IN THE SUPREME = COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

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No. 05-0372

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El Paso Hospital = District=20 d/b/a

R.E. Thomason = General=20 Hospital District, et al., Petitioner,

Texas Health and Human = Services=20 Commission

and Don Gilbert,=20 Commissioner, Respondents

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On Petition for Review from = the

Court of Appeals for the Third = District of=20 Texas

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Argued November=20 15, 2006

Justice Medina delivered the = opinion of=20 the court.

In = this=20 appeal from the denial of a declaratory judgment, we are asked whether = the Texas=20 Health and Human Services Commission=92s (HHSC) data-collection method = for=20 calculating prospective Medicaid inpatient service rates is an agency = rule as=20 defined by the Administrative Procedures Act (APA). Tex. Gov=92t = Code =A7 2001.003(6). If = it is, we=20 are further asked to declare the rule invalid because HHSC neglected to = adopt it=20 as the APA requires. We are further asked to determine whether HHSC = failed to=20 follow the procedure prescribed by other rules that govern an interested = party=92s=20 administrative appeal of HHSC=92s proposed = rates. The=20 trial court denied all relief, and the court of appeals affirmed its = judgment.=20 161 S.W.3d 587.

&nbs= p;=20 We conclude that HHSC=92s methodology is an = invalid rule=20 and remand that part of the case for further proceedings. We further = conclude=20 that HHSC did not err in applying the rules applicable to the = administrative=20 appeal of its proposed Medicaid rates. Accordingly, we reverse the court = of=20 appeals=92 judgment, in part, and affirm it, in part.

&nbs= p;=20 Fourteen Texas=20 hospitals sued HHSC asking that HHSC=92s = cutoff date for=20 submitting paid claims data to determine reimbursement rates for = inpatient=20 Medicaid services be declared invalid. The Hospitals claim the cutoff = date is=20 improper either because it is an invalid rule under the APA, or because = it=20 conflicts with relevant provisions of the Human Resources Code and HHSC=92s administrative rules. Additionally, the = Hospitals=20 assert that HHSC failed to follow its administrative appeals rules in = reviewing=20 the Hospitals=92 claims. A general understanding of the Medicaid program = and the=20 process HHSC uses to reimburse for Medicaid services is necessary before = addressing these complaints.

&nbs= p;=20 Medicaid is a health insurance program, jointly operated and funded by = the=20 federal and state governments, for the medical care of low-income and = other=20 eligible persons. See generally Pub. L. No. 89-97, 79 Stat. 286 = (1965)=20 (codified as amended at 42 U.S.C. =A7=A7 1396-1396u); see also Wilder = v.=20 Va. Hosp. Ass=92n,=20 496 U.S. 498, 502 (1990)(citing 42 U.S.C. =A7 1396). While federal law = establishes=20 Medicaid=92s basic parameters, each state decides eligible groups, types = and range=20 of services, payment levels for services, and administrative services.=20 See 42 C.F.R. =A7 430.0. Specifically, each state prepares a = written plan=20 describing the nature and scope of its Medicaid program. Id. =A7=20 430.10. Once the plan is approved by the Secretary of Health and = Human=20 Services, the state is responsible for operating the program to conform = with the federal guidelines. 42 = U.S.C. =A7=20 1396. In Texas, HHSC is the agency charged = with this=20 responsibility. See Tex. Hum.=20 Res. Code =A7=A7 32.028(a)-(d),=20 32.0281(a).

&nbs= p;=20 Under the approved plan, HHSC is responsible for reimbursing hospitals = that=20 provide services to Medicaid patients. See 42 U.S.C. =A7 1396a(a)(13). The reimbursement methodology in = Texas is a = prospective=20 payment system. Tex. Hum. = Res. Code =A7=20 32.028(d). Under this system, HHSC sets the rates = paid to=20 hospitals for each service in advance, which allows hospitals to know = the rate=20 at which they will be reimbursed for specific services. See = Wilder, 496=20 U.S. at 506. The = prospective=20 payment system encourages hospitals to control costs for inpatient = Medicaid=20 services so they can earn a profit under the pre-determined rates. = Id. at=20 506-07.

