Opinion ID: 1230026
Heading Depth: 1
Heading Rank: 2

Heading: contracts clause analysis

Text: [3] Caritas contends, and the trial court agreed, that retroactive application of EHB 1890 and the 1990 permanent regulations violates the contract clauses of the state and federal constitutions. See Const. art. 1, § 23 (No ... law impairing the obligations of contracts shall ever be passed); U.S. Const. art. 1, § 10 (No state shall ... pass any ... law impairing the obligation of contracts). We give the state and federal contract clauses the same effect. Margola Assocs. v. Seattle, 121 Wn.2d 625, 653, 854 P.2d 23 (1993); Washington Fed'n of State Employees v. State, 101 Wn.2d 536, 539, 682 P.2d 869 (1984). [4] The test for legislative impairment of public contracts is more exacting than the test for legislative impairment of private contracts. [6] The test for analyzing impairment of public contracts has three parts. First, the court must determine whether a contractual relationship exists; second, the court must determine whether the legislation substantially impairs the contractual relationship; third, when a state impairs its own contracts, the court must determine if the impairment was reasonable and necessary to serve a legitimate public purpose. Carlstrom v. State, 103 Wn.2d 391, 694 P.2d 1 (1985); United States Trust Co. v. New Jersey, 431 U.S. 1, 52 L.Ed.2d 92, 97 S.Ct. 1505 (1977). [5] We begin our analysis by examining the nature of the contractual relationship. To meet the first prong, the provider agreements between respondents and DSHS must be a `contract' in the usual sense of [that] word, that is, an agreement of two or more minds, upon sufficient consideration, to do or not to do certain acts. Haberman v. WPPSS, 109 Wn.2d 107, 145, 744 P.2d 1032, 750 P.2d 254 (1987) (quoting Crane v. Hahlo, 258 U.S. 142, 146, 66 L.Ed. 514, 42 S.Ct. 214 (1922)), appeal dismissed, 488 U.S. 805 (1988). [6] DSHS contends the provider agreements are not true contracts. We have previously held that the term contract as used in RCW 74.09.120 should be given its common law meaning. Multicare Med. Ctr. v. Department of Social & Health Servs., 114 Wn.2d 572, 583, 790 P.2d 124 (1990). Moreover, the enabling statute requires DSHS to purchase nursing home care by contract. RCW 74.09.120. Indeed, the record is replete with references to the contract between DSHS and health care providers. The provider agreements are entitled contracts; providers are addressed as Dear Contractors; contract numbers accompany all correspondence; contracting officers sign for the State; and the agreements contain a standard merger clause. It is abundantly clear from the record that the relationship between DSHS and providers is a contractual one. DSHS argues, apparently in the alternative, that even if the agreements are contracts, they do not create a contractual right to a particular rate of reimbursement. The only provision in the provider agreements relevant to this assertion is section 1, which states generally: All rights and obligations of the parties to this agreement shall be ... governed by the terms of this agreement or as set forth in the laws and regulations of the State of Washington and the United States, as now existing or hereafter adopted or amended, relating to administration of the Title XIX Medicaid program, payment for services under such program and operation of nursing homes generally.... (Italics ours.) CP, at 474. [7] DSHS argues that Caritas's only rights to reimbursement are statutory, and that the statutes never excluded land from the operation of the DEFRA restrictions. This is a distinction without a difference. A contractual right to specific reimbursement is not different from a statutory right to specific reimbursement if the statute is incorporated by reference into the contract. The express incorporation of the statutes into the contract makes the statutory provisions relating to reimbursement a part of the obligation assumed by DSHS, just as if the statutory provisions had been spelled out in the contract. There is therefore no difference between mere statutory rights to reimbursement and contract rights to reimbursement. We hold that the provider agreements constitute a contract between DSHS and respondents. [7] Having found that a contract did exist, we must next decide whether it was substantially impaired. A contract is impaired by a statute which alters its terms, imposes new conditions or lessens its value. Federated Am. Ins. Co. v. Marquardt, 108 Wn.2d 651, 660, 741 P.2d 18 (1987). The retroactive application of EHB 1890 to Caritas Services, Inc. alone represents a diminution in reimbursement (without the partial settlement) of approximately $175,000, without interest. Impairment may be substantial if the complaining party relied on the supplanted portions of the contract. See Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 246, 57 L.Ed.2d 727, 98 S.Ct. 2716 (1978). Parties are generally deemed to contract in reliance on existing law. Margola Assocs. v. Seattle, 121 Wn.2d at 653. Given these facts, Caritas appears to have a prima facie claim of substantial impairment. [8] DSHS argues that no diminishment of contractual expectation occurred. In Margola, this court noted that a party who enters into a contract regarding an activity `already regulated in the particular to which he now objects' is deemed to have contracted `subject to further legislation upon the same topic.' 