The rule at issue w as o ri gi n ally promulg ated by

the Texas Workers’ Compensation 1 Commi ssion in 1997, but t he leg islature abolished the TWCC i n 2 0 0 5 and transferr ed its duties and rule s to the Division of W orker s’ Compensation within the Tex as Department of I nsuranc e. See Act of Ma y 29, 2005, 79th L eg ., R.S., ch. 265, §§ 8.001(b), .004(a) , 2005 Tex. Gen. L aws 468, 607- 11. I n light of this cha ng e, we ref

er to the a g ency

throug hout this o p i n i o n as either the “Commissi on” or the “Division.” 

### TEXA S C OU R T OF A PPEAL S, THIR D DIST R ICT , AT AU STIN

NO. 03-0 7 -00 682 -CV

Texas Mutual Ins urance Com pany, L iberty M utual In surance Com pany, Ze nith In surance Com pany an d Zurich Am eric an In surance Com pany , Appellan ts
v. Vi st a C om m unit y M e dic al C e nt e r , LL P , d/ b/a Vi st a M e dic al C e nt e r Hos pit al; Christus Health Gulf

Coast; and The Texas Departm ent of In surance, Division of Workers’ Com pensation , Appellees

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 353RD JUDICIAL DISTRICT NO. D-1- GN-06- 0002 13 , HO NORAB LE MARGARET A. COO P ER , JUDGE PRESIDI NG

O P I N I O N This appea l conce rns a c halleng e t o the validity of a r ule promulg ated by

the Texas Depar

tment of I nsuranc e, Divisi o n of Workers’ Compensation, reg ardinghospital 1 fee reimburse ment for inpatient se rvice s to injured worke rs’ c ompensation p at i ents. See2 2 T e x. Reg . 6264-308 (July

4, 1997) (or iginally

codified at 28 Tex. Admi n. Code § 134.401), repeale d , 33 Te x. Re g . 5 31 9 (J ul y

4, 20 08 ). Ap pe lle e Vi sta Com mun ity

Me dic a l Ce nte r, L L P, d

/b/ a Vi staRu l e 1 3 4.401 was a dopted in 1997, see22 Te x. Re g . 6 26 4 ( July 4, 19 97 ), and

fo rm e rl y 2 codified at 28 Tex. Admin. Code § 134.401 (2007), but has since been r epea led. See3 3 T ex . R eg. 5 3 1 9 ( Ju ly 4 , 2 0 0 8 ) ( r e p e a li n g Ru le 1 3 4
. 4 0 1 )
. B e c a u s e th e 1 9 9 7 r

u le r e ma in s in e ffe ct for a dmissions occur

ri n g p ri o r to its repeal e ffe ctive Mar ch 1, 2008, we ref er to the r

ule as “Rule 134.401” or

the “1997 guideline.” The Worker s’ Compensation Act wa s initi ally located in a

rticles 8303-1.01 through 8308- 3 11.10 of the Te x as Revised Civil St atutes, but was c odified in the l abor c ode in 1993. SeeAct of May 12, 1993, 73rd L eg ., R.S., ch. 269, 2003 Tex. Gen. L aws 987. 2 Medica l Center Hospital filed suit ag ainst the Division and appellant Te x as Mutual Insuranc e Com pa ny in a me dic a l f e e re imb ur s e m e nt

d i s p ut e s e e k inga

de c lara tor y jud g me nt t

hat th e “ Sto p- L os s Ex ception” in Rule 134.401 wa s inv a lid . A no the r h os pit a l, a pp e lle e Chr ist

us He a lthGu lf

Coa st, 2

and se ve ra l insu ra

nc e c arr ie rs , in c lud inga

pp e lla nts L ibe rt y Mu tua l Ins ur anc e Com

pa ny , Z e nit h I nsuranc e Company , and Z urich Americ an I nsuranc e Company , intervene d and soug ht competing decla rations re g ardingthe validity of Rule 134.401. The trial court severe d the parties’ claims for decla ratory relief and, af ter a bench tr ial, issued a fina l judgment g ranting decla ratory relief in favor of the hospitals and reje cting the Division’s inter pretation of the Stop-L oss E x ception. Be cause we
c on c lud e the re wa s e rr or

in the tr ia l c ourt ’s jud g me nt, we a ff ir m the tr ia l c ourt ’s jud g me nt i n p art , and re ve rs e and

re nd e r i n p art
.
F ACTUAL AND P ROCEDURAL BACK GR OUND I n 1989, the Texas L eg islature enact ed a new Workers’ Compensation Ac t that restruc tured wor

kers’ compensation law in Texas. SeeTex. L ab. Code Ann
. §§ 401.001-506.002 ( We s t 2 0 0 6 & Su

p p . 2 0 0 8). T h e Act cha rg ed the Division with the difficult task of de veloping 3 medical f ee r eimburseme n t guidelines that would ensure quality medical c are for injure d worke rs and ac hieve e ffe ctive medica l cost control. Id. § 4 13 .0 11 ; see also P atient Advocate s v. Texas3

W orkers’ Comp. Comm’n , 80 S.W .3d 66, 71 (Tex. App.—Austin 2002), aff ’d in p ar t, r e v ’d

in p ar t , 136 S.W .3d 643 (Tex. 2004). To satisfy its legislative mandat e t o balanc e these competing leg islative policy

g oals, the Division adopted the 1992 hospital re imbursement g uideline, which wa s invalidated by

this Court i n 1995 for lack of a reasoned justification. See Tex as Hosp. Ass’n v. Tex as W orkers’ Comp. Comm’n , 911 S.W .2d 884, 8 8 5 -86, 888 (Te x . App.—Austin 1995, writ denied) (dec laring“Rule 400” v o i d beca use it failed to include r easone d justification as requir ed by section 2001.033 of the APA). I n the wake of this Court’s decision, the Division adopted the 1997 g uideline, including the Stop-L oss Ex ception, at issue in this appea l. See22 Tex. Reg. 6264.
The 19 97 Gui de line Wit h cer tain exceptions, the 1997 g uideline provides that hospitals ar e to be reimburse d for inpatient a dmissions under a standard per diem methodology based on the categ ory of admission. Se e ge ne ra lly Rule 134.401(c) (1)- (2). The 19 9 7 gu i d el i n e also spec ifies two exceptions to the standar d per die m reimburseme nt methodology
. Id. 134.401(c) (2)( C). These two exceptions apply o n a ca s e-by -ca se basis and inc lude the “T rauma -B urn-HIV,” or “TB HI V,” exception, and the St op-L oss Ex ception. See id. 134.401(c) (5) & (6). Only the Stop-L oss Ex ception is at is su e in t

his a pp e a l. Withre g ard

to t he Sto p- L os s E xce pti on , Ru le 13 4. 40 1( c )( 6) pr ov ide s:
Sto p- los s is an in de pe nd e nt r e imb ur se me nt m e tho do logy e sta bli sh e d to e ns ur e fa ir and re asonable compensation to the hospit al for unusually costly service s rende red during treatment to an injured worke r. This me thodology shall be used in plac e of and no t in a dd iti on to t he per diem

ba se d r e imb ur se me nt s y ste m. T he dia g no sis c od e s sp e c if

ie d in pa ra g ra ph(5 ) o f t

his su bs e c tio n a

re e xemp t f

ro m th e sto p- los s4

me tho do log y

and the e nti re a dmi ssi on

sh a ll be rei mb urse d at a

fa ir and re a so na ble rate
. (A) Ex planation ( i) To b e e li g ib le f

o r s to p - lo s s p ay

me n t th e to ta l a

u d it e d c h ar g e s for a ho sp ita l a dmi ssi on

mus t e xce e d $ 40 ,0 00 , th e min imum st op -l os s threshold. ( ii ) Th is s to p - lo s s thr e s h o ld is e s ta b li s h e d to in s u r e c o mp e n s a ti o nf or unusually extensive service s require d during an admission. (iii) I f audited char g es ex cee d the stop-loss threshold, reimburse ment for the entire admission shall be paid us ing a S top-L oss Reimbursement Fa ctor (SL RF) of

