Maryland Ass'n of Health Maintenance Organizations v. Health Services Cost Review Commission

⁵⁸⁵ ELDRIDGE, Judge. The issues in this case involve the statutory authority of the Maryland Health Services Cost Review Commission. The plaintiffs-appellants, who are the Maryland Association of Health Maintenance Organizations and Deron Johnson, a member of a Health Maintenance Organization (HMO), claim that the Commission has exceeded its statutory authority in two ways: (1) by implementing the Inflation Adjustment System (IAS), and (2) by allowing excess revenue to be used toward community service programs. They also contend that the Commission violated Maryland’s Administrative Procedure Act (APA) by not following APA rulemaking procedures when the IAS was implemented.

The Commission argues that the plaintiffs-appellants have no standing to raise these issues. I. The General Assembly established the Health Services Cost Review Commission in 1971. See Ch. 627 of the Acts of 1971, presently codified as Maryland Code (1982, 1996 Repl.Vol., 1999 Supp.), §§ 19-201 through 19-227 of the Health-General Article. 1 The Commission has “jurisdiction over the costs and rates of hospitals, health care institutions and related institutions located in Maryland.” Blue Cross v. Franklin Sq. Hosp., 277 Md. 93, 95 , 352 A.2d 798, 800 (1976) (Franklin Square I).

In § 19-212(5), the Commission is given the ⁵⁸⁶ three-fold duty of assuring each purchaser of health care facility services that “(i) The total costs of all hospital services offered by or through a facility are reasonable; (ii) The aggregate rates of the facility are related reasonably to the aggregate costs of the facility; and (iii) Rates are set equitably among all purchasers of services without undue discrimination.” In order to carry out this duty, the Commission is authorized to “review and approve or disapprove the reasonableness of any rate that a facility sets or requests.” § 19—219(b)(1). Beginning in 1974, the Commission commenced setting hospital rates. A regulated hospital is prohibited from charging any rate not approved by the Commission. § 19—219(b)(2). The record in this case reflects an historical account of the Commission’s setting of rates.

The Commission at first conducted “full rate reviews” with respect to every hospital and related institution within its jurisdiction. Under a full rate review, the Commission split the hospitals into groups based on whether they were urban or rural and then computed the actual cost per unit of service department-by-department, including “all overhead, routine, ancillary, and outpatient areas.” See also COMAR 10.37.01. The Commission learned, however, that completing the full rate review process for the more than 50 hospitals within its jurisdiction was burdensome. The Commission sought a new methodology that was more efficient, less administratively burdensome, and less expensive.

The solution was the IAS, the purpose of which was two-fold: first, to adjust rates in a more administratively practical manner so as to reflect changes that had occurred in the hospitals since their initial full rate reviews, and second, to provide incentives for the hospitals to perform more efficiently. After the IAS was implemented, hospital rates went from 25% above the national average in 1976 to 11% below the national average in 1992. While the differential has lessened in the years since 1992, the Commission has acted accordingly, appointing the Targets ⁵⁸⁷ Task Force in 1995 to recalibrate the system. The Task Force, which was comprised of representatives of insurers, HMO’s, hospitals, business, and labor, recommended several changes to the ratesetting system, including the addition of the System Correction Factor (SCF) to the IAS. 2 The SCF is a formula used to create a factor which is added to the IAS in order to reduce rates otherwise created under the IAS.

The SCF was first applied in 1997; however, from 1992 until the implementation of the SCF, hospital rates in Maryland never exceeded 3% below the national average. Despite the implementation of the SCF, the plaintiffs Deron Johnson and the Association argue that the use of the IAS, as a ratesetting methodology, is improper. They contend that use of the IAS exceeds the Commission’s statutory authority because it is based upon “system-wide inflation factors” rather than “hospital-specific” data. (Plaintiffs’ reply brief at 3).

Deron Johnson and the Association filed in the Circuit Court for Baltimore City a six-count complaint seeking a declaratory judgment, a preliminary injunction, a permanent injunction, and the issuance of a writ of mandamus. Counts 1, 3, and 4 of the complaint are at issue before this Court. Those counts alleged that the Commission had violated its statutory authority by implementing the IAS, that the Commission violated the statute by allowing excess revenue to be used toward community service programs, and that the Commission violated Maryland’s APA by failing to follow APA rulemaking procedures when the IAS was first implemented. 3 ⁵⁸⁸ When the complaint was filed, the only named defendant was the Commission. Shortly thereafter, the Maryland Hospital Association and the Maryland Hospital Coalition were permitted to intervene as defendants.

