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

NOLAN, J. This case represents phase two of an action which was commenced on March 12, 1981, and which resulted in our decision on August 23, 1983, in Addison Gilbert Hosp. v. Rate Setting Comm'n, 390 Mass. 17 (1983) (Addison Gilbert I). In the present case, we affirm the trial judge's entry of summary judgment for the plaintiffs which awarded the plaintiffs prejudgment interest on the principal sums due to them after the judgment which followed Addison Gilbert I. The defendants appealed, and we transferred the case to this court on our own motion. We affirm.

It is important to note what Addison Gilbert I decided. In that case, the plaintiffs challenged the validity of a regulation promulgated by the commission. The regulation (114.1 Code Mass. Regs. Section 3.06 [1981]) fixed a flat reimbursement rate for health care providers, such as the plaintiffs, to Medicaid patients. The rate was applicable to those days which are called "administratively necessary days." Addison Gilbert I described "administratively necessary days" in the following language: "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 3] Id. at 19 & n.5.

Page 58

After the issuance of several reimbursement rates for "administratively necessary days," in December, 1980, following a hearing before the commission, the department submitted a proposed amendment to the rate regulations to Federal authorities in the Department of Health and Human Services for approval. The department reserved its right to contest the Federal government's insistence on the need for approval. This new rate for "administratively necessary days" called for reimbursement 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 failure of the department to obtain Federal approval. See Addison Gilbert I, supra at 20.

The Federal legislation which created the Medicaid program requires a State to adopt a plan which complies with Federal law and which must be approved by the Secretary of Health and Human Services. 42 U.S.C. Section 1396a(b) (1982). In particular, the Federal law required States to establish rates for "inpatient hospital services" and these rates require approval of the Secretary of Health and Human Services. Addison Gilbert I, supra at 19.

The narrow question decided in Addison Gilbert I was "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)." Id. at 20. We answered that question in the affirmative. It followed that Federal approval was required and that failure to obtain the approval rendered the $70 flat rate invalid. Id. at 20-21.

Following our rescript in Addison Gilbert I, a judgment was entered for the plaintiffs on November 1, 1983, for the difference between the rate at which the plaintiffs were previously reimbursed for "administratively necessary days" and the correct rate, but this judgment left open the issue presented on this appeal, i.e., whether the plaintiffs are entitled to prejudgment interest from November 1, 1981, to January 10, 1984 (a time period stipulated by the parties as applicable, if any prejudgment interest is due).

Page 59

All parties seem to concede that if interest is due, the computation is governed by G. L. c. 231, Section 6C, [Note 4] which is set forth in full in the margin, and which is invoked in cases based on contractual obligations. They agree that the thrust of the underlying obligations of the defendants to the plaintiffs is in contract. See Massachusetts Gen. Hosp. v. Commissioner of Pub. Welfare, 359 Mass. 206, 209 (1971). They disagree as to the existence of a breach. They do not contest the principle that the Commonwealth may be liable for breach of contract and for interest to the same extent as a private person. See G. L. c. 258, Section 12.

The defendants argue that they did not cause a breach of contract, that they acted in good faith and that they honestly misinterpreted Federal law as to the requirement of approval of the rate. They argue that under the test of Perkins School for the Blind v. Rate Setting Comm'n, 383 Mass. 825, 831 (1981), they should be exonerated from the payment of interest because they have "done all that the law required . . . in the particular case." We disagree.

Language from Massachusetts Gen. Hosp. appearing in Perkins immediately before this quoted language provides that "interest may be allowed against the Commonwealth for any `detention of money, beyond the reasonable time which the statutes requiring payment to [plaintiffs] fairly should be interpreted as contemplating.'" Perkins, supra at 831, quoting Massachusetts Gen. Hosp., supra at 209.

Despite the defendants' arguments to the contrary, the present case is distinguishable from one in which a provider successfully appeals the amount of the rate under the procedure established in G. L. c. 6A, Section 32. In this instance, the language of

Page 60

Perkins ("a liability for interest in the Commonwealth does not arise each time an initial rate is subsequently adjusted upward," id. at 832) is not applicable to the present case since the original appeal in Addison Gilbert I was a frontal attack on the legality of the rate. Applying the principles of Perkins and Massachusetts Gen. Hosp. to the instant case, it is clear that the defendants did not do all that the law required because they failed to obtain Federal approval. They knew of the Federal requirement of prior approval when they made the $70 rate effective. The Federal agency informed the defendants that such action would violate Federal law. By statute, G. L. c. 6A, Section 32, provides that these rates must conform with the requirements of Federal law.

In a word, the defendants' conduct constituted a breach of contract for which they must be responsible for the payment of interest.

Judgment affirmed.