Cite as 2023 Ark. App. 197

ARKANSAS COURT OF APPEALS

DIVISION II

No. CV-22-197

PHYSICIANS’ SPECIALTY HOSPITAL, LLC

APPELLANT

V.

ARKANSAS DEPARTMENT OF HUMAN 

SERVICES, DIVISION OF MEDICAL 

SERVICES; AND THE ARKANSAS 

HOSPITAL ASSOCIATION

APPELLEES

Opinion Delivered April 5, 2023

APPEAL FROM THE WASHINGTON

COUNTY CIRCUIT COURT

[NO. 72CV-16-1370]

HONORABLE CRISTI BEAUMONT, 

JUDGE

AFFIRMED

MIKE MURPHY, Judge

Physicians’ Specialty Hospital (PSH) appeals the decision of the Washington County 

Circuit Court granting summary judgment on the issue of liability in favor of the Arkansas 

Department of Human Services, Division of Medical Services (DHS). On appeal, PSH argues 

that the circuit court erred in finding that the fee levied against it was a lawful assessment. 

Oral argument was held, and all counsel present provided thoughtful discussion helpful to 

this decision. We affirm.

On July 5, 2016, DHS commenced this action to recover unpaid assessments from 

PSH totaling $873,173.28, pursuant to the Hospital Assessment Fee Program, found at 

Arkansas Code Annotated sections 20-77-1901 et seq. (Repl. 2018). The stated purpose of 

the program is “to levy an assessment fee on hospitals to improve health care access for the 
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citizens of Arkansas.” Act 562 of 2009. To do so, the program imposes a yearly assessment 

on nonexempt Arkansas hospitals in an amount calculated as a percentage of each hospital’s 

net patient revenue. Ark. Code Ann. § 20-77-1902.

The assessments are paid into a designated “Hospital Assessment Account,” which is 

a part of the Arkansas Medicaid Program Trust Fund. Ark. Code Ann. § 20-77-1904. That 

account is explicitly designated as “separate and distinct” from the General Revenue Fund 

Account of the State Apportionment Fund, and funds in it are supplementary to the 

Arkansas Medicaid Program Trust Fund. Id. “Moneys in the Hospital Assessment Account 

shall not be used to replace other general revenues appropriated and funded by the General 

Assembly or other revenues used to support Medicaid.” Ark. Code Ann. § 20-77-1904(d). 

This money is matched by the United States Department of Health and Human Services, 

Centers for Medicare and Medicaid Services (CMS) and then distributed back to the 

participating hospitals pro rata to how many patients on Medicaid each hospital treats. Ark. 

Code Ann. § 20-77-1904(d). 

The parties agree that a great majority of the levied hospitals realize a net gain under 

the program. PSH, however, does not. Over a four-year period, PSH alleges to have lost over 

a million dollars to the program, whereas other hospitals have realized a net gain of twenty 

million and more. Without question, if PSH accepted more Medicaid patients, it would 

receive more in access payments. But, PSH argues, it is a specialty hospital (a term of art in 

this area of law discussed in greater detail later) with twenty beds, “no real emergency room,” 

and is “not equipped to ‘accept’ large numbers of Medicaid patients in order to make this 
3

system work.” PSH contends that because it is not “on the same footing” as “larger public 

hospitals” it could never accept enough Medicaid patients to have its tax bear a reasonable 

relationship to its assessment. 

To that end, when DHS brought this action to recover unpaid assessment fees, PSH 

counterclaimed, alleging that the assessment was (1) an illegal exaction, (2) in violation of 

federal law, and (3) in violation of equal-protection principles. The counterclaim further 

sought to recoup $717,713.74 of assessments already paid by PSH under the program.

