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AGLO 1977 No. 48 - November 01, 1977
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Slade Gorton | 1969-1980 | Attorney General of Washington

OFFICES AND OFFICERS ‑- STATE ‑- HOSPITAL COMMISSION ‑- DISTRICTS ‑- HOSPITAL ‑- AUTHORITY OF HOSPITAL COMMISSION OVER RATES AND BUDGETS OF PUBLIC HOSPITAL DISTRICTS

Explanation of the legal relationship between the budget and rate‑making functions of the commissioners of a public hospital district and the statutory review functions of the state hospital commission under chapter 70.39 RCW; procedures to be followed by a public hospital district in establishing budgets and fixing rates, and in obtaining review and approval thereof from the state hospital commission; necessity for further action by a public hospital district commission following approval or disapproval of its proposed rates or budget by the hospital commission; effect of a rate increase made by a public hospital district which is later disapproved by the state hospital commission.

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                                                                November 1, 1977

Honorable Susan E. Gould
State Senator
19225 92nd West
Edmonds, Washington 98020                                                                                                               Cite as:  AGLO 1977 No. 48

Dear Senator Gould:

            By letter previously acknowledged you have requested our opinion on several questions relating to the procedures that public hospital districts are to utilize in establishing rates and budgets in light of the authority granted to the state hospital commission by chapter 70.39 RCW.  We paraphrase your questions as follows:

            (1) What body adopts thefinal rates and budgets of public hospital districts and under what procedures are those rates adopted?

            (2) Must public hopsital district superintendents and commissioners continue to observe the filing, publication, and budget adoption provisions of RCW 70.44.060(6)?

             [[Orig. Op. Page 2]]

            (3) Are changes in rates and budgets of public hospital districts ordered by the state hospital commission self-executing when communicated to the hospital district or is some further action necessary by the hospital district commissioners to implement the changes?

            (4)  What is the effect of a rate increase made by a public hospital district which is later disapproved by the state hospital commission?

            We answer the foregoing questions in the manner set forth in analysis.

                                                                     ANALYSIS

            The obvious starting point for our response to your questions is a previous opinion of this office, AGLO 1977 No. 7 [[to Francis D. Baker, Executive Director, State Hospital Commission, on February 18, 1977, an Informal Opinion, AIR-77507]], which was written to the state hospital commission earlier this year.  In that opinion, a copy of which is enclosed for your immediate reference, we concluded that the provisions of RCW 70.39.140 etseq., under which hospital rates and related matters are regulated by the hospital commission, are applicable to hospitals maintained and operated by public hospital districts formed under chapter 70.44 RCW.  In so concluding we further advised that:

            "[I]nsofar as rate schedules and budgets are concerned, final authority over those subjects no longer rests exclusively with the various hospital district boards of commissioners under RCW 70.44.060, supra, because, to the extent of any irreconcilable conflicts between those statutes and RCW 70.39.140 et seq., the former must be deemed to have been impliedly amended by the latter."1/

             In addition we said:

            ". . .  The power of hospital district commissioners to establish hospital rates and adopt budgets without review is clearly inconsistent with the power of the hospital commission to regulate and review the same things.  Thus, there is no manner in which the two acts can be  [[Orig. Op. Page 3]] reconciled in this respect because final authority for budget and rate levels necessarily must reside in only one body.  Therefore, it must be concluded that chapter 70.39 RCW has superseded the provisions of chapter 70.44 RCW relative to final authority over rates and budgets of hospitals operated by public hospital districts."2/

             Then, after thus concluding that certain parts of chapter 70.44 had been impliedly amended, we added the following caution, at page 8 of our prior opinion:

            "Also, lest there be any misunderstanding, it is important to note that where possible, provisions relating to the same subject matter which are embodied in different statutes should be harmonized to give effect to both statutes.  State ex rel. Shomaker v. Superior Court, 193 Wash. 465, 76 P.2d 306 (1938).  Therefore, only the portions of chapter 70.44 RCW that are actually inconsistent or irreconcilable with chapter 70.39 RCW should be viewed as having been amended or repealed by the latter act.  Other provisions contained in chapter 70.44 RCW relating to rates and budgets of district hospitals should be given effect to the fullest extent possible without detracting from the hospital commission's ultimate authority to regulate hospital rates and budgets."