The defendants filed a motion to dismiss, arguing that the plaintiffs lacked standing and that some of the issues were not ripe for decision. The plaintiffs filed a motion for summary judgment as to counts 1, 3, and 4, and the Commission filed a cross-motion for summary judgment on the same counts. Following a hearing on the motions, the circuit court dismissed counts 2, 5, and 6 on the ground that the issues were not ripe for decision, and granted summary judgment in favor of the defendants on counts 1, 3, , and 4. The plaintiffs appealed to the Court of Special Appeals, challenging the grant of summary judgment on counts 1, 3, and 4.

Prior to oral argument in the Court of Special Appeals, this Court issued a writ of certiorari. Maryland Assoc. of HMO’s v. Health Services Costs, 349 Md. 105, 707 A.2d 90 (1998).

II

Preliminarily, the Commission argues in this Court that neither Deron Johnson nor the Association had standing in the circuit court to raise the issues encompassed by counts 1, 3, and 4 of the complaint. The Commission asserts that Johnson has not and will not be affected differently from the general public by the Commission’s action. See Medical Waste v. Maryland Waste, 327 Md. 596 , 611 n. 9, 612 A.2d 241 , 248-249 n. 9 (1992) (in order to have standing to challenge a government agency’s action, ordinarily the challenger’s “ ‘interest therein must be such that he is personally and specifically affected in a way different from that suffered by the public generally,’ ” quoting Bryniarski v. Montgomery Co., 247 Md. 137, 144 , 230 A.2d 289, 294 (1967)). See also Sugarloaf v. Dep’t of Environment, 344 Md. 271, 288 , 686 A.2d 605, 614 (1996), and cases there cited.

The Commission contends that the Association lacks standing because it has no interest of its own, separate and distinct from that of its members. See Medical Waste v. Maryland Waste, supra, 327 Md. at 612 - ⁵⁸⁹ 613, 612 A.2d at 249 (“Under Maryland common law principles, for an organization to have standing to bring a judicial action, it must ordinarily have [an] ‘... interest of its own— separate and distinct from that of its individual members,’ ” quoting Citizens Planning and Housing Ass’n v. County Executive, 273 Md. 333, 345 , 329 A.2d 681, 687-688 (1974)). Section 19-227(c) of the Health-General Article of the Code, entitled “standing,” provides, inter alia, that “[a]ny person ... that contracts with or pays a facility for health care services has standing to participate in Commission hearings and shall be allowed” to seek judicial review of the Commission’s final decisions. In Franklin Square I, 277 Md. at 105-106 , 352 A.2d at 806 , we took the position that one who pays hospital insurance premiums, with the insurer then paying the hospital, is also a “purchaser” of hospital health care services within the meaning of the statute.

Deron Johnson is a member of an HMO. As such, he pre-purchases hospital services, if needed, by paying a monthly premium to his HMO. This premium is based, in part, upon rates set by the Commission. In addition, Johnson is a member of the Commission’s Task Force which studies and makes recommendations to the Commission with regard to its rate-setting system.

Although the present case is not a judicial review action under § 19-227(c) of the statute, nevertheless the General Assembly contemplated that persons in Johnson’s position would have standing to challenge the Commission’s actions. Moreover, in our view, Johnson is affected by the Commission’s action in a different way than a member of the general public. Consequently, Johnson has standing to maintain this action. In light of our holding that Johnson has standing, it is unnecessary for us to determine whether the Association also has standing. “Where there exists a party having standing to bring an action or take an appeal, we shall not ordinarily inquire as to whether another party on the same side also has standing.” Board v. Haberlin, 320 Md. 399, 404 , 578 A.2d 215, 217 (1990), and cases there cited.

See also, e.g., Sugarloaf v. Dep’t of Environment, supra, 344 Md. at 297 , 686 A.2d at 618 ; ⁵⁹⁰ People’s Counsel v. Crown Development Corp., 328 Md. 303, 317 , 614 A.2d 553, 559-560 (1992); County Council v. Md. Reclamation, 328 Md. 229 , 232 n. 1, 614 A.2d 78 , 80 n. 1 (1992).

III

Turning to the first issue on the merits, we hold that the use of the IAS is within the statutory authority of the Commission. As discussed in Part I, the General Assembly gave the Commission three broad statutory duties. The Commission’s mandate is to assure each purchaser of hospital services that the total costs of hospital services are reasonable, that aggregate hospital rates are related reasonably to aggregate hospital costs, and that rates are set equitably among all purchasers without undue discrimination. §§ 19-212(5), 19-219(a) of the Health-General Article. In order to carry out these duties, the Commission “may review costs and rates” (§ 19-219(a)), and “take into account objective standards of efficiency and effectiveness” when “determining the reasonableness of rates.” § 19-219(b)(3).

