BAPTIST HOSPITAL, ET AL.,         )
    Plaintiffs/Appellees,         )   Appeal No.
                                  )   01-A-01-9610-BC-00465
v.                                )
                                  )   TN Claims No.
TENNESSEE DEPARTMENT OF
HEALTH,
                                  )
                                  )
                                      404692            FILED
    Defendant/Appellant.          )                       April 25, 1997

                                                       Cecil W. Crowson
                   COURT OF APPEALS OF TENNESSEE      Appellate Court Clerk


                    MIDDLE SECTION AT NASHVILLE


         APPEAL FROM THE TENNESSEE CLAIMS COMMISSION

             MIDDLE DIVISION AT NASHVILLE, TENNESSEE


            THE HONORABLE W.R. BAKER, COMMISSIONER


CHARLES W. BURSON
Attorney General and Reporter

SUE A. SHELDON
Assistant Attorney General
Cordell Hull Building, 2nd Floor
426 5th Avenue, North
Nashville, Tennessee 37243-0499
      ATTORNEYS FOR DEFENDANTS/APPELLANTS

WILLIAM B. HUBBARD
Weed, Hubbard, Berry & Doughty
Third National Financial Center
424 Church Street, Suite 2900
Nashville, Tennessee 37219

SANFORD E. PITLER
ELIZABETH A. McFALL
Bennett & Bigelow
1111 Third Avenue, Suite 1580
Seattle, Washington, 98101
       ATTORNEYS FOR PLAINTIFFS/APPELLEES



                       REVERSED AND REMANDED


                                            SAMUEL L. LEWIS, JUDGE
                                         OPINION

       This is an appeal by defendants/appellants, the Tennessee Department of
Health and the Tennessee Department of Finance and Administration (“the State”),
from a decision of the Tennessee Claims Commission (“the Commission”) denying
the State's motion to dismiss plaintiff/appellee's claim.1 The facts out of which this
matter arose are as follows.


       The State entered into provider agreements with the Hospitals for the provision
of health care to Medicaid recipients. From 1 October 1983 to 31 December 1993,
the State reimbursed the Hospitals using a prospective payment methodology, i.e, the
Hospitals received a fixed dollar amount for every day a patient spent in the hospital.
Effective 1 July 1989, the State began limiting the Hospitals' reimbursement. Once
a patient had spent twenty days as an inpatient during the State's fiscal year, the State
only paid sixty percent of the fixed rate for the twenty-first day and every day
thereafter.


       In 1990, Congress passed a law regarding the reimbursement of Medicaid
providers. Effective 1 July 1991, federal legislation prohibited states from imposing
day and dollar limits on the reimbursement of hospitals for services provided to infant
Medicaid eligibles and Medicaid eligible children in hospitals serving a
disproportionate share of low income patients with special needs. 42 U.S.C. §
1396a(s)(2),(3) (“OBRA '90"). On 8 August 1995, the Hospitals filed a complaint
with the Commission.            The Hospitals alleged that the State breached the
reimbursement methodology clause2 of the provider agreements. Specifically, the
Hospitals claimed the conflict clause3 found in the provider agreements caused


       1
           The plaintiffs in this case are Baptist Hospital, East Tennessee Children's Hospital,
Erlanger Medical Center, Fort Sanders Regional Medical Center, Holston Valley Hospital &
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, St. Mary's Medical Center, and Vanderbilt University Medical Center. Hereinafter the
plaintiffs shall be referred to as “the Hospitals.”
       2
          The “Reimbursement Methodology Clause” provided that “this facility: . . . Agrees to
use the same method of reimbursement for Title XIX that is used for Title XVIII, Medicare.
       3
          The conflict clause provided: “If any part of this agreement is found to be in conflict
with any Federal or State laws or regulations having equal weight of law, or if any part is placed
in conflict by amendment of such laws, this agreement is so amended.”

                                                -2-
OBRA '90 to amend the reimbursement methodology clause and the State breached
the provider agreements when it continued to restrict the Hospitals' reimbursement.
The Hospitals claimed approximately twelve million dollars in damages.