            Your present opinion request essentially asks for further direction on the coordination of the hospital commission's budget review and rate approval procedures with those of public hospital districts as outlined in chapter 70.44 RCW.

            Question (1) and (2):

            Your first question concerning the adoption of final rates and budgets for hospital districts is largely answered in AGLO 1977, No. 7.  The hospital commission has the final authority over hospital rates insofar as a hospital district cannot charge a rate that has not been approved by  [[Orig. Op. Page 4]] the commission.  See RCW 70.39.140.3/   The hospital commission also has the authority to review budgets of hospital districts in order to make the determinations necessary to approve reasonable rates to be charged by the hospital district.  See RCW 70.39.140 and 70.39.150.  Any provisions in chapter 70.44 RCW which are inconsistent with the authority of the hospital commission to approve or disapprove rates or to review budgets for the purpose of the rate approval process are impliedly repealed by chapter 70.39 RCW.

            However, it is not entirely correct to characterize the authority granted to the hospital commission as the authority to "adopt" rates and budgets.  It is also incorrect to assume that the authority of the hospital commission eliminates any role for the hospital district commissioners in the budget formulation and rate‑setting processes.  These points will be explained in our response to the remainder of your questions below.

            By your first question you have also asked for a description of the procedures under which public hospital district rates and budgets are to be adopted.  We will respond to that request in conjuction with our answer to your second question which is closely related and asks:

            "Must public hospital district superintendents and commissioners continue to observe the filing, publication, and budget adoption provisions of RCW 70.44.060(6)?

            Our answer to your second question is in the affirmative, as will be more fully explained following our description of the applicable procedures.

             [[Orig. Op. Page 5]]

            Although the hospital commission has the final authority over hospital district rates and the authority to review hospital district budgets as we have said, the commission does not, strictly speaking, adopt either those rates or budgets.  Instead, the commission's primary function is to review and approve, or disapprove, rates proposed to it by hospitals includingpublichospitalsunderchapter70.44RCW.  The standards pursuant to which the commission acts in the approval process are contained in RCW 70.39.140 and RCW 70.39.150; and those statutes provide,interalia, that hospitals are to be permitted to charge reasonable rates which will permit them to render effective and efficient service in the public interest and produce sufficient total revenue for them to meet all of the reasonable obligations specified in the law.  In addition, non-profit hospitals are to be maintained on a solvent basis and profit-making hospitals are to be allowed a fair return on their investment.

            The basic procedures to be utilized by the commission in the rate approval process are, in turn, set out in RCW 70.39.160, which provides that proposed rate changes must be submitted to the commission for approval in advance of their effective dates.  This statute also sets timetables for the commission's consideration of proposed changes and it provides for a hearing process to be used in some cases.  In addition, note must be made of the fact that the provisions of RCW 70.39.160 have been elaborated upon and implemented by administrative regulations now codified in chapter 261-40 WAC.

            Through those regulations the hospital commission has established an orderly procedure for the yearly review and approval of hospital rates.  The regulations contemplate that hospitals will generally submit proposed rate changes only once a year rather than at random intervals throughout the year.  The procedure for the approval of rates thus submitted essentially involves a review by the commission of the hospital's proposed budget for the next fiscal year to determine which expenditures4/ are reasonable and will be allowed by it when considering approval of the hospital's rates.  The proposed budget is prepared and submitted to the commission in accordance with the standards set out in theAccounting and Reporting Manual for Hospitals adopted by the commission.  See RCW 70.39.100, chapter 261-20 WAC, WAC 261-30-020(5), and WAC 261-30-030.  Regulations describe in detail the steps to be taken in order to secure approval of rate changes through the budget review process.  Those steps are as follows:

             [[Orig. Op. Page 6]]

            (1) Submission of the proposed hospital budget for the next fiscal year at least sixty days before the beginning of the fiscal year (WAC 261-40-015, 261-40-100, 261-30-040);

            (2) Review of the proposed budget by commission staff to determine its completeness and for recommendations to the commission concerning the reasonableness of the proposed expenditures and the rates that should be allowed to the hospital based on these expenditures (WAC 261-40-105 to WAC 261-40-135);

            (3) Commission allowance or disallowance of proposed expenditures in the budget for the purpose of determining rates and the approval or disapproval of rates following a public hearing held at a time set by the commission (WAC 261-40-140 to WAC 261-40-160); and

            (4) Appeal and additional hearings based upon a hospital's appeal from an adverse decision by the commission (WAC 261-40-200 etseq.).