75%. (iv) The Stop-L oss Reimbursement Fa ctor is m u ltipli ed by the total audited cha

rg es to deter

mine th e Workers’ Compensation Reimbursement Amount (WCRA) for the a dmission. (v) Audited cha

rg es ar e those c harg es which remain after a bill review by the insuranc e ca

rrier has been perf

ormed. Those cha

rg es which ma

y be deduc ted are persona l items (e.g ., telephone, te levision). I f an onsite audit is perfor

med, cha

rg es for service s which ar e not documented a s rende red dur ing the admission may be deduc ted. The fo rm ula to o bta in a

ud ite d c ha

rg e s is a s f

oll ow s: Tot a l Ch arg e s - De du c te d Ch arg e s = Au dit e d Ch arg e s. (B ) For

mula. Audited Charg es x S L RF = WCRA. (C) Ex ample. Total Char g es : $108,000; Deducted Cha rg es: $8,001; Audited Charg es: $99,999. $99,999 x 75% = $74,999.25 ( WC RA).
Rule 134.401(c) (6). I n addition, Rule 134.401 also define s the terms “Stop-L oss Payment,” “StopL oss Reimbursement Fa ctor,” and “Stop-L oss Threshold.” Id. § 1 34 .4 01 (b )( 1) (F )- (H ). Sto p- L os s Pay ment is “[a] n independe nt method of pay ment for a

n unusually

costly o r l en gt h y

stay .” Id. § 134.401(b)( 1)(F ). Stop-L oss Reimbursement Fa ctor is “[a] fac tor established by the Commiss ion5

to be used a s a multipli er to e stab l i s h a re imbursement amount when the total hospital charg es have e x cee ded spec ific stop-loss thresholds.” Id. § 134.401(b)( 1)(G) . Stop-L oss Threshold is “[the] Th res ho ld of

tot a l c ha

rg e s e sta bli sh e d b y

the Com mis sio n, be y on d w hic h r e imb ur se me nt i s calc ulated by

multipl ying the applicab l e Stop-L oss Reimbursement Fa ctor by the total char g es identifying that particular threshold.” Id. § 134.401(b)( 1)(H)
. Rul e 13 4. 40 1 a lso se ts f

or th c e rt a in g e ne ra l in fo rm ati on a s f oll ow s: A ll h os pit a ls must bill their “usual and customar y char g es.” Id. § 134.401(b)( 2)(A)
. Hospital reimburseme nt for acute car e hospital inpatient service s rende red shall be the lesser of pre- neg otiated rates betwe en the hospital and ins uranc e carrie r, t he hospital’s usual and c ustomary char g es, or r eimbursement a s set out in subsection (c) of Rule 134.401 for the pa rticular a dmission. Id. § 134.401(b)( 2)(A) (i)-( iii). Ad ditio na l Re imb ur se me nts a s o utl ine d in su bs e c tio n ( c )( 4) wi ll b e de te rm ine d o n a c a se -b y -c a se basis within the guide lines established fo r t he spec ific ser vices re ndere d. Id. § 134.401(b)( 2)(B ). Fin al l y , all hospital charg es ar e subjec t to audit as descr ibed in the Commiss ion’s rules. Id. § 134.401(b)( 2)(C).
Medical Fee D isput

es I n 2 00 1, wi th he a lth c are c os ts ri sin g , the Di vis ion be g an to se e a

c or re sp on din g ri se in the number of me dical fe e disputes betwe en hospitals an d i n s u ra n ce car riers. U nder the labor
c od e , a he a lthc are pr ov ide r d iss a tis fi e d w itha c a rr ie r’ s pay

me nt ca n fil e an a dmi nis tr a tiv e dis pu te with the Division. SeeTex. L ab. C ode Ann. § 413.031(a) (West Supp. 2008). A Division employ ee known as a

medical disput e resolution office r, or MDRO, revie ws the complaint and doc umentation filed by the provider

and the c arr ier and deter

mines the appropr iate reimburse ment due the pr oviderTh e re wa s a wi nd owof

tim e bet ween 20 05 and

20 07 wh e n a

pa rt y wa s n ot e nti tle d to 4 re qu e st a he ari nga t SO AH . In 2 00 5, the L e g isl a tur e a me nd e d s e c tio n 4 13 .0 31 (k ) t o e lim inate the option of reque sting a hear ing a

t SOAH in a medica l fee dispute. SeeAct of Ma y 29, 2005, 79th L eg ., R.S., ch. 265, § 3.245, 2005 Tex. Gen. L aws 469, 554 (a mending section 413.031(k) of the labor c ode). B ut, in 2 0 0 7 , the L eg islature re -wrote section 413.031(k) ag ain and r estored the option of reque sting a SOAH hearing befor e seeking judicial revie w i n a medica l fee dispute. See Act of Ma

y 23, 2007, 80th L eg ., R.S., ch. 1007, § 1, 2007 Tex. Gen. L aws 3525, 3525 (c odified at Tex. L ab. Code Ann. § 413.031( k) (West Supp. 2008)). 6 under the labor code and the Division’s rules. See id. § 413.031(c) ; 28 Tex. Admin. C ode § 133.307 (2007). I f either

party is dissatisfied with the MDRO’s decision, that par ty can r equest a

hear i ng befor e an Administrative L aw J udg e at the State Offic e of Administrative Hea ring s (SOAH). See Tex. L ab. Code Ann. § 413.031(k). Under the labor c ode, the AL J issues the final administrative 4 order
. See id. §§ 402.073(b) (West Supp. 2008), 413.031(k) . But a party may seek judicia l review of the AL J ’s orde r in a Tr avis County District Court under the substantial e vidence rule. See id. § 413.031(k-1)
.

M a ny o f t h e s e a d m i n i s t r a t i v e f e e d i s p ut e s c o n c e rn e d th e a pp lic a bil ity of the Sto p- L os s Ex ce p t i on. The hospitals argued that the Stop-L oss Ex ception applied wheneve r the a udited char g es for

a par tic u l ar admi ssion ex cee ded $40,000. The hospitals thus urge d that whene ver the audited c harg es for

a par ticular a dmission ex cee ded $40,000, reimburse ment should be paid at 75% of the total a

udited char g es using the Stop-L oss Re imbursement Fa ctor in Rule 134.401. See Rule 134.401(c) (6)( A)(iii). The insurance car riers disag ree d and argued that re imbursing a hospital
a dmi ssi on

a t 7 5% of th e tot a l a

ud ite d c ha

rg e s any tim e tho se c ha

rg e s e xce e de d $ 40 ,0 00 wo uld produce a windfa ll for the hospitals and def eat th e s t at u tory

objective of

achie ving e ffe ctive medical c ost control. Acc ording ly , th e ca rr i er s urg ed that, in addition to total audited char g es7

exceed i n g $40,000, a hospital must prove that an a dmission i nvolved “unusua lly costly ” and “unusually

exte n s i v e” service s, befor e the Stop-L oss Ex ception applied. E ssentially , the ca rrier s
argue d th a t the ho sp ita ls mus t sat isf y a tw o- pr on g e d te st b e fo re re imb ur se me nt u nd e r t he Sto p- L os s Ex ception applied.

When resolving these initial administrative disputes, the Division’s MDROs issued conflictingopinions reg arding the applicability of t he S top-L oss Ex ception. Some MDROs applied the Stop-L oss E x ception whene ver total a udited char g es exceede d $40,000, and so m e MDROs
a pp lie d th e Sto p- L os s E xce pti on on a c a se -b y -c a se ba sis on ly to t ho se c a se s invo lvi ngunus ua lly
c os tly and un us ua lly e xten siv e se rv ic e s w he re tot a l a ud ite d c ha

rg e s ex ceede d $4 0, 00 0. F or tho se
case s appea led to SOAH, the first SOAH de cisions issued in 2001 applied the Stop-L oss Ex ception
on a ca se-by -ca se basis only to those case s i n v o l v i n g unusually costly and unusually

extensive service s in which total audited cha rg es exceede d $40,000. There afte r, SOAH AL J s issued
c on fl ic tin g de c isi on s o n w he n to a pp ly the Sto p- L os s Exc e pti on . L ike the Di vis ion ’s MD RO s, so me AL J s applied the Stop-L oss E x ception whene ver total a udited char g es excee ded $40,000, and othe r AL J s applied the Stop-L oss Ex ception on a c ase- by -ca se basis only in t h o s e ca s es involving unusually costly or unusually

extensive service s where total audited cha rg es excee ded $40,000.
The 20 05 Sta ff Re po rt & Re

sult ing App e als When Allen McDona ld b ec am e Dire ctor of the Medica l Review Division in 2004, he identified a

n internal split among Division employ ees ove r the prope r i n t erp retation and application of the Stop-L oss Ex ception. I n the fa ll of 2004, McDonald or dere d a halt in the issuance of MDRO dec isions in S top-L oss Ex ception disputes until he could investigate furthe r. At theThese appea ls wer e taken during the window of t ime when pa rties wer e not entitled to a 5 hear ing at SOAH. Seenote 4 su pra . The pa

rties have informed the C o u rt t h at t h ese appea ls are ina c tiv e pe nd ingre so lut ion of thi s a pp e a l. 8 J anuar y 2005 public meeting , the Division’s Chairman inquired a bout the inconsis tent ag ency p o s it io n s r e g ar d in g th e St o p - L o s s E xc e p ti o n . M c D o n a ld p r o mi sed t o repor

t b a c k a t t h e n e xt meeting . At the Fe bruar

y 2005 public meeting , McDona ld prese nted t he 2005 S taff Re port, a one
pag e docume nt in which McDona ld explained the proper interpre tation and application of the StopL os s E xce pti on . T he 20 05 Sta ff Re po rt e xpla ine d that in or de r to qua lif y fo r S top -L os s Pa

y me nt, an admission mu s t h av e audited char g es excee ding $40,000 a nd the admission must i nvolve unusually cost l y and unusually

extensive service s. The ag ency Commi ssioners ac knowledg ed Mc Do na ld f

or his pr e se ntatio n b ut t oo k n o o ff ic ia l a c tio n r e g ard ingthe 20 05 Sta ff Re po rt
. Be tween F ebrua

