TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-03-00435-CV

Texas Workers= Compensation Commission; Richard Reynolds, in his Official Capacity as 

Executive Director of the Texas Workers= Compensation Commission; State Office of 

Administrative Hearings; and Chief Administrative Law Judge Sheila Bailey Taylor,

in her Official Capacity/East Side Surgical Center; Clinic for Special

Surgery; and Surgical and Diagnostic Center, L.P., Appellants

v.

East Side Surgical Center; Clinic for Special Surgery; and Surgical and Diagnostic

Center, L.P./Texas Workers= Compensation Commission; Richard Reynolds,

in his Official Capacity as Executive Director of the Texas Workers=

Compensation Commission; State Office of Administrative

Hearings; and Chief Administrative Law Judge Sheila

Bailey Taylor, in her Official Capacity, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT

NO. GN202229, HONORABLE DARLENE BYRNE, JUDGE PRESIDING

M E M O R A N D U M O P I N I O N

This case involves the failure of the Texas Workers= Compensation Commission (the 

ACommission@) to establish fee guidelines for health care services provided by ambulatory surgical centers1

under the Texas Workers= Compensation Act (the AAct@). See Tex. Lab. Code Ann. '' 401.001-506.002 

 

1 An ambulatory surgical center is a healthcare facility Athat operates primarily to provide surgical 

services to patients who do not require overnight hospital care.@ Tex. Health & Safety Code Ann. '

243.002 (West 2001).
2

(West 1996 & Supp. 2004). Ambulatory surgical centers, East Side Surgical Center, the Clinic for Special 

Surgery, and intervenor Surgical and Diagnostic Center (collectively AEast Side@), sued the Commission in 

an attempt to invalidate certain default rules, 28 Tex. Admin. Code '' 133.304(i), 134.1(c) (2003),

designed to apply where the Commission has failed to promulgate fee guidelines.2 After a bench trial, the 

district court declared rule 133.304(i) invalid and enjoined the Commission from enforcing it. We will 

reverse the judgment invalidating rule 133.304(i) and dissolve the injunction.

PROCEDURAL AND FACTUAL BACKGROUND

The parties proceeded to a bench trial on stipulated facts. For our purposes, the most 

relevant facts are that East Side is an ambulatory surgical center, which has rendered health care services to 

injured workers who were insured by the Act, that it submits each claim to an insurance carrier, and that the 

carrier decides how much to pay on each claim based on the carrier=s determination of whether the claim Ais 

fair and reasonable.@ It is this last point that forms the basis of this suit. East Side contends that the 

Commission has unlawfully delegated its authority to the carriers to set the fees paid to ambulatory surgical 

 

2

In addition to the Texas Workers= Compensation Commission, East Side sued Richard 

Reynolds, Executive Director of the Commission, the State Office of Administrative Hearings (ASOAH@), 

and Administrative Law Judge, Sheila Bailey Taylor. Texas Mutual, Continental Casualty, and the State 

Office of Risk Management (ASORM@) are insurance carriers authorized to insure payment of workers=

compensation. See Tex. Lab. Code Ann. ' 401.011(27) (West Supp. 2004). They intervened in support 

of the Commission. We will refer to them collectively as the ACommission.@
3

centers. But before we address the merits of East Side=s argument, we will frame the discussion with an 

overview of the applicable statutory and regulatory process at issue.

The claims-reimbursement process

Claims for reimbursement for health care services rendered to injured workers insured by 

the Act are submitted to the insurance carrier, who pays the fee allowed under section 413.011 of the labor 

code. See Tex. Lab. Code Ann. '' 408.027(a),3 413.015(a) (West Supp. 2004). Section 413.011 

requires the Commission to establish fee guidelines that are Afair and reasonable and designed to ensure the 

quality of medical care and to achieve effective medical cost control.@ Id. ' 413.011(a), (d) (West Supp. 

