Congress of Cal. Seniors v. Catholic Healthcare West (2001)

[No. B140639. Second Dist., Div. One. Feb. 28, 2001.]

CONGRESS OF CALIFORNIA SENIORS et al., Plaintiffs and Appellants, v. CATHOLIC HEALTHCARE WEST et al., Defendants and Respondents.

(Superior Court of Los Angeles County, No. BC210644, Victoria G. Chaney, Judge.)

(Opinion by Vogel (Miriam A.), J., with Ortega, Acting P. J., and Mallano, J., concurring.)

COUNSEL

Carol R. Golubock and Andrew L. Strom for Plaintiffs and Appellants.

Manatt, Phelps & Phillips, Barry S. Landsberg, Terri D. Keville and Ileana M. Hernandez for Defendants and Respondents. [87 Cal. App. 4th 493]

OPINION

VOGEL (MIRIAM A.), J.-

Hospitals, doctors and others who provide services to Medicare beneficiaries are reimbursed based in part upon annual cost reports filed by the providers to conform to the Medicare statute and a variety of federal rules and regulations. Those cost reports are at the heart of this case, in which the primary plaintiff is a union and the primary defendant is a hospital at which there appears to be an ongoing effort to unionize the hospital's employees. The union claims the hospital has included in its annual cost reports certain "anti-union" expenses that the union says are not allowable under federal law. For relief, the union wants a declaration that the hospital's conduct constitutes an unfair business practice within the meaning of section 17200 of the Business and Professions Code, an accounting of the hospital's "expenditures on activities to influence employees regarding unionization and of the impact of such expenditures on payments received" by the hospital under the Medicare program, and an injunction compelling the hospital to disgorge all money it has acquired by means of any unlawful business practice.

The issue is preemption. Our conclusion is that the field of Medicare provider cost reporting and reimbursement is so fully and completely occupied by federal lawas our unfortunately lengthy discussion of the pertinent statutes, regulations, manuals and other rules will showthat there remains no room for state action. We affirm the trial court's judgment of dismissal.

Facts

The Congress of California Seniors, the Service Employees International Union, and two of the Union's locals (collectively, the Union) sued Catholic Healthcare West and related medical organizations (collectively, CHW), alleging violations of Business and Professions Code section 17200. fn. 1 The Union alleges that both "the Medicare and the Medi-Cal programs impose upon providers of medical services detailed cost reporting requirements. Under the Medicare program, hospitals ... are required to submit annual reports ... includ[ing] information on patient revenues, operating expenses by classification, patient days, and number of Medicare patient days. The reports are a necessary component of claims for payment under the program. [87 Cal. App. 4th 494] The Medi-Cal program requires the submission of similar cost reports." Since any costs incurred for activities directly related to influencing employees with regard to unionization may not be included in determining reasonable costs, "a provider is under an obligation when reporting costs of providing services under the Medicare and Medi-Cal programs to exclude the costs of such activities from the reasonable operating costs reported."

According to the Union, CHW has for the past several years "engaged in activities to deter unionization by [its] employees" and, in the process, has incurred considerable costs, including "a share of the salaries and benefits paid to supervisory employees for time spent in their employer's anti-unionization activities; a share of the salaries and benefits paid to non-supervisory employees for time spent attending meetings and other activities arranged by [CHW] to influence them regarding unionization; payment to consultants who have been retained by [CHW] to plan and direct [its] anti-unionization activities; the costs of preparing, producing, and disseminating communications to employees in an effort to influence them regarding unionization; attorneys fees for planning and defending [CHW] in proceedings brought by governmental agencies with regard to [CHW's] illegal activities in [its] efforts to influence employees regarding unionization." According to the Union, CHW has failed to exclude the "considerable costs" it incurred "in activities to influence employees regarding unionization" from its calculation of its reasonable and allowable costs on its cost reports.

In five causes of action, the Union alleges that CHW's activities are unlawful, unfair or fraudulent, all in violation of section 17200. In its prayer, the Union asks for a declaration that CHW's conduct violates the law, an "accounting ... of all expenditures on activities to influence employees regarding unionization and of the impact of such expenditures on payments received under the Medicare and [Medi-Cal] programs and from private health plans," injunctions (1) prohibiting CHW from "refusing to disgorge all monies which [it] acquired by means of any" unlawful business practice, (2) prohibiting CHW from "refusing to amend [its] Medicare and Medi-Cal cost reports to exclude the costs of their anti-unionization activities from allowable costs," and (3) "refusing to correctly report" its costs in the future, and attorneys' fees. (Italics added.)