Specifically with regard to the IAS, the use of “alternate ratesetting methods” is expressly provided for under the statute. According to § 19-219(c), “the Commission may promote and approve alternate methods of rate determination and payment that are of an experimental nature,” in order “to promote the most efficient and effective use of health care facility services.” The IAS, at its inception, was an alternate ratesetting method of an experimental nature adopted in order to promote the efficiency and effectiveness of both the Commission and the regulated hospitals. Within just one year of setting rates, the Commission came to the conclusion that full rate reviews were neither the most efficient nor the most effective means of setting rates. The full rate review process could take up to 6 to 8 months and could cost $50,000 to $200,000, depending upon the individual circumstances.

As a result, the Commission adopted the IAS to replace, at the hospitals’ option, the ⁵⁹¹ time-consuming, expensive, and administratively difficult full rate reviews. The IAS makes annual adjustments in hospital rates using the hospital’s initial full rate review as a base the first year. For each subsequent year, the IAS adjustments are applied to the previous year’s rate. As a result, actual hospital costs are taken into account from the very beginning.

The adjustments are based upon national inflation rates in goods and services which the Commission believes to be comparable to goods and services actually utilized by Maryland hospitals. The inflation indices are category-specific: salaries and fringe benefits; food; supplies; utilities; equipment; and other expenses. Contrary to the plaintiffs’ arguments, the implementation of the IAS is based upon “hospital-specific” data. The category-specific inflation indices are individually applied to each hospital’s own category-specific cost structure.

Again, actual costs are taken into account. Volume adjustments are also made according to respective increases and decreases in volume of services in each particular hospital. Finally, other adjustments are made to reflect the individual hospital’s pricing practices, changes in uncompensated care levels, and unusual or government-mandated costs. The completed rate order is offered to the individual hospitals, which have the option of a full rate review if they do not believe that the rate order under the IAS is appropriate.

Since its inception, the large majority of hospitals have utilized the IAS as opposed to the full rate review without complaint. In fact, there had been 1000 rate adjustments from 1977 until the time this action was filed, but only 35 were formal rate reviews. The record in this case indicates that the IAS works: it is administratively less burdensome for both the Commission and the regulated hospitals, and it has accomplished the goals set by the General Assembly. Between 1976 and 1992, Maryland hospital rates fell 36 percentage points in comparison to the national average.

As mentioned in Part I, the IAS has been less successful in the years since 1992; however, the Commission has acted promptly and effectively with the addition of the SCF, and rates have always remained at or below ⁵⁹² 3% less than the national average. Although the IAS may be imperfect, specifically in its performance since 1992, its record over the past 22 years shows that the system does work. See P.G. Doctors’ Hosp. v. Health Serv. Cost Rev. Comm’n, 302 Md. 193, 204 , 486 A.2d 744, 749-750 (1985) (the Commission’s use of the Guaranteed Inpatient Review (GIR) System was within the authority of the Commission despite the fact that the method had imperfections).

With the implementation of the SCF, the record shows that the IAS is constantly being improved. See P.G. Doctors’ Hosp., 302 Md. at 209 , 486 A.2d at 752 (the Commission’s use of the “market basket” methodology was within the Commission’s statutory authority despite the fact that the method had been altered over time). Simply because a methodology has been refined does not mean' that it was initially defective. 302 Md. at 209 , 486 A.2d at 752 . The Commission’s authority to employ the IAS is reinforced by the General Assembly’s acquiescence in the 22 years that the IAS has been utilized by the Commission.

Section 19-212, which delineates the Commission’s duties, has been amended four times since the IAS was first implemented in 1976, and § 19-219, which permits use of “alternate ratesetting methods,” has been amended five times since 1976. In fact, in 1985, the General Assembly, added § 19-219(b)(3) which specifically allows the Commission “to take into account objective standards of efficiency and effectiveness” when “determining the reasonableness of rates.” The General Assembly has had numerous opportunities to forbid the use of, or even limit the use of, the IAS, yet it has not done so.- The Legislature has not reduced the Commission’s authority and, with the addition of section 19-219(b)(3), has even expanded that authority. Finally, when the statutory provisions governing the Commission’s authorizing statute were amended this year, after the present case was filed, the General Assembly failed to make any relevant changes to the statutory provisions at issue in this case. Since the IAS methodology has been utilized by the Commission for 22 years without any legislative change, there is “a strong presumption that the agency’s interpretation [of the statute] is correct.” Falik v. ⁵⁹³ Prince George’s Hosp., 322 Md. 409, 415-416 , 588 A.2d 324, 327 (1991).

