CITY OF LYNN & another [Note 1] vs. RATE SETTING COMMISSION.

FINE, J. The city of Lynn owns and operates a licensed public medical institution which provides nursing home services to patients, including those eligible for benefits under the Massachusetts Medicaid program. [Note 2] Lynn brought this action against the Rate Setting Commission (commission), seeking a declaration pursuant to G. L. c. 231A that certain of the commission's

Page 577

regulations, 114.2 Code Mass. Regs. Sections 2.04 (6) and 2.05 (1) (1982, and as further amended), which place a Statewide ceiling on per diem rates for reimbursement by the Commonwealth to operators of long-term care facilities, including nursing homes such as that operated by Lynn, violate G. L. c. 29, Section 27C(c), the "local mandate" provisions of Proposition 2 1/2 (St. 1980, c. 580, Section 2). The parties filed cross motions for summary judgment. Lynn's motion was accompanied by affidavits supporting its allegation that the regulations, adopted for the first time after January 1, 1981, resulted in the imposition of additional costs for which it received no reimbursement from the Commonwealth. [Note 3] From the judge's favorable action on the commission's motion, Lynn appeals.

At issue is the relationship between Proposition 2 1/2 and the elaborate rate-setting scheme encompassed in statutes and regulations. We rule that, in this instance at least, there is no conflict between G. L. c. 29, Section 27C(c), and the relevant statutes and regulations governing the operation of the commission. We examine the relevant portions of each statutory scheme in turn.

Proposition 2 1/2.

"At the November, 1980, general election, acting under the initiative process of the Constitution of the Commonwealth, the voters adopted as chapter 580 of the Acts of 1980 a tax limitation measure commonly known as Proposition 2 1/2." Massachusetts Teachers Assn. v. Secretary of the Commonwealth, 384 Mass. 209, 212 (1981). Among its provisions is the "local mandate" section, G. L. c. 29, Section 27C, as amended by St. 1981, c. 782, Sections 4 through 7, which in relevant part provides:

"Notwithstanding any provision of any special or general law to the contrary:

(a) Any law taking effect on or after January [1, 1981,] imposing any direct service or cost obligation upon any

Page 578

city or town shall be effective in any city or town only if [the municipality accepts the law or the Legislature provides for the Commonwealth to assume such cost].

". . . .

(c) Any administrative rule or regulation taking effect on or after January [1, 1981,] which shall result in the imposition of additional costs upon any city or town shall not be effective until [the Legislature has provided for the Commonwealth to assume such cost]."

Subsection (d) gives cities and others the right to request that the division of local mandates of the Department of the State Auditor, see G. L. c. 11, Section 6B, determine whether such costs have been paid in full by the Commonwealth and, if not, to determine the amount of any deficiency. Subsection (e) gives cities and others the right to file a petition in the Superior Court for reimbursement of such costs. In such an action, a determination by the division of local mandates of the amount of any deficiency is prima facie evidence of the amount necessary to reimburse the municipality. [Note 4]

The local mandate provisions have been described as being "concerned with preventing the involuntary imposition on cities and towns of certain direct service or cost obligations resulting from statutes and administrative rules or regulations" and as setting forth "the requirement that the Commonwealth assume the cost, at least, of any new law or regulation imposing any direct service or cost obligation on any city or town without its consent." Massachusetts Teachers Assn. v. Secretary of the Commonwealth, 384 Mass. at 216 and 221.

It is subsection (c) of G. L. c. 29, Section 27(C), dealing with State administrative rules and regulations, upon which Lynn relies. We are unaware of any other case involving a claim by a municipality based upon that particular provision. Subsection (a), dealing with State statues, however, has been the subject of litigation. In Lexington v. Commissioner of Educ., 393 Mass. 693

Page 579

(1985), it was held that, because the Legislature did not appropriate the funds necessary to cover the costs imposed, Lexington was not obligated to comply with a statute, adopted after January 1, 1981, requiring cities and towns to provide transportation for private school students.

The Rate Setting Mechanism.

