from the one-time power to correct his invalid action, there is the question of the Director‘s standing authority to adopt regulations permitting retroactive redeterminations. That question is not directly posed here. In fashioning administrative solutions, the parties may find useful advice in the mail rate cases. The analogy seems more apt than the public utility decisions. In the mail rate cases, as here, the administrator fixes rates under statutory direction for a service purchased by the government as a customer. (See Transcontinental & Western Air, Inc. v. Civil Aeronautics Board (1949) 336 U.S. 601, 605-606 [93 L.Ed. 911, 915-916, 69 S.Ct. 756], also separate opinion of Jackson, J., at p. 608 [93 L.Ed. at p. 917]; United States v. New York Central R.R. Co., supra, 279 U.S. at p. 77 [73 L.Ed. at p. 620]; Trans World Airlines, Inc. v. Civil Aeronautics Board (D.C.Cir. 1967) 385 F.2d 648, 658; American Overseas Airlines, Inc. v. Civil Aeronautics Board (1958) 254 F.2d 744, 749-750 [103 App.D.C. 41];
Our attention has also been called to a memorandum opinion, dated December 8, 1969, by a three-judge federal court in the case of Catholic Medical Center of Brooklyn & Queens, Inc. v. Rockefeller (E.D. N.Y. 1969) 305 F.Supp. 1268. The opinion deals with a regulation of the federal Department of Health, Education and Welfare under Title XIX of the Social Security Act, requiring provision for retroactive adjustments in rates of hospital payment.
Petitioner seeks to have rates for past and future care measured by the reasonable cost yardstick, free or virtually free of fiscal restrictions. The statutes, to the contrary, bespeak a legislative response not only to medical needs and the quality of medical care, but also tо the promptings of fiscal economy. At least three separate sources express meaningful financial limitations. These financial limitations, springing from sources outside the Medi-Cal law itself, are entitled to concurrent operation with it. (See Morris v. Williams, supra, 67 Cal.2d at p. 752; Warne v. Harkness (1963) 60 Cal.2d 579, 588 [35 Cal.Rptr. 601, 387 P.2d 377].)
In the first place, all actions of the Medi-Cal administrator are limited by the annual appropriations for health services. (Morris v. Williams, supra, 67 Cal.2d at pp. 749-750.) Secondly, a 1967 amendment to section 14105 added a clause authorizing the director to “limit the rates of payment” for services. (See fn. 4, supra.) There is no need to decide here whether the 1967 amendment extracts any vital ingredient from the reasonable cost standard. Suffice it to say that it manifests a legislative intent to compromise reimbursement rates if necessitated by fiscal limitations. (Morris v. Williams, supra, 67 Cal.2d at pp. 757-758.)
The provisos attached to the annual Budget Act appropriations for the administrative expense of the Medi-Cal program form a third limitation. These provisos, as noted earlier, declare that “any rule or regulation adopted by the Director of the Department of Health Care Services during the [specified] fiscal year which adds to the cost of the medical assistance program shall only be effective from and after the date upon which it is approved as to availability of funds by the Department of Finance.”
As we stated above, these provisos authorize the Department of Finance to demand deferment, but not to establish overriding or conflicting rates. Petitioner argues that this clause arms the Department of Finance with no power over nursing home rates, being attached to the appropriations for administrative costs, not the appropriations for health costs. To the contrary,
Order
The judgment is reversed and the cause remanded to the superior court with directions to issue a peremptory writ of mandate ordering the Director of Health Care Services to adopt a regulation or regulations establishing rates or rate formulae for the care of Medi-Cal patients in nursing and convalescent homes and, in the promulgation thereof, to give public notice and hold public hearings in сompliance with the applicable provisions of the Administrative Procedure Act (
Pierce, P. J., and Janes, J., concurred.
Petitions of both parties for rehearing were denied March 24, 1970, and the following opinion then rendered:
THE COURT.—Both parties have filed petitions for rehearing. The nursing homes contend that our opinion is not sufficiently explicit in calling for the adoption of regulations covering nursing home rates from March 1, 1966, the operative date of the Medi-Cal program. The Attorney General expresses his understanding that the writ of mandate will require the Medi-Cal agency to adopt regulations retroactively covering nursing home services rendered on and after March 1, 1966, but that the rates or rate formulae may vary for different periods. The Attorney General is correct.
In his petition for rehearing, the Attоrney General contends for the first time that the regulation in question fixes “rates, prices or tariffs,” hence is within the exemption provided by
*
“Every state agency shall:
“(a) Transmit to the department for filing with the Secretary of State and with the Rules Committee of each house of the Legislature a certified copy of every regulation adopted by it except one which:
“(1) Establishes or fixes rates, prices or tariffs.”
Usuаlly, when a state law directs an agency to promulgate rates or tariffs binding on the public, the same law fixes its own procedure for hearings upon notice to the public. (See, e.g.,
Appellant‘s petition for a hearing by the Supreme Court was denied April 29, 1970.
Notes
Press accounts indicate that Mr. Williams has resigned as Administrator of the Health and Welfare Agency and has been succeeded by Mr. Lucian Vandegrift; also, that Mr. Carel Mulder, the current Director of Health Care Services, is about to retire. No attempt has been made to substitute parties resрondent. We are about to remand this action to the superior court. Appropriate substitutions should be made prior to issuance of a writ of mandate.
“Such policies and regulations shall include rates for payment for services not rendered under a contract pursuant to Section 14104. Standards for costs shall be based on payments of the reasonable cost for such services.” (The italicized clause was added by a 1967 amendment.)
“(a) The per diem rate paid under this section shall not exceed $12.74, excepting that the Administrator may negotiate all-inclusive per diem rates which provide for additional medically indicated covered service and provided that such negotiated rates do not increase overall program costs.
“(b) A facility may continue until June 30, 1967, the per diem rate in effect during April, 1967, with the approval of the Administrator.”
A later version of the regulation, filed as an “emergency” amendment on February 9, 1968, increased the daily rate ceiling from $12.74 to $14.