2004); Texas Workers= Comp. Comm=n v. Patient Advocates of Tex., 47 Tex. Sup. Ct. J. 607, 2004 

Tex. LEXIS 477, at *20-21 (May 28, 2004). The Commission has yet to establish a fee guideline for 

ambulatory surgical care. See 28 Tex. Admin. Code ' 134.401(a)(4) (2003) (AAmbulatory/outpatient 

 

3

Section 408.027(a) used to read: AAn insurance carrier shall pay the fee charged for a 

service rendered by a health care provider.@ See Act of May 22, 1993, 73d Leg., R.S., ch. 269, 1993 

Tex. Gen. Laws 1179, amended by Act of June 19, 1999, 76th Leg., R.S., ch. 1426, 1999 Tex. Gen. 

Laws 4868 (emphasis added). It now reads: AAn insurance carrier shall pay the fee allowed under

section 413.011 for a service rendered by a health care provider.@ Tex. Lab. Code Ann. ' 408.027(a) 

(West Supp. 2004) (emphasis added). The purpose of this amendment was to clarify that health care 

providers are not automatically entitled to their billed charges. House Comm. on Bus. & Indus., Bill 

Analysis, Tex. H.B. 2510, 76th Leg., R.S. (1999).
4

surgical care is not covered by this guideline and shall be reimbursed at a fair and reasonable rate until the 

issuance of a fee guideline addressing these specific types of reimbursements.@).

In lieu of a fee guideline applicable to ambulatory surgical centers, the Commission 

promulgated rules 133.1 and 133.304 of title 28 of the administrative code, 25 Tex. Reg. 2127, 2531 

(adopted Mar. 10, 2000), and rule 134.1(c) of title 28 of the administrative code, 27 Tex. Reg. 4047-48 

(adopted May 10, 2002). Rule 133.1 is entitled, ADefinitions for Chapter 133CMedical Benefits,@ and 

states that a fair and reasonable reimbursement must meet Athe standards set out in ' 413.001@ of the labor 

code and is

the lesser of a health care provider=s usual and customary charge, or

(A) the maximum allowable reimbursement [(AMAR@)], when one has been established in 

an applicable Commission fee guideline,

(B) the determination of a payment amount for medical treatment(s) and/or service(s) for 

which the Commission has established no maximum allowable reimbursement amount, 

or

(C) a negotiated contract amount.

28 Tex. Admin. Code ' 133.1(a)(8) (2003).

Rule 133.304(i) states:

(i) When the insurance carrier pays a health care provider for treatment(s) and/or 

service(s) for which the Commission has not established a maximum allowable 

reimbursement, the insurance carrier shall:

(1) develop and consistently apply a methodology to determine fair and reasonable 

reimbursement amounts to ensure that similar procedures provided in similar 

circumstances receive similar reimbursement.
5

Id. ' 133.304(i) (2003).

And rule 134.1(c) states, AReimbursement for services not identified in an established fee 

guideline shall be reimbursed at fair and reasonable rates@ under section 413.011 of the labor code until 

those fees Aare established by the commission.@ Id. ' 134.1(c) (2003). These medical-dispute-resolution 

rules bring us to the underlying dispute.

The dispute

East Side sued the Commission for declaratory relief4 regarding the validity of rules 

133.1(a)(8), 133.304(i), and 134.1, and requested injunctive relief to enjoin their enforcement. It asserted 

that the Commission did not have the express or implied authority to promulgate those rules; that the 

promulgation of those rules constituted an unlawful delegation of the Commission=s rule-making authority to 

the insurance carriers, the Medical Review Dispute Officers (AMROs@), see 28 Tex. Admin. Code '

133.307 (2003), and SOAH; and that the Commission was acting outside its statutory authority by allowing 

the carriers, the MROs, and SOAH to determine reimbursements on an ad hoc adjudicatory basis instead 

 

4 East Side sought declaratory relief under the Administrative Procedures Act (AAPA@), Tex. 

Gov=t Code Ann. '' 2001.001-.902 (West 2000 & Supp. 2004), the Uniform Declaratory Judgments Act 

(AUDJA@), Tex. Civ. Prac. & Rem. Code Ann. '' 37.001-.011 (West 1997), and section 402.021 of the 

labor code, Tex. Lab. Code Ann. ' 402.021 (West 1996). Section 402.021 of the labor code provides 

that judicial review of a Commission rule is governed by the APA. Tex. Lab. Code Ann. ' 402.021(a).
6

of by rule. East Side also requested the district court to declare that in the absence of a properly 

promulgated fee guideline, it was entitled to its usual and customary reimbursement amount.