ry 2005 an d J une 2006, Division MDROs applied the two-pa rt interpre tation of t he S top-L oss Ex ception in the 2005 Staff R eport in almost 1,500 disputes. Many of th e s e d is p u te s , in c lu d in g th e d is p u te th a t le d to th is c a s e , w e r e a p p e a le d d ir e c tly

to the dis tr ic t c ourt
. 5
The 2007 En B anc Panel Dec ision

Af te r t he Sta ff Re po rt wa s issu e d in 20 05 , SO AH be g an c on so lid a tin g the Sto p- L os s Ex ception disputes into one docke t for conside ration of thre sho ld leg al issues. This docket wa s assig ned to an e n banc pa nel of nine SOAH AL J s in 2006. I n J anuar y 2007, afte r briefing on a limit ed rec ord, the en banc panel reje cted the Division’s interpre tation and application of the StopL oss Ex ception as e x plained in the 2005 Staff Report a nd held, 7-2, that the Stop-L oss Ex ceptionTh e pa rt ie s a g re e that th e se a

pp e a ls ar e lik e wi se ina c tiv e pe nd ing re so lut ion of thi s a pp e a l. 6 9 applied in any case in which tot al audited char g es ex cee ded $40,000. The en banc panel held that t h i s d o l l ar am o u n tt h r e s h o l d

w a s t h e o n l y

p r e r e qu i s i t e f

o r p ay m e n tu n d e r

t h e s t o p - l o s s m e t h o d
. In
a dd iti on , th e e n b anc pa

ne l he ld t hat a ho sp ita l’ s im

pla nt c ha rg e s, re g ard le ss o f m ark -u p, mus t be used w hen de ci d i n g wh ether the $40,000 threshold has be en met. The en banc panel r ejec ted the c arr ie rs ’ a

rgume nts that im

pla nt c harges sh ou ld b e re du c e d to c os t pl us 10 % a s r e qu ir e d in Rule 134.401 when de termining whether audited cha

rg es excee ded $40,000. Since the issu an ce o f t he en ba nc pane l decision, SOAH AL J ’s have order ed
nume ro us re imb ur se me nts a t 75 % of a ud ite d c ha

rg e s. Mo st c arr ie rs have pai d u nd er pr ote st
and pe rf e c te d a pp e a ls t o th e dis tr ic t c ourt in t he se c a se s. 6
The Trial Cour t’ s J udg ment The instant appe al orig inated in 2006 when Vista appea led one of the many decisions rende red by

the Division’s M DR Os p u rs u ant t o the 2005 Staff Repor t. I n addition to the suit for judicial revie w allowed under the labor code, Vist a sought a de clar ation under se ction 2001.038 of the Administrative Procedure Act, see Tex. Gov’t Code Ann. § 2001.038 (West 2000), re g arding the prope r interpr etation of the Stop-L oss Ex ception, as w ell as a d ec l ar ati on that the 2005 Staff Report was a

n invalidly

adopted r ule. As one of the defe ndant s i n Vi sta’s lawsuit, Texas Mutual filed an a nswer a nd counter claim ag ainst Vista, as we ll as a cr oss-claim ag ainst the Divi sion challeng ing the validity of Rule 134.401 and the Stop-L oss Ex ception. Texas Mutual sought c ompeting de clar ations that the10

1997 g uideline, prope rly

interpre ted: (1) require d that char g es for implants be audited to cost plus 10% bef ore d et er m i ning whether an admission met the $40,000 minimum s top-loss threshold;
and (2 ) r e qu ir e d a

ho sp ita l to pr ov e th at th e servi c e s p ro vid e d in an a dmi ssi on

we re unus ua lly costly and unusually

extensive before t hat admission was entitled to Stop-L oss Pay ment under Rule 134.401. Alternatively , Texas Mutual soug ht a declaration that the Stop-L oss Ex ception wa s invalid beca

use it vi o l at ed statutory

standards a

nd was a n unconstitutional deleg ation of the Di vis ion ’s le g isl a tiv e a

uth or ity to p ri vate pa

rt ie s. Severa l car

riers a nd another

hospital intervened a

nd so u gh t d ecla

ratory relief reg arding the application and va lidity of the Stop-L oss Ex ception. The trial court se vere d the parties’ claims for de clar atory relief from Vista’s a dminist rative a p peal. Af

ter a bench tr ial, the tr ia l c ourt e nte re d f ina l ju dg me nt w iththe fo llo wi ngde c lara tio ns :
1. The Court dec lare s that the s t op-loss reimburseme nt methodology of the Acute C ar e I np a ti e n t H o s p it a l F e e G u id e li n e f o u n d a t 2 8 T exas Administrative Code § 134.401(c) (6) requires only that a provide r prove that its tot a l a

ud ite d c harges e xce e d $ 40 ,0 00 in o rd e r f or the sto p- los s reimburse ment methodology to apply ; there is no additional re quirement that a pr ov ide r p ro ve tha

t th e a dmi ssi on

wa s unu su a lly

c os tly , o r u

nu su a lly e x t e n s i v e [ , ] i no r d e r

f o r t h e s t o p - l o s s r e i mb u r s e m e n t m e t h o d o l o g y t o a p p l y. 2. The Court dec lare s that the S taff Report that was a dmitted into evidence a s Vi sta Exhi bit 9 a nd Joint Exhi bit 4 is an a dmini st rat ive ru le a s d e fi ne d in Tex. Gov’t Code § 2001.003(6) a nd i s i n v ali d and voidable be cause it was not adopted in substantial compliance with Tex. Gov’t Code § 2001.0225 throug h Tex. Gov’t Code § 2001.034. 3. I nstead of r emandingthe rule to the D ivision und er Tex. Gov’t Code § 2001.040 to all o w a r easona ble time for the D ivision t o either r evise or re a do pt t he ru le thr ou g h e sta

bli sh e d p ro c e dure s, the Court fi nd s g oo d c a us e to immediately

inval idate the Staff

Report bec ause the Court holds that absent the a ddition of objecti v e criter ia, the phra ses “unusua lly costly ” and11 “unusually

extensive” as used by

the Division are so va g ue and unc erta in that t h ei r u s e i n d et erm i n i n g wh et h er t h e s t o p -l o s s re i mb u rs em en tm et h o d o l o gy a p p l i e s w o u l d

b e ar b i t r ar y. 4. The Court declare s that when de terminingwhether pay ment is due under 28 Tex. Admin. C ode 134.401(c )(6) , a ca rrier is authorized to audit all hospit al char g es in ac corda

nce with a pplicable Division re trospective r ules, and is not limit ed to auditing for the deductions as desc ribed in 28 Tex. Admin. Code § 134.401(c) (6)( A)(v)
. 5. The Court dec lare s that under 28 Te x . Admin. Code § 134.401(c) (6), a car rier is not author i zed to reduce the provider ’s usual and c ustomary char g es for implantables, orthotics and prosthe tics to cost plus 10% in deter mining wh e th e r th e s to p - lo s s r e im

b u r sement methodolog y

applies for

reimburse ment purp os e s.
The trial c ourt’s judg ment denied a ll further r elief not spec ifically g rante d and orde red that eac h party was to bea

r its ow n costs, attorney ’s fe es, and othe r expenses. The tr ial court de nied Texas Mu tua l’ s mo tio n f

or ne w tri a l, a

nd the ins ur anc e c arr ie rs , in c lud ing Te xas Mu tua l, L ibe rt y Mu tua l, Z e nit h, and Z ur ic h A me ri c an, a

pp e a le d to thi s Co ur

t. T he Di vis ion

did no t a pp e a l.
DI SCU SSIO N This appea l involves the proper interpre tation and application of Rule 134.401. The
car ri e r s u r g e r e v e r s a l o f

th e tr ia l c o u rt’ s ju d g me n t a r g u in g th a t t

h e tr ia l c o u rt’ s d e c larations
err oneously

interpre t Rule 134.401. The hospitals counter that the t rial court’s judgme nt was prope r
and thi s Co ur t sh ou ld a ff

ir m. T he Di vis ion

do e s n ot a

pp e a l the tr ia l court ’s jud g me nt but ur g e s th is Court to rejec t the car

riers’ challeng es to the validity of Rule 134.401. For

the re asons di scussed below, we deter

mine the trial cour

t erre d in its i nterpre tation of Rule 134.401.12

Stan dard of Revie w

We r e vie w the tr ia l c ourt ’s de c larator y jud g me nt de novo
. Se e City of Sa n A nto nio v. City of Boerne , 111 S.W .3d 22, 25-26 (Te x . 2003).

