Filed 7/8/26 L.A. Unified School Dist. v. Dept. of Health Care Services CA2/8
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
LOS ANGELES UNIFIED B327073
SCHOOL DISTRICT,
Los Angeles County
Plaintiff and Appellant, Super. Ct. No. 20STCP03700
v.
DEPARTMENT OF HEALTH
CARE SERVICES,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Mitchell L. Beckloff, Judge. Reversed in part,
affirmed in part, and remanded with directions.
Andrade Gonzalez, Sean A. Andrade and Eric D. Mason for
Plaintiff and Appellant.
Rob Bonta, Attorney General, Cheryl L. Feiner, Assistant
Attorney General, Gregory D. Brown and Nicolas P. Rossenblum,
Deputy Attorneys General, for Defendant and Respondent.
____________________
When the plan is to help the needy but the result hurts the
needy, something is amiss.
The State Department of Health Services committed this
blunder in a rushed audit of data from the Los Angeles Unified
School District. The data concerned services to student Medi-Cal
recipients. The Department then applied the same flawed
reasoning in a second audit for the next fiscal year. Because the
Department did not apply the law correctly, we reverse the ruling
denying the District’s petition for writ of mandate. We direct the
superior court to grant the petition and to set aside the
challenged audit adjustments. Undesignated statutory citations
are to the Welfare and Institutions Code.
I
We provide background by sketching the Medi-Cal
program, the reimbursement plan, and the key documents. Then
we discuss the Department’s audits and the ensuing proceedings.
A
Medi-Cal is California’s Medicaid program. Medicaid is a
cooperative federal-state program for medical care to low-income
populations. (Fam. Health Centers of San Diego v. State Dept. of
Health Care Services (2023) 15 Cal.5th 1, 4, 7 (Health Centers);
see also § 14063 [“Medi-Cal” is short for the California Medical
Assistance Program].) In return for federal funding, states agree
to reimburse health care providers for their costs. (Ibid.)
The Department must administer Medi-Cal in accord with
the state Medicaid plan. (Cal. Code Regs., tit. 22 § 50004, subd.
(b); Fam. Health Centers of San Diego v. State Dept. of Health
Care Services (2021) 71 Cal.App.5th 88, 92 (Health Centers II).)
The Department must audit payments to providers of Medi-Cal
2
services to ensure they spend federal funds responsibly. (See
§ 14170, subd. (a)(1).)
The Medi-Cal program at issue here is the LEA Medi-Cal
Billing Option Program, which we call the Program.
Under the Program, the Department reimburses local
education agencies, which we sometimes shorten to local
agencies. The record documents use the acronym LEA to denote
these entities.
Local agencies include school districts. They provide
specified health-related services to Medi-Cal eligible students.
Covered services include counseling, speech therapy, occupational
therapy and the like. The Program reimburses local agencies
around 50% of their costs of providing covered services.
Expenditures funded by other federal sources are not eligible for
reimbursement, however. The Department draws down federal
Medicaid funding for covered services. (See §§ 14132.06, 14115.8;
42 C.F.R. § 433.51, subd. (c); LEA Program Overview, California
Department of Health Care Services, <https://www.dhcs.ca.gov/
providers-partners/lea-program-overview/> [as of Jul. 2, 2026],
archived at < https://perma.cc/9N3P-W43N>.)
In 2001, state legislators noticed that California schools,
despite having the nation’s largest group of eligible children
receiving school-based services, were receiving considerably less
reimbursement than schools in other states. (Sen. Rules Com.,
Off. of Sen. Floor Analyses, 3d reading analysis of Sen. Bill No.
231 (2001–2002 Reg. Sess.), as amended May 7, 2001.) The
Legislature responded by ordering the Department to amend the
state plan to increase Medicaid reimbursement to local agencies.
(See id.; § 14115.8, subd. (a)(1).) This was State Plan
3
Amendment 03-024, Section 4.19-B, Supplement 8. This change
is central to this appeal, and we call it the Amendment.
The 2001 legislation sought expansive reimbursement for
schools, requiring that they “shall be reimbursed for all eligible
services that they provide that are not precluded by federal
requirements.” (§ 14115.8, subd. (a)(1).)
Reimbursement under the Program operates in two parts.
First, the Department makes interim payments to participating
school districts throughout the year based on flat fees for services
the districts provide. Second, after the year ends, there is a final
“true-up” or reconciliation process that determines the final
amount to be reimbursed or repaid. Local agencies calculate
their total actual costs eligible for Medicaid reimbursement for
the year, and the Department reconciles these costs to the
interim payments. The Department may audit the local agencies’
filed cost information and must ensure there are no instances
“where total Medi-Cal payments for services exceed 100 percent
of actual, certified expenditures” for providing Program services.
The Amendment sets out this process.
Next, we take a closer look at the Amendment and the
worksheets the Department created to implement it.
1
Unchanged since 2003, the Amendment sets out a four-step
plan to determine the final settlement with a local agency.
