A chain of skilled nursing facilities has lost its appeal against the California Department of Health Care Services over the reclassification of certain employee costs, resulting in a significant reduction in Medi-Cal reimbursements. The complaint was filed by Windsor Gardens Convalescent Center and other related entities in the Superior Court of Los Angeles County on July 9, 2024, against Michelle Baass, the current Director of the Department.
The plaintiffs, a group of skilled nursing facilities sharing a home office under SNF Management, Inc., sought Medi-Cal reimbursement for fiscal years 2013 and 2014. They reported the costs associated with specific home office employees as labor costs. However, during an audit, the Department reclassified these costs as administrative expenses, which are reimbursed at a lower rate than labor costs. The plaintiffs challenged this reclassification through administrative appeals but were denied by an Administrative Law Judge (ALJ). Subsequently, they filed a petition for writ of mandate to overturn the Department's final decision.
According to court documents, the plaintiffs argued that their home office employees—specifically regional clinical directors, regional directors of staff development, and regional dietary supervisors—performed duties that should be classified as labor costs. They presented job descriptions and affidavits from employees to support their claims. However, during audits conducted by the Department for fiscal years 2013 and 2014, it was found that necessary documentation such as payroll records and allocation schedules were not provided by the plaintiffs. This lack of documentation led to the reclassification from labor to administrative costs.
The trial court upheld the ALJ's decision on March 24, 2022. Judge James C. Chalfant ruled that California Code of Regulations differentiates between services provided directly by facility employees and those provided by home office employees. The court concluded that since the plaintiffs failed to provide adequate documentation during audits, they did not meet their burden of proof to show that these positions should be classified under labor costs.
In their appeal, Windsor Gardens Convalescent Center argued that direct care labor costs should include all nursing-related activities regardless of whether performed by facility or home office employees. However, substantial evidence presented during hearings showed that tasks performed by these positions were more aligned with administrative functions rather than direct patient care.
The plaintiffs sought relief through both administrative mandamus under Code of Civil Procedure sections 1094.5 and traditional mandamus under section 1085 along with declaratory relief under section 1060. They requested a judicial declaration stating that nursing, dietary, and in-service education costs rendered by home office personnel should be reimbursed as labor costs.
The appellate court affirmed the trial court’s judgment on all counts. The panel included Judges Ashmann-Gerst, Lui, and Hoffstadt who concurred with the decision to uphold the Department's cost reclassifications based on substantial evidence supporting their findings.
Attorneys representing Windsor Gardens included Stanton J. Stock from Hooper Lundy & Bookman while Rob Bonta represented Michelle Baass with assistance from Cheryl L. Feiner and Deputy Attorneys General Charles J. Antonen and Colin D. Schoell.