



THA v. TWCC                                                         



TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN





NO. 03-95-00227-CV





Texas Hospital Association; Dallas/Fort Worth Hospital Council;

Memorial Healthcare System; and Hendrick Medical Center, Appellants


v.


Texas Workers' Compensation Commission, Appellee





FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT

NO. 92-12348, HONORABLE PAUL R. DAVIS, JR., JUDGE PRESIDING






	Appellants Texas Hospital Association, Dallas/Fort Worth Hospital Council,
Memorial Healthcare System, and Hendrick Medical Center ("the Hospitals") sued in district court
for an injunction and a declaratory judgment that a rule promulgated by appellee Texas Workers'
Compensation Commission ("the Commission") is void and unenforceable because the
Commission failed to satisfy the reasoned-justification requirement of the Administrative
Procedure Act. (1)  Following a bench trial, the district court rendered judgment denying the relief
sought by the Hospitals, who now appeal.  We will reverse the district court's judgment and
render judgment that the rule is void and that the Commission be enjoined from enforcing it.


THE CONTROVERSY

	In 1989, the Texas Legislature significantly amended the Texas Workers'
Compensation Act and directed the Commission to set new guidelines for reimbursements to
health-care providers treating injured workers.  Tex. Labor Code Ann. § 413.011(a)(1) (West
1995). (2)  The Legislature provided that the guidelines "must be fair and reasonable and designed
to ensure the quality of medical care and to achieve effective medical cost control."  Id.
§ 413.011(b).  To fulfill this difficult statutory command, the Commission implemented a
completely new method for the calculation of hospital and medical services fees:  flat-rate per-diem reimbursement.
	In the past, the Commission had set fees at a percentage of the provider's usual
charges, with added maximum-payment levels to provide for cost containment.  Under the new
system, the Commission divided hospital and medical services into broad categories, such as
surgical or intensive care, and assigned a fixed per-diem reimbursement for any treatment within
the category.  The old system accounted for differences in geography and complexity of the
procedure because it calculated reimbursements as a percentage of the provider's usual charges. 
The new fee system breaks with the old reimbursement method in that it applies a fixed per-diem
reimbursement without variation for geographic location or the specific medical condition
involved.  For example, under the new system Methodist Hospital in Houston receives the same
per-diem reimbursement for open-heart surgery that a smaller hospital receives for surgery
necessitated by a broken leg because both receive the fixed per-diem rate pursuant to the
"surgery" category.  Under the old system based on provider charges, the two procedures would
have yielded significantly different reimbursements.
	At issue in this appeal is a rule promulgated by the Commission in 1992 to
implement the new per-diem reimbursement system for hospitals providing inpatient, acute-care
services.  See 28 Tex. Admin. Code § 134.400 (1995) ("Rule 400").  Rule 400 adopts by
reference the "Acute Care Inpatient Hospital Fee guideline" ("the guideline").  The guideline sets
the per-diem reimbursement rates for the three broad categories of treatment devised by the
Commission (medical, surgical, and intensive care).  The Commission developed the guideline
by analyzing empirical billing data provided by hospitals, devising an average per-diem rate for
each broad category of medical service, and adjusting downward by 8.5% for cost containment.
	The Hospitals challenged Rule 400 in district court after the Commission adopted
the rule by an order published in the Texas Register.  17 Tex. Reg. 4949 (1992) ("the order"). 
The Hospitals argued that Rule 400 is invalid because the order adopting it did not contain a
"reasoned justification," as required by the APA.  APA §§ 2001.033(1), 2001.035(a).  The
district court denied the Hospitals' request for declaratory and injunctive relief, and they now
appeal the district-court judgment.