After a one-day bench trial, the district court concluded that rule 133.304(i) was invalid 

because it interfered with and impaired East Side=s legal right and privilege to have fee guidelines established 

by rule by the Commission and because it improperly delegated to the insurance carriers the Commission=s 

statutory duty and authority to establish fee guidelines. The district court enjoined the Commission from 

applying rule 133.304(i) in setting fees for East Side=s services until the fee guidelines were established by 

rule by the Commission. The district court subsequently filed conclusions of law, repeating those previously 

cited conclusions and adding that the Commission could not by law establish fee guidelines through ad hoc

adjudication.

Both parties now appeal. East Side raises one issue: whether the district court erred in 

failing to declare that the appropriate payment for a medical service, in the absence of a fee guideline, is the 

provider=s usual and customary charge. The Commission raises two issues: whether rule 133.304(i) was an 

unlawful delegation of the Commission=s fee-setting authority, and whether rule 133.304(i) interfered with or 

impaired East Side=s legal right and privilege to have the Commission set its fees.5

 

5

Intervenor SORM also filed a separate appeal in this Court. At trial and now on appeal, it 

argued that the district court lacked jurisdiction over East Side=s request for declaratory relief because East 

Side had failed to exhaust its administrative remedies prior to instituting suit. Because the declaratory relief 

sought by East Side raised pure questions of law and dealt with the authority of the Commission to delegate 

its fee-setting duties to the insurance carriers, the exhaustion doctrine is inapplicable. See Grounds v. Tolar 

Ind. Sch. Dist., 707 S.W.2d 889, 892 (Tex. 1986) (questions of law); Westheimer Indep. Sch. Dist. v. 

Brockette, 567 S.W.2d 780, 785 (Tex. 1978) (challenge to statutory authority); Mission Ind. Sch. Dist. v. 

Diserens, 188 S.W.2d 568, 570 (Tex. 1945) (questions of law); Chocolate Bayou Water Co. v. Tex. 

Natural Res. Conservation Comm=n, 124 S.W.3d 844, 852 (Tex. App.CAustin 2003, pet. filed) (citing 
7

 

Friends of Canyon Lake v. Guadalupe-Blanco River Auth., 96 S.W.3d 519, 527 (Tex. App.CAustin 

2002, pet. denied)). We also note that resolution of this suit against the Commission will not require the 

determination of facts in the context of a particular claim for reimbursement. See American Motorists Ins. 

Co. v. Fodge, 63 S.W.3d 801, 804 (Tex. 2001); Beacon Nat=l Ins. Co. v. Montemayor, 86 S.W.3d 

260, 268 (Tex. App.CAustin 2002, no pet.) (citing and distinguishing City of Waco v. Texas Natural Res. 

Conservation Comm=n, 83 S.W.3d 169, 176-78 (Tex. App.CAustin 2002, pet. denied)). Here, we are 

presented with the question of the Commission=s rulemaking authorityCa question subject to declaratory 

relief. See All Saints Health Sys. v. Texas Workers= Comp. Comm=n, 125 S.W.3d 96, 98-107 (Tex. 

App.CAustin 2003, pet. denied); State Bd. of Ins. v. Deffenbach, 631 S.W.2d 794, 796-802 (Tex. 

App.CAustin 1982, writ ref=d n.r.e.). We overrule SORM=s jurisdictional issue.