The first part of the process calculates the net costs eligible
for Medicaid reimbursement. Paragraphs I.1 and I.2 in the
Amendment set forth steps to determine these costs. We excerpt
these rules.
“I. Each LEA will certify to the Department, on an annual
basis, the amount of its eligible costs to provide LEA services
4
pursuant to Section H, and will compare its total computable
eligible costs to the interim Medi-Cal reimbursement (‘Cost and
Reimbursement Comparison Schedule’ as specified by the
Department and approved by the Centers for Medicare &
Medicaid Services) using the following methodology:
“1. Total personnel costs, consisting of salaries, benefits
and other costs such as materials and supplies and contractor
costs, necessary for the provision of health services will be
reported for personnel providing health services by
practitioner type (psychologist, speech therapist, etc.). The
Department will specify allowable codes from the
Standardized Account Code Structure (SACS), a
comprehensive system of accounting and reporting school
district revenues and expenditures. Personnel costs that
are funded by federal revenues other than Medicaid will
be excluded. All costs used to determine the certified actual
costs must be in compliance with OMB Circular A-87, and, to
the extent not governed by Circular A-87, by Generally
Accepted Accounting Principles.
“2. Total personnel costs by practitioner type (from
paragraph I.1.) will be multiplied by the percent of hours
worked by corresponding practitioners to provide LEA
Medi-Cal services to calculate the Medi-Cal direct cost of
providing LEA services by practitioner type. The percent
of hours worked will be based on the number of units paid by
Medi-Cal for each LEA service multiplied by the time worked
by practitioners to provide one unit of service (numerator),
divided by the total annual hours each practitioner type were
required to work (denominator). The time worked by
5
practitioners to provide one unit of service will include face-to-
face as well as preparatory and follow-up time.”
(Italics added.)
We note some key aspects of these paragraphs. First, the
formula begins by identifying net personnel costs: it excludes
personnel costs funded by other federal revenues to ensure
certified expenditures are eligible for Medicaid reimbursement.
In other words, consistent with federal law, it ensures no double-
dipping: no cost covered by other federal funds is eligible for
reimbursement under the Amendment. (See 42 C.F.R. § 433.51.)
Second, the two paragraphs that get you to the Medi-Cal
direct cost of providing local agency services are interrelated: the
second paragraph builds off the first by incorporating its
limitations, including by referring to “corresponding
practitioners.”
The second step answers how much of the practitioners’
time was devoted to providing reimbursable Medi-Cal services.
Or as the superior court framed it, with our emphasis, “Step Two
considers the percentage of time expended by practitioner type in
the context of those costs incurred” and calculated in Step One.
The second step is necessary because local agencies provide
services to both Medi-Cal and non-Medi-Cal students, and the
Department reimburses local agencies for Medi-Cal services only.
Local agencies must allocate the costs to the Program correctly to
receive the correct reimbursement from the Department.
The first two steps of the Amendment can be combined and
simplified as follows:
6
The parties generally agree the percent of hours worked
figure boils down to this ratio:
The parties differ on interpreting the Amendment’s second
step. Specifically, they dispute how to compute the denominator
used to determine the percentage of time District practitioners
served Medi-Cal students. We use “percent of hours worked” as
shorthand for the percentage outlined in Paragraph I.2 of the
Amendment. And when we refer to the numerator and the
denominator, it is to the calculation in this paragraph that we
refer.
The percentage from the Amendment’s second step is
critical. A lower percentage ultimately means less
reimbursement.
We omit a detailed discussion of the third and fourth steps
of the Amendment, as they are not at issue. These steps include
applying the federal medical assistance percentage to reduce a
local agency’s cost figure and comparing the result to the interim
payments received during the relevant fiscal year.
We now turn to the documents that implement the
Amendment — and that sparked the audits here.
7
2
California school districts participating in the Program
report their cost information annually to the Department by
certifying and submitting a report called a Cost and
Reimbursement Comparison Schedule. We call these reports the
Schedules.
This appeal stems from the Department’s audits of the
District’s Schedules for the fiscal years ending in June 2010 and
June 2011. From now on, we omit “fiscal” when referring to these
fiscal years.
The Schedule assists with the annual reconciliation process
and determines the final settlement. It aims to capture the total
costs eligible for federal financial participation in the aggregate.
Thus, instead of tracking expenditures for each individual
practitioner, the Schedule uses a full-time equivalent employee
standard, which is a composite of multiple employees. Services
by practitioners are translated into units, which then are
aggregated and converted into time. The Schedule permits
averages in some circumstances.
The Schedule is made up of worksheets authored by the
Department and approved by the federal Centers for Medicare &
Medicaid Services. The worksheets implement the four steps of
the Amendment.
The key worksheets for this appeal are Worksheet A.1/B.1,
Worksheet A-3/B-3, and Worksheet A.
