      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                      NO. 03-17-00711-CV



Calab, Inc.; Mosaic, Inc.; Mosaic Martin Luther Homes, Inc.; The Center Serving Persons
  with Mental Retardation; Unified Care Group; and Mosaic of Bethphage, Appellants

                                                v.

                Texas Department of Aging and Disability Services, Appellee


     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 261ST JUDICIAL DISTRICT
      NO. D-1-GN-16-003653, HONORABLE GISELA D. TRIANA, JUDGE PRESIDING



                            MEMORANDUM OPINION


               Appellants Caleb, Inc.; Mosaic, Inc.; Mosaic Martin Luther Homes, Inc.; The Center

Serving Persons with Mental Retardation; Unified Care Group; and Mosaic of Bethphage (the

Providers) appeal from the trial court’s agreed final judgment granting their bill of review and

affirming the final orders of appellee Texas Department of Aging and Disability Services (the

Department).1 In its orders, the Department found that the Providers were liable for underpaying

quality assurance fees (QAF) for the time period September 1, 2004, to December 31, 2007,

following the Department’s after-the-fact recalculation of the QAF that each Provider owed for that

time period. See Tex. Health & Safety Code § 252.202 (addressing computation of QAF). For the


       1
         In 2017, the Texas Department of Aging and Disability Services ceased to be a state agency
after the transfer of its operations to the Texas Health and Human Services Commission (the
Commission) was completed. We, however, refer to appellee as the Department to be consistent
with the parties’ briefing.
following reasons, we reverse the trial court’s final judgment and the Department’s final orders and

remand the administrative cases to the Department.2


                                            Background

               The Providers contract with the Department to provide services to qualified

individuals pursuant to respective Medicaid provider agreements,3 and they are required to pay QAF.

See id.; 1 Tex. Admin. Code §§ 352.1–.9 (2003) (Tex. Health & Human Servs. Comm’n, Quality

Assurance Fee for Long-Term Care Facilities).4 The Department also is under contract with the

Centers for Medicare and Medicaid Services (CMS), which provides federal funding for the

provision of services to qualified individuals. The parties’ dispute concerns the Department’s

change in practice concerning amounts of underpaid QAF by a facility following six-month reviews

during the 2004–2007 time period. See 1 Tex. Admin. Code § 352.3(c); see also Tex. Health

& Safety Code § 252.202(c). Prior to applicable rules being amended in 2008, the Department’s



       2
          This appeal was consolidated with this Court’s cause number 03-17-00712-CV for
purposes of briefing and consideration. By opinion issued this same date, we reverse the trial court’s
order and the Department’s final orders in that case and remand the administrative cases to
the Department.
       3
          Among the terms in their respective agreements with the Department, appellants agreed
to “[a]llow the Department to adjust payments made to [them], without notice, for prior overpayment
or underpayment,” and they agreed to “[c]omply with applicable state laws and rules” and
“applicable federal laws and regulations.” Although the Department relied on these provisions at
the administrative level to support its position, the Department has not done so on appeal. We limit
our analysis to the arguments raised by the parties. See Tex. R. App. P. 38.1(i), 38.2(a)(1).
       4
          Unless otherwise stated, citations to the Commission’s rules are to the version of the rules
as they existed prior to their amendment in 2008. The current version of the rules is found in sections
11.2 to 11.9 of title 40 of the Texas Administrative Code. See 40 Tex. Admin. Code §§ 11.2–.9
(Dep’t of Aging & Disability Servs., Quality Assurance Fee).

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practice was not to assess additional QAF from a facility to equal six percent of the facilities’ gross

receipts based on a six-month review but to issue a refund to a facility if the six-month review

showed that the facility had overpaid its QAF above the six-percent measure for that particular

six-month period.

               Following a financial management review of the QAF program, the CMS in 2009

determined that the Commission had not been performing a proper reconciliation process, resulting

in facilities, including the Providers, underpaying amounts due to the State for the 2004–2007 time

period.5 Specifically, the CMS determined that some facilities had not been paying amounts equal

to six percent of gross receipts and that this practice violated the uniformity requirement in section

1903(w) of the Social Security Act. See 42 U.S.C. § 1396b(w) (requiring states to impose health

care related taxes uniformly). The CMS requested that the Commission recalculate the QAF that

facilities owed to the State so that the total amount paid per facility equaled six percent of the

particular facility’s gross receipts for the 2004–2007 time period and then collect underpayments

based on the recalculation. The CMS further warned the Commission that “[f]ailure to collect these

underpayments may render the entire tax impermissible.”




       5
          In the final report, CMS explained how the Commission was not performing a proper
reconciliation process:

       [The Commission] was submitting refunds for overpayments of QAF but not
       requiring underpayments to be paid to [the Department] upon reconciliation.
       Therefore, some of the facilities were delaying the submissions of Medicaid claims
       in order to lower gross receipts for the six month reconciliation period and thus, pay
       a lower QAF amount.

