Pharmserv, Inc. v. Texas Health and Human Services Commission Office of the Inspector General of the Texas Health and Human Services Commission Kyle Janek, in His Official Capacity as Commissioner of Texas Health and Human Services Commission

ACCEPTED 03-13-00526-CV 3712698 THIRD COURT OF APPEALS AUSTIN, TEXAS 1/9/2015 12:35:22 PM JEFFREY D. KYLE CLERK NO.03-13-00526-CV IN THE COURT OF APPEALS RECEIVED IN 3rd COURT OF APPEALS THIRD COURT OF APPEALS DISTRICT AUSTIN, TEXAS 1/9/2015 12:35:22 PM PHARMSERV, INC., Appellant JEFFREY D. KYLE Clerk

V.

THE TEXAS HEALTH AND HUMAN SERVICES COMMISSION and OFFICE OF INSPECTOR GENERAL OF THE TEXAS HEALTH AND HUMAN SERVICES COMMISSION, ET AL Appelles

On Appeal from the 261 sf Judicial District Court of Travis County, Texas Cause No. D-I-GN 12-00107-CV

TexasTruecare's Amicus Curiae Brief

Respectfully submitted,

RIGGS ALESHIRE & RAY, P.C.

Jennifer S. Riggs Bar No. 16922300 700 Lavaca St., Suite 920 Austin, Texas 78701 (512) 457-9806 Telephone (512) 457-9066 Facsimile Jriggs@r-alaw.com

TABLE OF CONTENTS

Table of Contents .i Index of Authorities ii Disclosure of Interest iv Summary of the Argument. 1 Argument and Authorities 3 1. Due Process 3 II. Statutory Authority: Payment holds and hearings to challenge them S III. Separation of Powers 9

IV. A sanction by any other name is still a sanction 12 Prayer 14 Certificate of Compliance 14 Certificate of Service 15

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INDEX OF AUTHORITIES Cases Grounds v. Tolar Independent School Dist., 856 S.W.2d 417 (Tex. 1993) 3, 4

Harlingen Family Dentistry, Pc. v. Texas Health and Human Services Commission , --- S. W 3d .----, 2014 WL 6844947 , (Tex. App.-Austin, Nov 25,2014, no pet. hist.) (NO. 03-14-00069-CV) 8, 12

McAllen Hospitals, L.P. v. Suehs, 426 S.W.3d 304 (Tex. App.-Amarillo, 2014, no pet.) .4

State v. Flag-Redfern Oil Co., 852 S.W.2d 480 (Tex. 1993) 10

Stratton v. Austin Independent School Dist., 8 S.W.3d 26,29 (Tex. App.-Austin 1999, no writ) 3

Texas Dept. ofHuman Services v. Christian Care Centers, Inc., 826 S.W.2d 715 (Tex. App.-Austin, 1992, writ denied) 8, 9

Texas Constitution TEX. CONST. Art. I, section 13. 11 TEX. CONST. Art. II, section 1. 10

Texas Statutes TEX. GOV'T CODE § 2260 11 TEX. GOV'T CODE ANN. § 53 l.l02(a) 6,7,12 TEX GOV'T CODE §531.1101(1) 6 TEX HUMAN RESOURCES CODE § 32.0291 5, 6, 7,12

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Administrative Rules 1 TAC. §354.1811 13 1 TAC. §354.1891. 5, 12, 13 1 TAC. §371.1667 5, 7,12

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DISCLOSURE OF INTEREST (COMPLIANCE WITH TRAP 11) This amicus curiae brief is submitted on behalf of Pharmacy Buying Association, Inc., d/b/a Texas TrueCare and PBA Health. Texas TrueCare is a Pharmacy Services Administration Organization CPSAO") recognized by federal govermnent as an agent authorized to negotiate and/or sign contracts on behalf of providers in the Medicaid program. See CMS Standard Operating Procedures §50.8.l CSome pharmacies, particularly independent pharmacies, work with agents or Pharmacy Services Administration Organizations (PSAO) for purposes of negotiating and/or signing contracts with Part D sponsors."). Texas TrueCare is a membership-based organization with over 600 member independent pharmacies in Texas. Texas TrueCare keeps its members informed of potential changes in law or regulations that may affect their businesses and their patients. Texas TrueCare has been closely following this case due to the tremendous impact it could have on its member pharmacies and their patients.