“Worksheet A.1/B.1: Salary, Benefit and Other
Expenditures” implements the Amendment’s Paragraph I.1 to
capture a local agency’s net total personnel costs. The worksheet
requires local agencies to report all salary and benefit
expenditures for all practitioners billing Program services. Local
8
agencies also must identify their costs funded by federal revenues
other than Medicaid, which are subtracted from the total
personnel costs.
“Worksheet A.3/B.3: Percent of Time providing LEA
Services” implements Amendment’s Paragraph I.2. It calculates
the percent of time corresponding practitioners spent providing
Program services. The worksheet has the local agency input the
number of “Full-Time Equivalent (FTE) Employees” billing
Program services, by practitioner type, in Column A. As written,
the worksheet instructs: “Enter the number of total FTEs by
practitioner type [ ] for all qualified district employed
practitioners billing LEA reimbursable services in [the
Program]. . . . If your LEA receives federal funding for
practitioners that are providing reimbursable [Program]
services, and their time is dedicated, in full or in part, to
that federal program, exclude these FTEs (or portion of
FTEs) from Column A.”
We advise readers to remember the “dedicated” language of
this instruction, for it is the heart of this dispute. The worksheet
does not spell out what it means to be “dedicated” to another
federal program.
Another column in Worksheet A.3/B.3, Column C, captures
the total hours required to work — the denominator of the time
ratio in Paragraph I.2 of the Amendment. Column C is tied to
Column A and therefore the latter’s “dedicated” language. Local
agencies calculate the total hours required to work figure by
multiplying the number of Full-Time Equivalent Employees
(Column A) by the annual hours required to work for these
employees (Column B).
9
Worksheet A-3/B-3 generates the percentage of time
providing local agency services by practitioner type by dividing
the number of hours an agency was reimbursed by the
Department for Program services by the total hours required to
work for each practitioner type.
Finally, Worksheet A calculates the “Cost of Providing LEA
Services” by multiplying “Net Total Personnel Costs” (from
Worksheet A.1/B.1) by the “Percent of Time Providing LEA
Services” (from Worksheet A-3/B-3). Among other things, the
worksheet goes on to subtract the interim payments the local
agency received to reach the final settlement, which appears as
either an “Overpayment” or an “Underpayment.” This is where
the interim payments are reconciled.
B
The issues in this case arose after the Department provided
two versions of the Schedule for the 2010 fiscal year.
The Schedules from 2006 to 2009 were like the Schedule we
just described. They had local agencies exclude “federal funds”
and “federally-related” full-time equivalents.
But the Department modified the instructions for the 2010
Schedule.
The original 2010 Schedule had two relevant modifications.
First, it ordered local agencies to report cost information for all of
the agency’s qualified practitioners, regardless of whether they
billed Program services. Second, it required the agencies to
report all federally funded Full-Time Equivalent Employees in
Worksheet A-3/B-3, regardless of whether their practitioners’
time was dedicated to another federal program.
The Department’s consultant on the Program, Navigant
Consulting, Inc., which helped draft the Schedules, warned the
10
Department about problems with the second change.
Specifically, Navigant warned the change created “a matching
issue whereby the LEA is reporting net Salaries . . . but gross
FTEs” — a situation that would dilute the percent of time worked
figure and lower reimbursable costs.
The Department did not heed this caution. It proceeded
with both changes. It acknowledged the potential dilution with
the second change but believed this change resulted in a “truer
LEA percentage” and also made the Schedules more “auditable.”
Local agencies swiftly pushed back. Reimbursement was
lower, as anticipated. The Department convened an ad-hoc
committee to address the concerns. Local agencies claimed
excluding federal salary and benefits while including federal
hours unfairly reduced the percentage of time worked. Crucially,
the new Schedule also seemed to hurt districts with other federal
funding the most, and “[u]sually the poorer a district, the more
federal funds it has.”
The Department thereafter revised the forms to correct the
two issues. It permitted local agencies to resubmit their forms
using the revised instructions.
The Department’s resubmission announcement candidly
told local agencies that the original 2010 Schedule “removed
federal revenues, but included federally funded practitioners
which diluted the percentage of time estimates for practitioners
and understated costs on the [Schedule], if the LEA reported
federally funded expenditures and FTEs.”
Similarly, training materials distributed to local agencies
about the resubmission process conceded, regarding the Full-
Time Equivalent issue, that the Department’s modification
11
“[d]iluted the percentage of time estimates and understates
practitioner costs for federally funded practitioners.”
The revised 2010 forms once again allowed local agencies to
exclude federally funded Full-Time Equivalents (or portions)
dedicated to another federal program.
The District submitted its revised 2010 Schedule on
November 13, 2012.
The District later submitted its 2011 Schedule using the
same approach. The relevant instructions for this Schedule were
similar to those for the revised 2010 Schedule.
C
The Department audited both submissions.
In October 2015, a few weeks before the three-year audit
deadline, the Department notified the District of the first audit
and requested several categories of records — what one witness
categorized as a “voluminous amount of information” due within
a few days. (See § 14170, subd. (a)(1).) The Department
apologized for “such a short notice.”