DISCUSSION

	The APA requires that an agency order adopting a rule must contain a reasoned
justification for that rule.  APA § 2001.033(1).  A reasoned justification must include the
following three elements:  a summary of comments the agency received, a restatement of the
rule's factual basis, and the reasons why the agency disagrees with a party's comments.  Id.  In
addition to the three minimum criteria, the agency must provide a reasoned justification for the
rule as a whole.  Railroad Comm'n v. Arco Oil & Gas Co., 876 S.W.2d 473, 492 (Tex.
App.--Austin 1994, writ denied); Chrysler Motors v. Motor Vehicle Comm'n, 846 S.W.2d 139,
143 (Tex. App.--Austin 1993, no writ).  If the order adopting a rule does not substantially comply
with the above requirements within its "four corners," the rule is invalid.  APA § 2001.035(a);
Methodist Hosps. v. Industrial Accident Bd., 798 S.W.2d 651, 659 (Tex. App.--Austin 1990, writ
dism'd w.o.j.).  To substantially comply with the APA, a reasoned justification must concisely,
specifically, and unambiguously secure the essential legislative objective of "provid[ing] the
factual basis and rationality of the rule as determined by the agency."  Arco, 876 S.W.2d at 491. 
We review a challenge to the reasoned-justification requirement using an "arbitrary and
capricious" standard, with no presumption that facts exist to support the agency's order.  Id.
	The Hospitals argue that the Commission failed to substantially comply with its
statutory duty to provide, within the four corners of the order adopting Rule 400, a restatement
of the rule's factual basis or an independent justification of the rule as a whole.  The Commission
responds that its order, even if it does not contain a concise and discrete restatement of factual
basis or reasoned justification, nevertheless satisfies both requirements through language "woven"
into the Commission's responses to the summarized comments.  We agree with the Hospitals that
the order does not provide a reasoned justification or restate the factual basis of Rule 400 and thus
does not substantially comply with the APA requirements.
	The Commission claims that several portions of the order satisfy the reasoned
justification and factual basis requirements.  First, the Commission points to the following:


The commission is required by law to adopt rules to establish guidelines for fees
charged or paid for medical services.  This section adopts by reference the "Acute
Care Inpatient Hospital Fee Guideline" and establishes a per diem method of
payment for services provided by certain hospitals for acute care.


This language fails to meet either requirement.  The first sentence does not suffice because it
merely summarizes a legislative mandate.  Arco, 876 S.W.2d at 494.  Nor can the second sentence
suffice by simply stating what action the Commission took and not the facts or reasoning justifying
why the Commission took it.  This is no justification at all, much less a reasoned one.  See Id. at
493.
	Next, the Commission points to the following:


The per diem model was developed after consulting with the Texas Hospital
Association (THA) and was based on THA provided billing data for approximately
6,000 workers' compensation hospital admissions.  The proposed payment levels
were derived from actual workers' compensation data collected from all areas of
the state and from all types of hospitals.  The data also represented various lengths
of stay, as well as various types and severity of injuries/illness.  Original payment
levels were then adjusted to reflect an 8.5% cost containment factor.  The specific
payment levels proposed were recommended by the Medical Advisory Committee,
after review of possible models prepared by staff.


This language from the order also fails to provide a reasoned justification or factual basis for Rule
400.  The Commission generally describes the data it relied upon in formulating the rule, but in
no way answers why it decided that Rule 400 was an appropriate response to that data.  For
instance, the paragraph mentions several "models" that the Commission considered but fails to
justify why the Commission chose the model adopted by Rule 400 over another.  This failure to
compare or analyze amounts to "rationale with no substance" and does not satisfy the APA.  Arco,
876 S.W.2d at 493.  In other words, the language cited by the Commission fails to show how
Rule 400 is "a rational response" to the data it analyzed, given the legislative mandate.  National
Ass'n of Ind. Insurers v. Texas Dep't of Ins., 888 S.W.2d 198, 209 (Tex. App--Austin 1994, writ
granted).  
	Even when viewed as a whole, the order fails to provide a restatement of factual
basis or reasoned justification for Rule 400.  See id.; Chrysler Motors, 846 S.W.2d at 143.  The
Labor Code charges the Commission with a very important and difficult task:  quality medical
care at fair prices with emphasis on cost containment.  The order promulgating Rule 400 should
explain how and why the guidelines selected by the Commission satisfy those statutory criteria. 
It does not do so, even when reviewed with a generous eye.  Woven throughout the order are the
following remarks:


The commission has determined the [guideline] to be fair and reasonable
reimbursement for health care providers.

The per diem method provides strong incentives to a hospital to control costs.

Staff compared per diem to diagnosis related group [models] and found the per
diem system to be more accurate . . . .

The proposed per diem levels were based on analysis of actual workers'
compensation admission/billing data . . . as well as the judgment (experience) of
the Medical Advisory Committee.


