ADDISON GILBERT HOSPITAL & others [Note 1] vs. RATE SETTING COMMISSION & others. [Note 2]

ABRAMS, J. The plaintiffs, twenty-six nonprofit hospitals located throughout the Commonwealth, brought this action to challenge the validity of a regulation promulgated by the Rate Setting Commission. 114.1 Code Mass. Regs. Section 3.06 (1981). The contested regulation establishes a fixed reimbursement rate for each "administratively necessary day," see note 6, infra, spent by a Medicaid patient in a hospital in the Commonwealth. A Superior Court judge entered partial summary judgment for the hospitals on the issue of liability. The judge concluded that the regulation was invalid from February 1, 1981, its effective date, to August 13, 1981, when it was superseded by Federal law. See Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97-35, Section 2173, 95 Stat. 357, 808 (1981). [Note 3] At the defendants' request the judge reported his interlocutory order to the Appeals Court. We allowed the defendants' application for direct appellate review, and we affirm.

We summarize the statutory framework within which the challenged regulation was enacted. The Medicaid program provides Federal medical assistance to participating States. 42 U.S.C. Sections 1396 et seq. (1976 & Supp. III 1979). At the Federal level, the program is administered through the Department of Health and Human Services. Massachusetts participates in the program, G. L. c. 118E, having designated the Department of Public Welfare (department) to ensure that the program is administered in accordance with Federal law. See G. L. c. 118E, Sections 4, 6. Under the Massachusetts

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regulatory structure, the Rate Setting Commission establishes rates for payment to Medicaid providers, which include hospitals. G. L. c. 6A, Section 32.

As part of a State's participation in the Medicaid program, it must adopt a "State plan," which must comply with Federal law and which must be approved by the Secretary of Health and Human Services. 42 U.S.C. Section 1396a(b) (1976 & Supp. III 1979). As part of its plan, the State must establish rates for "inpatient hospital services." These rates, unlike other portions of the plan, must receive the approval of the Secretary of Health and Human Services before they may be modified. 42 U.S.C. Section 1396a(a) (13) (D) (1976 & Supp. III 1979). 42 C.F.R. Section 447.261 (a). [Note 4] In addition, the reimbursement paid to the providers of inpatient hospital services must be for the reasonable cost of those services, not to exceed the calculations for the cost of those services under the Medicare program in 42 U.S.C. Section 1395x(v). 42 U.S.C. Section 1396a(a) (13) (D) (1976). 42 C.F.R. Section 447.261.

The regulation at issue, 114.1 Code Mass. Regs. Section 3.06, was promulgated by the Rate Setting Commission in 1980, to be effective on February 1, 1981. The regulation sets the rate at which hospitals are to be reimbursed for their patients who are on "administratively necessary day" status. These patients are originally admitted to hospitals to receive care for their acute conditions, which could only be provided in the hospital setting. When their conditions change so that the medical services they require can be administered in a lower level facility, such as a nursing home, the patients are usually released from the hospital. However, frequently no nursing home beds are available for these patients, and the hospital is forced to keep them. The days during which the hospital continues to provide care for these patients are known as "administratively necessary days." [Note 5]

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The reimbursement rates for administratively necessary days have been changed several times in the last decade. In 1977, prior to the issuance of the contested regulation, the Legislature directed reimbursement for all administratively necessary days unless an available bed in an appropriate facility could be located within a reasonable distance. St. 1977, c. 363A, Section 35. Thus, reimbursement commencing on October 1, 1977, was at a "routine rate," which compensated each hospital for its cost of routine, rather than ancillary, hospital services.

In December, 1980, after a hearing by the Rate Setting Commission, the department submitted a proposed amendment to the Massachusetts State plan to the Regional Medicaid Director for the Department of Health and Human Services for approval, reserving its right to contest the Federal government's position that such approval was required. The new regulation required reimbursement for administratively necessary days at a flat rate of $70 a day for all hospitals. See 114.1 Code Mass. Regs. Section 3.06. The rate was to be effective on February 1, 1981, despite the department's failure to obtain approval by the Secretary of the Department of Health and Human Services. [Note 6]

The question in this case is whether the care provided by hospitals to patients on administratively necessary day status is considered to be "inpatient hospital services" under 42 U.S.C. Section 1396a(a) (13) (D) (1976). If so, the rates for such care must be approved by the Secretary of Health and