DISCUSSION

A. Standard of review

Because the extent to which the Commission has unlawfully delegated its authority is a 

matter of statutory construction, we review the district court=s conclusions de novo. Public Util. Comm=n 

v. City of Austin, 728 S.W.2d 907, 911-12 (Tex. App.CAustin 1987, writ ref=d n.r.e.). Because the 

district court=s conclusions of law are reviewed de novo, we afford no deference to the district court=s 

decision. State v. Heal, 917 S.W.2d 6, 9 (Tex. 1996). The district court=s legal conclusions will be upheld 
8

on appeal if the judgment can be sustained on any legal theory supported by the evidence. Westech Eng=g, 

Inc. v. Clearwater Constructors, Inc., 835 S.W.2d 190, 196 (Tex. App.CAustin 1992, no writ). Those 

conclusions of law may not be reversed unless they are erroneous as a matter of law. Id.

B. Delegation

We begin with a discussion of the delegation issue. In an opinion issued after the parties 

filed their appeals, the Texas Supreme Court decided that rule 133.304(i) was not an unlawful delegation of 

the Commission=s fee-setting authority to the insurance carriers. Patient Advocates, 2004 Tex. LEXIS 

477, at *29-37.6 Because the validity of rule 133.304(i) is at the heart of every issue on appeal, a review of 

that case is in order.

 

6

In a letter brief filed after Texas Workers= Compensation Commission v. Patient Advocates of 

Texas, 47 Tex. Sup. Ct. J. 607, 2004 Tex. LEXIS 477 (May 28, 2004), was decided, East Side 

conceded the delegation issue. The decision is applicable to all of East Side=s issues, however, so we will 

briefly discuss the supreme court=s holding.

For our purposes, the relevant issue in Patient Advocates was whether the Commission=s 

rules for determining reimbursement amounts Ain the absence of specified fee guidelines improperly 

delegated the agency=s . . . fee-setting authority to private entities.@ Id. at *1. The argument was that 

Apermitting insurance carriers to develop a methodology to determine reimbursement amounts where [the 

Commission] has not determined a [maximum allowable reimbursement] gives carriers unfettered discretion 

and allows them to engage in secret rulemaking.@ Id. at *29.
9

After a discussion similar to ours above reviewing the Act=s reimbursement procedures, the 

supreme court concluded that the carriers were not setting fees. Id. at *34. It noted that, in the absence of 

a fee guideline, the provider initially set the fee, namely, the billed amount. Id. It also noted that the 

Acarriers do not make the final determination of the fees for disputed claims. If a carrier and a provider 

disagree on a reimbursement amount, [the Commission], not the carrier, makes the decision on the proper 

payment, subject to review.@ Id. (emphasis added). Any party dissatisfied with the outcome could 

Acontinue the review process through SOAH and then the courts.@ Id. (citing Tex. Lab. Code Ann. '

413.031(d)). The court also explained that rule 133.304(i) did not give the carriers Ahidden and unbridled 

discretion to arbitrarily set payments, but [gives] them specific instructions on the procedures they are to 

follow.@ Id. at *35. Consequently, rule 133.304(i) was not an unlawful delegation of the Commission=s 

fee-setting authority. Id.

We address an argument made by East Side that was not directly addressed by Patient 

Advocates but is similar in nature, involving a claim that SOAH, in addition to the carriers, was setting the 

fees. East Side contends that the methodology employed by SOAH constitutes fee setting. SOAH places 

appeals from the Commission=s Medical Review Division into various groupings, sorted by carrier and 

further sorted into common reimbursement methodologies and common procedures. According to East 

