      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                      NO. 03-03-00355-CV



      Albert Hawkins, in his capacity as Commissioner of Health & Human Services;
               the Texas Health and Human Services Commission; and the
                         Texas Department of Health, Appellants

                                                 v.

                    Dallas County Hospital District d/b/a Parkland Health
                               and Hospital System, Appellee




     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
          NO. GN202951, HONORABLE ROSE SPECTOR, JUDGE PRESIDING



                                          OPINION


               In this appeal, we consider the rules and formulas used to reimburse Texas teaching

hospitals for a portion of their annual costs of providing graduate medical education to resident

physicians. We affirm the judgment of the district court.


                                         BACKGROUND

               The dispute in this case requires us to discern the intent of the legislature when it

created statutory language concerning how to allocate particular Medicaid funds to teaching hospitals

in Texas. These funds are meant to reimburse those hospitals for some of the costs associated with

training medical residents. Thus, we will begin with a brief overview of the Medicaid program in

Texas as it relates to these funds.
               Medicaid is a federal-state assistance program, run by state governments within

federal guidelines, that pays for health care services provided to eligible recipients—low-income

people of any age—from federal, state, and local tax funds. See 42 U.S.C.A. §§ 1396-1396v (West

2003).1 It is administered by the states. See id. §§ 1396, 1396(a)(2). The federal government pays

a percentage of the total cost that a participating state incurs in providing Medicaid services. Id.

§ 1396b. Under the federally approved plan for the administration of the Medicaid program in

Texas, teaching hospitals that provide inpatient hospital services to Medicaid-eligible individuals

are entitled to Medicaid reimbursement for the cost of these services, including reimbursement for

a portion of the costs associated with the hospital’s resident-physician graduate medical-education

and training (GME costs). See id. §§ 1396, 1396a, 1396d(a).

               A similar program exists in Medicare,2 and in April 1986 Congress established the

current federal method for calculating reimbursable GME costs under that program. See id.

§ 1395ww(h) (West 2003); 42 C.F.R. § 413.86 (2004). Instead of annual determinations of cost

actually incurred, Congress designated 1984 a baseline year for cost determinations, i.e., costs




       1
         The federal Department of Health and Human Services provides a concise summary of the
Medicaid law as it relates to the federal-state partnership. See Centers for Medicare and Medicaid
Services, Welcome to Medicaid: Site for State & Territorial Government Information, at
http://www.cms.hhs.gov/states/default.asp (last visited Mar. 19, 2004).
       2
          Medicare is a distinct medical insurance program run by the federal government that pays
for health care services provided to covered beneficiaries—primarily people over the age of 65,
regardless of income, and younger disabled and dialysis patients. See 42 U.S.C. §§ 1395-1395gg
(West 1992 & Supp. 2003).

                                                 2
“recognized as reasonable” for that year would serve as the base figure used to calculate Medicare

GME reimbursements for all subsequent years. See Regions Hosp. v. Shalala, 522 U.S. 448, 453

(1998). The 1984 per-resident amount, adjusted for inflation, would then be used to determine the

provider’s GME reimbursements for all fiscal years “beginning on or after July 1, 1985.” See id.

The provider’s reimbursable costs for a particular year would be computed by multiplying the

inflation-adjusted 1984 per-resident amount by the provider’s weighted number of

full-time-equivalent residents, as determined by section 1395ww(h)(4), and the hospital’s Medicare

patient load, as described in section 1395ww(h)(3)(C).         No federal guideline governs the

disbursement of Medicaid funds for GME costs.

               In Texas, the Health and Human Services Commission (the department), of which

Hawkins is the commissioner, directs the disbursement of Medicaid funds.3 Tex. Gov’t Code Ann.

§ 531.005 (West 1998), § 531.0055 (West Supp. 2003); Tex. Hum. Res. Code Ann. § 32.021 (West

Supp. 2003).4 In 1997, the legislature directed the department to establish procedures and formulas

to govern the allocation of these funds. See Act of May 12, 1997, 75th Leg., R.S., ch. 252, § 1, 1997




       3
          Appellants present their legal issue together in one brief. Because that issue concerns the
statutory authority of the health and human services commission, referred to as “the department” in
the statute in question, we will refer to them collectively as “the department” when discussing their
legal claims. See Tex. Hum. Res. Code Ann. § 32.003(3) (West 2001).
       4
        From 1991 to 1999, this program was operated by the department of health under an
agreement with the health and human services commission.

                                                 3
Tex. Gen. Laws 1182, 1182-84 (amended in part by and repealed in part by Act of June 2, 2003, 78th

Leg., R.S., ch. 198, §§ 2.100(a), (b), 2003 Tex. Gen. Laws 611, 689) (Former section 32.0315).5 At


         5
             Former section 32.0315 provided in relevant part:

             (a) The department shall establish procedures and formulas for the allocation of
                 federal medical assistance funds that are directed to be used to support
                 graduate medical education in connection with the medical assistance
                 program.