DHS moved for summary judgment on the issue of liability, which the circuit court 

granted. In that order, the court wrote that the program does not involve a “public fund” 

under article 16, section 13 of the Arkansas Constitution and that it is not a “tax.” The court 

explained that “[t]he actual benefit of the [program] is maximized federal contribution, with 

greater payment to Medicaid hospital providers,” resulting in lessened expenses for hospitals 

and Arkansans. It found that PSH benefits from the payments from the program directly in 

proportion to its Medicaid discharges. The court further found that the program, fees, and 

payments are fair and reasonable and in compliance with federal regulations and the CMS 

waiver requirements. Finally, the court found that the program is rationally based on 

legitimate government objectives, and PSH did not demonstrate any equal-protection 

violations. 

PSH timely appealed the grant of summary judgment. 

As we have often stated, summary judgment is to be granted by a circuit court if the 

pleadings, depositions, answers to interrogatories and admissions on file, together with 
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affidavits, if any, show that there is no genuine issue of material fact and that the moving 

party is entitled to judgment as a matter of law. Ark. R. Civ. P. 56; Gonzales v. City of DeWitt, 

357 Ark. 10, 14–15, 159 S.W.3d 298, 301 (2004). The purpose of summary judgment is not 

to try the issues but to determine whether there are any issues to be tried. Fryar v. Roberts, 

346 Ark. 432, 57 S.W.3d 727 (2001).

Summary judgment is to be granted by a circuit court only when there are no genuine 

issues of material fact to be litigated and the moving party is entitled to judgment as a matter 

of law. Id. Once a moving party has established a prima facie entitlement to summary 

judgment, the opposing party must meet proof with proof and demonstrate the existence of 

a material issue of fact. Id. On appeal, we determine if summary judgment was appropriate 

by deciding whether the evidentiary items presented by the moving party in support of its 

motion leave a material fact unanswered. Id. This court views the evidence in a light most 

favorable to the party against whom the motion was filed, resolving all doubts and inferences 

against the moving party. Id. Our review is not limited to the pleadings—we also focus on the 

affidavits and other documents filed by the parties. Id. After reviewing undisputed facts, 

summary judgment should be denied if, under the evidence, reasonable men might reach 

different conclusions from those undisputed facts. Allen v. Allison, 356 Ark. 403, 413, 155 

S.W.3d 682, 689 (2004).

I. Fee or Tax

PSH does not argue that there are material facts in dispute; instead, it contends that 

the court erred in its application of the facts to the law. It first explains that the circuit court 
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erred in finding that the fee imposed by the program is not a “tax.” The distinction is 

important because unless the fee is a “tax,” PSH’s illegal-exaction arguments automatically 

fail. 

Illegal-exaction lawsuits in Arkansas are authorized under article 16, section 13 of the 

Arkansas Constitution, which provides, “Any citizen of any county, city or town may institute 

suit on behalf of himself and all others interested, to protect the inhabitants thereof against 

the enforcement of any illegal exactions whatever.” An illegal exaction is defined as any 

exaction that either is not authorized by law or is contrary to law. McCafferty v. Oxford Am. 

Literary Project, Inc., 2016 Ark. 75, at 2–3, 484 S.W.3d 662, 664. Two types of illegal-exaction 

cases can arise under article 16, section 13: “public funds” cases, where the plaintiff contends 

that public funds generated from tax dollars are being misapplied or illegally spent; and 

“illegal tax” cases, where the plaintiff asserts that the tax itself is illegal. Id. PSH challenges 

the assessment as an “illegal tax” exaction case. To bring an illegal-exaction claim based on 

an “illegal tax,” the exaction must be a tax and not a fee. Morningstar v. Bush, 2011 Ark. 350, 

at 6–7, 383 S.W.3d 840, 845.

The distinction between a tax and a fee is that government imposes a tax for generalrevenue purposes, but a fee is imposed in the government’s exercise of its police powers. Rose 

v. Ark. State Plant Bd., 363 Ark. 281, 292, 213 S.W.3d 607, 616–17 (2005). Taxing power is 

usually exercised to provide funding for public services at large, while police power is usually 

exercised to cover the cost of administering a regulatory scheme or providing a service. See 

generally Morningstar, supra. A fee may be assessed for providing a service without obtaining 
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public approval. Id. In order not to be denominated a tax by the courts, a governmental levy 

of a fee must be fair and reasonable and bear a reasonable relationship to the benefits 

conferred on those receiving the services. Id.

