The California Court of Appeal affirmed a trial court’s ruling that, under the state Medi-Cal statute and federal law, estate recovery is limited to the value of health care services received and does not extend to excess capitation payments. Phillip v. Baass, No. B341853 (Cal. Ct. App. Oct. 9, 2026).
Theodosia Phillip lived in a nursing care facility and received Medi-Cal benefits from October 2010 until she died in 2015. The California Department of Health Care Services (the Department) paid $261,957.40 in capitation payments (a risk-sharing arrangement under which Medi-Cal makes monthly prospective payments to managed care plans to cover the projected cost of a member’s medical care) to CenCal Health (CenCal), Theodosia’s managed care plan. CenCal paid Theodosia’s health care providers $106,672.71 for Medi-Cal services provided to her. After her death, the Department sought $407,774.41 in estate recovery: the full $261,957.40 in capitation payments, $5,852.30 in Medicare Part B premiums, and $139,964.71 in interest.
Theodosia’s trustee challenged the Department’s estate recovery claim, and the Department filed a lawsuit. Two of Theodosia’s beneficiaries cross-complained on behalf of themselves and others similarly situated, seeking declaratory relief and a writ of mandate compelling the Department to limit its estate recovery claims to the amounts paid for “health care services received” by Medi-Cal recipients under California’s estate recovery statute, section 14009.5 of the California Welfare and Institutions Code. The trial court certified a class of Medi-Cal members and their estates against whom the Department sought to recover capitation payments exceeding the amount paid for health care services received, i.e., excess capitation.
The trial court ruled that estate recovery of excess capitation violated section 14009.5 and 42 U.S.C. § 1396p(b)(1), and that its ruling applied retroactively. It entered judgment in favor of the Department limited to the amount Theodosia’s plan paid for her health care services plus prejudgment interest, entered a declaratory judgment in favor of the beneficiaries and the class limiting its estate recovery to amounts paid for health care services received, and issued a writ of mandate requiring the Department to stop collecting excess capitation and to reprocess certain class claims. The Department appealed.
The California Court of Appeal affirmed. The court noted that under the managed care model used by approximately 95 percent of Medi-Cal members, the Department pays a fixed monthly capitation payment to a managed care plan for each member, whether or not the member receives any services. A member may therefore receive services worth less than the capitation rate. In a de novo review of section 14009.5, the court noted that the Department’s estate recovery formula depends on the version of the statute in effect at a recipient’s death. Although a prior version of the statute applied to Theodosia and others who died prior to January 1, 2017, the court examined both the prior and current versions because the class included Medi-Cal members who died both before and after that date.
Under the former version of section 14009.5, the Department was required to claim against a decedent’s estate “an amount equal to the payments for the health care services received.” Health care services were defined by reference to specific listed benefits, such as hospital, nursing facility, and dialysis services, and did not mention premiums or capitation payments. The current version of the statute limits estate recovery to the health care services required to be collected under federal law (as set forth in 42 U.S.C. § 1396p(b)(1)(B)(i)): medical assistance consisting of nursing facility services, home and community-based services, and related hospital and prescription drug services. The court held that, under the plain language of both versions, excess capitation is not recoverable because it is not tethered to the health care services actually received. A contrary conclusion would require the court to rewrite the statute.
The court also found support in Pottgieser v. Kizer, 906 F.2d 1319 (9th Cir. 1990), in which the Ninth Circuit held that premiums are not recoverable medical assistance, and distinguished In re Estate of Ecklund, 20 N.W.3d 351(Minn. 2025), a Minnesota Supreme Court decision allowing the state of Minnesota to recover the actuarially determined portion of capitation attributable to the cost of the Medicaid recipient’s long-term care services.
The court concluded that, even if the statute were ambiguous, its legislative history would support the same result. The legislative history never mentioned the recovery of excess capitation; none of the statute’s six amendments referred to premiums or capitation; and the 2016 amendments narrowed, rather than expanded, recovery.
The court also ruled that the Department’s regulation, California Code of Regulations title 22, section 50961(c), was void. The regulation provided that an estate recovery claim includes all payments made by Medi-Cal on behalf of a decedent, including payments to managed care plans; thus, on its face, the regulation included excess capitation, which is paid to managed care plans. The court determined that the regulation impermissibly enlarged the scope of its enabling statute by allowing recovery of amounts not equal to the payments for health care services received and, thus, was invalid.
In addition, the court rejected the Department’s argument that federal law required recovery of excess capitation, noting that mandatory federal estate recovery is limited to the categories of medical assistance listed in 42 U.S.C. § 1396p(b)(1)(B)(i), which do not include excess capitation. Further, the court held that the federal State Medicaid Manual is nonbinding federal guidance and the Department cannot rely on it to implement a rule that is inconsistent with California’s unambiguous statute.
The court affirmed the lower court’s judgment.
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