A few days later, the Department sent the District
proposed audit adjustments.
The Department’s audit division focused on one aspect of
the reimbursement formula: the total hours required to work
figure from Worksheet A-3/B-3. Recall this figure becomes the
denominator of the time ratio in the second step of the
Amendment.
Never before had the Department audited this figure in the
Schedule. The Department privately told its consultant that
Full-Time Equivalent data can be “difficult to audit.”
The Department determined the District had excluded from
the total hours required to work figure hours for practitioners
12
who were funded by federal revenues other than Medicaid. The
Department proposed adding thousands of federally funded Full-
Time Equivalent hours for some practitioner types.
Increasing the denominator necessarily decreases the value
of the ratio (here, the percent of hours worked) and affects later
calculations using this figure. This is a mathematical truism. As
a result, the Department’s proposed change would result in a
smaller reimbursement claim.
The District disputed the proposal.
On November 4, 2015, the Department explained that to
exclude federally funded Full-Time Equivalents from the
formula, the District needed to provide documentation showing
the practitioners were not available to provide Program services.
The District provided additional documentation, which the
Department deemed insufficient.
On November 12, 2015, before receiving all of the District’s
documentation, the Department adopted the disputed adjustment
in its final audit report. This was the deadline for any audit of
the District’s revised 2010 Schedule.
In 2016, the Department used the same approach and
adopted a similar adjustment for the District’s 2011 Schedule.
The adjustments were blows to the District. For 2010, the
District claimed the Department owed it $1,771,167, but the
audit determined the amount owed was just $69,076. For 2011,
the District reported it owed the Department $58,434, but the
audit adjustment increased this repayment obligation to
$2,733,563.
The District says the Department’s adjustments meant
roughly $4.4 million fewer Medicaid dollars for the District for
these two years.
13
D
The District challenged the audit adjustments by appealing
them through the Department’s administrative appeals process.
After informal hearings, the appeals of both audits were
consolidated before Administrative Law Judge Matthew C. Felix.
The formal hearing lasted eight days and stretched from June to
December 2018.
The lead auditor who performed the disputed audits, Olga
Barajas, testified about her involvement and observations. She
compared the information in the District’s Worksheets A-3/B-3
with the District’s supporting documents and concluded the
District had not reported hours required to work for federally
funded practitioners for whom the District had received
reimbursement.
Barajas gave examples of individual practitioners who were
100% federally funded and had billed the Program but for whom
the Districted reported zero Full-Time Equivalents. In other
words, the practitioners’ services were reflected in the numerator
but not the denominator of the percent of hours worked
calculation. Applying this calculation, Barajas showed the
District’s failure to report these hours resulted in a mathematical
error, when viewed in isolation: a number divided by zero results
in error. In the aggregate, Barajas maintained, this failure
artificially elevated the percent of hours worked for various
practitioner groups — school nurses and Trained Health Care
Aides (Aides), in particular. And it caused the District’s claimed
reimbursement to be overstated.
Although she focused on individual examples, Barajas
acknowledged the Schedule depends on aggregated information
14
for practitioner groups, not information for individual
practitioners.
Barajas maintained she made the audit adjustments to
agree with the District’s documentation. According to Barajas,
the District failed to provide documentation demonstrating its
federally funded practitioners dedicated their time to a federal
program other than Medi-Cal. The only way to show
practitioners were dedicated to another program, she maintained,
was to show they were restricted or precluded from providing
Program services or from billing Medi-Cal. We call this the
Department’s “preclusion requirement.”
The Department argued the District’s records did not meet
this requirement. Barajas pointed to multi-funded time reports
and daily activity logs submitted by the District and used by
multi-funded practitioners to track their time. These reports
track the type of federal funding supporting each employee, the
scope of work each day, and the amount of time spent on the
programs funding the employee. But the reports did not show
any worker was precluded from providing Medi-Cal services or
unavailable to provide these services; nor did they document the
time spent on local agency services versus other federal
programs. Thus, they did not support the exclusion of any hours
from the denominator. Additionally, the Department argued, the
100% federally funded workers necessarily were not fully
dedicated to another federal program because they billed for
Program services and thus were available to provide these
services.
For its case, the District called the Department audit
manager for the Program, Martin Alvarez, and put on three
additional witnesses. The District aimed to show how the
15
Department’s approach unfairly diluted its eligible
reimbursement and reduced its eligible costs below actual costs.
District witness Timothy Rosnick had been involved as
either a director or a controller in the District’s accounting and
audit procedures for more than a decade. He admitted there was
an issue regarding one practitioner group in 2011 (the Aides) and
the District overstated costs for this group that year. Rosnick
explained many of these practitioners ultimately were
reclassified that year because the District needed to use up
lapsing federal funds from a one-time program; yet when the
claims for their services were filed, it was not known they would
be 100% federally funded. The District believed the Schedule’s
instructions required it to exclude this group’s federally funded
hours, which resulted in a percent of hours spent providing
Program services over 128% — an impossibility. The District
flagged this issue for the Department and sought assistance
before the 2011 Schedule was due. But the Department gave no
meaningful guidance, basically told the District to do its best, and
said it would address this issue through an audit.