       The State responded to the complaint by filing a motion to dismiss. The
motion alleged the Hospitals failed to state a claim, the Commission lacked
jurisdiction, and the State was immune. The Commission dismissed the Hospitals'
claim for attorney's fees, but denied the rest of the State's motion. The Commission
held it had subject matter jurisdiction and the Hospitals had stated grounds for which
it could grant relief.


       On 14 October 1996, the State filed a motion requesting permission to file an
interlocutory appeal pursuant to Rule 9 of the Tennessee Rules of Appellate
Procedure. The motion explained the State had also filed a “Petition for Interlocutory
Review” pursuant to Rule 12 of the Tennessee Rules of Appellate Procedure in this
court because “[t]he question of whether proceedings for review of an interlocutory
order of the Claims Commission are properly commenced under Tenn. R. App. Proc.
9 or 12(II) appears somewhat unsettled.” The Commission granted the motion after
finding that “an interlocutory appeal will result in a net reduction in the duration and
expense of the litigation if the challenged order be reversed.” The Commission also
held Rule 12(II) did not apply to its decisions.


       On 29 October 1996, the Hospitals filed an objection to the Rule 12 petition
for review. The Hospitals claimed the appropriate rule was nine, not twelve, but also
argued the State had failed to meet the requirements of a Rule 9 interlocutory appeal.
On 1 November 1996, this court entered an order reserving judgment on the
Hospitals' objection until after oral argument. The Hospitals later withdrew their
objection.


       On 26 November 1996, the Hospitals filed a response in support of the State's
Rule 9 application. In December, this court entered an order regarding the Rule 9
application. This court stated: “It is, therefore, ordered that judgment on the Tenn.
R. App. P. 9 application for permission to appeal be reserved until oral argument of
the Tenn. R. App. P. 12 petition for review. In the event the Tenn. R. App. P. 9

                                          -3-
application is granted, the briefs and arguments of the parties on the merits of the
Tenn. R. App. P. 12 application will be considered in the Tenn. R. App. P. 9 appeal.”


      I.     Basis of Appeal


             A.     Which Rule Applies?


      The State initially filed a Rule 12 petition for review citing part II of Rule 12.
It then filed a Rule 9 application for permission to appeal. It is the opinion of this
court that the appropriate basis for appeal given the procedural history of this case is
Rule 12(II). Rule 12(I) applies when: 1) the agency is subject to the Uniform
Administrative Procedures Act (“UAPA”) and 2) a party must appeal a decision of
the agency directly to the court of appeals. Part II applies when only the second
factor exists. It is the opinion of this court that Rule12(II) applies because the
Commission is not subject to the UAPA and its orders are directly appealable to the
court of appeals.


      Unfortunately, there is no clear statement as to whether the Commission is
subject to the UAPA. In fact, the parties appear to have assumed this aspect of their
case. Nevertheless, this court finds no fault in the assumption. To explain, the
provisions of Title 9, chapter 8, parts 3 and 4 establish the Commission, set out its
powers and jurisdiction, and dictate certain procedural requirements. See Tenn. Code
Ann. §§9-8-301, -305, -307, -403 (1992 & Supp. 1996). The provisions of the UAPA
do essentially the same things for those agencies to which the provisions apply. Thus,
it seems that had the General Assembly intended the provisions of the UAPA to apply
to the Commission it would not have gone to such great lengths to throughly describe
the powers, jurisdiction, and procedures of the Commission in a separate title.
Moreover, a finding that the Commission is subject to the UAPA would create a great
deal of conflict between the statutes involving the Commission and the statutes of
the UAPA. Courts should avoid reading statutes in ways “which would operate to
impair, frustrate, or defeat the object of the statute.” First Nat'l Bank of Memphis
v. McCanless, 186 Tenn. 1, 9, 207 S.W.2d 1007, 1010 (1948). Application of the
UAPA to the Commission would essentially destroy the need for a majority of the
statutes regulating the activities of the Commission. It is the opinion of this court that

                                           -4-
the Commission is not subject to the provisions of the UAPA. In addition, decisions
of the Commission are directly appealable to the court of appeals pursuant to
Tennessee Code Annotated section 9-8-403(a)(1).            Thus, a decision of the
Commission is appealable under Rule 12(II).