121 Wn.2d at 653 (quoting Veix v. Sixth Ward Bldg. & Loan Ass'n, 310 U.S. 32, 38, 84 L.Ed. 1061, 60 S.Ct. 792 (1940)). First, it is true that Medicaid and Medicare cast a wide and heavy net of regulation. However, the seminal case on this aspect of contract clause doctrine limited itself to state impairment of private contracts, not public contracts. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 412 n. 14, 74 L.Ed.2d 569, 103 S.Ct. 697 (1983) (noting the stricter standard of impairment of public contracts was inapplicable since Kansas had not altered its own contractual obligations). The Court explicitly stated that, [w]hen a State itself enters into a contract, it cannot simply walk away from its financial obligations. In almost every case, the Court has held a governmental unit to its contractual obligations when it enters financial or other markets. Energy Reserves, at 412 n. 14. Second, it is one thing to say that parties contracting in a heavily regulated industry may be imputed to expect prospective regulatory changes. It is another thing to assert that heavy regulation gives a state as a contractor carte blanche to alter retroactively the legal consequences of completed performance. The set of expectations defined by heavy regulation does not and cannot include the expectation that a state will retroactively abrogate its contracts in violation of the contract clause. Whether it enters contracts in a heavily regulated area or not, a State cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money to promote the public good rather than the private welfare of its creditors. United States Trust Co., 431 U.S. at 29. DSHS next argues that the phrase as now existing or hereafter adopted or amended in section 1 of the provider agreements shows that the parties agreed that any contractual rights were subject to future alteration by the State Legislature. In addition, DSHS relies on a statutory reservation of powers clause. RCW 74.46.840. [8] Caritas contends the language of each clause incorporates prospective amendments only, and not retroactive changes. The broad language of the contract's reservation of powers clause (as now existing or hereafter adopted or amended) initially appears to be at least ambiguous, so as to present an issue of fact. There are, however, two reasons which compel us to resolve this as an issue of law rather than fact. [9] First, our case law requires such reservation clauses to be made explicitly contingent on future acts of the Legislature with retroactive effect. [9] Carlstrom, 103 Wn.2d at 393-95, 398-99. See also Continental Ill. Nat'l Bank & Trust Co. v. Washington, 696 F.2d 692, 698-99 (9th Cir.1983). Carlstrom concerned a reservation clause in a contract that made the public employment contract subject to all present and future acts of the legislature. Carlstrom, at 393. This court concluded that the reservation was not specific enough to subject the contract to retroactive modification, Carlstrom, at 394-95, and we emphasized that [t]he Legislature knows how to use plain English to make existing contracts subject to future modification. Carlstrom, at 398. The same rule was underscored in Continental, where the court held that the effect of a similar statutory reservation clause was simply [] to render applicable to [future transactions] the requirements of state law then in existence so long as imposition of those requirements does not modify pre-existing contracts. Continental, 696 F.2d at 699. DSHS relies on a reservation clause in the contract (as now existing or hereafter adopted or amended) and a reservation clause in the statute, RCW 74.46.840. Because neither the contract nor the statute explicitly mentions future retroactive modification of pre-existing or already-performed contracts, we hold they are insufficient to reserve the power to retroactively modify the contracts between DSHS and respondents. [10] Second, construing the clause in the manner DSHS suggests would allow DSHS unilaterally and retroactively to modify its contracts at will and without prior explicit notice. This result is antithetical to the intent of the contract clause. A promise in a contract that gives one party the power to deny or change the effect of the promise, is an absurdity. United States Trust Co., 431 U.S. at 25 n. 23 (quoting Murray v. Charleston, 96 U.S. 432, 455, 24 L.Ed. 760 (1877)). See also United States Trust Co., 431 U.S. at 26 (If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.). DSHS also argues that the language of DEFRA is broad