Texas TrueCare is paying the fee for the preparation of this amius curiae brief. This brief contains a certificate of service, as required by TRAP 11 (c).

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SUMMARY OF ARGUMENT The Texas Health and Human Services Commission and its Office of

Inspector General (collectively HHSC-OIG) take the position that a provider of pharmacy services under contract with the HHSC to provide services in the Texas Medicaid program simply has no right to judicial review. The HHSC-OIG contends (1) that the due process clauses of the Texas Constitution, Article I, sections 13 and/or 19, do not confer such rights; (2) that section 32.029lof the Texas Human Resources Code does not confer such rights because it does not apply; (3) that 1 T.A.C. §371.1667 does not confer such rights because it applies only to "sanctions" and a pharmacy audit recoupment is not a "sanction"; (4) that 1 T.A.C. §354.l89l(c) does apply but does not provide for a hearing and judicial review; and (5) that the HHSC Medicaid contract itself does not create a right to a hearing and judicial review.

The simple resolution of this matter is that a sanction by any other name is still a sanction. The HHSC cannot avoid the consequences of its actions simply by labeling its action an "audit," as opposed to a sanction. As noted in Harlingen II, affording a provider a full adjudicative hearing on alleged fraud and abuse while providing no hearing and no judicial review on simple program violations makes no sense.

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The HHSC-OIG, however, contends that program violations subject to audit that do not involve fraud and abuse are fundamentally different. That may well be true - the essence of an adverse audit finding is that the provider has breached its agreement with the HHSC. What the HHSC-OIG glosses over, however, is the complete absence of statutory authority to exercise self-help by withholding future payments to remedy alleged past breaches of the Medicaid contract. It is the statutes that afford a provider a hearing and judicial review that confer the authority to withhold funds from providers. If the hearing and judicial review provisions of such legislation do not apply then neither does the authority to withhold pending hearing and judicial review.

At issue here is not just the jurisdiction of the courts, but the jurisdiction of the HHSC. The HHSC has no authority to adjudicate contract rights. When the HHSC withholds money under its contracts with pharmacy providers to enforce audit findings, it is effectively adjudicating contract rights. The fact that the doctrine of sovereign immunity may prevent a pharmacy provider from suing the HHSC for breach of contract does not mean that the HHSC may effectively sue the pharmacy provider for breach of contract without doing so in court. There are two sides to that coin. Absent a legislative scheme that transfers the contract remedy to an agency, a pharmacy provider has the right to defend alleged breach of contract claims in court.

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As a result, the HHSC-OIG lacks authority to withhold the funds at issue until and unless it files a breach of contract claim in district court. The district court has the jurisdiction to consider its failure to do so.

ARGUMENT AND AUTHORITIES

I. Due Process

The HHSC-OIG appears to acknowledge that a statute, agency rule or contract can confer rights that are protected by due process, depending on its terms. (Appellees' Brief, pp. 16-19, can depend on parties "understanding") It is not necessary, however, that such a statute or contract expressly provide the right to a due process hearing. For example, in Grounds v. Tolar Independent School Dist., 856 S.W.2d 417 (Tex. 1993), the Court addressed the Term Contract Nomenewal Act (TCNA), which required that a school district have reasons not to renew a contract, and held "that this limit on the school district's discretion is sufficient to create a property interest entitled to due process protection." Grounds, 856 S.W.2d at 420. Although subsequent amendments to the TCNA expressly disclaimed any such due process interest, see Stratton v. Austin Independent School Dist., 8 S.W.3d 26, 29 (Tex. App.-Austin 1999, no writ), the initial constitutional basis in Grounds for finding a due process interest remains.

