St Paul Pharmacy v. Department of Health and Human Services ( 2024 )

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
revision until final publication in the Michigan Appeals Reports.
STATE OF MICHIGAN
COURT OF APPEALS
ST. PAUL PHARMACY, UNPUBLISHED
August 15, 2024
Plaintiff-Appellant,
v No. 362579
Ingham Circuit Court
DEPARTMENT OF HEALTH AND HUMAN LC No. 19-000842-AA
SERVICES,
Defendant-Appellee.
Before: REDFORD, P.J., and GADOLA, C.J., and RIORDAN, J.
PER CURIAM.
Plaintiff, St. Paul Pharmacy (St. Paul), appeals by leave granted1 the circuit court’s order
upholding a decision by defendant, the Department of Health and Human Services (DHHS),
requiring St. Paul to repay $734,647.03 in Medicaid overpayments. We affirm.
This case involves a fiscal audit of St. Paul by DHHS’s Office of Inspector General. The
audit, encompassing transactions from August 1, 2012, to May 31, 2016, resulted in a finding by
DHHS that St. Paul owed $734,647.03 for Medicaid fee-for-service overpayments. The audit
method DHHS employed is referred to as an invoice/inventory reconciliation audit (IR audit). An
IR audit involves comparing wholesale quantities of drugs ordered to amounts billed; if fewer
drugs were ordered than were billed, the apparent excess in Medicaid billing is to be recovered by
DHHS. St. Paul contested the amount alleged to be owed, but after an evidentiary hearing, an
administrative law judge (ALJ) upheld the assessment in a lengthy and detailed proposal for
decision (PFD). The director of DHHS adopted the PFD without elaboration. St. Paul appealed
the decision to the circuit court. The circuit court concluded that the appeal of the final
administrative decision by St. Paul was subject to dismissal because St. Paul had not filed any
1
St Paul Pharmacy v Dep’t of Health & Human Servs, unpublished order of the Court of Appeals,
entered June 13, 2023 (Docket No. 362579).
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exceptions to the PFD before the director’s final decision. The circuit court also ruled that, in any
event, no errors requiring reversal were apparent.
On appeal, St. Paul contends that the panel in ER Drugs v Dep’t of Health & Human Servs,
341 Mich App 133; 988 NW2d 826 (2022)—a case involving a pharmacy owned by the same man,
Raad Kouza, who owns St. Paul—wrongly concluded that a party must file exceptions to a PFD
in order to raise corresponding issues on appeal. St. Paul contends that we should therefore call
for a conflict panel under MCR 7.215(J)(2) to challenge the pertinent holding of ER Drugs. We
note that our Supreme Court denied leave to appeal in ER Drugs. 977 NW2d 558 (2022). St. Paul
additionally argues that (1) a prior audit conducted by a DHHS contractor barred the audit at issue
in this case under the doctrine of res judicata; (2) DHHS’s decision regarding the required
repayment amount rested on faulty evidence, with DHHS improperly rejecting additional evidence
proposed by St. Paul; and (3) DHHS had no authority to apply an IR audit to periods preceding
the implementation of subsection 19.2 of the Pharmacy chapter of the Medicaid Provider Manual,
which was implemented on July 1, 2015, and which set forth information pertaining to such audits.
We reject St. Paul’s argument that the circuit court erred by concluding that St. Paul’s
circuit court appeal was not viable because it failed to file any exceptions to the PFD.2 St. Paul
cites MCL 24.281(1) and argues that because the DHHS director read the entire record in this case,
St. Paul did not have an affirmative duty to file exceptions to the PFD in order to be able to raise
its substantive issues on appeal. MCL 24.281(1) provides:
When the official or a majority of the officials of the agency who are to make
a final decision have not heard a contested case or read the record, the decision, if
adverse to a party to the proceeding other than the agency itself, shall not be made
until a proposal for decision is served on the parties, and an opportunity is given to
each party adversely affected to file exceptions and present written arguments to
the officials who are to make the decision. Oral argument may be permitted with
consent of the agency. [Emphasis added.]
St. Paul’s argument is controlled by ER Drugs. In ER Drugs, 341 Mich App at 138-139,
this Court, in considering the same argument made by the pharmacy in that case, first set out the
full text of MCL 24.281:3
(2) The proposal for decision shall contain a statement of the reasons
therefor and of each issue of fact and law necessary to the proposed decision,
prepared by a person who conducted the hearing or who has read the record.
2
As an alternative basis for affirmance, DHHS argues that the circuit court lacked jurisdiction to
entertain St. Paul’s appeal in the first instance given the untimeliness of that appeal. We find this
to be a fairly persuasive argument, but ultimately it is unnecessary to reach and decide the issue
because of St. Paul’s wholesale failure to file an exception to the PFD.
3
We shall not repeat MCL 24.281(1).
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(3) The decision, without further proceedings, shall become the final
decision of the agency in the absence of the filing of exceptions or review by action
of the agency within the time provided by rule. On appeal from or review of a
proposal of decision the agency, except as it may limit the issue upon notice or by
rule, shall have all the powers which it would have if it had presided at the hearing.
