Update: California’s Free Care Challenge

A final judgment is expected soon in the 2009 lawsuit brought by San Francisco Unified School District (SFUSD) against California’s Department of Health Care Services (DHCS) for payment of “regular education” health services.


Billing for medically necessary health services provided to Medi-Cal students when those services are also made available to all students without charge, so-called “regular education” services, has been significantly limited during the last decade due to the federal free care rule.

The free care rule, an interpretation of federal regulation that has been struck down twice by a federal appeals board, is the primary factor that currently limits claiming for direct health services under the LEA Billing Option program to those provided as part of special education students’ Individualized Education Program (IEP) or Individual Family Services Plan (IFSP). It was also central to the suit brought by SFUSD after California’s DHCS withheld $305,000 from the district on the basis of free care in 2005.


Free Care Challenge Update

Two documents were recently submitted to the San Francisco Superior Court in anticipation of the final judgment in this suit. The filings indicate that DHCS has successfully petitioned the federal Centers for Medicare and Medicaid Services (CMS) for payment of eligible regular education service claims on behalf of SFUSD, and will be able to receive payment in the form of federal financial participation (FFP) for similar claims submitted in the future.

  1. 10th Joint Status Report (June 6, 2012): This status report announces CMS’s issuance of a positive grant award, in the form of payment, for regular education claims submitted by DHCS on behalf of SFUSD. The report specifically states that, “DHCS will be able to obtain FFP for those claims [claims for services provided to Medi-Cal students in the district when those services are also available to others without charge].”
  2. Stipulation and Order to Lift Stay of Action Stipulation and Order to Lift Stay of Action (June 14, 2012): After the October 2009 court ruling in favor of SFUSD, a stay of action was put in place while DHCS challenged the federal government. In light of CMS’s positive grant award, in which CMS awarded FFP for SFUSD’s disallowed regular education claims, the stay of action has been lifted which signals that a final judgment in the case should follow.


It is anticipated that the court’s pending final judgment will go into additional detail on the role free care played in the case and will lay a foundation supporting schools’ ability to bill for regular education services in California. It is important to note that all other federal requirements, including compliance with third party liability (TPL), must be adhered to for regular education services to be considered eligible for payment.


A Review of California’s Free Care Challenge

In 2005, the state of California withheld $305,000 from SFUSD on the basis of CMS’s free care interpretation. SFUSD sued the state in May 2009 arguing that, under California law, federal reimbursement is available for medically necessary health services provided to regular education Medi-Cal students regardless of whether those same services are provided at no charge to other students.

The San Francisco Superior Court ruled in favor of SFUSD in October 2009 and the California DHCS was given two options: to reimburse SFUSD for future eligible regular education claims or to challenge CMS on its application of the free care rule and obtain approval to receive federal payment for future regular education claims.

With the stay of action lifted in June of 2012, it would appear that California’s federal challenge has concluded and that a final judgment is imminent in the suit brought by SFUSD. Paradigm will continue to track the status of this suit and its impact on the federal free care principle for school Medicaid programs.

Read More

Read more about the history and challenges to CMS’s free care rule…