               IN THE SUPREME COURT OF MISSISSIPPI

                        NO. 2016-CC-01693-SCT

CROSSGATES RIVER OAKS HOSPITAL,
GRENADA LAKE MEDICAL CENTER, RILEY
MEMORIAL HOSPITAL, NATCHEZ
COMMUNITY HOSPITAL, WOMAN’S HOSPITAL,
NORTHWEST MISSISSIPPI REGIONAL
MEDICAL CENTER, BILOXI REGIONAL
MEDICAL CENTER, RIVER OAKS HOSPITAL,
KING’S DAUGHTERS MEDICAL CENTER-
BROOKHAVEN, ST. DOMINIC-JACKSON
MEMORIAL HOSPITAL AND DELTA REGIONAL
MEDICAL CENTER

v.

MISSISSIPPI DIVISION OF MEDICAID AND
DAVID J. DZIELAK, Ph.D., IN HIS OFFICIAL
CAPACITY AS EXECUTIVE DIRECTOR OF
MISSISSIPPI DIVISION OF MEDICAID


DATE OF JUDGMENT:                10/31/2016
TRIAL JUDGE:                     HON. PATRICIA D. WISE
TRIAL COURT ATTORNEYS:           GEORGE H. RITTER
                                 JONATHAN ROBERT WERNE
                                 P. SCOTT PHILLIPS
                                 JANET D. McMURTRAY
                                 WILLIAM CLARK PURDIE
                                 CHARLES PALMER QUARTERMAN
                                 DION JEFFERY SHANLEY
                                 STEPHEN DEAN STAMBOULIEH
                                 JAMES D. BELL
                                 JOHN P. SNEED
                                 LAURA L. GIBBES
COURT FROM WHICH APPEALED:       HINDS COUNTY CHANCERY COURT
ATTORNEYS FOR APPELLANTS:        GEORGE H. RITTER
                                 JOHN P. SNEED
                                 JONATHAN ROBERT WERNE
                                 P. SCOTT PHILLIPS
ATTORNEYS FOR APPELLEES:                    DION JEFFERY SHANLEY
                                            JANET D. McMURTRAY
NATURE OF THE CASE:                         CIVIL - STATE BOARDS AND AGENCIES
DISPOSITION:                                REVERSED AND REMANDED - 04/12/2018
MOTION FOR REHEARING FILED:
MANDATE ISSUED:

       EN BANC.

       RANDOLPH, PRESIDING JUSTICE, FOR THE COURT:

¶1.    Twelve Medicaid-participating hospitals (“Hospitals”) filed an appeal in the Chancery

Court of the First Judicial District of Hinds County, challenging the Department of

Medicaid’s (“DOM’s”) recalculation of their Medicaid outpatient rates for fiscal year 2001.

The chancery court affirmed the opinion of the DOM. Finding error, we reverse the judgment

of the chancery court and order the Executive Director of DOM to provide payments to the

Hospitals consistent with this opinion.

             STATEMENT OF FACTS AND PROCEDURAL HISTORY

¶2.    The DOM is a state agency responsible for administering the Medicaid program

pursuant to the State Medical Plan (“State Plan”) and applicable federal regulations. Pursuant

to the State Plan, the Hospitals’ outpatient rates for fiscal year 2001 were set based upon data

provided in their 1999 hospital cost report and all subsequently amended reports.

¶3.    In 2010, DOM sent each Hospital a notice of a lump-sum settlement, stating that

DOM was amending the fiscal year 2001 outpatient rate. In response, the Hospitals filed

requests for appeals and formal hearings, asserting that DOM did not follow the requirements

of the State Plan. After the formal hearings were held, the hearing officer opined that the

Hospitals’ claims that DOM’s calculations of the outpatient reimbursement rate did not


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follow the requirements of the State Plan were without merit. The hearing officer’s decision

was adopted by the Executive Director of DOM.