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Human Services. We conclude that care provided for administratively necessary days constitutes inpatient hospital services. Thus, we affirm the judge's decision that the $70 rate is invalid because it was not approved by the Secretary. [Note 7]

Our analysis of inpatient hospital services must begin with Federal Medicaid regulation 42 C.F.R. Section 440.10 (1981), which defines inpatient hospital services to be those services which "are ordinarily furnished in a hospital for the care and treatment of an inpatient," and are provided "under the direction of a physician or dentist." We must construe the regulation according to its plain meaning. Treasurer & Receiver Gen. v. John Hancock Mut. Life Ins. Co., 388 Mass. 410, 422 (1983). We conclude that administratively necessary days are plainly encompassed within the regulatory language. The services provided to those patients include services typically or "ordinarily" provided to all inpatients of hospitals, such as bed, board, and basic nursing care. In addition, patients on administratively necessary day status must remain in the hospital until a more appropriate placement is found because they still require medical care. Thus, we assume the care they receive is provided under a physician's direction. See Commonwealth v. Temple Univ. of the Commonwealth Sys. of Higher Educ., 21 Pa. Commw. 162, 166 (1975).

The defendants contend that it is "deceptively simple" to argue that because administratively necessary days are days in hospitals, they represent inpatient hospital services. [Note 8] However, we believe that there is no reason to make the meaning of those services more complicated than need be. Thus, we disagree with the defendants' assumption that, because administratively necessary day care could be provided

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more economically by a nursing home, it is not appropriately rendered by a hospital, and thus does not constitute inpatient hospital services.

The defendants attempt to bolster their argument by citing the Professional Standards Review Organization (PSRO) laws, 42 U.S.C. Sections 1320c et seq. (1976). Under those laws, one responsibility of a PSRO is to ensure that medical care provided under Medicaid is medically necessary and cannot be provided more economically in a lower level facility. See 42 U.S.C. Section 1320c-4(a) (1) (1976). Since administratively necessary days can be effectively provided by a lower level facility, the defendants argue they are not appropriately rendered in a hospital and do not constitute inpatient hospital services.

However, under another PSRO provision, 42 U.S.C. Section 1320c-9(a) (2) (1976), a patient may continue to remain in a hospital on inpatient status if medically necessary and either the care cannot be provided in a lower level facility or there is no such facility in the area available to provide care to the patient. The defendants argue that this provision is designed for hospital compliance with tort law, rather than to make such care reimbursable. That limitation is not found in the language of the statute. The defendants' analysis, moreover, ignores the need to interpret the statute harmoniously. See Peters v. Michienzi, 385 Mass. 533, 537 (1982). The defendants cannot claim on the one hand that the PSRO laws define what is an inpatient hospital service, and on the other hand ignore provisions of that law which undermine their position.

In addition, Congress has indicated that administratively necessary days were included within inpatient hospital services at the time in question. In 1980, Congress enacted a law authorizing hospital reimbursement of administratively necessary days at lower than usual rates, equivalent to rates paid to skilled nursing facilities and intermediate care facilities. These lower rates were instituted for all hospitals with occupancy rates were instituted for all hospitals with occupancy rates of less than eighty per cent. See Medicare & Medicaid Amendments of 1980, Pub. L. No. 96-499,

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Section 902, 94 Stat. 2609, 2613 (1980). However, by its very terms, the statute allowed payments for administratively necessary days at inpatient hospital services rates to "continue" in those hospitals with greater than eighty per cent occupancy. Id. It is therefore obvious that Congress intended that hospitals should receive inpatient hospital services rates for administratively necessary day care under the Medicaid program. [Note 9] Since the Secretary did not promulgate regulations, the 1980 statute did not become effective, and inpatient hospital services rates continued until 1981, when a new statute was passed. See Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97-35, Section 2173, 95 Stat. 357, 808-809 (1981).