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Grounds was based on a long line of decisions from the United States Supreme Court and other federal courts. For example,

The United States Supreme Court defined a constitutionally protected property interest in Logan v. Zimmerman Brush Co. as "an individual entitlement grounded in state law, which cannot be removed except 'for cause'." 455 U.S. 422, 430, 102 S.Ct. 1148, 71 L.Ed.2d 265 (1982) (quoting Memphis Light, Gas & Water Div. v. Craft, 436 U.S. 1, 11-12,98 S.Ct. 1554, 1561-62,56 L.Ed.2d 30 (1978» (other citations omitted). The "for cause" requirement discussed in Logan constitutes a substantive limit on the State's discretion creating a property interest. Likewise, the TCNA requirement of pre-established reasons for nomenewal constitutes a substantive limit on the State's discretion creating a property interest.

Grounds, 856 S. W.2d at 418.

The decision in McAllen Hospitals, L.P. v. Suehs, 426 S.W.3d 304 (Tex. App.-Amarillo, 2014, no pet.), with respect to due process is not to the contrary. The property interest necessary to sustain a "takings" claim for inverse condemnation of property is not the same property interest that triggers procedural due process protection. In McAllen Hospitals, the Amarillo Court of Appeals noted that the hospitals had not availed themselves of all available remedies, hence they had no viable due process claim. McAllen Hospitals, 426 S.W.3d at 313. The same considerations do not apply here, where all administrative remedies made available by the HHSC-OIG were exhausted.

Certainly the HHSC-OIG cannot contend that it may withhold contract payments for any reason, no matter how arbitrary, or no reason at all. The HHSC-OIG has only the powers granted to it expressly or by necessary implication. As a

Texas TrueCare Amicus Brief - Page 4 result, it ca=ot withhold contract payments on a basis for which it lacks authority. The HHSC-OIG rules themselves require that there be some basis for the audit findings. See, e.g., 1 TAC. §354.l891.

Likewise, the Medicaid contract itself requires compliance with Medicaid program requirements. It would strain credulity to argue that the contract does not create a legitimate expectation of payment if program requirements are met.

For these reasons, the HHSC ca=ot withhold contract payments absent some legitimate reason. Those regulatory and contractual limits themselves create a property interest entitled to due process protection. II. Statutory Authority: Payment holds and hearings to challenge them

The HHSC-OIG contends that section 32.029lof the Texas Human Resources Code and 1 T.AC. §371.l667 do not confer on pharmacy providers the right to a hearing and judicial review because those provisions do not apply to pharmacy providers subject to performance audit reviews, which do not involve fraud and abuse.

Section 32.0291 provides as follows:

(a) Notwithstanding any other law, the department may: (1) perform a prepayment review of a claim for reimbursement under the medical assistance program to determine whether the claim involves fraud or abuse; and

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(2) as necessary to perform that review, withhold payment ofthe claim for not more than five working days without notice to the person submitting the claim. (b) Subject to Section 531.1 02, Govermnent Code, and notwithstanding any other law, the department may impose a payment hold on future claims submitted by a provider. (c) A payment hold authorized by this section is governed by the requirements and procedures specified for a payment hold under Section 531.102, Govermnent Code, including the notice requirements under Subsection (g) ofthat section. TEX HUMAN RESOURCES CODE §32.0291 (emphasis added).

As a preliminary matter, section 32.0291 expressly references section 531.102 of the Texas Govermnent Code. Chapter 531 of the Texas Govermnent Code governs "Medicaid and Other Health and Human Services Fraud, Abuse, or Overcharges." In the 2013, the HHSC sought and obtained from the Texas Legislature a very broad definition of "abuse":

(1) "Abuse" means: (A) a practice by a provider that is inconsistent with sound fiscal, business, or medical practices and that results in: (i) an unnecessary cost to the Medicaid program; or (ii) the reimbursement of services that are not medically necessary or that fail to meet professionally recognized standards for health care; or (B) a practice by a recipient that results in an unnecessary cost to the Medicaid program. TEX GOV'T CODE §531.110l(1) (Vernon Supp. 2013).

Abuse, as defined in this section is not limited to fraud and is broad enough to encompass simple program violations. For policy reasons, perhaps it should not.