PSH first argues that because in some reports and depositions DHS refers to the 

access fee as a tax, the circuit court necessarily erred when it did not find the assessment to 

be a tax. However, the fact that the levy is labeled a “ fee,” not a “tax,” is not binding, and 

this court looks to the true character of the levy to determine which it is. Id.

In Rose, the levies at issue were collected to fund a boll-weevil-eradication program, 

and it was important that the assessments were “only charged to those persons who will 

directly benefit from the eradication program, namely the cotton growers in the eradication 

zone,” and that the money collected was not deposited into the state’s general revenue or the 

Plant Board’s revenue. “Moreover,” the court wrote, “the fees do not exceed the estimated 

costs proposed by the [cotton grower organizations], and they bear a reasonable relationship 

to the benefits conferred on the growers. Accordingly, we affirm the trial court’s conclusion 

that the fees levied by the Board under the Act are not taxes[.]” Rose, 363 Ark. at 292, 213 

S.W.3d at 617. 

Similarly, in Holman v. City of Dierks, 217 Ark. 677, 678, 233 S.W.2d 392, 393 (1950), 

an annual $4 sanitation charge per business and residence was held to be a fee “for services 

to be rendered,” and not a tax, when it was collected and used to pay for fogging the city 

three times year with insecticide. However, in City of North Little Rock v. Graham, a “public 

safety fee” added to residents’ water bills was a “tax” because its purpose was to increase 
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police salaries, which the court wrote was more of a “means of raising revenue to pay 

additional money for services already in effect,” instead of a specific, special service or 

scheme. 287 Ark. 547, 549, 647 S.W.2d 452, 453 (1983).

PSH argues that, here, the hospital assessments imposed under the program are

charged to and paid by the hospitals, “which derive no direct benefit from the assessments.” 

PSH instead contends that the Medicaid recipients are the true beneficiaries, but they are 

not the ones paying the assessment. We are not so persuaded. Here, the money collected is 

deposited into a Hospital Assessment Account, separate and distinct from the general 

revenue. It is collected with the purpose of being matched with federal funds and 

redistributed to those same levied hospitals on the basis of the amount of Medicaid patients 

each hospital treats. Medicaid provides funding for medical services to the poor. Frew ex rel. 

Frew v. Hawkins, 540 U.S. 431, 433 (2004). Accordingly, the fees at bar are collected for a 

specific purpose that bears a reasonable relationship to the benefits conferred on those 

levied: defraying the hospital costs associated with treating Medicaid patients. See, e.g., id. (“A 

hospital that treated an unusually high number of low-income patients therefore would be 

treating an unusually high number of patients who tend to be sicker, and to cost more to 

treat, than others.”). The court did not err, as a matter of law, when it determined that the 

program assessments are fees and not taxes. 

II. Federal Compliance and the CMS Waiver

PSH next challenges the finding that the assessment complies with the relevant 

federal regulations and the CMS waiver. The Hospital Assessment Fee Program was designed 
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to take advantage of a federal program providing additional funding for treating Medicaid 

patients. Under this federal program, hospital-provider taxes must be broad based and 

uniformly applied, but federal law permits a state to request a waiver of the broad-based 

requirement, including the uniformity requirement from the CMS. 42 U.S.C. § 

1396b(w)(3)(E); 42 C.F.R. §§ 433.68(c)(3), 433.72 (2008) WL 42 CFR §§ 433.68, 433.72.

CMS has discretion to approve such waivers upon a showing that the net impact of the 

provider fee is generally redistributive in nature, and the amount of the provider fee is not 

directly correlated to payments for items or services with respect to which the provider fee is 

imposed. 42 U.S.C. § 1396b(w)(3)(E)(ii); 42 C.F.R. §§ 433.68(c)(2), 433.72(b).

