Case Title: Dept. of Health v. Chimes

Citation: 343 Md. 336

Docket Number: 94/95

State: maryland

Court: Maryland Supreme Court

Date: 1996-08-27T00:00:00Z

Document:
IN THE COURT OF APPEALS OF MARYLAND
No. 94
September Term, 1995
_____________________________________
DEPARTMENT OF HEALTH AND MENTAL
HYGIENE
v.
CHIMES, INC.
____________________________________
Murphy, C.J.
Eldridge
Rodowsky
Chasanow
Karwacki
Bell
Raker,
JJ.
____________________________________
Opinion by Murphy, C.J.
    Bell, J. dissents.
____________________________________
       Filed:  August 27, 1996
The issue in this case is whether the Developmental
Disabilities Administration in the Department of Health and Mental
Hygiene violated the Maryland Administrative Procedure Act by
instituting a cost containment measure without following "notice
and comment" or emergency rulemaking procedures.
I
In 1952, the Commission on Administrative Organization of the
State, appointed by Governor McKeldin, recommended adoption of the
1946 Model State Administrative Procedure Act (MSAPA) "to the end
that administrative agencies may be subjected to essential controls
but not unduly hampered in the performance of their functions."
Seventh Report of the Commission on Administrative Organization of
the State 70 (1952).  That statute was designed to ensure that
"certain basic principles of common sense, justice and fairness,"
including 
notice 
to 
interested 
parties, 
are 
applied 
in
administrative procedures, Id., "without unduly restricting the
agencies in the performance of their various tasks."  Id. at 8; see
also Maryland Code (1995 Repl. Vol., 1995 Supp.) § 10-201 of the
State Government Article (declaration of policy); Commission to
Revise the Administrative Procedure Act, Initial Report on
Subtitles 2 and 4 of the APA 2 (1992).  The Maryland Administrative
Procedure Act (APA), adopted by Ch. 94 of the Acts of 1957 and
based on the MSAPA, therefore, sought to balance the State's
interest in efficient administration against the individuals'
interest in fairness.  Cf. Bonfield, State Administrative Rule
      Section 10-101(g) (formerly paragraph e) of the APA defines
1
"Regulation" as follows:
(1) "Regulation" means a statement or an amendment or
repeal of a statement that:
(i) has general application;
(ii) has future effect;
(iii) is adopted by a unit to:
1. detail or carry out a law that the unit
administers;
2. govern organization of the unit;
3. govern the procedure of the unit; or
4. govern practice before the unit; and 
(iv) is in any form, including:
1. a guideline;
2. a rule;
3. a standard;
4. a statement of interpretation; or
4. a statement of policy.
(2) "Regulation" does not include:
(i) a statement that:
1. concerns only internal management of the
unit; and
2. does not affect directly the rights of the
public or the procedures available to the
public;
(ii) a response of the unit to a petition for
adoption of a regulation under § 10-123 of this
subtitle; or
2
Making § 1.2.2 (1986 & Supp. 1993) (discussing the 1981 MSAPA);
Woodland Private Study Group v. State, 109 N.J. 62, 533 A.2d 387,
393 (1987) (in determining whether the intra-agency statements
exception from the New Jersey APA applies, the court focuses upon
"whether the agency's interest in streamlined procedure is
outweighed by the importance of the interests that are affected.");
see also Emma Ah Ho v. Cobb, 62 Haw. 546, 617 P.2d 1208, 1213
(1980) (discussing the federal APA contracts exception).
The 
APA 
requires 
State 
agencies 
to 
submit 
proposed
regulations  to the Attorney General for approval as to legality,
1
(iii) a declaratory ruling of the unit as to a
regulation, order, or statute, under Subtitle 3 of
this title.
(3) "Regulation", as used in §§ 10-110 and 10-111.1,
means all or any portion of a regulation.
3
§ 10-107(b) of the State Government Article, and also to the Joint
Committee on Administrative, Executive, and Legislative Review
(AELR Committee) for preliminary review 15 days prior to
publication.  § 10-110(b).  The agency must publish the proposed
regulation in the Maryland Register and may adopt the regulation 45
days later.  § 10-111(a)(1).  For 30 out of the 45 days, the agency
must accept public comment on the proposed regulation.  § 10-
111(a)(3).  The AELR Committee may delay adoption of the regulation
to allow more time for review.  § 10-111(a)(2)(i).  The AELR
Committee considers whether the regulation is in conformity with
the statutory authority of the agency and the legislative intent of
the statute under which the regulation is promulgated.  § 10-
111.1(b).  If the AELR Committee votes to oppose adoption of the
regulation, the agency may withdraw or modify the regulation, or
submit it to the Governor for approval.  § 10-111.1(c)(2).  The
Governor may then order the agency to withdraw, modify, or adopt
the regulation.  § 10-111.1(c)(3).  Notice of the adoption of the
regulation must be printed in the Maryland Register.  § 10-114.
This process is commonly known as "notice and comment" rulemaking.
The APA also provides for "Emergency Adoption" of regulations.
If an agency deems it necessary, § 10-111(b)(1) allows immediate
4
adoption of regulations by submitting the regulation and a fiscal
impact statement to the AELR Committee.  A majority of the AELR
Committee or the chair or co-chair may approve the regulation.  §
10-111(b)(2)(i).  A public hearing must be held at the request of
any member of the AELR Committee.  § 10-111(b)(2)(ii).  The circuit
courts must declare invalid any regulation adopted in violation of
these procedures.  § 10-125(d).
II
The Developmental Disabilities Administration (DDA) in the
Department of Health and Mental Hygiene is charged with developing
a State plan to provide services to persons with developmental
disabilities through "consultation, cooperation, contract, or
direct operation" of facilities.  Maryland Code (1994 Repl.Vol.,
1995 Supp.) § 7-303 - 305 of the Health-Gen. Article.  DDA may
provide for community-based residential programs such as public or
private group homes or alternative living units.  § 7-601.  The
Chimes, Inc. is one of 93 private entities with which DDA contracts
to provide such services.
In 1987, DDA established by regulation the "Prospective
Payment System" (PPS) for reimbursement of private providers.  Code
of Maryland Administrative Regulations (COMAR) 10.22.17.  The
regulation incorporates by reference the "Prospective Payment
System for Community Services to the Mentally Retarded and
Developmentally Disabled Clients Procedures Manual (First Edition)"
(Manual).  COMAR 10.22.17.02.A.  The Manual explains that the PPS
5
is "a system based on a fixed price per day per client."  Manual at
800-3.  It is intended to give providers the incentive to provide
quality care efficiently and the flexibility to develop innovative
programs, as well as to give accountability to providers and DDA.
Id.  
To be included in the PPS, a provider must operate under a
grant contract for two years, giving DDA the opportunity to review
the provider's costs.  When a provider is accepted into the PPS, it
is exempted from the State's competitive bidding requirements.
Maryland Code (1995 Repl.Vol., 1995 Supp.) § 11-101(n)(2)(iii) of
the State Fin. & Proc. Article.
Under the PPS, payments to providers are based on two
categories of costs or "cost centers."  COMAR 10.22.17.10.A.  The
first is the Client Assessment Sub-System, or "the costs of
providing routine services to clients," COMAR 10.22.17.01.B.(25),
and is not at issue in this case.  The second set of cost centers
is the Provider Component which includes administration, general,
capital, 
special, 
and 
transportation 
costs. 
 