&nbs= p;=20 To implement this system, HHSC has adopted specific rules to determine = the=20 prospective payment rates. Although the rate-calculation rules are = detailed and=20 complex, they generally involve three components: 1) the data that forms = the=20 basis for the rate calculation, 2) the formula that converts the data = into=20 reimbursement rates, and 3) the process HHSC uses to collect the data = and=20 calculate rates.

&nbs= p;=20 The first component, the data used for the rate calculation, is = comprised of=20 both cost and claims data. See 1 Tex. Admin. Code =A7=20 355.8063(c). Cost data are derived from the = hospitals=92 cost=20 reports that allocate a portion of their total costs to the Medicaid = program=20 based on how many days Medicaid patients stay in the hospital, charges=20 associated with such patients, and other factors. See id. =A7 355.8063(l). Claims data are derived from = hospital claims=20 requesting payment for services rendered to Medicaid patients under = existing=20 reimbursement rates. Id. =A7 355.8063(b)(5).

&nbs= p;=20 The second component, the rate-calculation formula, converts the cost = and claims=20 data into reimbursement rates that approximate a hospital=92s cost for = treating a=20 Medicaid patient. The formula achieves this goal by taking a group of = hospitals=20 with similar Medicaid cost experiences, deriving those hospitals=92 = approximate=20 costs to treat an average Medicaid case, then adjusting that cost to = reflect the=20 relative expense of a particular service. Id. =A7 355.8063(e). The result is the new rate to be = paid to that=20 hospital group for that service. See id. Specifically, the rate = for a=20 service is determined by multiplying (1) the relative weight of the = patient=92s=20 diagnosis-related group by (2) the standard dollar amount for the = hospital=92s=20 payment division. Id. Although several steps = are involved=20 in calculating the diagnosis-related groups and standard dollar amounts, = the=20 foundation for the calculations, and what is important for purposes of = this=20 appeal, is the =93base year=94 that we will later discuss in more = detail. Id. = =A7=20 355.8063(b)(5).

&nbs= p;=20 The third component for determining prospective rates for Medicaid = services is=20 HHSC=92s process for collecting the data. = This process=20 requires that the prospective reimbursement rates be recalculated at = least every=20 three years to account for inflation and medical advances that effect the cost of medical services. See id. = HHSC=92s current policy is to recalculate the = rates on a=20 three-year cycle. See id. The first year is the base year, and = only=20 claims data from Medicaid patients admitted in this base year may be = included in=20 the rate calculation. See id. =A7 355.8063(n). The next year HHSC = collects=20 the data and converts it into prospective reimbursement rates. See = id.=20 These rates then go into effect in the third year and remain effective = for three=20 years during which this process is repeated. See id. During the = third=20 year, HHSC makes changes only if a hospital successfully appeals a = mathematical=20 or data entry error. Id. =A7 355.8063(k)(1). For example, the base year at issue here was = the state=20 fiscal year from September 1, 1999, to August, 31, 2000. The process for = collecting data and generating rates occurred between September 1, 2000, = and=20 August 31, 2001. These rates were in effect from September 1, 2001, = through=20 August 31, 2004.

&nbs= p;=20 This appeal focuses on HHSC=92s = interpretation of what=20 constitutes a =93base year.=94 HHSC=92s = rules define the=20 =93base year=94 as =93[a] 12-consecutive-month period of claims data = selected by the=20 [department] or its designee.=94 Id. =A7 355.8063(b)(5). HHSC requires that the = =9312-consecutive-month period=94=20 run concurrently with the State=92s fiscal year from September 1 to = August 31.=20 See id. =A7 355.8063(n). HHSC gathers all claims data for = Medicaid patients=20 admitted during that fiscal year but uses only the claims that Medicaid = actually=20 pays to assure that the data is from Medicaid-eligible claimants. Most = important=20 to this appeal, HHSC imposes a =93cutoff=94 date, selecting claims data = only from=20 base-year claims that are paid within the fiscal year plus a six-month = grace=20 period (the =93February 28 cutoff=94). Put simply, when determining what = claims go=20 into the rate calculation, HHSC considers only the claims of Medicaid = patients=20 admitted during the base year that are actually paid within six months = of the=20 base-year=92s end. Claims for all patients admitted during the base = year, but not=20 paid by February 28, are not included in determining the prospective=20 reimbursement rates. Between February 28 and August 31, HHSC = recalculates the=20 standard dollar amount and diagnosis-related group relative weights, = informs=20 hospitals of the proposed new rates, hears appeals, and finalizes the = new rates=20 before they go into effect on September 1 of that year.