             (b) The department shall allocate the funds in the manner the department
                 determines most effectively and equitably achieves the purposes for which
                 those federal funds are received, consistent with the needs of this state for
                 graduate medical education and the training of resident physicians in
                 accredited residency programs in appropriate fields and specialties, taking into
                 account other money available to support graduate medical education. In
                 determining the needs of this state for graduate medical education, the
                 department shall give emphasis to graduate medical education in primary care
                 specialties.

             (c) The department shall consult with the Texas Higher Education Coordinating
                 Board before adopting or revising a formula under this section. At the request
                 of the department, the coordinating board shall provide the department with
                 any information the board possesses to assist the department in administering
                 this section.

             (d) The department shall reimburse each teaching hospital under this section using
                 the following formula:

                                       R = GME/P x WNP x MD/TD
where:

                 “R” is the annual amount to be reimbursed;

                 “GME” is the hospital’s annual cost of training resident physicians for the
                 fiscal year; “P” is the number of resident physicians for the fiscal year;

                 “WNP” is the weighted number of full-time equivalent resident physicians
                 trained by the hospital during the fiscal year and reported on its Medicaid cost
                 report, adjusted to count each full-time equivalent resident in primary care as

                                                     4
that time, the department calculated GME reimbursement based on a formula under rules

substantially unchanged since 1987. Under the rule, the department used the federal Medicare

reimbursement formula and, by reference, the GME cost-calculation methods and procedures

prescribed under the federal Medicare Act. See 1 Tex. Admin. Code § 355.8063 (2003) (rule 8063).

The difference between the two formulas can be simplified in this way: the department rule,

mirroring the federal approach for the disbursement of Medicare funds, determines the GME by

using a 1984 “base-period” figure (a hospital’s Medicare-allowable GME costs for fiscal year 1984),

adjusted for inflation to the current year, see id. § 355.8063(a);6 the formula found in former section


               1.2 residents and each other full-time equivalent resident as 1.0 residents;

               “MD” means the number of patient days for the hospital for the fiscal year that
               are attributable to Medicaid patients; and “TD” means the total number of
               patient days for the hospital for the fiscal year.

           (e) To determine a teaching hospital’s average annual cost for training residents
               for purposes of this section, the department may use the most recent Medicaid
               cost report submitted to the department by the hospital, or may establish
               alternative procedures to determine that cost.

           The legislature repealed subsections d and e in 2003. See Act of June 2, 2003, 78th
           Leg., R.S., ch. 198, §§ 2.100(a), (b), 2003 Tex. Gen. Laws 611, 689.
       6
           The rules outlined the department’s formula in this way:

           [T]he department . . . groups hospitals into payment divisions using the average
           base year payment per case in each hospital after adjusting each hospital’s base
           year payment per case by a case mix index, a cost-of-living index, and a
           budgetary reduction factor of 10%.

1 Tex. Admin. Code § 355.8063(a) (2003). They then defined “base year payment per case” as

           The payment that would have been made to a hospital at the time covered
           inpatient hospital services were provided if the department or its designee
           reimbursed the hospital under similar methods and procedures used in the Social

                                                  5
32.0315 instead relies on a “hospital’s annual cost of training resident physicians for the fiscal year”

for which it is to be reimbursed.7 The department did not amend its rules or methodologies after

former section 32.0315 went into effect.



             Security Act, Title XVIII [the Medicare Act], as amended, effective October 1,
             1982 by public law 97-248.

Id. § 355.8063(b)(6).

The rule does not exactly lay out a formula for determining reimbursement. See id. Scott
Reasonover, the department’s manager of the hospital rate analysis division, articulates the formula
he used, and has continued to use after the repeal of former section 32.0315(d), in this way:

                    R = (PRA) x (Weighted number of resident FTEs) x (MD/THD)
where:

             “R” is the amount to be reimbursed;

             “PRA” is the hospital’s allowable graduate medical education cost of training
             resident physicians for the cost reporting period beginning on or after October 1,
             1983 but before October 1, 1984, divided by the average number of full-time
             equivalent resident physicians for the cost reporting period beginning on or after
             October 1, 1983 but before October 1, 1984. The per resident amount is then
             adjusted for inflation;

             “Weighted number of resident FTEs” is the weighted number of full-time
             equivalent resident physicians trained by the hospital during the cost reporting
             period;

             “MD” is the total number of hospital patient days during the cost reporting period
             that are attributable to patients for whom payment is made by Medicaid. In
             calculating Medicaid patient days, nursery days are excluded;

             “TD” is the total number of hospital patient days during the cost reporting period.

