Health Law Case Brief: Boston Medical Center Corporation v. Secretary of EOHHS

By Andrew P. Rusczek

On September 14, 2012,[1] the Supreme Judicial Court of Massachusetts (the “Court”) denied an appeal brought by Boston Medical Center Corporation (“BMC”), Boston Medical Center Health Plan, Inc. (“Health Plan”), Holyoke Medical Center, Inc. (“Holyoke”), Quincy Medical Center, Inc. (“Quincy”), and Brockton Hospital, Inc. (“Brockton” and collectively, “Plaintiffs”) of decisions by the Superior Court to deny the Plaintiffs’ claims against the Secretary of the Executive Office of Health and Human Services (“EOHHS”) regarding MassHealth payment rates.[2]  After denying each of the Plaintiffs’ claims, the Court advised the Plaintiffs that the proper forum for seeking redress with respect to MassHealth payment rates is the political arena, not the courts.

This brief first discusses the hospitals’ claims, then discusses Health Plan’s claim, and finally discusses the claims common to all Plaintiffs.

Claims Asserted by Plaintiff Hospitals

As explained further below, the Plaintiff hospitals claimed that by setting unreasonably low MassHealth payment rates, EOHHS had violated state law, violated the contract that it had entered into with each hospital, violated federal Medicaid regulations, and unlawfully taken the hospitals’ property.

The hospitals asserted that MassHealth payment rates set by EOHHS violated Massachusetts law because the payment rates did not compensate the hospitals for the reasonable costs of providing medical care to MassHealth enrollees.  The hospitals are all disproportionate share hospitals.  Under M.G.L. ch. 118E, § 13F (the “Statute”),[3] MassHealth payment rates for a disproportionate share hospital must equal the hospital’s revenue requirements for providing care to MassHealth enrollees.  These payment rates must take into account costs such as the hospital’s reasonable operating, capital, and working capital costs, reasonable costs of depreciation of plant and equipment, and reasonable costs related to medical practice and technology changes.[4]

The Court held that the doctrine of sovereign immunity barred the hospitals’ claims that the MassHealth payment rates did not equal the hospitals’ reasonable costs as required by Massachusetts law.  The Statute neither waives the doctrine of sovereign immunity nor provides the hospitals a private right of action.  In support of this finding, the Court noted that it would be “complex and difficult” for the Court to review a hospital’s payment rates set by EOHHS and to determine whether the hospital’s costs are “reasonable” in accordance with the Statute.

The hospitals also argued that EOHHS had violated its contract with each of the hospitals when it set payment rates that did not comply with the Statute.  The payment rates that a hospital receives from MassHealth are set forth in that hospital’s contract with EOHHS.  EOHHS generally has the authority to revise payment rates or other terms set forth in a MassHealth hospital contract as it determines necessary upon thirty days’ notice to the hospital.[5]  The rates at issue in this case were set by EOHHS in December 2008 in a Request for Applications for payment year 2009.[6]  The Plaintiff hospitals argued that although EOHHS was authorized to set and even to revise each hospital’s payment rates under the contract, EOHHS could not choose payment rates that did not comply with the Statute.  The Plaintiffs argued further that by choosing payment rates that did not comply with the Statute, EOHHS had violated the contract.  The Court, however, held that the doctrine of sovereign immunity bars this contract claim just as it bars the hospitals’ claim that EOHHS directly violated the Statute.

Holyoke, Quincy, and Brockton additionally asserted that EOHHS had violated the implied covenant of good faith and fair dealing by imposing unreasonably low payment rates in violation of the Statute.  The Court did not agree with this position and instead found that EOHHS could not have acted in bad faith or engaged in unfair dealing simply by not proposing higher payment rates as the hospitals had agreed to accept the payment rates set forth in their MassHealth contracts.

The Court also rejected the hospitals’ claims that the payment rates violated federal Medicaid regulations and that the hospitals had a private right of action to challenge the rates under the supremacy clause.  Under federal Medicaid laws, a state Medicaid plan (such as MassHealth) must “assure that [Medicaid] payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.”[7]  The Plaintiff hospitals argued that by imposing unreasonably low payment rates, EOHHS had failed to ensure that the rates were consistent with efficiency, economy, and quality of care and that the rates were sufficient to ensure adequate access to care.  Because these federal Medicaid laws do not provide a private right of action, the hospitals argued that EOHHS’s rate setting process and payment rates were preempted by the supremacy clause of the United States Constitution.  The Court, however, held that the hospitals could not “sidestep” the lack of a private right of action by claiming a violation of the supremacy clause.  Further, even if the hospitals could bring a claim under the supremacy clause, the claim would be invalid due to the Commonwealth’s sovereign immunity.