enough to include both depreciable and nondepreciable assets. The 1986 enactment of COBRA, however, eliminated DEFRA as a federal requirement for nursing homes, so any restriction on revaluation must be found in the laws of this state. As mentioned above, Washington implemented DEFRA solely by amending RCW 74.46.360. The version of the statute in effect at the time of the amendments limited its discussion to depreciable assets. Subsection (4)(a) stated: Where depreciable assets are acquired that were used in the medical care program subsequent to January 1, 1980, the depreciation base of the assets will not exceed the net book value which did exist or would have existed had the assets continued in use under the previous contract with the department.... (Italics ours.) Laws of 1986, ch. 175, § 1, at 570. This language prohibited the new owner of the depreciable asset from using a stepped-up base when calculating depreciation, thereby assuring, in the same manner as DEFRA, that the Medicaid program would pay for such assets only once. Subsection (4)(b) excepted certain arms-length transactions from the operation of the restriction in subsection (4)(a). [11] The 1986 amendments added the following proviso to subsection (4)(b): This subsection is inoperative for any transfer of ownership of any asset occurring on or after July 18, 1984, leaving (a) of this subsection to apply alone to such transfers[.] (Italics ours.) Laws of 1986, ch. 175, § 1, at 570. It is apparent from the reference to subsection (4)(a) that the term any asset refers to depreciable assets only, since those are the only assets addressed in that subsection. [12, 13] The Legislature's decision not to amend RCW 74.46.530 is significant. That statute governs calculation of a Medicaid provider's return on investment allowance, and specifically applies to both depreciable and nondepreciable assets. As mentioned earlier, the return on investment allowance is based on a percentage of net invested funds. The version of RCW 74.46.530(1)(b) in effect in 1986 provided: In computing the portion of net invested funds representing the net book value of tangible fixed assets, the same assets, depreciation bases, lives, and methods referred to in RCW 74.46.330, 74.46.350, 74.46.360, and 74.46.370, including owned and leased assets, shall be utilized, except that the capitalized cost of land upon which the facility is located and such other contiguous land which is reasonable and necessary for use in the regular course of providing patient care shall also be included. (Italics ours.) This language expressly provides for inclusion of the capitalized cost of land in the value of fixed assets, despite any other valuation methods specified in the other statutes, including RCW 74.46.360. As the ALJ concluded, When DSHS and the legislature made changes only in the statute and WAC governing depreciable assets, RCW 74.46.360 and WAC 388-96-559(8)(a), and did not make changes in the specific language dealing with the capitalized cost of land in RCW 74.46.530(1)(b) and WAC 388-96-754(2)(b), it must be presumed that the intent of the change was to limit use of a stepped-up basis for only depreciable assets. CP, at 412. Thus, the DEFRA limitation found in the 1986 version of RCW 74.46.360(4)(a) clearly does not apply to land. DSHS suggests that the Legislature never actually intended that result. However, a court cannot indulge in speculation about the Legislature's subjective intent or its group psychology. Unambiguous statutory language must be given its unambiguous meaning. State v. Smith, 117 Wn.2d 263, 270-71, 814 P.2d 652 (1991). A court may not add words to a statute even if it believes the Legislature intended something else but failed to express it adequately. See Vita Food Prods., Inc. v. State, 91 Wn.2d 132, 587 P.2d 535 (1978). [14] Finally, we find that the relevant statutes, incorporated by reference into the contract, clearly establish that reimbursement rates are to be set on a prospective basis: The following principles are inherent in RCW 74.46.430 through 74.46.590 [nursing home rate reimbursement sections]: (1) Reimbursement rates will be set prospectively ... and (2) The rates so established will be adjusted for economic conditions and trends in accordance with appropriations made by the legislature as consistent with federal requirements for the period to be covered by such rates. (Italics ours.) Former RCW 74.46.420. The period covered is no more than 1 year. See former RCW 74.46.460 (Each contractor's reimbursement rates will be determined prospectively at least once each calendar year, to be effective July 1st.). Given the repeated and unambiguous references to prospective ratesetting in both the statutes and the provider agreements, retroactively resetting the reimbursement rates impaired the contract between DSHS and the providers, and the magnitude of the impairment was substantial. In sum, the provider agreements are contracts for purposes of the constitutional