In calculating total hospital inpatient days, nursery days are excluded.
         7
         The parties in this case do not dispute other factors that may differ between the two
formulas.

                                                     6
                 Dallas County Hospital District operates Parkland Memorial Hospital (Parkland).8

Parkland is the sole public hospital in Dallas County and the principal component of the health and

hospital system in the Dallas County Hospital District. Parkland is an eligible Medicaid health care

services provider under the Texas Medicaid program, and a teaching hospital entitled to Medicaid

reimbursement for inpatient hospital services provided to Medicaid patients.

                 Parkland sued the department in district court, seeking a declaratory judgment that

the rules, procedures and formulas used by Hawkins to allocate and distribute federal Medicaid funds

were invalid and contrary to section former 32.0315. Parkland also sought a permanent injunction

to enjoin the department from using the invalid rules, procedures, and formulas when calculating

GME cost reimbursement. Parkland calculated that, for the period from 1998 to 2001, the

department underpaid it $72,371,632 by using the base-year GME costs rather than the actual GME

costs.9 In granting summary judgment and a permanent injunction in favor of Parkland, the district



        8
          Because Parkland is the sole Medicaid-eligible hospital in the Dallas County Hospital
District, we will refer to the appellee as “Parkland” in this opinion.
        9
            In its summary judgment evidence, Parkland included these figures:

Fiscal Year      Amount allocated as a result         Allocation resulting from     Difference
_________        of the department’s formula          using section 32.0315(d)      _________

1998             $6,356,013                           $22,220,937                   $15,844,924
1999             $6,932,503                           $24,230,656                   $17,298,154
2000             $6,690,777                           $26,183,281                   $19,222,504
2001(interim)    $6,960,777                           $26,966,827                   $20,006,050

Total            $27,210,070                          $99,601,733                   $72,371,632

We are aware that the arithmetic reflected in these figures is not entirely accurate. However, we
reproduce them as contained in the record.

                                                  7
court declared that the rules, procedures, and formulas employed by the department, including rule

8063, violated the reimbursement calculation methodology guidelines promulgated in section

32.0315. See Former § 32.0315. This appeal followed.


                                            DISCUSSION

                In one issue, the department argues that former section 32.0315 authorized it to

establish an alternative formula to reimburse a teaching hospital for the annual costs incurred to

provide graduate medical education. See id. § 32.0315. In particular, it believes that various

subsections of former section 32.0315 granted broad power to the department to establish formulas

and methodologies to disburse Medicaid funds to teaching hospitals. Thus, it asserts that the statute,

when read as a whole, indicates that the legislature offered the department an advisory, but not

mandatory, reimbursement formula while at the same time giving the department discretion to

establish an alternative formula.

                Statutory construction is a question of law, which we review de novo. See Johnson

v. City of Fort Worth, 774 S.W.2d 653, 656 (Tex. 1989). The primary rule of statutory interpretation

is to construe the statute as a whole so as to give effect to the legislative intent. See State v. Public

Util. Comm’n, 883 S.W.2d 190, 196 (Tex. 1994); see also Citizens Bank of Bryan v. First State

Bank, 580 S.W.2d 344, 348 (Tex. 1979). We are bound to construe the statute as written and, if

possible, ascertain the legislature’s intent from the language used in the statute. Del Indus., Inc. v.

Tex. Workers’ Comp. Ins. Fund, 973 S.W.2d 743, 745 (Tex. App.—Austin 1998), aff’d, 35 S.W.3d

591 (Tex. 2000).




                                                   8
               Statutory provisions, however, must not be isolated from the surrounding language

nor construed apart from their context. Id. at 746. Disputed provisions of a statute are to be

considered in context, not in isolation. See Texas Workers’ Comp. Comm’n v. Continental Cas. Co.,

83 S.W.3d 901, 905 (Tex. App.—Austin 2002, no pet.); see also Fitzgerald v. Advanced Spine

Fixation Sys., 996 S.W.2d 864, 866 (Tex. 1999). When interpreting a statute, we should give effect

to all words of a statute and, if possible, not treat any statutory language as mere surplusage. See

Continental Cas. Ins. Co. v. Functional Restoration Assoc., 19 S.W.3d 393, 402 (Tex. 2000). We

must presume that in enacting the statute the legislature intended the entire statute to be effective.

See Tex. Gov’t Code Ann. § 311.021(2) (West 1988). We presume that the legislature intended a

reasonable and just result in enacting a statute. Id. § 311.021(3). In doing so, we are to consider,

among other factors, the language of the statute, its legislative history, the nature and object to be

obtained, and the consequences that would follow from alternative constructions, even when a statute

is not ambiguous on its face. See Helena Chem. Co. v. Wilkins, 47 S.W.3d 486, 493 (Tex. 2001).