&nbs= p;=20 The problem with this process, according to the Hospitals, is that HHSC = does not=20 use twelve consecutive months of claims data in computing rates as its = rules=20 require. Instead, the Hospitals argue that HHSC=92s=20 six-month cutoff arbitrarily excludes relevant Medicaid claims simply = because=20 they are not paid quickly enough. The Hospitals submit that under HHSC=92s interpretation of the rule, only 95-97% = of base-year=20 claims are used to calculate the rates, while the rules actually require = a =93true=20 cost average.=94

&nbs= p;=20 Dissatisfied with this process, the Hospitals sought administrative = review of=20 the reimbursement rates from fiscal year 2000, asking=20 HHSC to include claims data excluded by the February 28 cutoff. HHSC = denied the=20 Hospitals=92 request and refused to refer the case to the State Office = of=20 Administrative Hearings for a formal hearing. The Hospitals then sued = HHSC for=20 declaratory and injunctive relief to enjoin it from applying the = February 28th=20 cutoff. The Administrative Procedures Act = authorizes=20 declaratory relief when determining the validity or applicability of a = rule, if=20 the plaintiff alleges =93that the rule or its threatened application = interferes=20 with or impairs, or threatens to interfere with or impair, a legal right = or=20 privilege of the plaintiff.=94 Tex. Gov't Code =A7=20 2001.038.

&nbs= p;=20 The trial court granted the Hospitals=92 request for a temporary = injunction, but,=20 at a subsequent trial on the merits, a visiting judge ruled against the=20 Hospitals on all claims. The court of appeals affirmed, 161 S.W.3d 587, = and this=20 appeal followed.

&nbs= p;=20 The Hospitals present two arguments on appeal. First, they ask that we = declare=20 the February 28 cutoff invalid either because it constitutes an = improperly=20 promulgated rule or because it conflicts with the applicable provisions = of the=20 Texas Human Resources Code and the Texas Administrative Code. See=20 generally Tex. Hum. Res. Code =A7 = 32.028(d); 1=20 Tex. Admin. Code =A7 355.8063. = Second, the=20 Hospitals argue that HHSC failed to refer their administrative appeal = relating=20 to the rate issue for formal hearing, as required by HHSC=92s rules and the Texas Human Resources Code. = They ask=20 that we either direct HHSC to refer their appeal or remand the case for = further=20 proceedings.

&nbs= p;=20 HHSC is charged with establishing methods for administering and adopting = necessary rules for the proper and efficient operation of medical = assistance=20 programs. Tex. Hum. Res. Code =A7=20 32.021(c). Specifically, HHSC has statutory = authority to=20 adopt =93reasonable rules and standards governing the determination of = rates paid=20 for inpatient hospital services on a prospective payment basis.=94 = Id. =A7=20 32.028(d). HHSC also has authority to adopt rules relating to the = payment=20 rates that describe the process used to determine the rates. Id. =A7=20 32.0281(b). HHSC further must describe the prospective payment = system=20 used to reimburse hospitals that provide inpatient Medicaid services. = See=20 1 Tex. Admin. Code =A7 355.8063(a). =

&nbs= p;=20 HHSC argues that it complied with these statutes, and that the February = 28=20 cutoff is not a rule itself, but rather its interpretation of the = base-year=20 rule. The Hospitals disagree, arguing the February 28 cutoff falls = squarely=20 within the APA=92s definition of a rule. We = agree with=20 the Hospitals. Under the APA, a rule: (1) is an agency statement of = general=20 applicability that either =93implements, interprets, or prescribes law = or policy=94=20 or describes [HHSC=92s] =93procedure or = practice=20 requirements;=94 (2) =93includes the amendment or repeal of a prior = rule;=94 and (3)=20 =93does not include a statement regarding only the internal management = or=20 organization of a state agency and not affecting private rights or = procedures.=94=20 Tex. Gov=92t Code = =A7=20 2001.003(6)(A)-(C).

