RATE SETTING COMMISSION vs. DIVISION OF HEARINGS OFFICERS & another. [Note 1]

LIACOS, J. The plaintiff, Rate Setting Commission (commission), brought this action in Superior Court under G. L. c. 6A, Section 36, and G. L. c. 30A, Section 14, to obtain review of a

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decision of the defendant Division of Hearings Officers (division). [Note 2] The division had ordered the commission not to apply a promulgated regulation to the defendant-provider Kelly Health Care, Inc. (Kelly), and to recalculate Kelly's 1981 rates for certain of its homemaker and home health aide offices. The judge referred the case to a special master. The master found that the division had jurisdiction over Kelly's rate challenge, and that substantial evidence supported the division's finding that the rates as applied to Kelly were not "adequate, fair and reasonable." See G. L. c. 6A, Section 36. The judge adopted the master's report and entered judgment for the defendants. The plaintiff appealed, and we transferred the case to this court on our own motion.

In December, 1980, the commission promulgated a new regulation, 114.3 Code Mass. Regs. Section 11.00, [Note 3] governing reimbursement rates for providers of homemaker and home health aide services. The main goal of the regulation was cost containment, reducing the price of such services to the Commonwealth through elimination of duplicative costs.

Under the regulations in force prior to 1980, the commission based reimbursement rates for these services on the individual and reasonable direct costs of the separate offices of a provider. The new regulation, by contrast, provided that the rate be based on the combined volume of all branch offices or related providers within thirty-five miles of each other. In theory, as the aggregate volume increased, the costs would decrease. Three of Kelly's offices, located in Watertown, Lawrence, and Lowell, were within thirty-five miles of each other and

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thus were subject to having their volumes combined for rate setting purposes.

Kelly appealed to the division, claiming that Section 11.03 (3) was promulgated improperly. The commission moved to dismiss on the ground the division had no jurisdiction to make such a determination. The division ruled, however, that it had jurisdiction and also had authority to "go beyond" the commission's regulation and to calculate a new rate for the individual provider, if it determined as an initial matter that the general rate was unfair, unreasonable, and inadequate for that provider. See Beth Israel Hosp. Ass'n v. Rate Setting Comm'n, 24 Mass. App. Ct. 495, 498 (1987) (where division similarly asserted authority to ignore "validly promulgated and properly applied . . . regulations" and to "go beyond" such regulations).

The scope of the division's jurisdiction to consider an individual provider's challenges to application of valid regulations, brought pursuant to c. 6A, Section 36, has been a matter of ongoing controversy between the division and the commission. See id. at 495 n.2. The commission itself has demonstrated some confusion as to where the jurisdictional lines are to be drawn under the statutory scheme of G. L. c. 6A, Section 36. See Medi-Cab of Mass. Bay, Inc. v. Rate Setting Comm'n, ante 357, 359-363 (1987). We had indicated that a substantive challenge to a rate regulation of general applicability to a class of providers may be brought in a declaratory judgment action under G. L. c. 30A, Section 7, and G. L. c. 231A. Massachusetts State Pharmaceutical Ass'n v. Rate Setting Comm'n, 387 Mass. 122, 139 (1982). In Cliff House Nursing Home, Inc. v. Rate Setting Comm'n, 378 Mass. 189, 193 (1979), we indicated, also, that the division had the power, under G. L. c. 6A, Section 36, to "determine a rate of reimbursement" for an individual provider. More recently, in Beth Israel Hosp. Ass'n v. Rate Setting Comm'n, supra at 503, the Appeals Court ruled that "where a provider's challenge is to the substantive validity, that is, the adequacy, of a regulation of general application and not to the peculiar application of that regulation to the provider, the division is without authority to act, and the remedy for the provider is to proceed by way of an action for declaratory judgment under G. L. c. 30A,

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Section 7, and G. L. c. 231A" (footnotes omitted). We agreed with that ruling in Medi-Cab of Mass. Bay, Inc. v. Rate Setting Comm'n, supra at 363 n.9.

"A substantive challenge is [one] mounted `on the ground that the general regulation is substantively defective, that is, inadequate.'" Beth Israel, supra at 501, quoting State Pharmaceutical, supra at 126. However, a challenge to a regulation of particular application to an individual provider may be brought on administrative appeal to the division. State Pharmaceutical, supra at 139. Beth Israel, supra at 501-502. See G. L. c. 6A, Sections 32, 36. No absolute boundary separates a challenge to the substantive validity of a general regulation from a more narrow appeal from an individual rate. See Geriatric Auth. of Holyoke v. Rate Setting Comm'n, 21 Mass. App. Ct. 953, 955 (1986). Nevertheless, a line between the two does exist. Medi-Cab of Mass. Bay, Inc. v. Rate Setting Comm'n, supra. Beth Israel, supra at 503 n.16.