The Federal statute focuses on services which are ordinarily provided by hospitals rather than on the patients who ordinarily receive them. It is the type of care provided by a particular institution, rather than the person to whom it is provided, which controls. [Note 10] The level of services would

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only be relevant if the hospital were to provide services not otherwise covered under the Medicaid program. For example, in Monmouth Medical Center v. Harris, 646 F.2d 74, 78-81 (3d Cir. 1981), a Medicare case, the court held that where there is a shortage of lower level beds, a hospital's provision of skilled nursing care is reimbursable, while unskilled nursing care is not reimbursable. The court's rationale was that the Medicare program does not reimburse intermediate care facilities which provide unskilled custodial care, and therefore those services could not be covered by the program in a hospital. However, under the Medicaid program, the type of care rendered for administratively necessary day patients is provided only in institutions covered by the program. Thus, the place, rather than the level of services, must determine whether the services provided are inpatient hospital services.

Congress has given the Commonwealth and other States broad authority to design their own Medicaid reimbursement systems. See Social Security Amendments of 1972, Pub. L. No. 92-603, 86 Stat. 1329 (1972); Massachusetts Gen. Hosp. v. Weiner, 569 F.2d 1156 (1st Cir. 1978). Under the program, cost and efficiency concerns embodied in the Medicaid plan are not the only restrictions on the Commonwealth. The department was required to comply with the express terms of the Federal statute. Since administratively necessary day rates are encompassed within inpatient hospital services, the department had to obtain the approval of the Secretary of the Department of Health and Human Services prior to implementing 114.1 Code Mass. Regs. Section 3.06. Due to its failure to comply, the department's regulation is invalid.

The defendants also allege that the plaintiffs cannot properly bring this action for rate reimbursement under either

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State or Federal law. This issue was not reported to us, and thus is not properly before us. See Mass. R. Civ. P. 64, 365 Mass. 831 (1974). Nevertheless, the parties have briefed the issue and we therefore express our view. Wellesley College v. Attorney Gen., 313 Mass. 722, 731 (1943). The plaintiffs are entitled to declaratory relief. G. L. c. 231A. The plaintiffs also allege damages on contract grounds. G. L. c. 258. We reject the defendants' argument that the plaintiffs could not bring this action, at least as to questions of State law. [Note 11]

The plaintiffs claim that the hospitals, as Medicaid providers, entered into contracts with the department, under which they agreed to provide services in exchange for reimbursement in accordance with statutory requirements. Thus, their claims are based "either on an actual or implied contract, or a statutory liability, which gave rise to a contractual relationship when [the plaintiffs] rendered services" to Medicaid patients. Massachusetts Gen. Hosp. v. Commissioner of Pub. Welfare, 359 Mass. 206, 209 (1971). The defendants do not disagree with the general proposition that the plaintiffs may maintain this action as against the department. See Moe v. Secretary of Admin. & Fin., 382 Mass. 629, 642-643 (1981). Rather, the defendants argue that G. L. c. 258 provides a remedy to recover the rates set by the Rate Setting Commission, without reference

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to Federal law. The defendants argue that "a provider has no contractual right to receive payments in excess of the established rate," Perkins School for the Blind v. Rate Setting Comm'n, 383 Mass. 825, 832 (1981), claiming that rate is the flat $70 rate established by 114.1 Code Mass. Regs. Section 3.06 (1981). We do not agree.

"Established rates" may be defined by reference to G. L. c. 6A, Section 32, which applies to the Rate Setting Commission. That statute states, in pertinent part, "Every rate, classification and other regulation established by the commission shall be consistent where applicable with the principles of reimbursement for provider costs in effect from time to time under Titles XVIII and XIX of the Social Security Act." Relying on New England Medical Center, Inc. v. Rate Setting Comm'n, 384 Mass. 46 (1981), the defendants argue that these reimbursement principles encompass only rate establishment methodologies, rather than the requirement for prior approval by the Secretary. That case, however, states that "the Medicaid statute gives the States authority to implement their own methods of determining reasonable cost reimbursement rates for purposes of Medicaid programs, subject to the approval of the Secretary of Health and Human Services, 42 U.S.C. Section 1396a(a) (13) (D) (1976)" (emphasis added). [Note 12] Id. at 51 n.5. This requirement for prior approval of the Secretary is not simply procedural, as the defendants suggest, but is substantive as well, since the Secretary must determine whether the rates are reasonable. Thus, we conclude that the "established rate" must have received the Secretary's approval before it became effective. [Note 13]

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The order for partial summary judgment is affirmed. The matter is remanded to the Superior Court for further proceedings.

So ordered.