               When we consider former section 32.0315, we note that the legislature directed that

the department “shall reimburse each teaching hospital” using the statutory formula. See Former

§ 32.0135(d). Under our rules of statutory construction, “shall” is generally construed to be

mandatory, but may in limited circumstances be construed to be directory. See Tex. Gov’t Code

Ann. § 311.016 (West 1998); Chisholm v. Bewley Mills, 287 S.W.2d 943, 945 (Tex. 1956). In

determining whether the legislature intended the particular provision to be mandatory, we should

consider the nature and object of the entire act and the consequences that would follow each

construction. Id. On its face, former subsection 32.0315(d) appears to be mandatory. See id.



                                                  9
Because Hawkins argues that other subsections of former section 32.0315 contradict this

interpretation, we now turn to the remainder of the statute to glean the intent of the legislature.

               First, former section 32.0315(a) directs that the department “shall establish

procedures and formulas for the allocation of federal medical assistance funds that are directed to

be used to support graduate medical education.” When we read this subsection with former section

32.0315(d), we note that the latter, in setting a formula, leaves undefined the methodology for the

department to use to determine the values of several variables in any given situation. For example,

it does not provide a formula to determine what constitutes a “patient day,” either for Medicaid or

for general accounting purposes. See Former § 32.0135(d). It does not define or describe how the

department is to determine the annual cost of training resident physicians. See id. It does not

provide criteria for determining how to determine “the weighted number of full-time equivalent

resident physicians.” See id. Thus, in order to implement the statutory formula, it was necessary for

the department to formulate additional procedures and formulas. As a result, in former section

32.0315(a), the legislature seemed to have granted the department the authority to develop these

necessary definitions and formulas in order to give effect to the reimbursement formula.

               Next, former section 32.0315(b) directed that the department “shall allocate the funds

in the manner the department determines most effectively and equitably achieves the purposes for

which those federal funds are received.” It also mandated that the department should take “into

account other money available to support graduate medical education.” Former § 32.0315(b). The

focus of this subsection was not on the amounts to be reimbursed to each teaching hospital.

Compare id., with Former § 32.0315(d). In other words, when determining the amount available for



                                                 10
the reimbursement program, the department was to consider all funds available to support graduate

medical education. In addition, the former section 32.0315(d) did not indicate that use of the

statutory formula to reimburse teaching hospitals will exhaust all funds available. It did, however,

outline various state policy objectives for the disbursement of funds. Former section 32.0315, then,

limited the authority of the department in making the determinations allowed under the previous two

subsections—in adopting or revising any formula, the department must have consulted with the

Texas Higher Education Consulting Board.

                Turning, then, to former section 32.0315(e), we note this subsection did not address

the required formula for determining Medicaid reimbursement. Instead, it focused on the sources

of information from which the department could establish a hospital’s “average annual cost for

training residents”—a variable in the former section 32.0315(d) formula defined as “GME.” In

arriving at a figure to use for that variable, the department could have used “the most recent

Medicaid cost report submitted to the department by the hospital, or it could have developed

“alternative procedures to establish that cost.” See Former § 32.0315(e). Whatever method the

department chose, it was bound by the statutory definition, which limited the scope of the variable

to the costs of training for the fiscal year.

                We conclude, then, that former section 32.0315(d) created a mandatory formula for

the department to determine the amounts of medical-education costs for the purposes of

reimbursement. Former sections 32.0315(a), 32.0315(b), 32.0315(c), and 32.0315(e) granted the

department limited discretionary powers to calculate the values of particular statutory variables, but




                                                 11
the department could not contradict the terms of the formula. To hold otherwise would render

irrelevant the formula in former section 32.0315(d).10


                                          CONCLUSION

               Because we overrule the department’s issue, we affirm the judgment of the district

court.




                                               __________________________________________

                                               W. Kenneth Law, Chief Justice

Before Chief Justice Law, Justices B. A. Smith and Patterson

Affirmed

Filed: April 8, 2004




         10
            The department additionally states that the legislature never funded the increased
expenditures that our holding would require if Parkland’s figures are correct. It asserts that fact
should compel us to consider our interpretation of former section 32.0315 unreasonable and unjust.
See Tex. Govt Code Ann. § 311.021(2) (West 1998). Rather, if the legislature did not provide the
appropriate amount of funding, the problem is that the legislature created an “unfunded mandate,”
not that the statute ought to be interpreted in a different way. This grievance is most appropriately
brought to the legislature, not the courts. See, e.g., Socorro Indep. Sch. Dist. v. State Bd. of Educ.,
968 S.W.2d 547, 553 (Tex. App.—Austin 1998, pet. denied); Mutchler v. Texas Dep’t of Public
Safety, 681 S.W.2d 282, 285 (Tex. App.—Austin 1984, no writ).

                                                  12
