# FILED
December 7, 1998 Cecil W. Crowson Appellate Cou rt Clerk IN THE SUPREME COUR T OF TENNESSEE AT NASHVILLE

FOR PUBLICA

TION Filed: December 7, 1998
BAPTIST HOSPIT

AL; EAST ) TENNESSEE CHILDREN'S ) HOSPITAL; ERLANGER MEDICAL ) CENTER; FORT SANDERS ) REGIONAL MEDICAL CENTER; ) Tennessee Claims Commission HOLSTON VALLEY HOSPITAL AND ) MEDICAL CE NTER; JOHN SON CITY ) MEDICAL CENTER HOSPITAL; ) LE BONHEUR CHILDREN 'S MEDICAL ) CENTER; MAURY REGIO NAL ) HOSPITAL; METHODIST HOSPITALS ) OF MEMPHIS; REGIONAL M EDICAL ) CENTER OF MEMPHIS; SAINT ) MARY'S MEDICAL CENTER; AND ) Hon. W. R. Baker, Commissioner VANDERBILT UNIVERSITY M EDICAL ) CENTER, ) ) PLAINTIFFS/APPELLANTS, ) ) v. ) ) TENNESSEE DEPARTMENT OF ) HEALTH, AND TENNESSEE ) No. 01S01-9711-BC-00249 DEPARTMENT OF FINANCE ) AND ADMINISTRATION, ) ) DEFENDANTS/APPELLEES. )

FOR CLAIMANT/APPELLANT : FOR RESPONDENT/APPELLEE : William B. Hubbard John Knox Walkup Nashville Attorney General and Repor ter Sanford E. Pitler Sue A. Sheldon Elizabeth A. McFall Assistant Attorney Gener al Seattle, Washington Nashville



# O P I N I O N

AFFIRMED AS MODIFIED HOLDER, J.1 On January 1, 1994, Tennessee insti tuted the TennCare program, which made substanti al changes in the provi sion of heal th care servi ces to Medicaidrecipi ents. Under TennCare, health care provi ders are no l onger reimbursed under the prospecti ve payment methodology at

issue in this case; pr oviders are

now paid by managed care organizat ions rather than by t he State. The plainti ffs’ cl aims in thi s case are li mited to the p eriod pri or to the implementation of

the TennCare program. 2

OPINION
We granted this ap peal to deter mine whethe r the Tennessee claims commission has subject matter jurisdiction over the plaintiffs’ cha llenge to certain Medicaid reimbursements pai d to them by the State. Upon r eview, we hold that the Tennessee claims commission lacks subject matte r jurisdiction over this case. Because the plaintiffs’ chal lenge is based upon an assertion that a state Medicaid regulation i s invalid under federal l aw, the Tennessee Department of Health was the agency with subject matter j urisdiction over thi s case pursuant to Tenn. Code Ann. § 4-5-223 of the Unifo rm Administrative Procedures Act ("UAPA").

BACKGROUND

The State entered into “Medical Assistance Participati on Agreements (Medicaid - Title XIX Program) for Inpatient and Outpatient Hospital Services” (“provider agreement

s”) with the plainti

ffs ("hospitals") for the provi sion of health care services to Me

dicaid recipients. Those hos pitals participating in the Medicaid program were reimbursed un der a prospective payment metho dology established in rules of the Department of Health. Hospitals were reimbursed under this system from October 1, 1983, to December 31, 1993. 1
Under the prospective pay ment methodology, each hospital was paid a per diem rate for Medicaid pati ents. There were two p rimary components to the per diem rate, an “operating component” and a “pass-through com ponent.” Each2 The reimbursement methodology cl ause provided that “thi s facili ty: .. . [a] grees to use the sam e me thod of re imbu rsem ent for T itle XIX that is used fo r Title XV III, Medica re.”

3 The c onflict claus e provide d: “If any part o f this agree men t is found to be in con flict with any F ede ral or S tate la ws o r regu lation s hav ing eq ual w eight of law , or if an y part is place d in conflict by am endm ent of su ch laws , this agree men t is so am ended .” 3 hospital’s operating and pass-through components w ere calculated based upon financial data contained in the hos pital’s annual “cost rep ort” filed with the State

