                IN THE SUPREME COURT OF TENNESSEE
                           AT NASHVILLE

                                                FILED
                                      FOR PUBLICATION
                                              December 7, 1998
                                      Filed: December 7, 1998
                                              Cecil W. Crowson
                                             Appellate Court Clerk
BAPTIST HOSPITAL; EAST        )
TENNESSEE CHILDREN'S          )
HOSPITAL; ERLANGER MEDICAL    )
CENTER; FORT SANDERS          )
REGIONAL MEDICAL CENTER;      )       Tennessee Claims Commission
HOLSTON VALLEY HOSPITAL AND )
MEDICAL CENTER; JOHNSON CITY )
MEDICAL CENTER HOSPITAL;      )
LE BONHEUR CHILDREN'S MEDICAL )
CENTER; MAURY REGIONAL        )
HOSPITAL; METHODIST HOSPITALS )
OF MEMPHIS; REGIONAL MEDICAL )
CENTER OF MEMPHIS; SAINT      )
MARY'S MEDICAL CENTER; AND    )       Hon. W. R. Baker, Commissioner
VANDERBILT UNIVERSITY MEDICAL )
CENTER,                       )
                              )
     PLAINTIFFS/APPELLANTS,   )
                              )
v.                            )
                              )
TENNESSEE DEPARTMENT OF       )
HEALTH, AND TENNESSEE         )       No. 01S01-9711-BC-00249
DEPARTMENT OF FINANCE         )
AND ADMINISTRATION,           )
                              )
     DEFENDANTS/APPELLEES.    )



FOR CLAIMANT/APPELLANT:         FOR RESPONDENT/APPELLEE:

William B. Hubbard              John Knox Walkup
Nashville                       Attorney General and Reporter

Sanford E. Pitler               Sue A. Sheldon
Elizabeth A. McFall             Assistant Attorney General
Seattle, Washington             Nashville




                        OPINION

AFFIRMED AS MODIFIED                                         HOLDER, J.
                                          OPINION



        We granted this appeal to determine whether the Tennessee claims

commission has subject matter jurisdiction over the plaintiffs’ challenge to certain

Medicaid reimbursements paid to them by the State. Upon review, we hold that

the Tennessee claims commission lacks subject matter jurisdiction over this

case. Because the plaintiffs’ challenge is based upon an assertion that a state

Medicaid regulation is invalid under federal law, the Tennessee Department of

Health was the agency with subject matter jurisdiction over this case pursuant to

Tenn. Code Ann. § 4-5-223 of the Uniform Administrative Procedures Act

("UAPA").



                                      BACKGROUND



        The State entered into “Medical Assistance Participation Agreements

(Medicaid - Title XIX Program) for Inpatient and Outpatient Hospital Services”

(“provider agreements”) with the plaintiffs ("hospitals") for the provision of health

care services to Medicaid recipients. Those hospitals participating in the

Medicaid program were reimbursed under a prospective payment methodology

established in rules of the Department of Health. Hospitals were reimbursed

under this system from October 1, 1983, to December 31, 1993.1



        Under the prospective payment methodology, each hospital was paid a

per diem rate for Medicaid patients. There were two primary components to the

per diem rate, an “operating component” and a “pass-through component.” Each


       1
         On January 1, 1994, Tennessee instituted the TennCare program, which made
substantial changes in the provision of health care services to Medicaid recipients. Under
TennCare, health care providers are no longer reimbursed under the prospective payment
methodology at issue in this case; providers are now paid by managed care organizations rather
than by the State. The plaintiffs’ claims in this case are limited to the period prior to the
implementation of the TennCare program.

                                               2
hospital’s operating and pass-through components were calculated based upon

financial data contained in the hospital’s annual “cost report” filed with the State.

Effective July 1, 1989, the Department of Health implemented Tenn. Comp.

R. & Regs. ch. 1200-13-5-.08 which provided, in pertinent part, that after a

Medicaid patient had been a hospital inpatient for twenty (20) days, the hospital’s

per diem rate would be reduced for each subsequent day (over 20) by reducing

the “operating component” to 60%; this rule did not affect the pass-through

component of the hospital’s per diem rate.



         In 1990, Congress passed legislation prohibiting states from imposing day

and dollar limits on Medicaid reimbursement for health care provided to infants

and children by hospitals serving a disproportionate share of low-income patients

with special needs. 42 U.S.C. § 1396(a)(s)(2), (3) ("OBRA '90"). The effective

date of this legislation was July 1, 1991.