General Laws c. 6A, Section 32, as amended through St. 1983, c. 687, Section 1, provides in pertinent part:

"There shall be a rate setting commission, hereinafter called the commission, which shall have the sole responsibility for establishing fair, reasonable and adequate rates to be paid providers of health care services by governmental units. . . . The commission: (1) shall determine, after public hearing, at least as often as annually, for institutional providers . . . the rates to be paid by each governmental unit to providers of health care services. . . . Except for ceilings or maximum rates of reimbursement which are determined in accordance with rate determination methods imposed on nursing homes, any ceiling or maximum imposed by the rate setting commission upon the rate of reimbursement to be paid to rest homes shall reflect the actual costs of rest home providers and shall not prevent any such rest home provider from receiving full payment for costs necessarily incurred in the provision of services in compliance with federal or state regulations and requirements. . . . Each rate established by the commission shall be deemed a regulation."

General Laws c. 6A, Section 36, provides that any party aggrieved by an interim or a final rate set by the commission may appeal to what is now the division of administrative law appeals of the Executive Office for Administration and Finance, G. L. c. 7, Section 4H, as appearing in St. 1983, c. 683. "On appeal, the rate determined for any provider of services shall be adequate, fair and reasonable for such provider, based, among other things, on the costs of such provider." G. L. c. 6A, Section 36, inserted by St. 1973, c. 1229, Section 2. Alternatively, to challenge

Page 580

a regulation of general Statewide applicability, a party may seek direct judicial review under G. L. c. 30A, Section 7, and G. L. c. 231, Sections 1 and 2. Massachusetts General Hosp. v. Rate Setting Commn., 359 Mass. 157 (1971). Massachusetts State Pharmaceutical Assn. v. Rate Setting Commn., 387 Mass. 122, 126-128 (1982). New England Memorial Hosp. v. Rate Setting Commn., 394 Mass. 296, 297 n.4 (1985). See and compare Geriatric Authy. of Holyoke v. Rate Setting Commn., post 953 (1986).

Our courts have recognized that in setting rates the commission need not recognize all of a provider's actual costs. Affiliated Hosps. Center, Inc. v. Rate Setting Commn., 7 Mass. App. Ct. 563, 572-577 (1979). This is because "[t]he legislation in its entirety was intended to commit to the Commission the authority necessary `to stabilize hospital charges . . . [and] to control the costs of purchasing hospital care in the Commonwealth' (quoted from the preamble to the predecessor law, St. 1975, c. 424)." Mercy Hosp. v. Rate Setting Commn., 381 Mass. 34, 39 (1980). In determining what is a fair and reasonable rate for reimbursement of nursing homes for the care of publicly aided patients, the commission "must balance [against the interests of those patients and of nursing homes] the interests of the Commonwealth and its taxpayers in avoiding exorbitant expenditures." Murphy Nursing Home, Inc. v. Rate Setting Commn., 364 Mass. 454, 462 (1973).

The commission has adopted regulations for rates of payment to nursing home facilities. 114.2 Code Mass. Regs. 2.00 et seq. The regulations on which Lynn's claim is based are Sections 2.04 (6) and 2.05 (1), which concern final and interim reimbursement rates, respectively. Those regulations provided for ceilings of $70 in 1982, and $72 in 1984, on the per diem reimbursement rate. [Note 5]

Page 581

Resolution of the Apparent Conflict Between Proposition 2 1/2 and Certain Regulations of the Rate Setting Commission.

On appeal Lynn argues that, having established that the regulations in issue took effect after January 1, 1981, that they have resulted in additional costs to Lynn which are reflected in its property tax rates, and that no provision has been made for the Commonwealth to pay those additional costs, nothing more is required to bring its claim within G. L. c. 29, Section 27C(c). For purposes of assessing the propriety of the allowance of the commission's motion for summary judgment, we assume to be true the facts upon which Lynn relies. The motion judge gave several reasons for ruling that the section of Proposition 2 1/2 on which Lynn relies did not render the challenged regulations ineffective against Lynn. The principal reason stated by the motion judge, and the only one of the judge's stated reasons relied upon by the commission on appeal, is that the regulations did not mandate any city expenditure, the provision of the services being voluntary on Lynn's part. [Note 6] We need not resolve

Page 582

in this case whether G. L. c. 29, Section 27C (c), applies only to mandatory expenditures, however, because we are persuaded for other reasons that the voters did not intend that Proposition 2 1/2 would invalidate regulations adopted by the commission pursuant to G. L. c. 6A, Section 32. Thus, we affirm the judgment although we reach our conclusion via a route different from that taken by the motion judge.