Side, once the methodology is approved, Athe ALJs will then apply the carrier=s reimbursement rates to all 

cases pending at SOAH involving the carrier.@ Thus, A[g]iving stare decisis effect to the approval of a 

carrier=s reimbursement determinations would, in practical effect, amount to retrospective establishment of a 

fee guideline for all services billed to that carrier.@
10

First, as indicated above, there has been no delegation of Commission authority. Second, 

the methodology is consistent with relevant statutes and rules. The legislature has mandated that fees paid 

for services must be consistent. See Tex. Gov=t Code Ann. ' 413.011. The Commission=s rules reflect that 

requirement. See 28 Tex. Admin. Code ' 133.304(i) (requiring the insurance carrier to Adevelop and 

consistently apply a methodology to determine fair and reasonable reimbursement amounts to ensure that 

similar procedures provided in similar circumstances receive similar reimbursement@). SOAH=s practice of 

consolidating cases by carrier and by procedure allows it to determine whether the carrier has applied a 

consistent methodology. And, again, as the supreme court stated in Patient Advocates, because the fee 

initially is set by the provider, there has been no delegation of the Commission=s fee-setting authority.

Following the reasoning in Patient Advocates, we conclude that the Commission has not 

unlawfully delegated its fee-setting authority to either the carriers or SOAH. We sustain the Commission=s 

first issue, conclude that rule 133.304(i) of title 28 of the administrative code is not an unlawful delegation of 

the Commission=s fee-setting authority, and reverse the district court=s judgment.

C. Statutory and legal right to have a fee guideline set

The district court concluded that rule 133.304(i) was invalid for another reason: the rule 

interfered with and impaired Athe legal right and privilege of [East Side] to have fee guidelines established by 

rule by the Commission[].@ On appeal, the Commission makes two arguments. First, it argues that the 

Commission=s failure to establish a fee guideline is not a legal basis for invalidating the rule. Second, it 

argues that East Side is not entitled to ACommission action solely by rulemaking.@ The Commission believes 

that it has the discretion to set the fees paid to East Side on an ad hoc basis and is not required to establish 

fee guidelines by rule. See Tex. Lab. Code Ann. '' 413.002, .011, .031 (giving the Commission 
11

adjudicatory power over the resolution of fee disputes). East Side counters with the argument that the 

Commission=s Achoice to abdicate in favor of the insurance carriers is unlawful and prejudicial@ and that it 

has Aa statutory right to have [its] fees regulated by the Commission, based on the criteria stated in Section 

413.011 of the labor code.@

The basis for East Side=s argument is a quote from this Court: AUnless mandated by 

statute, the choice by an agency to proceed by general rule or by ad hoc adjudication is one that lies 

primarily in the informed discretion of the agency.@ State Bd. of Ins. v. Deffebach, 631 S.W.2d 794, 799 

(Tex. App.CAustin 1982, writ ref=d n.r.e.) (citing Securities & Exch. Comm=n v. Chenery Corp., 332 

U.S. 194, 203 (1947)) (emphasis added). East Side believes that because section 413.011 requires the 

Commission to adopt the fee guidelines by rule and because that power cannot be delegated, the statute 

mandates the Commission=s enactment of fee guidelines, see Deffebach, 631 S.W.2d at 799.

The supreme court, however, as we discussed above, held there was no delegation. It also 

held that the Commission complied with the statutory mandate in part, recognizing that Ait may be impossible 

for [the Commission] to create a comprehensive guideline covering all possible medical procedures that an 

injured employee might require.@ Patient Advocates, 2004 Tex. LEXIS 477, at *31. Similarly, the court 

cited Railroad Commission v. Lone Star Gas Co., 844 S.W.2d 679, 689 (Tex. 1995), and Texas Boll 

Weevil Eradication Foundation v. Lewellen, 952 S.W.2d 454, 471 (Tex. 1997), for the proposition that 

Aan administrative agency=s failure to include every specific detail and anticipate unforeseen circumstances 

when promulgating rules does not invalidate the rules.@ Patient Advocates, 2004 Tex. LEXIS 477, at *31.

We held similarly in Brinkley v. Texas Lottery Commission:
12

The legislature intends that administrative agencies exercise effectively the powers delegated 

to them . . . . Agencies would be reduced to impotence, however, if bound to express their 

views as to Alaw,@ Apolicy,@ and procedural Arequirements@ through contested-case 

decisions or formal rules exclusively; and they could not under such a theory exercise 

powers explicitly delegated to them by the legislature . . . . 