Th is a pp e a l c on c e rn s a

c ha lle ng e to t

he va lid ity of an a dmi nis tr a tiv e ru le under se ction 2 0 0 1
. 0 3 8 of the g overnme nt code. SeeTex. Gov’t Code Ann. § 2001.038. When consideringa cha lleng e to the validit y of an administrative rule, we be g in with the presumption that t h e r u l e i s v a l i d , a

n d t h e p art y c h a l l e n g i n g t h e r

u l e h a s t h e b u r d e no f

d e m o n s t r a t i n g i t s i n v a l i d i t y. See O ffice of Pub. Util. Counsel v. Public Util. Comm’n , 1 04 S.W. 3d 22 5, 23 2 ( Te x. Ap p. —Aus tin 20 05 , no pe t.) ; McCarty v . Texas Parks &W ildlif e De p’t , 919 S.W. 2d 85 3, 85 4 ( Te x. Ap p. —Aus tin 1996, no writ) (citing cases). We construe administrative rules, which have the same force and ef fec t
as statutes, in the same manne r as statutes. Rodriguez v. Service Ll oyds Ins. Co. , 997 S.W .2d 248, 25 4 ( Te x. 19 99 ); Lewis v. Jack sonville Bldg. & Loan Ass’n , 5 4 0 S
. W
. 2 d 3 0 7 , 3 1 0 ( T e x . 1 9 7 6 )
. In construing a Division rule, our primary objective is to g ive ef fec t to the Division’s int ent. Rodriguez , 997 S.W .2d at 254. We defe r to the Division’s interpre tation o f i t s o wn rules so long as that interpre tation is reasona

ble and c onsistent with the plain lang uag e of the rule. Public Util. Comm’n v. Gulf States Utils. Co. , 8 0 9 S
. W
. 2 d 2 0 1 , 2 0 7 ( T e x. 1 9 91 ); se e als o Tex. Gov’t Code Ann. § 311.023(6) ( West 2005). Our re view is limit ed to determining whe ther the a dminist rative interpre tation is plainly err oneous or inconsistent with the rule
. Gu lf S tates U til s. , 809 S.W .2d at 207 (c i t i n g Un ite d Sta te

s v . La rio no

ff , 431 U.S. 864, 872 (1977)). H oweve r, if an a g ency fails to follow the clea r, unambig uous lang uag e of its own regulation, w e must re verse its a ction as arbitra ry and capr icious. Id. (c i t i n g Sam Houston Elec. Coop., Inc . v. Public Util. Comm’n , 733 S.W .2d 905, 913 (Tex. App.—Austin 1987, writ denied))
.Certain car riers arg ue that Rule 134.401 has bee n invalid since its inception or that it has 7 be c ome inv a lid

fo r t he va ri ou s r e a so ns we dis c us s.

13 C a rr i e r C l a i ms On a pp e al, th e in su ranc e carri ers rai se s ever al c hal len ges t o t he t ri al c ourt ’s jud g me nt. I n g e ne ra l, t

he c arr ie rs argue that the tr ia l c ourt e rr e d in its c on str uc tio n of Rul e 13 4. 40 1 a

nd in i ts decla ration that Rule 134.401 was a valid rule. Th e car

ri e rs argue tha

t Ru le 13 4. 40 1 is va lid

if 7 proper ly interpre ted. The c arr iers asse rt that the prope r interpr etation of Rule 134.401 re quires proof that a ud ite d c ha

rg e s e xce e d $ 40 ,0 00 , a s w e ll a s p ro of that an a dmi ssi on

inv olv e d unu su a lly

c os tly and unusually

extensive service s, befor e an admission can be paid under the Stop-L oss Ex ception. T h e c ar r i e r s a l s o ar g u e t h a t t h e t r i a l c o u rt e r r e d i ni t s d e c l ar a t i o nt h a tt h e t e r m s “ u nu s u a l l y c o s t l y”
an d “ u nu s u a ll y

e xte n s iv e ” ar e s o v a g u e a s to b e ar b it r ar y an d th a t t h e tr ia l c o u rt s h o u ld

n o t ha ve found the 2005 Staff

Report t o be an invalid rule. Finally , the ca rrier s argue that the tria l court er red in its declaration that the char g es for implantables, orthotics, and prosthetics could not be audited to cost plus 10% when de termining whether audited cha

rg es excee d $40,000. Alternatively , the ca

rrier s assert that Rule 134.401 a s int erp rete d by the trial cour

t i s i n v a l i d b e c a u s e i tf a i l s t o s a t i s f

y t h e s t a tu t o r

y r e qu i r e m e n t s o f

l a b o r c o d e s e c t i o n4 1 3
. 0 1 1
. In particula r, the c arr iers ar g ue that Rule 134.401 as i nterpre ted by the t rial court violates labor c ode section 413.011 bec ause:

C it d oe s n ot r e su lt i n f a ir and re a so na ble re imb ur se me nt;

C it i s n ot b a se d o n M e dic are re imb ur se me nt p oli c ie s a nd me tho do log ie s;

C it h a s n ot b e e n r e vie we d a nd re vis e d e ve ry

tw o y e ars ;14

C it n o lo ng e r a c hie ve s e ff e c tiv e me dic a l c os t c on tr ol;

C i tc o n s t i tu t e s anu n c o n s t i tu t i o n a l p r i v a t e d e l e g a t i o no f a g e n c y a u t h o r i t y;

C it a llo ws fo r r e imb ur se me nt f or me dic a l se rv ic e s in

e xce ss o f t

ho se a mou

nts char g ed for simil ar tre atment to individuals with an equivalent standar d of living; and

C it is i nconsistent with the labor c ode def inition of “medical be nefit.”
1. Interpre tation of the Stop -Loss Exception We beg in our ana ly s i s o f t h e ca rrier s’ claims with a re view of the trial court’ s int e rp re tatio n o f R

ule 13 4. 40 1. Th e c arr ie rs c ha lle ng e the tr ia l c o u r t ’ s i nt e rp re tatio n o f t

he Sto p- L os s Ex ception, or se ction 134.401(c) (6) of the rule. The plain lang uag e of the rule provides that the stoplos s metho d is an in de pe nd e nt r e imb ur se me nt m e tho do logy e sta bli sh e d to e ns ur e fa ir

and re a so na ble compensation to the hospital f or unusually costly service s rende red during treatment to an injured worke r. SeeRule 134.401(c) (6). The rule also provides that the stop-loss threshold was established to ensure c ompensation for unusua lly extensive service s during a hospit al admi ssion and that an admission is eligible for stop-loss pay ment if the total audited c harg es excee d $40,000. Id. § 134.401(c) (6)( i)-(ii).

We c on str

ue a dmi nis tr a tiv e ru le s, wh ic h h a ve the same fo rc e a s statut e s, in t he same
manner as statutes. Rodriguez , 997 S.W .2d at 254. As whe n construinga st at u t e, we must read the rule as a whole, g iving meaning and purpose to ever y part. See Sharp v. House of Lloyd, Inc. , 81 5 S. W.2 d 2 45 , 2 49 (T e x. 19 91 ); Ex Pa rtePr uit t , 5 51 S.W. 2d 70 6, 70 9 (T e x. 19 77 ). We s ho uld not constr

u e a r u le in a w ay th a t w o u ld

le a d to ana b s u r d o r u n r e a s o n a

b le r e s u lt if an o th e r mo re
rea sonable construction or i nterpre tation exi sts. Se e Nat ion al Plan Ad m’rs, In c . v . Nat ion al H

e alt h15

Ins. Co. , 2 35 S.W. 3d

69 5, 70 1 (T e x. 20 07 ); C& H Nationwi de v. Thompson , 903 S.W .2d 315, 322 n.5 (Tex. 1994)
. W e gi v e ef fe ct t o all words in the rule and, if possible, do not treat any words
as mere surplusag e. See Spradlin v. J im W alter Homes, I

nc. , 34 S.W .3d 578, 5 8 0 (T ex . 2 0 00). Ac c or din g ly , w e avo id c on str uin g ru le s in

a wa y that wou ld re nd e r por

tio ns of the ru le ino pe ra

ble
or mea ningle ss. See id. The trial c ourt’s dec laration that a hospi tal need only demonstrate that total audited
c ha rg e s e xce e d $ 40 ,0 00 to b e e nti tle d to pa y me nt u nd e r t he Sto p- L os s E x cept io n is c on tr ary to the pla in l angua g e of

the ru le . T he ru le state s th a t th e Sto p- L os s E xce pti on wa s e sta bli sh e d to
ensure compensation for unusually costly and unusually

ex t ensive ser

vices duringa hospital admission. SeeRule 134.401(c) (6). The rule a lso states that the s top-loss threshold was e stablished to ensure c ompensation for unusua lly extensive service s during a hos p i t al ad mission. Id. § 1 34 .4 01 (c )( 6) (A )( ii) . T he tr ia l c ourt ’s de c laratio n e lim inate s th e Di vis ion ’s a bil ity un de r the ru le to en sure that th e Sto p- L os s E xce pti on pr ov ide s c omp e ns a tio n f or unus ua lly

c os tly and unus ua lly
e xten siv e se rv ic e s.