In addition to the statute’s plain language and the Legislature’s inaction over the past 22 years, the General Assembly has made one goal clear which provides further legislative justification for the use of the IAS. The Commission has been told repeatedly by the General Assembly to maintain the so-called “Medicare waiver,” which is considered to be “the foundation of Maryland’s hospital payment system.” Ch.112 of the Acts of 1985, Laws of Maryland 1985 at 1544. See § 19—214(b)(5). Under Maryland’s “all-payor” system, which was implemented in 1977, all payors of hospital care in Maryland generally pay the same Commission-set rates.

This enables Maryland hospitals to provide care for the uninsured. In order for this system to be carried out, the federal Medicare program has waived application of its reimbursement rates in Maryland. Consequently Commission rates also apply to Medicare reimbursement. To keep this waiver, Maryland hospitals’ aggregate rate of increase in costs per hospital inpatient admissions must not exceed the rate of increase for admissions with respect to all hospitals in the nation.

See 42 U.S.C. § 1395 (f)(b)(3)(B). Therefore, in order to maintain the Medicare waiver, the Commission must do a national rate comparison. Under the IAS, the national inflation rate in certain goods is applied in order to adjust rates from the previous year. In light of the Commission’s mandate to keep rates below the national rate of increase, use of the national inflation rate is reasonable.

The Commission’s authority to use the IAS is further supported by our prior opinions dealing with the Commission. In Franklin Square I, 277 Md. 93 , 352 A.2d 798 , we addressed the issue of whether or not the Commission was required to approve rates proposed by a hospital whenever those rates were reasonable. We answered that question in the negative, holding that the Legislature intended to give the Commission “broad authority over the financial affairs of hospitals.” 277 Md. at 111 , 352 A.2d at 809 . Accordingly, we concluded that the Commission was “empowered to approve that rate struc ⁵⁹⁴ ture which it finds to be most reasonable under the circumstances,” and was not required “to defer to the hospital’s view of reasonableness in cases of conflict.” 277 Md. at 110, 113 , 352 A.2d at 809, 810 .

After Franklin Square I was remanded to the trial court and the judgment was modified, the case was again appealed to this Court in order to determine if the modified judgment was consistent with this Court’s prior opinion. Health Serv. Cost v. Franklin Sq., 280 Md. 233 , 372 A.2d 1051 (1977) (Franklin Square II). In Franklin Square II, we held that the trial court’s modified judgment was inconsistent with this Court’s opinion in that it required the Commission to include certain cost factors in rate determination without a finding by the Commission that inclusion was appropriate in each particular case. 280 Md. at 241 , 372 A.2d at 1055 .

This Court held that, in order for the Commission to exercise its broad authority to set reasonable rates, the Commission’s setting of rates “must of necessity be determined on a case-by-case basis,” and that “[ajbsolute rules concerning cost factors, applicable to all hospitals under all circumstances ... are ... inappropriate.” 280 Md. at 241 , 372 A.2d at 1055 . Contrary to the contentions of the plaintiffs, the Commission’s implementation of the IAS is not inconsistent with this Court’s decision in Franklin Square II. During the past 22 years in which the IAS has been in use, hospital rates in Maryland have been determined on a case-by-case basis. Although the national inflation rate is uniformly applied to all hospitals under the Commission’s authority, the individual circumstances of each hospital have been taken into account annually, resulting in a wide range of hospital rate increases per year.

For example, in 1996-97, the individual hospital rate changes ranged from -1.78% to + 20.41%. The wide range of rate changes is the result of the' particularized findings of the Commission in the application of the IAS to each hospital. As discussed previously, the application of the national inflation rate varies from hospital to hospital because the rate is indexed and applied according to ⁵⁹⁵ the individual hospital’s category-specific cost structure. For example, a hospital carrying a larger burden in salaries and fringe benefits compared to equipment would have the inflation rate applied differently than a hospital with elevated equipment costs and lower salary costs.

In addition, according to the Commission’s staff, the IAS takes into account the particular circumstances of individual hospitals in numerous ways: “Uncompensated care mark-ups are provided based on a hospital’s actual values of characteristics that are statistically significant in