&nbs= p;=20 First, the February 28 cutoff is a statement of general applicability = that=20 implements law or describes procedure. See id. =A7 = 2001.003(6)(A)(i)-(ii). The term = =93general=20 applicability=94 under the APA references =93statements that affect the = interest of=20 the public at large such that they cannot be given the effect of law = without=20 public input.=94 R.R. Comm=92n of=20 Tex. v. WBD Oil and Gas Co., 104 = S.W.3d 69,=20 79 (Tex.=20 2003). The prospective payment system and its calculations affect = all=20 hospitals receiving reimbursement for inpatient Medicaid services. Thus, = no=20 question exists that the February 28 cutoff is a statement of general=20 applicability because it applies to all hospitals.

&nbs= p;=20 The cutoff further implements policy and describes HHSC=92s data collection procedure. HHSC is = required to=20 describe the process used to determine payment rates through its = formally=20 promulgated rules, and HHSC=92s rule = provides that it=20 will use a base year, =93[a] 12-consecutive-month period of claims = data,=94 to=20 calculate the Hospitals=92 rates. 1 Tex. Admin. = Code =A7=20 355.8063(b)(5). The effect of HHSC=92s February 28 cutoff, however, is to modify = the=20 base-year rule by controlling the data HHSC will use from that year. The = February 28 cutoff thus amends another rule, the base year=92s=20 12-consecutive-month period of claims data, thus meeting the second = criteria of=20 a rule. See Tex. = Gov=92t Code=20 =A7 2001.003(6)(B).

&nbs= p;=20 Finally, the February 28 cutoff affects the Hospitals=92 private rights = because it=20 is a key formula component that determines prospective reimbursement = rates.=20 Id. =A7=20 2001.003(6)(C). No definitive test exists for = determining whether an agency=92s statement affects private rights. = Although we=20 recognize no bright line rule or single test, one approach is to = consider=20 whether an agency=92s =93statement=94 (here the cutoff) has a binding = effect on a=20 private party. For instance, if the cutoff is merely the agency=92s view = on an=20 issue as found in letters, guidelines, reports or court briefs, and the=20 statement has no binding effect on a private party, it is likely nothing = more=20 than a statement of the agency=92s internal policies or procedures. = See=20 Brinkley v. Tex. Lottery Comm=92n, 986 S.W.2d 764, = 769-70=20 (Tex. App.=97Austin 1999, no pet.). However, if the cutoff adopts = guidelines,=20 practice requirements, or enforcement policies that will have a binding = effect=20 on private parties, it more likely affects private rights. See Tex. Alcoholic Beverage Comm=92n v.=20 Amusement & Music Operators of Tex., Inc., 997 S.W.2d 651, = 658-59 (Tex.=20 App.=97Austin 1999, pet. dism. w.o.j.).

&nbs= p;=20 The enabling statute here requires that HHSC adopt =93reasonable rules = and=20 standards governing the determination of rates paid for inpatient = hospital=20 services on a prospective payment basis.=94 Tex. Hum. Res. = Code =A7 32.028(d). = Specifically,=20 HHSC must =93assure that the payment rates are reasonable and adequate = to meet the=20 costs incurred by the hospital in rendering services to Medicaid = recipients.=94=20 Id. The=20 February 28 cutoff is a significant component for calculating = prospective=20 reimbursement rates, and the Hospitals complain that its effect is to = skew those=20 rates to their disadvantage. Whether or not this is true it is a matter = that the=20 agency should explore as a part of its rule-making process.

