Tuesday, October 30, 2007

Department of Social Services, Division of Medical Services v. Little Hills Healthcare[1]

Opinion handed down October 30, 2007

The Missouri Supreme Court held that the Administrative Hearing Commission correctly determined that the Department of Social Services, Division of Medical Services’ method of calculating “estimated Medicaid days” for Medicaid providers constituted a rule subject to the rule promulgation requirements of the Missouri Administrative Law Act.

I. Facts and Holding

Beginning in late state fiscal year (“SFY”) 2003, the Department of Medical Services [2] (“DMS”) changed the way it calculated “estimated Medicaid days,” which directly reimburse medical service providers for their projected estimated Medicaid expenses. [3] “Estimated Medicaid days” are determined based upon an annual cost report that each Medicaid provider submits to the agency, but DMS regulations do not prescribe a specific formula for calculating “estimated Medicaid days” based on these reports. [4] Nor does DMS inform healthcare providers of changes in its methodology or publish its computations. While DMS has been inconsistent in its methodology for determining “estimated Medicaid days” from year to year, it always applies the same standard to each of the 140 Medicaid-providing hospitals in Missouri in any given year. Medicaid service providers receive two notices per year regarding Medicaid computations and their prospective reimbursements.

From SFY 1991 until SFY 2003, DMS calculated each provider’s “estimated Medicaid days” by using that provider’s “fee for service days” calculation from the previous year in order to determine the number of “fee for service days” in the current SFY. However, between the first and second notice of SFY 2003, DMS began basing its reimbursement calculations on actual “fee for service days” in the first two-thirds of the current fiscal year. [5] DMS revised its procedures again in 2004, at which time it began basing its calculations upon “fee for services days” from SFY 2003.[6]

As a result of the methodological changes in late SFY 2003 and 2004, Little Hills Healthcare’s[7] (“Little Hills”) direct Medicaid payments decreased by $1,803,904. Little Hills sued DMS after receiving its second estimated Medicaid calculations notice for SFY 2004, arguing that DMS’ unregulated procedures for calculating “estimated Medicaid days” violated the Missouri Administrative Procedures Act. Little Hills argued that the methodology for calculating “estimated Medicaid days” constituted a rule, and was therefore subject to certain rule-promulgating requirements contained in the Act. The Commission found in favor of Little Hills and ordered DMS to pay Little Hills $1,803,984 in additional reimbursements.[8] The Commission’s findings indicated that DMS’ calculation of “estimated Medicaid days” was void for its failure to comply with the rulemaking procedures specified in the Missouri Administrative Procedure Act. On review, the Missouri Supreme Court affirmed the Commission’s findings.

II. Legal Background

Missouri Revised Statutes section 536.010(6) provides, in pertinent part, that a rule is any “agency statement of general applicability that implements, interprets, or prescribes law or policy, or that describes the organization, procedure, or practice requirements of any agency.” [9] Implicit in the term “rule” is that it has the potential to impact the substantive or procedural rights of some member of the public. [10] By its nature, rulemaking involves an agency statement that affects the rights of individuals in the abstract. [11] Promulgation of a rule requires compliance with the rulemaking procedures specified in section 536.021 of the Missouri Revised Statutes. [12]

In the 1993 case of NME Hospitals v. Department of Social Services, [13] the Missouri Supreme Court held that the Department of Social Services’ decision not to reimburse Medicaid providers for any psychiatric treatment other than electric shock therapy constituted a rule and was therefore subject to the rulemaking procedures set forth in Chapter 536 of the Missouri Revised Statutes. [14] The Department argued that the policy change did not constitute a rule because it was not generally applicable, in that it only applied to Medicaid participants and not all hospitals in Missouri. [15] The Court rejected the Department’s argument, stating, “[t]he reimbursement policy applies generally to all participants in the Medicaid program.” [16] As such, the Department was required to comply with certain statutory rulemaking procedures in enacting the amendment and its failure to do so rendered the amendment void. [17]

In contrast, in 1994 the Missouri Supreme Court held that the Department of Revenue’s passage of Senate Bill 35 was not a rule and therefore not subject to rulemaking procedures. [18] Section 301.227 of the Missouri Revised Statutes authorizes the director of revenue to issue a title denominated a “salvage” certificate of title. [19] Prior to the enactment of S.B. 35, the word “salvage” appeared only on the type of title that could be negotiated with a dealer and which was not acceptable for registration purposes. After the enactment of S.B. 35, the word “salvage” could be used on a second type of title; one that is acceptable for registration and where the vehicle had previously been issued as a salvage title. The director announced her intention to use the label “prior salvage” to refer to this latter category of titles. [20] The court stated that the decision to incorporate the word “prior” did not substantially affect the legal rights of any party and merely “communicate[d] the difference between the two types of title.” [21] As such, the director’s announcement did not constitute a rule and was not subject to the rulemaking requirements.