In Medi-Cab, supra, we drew that line with greater precision. The correct distinction is not between "facial" and "as applied" challenges, for "every provider can phrase a challenge to a general regulation as an appeal from the particular rate set for it under that regulation." Id. at 363-364. Thus, when a provider challenges a class-based rate, it may pursue its appeal before the division "only if the provider can demonstrate circumstances -- other than voluntary business decisions -- which make application of the rate to that provider different from its application to all other providers in the class" (emphasis added). Id. at 364.

The requisite difference can be shown through evidence of special circumstances demonstrating that the general rate has been improperly applied to the provider, or that some factors exist, beyond the provider's control, which affect the provider but not the class as a whole. For example, a particular provider may service an area containing an unusually high concentration of patients with extreme health care needs; may require unusual equipment because of the unique nature of its services within the class, or because of the nature of its clientele; may traverse a territory with unusual geographic or transportation characteristics imposing a burden that other providers in the same

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class do not experience; or may cover an area where the population density differs greatly from that in areas covered by similar providers. It is unnecessary to burden the Superior Court with these types of specialized issues.

In this action, Kelly challenged application of the aggregation of volume rate to its offices in Watertown, Lawrence, and Lowell. Kelly claimed that the aggregation regulation provided for payment based on assumptions inapplicable to Kelly's operations. [Note 4]

First, Kelly asserted that the offices in question were not opened in order to capture a low volume/high unit rate (as a means of receiving higher rates for the same services), one of the general concerns underlying the regulation's adoption. The division found that the three offices were established before the regulation's adoption; that each office drew its work force from areas separate from the other two offices; and that each office served a clientele distinct from that of the others.

Second, regarding the regulatory goal of efficiency and cost containment, Kelly challenged the rate projection at which payment decreases as volume increases. Kelly's evidence showed that its costs for 1981 did not decrease with increasing volume at the rate projected. The division therefore found that the underlying principle of aggregation bore little correlation to Kelly's 1981 operations.

Based on the above conclusions, the division proceeded to examine the reasonableness of Kelly's actual costs. It found that Kelly's 1981 costs were reasonable, since they were at, or below, the average for other providers in the class. In addition, since Kelly's actual cost experience varied substantially from the theoretical rate projections, the division found that the rates as applied to Kelly were unfair, inadequate, and unreasonable. Finding, also, that the aggregated rate caused the

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unfairness, the division ordered the commission to ignore the regulation in setting Kelly's 1981 rates for the three offices. [Note 5]

The evidence that Kelly presented is best characterized as challenging the soundness of the regulation. It is clear, also, that the division premised its decision on an error of law, namely, that it had jurisdiction to consider the validity of the general rate. An evaluation of the accuracy or reasonableness of the rate projection goes to the adequacy of the regulation itself. The same is true of a comparison of Kelly's actual costs with the rate reimbursement allowances. The focus of a division hearing may not concern alleged defects in a regulation. Nor may it be an examination of the correlation between the principles and assumptions underlying a regulation with the actual experience of a single provider. These are, in effect, substantive challenges, whether brought by a single provider or by several providers in a class. See Massachusetts State Pharmaceutical Ass'n v. Rate Setting Comm'n, 387 Mass. 122, 138 (1982) (division has no authority to consider a class action challenging a rate regulation of general application). As such, the claims may be pursued only in a declaratory judgment action.

The proper focus of a division hearing under c. 6A, Section 36, is whether the individual provider can demonstrate "circumstances -- other than voluntary business decisions -- which make application of the rate to that provider different from its application to all other providers in the class." Medi-Cab, supra at 364.

The division's assertion of jurisdiction to determine the validity of the general rate was error of law. Thus, its decision cannot stand. G. L. c. 30A, Section 14. The judgment is reversed. The case is remanded to the Superior Court. The provider shall have thirty days from the entry of rescript either to move for remand to the division for rehearing on whether its circumstances differ from those of other providers, or to seek a

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declaratory judgment in the Superior Court concerning the validity of the general rate regulation. Otherwise, judgment is to enter for the plaintiff.

So ordered.