Texas TrueCare Amicus Brief - Page 6 But the language supports applying all of the provisions of Chapter 531, if any of them apply. As a result, if the payment hold provisions of section 531.102, to which this definition applies, apply to authorize a temporary payment hold, then so, too, do the hearing provisions of section 531.102. The fact that the "unnecessary cost" is actually determined through a process called an "audit" as opposed to an investigation makes no substantive difference.

The definition of a "provider" that is subject to section 531.102 (and, therefore, to section 32.0291), is likewise broad:

(10) "Provider" means a person, firm, partnership, corporation, agency, association, institution, or other entity that was or is approved by the commission to: (A) provide medical assistance under contract or provider agreement with the commission; or (B) provide third-party billing vendor services under a contract or provider agreement with the commission. TEX GOV'T CODE §531.110l(1O) (Vernon Supp. 2013).

Pharmacy providers clearly fall within this broad definition. The HHSC cannot identify any laws, because there are none, that authorizes the HHSC to label a pharmacy provider as an "audited entity" simply to evade the notice and hearing requirements of Chapter 531.

As a result, sections 32.0291 and rule 371.1667 do apply to pharmacy providers. On the other hand, if section 32.0291 and rule 371.1667 do not apply, then the HHSC-OIG likewise lacks authority to impose a temporary payment hold,

Texas TrueCare Amicus Brief - Page 7 much less a permanent payment hold. The HHSC-OIG glosses over the complete absence of any other statutory authority to exercise self-help by withholding future payments to remedy alleged past breaches ofthe Medicaid contract.

As noted by this Court in Harlingen Family Dentistry, Pc. v. Texas Health and Human Services Commission, --- S.W.3d ----, 2014 WL 6844947 (Tex. App.-Austin, Nov 25, 2014, no pet. hist.) (NO. 03-l4-00069-CV):

Through the challenged rules, HHSC grants the OIG authority, and assumes authority for itself, to impose a payment hold whenever it believes a provider has committed any program violation, no matter how minor and irrespective of whether there is any indication of fraud or other intentional abuse. As noted above, the rules significantly expand the circumstances under which a pre-notice payment hold can be imposed beyond those enumerated in Govermnent Code section 53 1.021(g)(2). Thus, the challenged rules are inconsistent with the legislature's directives related to those payment holds that it has expressly authorized, Harlingen Family Dentistry, 2014 WL 6844947, *5. This Court also noted the

anomalous result of affording a hearing to a provider accused of fraud, but not to one accused "only" of program violations. Id.

This Court's decision in Texas Dept. of Human Services v. Christian Care Centers, Inc., 826 S.W.2d 715 (Tex. App.-Austin, 1992, writ denied) is also instructive here. In Christian Care, this Court held that the predecessor to the HHSC exceeded its statutory authority in promulgating a rule providing for the permanent withholding of payments for services actually rendered to qualified

Texas TrueCare Amicus Brief - Page 8 Medicaid patients, based on nursing homes' failure to timely submit "level of care" forms:

TDHS is required to pay for qualified services made to eligible patients or give notice before finding patients ineligible, so that disqualified patients may exercise their due-process right to appeal eligibility decisions. See Tex.Hum.Res.Code A=. § 32.035 (1990); 42 U.S.C. § 1396a(a)(3) and (10) (1988 & Supp.I.1989); 42 C.F.R. § 431.200-.250 (1991); see also Goldberg, 397 U.S. 254, 90 S.Ct. 1011. By providing that a "Level of Care ceases to exist," rather than declaring a patient medically ineligible, TDHS seeks to avoid these due-process notice and appeal requirements. We find that use of this grammatical fiction circumvents the primary intent of the Medicaid statute; to provide continuous payment for necessary services to eligible individuals. Implied authority is not authority to depart from the intent of the statute. Sexton, 720 S.W.2d at 137; see also Texas Ed. ofDental Examiners v. Prichard, 446 S. W.2d 905, 909 (Tex.Civ.App.1969, writ rei'd n.r.e.). One of the key determinants of whether a rule is within an agency's implied authority is whether the rule harmonizes with the purpose of the agency's governing statute, in all of its provisions. See Gerst v. Oak CliffSav. & Loan Ass'n, 432 S.W.2d 702, 706 (Tex. 1968); see also State Ed. of Ins. v. DefJebach, 631 S.W.2d 794, 798 (Tex.App.1982, writ rei'd n.r.e.); Jefco, Inc. v. Lewis, 520 S.W.2d 915,921 (Tex.Civ.App.1975, writ rei'd n.r.e.). It would be inconsistent with the overall purposes of the Medical Assistance statute, i.e. providing quality nursing services to Medicaid qualified patients, to give TDHS the authority to withholdfunds permanently, merely for failure to file updated records timely. Christian Care Centers, Inc., 826 S.W.2d at 721 (emphasis added).