. Effective July 1, 1989, the Department of Health implemented Tenn. Comp. R. & Regs. ch. 1200-13-5-.08 which provided, in pertinent part, that after a Medicaid patient had been a hospital inpatient f or twenty (20) days, the hospital’s per diem rate would be red uced for each subsequent day ( over 20) by reducin g the “operating co mponent” to 6 0%; this rule did n ot affect th e pass-through component of the hospital’s per diem rate.
In 1990, Congress passed legislation prohibiting states from imposing day and dollar limits on Medi caid reimbursement for health car e provided to infants and children by hospital s serving a dispr oportionate share of low-i ncome patients with speci al needs . 42 U.S.C . § 1396(a )(s)(2), (3 ) ("OBRA '9 0"). The effect ive date of this legislation w as July 1, 1991.
On August 8, 1995, the hosp itals filed a complaint with the claims commission alleging br each of contract. The complaint all eged that the State breached the “reimbursement methodol ogy clause”2 of the provider agreements. The hospitals argued that the “ conflict clause” 3 found in the provider agr eements caused OBRA '90 to amend the reimbur sement methodology clause. The hospitals argued that the r educed payment provided for under Rule 1200-13-5- .08 for inpatient stays longer than twenty days breached the provider agreements by placing day and dollar limitati ons on services render ed to Medicaid-covered infants and children in violation of OBRA ‘90. The hosp itals alleged that they are entitled to additional Medic aid reimbursement as a result

.4 The State filed a motion to dismiss ar guing, in pertinent par

t, that the claims commission lacked s ubject matter jurisdicti on. The State contended that the hospitals’ claim w

as a challenge to the val idity of a state Medicaid regulation and was not a breach of contrac t action. The State argued that only the Department of Health may adjudic ate cases challenging the validity of a state Medicaid regulation.

The claims co mmission deni ed the State' s motion to di smiss. The claims commission concluded that the hosp itals' claim was for breach of contract and that the claims commission had s ubject matter jurisdicti on over all breach of contract actions against the State. The State sought an inte rlocutory appeal, which was grant

ed. The Court of Appeals rever sed the claims commission holding that the provid er agreements did not create a contractual obligati on on the State. The appellate court ther efore held that the claims commiss ion lacked jurisdiction and dismis

sed the case.

ANAL YSIS
The hospitals argue that this Medicaid reimbursement challenge is mere ly a breach of contr act actio n. The cla ims comm ission gen erally has exclusive subject matter jurisdic

tion over all monetary

claims against the State. Tenn. Code Ann. § 9-8-307. Acco rdingly , the hospita ls argue th at the claims
co mm is si on ha d s ub

je ct ma tt er ju ri sd ic ti on in th e cas e n ow

befo re us . We disagree.

Federal law mandates that s tates designate a singl e state agency for administration of state Medicai d plans. 42 U.S.C. § 1396(a) (5). The Tennessee Department of Health was desi gnated as the single stat e agency in charge of4 As of January 1995,the Department of Fi nance & Administrat ion was substituted for the Dep artm ent o f He alth a s the single state agen cy. 5 administering the Medic aid program during the period at issue in this c ase. 4 Tenn. Code Ann. §§ 71-5-101 et seq .
We have reviewed the hospitals' complaint and the entire recor d on appeal. The hospitals' case i s premised upon the contention that Tenn. Comp. R. & Regs. ch. 1200-13-5- .08 is invalid because the rule violates OBRA '90. Accordingly, the hos pitals' claim is proper ly classified as a chal lenge to the validity of Rule 1200- 13-5-.08.
Claims challenging the validity of or appl icability of a statute, r ule, or order must be brought pursuant to the UAPA. See Tenn. Code Ann. § 4-5-223(a) (“Any affected person may peti tion an agency for a declar atory order as to the validity or applicability of a s

tatute, rule or order within the primary jurisdiction of the agency”) (emphasis added). The Department of Health is an “agency” under the UAPA. Rule 1200-13-5-.0 8 is a Department of Health rul e. Moreover, the Department of Health was the s ingle state agency i n charge of administering the Medicaid program during the period in question. Accordingly, the hospitals' challenge to the validity of Rule 1200-13-5-.08 should have been brought bef ore the Department of Health pursuant to the UAPA.

CONCLUSION
The hospitals' claim was based upon the invalidation of a state Medica id regulation. We hold that the claims commis sion lacks subject matter jurisdiction to rule upon the validity of a state Medicaid regulation. Pursuant to the authorities cited above, the Department of Health was the agency with subject matter jurisdiction ov

er the hospitals’ claim.6 The decision of the appellate court is affirmed as modified, and the hospitals' complaint is di smissed. Costs of this appeal shall be taxed against the plaintif f hospit als, for which execu tion may is sue if ne cessary.

JANICE M. HOLDER, JUSTICE

Panel: Anderson, C.J. Birch and Barker, JJ. Drowota, J., Not Participating