III. Commentary

Given existing Missouri case law, DMS’ methodology for calculating Medicaid reimbursements was certainly a rule. By reducing Little Hills’s Medicaid reimbursements by nearly two million dollars, the regulation certainly affected Little Hills’s substantive rights. Not only do DMS regulations themselves state that Medicaid providers should be reimbursed for the “reasonable cost of care they provide,”[22] Missouri Revised Statute section 208.153.1 provides that DMS “shall by rule and regulation define the reasonable costs, manner, extent, quality, charges and fees” for medical services. [23] While the regulation appeared to fall squarely within the definition of a rule subject to rule-promulgating requirements, the appellate standard of review requires that the Court defer to the Administrative Commission’s finding so long as it is supported by competent and substantial evidence and is not arbitrary, unreasonable or capricious, or an abuse of discretion. [24] These two factors alone nearly dictated the result.

Furthermore, the stated purpose behind the notice and comment procedures delineated in Missouri’s rulemaking statutes is “to provide information to the agency through statements of proponents and opponents to the proposed rule.” [25] Requiring DMS to follow such procedures in the instant case effectuates the apparent intent behind them in that it allows providers such as Little Hills to have notice about, and possibly input into, the calculations. [26] Had DMS simply followed the rulemaking requirements laid out in Chapter 536 of the Missouri Revised Statutes, it may have saved itself a great deal of expense, in that Little Hills had reduced its SFY 2003 operations and might have been entitled to lesser “estimated Medicaid days” than in previous years. [27] Given DMS’ highly unregulated reimbursement system and the large amounts of money at stake for Medicaid providers, it is surprising that such calculations have not been challenged before now.

- Lauren Standlee

[1] No. SC88430 (Mo. Oct. 30, 2007) (en banc), available at http://www.courts.mo.gov/file.jsp?id=26586.  The West reporter citation is 236 S.W. 3d 637 (Mo. 2007) (en banc).
[2] DMS is the state agency that provides Medicaid reimbursements to Missouri Medicaid providers.
[3] Direct Medicaid payments are based on “estimated Medicaid days” because the actual number of days is indeterminable until the end of that year. Clevenger, 236 S.W. 3d at 639.
[4] DMS does take three components into consideration in calculating estimated Medicaid days: (1) direct “fee for service days” (where DMS pays directly); (2) days paid by managed healthcare plans; and (3) out-of- state days paid for non-Missouri patients by other states. Id. at 639.
[5] Based on the new methodology, Little Hills Healthcare’s estimated Medicaid days were reduced and therefore its direct Medicaid payments also decreased. Id. at 640. Little Hills then paid a refunded amount to DMS based on this new, reduced calculation. Id., n. 6.
[6] This estimated 2004 number was markedly lower than Little Hills’s actual SFY 2004 numbers because Little Hills had drastically reduced its SFY 2003 operations. Id., n.7.
[7] Little Hills Healthcare is a psychiatric hospital that provides Medicaid-funded services to children. Id. at 639, n.2.
[8] This is the addition amount that Little Hills would have received in SFY 2004 if DMS had not altered its “estimated Medicaid days” calculations. Id. at 641.
[9] Mo. Rev. Stat. § 536.010(6) (Supp. 2006). There are exceptions to the rule, such as statements that concern only the internal management of an agency and which do not affect the rights of any members of the public. §536.010(6)(a).
[10] Little Hills Healthcare, 236 S.W.2d at 42.
[11] Id.
[12] See Mo. Rev. Stat. § 536.021 (Supp. 2006).
[13] 850 S.W.2d 71 (Mo. 1993).
[14] Id. at 73.
[15] Id. at 74.
[16] Id.
[18] Bagus v. Dir. of Revenue, 878 S.W.2d 39, 40 (Mo. 1994).
[19] Id. at 40.
[20] Id. at 41.
[21] Id. at 42. The Court noted that the only other option would have been to have labeled the second type of title, “[c]ertificate of title issued subsequent to a title described in § 301.227, RSMo, known as a salvage certificate of title.” Id.
[22] Little Hills Healthcare, 236 S.W.3d at 643.
[23] Id. 639 (citing Mo. Rev. Stat. § 280.153.1 (Supp. 2006)).
[24] Id. at 644.
[25] Id. at 641.
[26] See id.
[27] Id. at 640, n. 7.