III. Separation of Powers

In determining the scope of the HHSC-OIG authority, this Court looks to powers granted expressly or by necessary implication in statutes. In evaluating the HHSC-OIG's contentions regarding the scope of its authority, the Court must also consider any constitutional limits on such grants of authority and interpret the

Texas TrueCare Amicus Brief - Page 9 authority in ma=er that renders it constitutional. Article II, section 1, of the Texas Constitution, the Separation of Powers provision, imposes limits on the authority that may be exercised by agencies in the Executive Department of Govermnent. TEX. CONST. Art. II, §1.

The essence of an HHSC-OIG adverse audit finding is that the provider has breached its agreement with the HHSC. The HHSC, however, has no authority to adjudicate contract rights. See State v. Flag-Redfern Oil Co., 852 S.W.2d 480 (Tex. 1993). In Flag-Redfern, a group of mineral lessees challenged the authority of the General Land Office (GLO) to adjudicate contract rights. At issue was a statutory scheme under which the GLO audited the leases retrospectively and withheld payments due prospectively to remedy what the GLO deemed to be violations of the lease. The Court held that although the GLO does not have authority to adjudicate the contract rights of parties to state mineral leases, the GLO may conduct audits to reassess the GLO's position under such contracts. Flag-Redfern Oil Co., 852 S.W.2d at 484.

The Flag-Redfern Court stated:

To the extent that section 52.135 merely allows the State to reassess its position with regard to state mineral leases, rather than to subject participants to binding judgments, we hold that the statute does not offend article II, section 1 of the Texas Constitution. See Fristoe v. Blum, 92 Tex. 76,85,45 S.W. 998, 1002 (1898).

Texas TrueCare Amicus Brief - Page 10 Flag-Redfern Oil Co., 852 S.W.2d at 484. The implications of the case are clearif the statute had allowed the GLO to render what amOlmted to a binding judgment, such action would have violated article II, section 1.

When the HHSC-OIG withholds money llllder its contracts with pharmacy providers to enforce audit findings, it is effectively adjudicating contract rights. Because the HHSC-OIG withholds money it alleges the pharmacy providers owe llllder their provider agreements, with no opportllllity for judicial review, much less a hearing, the effect of the action is that of a binding judgment. As a result, its action violates article II, section 1, ofthe Texas Constitution.

The Flag-Redfern Court further held that the requirement that state mineral lessees pay any disputed royalties before seeking judicial review of the GLO audit violated the lessees' constitutional right to access to courts under article I, section 13, of the Texas Constitution. PharmServ raised the applicability of article I, section 13, in this case.

The fact that the doctrine of sovereign immllllity may prevent a pharmacy provider from suing the HHSC for breach of contract does not mean that the HHSC may effectively sue the pharmacy provider for breach of contract without doing so in court. There are two sides to the breach of contract coin. Absent a legislative scheme that transfers the contract remedy to an agency, such as Chapter 2260 of the Texas Government Code, a pharmacy provider has the right to defend

Texas TrueCare Amicus Brief - Page 11 alleged breach of contract claims in court. The trial court had the jurisdiction to consider such claims. IV. A sanction by any other name is still a sanction

The HHSC cannot avoid the consequences of its actions simply by labeling its action an "audit," as opposed to a "sanction." The HHSC-OIG's position is that 1 T.A.C. §371.1667 does not confer the right to a hearing because it applies only to "sanctions" and a pharmacy audit recoupment is not a "sanction." The HHSC-OIG further urges that 1 TAC. §354.l89l(c) applies instead and that §354.l89l(c) does not expressly provide for a hearing and judicial review. The trial court had jurisdiction to consider whether §354.l89l means what the HHSC-OIG says it means and, if it does, whether it is invalid as inconsistent with the overall statutory scheme for the Medicaid program and/or the due process clauses of the Texas Constitution.