T h e tr ia l c o u rt’ s d e c la

r a ti o n is in c o n s is te n t w it

h o th e r p r o v is io n s in th e rule . For example, the rule de fines “Stop-L oss Pay ment” as a

n independe nt method of pay ment for a

n unusually costly or leng thy stay
. Id. § 134.401(b)( 1)(F ). B ut the trial court’ s decla ration pre cludes consideration of whether a hospital admission was unusually costly or leng thy . I n ad d ition, the rule states that $40,000 is the “ minimum stop-loss threshold.” Id. § 1 34 .4 01 (c )( 6) (A )( i) (e mph a sis added)
. By its terms, t his lang uag e sugg ests that there must be som ething more than a dollar amount to be consider ed whe n deter mining whether to a

pply the Stop-L oss E x ception. The ba sic structure16

of the rule is consistent with thi s conce pt: The rule provides that reimburse ment will be made under the standar d per die m method unl es s an ex ception applies. Id. § 134.401(c) (2). The rule fur ther
s t a t e s t h a ti n d e p e n d e n tr e i mb u r s e m e n tu n d e r t h e S t o p - L o s s E x c e p t i o nw i l l b e “ a l l o w e d o na c a s e - b ycase basis.” Id. § 134.401(c) (2)( C). This la ng uag e sug g ests that the Stop-L oss Ex ception wa s meant to apply on a ca se-by -ca se basis in rela t i v el y fe w case s. Wi thout consideration of whether an admission involves unusually costly or unusually

extensive service s, there can be no deter mination
on a ca se-by -ca se basis, and the Stop-L oss Ex ception would mec hanica lly apply in all case s where total audited cha

rg es exceede d $40,000. Reading the lang uag e of the rule a s a whole, this ca nnot be what the Division intended.

The trial c ourt’s dec laration is also contr ar y to the leg islative mandate in the la bor code be cause it preclude s the Division from achie ving e ffe cti ve medica l cost control. Under the tr ia l c ourt ’s int e rp re tatio n, the Di vis ion c ann ot limi t the a

pp lic a tio n of the Sto p- L os s E xce pti on to those ca ses involving unusua lly costly and unusu al l y extensive service s in which total audited char g es excee d $40,000. When the Division adopted the 1997 g uideline, i t provided for a standa rd per die m reimburseme nt methodology with two excep t i o n s . W i t h the rise in hea lth care costs as demonstrated by

the record evidence in this case, the tria l court’s interpr etation leads to the a bsurd
and unre a so na

ble re su lt tha

t r e imb ur se me nt u

nd e r t he Sto p- L os s Exc eption has re place d the standar d per diem method as t he gene ral method of hospi tal reimburse ment. Stated differ ently , the exception has now be come the r

ule. We do not believe that this is what the Division intende d when it adopted the 1997 g uideline.17 For t h es e reasons, we c onclude that the tr ial court’s inter pretation is contrary to t he pla in l angua g e of

the ru le, rend ers po rt ion s o f t he ru le me anin g le ss, and le a ds to r e su lts inc on sis te nt w iththe int e nt o f the statut or y str uc tur e . A mor e re a so na

ble int e rp re tatio n o f t

he ru le is that to be e lig ibl e fo r r e imb ur se me nt u nd e r the Sto p- L os s Exce pti on , a ho sp ita l mu st d e mon str a te that total audited cha

rg es excee d $40,000 and that an a dmission i n v o l v ed unusually costly and unusually extensive service s. This interpretation is consist ent with the plain languag e of the rule, which states that the stop-loss method was e stablished to ensure f air a nd rea sonable c ompensation to the hospital for unusually costly and unusually

extensive s er v i ces. Id. § 134.401(c) (6), (c) (6)( A)(ii). I t is likewise consistent with the interpr etation urg ed by the Division in the 2005 St aff Report, which we addre ss more fully below. And it is consistent with the basic struc ture of the rule,
w h i c h c a l l s f

o r r e i mb u r s e m e n t u n d e r t h e s t an d ar d p e r d i e m m e t h o d e x c e p ta s a l l o w e d

o na c a s e - b yc a se ba sis un de r t

he Sto p- L os s E xce pti on . A c c or din g ly , w e su sta in t he c arr ie rs ’ c ha lle ng e , r e ve rs e the trial cour

t’s decla ration, and r ender

judgme nt that the Stop-L oss E x ception require s a hospital to d e mon str a te that tot a l a ud ite d c ha

rg e s e xce e d $4 0, 00 0 and that the a dmi ssi on inv olv e d unu su a lly costly and unusually

extensive service s to rece ive re imbursement under the stop-loss method. We e mphasize that, in light of the leg islative mandate in se ction 413.011 of the labor code r equiringthe Division to adopt fee guidelines desig ned to ac hieve both quality medical c are
and e ff e c tiv e me dic a l c os t c on tr ol, thi s is a mor e re a so na

ble in terpr e tatio n o f t

he Sto p- L os s Ex cept io n in Ru le 1 3 4
. 4 0 1
. F u rth e r mo r e , b e c a

u s e w e a d o p t th e c o n s tr

u c ti o n o f th e r

u le urg ed by the ca rrier s on appea l, we need not rea ch the carr iers’ a lternative c laims that the rule, as c onstrued by the trial cour

t, is an invalid de leg ation of the Division’s leg islative authority . Nor do we rea chTh is lang ua g e wa s c ha ng e d in 20 05 fr om “ He a lthCare F ina nc ingAd min ist ratio n” to 8 “Center s fo r M edicare a

nd Medica id Services.” Act of Ma y 29, 2005, 79th L eg ., R.S., ch. 265, § 3.233, 2005 Tex. Gen. L aws 469, 548. 18 the ca rrier s’ claims that the rule, as interpre ted by the trial cour

t, is invalid because it fa ils to provide fair a nd rea sonable re imbursement , fails t o achie ve ef fec tive medical c ost control, or allows for
re imb ur se me nt f

or me dic a l se rv ic e s in e x cess of th os e a mou nts c ha rg e d f or sim ila r t re a tme nt t o individuals with an equivalent standar d of living as re quired in sec tion 413.011 of the labor c ode, or t hat t he trial court’s interpre tation is inconsist ent with the def inition of “medical be nefit” in labor code se ction 401.011(31).

To the extent ce rtain car

riers maintain that Rule 134.401 was invalid at its inception, or bec ame invalid at some later date, bec ause the rule is not based on Me dicar e re imbursement po lic ie s and

me tho do log ie s and ha s not be e n r e vie we d a nd re vis e d e ve ry

tw o y e ars , w e fi nd

tho se claims to be without merit. Whil e we ag ree with the car riers that section 413.011 of the labor code
curr ently require s the Division to adopt medical f ee guidelines that follow Medica re r eimbursement policies and methodolog ies, see Tex. L ab. Code Ann. § 413.011(a) , this requireme nt was not part of the statute whe n the Division adopted Rule 134.401 in 1997 and wa s not added until 2001. See Act of Ma y 25, 2001, 77th L eg ., R.S., ch. 1456, § 6.02, 2001 Tex. Gen. L aws 5167, 5185 (a mending section 413.011(a ) to requir e the Division to “adopt the most c urre nt r eimbursement methodolog ies . . . used by

the fe dera l Health Care Financ ing A dminist ration”)
. Be cause this req u i re m en t was 8
no t pa rt of the statut e in 1 99 7, the ru le wa s n ot i nv a lid a t it s in c e pti on for fai li ng to m e e t th is“The measure of the validity of an ag ency rule is whethe r it is constitut ional and whe ther 9 it c o nforms to the proc edura l and substantive statutes applica ble to its adoption.” Texas De p’t of Banking v. Restland Funeral Home , Inc. , 847 S.W .2d 680, 683 (Tex. App.—Austin 1993, no writ).

19 require ment. Nor do we believe that the rule be came invalid at the moment this requireme nt was added to the statute in 2001. 9

Simi la rl y , w e a g re e tha

t se c tio n 4 13 .0 12 state s that the me dic a l f e e g uid e lin e s “ sh a ll be re vie we d a

nd re vis e d” e ve ry tw o y e ars to re fl e c t f a ir and re a so na ble rate s and

to r e fl e c t r e a so na

ble and nec essar

y rang es of medic al treatment. SeeTex. L ab. Code Ann. § 413.012 ( West 2006). But it does not follow that the Division’s failure to re view and r evise the 1997 guideline eve ry two y ear s since it was a dopted invalidates the r ule. Although w e g ener ally construe the term “ shall” as imposing a duty or oblig ation, see Te x. G o v ’ tC o d e A n n . § 3 1 1
. 0 1 6 ( W e s t2 0 0 5 ) , T e xa s c o u rt s h a v e , i nc e rt a i nc i rc ums ta nc e s, construed “ shall” to be dire ctory
. See, e .g. , Albe rts on ’s In c . v . S inc lai r , 9 8 4 S.W .2d 958, 961 ( T e x . 1 9 9 9 )
. T o d e t e r

m i n e w h e t h e r t h e l e g i s l a tu r e i n t e n d e d a p r o v i s i o nt o b e m an d a t o r

y o r d i r e c t o r y,
we c onsider the plain mea ning of the words use d, as we ll as the entire act, its nature a nd object, and the conse quence s that would follow from each c onstruction. See Sc hepps v. Pre sbyterian Hosp. of Dallas , 6 5 2 S
. W
. 2 d