prohibition against impairment of contracts, and were substantially impaired by the retroactive amendments. DSHS had a contractual obligation to reimburse Caritas for its Medicaid services pursuant to the provisions of state and federal law. Neither state nor federal law mandated the DEFRA restrictions when the parties executed the contracts or when Caritas rendered the services under the contracts. [10] Because COBRA set mandatory limits and DEFRA's limits were only optional after enactment of COBRA, we hold that the limitations in COBRA must be read as incorporated by reference into the contracts between DSHS and respondents. [11] [15] Even if a substantial impairment of contract occurs, however, it may nonetheless be constitutional if it was reasonable and necessary to achieve a legitimate public purpose. United States Trust Co., 431 U.S. at 25. In determining whether retroactive legislation is necessary, courts consider whether the legislative purpose could have been achieved by alternative means which would not have impaired the contract. Carlstrom, 103 Wn.2d at 396. [16] Caritas correctly points out that the amendments were not necessary because there was no conflict between pre-amendment Washington law and federal Medicaid requirements. Federal law only requires assurances that reimbursements will not exceed the amounts allowable under COBRA. States may continue to impose the more stringent DEFRA limitations if they wish, but they are not required to do so. Implicit in this option is the additional alternative of maintaining DEFRA as to at least some assets. Even if a conflict with federal law could be found, DSHS has not shown that retroactive legislation was the only reasonable alternative. DSHS implies that Washington's entire Medicaid program was in jeopardy. The federal regulation it cites for this proposition reads: FFP [federal financial participation, that is, contribution] is not available for a State's expenditures ... in excess of the amounts allowable under this subpart. (Italics ours.) 42 C.F.R. § 447.257. [12] This regulation states only that the federal government will not help pay for costs in excess of the amounts allowable under the federal Medicaid program. The federal government will continue to pay its share of any costs that fall within the allowable range. State Medicaid programs will simply be held responsible for the full amount of any portions in excess of the federal ceiling. This is also consistent with HCFA's October 26, 1991, letter. HCFA informed DSHS it was disallowing federal contribution for the increased payments relating to the revaluation of respondents' land. Nothing in the letter indicates the agency was disallowing federal matching funds as to the remainder of the return on investment allowance, or as to any of the other cost centers, such as nursing services. [17] Thus, instead of passing retroactive legislation, the State could simply have made the payments in excess of DEFRA, assuming again there really was a conflict with federal law. [13] For that matter, DSHS could have clarified the statute when its problems were first brought to the Department's attention. The fact that either option might have represented a significant financial burden does not, as a matter of law, render it an unreasonable alternative. Financial necessity, though superficially compelling, has never been sufficient of itself to permit states to abrogate contracts. Carlstrom, 103 Wn.2d at 396. See also United States Trust Co., 431 U.S. at 25-26. [18-20] Finally, DSHS consistently characterizes the amendments as clarifying the law with regard to reimbursement for land, and so considers them merely curative. See Overton v. Economic Assistance Auth., 96 Wn.2d 552, 558, 637 P.2d 652 (1981). However, while curative amendments are presumed to apply retroactively even if the statute does not so specify, they are not ipso facto presumed to pass muster under the contract clause. DSHS contends that the curative amendments come within the police power of the State to act for the health, safety, and welfare of the public, and that the police power is one of the attributes of sovereignty that are implied in all contracts. However, purely financial obligations of a state do not automatically or necessarily come within the ambit of the reserved police powers doctrine. United States Trust Co., 431 U.S. at 24-25. If they did, the contract clause would be simply gutted. United States Trust Co., 431 U.S. at 26. Moreover, clarifying cannot extend to substantive alteration. We conclude that (1) there was a contractual relationship between respondents and DSHS; (2) the retroactive amendments substantially impaired that contractual relationship; and (3) the impairment was not reasonable and necessary to achieve a legitimate public purpose as defined by relevant case law. Although there were statutory and contract reservation of powers provisions, they did not satisfy Carlstrom's rule requiring explicit mention of retroactive modification.