CHW removed the case to federal court, contending there that the Union's claims are preempted by the False Claims Act, 41 United States Code section 3729 et seq. The district court rejected the removal and remanded the case to superior court. CHW then demurred, contending (among other [87 Cal. App. 4th 495] things) that the Union's claims are preempted by the Medicare and Medi-Cal statutes, the National Labor Relations Act, and the Federal False Claims Act. The demurrers were sustained with leave to amend but the Union elected to stand on its complaint and a judgment of dismissal was entered. At the same time, at CHW's request, the trial court issued a protective order to prohibit disclosure of "all information received during the discovery process in this matter." The Union appeals.

Discussion

I.

We agree with the Union that section 17200 prohibits any business act or practice that is unlawful, unfair or fraudulent, and we agree that the Union need not be personally aggrieved to sue under section 17200. (Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal. 4th 553, 567 [71 Cal. Rptr. 2d 731, 950 P.2d 1086].) We assume, as we must because this case is before us at the demurrer stage, that the Union has alleged conduct that could be unlawful, unfair or fraudulent. (First Nationwide Savings v. Perry (1992) 11 Cal. App. 4th 1657, 1662 [15 Cal. Rptr. 2d 173].) But it does not follow that the Union can pursue its Medicare-based claims under section 17200because the Union's attack on CHW's cost reporting and the resulting reimbursement to CHW is preempted by federal law.

A.

[1] In the absence of an express congressional command, state law is preempted (1) if it actually conflicts with federal law or (2) if federal law so thoroughly occupies a legislative field by a pervasive and complex regulatory system as to make reasonable the inference that Congress left no room for the states to supplement it. (Solorzano v. Superior Court (1992) 10 Cal. App. 4th 1135, 1139 [13 Cal. Rptr. 2d 161]; see also Smiley v. Citibank (1995) 11 Cal. 4th 138, 147 [44 Cal. Rptr. 2d 441, 900 P.2d 690].) Since there is no express preemption in the Medicare statute (Solorzano v. Superior Court, supra, 10 Cal.App.4th at p. 1141), and since our conclusion makes it unnecessary to separately consider whether there is an actual conflict, the question before us is whether federal law has occupied the field of Medicare reimbursement sufficiently to exclude the state. (Ball v. GTE Mobilnet of California (2000) 81 Cal. App. 4th 529, 537 [96 Cal. Rptr. 2d 801].)

The Union contends our analysis must start with a presumption of non-preemption. We disagree. "[A]n 'assumption' of nonpre-emption is not [87 Cal. App. 4th 496] triggered when the State regulates in an area where there has been a history of significant federal presence." (United States v. Locke (2000) 529 U.S. 89, 108 [120 S. Ct. 1135, 1147, 146 L. Ed. 2d 69].) Put more plainly, there is no presumption one way or the other where, as with Medicare, there is a history of significant federal presence in the field. But the fact that public health is a field historically within the police powers of the states means the party asserting preemption must establish that preemption was the " 'clear and manifest purpose of Congress.' " (Solorzano v. Superior Court, supra, 10 Cal.App.4th at p. 1139.) To meet that burden, CHW claims congressional intent to preempt California's regulation of Medicare reimbursement to healthcare providers is implicit in the statutes and regulations governing how and by whom Medicare reasonable cost reimbursement and recoupment decisions must be made. We agree. fn. 2

B.

1.

Medicare, established by the 1966 adoption of title XVIII of the Social Security Act, provides basic and supplementary health insurance to individuals age 65 and older and to other qualifying individuals. (42 U.S.C. §§ 1395c, 1395j.) The Medicare program is governed and administered by the Health Care Financing Administration (HCFA) of the Department of Health and Human Services (HHS). (Bowen v. Georgetown University Hospital (1988) 488 U.S. 204, 205-206 [109 S. Ct. 468, 470-471, 470-471, 102 L. Ed. 2d 493] [Congress has authorized the Secretary of HHS to promulgate regulations setting limits on the levels of Medicare costs that will be reimbursed].) The program has three components, each financed differently and each offering a distinct type of beneficiary coverage: Part A covers institutional health services; Part B covers outpatient services rendered by physicians and other professionals; Part C, adopted by the 1997 Balanced Budget Act, is a relatively new program providing an elective private health care plan for Medicare beneficiaries. [87 Cal. App. 4th 497]