9 3 4 , 9 3 6 (T ex . 1 9 8 3 ) ( ci t i n g Chi sh olm v . B e wle

yMi lls , 287 S.W .2d 943, 945 (Tex. 1956)). The supreme c ourt has held that “provisions which are not of t he esse nce of the thing to be done,” but are direc ted instead t o wa rd s t h e prompt and orderly conduct of

business, are not g ener ally considere d mandatory
. Id. When a statute i s silent about consequence s of noncompliance , we look to the statute’s pur pose in deter

mining the pr oper c onsequenc e of nonc omp l i ance . Id. at 938. “I f a provision r equire s that an act be perf ormed within a cer

tain time w ithout any

words20

restra ining the a ct’s perf

ormanc e afte r that time, the timing provision is usually direc tory .” Helena Chem. Co . v. W

ilkins , 4 7 S. W.3 d 4 86 , 4 95 (T e x. 20 01 ). F ur the r, we lib e ra lly

c on str ue wo rk e rs ’
c omp e ns a tio n le g isl atio n to c arr y out its e vid e nt p ur

po se of c omp e ns a tin g inj ur e d w or ke rs and the ir depende nts. See Lujan v. Houston Ge n. Ins. Co. , 756 S.W. 2d 29 5, 29 7 ( Te x. 19 88 ); W

ard v. Charter Oak Fire I

ns. Co. , 579 S.W .2d 909, 910 (Tex. 1979). The le g isl a tur e ha s p ro vid e d n o c on se qu e nc e s f or the Di vis ion ’s un fo rt

un a te noncompliance with the statutory direc tives in section 413.011 or 413.012 of the la bor code . I f the leg islature had intende d conseque nces fo r the fa ilure to adopt Medica re r eimbursement
me tho do log ie s o r t

he fa ilure to re vie w and

re vis e the fe e g uid e lin e s, it c ou ld h a ve sp e lle d o ut t ho se conseque nces in the s tatute. Wit h reg ard to the l eg islature’s requireme nt that the Divi sion adopt new treatment g uidelines for injure d worke rs, the leg islature expressly provided that “[ t] he tre atment g uidelines adopted unde r Chapter 413, in effe ct immediately befor e September

1, 2001,
are abolished on January

1, 2002.” See Act of May 25, 2001, 77th L eg ., R.S., ch. 1456, § 6.09(b), 2001 Tex. Gen. L aws 5167, 5188. I t speaks volumes that the l eg islature provide d no conseque nces fo r t he fa ilure to a do pt Me dic are re imb ur se me nt me tho do log ie s or the fa ilure to r e vie w a nd re vis e the fe e g uid e lin e s e ve ry

tw o y e ars . The car riers do not c omplain that the reimburse ment rate s under the 1997 g uideline,
as p roperly

interpre ted, ar e unre asonable . Nor have the c arr iers demonstrated har m from the a pp lic a tio n o f t

he rei mb urs eme nt rate s in the 19 97 g uid e lin e . F e e g uid e lin e s a re jus t that— g uidelines
. They

“mer ely assist carr iers and, upon r eview, the [Divi sion] in determining whether medical c harg es ar e ‘f

air a nd rea sonable’ or

s at i s fy the applica

ble standar d.” Me tho dis tWe rejec t the car riers’ argument that this Court’s opinion in Texas Me dical Association 10 v. T exas W orkers’ Compe nsation Commissi on , 137 S.W .3d 342 (Tex. App.—Austin 2004, no pet.), require s a differ ent re sult. I n Texas Me dical Association , this Court stated t hat “the Commission has the ong oing statutory duty to r eview and re vise the fe e guidelines to ensure they are in compliance with the statutory

fac tors,” see id. at 350 (citing Tex. L ab. Code Ann. § 413.012 (West 2006)), but this Court di d not consider whether that “ong oing duty ” was mandatory or di rec tory
. See id. Nor did this C ourt consider the appropr iate conse quence for nonc ompliance with this “ong oing duty .” Thu s , o u r opinion in Texas Me dical Association does not answe r the que stion before us today —namely , whether

this Court ma

y in v a li date a n ag ency rule for noncompliance with a statutory dir e c tiv e wh e n th e le g isl a tur e is s ile nt. 21 Hosp. v. Tex as W

o rke rs’ Comp. Comm’n , 874 S.W .2d 144, 149-50 (Te x . App.—Austin 1994, writ dism’d w.o.j.). This Court has previously held t hat there is no private rig ht to a fee g uideline established by

rule. Se e Te

x as W or k e rs’ Com p. Com m’n v. Ea st Sid

e Su rg ic al C

tr. , 142 S.W .3d 541, 549 (Tex. App.—Austin 2004, no pet.) (“ East Side is only entitled to ‘fair

and re aso nable’ reimburse ment—not to have the f ee guidelines established by rule.” ). Ac cording ly , there can be no private r ight to an up d at ed fee g uideline or a g uideline that uses a pa rticular r eimbursement methodology , so long as the reimbursement provided in the guideline is fair and re asonable
. See id.

For these re asons, we conclude that the labor c ode’s r equire ment to adopt fee g uidel in es th a t f

oll owMe dic are re imb ur se me nt m e tho do log ie s and to r e vie w a

nd re vis e the se g u i d e l i n e s e v e r

y t w o ye ar s ar e d i r e c t o r

y, n o tm an d a t o r

y. We further conclude that the Division’s 10 failure to comply

with these statu t o ry

direc tives does not invalidate the 1997 guideline, or Rule 134.401.
2. “Unusu ally Costly” and “Unusu ally Extensive” Wit hin their cha lleng e to the trial c ourt’s interpr etation of Rule 134.401, the ca rrier s
argue that th e tr ia l c ourt e rr e d in it s d e te rm inatio n th a t th e te rm s “ unus ua lly c os tly” and

“ unus ua llyThe re cord de monstrates that MDROs, ca rrier s, and hospitals understand a nd are familiar 11 with the se terms beca

use they have been previously utiliz ed and applied in othe r case s since the 1997 g uideline was pr omulga

ted. 22 e xten siv e ” are “ so va g ue and un c e rt a in that the ir us e in de te rm ini ng wh e the r the [S to p- L os s Ex ception] a

pplies would be arbitra

ry .” The c arr iers asse rt that such industry terms ar e knowa

ble, calc ulable, and de terminable a nd provide re asonably clea r g uidance to those parties a ffe cted by the rule. We ag ree . 11 Th is C our

t h a s p r e v iou sly

he ld t hat whe re an “ ide a

e mbo die d in

a ph ra se is r e a so na

bly clea r, a c ourt should find it acce ptable as a standard of

measure ment.” Te

x as Bl dg . O wne rs & Mana g er

s Ass’n v. Public U

til. Comm’n , 110 S.W .3d 524, 535 (Tex. App.—Austin 2003, pet. denied) . The supre me cour t has also rec og nized that a broad standard encompa ssing a multit ude of fa c tor s w ill pa ss c on sti tut ion a l sc rutiny if it i s n o mo re e xten siv e tha n th e pu bli c int e re st d e mand s. Se e J or da n v . Sta te Bd

. o f I ns . , 3 34 S.W. 2d

27 8, 28 0 ( Te x. 19 60 ); Housing Auth. v. Higginbotham , 143 S.W .2d 79, 87 (Tex. 1940). Ex amples of standards upheld by Texas courts include “ not worthy of public conf

idence ,” “unjust, fair, inequitable, misleading , dece ptive,” and “ just and rea sonable.” See Tex as Bldg. Owners & Managers Ass’n , 110 S.W .3d at 535 (c iting ca ses).

We have held that Rule 134.401 require s a provider to de monstrate that the servic es it has provided ar e “unusua lly costly ” and “ u nusually

extensive” in order

to be re imbursed under the stop-loss methodology . The phrases “unusua lly costly ” and “ unusually

extensive” are no more
v ague or unce rtain than other standards pr eviously

upheld by

Texas courts. See id. ( d is c u ssing standards a

nd citing case s). They are no more vag ue or uncer tain than ot her standards in the labor code r equiringfee g uidelines to be “f air a nd rea sonable,” “ensur e quality medical c a

r e , ” a n d “ac hieveSe e als o note 4 su pra (explaining that betwee n 2005 and 2007 the legislature provided for 12 direc t appea l to the courts without allowing a n administrative hea

ring at SOAH). 23 eff ective me dical cost c ontrol.” See Te x. L a b. Cod e Ann. § 4 13 .0 11 (d ). What is unus ua lly c os tly
and unus ua lly

e xten siv e in a

ny pa rt ic ula r f e e dis pute re ma ins a

fa c t- int e ns ive inq

uir y be st l e ft to the Division’s determination on a c ase- by -ca se basis. See Texas Bldg. Owners & Managers Ass’n , 110 S.W .3d at 536 (holding that what is “re asonable ” and “n o n d iscriminatory” is fac t-intensive inquiry best left to discre tion of Publi c Utility Commi ssion). No pa rt y dis pute s th a t th e la

bo r c od e de le g a te s a

uth or ity to the Di vis ion

to e sta bli sh medical f ee guidelines, resolve medical f ee disputes, and “adjudicate the pay ment g iven the re levant statutory provisions and commissioner rules.” Id. §§ 413.011(d) ( establish fee g uidelines), .031(c ) (a dju dic a te pa

y me nt d ue ). Th e sc op e of

thi s aut ho ri ty inc lud e s the dis c re tio n to e sta bli sha pp ro pr iate standards f

or re imb u rs em en t and to deter mine whether

those standar ds have be en met. Id. §§ 41 3. 01 1( d) , . 03 1( c ); see also Texas Bldg. Owne rs & Managers Ass’n , 110 S.W .3d at 53 5 -36 (commission’s authority

to require pay

ment of “r easona

ble” a nd “nondiscriminatory” compe nsation includes powe r to deter

mine what is r easona

ble and nondiscriminatory when dispute arises)
. To the extent the parties ar e dissatisfied with the Division’s deter mination, th e l ab o r code provides for revie w by SOAH and a

ppeal to the c ourts. SeeTex. L ab. Code Ann. § 413.031( k). 12 There is no c o n s ti tuti o n a l r e qu ir e me n t t h a t a s ta tute o r r u le mu s t d e f

in e a ll o f the terms used. See R ooms with a View, Inc. v . Private Nat’l Mortgage Ass’n, I nc. , 7 S.W .3d 840, 845 (T e x. Ap p. —Aus tin