The District presented several options it says the
Department could have pursued to address this problem fairly.
For example, the Department could have the Schedule cap the
percent of hours worked at 100% or allowed the District to return
the billed amounts for 100% federally funded practitioners. Or
the District could remove federally funded units billed to Medi-
Cal in the numerator and give back the interim payments for
those units, while also keeping out their expenses and hours.
According to Rosnick, neither the Amendment nor the Schedule
prevent this approach.
16
Barajas acknowledged amounts paid to the District for
federally funded workers should be repaid to the state, but she
rejected the proposed compromises as contrary to the
Amendment and beyond the scope of the audit, which was not to
adjudicate claims. In contrast, Department audit manager
Alvarez — who had supervised more than 2,000 audits and had
reviewed thousands of Schedules — acknowledged before the
hearing that the third option suggested by the District would
result in a “complete wash.”
Addressing the Department’s concern about double-dipping
into federal funds, the District emphasized the Amendment and
the Schedule provide checks against this. Worksheet A.1/B.1
removes all federal revenues so that only net personnel costs are
eligible for reimbursement; thus, the Schedule does not permit
the District to seek any costs for its 100% federally funded
workers. Worksheet A then reconciles the interim payments to
reach the final settlement. Under the Schedule, interim
payments for federally funded workers would result in an
overpayment situation where the District must pay the
Department back.
The District maintained its supporting documentation met
the federal criteria requiring that cost data be based on financial
records. The District also argued the Department’s new
preclusion requirement was illusory and adopting this
requirement exceeded the Department’s authority and amounted
to surreptitious rulemaking.
The District showed the Department provided training on
the Schedules but had not conveyed this interpretation of
“dedicated” in the worksheet instructions. Indeed, the
Department had not mentioned the preclusion requirement until
17
the 2015 audit — almost three years after the District submitted
its revised 2010 Schedule and five years after the services had
been performed. The Department additionally requested
documents after the retention period had lapsed.
Responding to the Department’s attack on its
documentation, the District explained practitioner logs do not
track the time spent providing Program services because
practitioners treat students without knowing if they are on Medi-
Cal — which is appropriate to avoid stigmatizing students, and
because the information is confidential.
Rosnick showed how excluding federally funded
practitioners on Worksheet A-3/B-3 was consistent with the
Amendment and the worksheet instructions. Regarding the
“dedicated” language, he explained those who work on their
federal program and comply with the program dedicate their time
to it and can be excluded from the worksheet. “You’re not eligible
to charge the federal program if you’re not dedicated to it.”
Practitioners can be fully dedicated to a federal program like
Title I, yet also provide Medi-Cal services and bill for these
services. In other words, they can be dedicated to two federal
programs simultaneously: “The two have parallel tracks, if you
will. They’re not mutually exclusive … . So you can certainly
qualify for more than one funding source at a time or comply with
more than one program at a time. That does not mean that
you’re not dedicated to the program who’s funding you … .”
Department audit manager Alvarez confirmed that
dedicating time to another federal program means being funded
by that program and spending time on it.
The District showed the instructions for Worksheet A-3/B-3
bolster its view, as they recognize federally funded workers can
18
bill for Program services and still be “dedicated, in full” to their
other federal program. According to the District, it established
practitioners it excluded from the worksheet were funded by
other federal programs to which they were dedicated; only an
audit by the other federal programs would establish they were
not dedicated to those programs.
E
In February 2020, more than a year after the close of
evidence, the administrative law judge ruled for the Department
and upheld the challenged audit adjustments in a forty-seven-
page proposed decision. The Department then adopted this
proposal as its final decision.
In November 2020, the District sought a writ of mandate in
the superior court. The District later filed an amended petition
and lost two causes of action on demurrer.
The parties briefed the validity of the audit adjustments
and argued at a two-part hearing. The court provided a tentative
opinion in the District’s favor. But it ultimately denied the
District’s amended petition and upheld the adjustments in an
eleven-page decision issued in December 2022. The court later
entered judgment for the Department.
II
In reviewing administrative decisions like this one, we
discern whether there has been a prejudicial abuse of discretion.
(Code Civ. Proc., § 1094.5, subd. (b).) We independently review
legal issues, taking into account the relevant agency’s
interpretation. (Health Centers, supra, 15 Cal.5th at p. 10;
Yamaha Corp. of America v. State Bd. of Equalization (1998) 19
Cal.4th 1, 7–8 (Yamaha).)
19
A prejudicial abuse of discretion occurs when the
Department does not proceed as required by law. (See Code Civ.