             B.     Does Rule 12(II) Include Interlocutory Appeals?


      Pursuant to Rule 12(II) “[r]eview is instituted by filing a petition for review
with the clerk of the Court of Appeals within thirty days after the date of entry of the
administrative order appealed from.” The language of the Rule 12(II) does not in any
way limit the review to final decisions. Thus, it is the opinion of this court that Rule
12(II) includes interlocutory appeals.


             C.     Standard of Review


      The standard of review in this case is governed by the Tennessee Rules of
Appellate Procedure. See Tenn. Code Ann. § 9-8-403(a)(1) (1992); Tenn. R. App.
P. 12(II)(h). This court reviews the Commission's decisions pursuant to Rule 13(d).
That is, we review the findings of fact “de novo upon the record of the [Commission],
accompanied by a presumption of the correctness of the findings, unless the
preponderance of the evidence is otherwise.”          Tenn. R. App. P. 13(d).       No
presumption accompanies questions of law.


      II.    Issues Presented for Review


      The State presented two issues for this court to review. The State's first issue
is whether the Commission erred when it failed to find that it lacked subject matter
jurisdiction, and its second issue is whether the Commission erred in not finding that
the Hospitals' complaint failed to state a cause of action upon which relief could be
granted. We address these issues together.


      The State argues the complaint failed to state a breach of contract claim
because the provision relied on by the Hospitals does not create a contractual
obligation on the part of the State and because the conflict clause necessary to the

                                          -5-
Hospitals' theory only applies when there is a conflict between the provisions of the
contract and state or federal law, not when there is a conflict between state and
federal law. In response, the Hospitals argue this court must take their allegations as
true. The Hospitals also clarify that they are claiming that the State breached the
reimbursement methodology clause, not the conflict clause.


        It is the opinion of this court that both parties are correct in certain respects.
First, the Hospitals properly state the standard for disposing of motions to dismiss.
This court must take the allegations of the complaint as true and construe them in
favor of the plaintiff. Pemberton v. American Distilled Spirits Co,, 664 S.W.2d 690,
691 (Tenn. 1984). Second, the State properly argues the Hospitals failed to state a
cause of action because they failed to allege or allege a set of facts such that this court
could construe that the provider agreements included a contractual obligation which
the State breached.


        The Hospitals alleged the State's reimbursement method violated OBRA '90.
They also alleged the enactment of OBRA '90 automatically amended the
reimbursement methodology clause to include the provisions of OBRA '90. Finally,
the Hospitals alleged the State's violation of OBRA '90 constituted a breach of
contract. As argued by the Hospitals, we must take these allegations as true and
construe them in favor of the Hospitals. Nevertheless, we must conclude they fail to
state a cause of action. The problem is it is necessary to infer from the second and
final allegations stated above that the reimbursement methodology clause created a
contractual obligation on the part of the State.                  Unfortunately, the Hospitals'
complaint and the clause itself does not support this inference. To explain, the
complaint states:
        Each Provider Agreement also contains the following provision:
              [The Hospital] agrees to use the same method of
              reimbursement for Title XIX that is used for Title XVIII,
              Medicare.
        The foregoing provision is referred to hereinafter as the “Medicare
        Payment Clause.4

This clause creates a contractual obligation on the particular hospital, not the State.


        4
         (alterations in original) In their brief, the Hospitals refer to this provision as the
reimbursement methodology clause.

                                                  -6-
It is the opinion of this court that the Commission erred when it denied the motion to
dismiss because the complaint failed to allege an essential element of the Hospitals'
breach of contract claim. The Hospitals’ complaint did not include any other claims.
Thus, the Hospitals failed to state a cause of action and the Commission should not
have granted the motion.


      Therefore, it results that the decision of the Tennessee Claims Commission is
reversed, and the case is remanded to the trial court for collection of costs, and to the
Tennessee Claims Commission for any further proceedings in accordance with this
opinion. Costs on appeal are taxed to plaintiffs/appellees, the Hospitals.



                                                 ________________________________
                                                 SAMUEL L. LEWIS, JUDGE


CONCUR:


_______________________________
HENRY F. TODD, PRESIDING
      JUDGE, MIDDLE SECTION



_______________________________
BEN H. CANTRELL, JUDGE




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