The assessment-fee program, as it is written in Arkansas, provides that some hospitals 

may be exempted from the assessment imposed, necessarily requiring a CMS waiver. 

Hospitals excluded from paying the fee in Arkansas include (1) hospitals that are not 

privately operated hospitals (that is, government-run hospitals); (2) hospitals licensed by DHS 

as rehabilitation hospitals; and (3) specialty hospitals. Ark. Code Ann. § 20-77-1905. A 

“specialty hospital” as defined in the Arkansas Code as any hospital that “limits services 

primarily to children and qualifies as exempt from the Medicare prospective payment system 

regulation; or is primarily or exclusively engaged in the care and treatment of patients with 

cardiac conditions.” Ark. Code Ann. § 20-77-1901. 

Due to the presence of these exemptions, once the legislation passed, DHS sought a 

waiver of the broad-based requirements from CMS. According to the waiver-request letter, 

the recently adopted legislation at issue was attached. CMS granted the waiver request. In 
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the return correspondence from CMS granting the waiver, the language discussing the 

exemptions mirrors the language and structure of Ark. Code Ann. § 20-77-1905. The waiver 

provided the following:

(i) Hospitals that are not privately operated are excluded from the tax;

(ii) Rehabilitation hospitals are excluded from the tax;

(iii) Specialty hospitals are excluded from the tax;

Section 1903(w)(3)(E) of the Act specifies that the Secretary shall approve broad-based 

(and uniformity) waiver applications if the net impact of the tax is generally 

redistributive and that the amount of the tax is not directly correlated to Medicaid 

payments.

PSH argues that “specialty hospital” as it is defined in the Arkansas Code is not the 

same as a “specialty hospital” as it is defined in the Social Security Act, and it cites 42 U.S.C. 

§ 1395nn(h)(7) for the proposition that “specialty hospital” as it was used in the CMS waiver 

meant hospitals treating patients with cardiac or orthopedic conditions or patients receiving 

surgery. We are not persuaded. “Specialty hospital” is not defined in the Social Security Act 

anywhere beyond section 1395nn(h)(7), where it is addressed as only “for purposes of this 

section,” a section dedicated to discussion of limitations of certain physician referrals. Nor 

is there indication that CMS was referring to this definition from 42 U.S.C. § 1395nn(h)(7) 

when it was agreeing to exempt “specialty hospitals” when replying to the waiver request 

specifically sought due to the legislature’s exemptions located in Arkansas Code Annotated

section 20-77-1905.

PSH additionally argues that the assessment was not uniformly applied because, when 
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calculating the assessment, DHS used different-year cost reports and revenue percentages for 

different hospitals. The record, however, established that DHS used the most recently 

audited cost reports it had available to calculate the assessment for each hospital in the state 

of Arkansas, a policy uniformly applied. Regarding the different percentages, Arkansas Code 

Annotated section 20-77-1902(a)(2) explains that the assessment rate is 

determined annually based upon the percentage of net patient revenue needed to 

generate an amount up to the nonfederal portion of the upper payment limit gap plus 

the annual fee to be paid to Medicaid under § 20-77-1904(f)(1)(C), but in no case at 

a rate that would cause the assessment proceeds to exceed the indirect guarantee 

threshold set forth in 42 C.F.R. § 433.68(f)(3)(i).

So, while the result may have amounted to a “different percentage” for each hospital, it was 

again calculated using a method applied uniformly to all the hospitals. The circuit court’s 

finding that the assessment complies with the relevant federal regulations and the CMS 

waiver was not erroneous. 

III. Equal Protection

Finally, the circuit court dismissed PSH’s equal-protection counterclaim. The equal 

protection provisions of the Arkansas Constitution are applied using the same test as is 

applied in evaluating claims under the federal Equal Protection Clause. Streight v. Ragland, 

280 Ark. 206, 655 S.W.2d 459 (1983). It is settled law in Arkansas that to bring an Equal 

Protection claim to challenge an assessment fee or state tax, there must be, at a minimum,

factual allegations that similarly situated payers are treated differently and there is no 

hypothetical rational basis for the different treatment. U.S. Const. amend. 14, § 1; Ark. 
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Const. art. 2, §§ 2, 3; Rose, supra. Although this case does not involve a tax, the case law 

analysis of an equal-protection claim challenging an assessment fee and tax is the same. Rose, 

supra. 