19 99 , p e t. d e nie d) ; Ga ra

yv . S tate , 940 S.W .2d 211, 219 (Tex. App.—Houston [1st Dist.] 1997, pet. re f’d) . Recog nizi ng the my riad of f actua l situations t hat may

arise a nd allowing administrative ag encie s sufficient f lexi bility when dr aftingtheir rules, courts require no more than a24

rea sonable de g ree of ce rtainty definingwhat is requir ed or pr ohibited. See P ennington v. Singleton , 60 6 S. W.2 d 6 82 , 68 9 (Tex . 198 0) . Co ur ts w ill inv a lid a te an e c on omi c re g ulatio n “ on ly if it commands complianc e in terms so vague and indefinite as rea lly to be no rule or standar d at all . . . or if it is substantially

incomprehe nsible.” Ford Motor Co. v. Texas De p’t of Transp. , 264 F.3d 493, 50 7 ( 5th Cir . 2 00 1) (i nte rn a l qu otatio n o mitte d) ; see also H offman E states v
. F

l i p s i de, Ho ffman Estates, Inc. , 455 U. S. 489 , 498 (1 98 2) (“ Ec on omi c re g ulatio n is subj e c t to a le ss str ic t va g ue ne ss t e s t
. ” )
. A p p l yi n g t h e s e p r i n c i p l e s t o R u l e 1 3 4
. 4 0 1 , w e c o n c l u d e t h a tt h e p h r a s e s “ u nu s u a l l y c o s t l y” and “unusually extensive” are sufficie ntly definite to provide guidance to the MDROs and AL J s who revie w and deter

mine medical f

ee disputes on a

case -by -ca se basis. See H offman Estates , 4 55 U. S.
a t 49 8; Commission for L awyer Discipline v . Benton , 980 S.W .2d 425, 437 (Tex. 1998). Ther efor e,
w e s u s t a i nt h e c ar

r i e r s ’ c h a l l e n g e an d

r e v e r s e t h e t r i a l c o u rt ’ s d e c l ar a t i o nt o t h e c o n t r ar y.
3. 2005 Staff

Report The c arr iers also c halleng e the tria l court’s de termination that the 2005 Staff Repor t
was an invalid a

nd voidable rule. I n its sec ond decla ration, the trial c ourt held that the 2005 Staff Report was a

n administrative rule a s defined in se ction 2001.003(6) of the g overnme nt co de, and th a t i t w a s inv a li d

an d v o id a b le b e c a u s e it w a s n o t a d o p te d

in c o mp li an c e w it

hg o v e r n me n t c ode sections 2001.0225 throug h 2001.034. SeeTex. Gov’t Code Ann. § § 2 0 0 1
. 0 03, .0225-.034 (West 2000) (def

ining “ rule” and esta

blishing rulemaking proce dures)
. I n its thi rd dec laration, the trial court invalidated the 2005 S taff Re port bec ause it found that the D ivision’s use of the phra ses “unusually costly ” and “ unusually extensive” in determining whether the Stop-L oss Ex ception
a pp lie s w ou ld b e arb itr ary . T he c arr ie rs ur g e thi s Co ur t to re ve rs e the tr ia l c ourt ’s de c laratio ns .25 We a g re e wi th t

he c arr ie rs that the 20 05 Sta ff Re po rt is n ot a n inva lid and vo ida ble
r u le
. T h e A PAd e f

in e s a r u le a s “ a s tate a g e n c y

s tate me n t o f

g e n e r a l a

p p li c a b il it y that
. . . implements, interprets, or pr escr ibes law or policy ; or . . . descr ibes the proc edure or pra ctice require ments of a state ag ency .” Te x . Gov’t C ode Ann. § 2001.003( 6)(A) . The APA de finition of a rule includes “t h e am endment or r epea l of a prior rule,” but it does not include “a state ment
re g ard ingon ly

the int e rn a l ma

na g e me nt o r or g anizatio n o f a state a g e nc y

and no t a ff e c tin g pr ivate rig hts or proce dures.” Id. § 2001.003(6)( B) -(C).

As a pre liminary matter, we c onclude that the 2005 Staf f Report wa s not a statement by a state a g ency . The 2005 Staff Report was a

one-pa g e docume nt prepa red by t h e d i rector of the Medica l Review Division within the Divisi on that wa s i n t en d ed to address an interna l ag ency matter—namely , the inconsistent application of Rule 134.401. The 2005 Staff Report was pr esente d to the Division at the J anuar y 2005 open mee ting, but the Division simply thanked the dir ector

for the re port and took no officia l action. The 2005 Staff Report re cog nized that the Division’s MDROs had a history

of inconsistently

applying Rule 134.40 1 , and propose d a cor rec tion to that int erna l inconsistency

based on the lang uag e of Rule 134.401. F or this r eason, we c onclude that the 2005 Staff Report wa s not a statement of the ag ency within the meaningof the APA. Ev e n if we reco gnized the 20 05 Sta ff Re po rt a s an a g e nc y

state me nt, it i s w e llestablished that not eve ry administrative pronounc ement is a rule within the meaningof the APA. See Tex as Educ. Age ncy v . Leeper , 8 93 S.W. 2d 43 2, 44 3 ( Te x. 19 94 ); Br ink le y v . Texas Lot te ry Comm’n , 986 S.W .2d 764, 769 (Tex. App.—Austin 1999, no pet.). “This obser vation ref ers to the fa c t th a t a dmi nis tr a tiv e a g e nc ie s r outin e ly iss ue le tte rs , g uid e lin e s, and re po rt s, and

oc c a sio na lly

fi leI t is un dis pute d th a t th e Di vis ion ha s a uth or ity to i nte rp re t it s o wn

ru le s. 13 26 br ie fs in c ourt

pr oc e e din g s, any

of wh ic h mi g ht c on ta in s tate me nts that in tr ins ic a lly imp le me nt, interpre t, or

presc ribe law , policy , or proc edure or pra ctice r equire ments.” Brinkley , 986 S.W .2d at 769. I f such state ments were rules, an a g ency could not car

ry out its l eg islative functions: “How, under suc h a theor

y , could an a g ency

prac tically

express its vi ew s t o an i n formal confer ence or advisory committee, or state its re asons for de nying a petition to adopt a rule or file a brief in a court or ag ency proce eding ? ” Id. The supre me cour

t in El Paso Hospital Dist rict v. Texas He alth and Human Servic es Commission , 247 S.W .3d 709 (Tex. 2008) , analy zed whether an ag ency ’s interpre tation of its own rule wa s also a rule
. I n th at case , th e HH SC ha d inte rp re te d it s r ule to i mpo se a

F e br ua ry 28 th 13
c uto ff date wh e n cal cul ati ng Me dic a id r e imb ur se me nt r a te s. Un de r t he ru le ’s de fi nit ion

of “ ba se y e ar, ” the HH SC w a s r e qu ir e d to us e “ ‘[a ] 12- c on se c uti ve -m on th p e ri od of c la ims data ,’ to c a lc ulate the [h] ospitals’ rates.” See id. a t 71 4 (qu oti ng 1 Te x. Ad min . Co de § 3 55 .8 06 3( b) (5 )) . T he su pr e me court c oncluded that the F ebrua ry 28th cutoff wa s cont rary to the rule’s de finition of base y ear beca use it excluded sever al claims from the calc ulation of t he hospi tals’ rates and thus amende d the plain lang uag e of the rule. Id. Be cause the HHSC ha d not followed APA rulemaking pr ocedur es to promulgate the F ebrua

ry 28th cutoff, the supreme court also held that it was inva lid and enjoined the HHSC from using the Fe bruar y 28th cutoff to ca lculate the hospitals’ r eimbursement r ates. Id. at 715 (c iting Te x . Gov’t Code Ann. § 2001.035 ( West 2000)).