In evaluating the HHSC-OIG's position regarding §354.l89l, the Court must consider the rule in context. Section 354.1891 must be considered in the context of the overall Medicaid program. See Harlingen II, 2014 WL 6844947, *5; Christian Care, 826 S.W.2d at 721. In addition, that means reconciling the rule with sections 32.0291 of the Human Resources Code and its incorporation of section 531.102 of the Texas Govermnent Code and the definitions, discussed

Texas TrueCare Amicus Brief - Page 12 above, that apply to that section. Finally, interpreting the rule in context requires consideration ofthe rest of Chapter 345 of the HHSC rules.

The HHSC-OIG fails to reconcile its position regarding §354.l89l with 1 T.A.C. §354.l8ll. Section 354.1811, which is entitled simply "Sanctions," provides as follows:

(a) The Health and Human Services Commission (HHSC) reserves the right to impose administrative sanctions on a pharmacy provider who conducts pharmaceutical practices in violation of the ethics adopted by the profession, any applicable federal or state laws, or the criteria ofHHSC's Vendor Drug Program. Sanctions include, but are not limited to, termination or suspension from participation, suspension of payments, and recoupment of overpayments. (b) On receipt of a written request, HHSC provides an appeal to a pharmacy provider on whom HHSC sanctions have been placed for a violation described in subsection (a) of this section. 1 TAC. §354.l8ll (emphasis added).

The HHSC's own rules describe recoupment of an overpayment for violations of the criteria of the Vendor Drug Program or any applicable federal or state law as "sanctions." As a result, the HHSC-OIG's argument that rule 371.1667 does not apply lack merit. Pharmacy providers are entitled to a hearing and judicial revIew.

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PRAYER

FOR THESE REASONS, Texas TrueCare, as Amicus Curiae urges this Court to reverse the order dismissing this case for lack of jurisdiction and to remand the case for further proceedings consistent with the Court's opinion.

Respectfully submitted,

/s/ Jennifer S. Riggs Jennifer S. Riggs RlGGS ALESHIRE & RAY, P.C. Bar No. 16922300 700 Lavaca St., Suite 920 Austin, Texas 78701 (512) 457-9806 Telephone (512) 457-9066 Facsimile Jriggs@r-alaw.com

CERTIFICATE OF COMPLIANCE UNDER RULE 9.4(i)(3) OF THE TX. RULES OF APPELLATE PROCEDURE

By my signature below I certify that a computer assisted word count of the portions of this brief per Rule 9.4(i) (3) Tx. Rules of Appellate Procedure indicates that the number of countable words is 3,185, from the beginning of the Summary at page number 1 through the Prayer.

/s/ Jennifer S. Riggs Jennifer S. Riggs

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CERTIFICATE OF SERVICE

By my signature below I certify that a true and correct copy of the above and foregoing document was served on the following by hand delivery and/or electronic filing on January 9, 2015.

Jeff Avant AVANT & MITCHELL, L.P. 700 Lavaca, Suite 1400 Austin, Texas 78701 avantlaw@swbell.net

Hugh M. Barton, P.C. 603 West 13 th St., Suite lB Austin, TX 78701 bartonlaw@yahoo.com

Ann Hartley, Assistant Attorney General Financial, Tax and Litigation Section Office of the Attorney General 300 West 15 th, 6th Floor Austin, TX 78711 Ann.hartley@texasattorneygeneral.gov

/s/ Jennifer S. Riggs Jennifer S. Riggs

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