The equal-protection clause permits classifications that have a rational basis and are 

reasonably related to a legitimate government purpose. Otis v. State, 355 Ark. 590, 142 

S.W.3d 615 (2004). Equal protection does not require that persons be dealt with identically; 

it only requires that classification rest on real and not feigned differences, that the 

distinctions have some relevance to the purpose for which the classification is made, and 

that their treatment be not so disparate as to be arbitrary. Id. When reviewing an equalprotection challenge, it is not this court’s role to discover the actual basis for the legislation. 

Id. Rather, we consider whether there is any rational basis that demonstrates the possibility 

of a deliberate nexus with state objectives so that legislation is not the product of arbitrary 

and capricious government purposes. Id. If a rational basis exists, the statute will withstand 

constitutional challenge. Id. Under the rational-basis test, legislation is presumed 

constitutional and rationally related to achieving any legitimate governmental objective 

under any reasonably conceivable fact situation. Eady v. Lansford, 351 Ark. 249, 92 S.W.3d 

57 (2002). The burden is on the party challenging the legislation to prove its 

unconstitutionality. Id.

Again, the Hospital Assessment Fee Program was enacted with the stated purpose of 

levying an assessment fee on hospitals to improve health-care access for the citizens of 

Arkansas. That program excepts some hospitals from paying the fee. PSH argues that there 
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is no rational basis for treating it (an orthopedic hospital) differently than the exempted 

hospitals. However, “[i]nherent in the power to tax is the power to discriminate in taxation.”

Leathers v. Medlock, 499 U.S. 439, 451 (1991); we cannot strike down an entire classification 

merely because it is underinclusive. Medlock v. Leathers, 311 Ark. 175, 179, 842 S.W.2d 428, 

430–31 (1992). One of the reasons suggested by the amicus and DHS for not exempting a 

hospital like PSH includes the hypothesis that orthopedic specialty hospitals do not 

adequately serve Medicaid-eligible patients throughout the state; therefore, they were not 

excluded from the assessment fee to encourage them to serve Medicaid-eligible patients. This 

is a conceivable rational basis sufficient to satisfy equal protection. Medlock, 311 Ark. 175, 

842 S.W.2d 428. 

Importantly, nothing in the statute prevented PSH from taking advantage of the 

obvious benefits of the statute. PSH could have taken on more Medicaid patients, but it did 

not. PSH’s failure to do so does not make the entire statute unconstitutional. See Landers v. 

Stone, 2016 Ark. 272, at 16, 496 S.W.3d 370, 380 (explaining that an argument that “laws 

are underinclusive, by allowing a select few to briefly evade their strictures, provides no 

reason at all to hold that the statutes are unconstitutional”); see also City of Marion v. Baioni, 

312 Ark. 423, 428, 850 S.W.2d 1, 4 (1993) (rejecting equal-protection argument that the city 

treated nonresident users of water and sewer differently than residents). We give “great 

deference to the General Assembly in the legislation of taxation where the clear intent of the 

statute is to raise revenue and not to discriminate among similarly situated individuals.” 

Medlock, 311 Ark. at 180, 842 S.W.2d at 431.
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Affirmed.

HARRISON, C.J., and BARRETT, J., agree.

Murphy, Thompson, Arnold, Skinner & Castleberry, by: Kenneth P. “Casey” Castleberry; and 

Everett Law Firm, by: John C. Everett, for appellant.

Leslie Rutledge, Att’y Gen., by: Maryna Jackson, Sr. Ass’t Att’y Gen., for separate 

appellee Arkansas Department of Human Services.

Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., by: Megan D. Hargraves and Cara 

D. Butler, for separate appellee Arkansas Hospital Association.