Finally, the hospitals claimed that the unreasonably low payment rates represented a taking without lawful compensation.  Article X of the Massachusetts Constitution’s Declaration of Rights[8] and the Fifth and Fourteenth Amendments to the United States Constitution[9] prohibit the unlawful taking of private property.  While the Court agreed that the inadequacy of a regulated price can give rise to an unlawful taking when a property owner is legally required to engage in a price-regulated activity, the Court also noted there can be no unlawful taking when the property owner is not legally required to engage in the price-regulated activity.  The Court recognized that “it would be difficult, perhaps impossible,” for the hospitals to survive financially if they refused to participate in MassHealth.  But the Court nonetheless found that the hospitals did have a choice to participate in MassHealth and their participation was ultimately voluntary.  As a result, the hospitals’ claim that the low payment rates constituted an unlawful taking was unsuccessful.

Claim Asserted by Plaintiff Health Plan

Health Plan’s principal claim was that EOHHS had failed to increase its capitation rates for fiscal year 2009 by $84.6 million as was required by the 2006 Massachusetts health reform legislation (the “Act”).[10]  The Act required EOHHS for fiscal years 2007, 2008, and 2009 to reimburse certain hospitals operated by BMC and the Cambridge public health commission “at levels consistent with their net supplemental payments of $287,000,000 in fiscal year 2006.”[11]  In fiscal year 2009, EOHHS was required to meet this requirement by “allocating $160,000,000 in net supplemental payments from the Commonwealth Care Trust Fund and by increasing actuarially sound rates to the maximum extent allowable and eligible for financial participation, including the balance from other financing mechanisms.”[12]  Of the $287 million, BMC and Health Plan were to receive two-thirds, or $191.3 million.  EOHHS did make a lump-sum payment of $106.7 million to BMC in fiscal year 2009.[13]  Health Plan argued that EOHHS was obligated to pay the remaining $84.6 million to BMC and Health Plan “by increasing . . . to the maximum extent allowable” the capitation rates that Health Plan received for MassHealth enrollees.  EOHHS, however, had not raised Health Plan’s capitated rates for 2009 as Health Plan claimed the Act required.

EOHHS refuted Health Plan’s interpretation of the Act.  Under EOHHS’s interpretation, EOHHS was not required to make $287 million in supplemental payments in fiscal year 2009, but rather was only required to ensure that the total payments that Health Plan received from EOHHS from all funding sources (including capitation payments, the lump-sum payment of $106.7 million, and “other financing mechanisms”) was “consistent with” the 2006 supplemental payments.

Without resolving the parties’ dispute regarding the proper interpretation of the Act, the Court held that Health Plan’s claims were barred by the doctrine of sovereign immunity as the legislature did not provide a private right of action with respect to these provisions of the Act.

Claims Asserted by All Plaintiffs

The Court found against the Plaintiffs with respect to all of their common claims.  The Court held that the Plaintiffs were not eligible to recover costs of services provided to MassHealth enrollees under a theory of quantum meruit because a party cannot recover under a theory of quantum meruit when a valid contract sets forth the obligations of the parties.[14]  The Court also found the Plaintiffs’ claims with respect to certiorari, mandamus, and declaratory judgment to be invalid.

Andrew P. Rusczek  is Counsel in the Boston office of Verrill Dana LLP. Andrew provides regulatory, transactional and compliance advice to a broad range of health care clients, including hospitals, health systems, academic medical centers, physician practice groups, and pharmaceutical and medical device manufacturers.  Andrew has particular experience with respect to hospital mergers and affiliations, federal and state health care reform and accountable care organizations, HIPAA and HITECH, fraud and abuse laws, medical staff matters, and human subjects research compliance.  Andrew earned his J.D. and Master of Bioethics from the University of Pennsylvania and his B.A. from Bowdoin College.