Part A providers' claims for reimbursement are processed by companies called fiscal intermediaries, which are usually commercial insurance companies operating under contracts with the Secretary of HHS. (Your Home Visiting Nurse Services, Inc. v. Shalala (1999) 525 U.S. 449, 451 [119 S. Ct. 930, 932-933, 142 L. Ed. 2d 919]; Good Samaritan Hospital v. Shalala (1993) 508 U.S. 402, 404 [113 S. Ct. 2151, 2154, 124 L. Ed. 2d 368].) Part B professional and supplier claims are processed by entities called carriers, but they too are commercial insurance companies. Intermediaries and carriers not only process claims, but also have some responsibility for making coverage and payment decisions. (See Jost, Governing Medicare (1999) 51 Admin. L.Rev. 39, 44; hereafter Jost; Epstein, Fundamentals of Health Law, Overview of Medicare and Medicaid Reimbursement Issues (2000) pp. 7-9; hereafter Fundamentals; see also 3 Medicare and Medicaid Guide (CCH 2000) ¶¶ 13,310, 13,320, pp. 5345-5359-20.) fn. 3

2.

Before 1983, hospitals were paid by Medicare on a retrospective cost basis and increases in provider operating expenses were passed on to the federal government. Spiraling health care costs prompted a complete reformulation of the methodology, and the Prospective Payment System (PPS), adopted by Congress in 1983, is the result. (Fundamentals, supra, p. 41.) fn. 4 In general terms, providers are now reimbursed for their "reasonable costs" according to the PPS methodology, by a cost-based methodology, by a fee schedule, or by some combination of those approaches. (42 U.S.C. §§ 1395d, 1395k, 1395h, 1395x; Fundamentals, supra, pp. 41-60.)

Under PPS, nonexempt hospitals are paid for inpatient services (prospectively, as the name suggests) based upon a predetermined flat rate calculated with reference to the patient's diagnosis at discharge and the hospital's costs. Nationally established diagnosis related groups (DRG's, which group diseases by diagnosis and assign them into case types that take into consideration the resources needed to treat the condition) and major diagnostic [87 Cal. App. 4th 498] categories (MDC's, into which the DRG's are organized) form the basis for the PPS calculation. (Fundamentals, supra, p. 43.) The PPS rate may exceed the hospital's actual costs for treating the patientor it may not cover them, in which event any costs incurred in excess of the PPS rate are absorbed by the hospital. (42 C.F.R. § 412; Fundamentals, supra, pp. 41-42.) fn. 5

In general terms, this is how it works: When a PPS hospital submits a claim for payment for inpatient care provided to a Medicare beneficiary, a DRG is assigned. The DRG "weight" (a figure representing the average resources required to care for that group relative to the average resources used to treat all DRG's) is then multiplied by a dollar amount based on the average Medicare-allowable operating cost per discharge (the standardized amount, which is the sum of labor and nonlabor costs) for that year. (42 U.S.C. § 1395ww(d); Fundamentals, supra, pp. 46-47.) The labor component of the standardized amount, in turn, is adjusted by the wage index to account for variations in area hospital labor costs; the nonlabor component is determined by the hospital's classification as an urban or rural provider. (Id. at p. 47.)

Adjustments may be made to the standardized amount based upon the type of hospital making the claim, the kinds of cases it treats, and other factors. Sole community hospitals, Medicare-dependent, small rural hospitals, and others may be eligible for special payments under PPS (42 C.F.R. § 412.90), and additional payments are available to hospitals that serve a disproportionate share of low-income patients. (42 U.S.C. § 1395ww(d)(5)(F); 42 C.F.R. §§ 412.2(f)(6), 412.106, 412.320.) Teaching hospitals receive additional payments through indirect medical education adjustments for inpatient operating and capital-related costs. (42 C.F.R. § 412.105; Fundamentals, supra, p. 48.)

For each claim submitted, a notice of program reimbursement (NPR) is issued to the provider to explain the provider's total allowable costs and the amount of the PPS payment. (Fundamentals, supra, p. 46.) There is a similar but distinct PPS applied to claims based on outpatient services. (Id. at pp. [87 Cal. App. 4th 499] 53-54.) fn. 6 The PPS rate and adjustments are not static. PPS rate adjustments are the subject of HHS's annual rulemaking process, at which time rate adjustments are based in large part on the annual cost reports prepared by all Medicare providers and filed with their intermediaries for audit and review. (See Your Home Visiting Nurse Services, Inc. v. Shalala, supra, 525 U.S. at p. 451 [119 S.Ct. at pp. 932-933]; 42 C.F.R. § 413.20(b); Medicare Provider Reimbursement Manual, Pt. II, HCFA Pub. No. 15-2, §§ 100-106,