Very simply, this is not a situation in which the Commonwealth has failed to appropriate funds to pay for a municipal service. The Legislature had made clear its intention long before the passage of Proposition 2 1/2 that the costs in issue, to the extent they are recognized as reasonable, be paid by the Commonwealth. It provided by statute for reimbursement by the Commonwealth to municipalities providing public nursing home services at "fair, reasonable and adequate rates." G. L. c. 6A, Section 32. Compare Regents of Univ. of California v. Heckler,

Page 583

756 F.2d 1387, 1393 (9th Cir. 1985, concerning the Federal Medicare program). This case, therefore, is altogether different from Lexington v. Commissioner of Educ., 393 Mass. 693 (1985), in which the State made obligatory the provision of new services without providing for any reimbursement to the municipalities for the cost of providing those services.

Lynn's position with regard to the challenged regulations, in essence, is that they are invalid because they impose a flat ceiling without regard to the actual costs of an individual institutional provider. Lynn may very well be correct in its view that such a ceiling, particularly as applied to a municipality, [Note 7] is arbitrary, capricious, and invalid because it is inconsistent with G. L. c. 6A, Section 32. Lynn does not argue to us in this case, however, that the regulation is invalid under Section 32. Its claim here is that the regulations are invalid, instead, under Proposition 2 1/2. However, Lynn also has appropriately requested an administrative review of the challenged regulations under G. L. c. 6A, Section 36. [Note 8] Since the regulations in issue, to the extent that they impose a ceiling, are of general Statewide applicability, alternatively, as we noted above, it may be that direct judicial review of their validity under G. L. c. 6A, Section 32, would be available under G. L. c. 30A, Section 7, and G. L. c. 231A. Thus, Lynn has available to it an adequate remedy if the regulations do fail to provide for reimbursement by the Commonwealth at rates which are fair, reasonable and adequate. On the record before the motion judge, he had no basis, nor do we, for setting

Page 584

aside the regulations as arbitrary or capricious or inconsistent with the standards set forth in G. L. c. 6A, Section 32. Indeed, that was not the basis of the challenge in Lynn's complaint to the regulations. Absent such a basis, the regulations are entitled to deference. Massachusetts State Pharmaceutical Assn. v. Rate Setting Commn., 387 Mass. at 127. If the regulations should ultimately be ruled invalid, then Lynn would be entitled to have reimbursement rates established administratively and subject to judicial review. Those rates, finally determined, would be fair, reasonable and adequate for the years in question. If the regulations should ultimately be upheld, on the other hand, then the additional costs Lynn is seeking would be costs which exceed what would have been determined to be fair, reasonable, and adequate.

We do not think the people, adopting Proposition 2 1/2, a measure "relat[ing] directly or indirectly to the limitation of State and local taxation" (Massachusetts Teachers Assn. v. Secretary of the Commonwealth, 384 Mass. 209, 221 [1981]), intended that measure to be the vehicle for imposing on the State's taxpayers the burden of paying costs which have been determined under the elaborate rate setting mechanism to be unreasonable. Were we to reach a contrary result, only municipally-operated nursing homes would be exempt from the commission's regulatory power, exercised presumably for the purpose of controlling spiralling costs for medical services. In deciding as we do that the commission's regulations are not invalid under Proposition 2 1/2, we do not intimate any lack of understanding of the important role municipalities play, and have historically played, in the delivery of nursing home and other hospital services. But municipalities too must strain for efficiency and keep their costs for services to publicly-assisted patients within the limits properly set by the commission.

Judgment affirmed.