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               In response to the CMS’s request, the Department recalculated the QAF owed per

facility for the 2004–2007 time period and then sought to collect underpayments, including seeking

collection from the Providers for underpayments as to their facilities from that time period.

Disputing their liability for the underpayments, the Providers sought informal reviews and then

administratively appealed the results of the informal reviews. For purposes of this appeal, the

Providers’ administrative records are substantively the same, except as to the amount that the

Department sought to collect from each Provider. It is undisputed that the Providers made payments

in accordance with the Department’s instructions during the 2004–2007 time period but that they had

underpaid their respective QAF below the six-percent measure based on the three-year recalculation.

The Providers also did not present evidence to controvert the Department’s evidence of their gross

receipts and corresponding underpayments for the three-year period. The Providers contended that

they were not liable for the underpayments based on: (i) the Department’s practice during the

2004–2007 time period not to collect underpayments following six-month reviews; (ii) their

compliance with the Department’s instructions during that time period as to assessed QAF;

and (iii) the applicable rules that, according to the Providers, did not authorize collection

of underpayments.

               The Providers’ administrative appeals were denied by summary disposition. In their

proposals for decision, the administrative law judges determined that the Commission had not

followed its own rules when it did not collect underpayments from the Providers during the

2004–2007 time period, that the Department had mischaracterized the QAF rules in effect during that




                                                4
time period, and that the Providers remained liable for underpayments. For example, in the second

amended proposal for decision as to appellant Mosaic, the ALJ’s conclusions of law included:


        •       1 Texas Administrative Code Section 352.3 in effect from September 1,
                2004, through December 31, 2007, required ICF/MR providers to pay a QAF
                equal to 6% of reimbursements for residents, up to a total of 6% of annual
                gross revenues of the facility.

        •       [The Commission]’s failure to collect the full QAF that was payable under
                its rules did not excuse Appellant from its obligation to pay the full amount
                due it owed pursuant to those rules.

        •       Because there is no genuine issue of material fact regarding Appellant’s total
                gross receipts during from [sic] September 1, 2004, through December 31,
                2007, [the Department] is entitled to collect all underpayments of Appellant’s
                QAF up to a total of 6% of said gross receipts.


In the analysis section, the ALJ explained that “the rules in effect during the period in question

created an obligation on [the Provider] to pay a total of 6% of its gross receipts” and that the

Provider’s “obligation was not obviated by [the Commission]’s inability to devise a scheme to

collect said receipts or [the Department]’s erroneous portrayal of the rule that created the obligation.”

The proposals for decision in the administrative appeals by the other Providers were substantively

the same.    The Department adopted the proposals for decision, reaffirmed the amounts of

underpayment as to each Provider, and issued final orders that it was entitled to collect all

underpayments as to each Provider “up to a total of six percent of said gross receipts” for the

2004–2007 time period.

                The Providers filed a consolidated suit for judicial review, but it was dismissed for

want of prosecution. In 2016, they filed an original petition for bill of review seeking to set aside



                                                   5
the order dismissing their suit for judicial review. The parties entered into a rule 11 agreement in

which they agreed that the Providers’ bill of review had merit and should be granted. They also

stipulated that the issues were the same as the underlying proceeding addressed in this Court’s cause

number 03-17-00712-CV and that the arguments and analysis in that proceeding were applicable to

their cases. The trial court thereafter signed an agreed final judgment reflecting the parties’ rule 11

agreement. The trial court granted the Providers’ bill of review, affirmed the agency orders of the

Department as to each Provider, and stated that they had the right to appeal the judgment. This

appeal followed.

                                              Analysis

               The Providers raise the same two issues on appeal as are raised by the appellants in

this Court’s cause number 03-17-00712-CV. They argue that the Department “is not now authorized

to re-interpret the law to collect additional QAF taxes based upon the 2003 law that was settled and

in effect during the relevant time period” and that the trial court “committed error by retroactively

applying the law that came into effect in 2008, which was after the relevant time period for

calculation of the additional QAF taxes at issue.”

               Based on the analysis and conclusions in our opinion issued this same date in cause

number 03-17-00712-CV, we sustain the Providers’ first issue in this case. Given the applicable

statutes and rules, we conclude that the Department’s final orders adopting the proposals for decision

and affirming the Providers’ liability for underpayments for the 2004–2007 time period were

arbitrary and capricious and affected by errors of law that prejudiced the substantial rights of the




                                                  6
Providers. See Tex. Gov’t Code § 2001.174(2)(D), (F); Tex. Health & Safety Code §§ 252.204,

.205; 1 Tex. Admin. Code §§ 352.3, 352.6.

               Because our resolution of the Providers’ first issue is dispositive as to this appeal, we

do not address their second issue in which they contend that the trial court erred by retroactively

applying the 2008 amendments to the rules.


                                            Conclusion

               For these reasons, we reverse the trial court’s final judgment and the Department’s

final orders and remand the administrative cases to the Department for further proceedings.



                                               __________________________________________
                                               Melissa Goodwin, Justice

Before Justices Puryear, Goodwin, and Field

Reversed and Remanded

Filed: November 7, 2018




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