California Court Finds State Law Set Rates for Out-of-Network Medicaid MCO Post-Stabilization Services but Leaves Open Whether Federal Law Addresses the Issue

King & Spalding

The California Court of Appeal in Los Angeles recently took up the issue of whether federal and/or state law sets any rate for Medicaid MCOs to pay to hospitals for out-of-network post-stabilization services. The case was Dignity Health v. LA Care and involved more than $97 million in alleged underpayments relating to services rendered from 2012 to 2016. The health plans argued that federal law set a rate, and that state law was in accord with that federal law. The providers argued that federal law does not set a rate and state law also does not set a rate. The trial court had sided entirely with the Medicaid MCO’s positions on both federal and state law. The Court of Appeal, however, took a different tack, affirming the trial court’s decisions under state law, but expressly declining to address whether federal laws set a rate, or to address whether federal regulations prohibit state law rate-setting in this area. The result is that the Court of Appeal left open potentially important issues with both statewide and national implications for non-contracted hospitals and Medicaid MCOs.

The Court of Appeal found that California state statutes were ambiguous on whether California had set rates for these services. The specific California statutory language, from 2012, stated that rates were not set for “managed care inpatient days.” This plain language arguably should have resulted in the hospital prevailing. But the MCO argued that this language was meant only to apply to in-network providers. Ultimately, the three-judge panel assigned to this case concluded that a state senate legislative budget committee report for a predecessor statute indicated an intent to set such rates in late 2008, and thus, that the later statute in 2012 only meant in-network days when it said “managed care” days. The use of such a report as the basis for this decision leaves open the possibility that the California Legislature will provide future insight about whether it really did or did not have that intent. The decision also does not bind other California Courts of Appeal that might face this issue.

Interestingly, the Court of Appeal also called attention to another federal law argument, advanced in an amicus brief filed by King & Spalding on behalf of a group of non-profit hospitals, that federal law precludes states from setting a rate for what MCOs must pay for out-of-network post-stabilization services. The focus of the amicus was on the trial court’s errors about federal law setting a rate, explaining not only that federal law never purported to do so, but also that federal law confirms states are precluded from setting rates except in only limited circumstances – none of which applies here. Although the Court recognized this federal law restriction issue raised in the amicus, the panel expressly declined to consider it at this time because the underlying parties had not raised it in their briefs. By law, this means the federal issue remains live for other hospitals to raise in reimbursement disputes with Medicaid MCOs for out-of-network post-stabilization services, both in California and elsewhere.

Overall, this case is notable not only for the limited focus of its decision, but also for the number of issues that it left open which still can be addressed by subsequent courts, lawmakers, or regulators, including:

  • Do federal regulations affirmatively preclude states from setting these rates?

  • Did the California Legislature really intend to set a rate for these services?

  • What happens in other states where no statute has set rates for these services?

  • How will future courts, legislators, and regulators act on or respond to these issues?

  • Can the Medicaid MCO programs maintain sufficient provider networks for patient needs if rates are set through government decree versus fair market value negotiations?

It is important for providers in states with privatized MCO programs to assess state laws to see whether, and to what extent, the state legislature established a rate for out-of-network Managed Medicaid services. In many jurisdictions there are no state laws that address these issues. This leaves open the ability for out-of-network providers in those states to pursue the reasonable and customary value of their services, using their standard rates rather than the lower government or discounted rates that apply when there is a participation agreement.

The topic of how out-of-network post-stabilization services are reimbursed has major implications for the future of Medicaid MCO programs, which depend on the ability of hospitals and health plans to use privatized managed care concepts, like network participation, arm’s length contract negotiations, and proactive management by MCOs for where members receive services. For providers, the Dignity ruling is an unfortunate short-term setback, especially given prior California case law that had applied reasonable and customary value aka quantum meruit to the Medicaid MCO context. If health plans can pay government set rates for post-stabilization without contracting for them, then they have far less incentive to negotiate in good faith for hospital network participation, or to manage the location where these services are obtained.

The Court of Appeal opinion did not take sides in these broader policy concerns, pointing out that it is up to legislatures, not courts, to address them. This part of the opinion highlights the importance of lobbying efforts by stakeholders to make sure that lawmakers understand the full implications of this debate over non-contracted rates. If the rate set by a government is too low, or too high, the results typically are to skew the market forces that inspired the federal government to permit privatized Medicaid MCO programs in the first place.

The decision in the Dignity case only adds to the precarious business situation faced by many California hospitals, especially those serving large Medicaid populations. For example, the same month as this decision was issued, one of the longest operating hospitals in Los Angeles, Saint Vincent’s Medical Center, a 381-bed facility with over 500 doctors and more than 1,400 employees, announced that it will be closing its doors at the end of January. The hospital’s downtown location meant extensive exposure to members with Medicaid coverage. This is just the latest in a series of hospitals closures, a trend that gets exacerbated by inadequate rate setting rather than requiring private Managed MCOs to pay at fair market value.

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