Proc., § 1094.5, subd. (b); Health Centers, supra, 15 Cal.5th at
p. 10.) That happened here. We reverse the audit adjustments.
A
At the outset, we note both sides’ approaches create a
mismatch. The Department’s approach would have net personnel
costs (i.e., non-federal costs) applied to gross Full-Time
Equivalents (including federally funded workers). The District’s
approach includes billed units for federally funded workers in the
numerator of the percent of hours worked calculation but omits
these workers’ hours from the denominator.
The District admitted there was a problem with part of its
2011 Schedule and maintained there was an apparent flaw in the
Schedules. The District offered solutions, which the Department
rejected.
The Department does not acknowledge the mismatch
created by its approach and maintains it was proper to include all
federally funded workers’ hours in the denominator of the percent
of hours worked calculation. At the administrative hearing, the
Department said the District provided insufficient documentation
showing these workers dedicated their time to a federal program
other than Medicaid. Excluding their hours from the
denominator, the Department claimed, violated the Amendment
and artificially inflated the percentage of time District workers
spent providing Program services, thereby inflating the District’s
claimed reimbursement.
It was not enough for the Department to show the District’s
submissions were wrong. The Department’s burden at the
administrative hearing was to show its audit adjustments were
20
“correctly made.” (Cal. Code of Regs., tit. 22, § 51037, subd. (i).)
In this effort the Department failed.
Barajas made clear her adjustments were based on the
documentation supplied to support the District’s reported total
hours required to work in Column C of Worksheet A-3/B-3. She
explained the Department’s interpretation of the key instruction
in this worksheet — the “dedicated” language — as follows: the
District could exclude federally funded hours only if it provided
documentation showing its workers were restricted or precluded
from providing Program services or from billing Medi-Cal.
Many problems plague this approach.
To begin, this interpretation of “dedicated” in the
worksheet instructions is untethered to anything in the
Amendment. Barajas conceded this, admitting it was offered as a
“compromise” to the District.
The Department’s interpretation also runs counter to the
legislative command fully to reimburse local agencies for eligible
services. (See § 14115.8, subd. (a)(1).) It ignores the District’s
evidence showing real-world practitioners can both be dedicated
to their federal programs and be available to provide Medi-Cal
services. And it penalizes the school districts with the most need.
The parties point to competing principles of construction
supporting their view. “In the end, a court must adopt the
construction most consistent with the apparent legislative intent
and most likely to promote rather than defeat the legislative
purpose and to avoid absurd consequences.” (In re J.W. (2002)
29 Cal.4th 200, 213 (J.W.).)
The District illustrated how the Department’s
interpretation — requiring the inclusion of all federally-funded
hours in the denominator of the percent of hours worked formula
21
— hurts school districts with low-income students that rely on
federal funding other than Medicaid, like Title I of the
Elementary and Secondary Education Act of 1965, 79 Stat. 27, as
modified, 20 U.S.C. § 6301 et seq. Applying the reimbursement
formula using the Department’s view means wealthier school
districts with less or no need for federal funding are reimbursed
at a higher rate for providing the same services. The Department
does not dispute this effect: “Medi-Cal reimbursements are
reduced when an LEA receives other federal funding,” it admits.
The Department made similar concessions at the superior court
about this dilutive effect of its approach.
Having Title I funding cannot justify giving less in Program
reimbursements. Title I funds have purposes other than covering
Medi-Cal services. They are to be used for teachers and
programs to improve student academic outcomes in communities
that suffer higher rates of poverty. (See Bennett v. New Jersey
(1985) 470 U.S. 632, 634–635, 639.)
It is no justification to say, as the Department does, that
Medicaid is a payor of last resort and the other federal funds can
fill the gap created by the Department’s approach for the
Program. For these schools with needier populations relying on
federal dollars, the District showed the Department’s approach
lowers billing practitioners’ hourly rate of pay, which runs
counter to the federal charge of reimbursing the actual costs of
providing care. (See 42 C.F.R. § 413.9, subds. (a) & (c)(3).)
The Department’s approach also adopts a requirement for
supporting documentation that apparently is impossible to meet.
The requirement is illusory.
Barajas admitted this without qualification at the hearing:
“Q: [ ] So isn’t it true that this documented preclusion
22
requirement is really illusory because the [Department’s] position
is that if a practitioner bills for a single Medi-Cal service, then all
of their hours required to work must be included in the
denominator?” “A: Correct.”
Impossibility counsels against the Department’s approach.
The reimbursement formula is limited to practitioners who
billed Program services. Requiring the District to show that
billing practitioners were precluded from providing (billing)
services makes no sense.
Further underscoring the chimeric character of the
preclusion requirement, Barajas had not seen a document that
would meet this requirement. The Department’s discovery
responses confirmed the Department had no documents showing
a practitioner can bill for Program services and also be dedicated
to another federal program. Yet the instructions to Worksheet A-
3/B-3 contemplate this scenario.