¶4.    The Hospitals then appealed to the chancery court, challenging DOM’s calculations

of the outpatient rates for 2001.1 The chancery court affirmed DOM’s decision, finding that

“DOM interpreted its own regulation – the State Plan, which is its contract with the federal

government and which it is required to follow to receive federal funds to require Medicaid

to calculate the cost to charge ratio by using Medicare Methodology, which at that time was

using a blended rate.”

                              STATEMENT OF THE ISSUES

¶5.    The Hospitals raise the following issues before this Court:

       I.       Whether DOM’s decision to include a portion of laboratory and
                radiology charges in the denominator of the cost-to-charge ratio was
                arbitrary, capricious, and/or in violation of 4.19-B of the State Plan
                where the State Plan expressly provided, and DOM admitted, that all
                radiology and laboratory charges must be excluded from the formula.

       II.      Whether DOM’s decision to use certain Medicare blended payment
                amounts for Ambulatory Surgical Care (“ASC”) and Other Diagnostic
                Procedure (“ODP”) services in the outpatient rate calculation, in lieu of
                costs, was arbitrary, capricious, and/or in violation of 4.19-B of the
                State Plan where (a) the State Plan provided that the numerator of the
                cost-to-charge ratio is “cost,” (b) the State Plan adopted the Medicare
                definition of “cost” which is “actual cost,” (c) DOM admitted that
                “cost” means each Hospital’s actual costs as shown on the cost report
                and that the blended payment amounts are different than actual cost,
                and (d) the ASC and ODP blended payment amounts were between
                22% and 39% less than the ASC and ODP cost established on the cost
                reports.

                                 STANDARD OF REVIEW

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           The Hospitals’ cases were consolidated by the chancery court.

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¶6.    When reviewing a chancellor’s ruling concerning an administrative agency decision,

this Court applies the same standard of review as the chancellor. Miss. Comm’n on Envtl.

Quality v. Chickasaw Cty. Bd. of Supervisors, 621 So. 2d 1211, 1216 (Miss. 1993). This

Court has the authority to reverse the decision of DOM if we find that it (1) was not

supported by substantial evidence, (2) is arbitrary or capricious, (3) was beyond DOM’s

power to adopt, or (4) violates a constitutional or statutory provision. Town of Enterprise v.

Miss. Pub. Serv. Comm’n, 782 So. 2d 733, 735 (Miss. 2001).

¶7.    An agency’s interpretation of a rule governing the agency’s operation is a matter of

law that is reviewed de novo, but with great deference to the agency’s interpretation. Sierra

Club v. Miss. Envtl. Quality Permit Bd., 943 So. 2d 673, 678 (Miss. 2006) (citing

McDerment v. Miss. Real Estate Comm’n, 748 So. 2d 114, 118 (Miss. 1999)). However, an

agency’s interpretation will not be upheld if it is “so plainly erroneous or so inconsistent with

either the underlying regulation or statute as to be arbitrary, capricious, an abuse of discretion

or otherwise not in accordance with the law.” Div. of Medicaid v. Mississippi Indep.

Pharmacies Ass’n, 20 So. 3d 1236, 1238 (Miss. 2009) (quoting Buelow v. Glidewell, 757

So. 2d 216, 219 (Miss. 2000) (citation omitted)).

                                          ANALYSIS

¶8.    The Hospitals contend that Attachment 4.19-B of the State Plan contains a simple

formula for calculating outpatient rates: costs divided by charges, excluding services such

as laboratory and radiology, which are paid using a different methodology. DOM alleges that




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the Hospitals oversimplify the agency’s approach by not considering the Medicare Principles

of Reimbursement that were in effect for 2001.

¶9.    Attachment 4.19-B of the State Plan, which was adopted in 1997 and was in effect in

2001, specifically reads as follows:

       Outpatient hospital services shall be reimbursed at a percentage of billed
       charges unless specified differently elsewhere in this Plan. The percentage
       paid is the lower of 75% of charges or the cost to charge ratio, as computed
       by Medicaid using the hospital’s cost report. The cost to charge ratio shall be
       computed each year for use in the following rate year’s payments. Adjustments
       to outpatient services claims may be made if the cost to charge ratio is adjusted
       as a result of an amended cost report, audit, or Medicare settlement. The cost
       to charge ratio for outpatient services will be computed under Title XVIII
       (Medicare) methodology, excluding bad debts and other services paid by
       Medicaid under a different rate methodology. . . .

