Health-Care Facilities Win Protracted Licensing Fee Battle With State

A nine-year legal battle pitting most of California’s hospitals and nursing homes against the state Department of Health Services has ended with the state agreeing to forfeit more than $20 million in revenue from license fees.

Under a recent settlement that followed a court ruling in favor of about 2,000 health-care facilities, the state will waive $13.7 million worth of licensing fees that it has not attempted to collect and will give up trying to collect $5.8 million in fees that various facilities have refused to pay since 1974.

The state also must pay $700,000 in legal fees to the two law firms representing the nursing homes and hospitals.

Ruling in a class-action lawsuit that contended state license fees were arbitrarily set, Los Angeles Superior Court Judge Lester Olson held in 1982 that the Health Services Department’s collection of license fees between 1974 and 1981 was “invalid and made without authority.” Olson ordered the state to refund most of the fees it had obtained during that time and forbade the state from collecting any more fees until the refunding was completed.

The agreement with the plaintiffs releases the state from the tedious process of refunding. It also frees the Health Services Department’s licensing and certification division to resume charging nursing homes and hospitals annual license fees, which are used to finance its licensing, inspection and enforcement activities.

Charlene Stewart, deputy director of the department’s licensing and certification division, said, “Under the circumstances, it probably was the best resolution that could be reached.”

At issue in the 1975 class-action lawsuit was the state’s licensing fee mechanism. Until 1974, the state imposed a nominal annual license fee, which it believed did not come close to covering the costs of periodically inspecting the facilities.

The Legislature passed a measure to eliminate that inequity, allowing higher fees but requiring that they reflect the cost the department incurred in carrying out its licensing and inspection duties. Each year, the department was to set the fees through its regulations, but that was a process requiring a lot of time and public hearings, state officials said.

“It was a very difficult statute to follow,” said Sharon Mosley, an attorney with the Department of Health Services, and “pretty impossible to implement.”

Consequently, the fee schedules were often issued late or not at all. Additionally, the plaintiffs contended that the state was only estimating what the costs of the licensing programs were, rather than determining “actual” costs, which they contended was required by state law.

Large numbers of nursing homes and hospitals joined in the class-action suit asking that the new fees be voided.

In his 1982 ruling, Olson sided with the health-care providers and concluded that administrative records maintained by the state to justify the fee schedules in the 1970s were in too much of a shambles to be able to prove anything.

“Our basic thrust was, let’s calculate it (the fee schedule) properly and let’s do it on time,” said J. Mark Waxman, an attorney with the firm Weissburg & Aronson of Century City, which represented the majority of the plaintiffs.

It would be impossible to pinpoint how the state will be hurt because of the $20-million loss, said Dennis Hutcheson, a state Department of Finance analyst, because the health department fees are deposited into the state general fund. During the fee freeze, he said, it was the general fund, not the health department, that suffered.

Stewart said she has “never received any indication” that annual allocations to her division were cut back because the licensing program was not paying its own way.

But Ralph Lopez, chief of the Health Facilities Division in Los Angeles County, which receives state funds to inspect nursing homes, said “there would have been a greater potential to have more resources on board today if the money to support the system would have been in the general fund,” Lopez said.

Ironically, facilities now face license fees, established by the Legislature in 1982, which are stiffer than the ones that triggered the initial outcry in the mid-1970s. For example, in 1979 a 100-bed skilled nursing home would have paid $2,840 for its license. Today it would pay $5,650.