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On July 24, 2023, the California Supreme Court held in Family Health Centers of San Diego v. State Department of Health Care Services that federally qualified health centers’ (“FQHCs”) statutorily-required outreach and education activities to Medi-Cal patients cannot be categorically excluded from the allowable costs used to calculate their Prospective Payment System (“PPS”) rates. The case provides clarity on when and how to determine whether an outreach activity is an allowable cost, resolving a long-standing ambiguity and point of tension between FQHC providers and the Department of Health Care Services (“DHCS”).

The FQHC in this case, Family Health Centers of San Diego (“Family Health”), requested a PPS rate adjustment and submitted its costs of employing outreach workers and providing outreach services as part of the request. These costs were excluded by the auditor reviewing the request as insufficiently related to services and supplies incident to a FQHC visit and a covered benefit. This conclusion was upheld through the administrative appeals process within DHCS, and subsequent appeals to the superior and appellate courts were denied on the basis that Family Health’s outreach was non-reimbursable advertising because it was for the purpose of bringing in new patients and increasing utilization. The California Supreme Court reversed, determining that DHCS’ decision was an abuse of discretion for failure to apply the appropriate legal standard and for lack of support in the findings.

At its core, the case concerned whether, as part of its obligation to pay FQHCs 100 percent of reasonable costs related to the furnishing of medical assistance services to Medicaid beneficiaries, DHCS is obligated to incorporate the costs of outreach activities into the PPS rate paid per-visit to FQHCs. The question for the Court was whether outreach costs were “necessary and proper costs incurred in furnishing [covered] services.”

To resolve the question, the Court turned to the non-binding guidance in the Medicare Provider Reimbursement Manual (“Provider Manual”). The Court undertook a careful analysis of the guidance on allowable versus non-allowable advertising costs and determined that whether an advertising cost was allowable hinged on its purpose—is the advertising designed to facilitate access to available health care services or to encourage the use of the provider’s facilities over other facilities offering comparable services? The former, as an educational goal related to patient care, is allowable, while the latter, as a goal aimed at generating revenue, is not. The Court explained that this inquiry, not whether or not the communication tended to increase patient utilization, was key to determining an advertising cost was allowable. Because DHCS’ decision determined that outreach was a categorically unallowable advertising cost for its tendency to increase utilization alone and did not consider whether the outreach activities undertaken were necessary and proper to furnish FQHC services, nor whether they were common and accepted activities amongst FQHC providers, the appropriate legal standard was not followed.

With its careful analysis of the complex and interlocking laws, regulation, and guidance on this critical question, the California Supreme Court provides much-needed guideposts for analysis of allowable outreach costs that may be included in the PPS rate. FQHC providers now know that only those outreach costs that further patient care-related goals may be included, enabling them to receive compensation that are often life-altering communications with patients who might otherwise never know how or where to seek care.

For questions, please contact Lauren Barker.