Un l ike the HHSC’s interpr etation in El Paso Hospital Dist rict , th e 2 0 0 5 Staff Report does not contra dict Rule 134.401. Moreove r, assuming the 2005 Staff Repor t is an ag ency27

state me nt, it i s a state me nt re g ard ing the a g e nc y ’s int e rn a l mana g e me nt that do e s no t a ff e c t pr ivate rig hts. See Tex. Gov’t Code Ann. § 2001.003(6)( C). The 2005 Staff R eport is a statement reg arding internal mana g ement bec ause it is desig ned to cor rec t MDROs’ inconsistent application of the StopL oss Ex ception. I t also allowed the ag ency to function eff

ectively and produc ed cla

rity of direc tion in a hig hly

t echnical ar ea. T he 2005 Staff Re port did not affe ct private rig hts beca use it did not chang e or a

mend Rule 134.401; it sim ply mandated inter

nal consistency

when a pply ing the rule. We also reject t h e hospi tals’ ar g ument that the 2005 Staff Repor t was a “ new” interpre tation of Rule 134.401. The recor d befor e us demonstrates that MDROs in the Division, as
we ll as SOA H A L Js, ha d is su e d c on fl ic tin g op ini on s inte rp re tin g and a pp lyingthe Sto p- L os s E xce pti on in Rul e 1 3 4
. 4 0 1 b e f o r e t h e 2 0 0 5 S t a f

f R e p o rtw a s i s s u e d
. S o m e M D R O s an d A L Js interpre ted and applied the Stop-L oss Ex ception in the s ame manner a s the 2005 Staff Repor t, and some did not. Bec ause the re wer e prior opinions a nd decisions interpre ting and applying the StopL oss Ex cep t i o n in the same manne r as the 2005 Staf f Report, that re port ca

nnot, by definition, be a “ne w” inter

pretation of Rule 134.401. For these re asons, we c onclude that the 2005 Staf f Report was not a

rule within the meaningof the APA a

nd, there fore , was not subject to A PA r ulemaking proce dures. We sustain the
car r ie r s ’ c h a ll e n g e an d r e v e r s e th e tr ia l c o u rt’ s d e c la r a ti o n th a t th e 2 0 0 5 St a f f Re p o rt w as an invalidly adopted r ule.
4. Reim bursem ent for Im plan tables, Orthotics, and Pr osthetics The c ar r ie r s a ls o c h a ll e n g e th e tr ia l c o u rt’ s d e c la r a ti o nth a t R

u le 1 3 4
. 4 0 1 d o e s n ot allow a c arr ier to audit a pr ovider’s c harg es for implantables, orthotics, and prosthe tics to cost plusAlso included in the categ ory of “A dditional Reimbursements” ar e magne tic resona nce 14 imag ing ( MRI s), computer ized ax ial tomogr aphy (CAT sca

ns), hy perba ric oxy g en, blood, air ambulance, a

nd pharma ceutica ls. Rule 134.401(c)( 4)(B )-( C). 28 10% whe n deter

mining whe ther the $40,000 stop-loss t hreshold has be en met. F or the following
re a so ns we ov e rr

ule the c arr ie rs ’ c ha lle ng e and su sta in t he tr ia l c ourt ’s jud g me nt. Rule 134.401 specific ally car ves out reimburse ment for impl antables, orthotics, and prosthetics. SeeRule 134.401(b)(2) (B ) (g ener al information re g ardingadditional reimburse ments), (c) (4) ( “Additional Reimbursements”) . When medically nece ssary , i m plantables, orthotics, a nd prosthetics ar e re imbursed as “ Additional Reimbursements” under the rule. Id. § 1 3 4
. 4 0 1 ( c )(4) (A).

14 As pr ov ide d in

the ru le , im

pla nta ble s, or tho tic s, and

pr os thetics sh all be re imb ur se d at th e c os t to the hospital plus 10%. Id. Ru l e 134.401 also provides that “ [a] ll charg es ar e subjec t to audit as descr ibed in the Commiss ion rules.” Id. § 134.401(b)( 2)(C). Rule 134.401 prov i des that whe n audited char g es ex ce ed t h e $40,000 stop-loss threshold, the entire admission shall be reimbursed using the 75% stop-loss reimburseme nt fac tor. Id. § 134.401(c) (6)( A)(iii).

Re a din g the se pr ov isi on s to g e the r, we c on c lud e that th e c ha rg e s f or imp lanta ble s, orthotics, and prosthetics must be a udited befor e thos e ch arg es ca n be used to de termine whe ther t h e $ 4 0 , 0 0 0 s t o p-loss threshold has bee n met. The que stion then becomes a udited to what? The
c a rr ie r s ar g u e t h a tt h e s e c o s t s s h o u l d b e r e d u c e d , o r a u d i t e d , t o c o s tp l u s 1 0 % a s s p e c i f i e d in section 134.401(c )(4) (A). We do not believe this is what the Commi ssion intended. Consider the following example: if the cost for implantables in a g iven admission was $40,000, unde r the
car riers’ interpre tation, this cost would be audited to cost plus 1 0 %, o r $ 4 4 ,000, for pur poses of deter mining whe ther the S t o p -L oss Ex ception applied. A ssuming that the a dmission i nvolvedSL RF mea ns “Stop-L oss Reimbursement Fa ctor.” SeeRule 134.401(c) (6)( A). 15 WC RA means “Worke rs’ Compensation Reimbursement Amount.” See id. 16 29 unusually costly and unusually extensive se rvice s and beca use $44,000 is gr eate r than $40,000, the Stop-L oss Ex ception would apply
. There fore , the entire admission would be reimburse d using the following formula:
Au dit e d Ch arg e s x 75 % S L RF = WCRA 15 16
See Rule 134.401(c) (6)( B) . Applying this for mula to the example, the hospital would be reimburse d
on ly $3 3, 00 0, or

$7 ,0 00 le ss t

ha n it s c os t, f

or the imp lanta

bl e s. Un de r t

his e xamp le , th e ho sp ita l,
or oth e r p ro vid e r, wo uld

inc ur a los s. Be cause provi d er s would incur losses under the ca rrier s’ proposed c onstruction of the ru le , th a t inte rp re tatio n wou ld be c on tr ary to the statut or y re qu ir e me nt that fe e g uid e lin e s b e “ fa ir and re asonable .” See Tex. L ab. C ode Ann. § 413.011( d). We ca nnot construe the r

ule in a manne r that is inconsistent with t he statute. See, e .g. , Centerpoint E nergy, Inc. v. Pu b l i c U

t i l

. Co mm’n , 14 3 S. W.3 d 8 1, 85 (T e x. 20 04 ) (o bs e rv ingthat r ule is i nv a lid

if it v iol a te s st a tut or

y pr ov isi on ); Texas W orkers’ Comp. Comm’n v. Patient Advoc ates , 136 S.W .3d 643, 657-58 (Te x . 2004) (upholding
ru le a s c on sis te nt w ithstatut e ); National Plan A d m’ r s, Inc. , 2 35 S.W. 3d

a t 70 1 ( c ourt s sh ou ld
no t c on str ue statut e in mann e r that le a ds to absu rd r esu lts ); C& H Nationwi de , 903 S.W .2d at 322 n.5 (same)
. For

these re asons, we c onclude ther e wa s no err or in the trial cour t’s decla ration that the c o s t s fo r implantables, orthotics, and prosthe tics should not be reduc ed to cost plus 10%30

when de termining whether the $40,000 stop-loss thre shold ha s been met. This is consistent with t he plain lang uag e of the rule a nd section 413.011 of the labor code. It is li kewise c onsistent with the tr ia l c ourt ’s judgment that a c arr ie r i s a

uth or ize d to a

ud it a ll h os pit a l c ha

rg e s in a c c or da nc e wi th applicable Division retrospec tive revie w rules, whic h we a ffirm beca use no par

ty has cha lleng ed that de c laratio n o n a

pp e a l.
CO NC LU SION Havingconsidere d all of the parties’ issues, we a ffirm the tria l court’s judg ment that
car riers ma y audit a provide r’s c harg es as pe rmitted by the Division’s rules and that a ca rrier may not reduc e the c harg es for implantables, orthotics, and prosthe tics t o co s t p l us 10% when deter mining whe ther the Stop-L oss Ex cept i o n applies. We reve rse the tr ial court’s judg ment that the S top-L oss Ex ception applies to a ny admission in which audited cha rg es excee d $40,000, and we

r e n d e r j u d g m e n tt h a t , t o e s t a b l i s h e l i g i b i l i t y f

o r r e i mb u r s e m e n tu n d e r

t h e S t o p - L o s s m e t h o d o l o g y, a provide r must demonstrate that a udite d c h a r g e s exceed $40,000 a

nd that the servic es provided w ere
unus ua lly c os tly and un us ua lly e xten siv e so a s to a llo w a

pp lic a tio n of the e xce pti on . We a lso re ve rs e the tr ia l c ourt ’s jud g me nt t hat the 20 05 Sta ff

Re po rt is a n inva lid ru le and that th e ph ra se s “ unus ua lly
c os tly” and

“ unus ua lly

e xtens iv e” are so va g ue and un c e rt a in t

hat th e ir us e by the Di vis ion

in d e t e r m i n i n g w h e t h e r

t h e S t o p - L o s s E x c e p t i o na p p l i e s w o u l d

b e ar b i t r ar y.31 __________________________________________ J an P. Patterson, J ustice Be fore J ustices Patterson, Waldrop and H enson Affir med in part; Rever sed and Rende red in pa rt Filed: Nove mber 13, 2008