COMAR
10.22.17.01.B.(51).  DDA bases reimbursement rates upon reports
submitted by the providers.  COMAR 10.22.17.06.  DDA eliminates
costs that are not reimbursable, such as advertising and lobbying
expenses, COMAR 10.22.17.13, and adjusts the reimbursement rate for
inflation and attendance rates.  Manual at 800-9.  
Sections 7-205 and 7-234(a) of the State Finance & Procurement
Article prohibit State agencies from spending money in excess of
6
budget 
appropriations. 
 
The 
DDA 
regulation, 
accordingly,
establishes that the PPS "is subject to the budget appropriations
approved by the Legislature."  COMAR 10.22.17.02.E.  The regulation
further provides: 
The Department may take cost containment measures to
control total expenditures on the prospective payment
system.  These cost containment measures may include, but
are not limited to: 
(1) Sharing in any surplus on prospective payments
less actual cost; 
(2) Establishing limits on the percentage of the
prospective payment rate for any cost center.
COMAR 10.22.17.08.A.  In addition, the Manual provides that
"[o]ther cost containment measures for budgetary control may also
be necessary."  Manual at 800-8.  The regulation and the Manual
were incorporated into the "Provider Agreement" between DDA and
Chimes in paragraph IA in which Chimes agreed to comply with the
applicable statutes and regulations, as well as "transmittals and
guidelines issued by the Department."
To stay within budget appropriations, DDA has instituted
numerous cost containment measures over the years.  In fiscal year
(FY) 1990, DDA set a ceiling for certain cost centers at one
standard deviation above the average cost for all providers.  DDA
cut the annual inflation rate from 6% to 2.5% in FY 1991 and again
to 0% in FY 1993.  In FY 1992, DDA froze the hourly rates in the
Client Assessment Subsystem.  In FY 1993, the ceiling rate was
calculated using a weighted average and was cut to .75 standard
deviations above the mean.  Beginning in FY 1993, DDA cut $37 per
      Beginning in FY 1996, DDA voluntarily followed APA
2
procedures in imposing the "growth cap."  See Notice of Emergency
Action, 22 Md. Reg. 1654 (1995).
7
client per month from each provider's rate for 21 consecutive
months.  Providers were notified of these cost containment measures
by memoranda from DDA.  Although the agency did not follow APA
"notice and comment" or emergency rulemaking procedures in
instituting these cost containments, no provider challenged any of
these actions prior to this case.
In August 1993, DDA met with members of the Maryland
Association of Community Services to discuss reimbursement rates
for FY 1994.  DDA subsequently notified providers in individually-
addressed memoranda that it was taking several steps to control
costs.  At issue here is DDA's limitation on the growth in the
administration, general, capital, and transportation cost centers
to 7% for providers whose costs were below the mean and 4% for
providers whose costs were above the mean.  In FY 1994, DDA applied
the "growth cap," calculating averages for each cost center
separately.  In FY 1995, DDA again imposed the "growth cap," using
an aggregate of four cost centers to determine whether providers
were above or below the mean.  As a result of this action, Chimes'
reimbursement rate was cut.2
Chimes initially appealed imposition of the "growth cap" to
the PPS Appeal Board, which is empowered to hold evidentiary or
oral hearings on the calculation of the reimbursement rate, the
8
final reimbursement amount, and other disputes between providers
and DDA.  Manual at 700-3, 7.  The PPS Appeal Board delegated its
authority to the Office of Administrative Hearings (OAH).  The
parties 
filed 
cross 
motions 
for 
summary 
decision. 
 