&nbs= p;=20 A presumption favors adopting rules of general applicability through the = formal=20 rule making procedures the APA sets out. Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248, 255 = (Tex. = 1999). These=20 procedures include providing notice, publication, and public comment on = the=20 proposed rule. Id. (citing=20 Tex. Gov=92t Code = =A7=A7 = 2001.023-.030). The process=20 assures notice to the public and affected persons and an opportunity to = be heard=20 on matters that affect them. Id.

&nbs= p;=20 When an agency promulgates a rule without complying with the proper = rule-making=20 procedures, the rule is invalid. See Tex. Gov=92t = Code =A7 2001.035(a). = Although we do=20 not decide whether the February 28 cutoff is appropriate to the = determination of=20 whether hospitals receive reasonable and adequate reimbursement for = inpatient=20 Medicaid services, we do hold that HHSC should have incorporated the = cutoff into=20 the language of the =93base year rule.=94 See, = e.g., 1=20 Tex. Admin. = Code =A7=20 355.8065(b)(24) (including cutoff in rule = pertaining to=20 additional reimbursement for disproportionate share hospitals). Because = we=20 conclude that the February 28 cutoff is a rule, and that HHSC did not = follow the=20 proper rule-making procedures, we declare the rule invalid.

&nbs= p;=20 When a court finds an agency rule invalid, it may remand the rule to the = agency=20 to allow =93reasonable time for the agency to either revise or readopt = the rule=20 through the established procedures.=94 Tex. Gov=92t = Code =A7 2001.040. Unless = good cause=20 exists to invalidate the rule, it should remain effective for this = reasonable=20 period. Id. Finding no good reason to invalidate the rule = immediately, we=20 remand the rule to the agency for further action.

&nbs= p;=20 The Hospitals also complain that HHSC improperly applied its = administrative=20 appeals rules. The Hospitals contend that HHSC was required to refer = their=20 appeal for a formal hearing with the State Office of Administrative=20 Hearings.

&nbs= p;=20 According to the Texas Administrative Code, a hospital may appeal a = claim if the=20 hospital believes HHSC =93made a mechanical, mathematical, or data entry = error in=20 computing the hospital=92s base year claims data,=94 and =93may request = a review of=20 the disputed calculation by the HHSC . . . .=94 1 = Tex. Admin. = Code =A7=20 355.8063(k)(1)(A). HHSC considers this review = an=20 =93informal review.=94 See id. If a hospital is dissatisfied with = the results=20 of the informal review, the hospital may then request a formal hearing = before=20 the State Office of Administrative Hearings. See id.

&nbs= p;=20 However, the appeals rule also specifically states that a hospital = =93may not=20 appeal the prospective payment methodology used by the HHSC . . . = including: (A)=20 the payment division methodologies; (B) the diagnosis-related groups=20 established; (C) the methodology for classifying hospital discharges = within the=20 diagnosis-related groups; (D) the relative weights assigned to the=20 diagnosis-related groups; and (E) the amount of payment as being = inadequate to=20 cover costs. Id. =A7 355.8063(k)(2). Thus, the appeals rules specifically prohibit = any=20 appeals contesting HHSC=92s prospective = payment=20 methodology.

&nbs= p;=20 The court of appeals concluded that =93[b]ecause the=20 mathematical or data entry errors alluded to by the Hospitals did not = pertain to=20 individual claims but, rather, to how the claims selection process in = the=20 aggregate could lead to mathematical or data entry errors, we hold that = [HHSC]=20 was not required to act on the Hospitals=92 requests for formal reviews = and . . .=20 could properly deny requests for review that challenge the prospective = payment=20 methodology.=94 161 S.W.3d at 594. Thus, = because the=20 Hospitals=92 argument here essentially seeks a formal review of HHSC=92s methodology, we agree and, accordingly, = affirm that=20 part of the court of appeals=92 judgment.

*=20 * *

= We affirm the court of appeals=92 judgment in part, reverse it in part, = and remand=20 HHSC=92s rule to the trial court for further = proceedings.

=20 __________________________________________

=20 David M. Medina

=20 Justice

Opinion=20 delivered: August 31,=20 2007