. . . . If every expression by the agency as to Alaw,@ Apolicy,@ and procedural 

Arequirements@ requires the promulgation of a formal rule, the agency could no longer 

exercise its Ainformed discretion@ to choose adjudication as a means of making law and 

policy, rather than rulemaking, a choice we have repeatedly said an agency has when it 

possesses both adjudicatory and rulemaking powers.

986 S.W.2d 764, 769 (Tex. App.CAustin 1999, no pet.) (citations omitted). As articulated by the 

supreme court, given the hundreds of medical fees the Commission was charged with establishing and the 

complexity of some fees, it seems reasonable that the Commission would choose to proceed on an ad hoc 

basis pending the setting of those fees.7 Patient Advocates, 2004 Tex. LEXIS 477, at *32-37.

 

7 On October 31, 2003, the Commission proposed fee guidelines for ambulatory surgical centers. 

28 Tex. Reg. 9405 (proposed Oct. 31, 2003).

We also note that at trial and now on appeal, East Side cited no statutory right or privilege to have 

the fee guidelines set by rule. Section 413.011 simply provides that the Commission must establish fee 

guidelines that are Afair and reasonable and designed to ensure the quality of medical care and to achieve 

effective medical cost control.@ Tex. Lab. Code Ann. ' 413.011(a), (d). East Side is only entitled to Afair 

and reasonable@ reimbursementCnot to have the fee guidelines established by rule.

Fee guidelines were never intended to be an entitlement. As we stated in Methodist Hospitals v. 

Texas Workers= Compensation Commission, fee guidelines Amerely assist carriers and, upon review, the 
13

Commission in determining whether medical charges are >fair and reasonable= or satisfy the applicable 

standard.@ 874 S.W.2d 144, 149-50 (Tex. App.CAustin 1994, writ dism=d w.o.j.). Consequently, even if 

the Commission had promulgated fee guidelines, the provider would not have a statutory right or privilege to 

be paid the amount set out in the guideline. East Side=s contention that the Commission was obligated by 

statute to set the fee guidelines is therefore incorrect. We sustain the Commission=s second issue, reverse, 

and render on this issue.

D. In the absence of fee guidelines, the provider=s usual and customary charge applies

East Side raises one issue on appeal premised on the invalidation of rule 133.304(i). It cites All 

Saints Health System v. Texas Workers= Compensation Commission for the proposition that Athe 

appropriate remedy following the invalidation of an administrative rule under the APA is to return to the last 

validly adopted legal standard existing at the time of the rule=s promulgation.@ 125 S.W.3d 96, 102 (Tex. 

App.CAustin 2003, pet. denied). The last validly adopted legal standard, according to East Side, is rule 

42.105, which states that the maximum allowable charge for services rendered is the lesser of the 

Aprovider=s usual fees and charges,@ or the Afees and charges established by use of a relative value scale.@ 

28 Tex. Admin. Code ' 42.105 (2003). Because the Commission had not adopted a relative value scale, 

East Side felt it was due its usual and customary fee.

This argument fails because the supreme court concluded that rule 133.304 is a valid rule. Patients 

Advocates, 2004 Tex. LEXIS 477, at *36-37. We overrule East Side=s issue.

CONCLUSION
14

We affirm in part and reverse and render in part the judgment of the district court. We reverse the 

district court=s judgment declaring rule 133.304(i), 28 Tex. Admin. Code ' 133.304, an unlawful delegation 

of Commission authority and finding that East Side had a legal right or privilege to have the fee guidelines 

set; we render judgment that the rule is valid, and we dissolve the injunction. Last, because rule 133.304(i) 

is valid, East Side is not entitled to its usual and customary fee. We affirm the district court=s judgment on 

that issue.

____________________________________

David Puryear, Justice

Before Chief Justice Law, Justices Patterson and Puryear

Affirmed in Part; Reversed and Rendered in Part.

Filed: July 29, 2004