The
Administrative Law Judge (ALJ), ruled in favor of DDA.  OAH, the
ALJ held, "may rule on whether a statute or regulation was
appropriately applied by the agency, but has no authorization to
determine the validity of the regulation itself," and was, thus,
without jurisdiction in this case.
Chimes then filed a Complaint for Declaratory Judgment in the
Circuit Court for Baltimore County  claiming that DDA's adoption of
the 4%/7% "growth cap" violated the rulemaking procedures required
under the Maryland APA.  Both parties filed motions for summary
judgment.  Following a hearing, the circuit court held, on January
25, 1995, that the "growth cap" was a regulation under the APA and
was not within the "internal management" exception of § 10-
101(g)(2)(i) of the APA.  The court also rejected DDA's contention
that the existing regulation (COMAR 10.22.17.08.A) grants DDA the
authority to implement cost containment measures without following
APA rulemaking procedures.  It declared the "growth cap" invalid
and later granted supplemental relief in the amount of $941,788 for
FY 1994 and a similar amount for FY 1995, to be determined at the
end of the fiscal year.  DDA appealed to the Court of Special
Appeals.  Before arguments in that court, we granted a Writ of
Certiorari.
9
III
DDA argues that "[j]ust as an agency must have the discretion
to decide whether to proceed by rulemaking or case-by-case
adjudication, it must also possess the flexibility in applying
existing regulations to respond to the myriad situations that it
routinely confronts in the pursuit of its regulatory mission."
Specifically, it says that the question presented is whether it
must undergo "the rigorous and time-consuming requirements of the
rulemaking process each time it seeks to implement existing
regulations that authorize the State to take cost containment
measures 
to 
stay 
within 
its 
budgetary 
appropriation 
in
administering a government program through private contractors."
It further says that the State's right to limit the amount that
contractors may be reimbursed for their overhead costs does not
constitute a quasi-legislative judgment giving rise to a new rule,
but rather amounts to no more than the specific application of the
core authority that underlies the entire PPS.  In this regard, DDA
explains that its action effected no change in existing law but
merely applied a regulation that notified all participants in the
PPS that the State has the right to impose the same cost
containment measure that was implemented in this case.  According
to DDA, requiring that it amend its regulation each time it must
account for unpredictable contingencies constitutes an unnecessary
and costly burden on the State at the expense of proper efficient
and effective government.  Thus, DDA maintains that it was
10
authorized to impose cost containment measures without following
APA rulemaking procedures.
In Consumer Protection v. Consumer Pub., 304 Md. 731, 501 A.2d
48 (1985), the Maryland Attorney General proceeded by adjudication
against a company which sold diet pills through the mail, alleging
that its advertising was false and misleading in violation of the
Maryland Consumer Protection Act.  Id. at 737.  The company claimed
that since the same advertising practices were used industry wide,
the rule would apply to many companies, and the Attorney General
should have proceeded by rulemaking as required by the APA.  Id. at
753.  We held that the Attorney General was not required to proceed
by rulemaking because he "did not change existing law or even
formulate rules of widespread application."  Id. at 756.
We again declined to require formal rulemaking procedures in
Balto. Gas & Elec. v. Public Serv. Comm'n, 305 Md. 145, 501 A.2d
1307 (1986).  The Public Service Commission, when determining
whether a utility is entitled to a fuel rate adjustment, is
authorized by statute to consider whether the utility's plants
operate at a "reasonable level."  Id. at 152.  The Commission
partially denied BG&E's requests for fuel rate adjustments to
recover the costs of purchasing supplemental power during forced
outages at BG&E's plants.  The Commission determined that the
outages were partially due to "managerial imprudence" and, thus,
the plants were not operating at a "reasonable level."  Id. at 153-
55.  We held that the Commission was not required to proceed by
11
rulemaking because the Commission had not applied "materially
modified or new standards ... retroactively to the detriment of a
company that had relied upon the Commission's past pronouncements."
Id. at 169.
The only time we have mandated that an agency proceed by
rulemaking was in CBS v. Comptroller, 319 Md. 687, 692-93, 575 A.2d
324 (1990).  In that case, the Comptroller used a new method of
calculating Maryland's share of CBS's advertising receipts.  Id. at
690.  We held:
The effect of the Comptroller's audit was to announce a
substantially new generally applicable policy with
respect to apportionment of the network advertising
income of national broadcasting corporations.  That
change, for practical purposes, amounted to a change in
a generally applicable rule.  Unlike the agency action in
Consumer Protection, it was an effective "change [in]
existing law" and did "formulate rules of widespread
application."  Unlike the agency action in Baltimore Gas
& Elec. it was "a case ... in which materially modified
or new standards were applied retroactively to the
detriment of a company that had relied upon the
[agency's] past pronouncements.
Id. at 699.
IV
In this case, DDA did not formulate new rules of widespread
application, change existing law, or apply new standards
retroactively to the detriment of an entity that had relied upon
the agency's past pronouncements.  The "growth cap" at issue here
applied only to a limited number of providers in their capacity as
contractors with a state agency pursuant to contracts between the
12
parties subject to termination by either side.  Furthermore, the
"growth cap" applied only in a particular program, in a particular
year, and in response to a particular budget crisis.  Thus, the
"growth cap" was not a rule of widespread application.
The "growth cap" did not, as we said, change existing law.
Both the statute and regulation limited DDA's expenditures to
budget appropriations and the regulation and Manual provided for
cost containment.  The regulation specifically contemplated the
need for "establishing limits on the percentage of the prospective
payment rate for any cost center."  COMAR 10.22.17.08.A.  The
"growth cap" merely effectuated these policies, but did not change
the law.  Cf. Radiological Soc. v. New Jersey State Dept., 208
N.J.Super 548, 506 A.2d 755, 760 (1986) (policy statement need not
be promulgated as regulation where it "was simply a re-affirmation
of the certificate of need requirements already enunciated in
existing regulations... and does not constitute a material and
significant change from a clear, past agency position."); Bendix
Forest Etc. v. Div. of Occup. S. & H., 158 Cal.Rptr. 882, 600 P.2d
1339, 1344 (1979) (state agency did not engage in rulemaking when
it required an employer to provide gloves for employees, but merely
implemented a regulation that provided "[h]and protection may be
required for employees....").
Finally, the "growth cap" did not apply new standards
retroactively to the detriment of an entity that relied on prior
agency 
pronouncements. 
 