The District illustrated at the administrative hearing how
no document would meet the preclusion requirement. It pressed
Barajas on a particular multi-funded time report it produced
showing one of its Title I-funded workers had spent two hours on
staff development one day and recorded her time under the Title
I program. In other words, the timesheet showed the worker was
not providing services to Medi-Cal students and was unavailable
to provide such services at that time because she was training
adults. (See § 14132.06, subd. (k)(1) [“the department shall seek
federal financial participation for covered services that are
provided by a local educational agency pursuant to subdivision
(a) to a child who is an eligible Medi-Cal beneficiary”].) Barajas
conceded Medi-Cal does not pay for staff development, and this
worker was precluded from billing Medi-Cal for any services
23
during these two hours. Yet she testified even this timesheet was
insufficient to enable the District to exclude the worker’s hours.
Ultimately, the Department interpreted the instructions of
Worksheet A-3/B-3 in a manner to reach the same end its
consultant found improper in the original 2010 Schedule. That
is, it interpreted the “dedicated” phrase in a way that ensured all
federally funded hours would be included in the denominator and
thus would dilute the District’s eligible reimbursement. This was
error.
Neither the Amendment nor any authority cited by the
Department require all federally funded practitioner hours to be
included in the reimbursement formula to measure the Medi-Cal
direct cost.
Worksheet A-3/B-3 recognizes this. The Department
designed this worksheet to implement the Amendment. It
enabled the exclusion of hours for federally funded workers who
dedicate their time to another federal program. (Recall, the
Department abandoned this instruction in the original 2010
Schedule and then inserted it in the revised Schedule after
Navigant and local agencies voiced concern about dilution.)
The Department argued the “dedicated” language must
mean something more than receiving federal funding. This is
true. But the Department’s current interpretation renders the
entire instruction meaningless, as in practice it compels the
inclusion of all federally funded hours into Column C of the
worksheet.
The Department cited various regulations and federal
guidance as supporting its interpretation. These sources
generally address providers’ duty to maintain adequate
documentation supporting costs or the Department’s duties —
24
duties the District does not dispute. (See, e.g., 42 C.F.R.
§§ 413.20, subd. (a), 413.24, subd. (a); Cal. Code Regs., tit. 22,
§ 51458.1, subd. (a)(3).) As Barajas candidly admitted, none of
the sources cited as the basis for her adjustments sets forth the
Department’s novel preclusion requirement: “you’re not going to
find [ ] any regulation that states that time has to be restricted to
another federal program.”
B
For transparent reasons, the Department’s briefing largely
avoids the preclusion requirement. The Department averts its
gaze from the now-obvious problem even though Barajas
repeatedly testified this was the basis for the adjustments, and
even though it conceded in the superior court that “the issue
comes down to documentation.”
Instead, the Department offers a contradictory rationale to
rescue its adjustments. It argues Paragraph I.2 of the
Amendment, unlike Paragraph I.1, shows a clear intent to
include all federally funded hours in the percent of hours worked
calculation. Under this view, if practitioners bill for a single
Medi-Cal service, then all of their hours must be included in the
denominator. This interpretation is inconsistent with Worksheet
A-3/B-3’s instruction to exclude from the calculation any federally
funded Full-Time Equivalents dedicated to another federal
program. The Department does not acknowledge this
inconsistency.
This instruction was the focal point of the hearing; yet on
appeal the Department sidelines it.
The inconsistencies and reversals in the Department’s
approach poison our customary deference. (See Yamaha, supra,
19 Cal.4th at pp. 7–8, 11, 14–15 [appellate courts give deference
25
that is appropriate to the circumstances of the agency action;
depending on the context, an agency’s interpretation “may be
helpful, enlightening, even convincing” or “may sometimes be of
little worth”]; see also Health Centers II, supra, 71 Cal.App.5th at
p. 97 [“the court is the ultimate arbiter of the interpretation of
the law”].)
The Department’s alternative reading of the Amendment
violates basic rules of statutory construction and contradicts the
Amendment’s purpose.
When interpreting texts, including statutes, regulations,
and contracts, we naturally begin with the text: writing is meant
to be read. We also consider provisions in the context of the
entire framework and harmonize them so all parts retain
effectiveness. (In re Marriage of Harris (2004) 34 Cal.4th 210,
221–222 (Harris).) We assume every part serves a purpose and
nothing is superfluous. (J.W., supra, 29 Cal.4th at p. 209; see
also People v. Canty (2004) 32 Cal.4th 1266, 1276 (Canty) [courts
give significance to every word, phrase, sentence, and part of an
act]; Civ. Code, § 1641 [“The whole of a contract is to be taken
together, so as to give effect to every part, if reasonably
practicable, each clause helping to interpret the other”].)
The fundamental goal is to discern and effectuate the
drafter’s purpose. (Apple Inc. v. Superior Court (2013) 56 Cal.4th
128, 135.)
We restate the relevant portions of the two key paragraphs
in the Amendment.