         On August 8, 1995, the hospitals filed a complaint with the claims

commission alleging breach of contract. The complaint alleged that the State

breached the “reimbursement methodology clause”2 of the provider agreements.

The hospitals argued that the “conflict clause”3 found in the provider agreements

caused OBRA '90 to amend the reimbursement methodology clause. The

hospitals argued that the reduced payment provided for under Rule 1200-13-5-

.08 for inpatient stays longer than twenty days breached the provider

agreements by placing day and dollar limitations on services rendered to

Medicaid-covered infants and children in violation of OBRA ‘90. The hospitals

alleged that they are entitled to additional Medicaid reimbursement as a result.


         2
         The reimbursement methodology clause provided that “this facility: . . . [a]grees to use
the sam e me thod of re imbu rsem ent for T itle XIX that is used fo r Title XV III, Medica re.”

          3
            The c onflict claus e provide d: “If any part o f this agree men t is found to be in con flict with
any F ede ral or S tate la ws o r regu lation s hav ing eq ual w eight of law , or if an y part is place d in
conflict by am endm ent of su ch laws , this agree men t is so am ended .”

                                                       3
       The State filed a motion to dismiss arguing, in pertinent part, that the

claims commission lacked subject matter jurisdiction. The State contended that

the hospitals’ claim was a challenge to the validity of a state Medicaid regulation

and was not a breach of contract action. The State argued that only the

Department of Health may adjudicate cases challenging the validity of a state

Medicaid regulation.



       The claims commission denied the State's motion to dismiss. The claims

commission concluded that the hospitals' claim was for breach of contract and

that the claims commission had subject matter jurisdiction over all breach of

contract actions against the State. The State sought an interlocutory appeal,

which was granted. The Court of Appeals reversed the claims commission

holding that the provider agreements did not create a contractual obligation on

the State. The appellate court therefore held that the claims commission lacked

jurisdiction and dismissed the case.



                                    ANALYSIS



       The hospitals argue that this Medicaid reimbursement challenge is merely

a breach of contract action. The claims commission generally has exclusive

subject matter jurisdiction over all monetary claims against the State. Tenn.

Code Ann. § 9-8-307. Accordingly, the hospitals argue that the claims

commission had subject matter jurisdiction in the case now before us. We

disagree.



       Federal law mandates that states designate a single state agency for

administration of state Medicaid plans. 42 U.S.C. § 1396(a)(5). The Tennessee

Department of Health was designated as the single state agency in charge of


                                         4
administering the Medicaid program during the period at issue in this case.4

Tenn. Code Ann. §§ 71-5-101 et seq.



        We have reviewed the hospitals' complaint and the entire record on

appeal. The hospitals' case is premised upon the contention that Tenn. Comp.

R. & Regs. ch. 1200-13-5-.08 is invalid because the rule violates OBRA '90.

Accordingly, the hospitals' claim is properly classified as a challenge to the

validity of Rule 1200-13-5-.08.



        Claims challenging the validity of or applicability of a statute, rule, or order

must be brought pursuant to the UAPA. See Tenn. Code Ann. § 4-5-223(a)

(“Any affected person may petition an agency for a declaratory order as to the

validity or applicability of a statute, rule or order within the primary jurisdiction of

the agency”) (emphasis added). The Department of Health is an “agency” under

the UAPA. Rule 1200-13-5-.08 is a Department of Health rule. Moreover, the

Department of Health was the single state agency in charge of administering the

Medicaid program during the period in question. Accordingly, the hospitals'

challenge to the validity of Rule 1200-13-5-.08 should have been brought before

the Department of Health pursuant to the UAPA.



                                       CONCLUSION



        The hospitals' claim was based upon the invalidation of a state Medicaid

regulation. We hold that the claims commission lacks subject matter jurisdiction

to rule upon the validity of a state Medicaid regulation. Pursuant to the

authorities cited above, the Department of Health was the agency with subject

matter jurisdiction over the hospitals’ claim.

        4
         As of January 1995, the Department of Finance & Administration was substituted for the
Dep artm ent o f He alth a s the single state agen cy.

                                               5
       The decision of the appellate court is affirmed as modified, and the

hospitals' complaint is dismissed. Costs of this appeal shall be taxed against the

plaintiff hospitals, for which execution may issue if necessary.




                                          JANICE M. HOLDER, JUSTICE



Panel:

Anderson, C.J.
Birch and Barker, JJ.

Drowota, J., Not Participating




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