(4) The parties, by written stipulation or at the hearing, may waive
compliance with this section.
The ER Drugs panel then proceeded to state:
At the time the ALJ issued its PFD, the “official” who was to “make a final
decision”—i.e., the director of DHHS—had not heard the contested case and had
not yet read the record. While the director eventually did read the record, he had
not done so at the time of the ALJ’s ruling. MCL 24.281(1) refers to an action to
be undertaken in the future (providing that “officials of the agency . . . are to make
a final decision”). And one must keep in mind the maxim that statutes are to be read
as a whole. . . . Reading MCL 24.281(1) and (2) together indicates that the statutory
scheme is referring to exactly the type of situation that took place in the present
case: an ALJ undertook the initial review (by conducting a hearing or reading the
record), and the official who was to be the final decisionmaker and who had not yet
read the record at the time of the ALJ’s initial review later made a final decision.
This conclusion is reinforced by the fact that MCL 24.281(3) states that an agency,
on review of a PFD, “shall have all the powers which it would have if it had presided
at the hearing.” [ER Drugs, 341 Mich App at 139-140 (initial ellipsis in original).]
This Court then cited pertinent caselaw:
In Attorney General v Pub Serv Comm, 136 Mich App 52, 56; 355 NW2d
640 (1984), the Court, citing MCL 24.281, indicated that the failure to file
exceptions to a PFD constitutes a waiver of objections not raised. See also
Robertson v Local Div 26, Amalgamated Transit Union, 91 Mich App 429, 432-
433, 283 NW2d 766 (1979). ER Drugs states that these decisions are not binding
because they predate November 1, 1990. See MCR 7.215(J)(1) (“A panel of the
Court of Appeals must follow the rule of law established by a prior published
decision of the Court of Appeals issued on or after November 1, 1990, that has not
been reversed or modified by the Supreme Court, or by a special panel of the Court
of Appeals as provided in this rule.”). We note, however, that published cases
predating November 1, 1990, still hold value. Woodring v Phoenix Ins Co, 325
Mich App 108, 114; 923 NW2d 607 (2018) (“[T]his Court may not be strictly
bound to follow older published cases, but traditionally regards them as retaining
some authority, at least if they were not disputed by some other contemporaneous
case.”).
In addition, in a more recent case that has precedential value, In re MCI
Telecom Corp Complaint, 240 Mich App 292, 310; 612 NW2d 826 (2000), the
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Court held that the failure to raise exceptions to a PFD constituted waiver of the
issue[.] [ER Drugs, 341 Mich App at 140-141 (alteration in original).]
The Court concluded:
In light of the above analyses and in light of the language in MCL 24.281(3)
that “[t]he decision, without further proceedings, shall become the final decision of
the agency in the absence of the filing of exceptions”—language that emphasizes
the importance of filing exceptions—we reaffirm the pertinent principle from the
Attorney General v Pub Serv Comm case decided in 1984. [ER Drugs, 341 Mich
App at 141.]
Clearly, ER Drugs controls the argument regarding exceptions currently being advanced
by St. Paul, and ER Drugs is binding under MCR 7.215(J)(1). St. Paul argues that ER Drugs was
wrongly decided on this point and contends that we should call for a conflict panel under MCR
7.215(J)(2). Significantly, however, the principle expressed in ER Drugs was reaffirmed in yet
another recent, published opinion. In Meier v Pub Sch Employees’ Retirement Sys, 343 Mich App
571, 579; 997 NW2d 719 (2022), the Court stated:
[P]laintiff failed to raise [his] argument in his objections to the ALJ’s
proposal for decision. The failure to object to a proposal for decision waives “any
objections not raised.” This rule makes good sense because the failure to assert an
exception to a proposal for decision deprives the agency of the opportunity to
correct its error. The waiver extinguishes any error and precludes appellate review.
[Citations omitted.]
Two recent panels of this Court, then, have agreed with the “exceptions” requirement. In addition,
the ER Drugs decision was well reasoned with respect to the manner in which it interpreted the
statutory language.4 We thus decline to call for a conflict panel.
4
It is true that in ER Drugs, the Court characterized the In re MCI Telecom opinion as referring to
a “waiver,” whereas that latter opinion only referred to a “fail[ure] to preserve” an issue. ER
Drugs, 341 Mich App at 141; In re MCI Telecom, 240 Mich App at 310. But that was only one
part of the analysis engaged in by the panel in ER Drugs.
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We lastly note that even were we to address the substantive arguments made by St. Paul
on appeal, we would find no basis for reversal because the arguments raised were addressed—and
resolved in DHHS’s favor—in ER Drugs and Dearborn Hts Pharmacy v Dep’t of Health & Human
Servs, 338 Mich App 555; 980 NW2d 736 (2021).
Affirmed. Having fully prevailed on appeal, DHHS may tax costs under MCR 7.219.
/s/ James Robert Redford
/s/ Michael F. Gadola
/s/ Michael J. Riordan
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