The 
"growth 
cap" 
did 
not 
apply
13
retroactively, but was instituted to control costs in the current
fiscal year.  The regulation and the Manual notified the providers
that reimbursement was limited by budget appropriations and DDA had
instituted numerous cost containment measures previously.  In
addition, DDA notified the providers that it needed to implement
additional measures in FY 1994 and afforded them the opportunity to
discuss various options for controlling costs.  
Chimes' interest in fairness was substantially honored,
despite the lack of APA procedures.  On the other hand, DDA had a
strong interest in adopting a cost containment policy as quickly as
possible.  DDA's FY 1996 adoption of the "growth cap" as a
regulation through emergency adoption procedures took months to
complete.  Such a time lag is a huge burden on an agency
administering a complex program such as the Prospective Payment
System.  As Judge Eldridge said for the Court in Judy v. Schaefer,
"flexibility is needed in the administration of the budget in order
for the State to run efficiently and to avoid deficits."  331 Md.
239, 261, 627 A.2d 1039 (1993) (upholding statute authorizing
Governor to reduce budget appropriations by up to 25%).
    We hold, therefore, that following the standards enunciated in
CBS, Balto. Gas & Elec., and Consumer Protection, the "growth cap"
was not a "regulation" in the sense contemplated by the APA and
need not have been promulgated according to APA rulemaking
procedures.  See also Dep't v. Lions Manor Nursing Home, 281 Md.
425, 430 (1977) (nursing home vendor payment schedule was valid as
14
a contract amendment regardless of its status under the APA).
JUDGMENT REVERSED; COSTS
TO BE PAID BY APPELLEE