       All outpatient laboratory services shall be reimbursed on a fee-for-service
       basis.

       All outpatient radiology services shall be reimbursed on a fee-for-service basis.

(Emphasis added.)

¶10.   In simple, unambiguous language, Attachment 4.19B of the State Plan clearly sets

forth the formula for calculating outpatient rates: costs divided by charges, excluding

laboratory and radiology services, which are reimbursed on a fee-for-service basis. The

Medicare Principles of Reimbursement reads that:

       It is the intent of the program that providers are reimbursed the actual costs of
       providing high quality care, regardless of how widely they may vary from
       provider to provider, except where a particular institution’s costs are found to
       be substantially out of line with other institutions in the same area which are
       similar in size, scope of services, utilization, and other relevant factors. . . .

       Implicit in the intention that actual costs be paid to the extent they are
       reasonable is the expectation that the provider seeks to minimize its costs and

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       that its actual costs do not exceed what a prudent and cost-conscious buyer
       pays for a given item or service.

(Emphasis added.) Charges are defined as the:

       regular rates established by the provider for services rendered to both
       beneficiaries and to other paying patients. Charges should be related
       consistently to the cost of the services and uniformly applied to all patients
       whether inpatient or outpatient.

(Emphasis added.)

¶11.   DOM recalculated the ratio to include charges for radiology and laboratory services

and to substitute a portion of the Hospitals’ claimed costs with Medicare blended payment

amounts.2 The recalculation caused the Hospitals’ costs to be understated and the charges to

be overstated, reducing their overall reimbursement rate. This was a clear violation of the

language of the State Plan.

¶12.   The State Plan unambiguously calls for the exclusion of radiology and laboratory

charges. This fact was admitted by DOM. Moreover, the substituted blended payment amount

does not equate to the costs submitted by the Hospitals in their cost reports. Attachment

4.19-B providing the cost-to-charge ratio became effective October 1, 1997. The Mississippi

Medicaid Program paid hospitals based on the cost-to-charge ratio, and DOM could provide

no evidence that it amended the State Plan to the later-adopted blended payment rates.

¶13.   Throughout these proceedings, DOM never articulated an explanation for its failure

to exclude the radiology and laboratory charges or for its use of a blended rate in place of

actual costs, absent altering or amending the State Plan. The clear language of the State Plan



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           Blended payment amounts are used by Medicare for Medicare patients.

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establishes that DOM’s choice to reduce payments to the Hospitals was arbitrary, capricious,

and not supported by substantial evidence.

¶14.   Although we generally afford great deference to an agency’s interpretation of its

regulations, today’s case is not entitled to that deference. We find that DOM’s interpretation

of Attachment 4.19-B of the State Plan is inconsistent with the underlying regulation.

See Mississippi Indep. Pharmacies Ass’n, 20 So. 3d at 1238.

                                      CONCLUSION

¶15.   The plain language of Attachment 4.19-B of the State Plan provides a cost-to-charge-

ratio formula for calculating outpatient rates. Laboratory and radiology charges are to be

excluded from this formula, for they are reimbursed on a fee-for-service basis. DOM’s

inclusion of radiology and laboratory services in the charges and substitution of costs with

Medicare blended payment amounts was a clear violation of the State Plan.

¶16.   We reverse the judgments of DOM and the chancery court. Consistent with this

opinion, we remand and order the Executive Director of DOM to recalculate the Hospitals’

cost-to-charge ratio using the Hospital’s submitted costs in their cost reports, excluding

laboratory and radiology services, and reimbursing the Hospitals the appropriate amounts

determined by using the State Plan.

¶17.   REVERSED AND REMANDED.

    WALLER, C.J., KITCHENS, P.J., KING, COLEMAN, MAXWELL, BEAM,
CHAMBERLIN AND ISHEE, JJ., CONCUR.




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