These comments give a representative flavor of the order as a whole.  The order provides
conclusory allegations that the rule will effectively achieve the Commission's statutory mandate
but utterly fails to describe how or why the Commission arrived at that conclusion.  An order
phrased in conclusory terms does not satisfy the APA requirement of a reasoned justification or
factual basis for a rule.  Arco, 876 S.W.2d at 492.
	In the circumstances of this appeal, the order's lack of a stated factual basis or
reasoned justification is especially troublesome.  The Commission has implemented a totally new
reimbursement system with serious financial consequences to the Hospitals.  Such a significant
change should be based on reliable, pertinent data and a penetrating analysis of alternatives.  The
order fails to document either.  The Commission has decided to reimburse very different medical
services at the same rate because they fall into the same broad category.  The Commission cannot
justify such an action without providing, or more thoroughly describing, the data it used. (3)  A terse
reference to "empirical billing data" is not enough to provide a factual basis for the rule.  The
brief comments offered by the Commission do not even begin to explain either the data or
reasoning that compel the conclusion that a few per-diem rates can cover very different medical
procedures in the many and diverse communities of Texas.
	For the reasons given, we hold that Rule 400 is invalid because the Commission
order adopting it violates the APA by failing to provide a reasoned justification or restatement of
the rule's factual basis.  Accordingly, we sustain the Hospitals' first point of error.  We need not
address the Hospitals' second point of error nor their argument that the Commission failed to
adequately summarize the comments to Rule 400.
CONCLUSION

	The Commission order adopting Rule 400 violates the APA because it contains
neither a reasoned justification nor a restatement of the rule's factual basis.  Accordingly, we
reverse the judgment of the district court and render judgment that the rule is void and that the
Commission be enjoined from enforcing it. 


   					Mack Kidd, Justice
Before Justices Powers, Aboussie and Kidd
Reversed and Rendered
Filed:   December 6, 1995
Publish
1.        Tex. Gov't Code Ann. § 2001.033(1) (West 1995).  For the sake of simplicity, we
will refer to the Act as "the APA."
2.        The Legislature codified the Workers' Compensation Act into the Labor Code in
1993.  Act of May 22, 1993, 73d Leg., R.S., ch. 269, § 1, 1993 Tex. Gen. Laws 987 (Tex.
Labor Code Ann. §§ 401.001-417.004).  Prior to the codification, the Act had been
located at Tex. Rev. Civ. Stat. Ann. arts. 8306-8309i.
3.        Nowhere in Rule 400 or any of its supporting documentation do we find a
description of the accuracy or extent of the database used by the Commission in
calculating the per-diem reimbursement rates.


ission satisfy those statutory criteria. 
It does not do so, even when reviewed with a generous eye.  Woven throughout the order are the
following remarks:


The commission has determined the [guideline] to be fair and reasonable
reimbursement for health care providers.

The per diem method provides strong incentives to a hospital to control costs.

Staff compared per diem to diagnosis related group [models] and found the per
diem system to be more accurate . . . .

The proposed per diem levels were based on analysis of actual workers'
compensation admission/billing data . . . as well as the judgment (experience) of
the Medical Advisory Committee.


These comments give a representative flavor of the order as a whole.  The order provides
conclusory allegations that the rule will effectively achieve the Commission's statutory mandate
but utterly fails to describe how or why the Commission arrived at that conclusion.  An order
phrased in conclusory terms does not satisfy the APA requirement of a reasoned justification or
factual basis for a rule.  Arco, 876 S.W.2d at 492.
	In the circumstances of this appeal, the order's lack of a stated factual basis or
reasoned justification is especially troublesome.  The Commission has implemented a totally new
reimbursement system with serious financial consequences to the Hospitals.  Such a significant
change should be based on reliable, pertinent data and a penetrating analysis of alternatives.  The
order fails to document either.  The Commission has decided to reimburse very different medical
services at the same rate because they fall into the same broad category.  The Commission cannot
justify such an action without providing, or more thoroughly describing, the data it used. (3)  A terse
reference to "empirical billing data" is not enough to provide a factual basis for the rule.  The
brief comments offered by the Commission do not even begin to explain either the data or
reasoning that compel the conclusion that a few per-diem rates can cover very different medical
procedures in the many and diverse communities of Texas.
	For the reasons given, we hold