“1. Total personnel costs … necessary for the provision of
health services will be reported for personnel providing health
services by practitioner type … Personnel costs that are funded
by federal revenues other than Medicaid will be excluded … .
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“2. Total personnel costs by practitioner type (from paragraph
I.1.) will be multiplied by the percent of hours worked by
corresponding practitioners to provide LEA Medi-Cal services
to calculate the Medi-Cal direct cost of providing LEA services
by practitioner type. The percent of hours worked will be
based on the number of units paid by Medi-Cal for each LEA
service multiplied by the time worked by practitioners to
provide one unit of service (numerator), divided by the total
annual hours each practitioner type were required to work
(denominator) … .” (Italics added.)
As written, Paragraph I.2 carries over the limitations from
the previous paragraph. We read these paragraphs together, as
we must and as the wording directs. Therefore, “corresponding
practitioners” in the second paragraph must refer to the
practitioners who make up the net personnel costs in the first
paragraph. Federally funded practitioners are explicitly excluded
from that group. Unlike the Department’s reading, this reading
gives meaning to all words in the second paragraph.
The first sentence of this paragraph narrows the formula to
cover only a subset of those who provided Program services. The
Department’s alternative interpretation of Paragraph I.2
impermissibly reads out the limiting parenthetical and distorts
the key phrase “corresponding practitioners.” In various briefing,
the Department erroneously cites the formula in this paragraph
as if the first sentence were not there and then concludes it
covers all practitioners who bill Program services. Or the
Department changes the wording of the first sentence by
referring to “corresponding practitioner type.”
To the extent the parties claim “corresponding
practitioners” is ambiguous, our reading of the term effectuates
27
the Amendment’s purpose of enabling local agencies to obtain the
maximum federal financial participation. (See § 14115.8, subd.
(a)(1); see also Canty, supra, 32 Cal.4th at p. 1277 [where
ambiguity exists, courts adopt the interpretation that achieves a
more reasonable result, considering the intent of the enacting
body and the history of the provision]; Alvarado v. Dart Container
Corp. (2018) 4 Cal.5th 542, 566–569 [rejecting an interpretation
of a pay formula that undermined state policy].)
Reading the Amendment as we do shows one of the
District’s compromise approaches — removing billed units for
federally-funded practitioners from the numerator of the percent
of hours worked formula, as discussed in Exhibit 34 — in fact is
consistent with the Amendment.
The Department fails to address this approach on appeal.
We do not spell out the particulars of a compromise
approach in the absence of briefing on this issue. The
compromise must be consistent with this opinion. The
Department thus cannot construe this opinion as permitting it to
remove from the numerator all units for partially federally-
funded District workers.
This compromise avoids the illogic of including in the
formula practitioner hours that have no associated reimbursable
cost, while also ensuring the percentage is not inflated by the
services provided by these practitioners. It avoids the two
mismatch issues identified by the parties. (See Harris, supra, 34
Cal.4th at p. 222 [fundamental rule of statutory construction is to
avoid anomalies].)
Barajas rejected this approach at the hearing, saying “the
numerator is not an issue here” and she “didn’t find it to be
problematic.” She also explained the purpose of the
28
Department’s audits is not to adjudicate claims and they must
follow the Amendment’s methodology, not create a new one.
Barajas conceded that removing from the numerator would
decrease the percent of hours worked and that “no matter what”
she could have requested money back for overpayments through
the audit. She also conceded the Department could have
determined the difference between what the District billed and
what its actual costs were, but she did not pursue this.
Both parties appear to recognize the errors here could have
been averted had the District not billed Medi-Cal for services that
were federally funded. Although such billings are permissible,
the District has a policy of not billing the Program for federally
funded practitioners. Going forward, the District could save itself
some trouble by systematically pursuing this policy.
We hold the Department misinterpreted the Amendment
and the related worksheet instructions in making the audit
adjustments here. Our holding renders it unnecessary to address
the District’s arguments about rulemaking procedures.
III
The District contends the superior court erred in sustaining
the Department’s demurrer to two causes of action in the
amended petition.
The Department says the parties agreed the remaining
cause of action encompasses all relief sought by the District. The
District does not dispute this. Nor does it offer any argument on
appeal as to why the other two claims properly belong in this
case. The District thus has forfeited any challenge to their
dismissal. (See Haley v. Casa Del Rey Homeowners Assn. (2007)
153 Cal.App.4th 863, 867, fn. 1 [issues lacking argument are
forfeited].)
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DISPOSITION
We affirm the demurrer ruling. We reverse the December
5, 2022 ruling denying the District’s petition for writ of mandate
and the resulting judgment. We remand the matter and direct
the superior court to grant the petition and to set aside the
challenged audit adjustments. (See Code Civ. Proc., § 1094.5,
subd. (f).) The District shall recover its costs on appeal.
WILEY, J.
We concur:
STRATTON, P. J.
SCHERB, J.
30