            What it is important to note, both in terms of the remainder of your first question and the essence of your second question, is that the above‑described procedures utilized by the hospital commission in the budget review and rate approval process do not conflict with the procedures contained in chapter 70.44 RCW governing the preparation of hospital district budgets.  Principally to be noted is RCW 70.44.060(6) which provides, in part, that:

            ". . .  The superintendent shall prepare a proposed budget of the contemplated financial transactions for the ensuing year and file the same in the records of the commission on or before the first Monday in September.  Notice of the filing of said proposed budget and the date and place of hearing on the same shall be published for at least two consecutive weeks in a newspaper printed and of general circulation in said county.  On the first Monday in October the commission shall hold a public hearing on said proposed budget at which any taxpayer may appear and be heard against the whole or any part of the proposed budget.  Upon the conclusion of said hearing, the commission shall, by resolution, adopt the budget as finally determined and fix the final amount of expenditures for the ensuing year. . . ."

             [[Orig. Op. Page 7]]

            The fiscal year for public hospital districts begins on the first of January.  A hospital district would not need to submit its proposed budget to the hospital commission until November 1st of the preceding year.  By the time of the required submission, then, the statutory preparation and hearing process outlined in RCW 70.44.060(6) would be completed and there thus should be no difficulty in submitting the proposed budget to the commission.

            Furthermore, in direct answer to your second question, the hospital commission's "final authority" to review hospital budgets and approve rates does not eliminate the need to prepare a hospital district's budget in accordance with this last quoted statute.  The filing, publication, hearing, and budget adoption provisions of RCW 70.44.060(6) are quite apparently designed to allow for public input in the budget process and the need for such input is not reduced by virtue of the commission's ultimate rate regulation and budget review authority.  Again, the commission does not itself prepare hospital budgets through its review and hearing procedures; it merely has the power to review the budget for the purpose of determining what is a reasonable level of expenditure that may be used to compute the hospital's allowable rates.  As noted further below in response to your third question, the hospital will, of course, need to modify its budget after the commission's review if the commission's disagreement with certain expenditures in the budget causes it ultimately to approve only rates based on a lower level of expenditure.  However, the responsibility for the preparation of hospital district budgets remains with the public hospital district superintendents and commissioners and those individuals will continue to make the essential practical and policy decisions.

            As we said in AGLO 1977 No. 7, only such parts of chapter 70.44 RCW as are actually in conflict with chapter 70.39 RCW have been impliedly amended or repealed by the latter legislation.  The filing, publication, hearing, and budget adoption provisions of RCW 70.44.060(6) continue to play an important role in the budget preparation process of public hospital districts after the enactment of chapter 70.39 RCW and that role is not inconsistent with the authority of the hospital commission.  Therefore, RCW 70.44.060(6) has not been impliedly repealed and we answer your second question in the affirmative.

             [[Orig. Op. Page 8]]

            Question (3):

            Your third question asks whether changes in rates and budgets of public hospital districts that are ordered by the hospital commission are self-executing or whether some further action by hospital district commissioners is necessary to implement the changes.  In regard to hospital rates, the hospital commission's orders are not entirely self-executing, for reasons that we will explain below.  In regard to hospital budgets, the hospital commission does not directly "order" changes.  Therefore, as we will also explain below, your question cannot apply to commission action on hospital budgets.

            RCW 70.39.140, 70.39.150, and 70.39.160 grant direct authority over hospital rates to the hospital commission.  RCW 70.39.160 specifically grants the hospital commission authority to approve or disapprove requests for changes in rates made by hospitals.  Hospitals are forbidden to charge any rates not approved by the hospital commission.  See RCW 70.39.140.  There are penalties for violation of any valid order, rule, or regulation of the hospital commission.  See RCW 70.39.200.  The clear implication of the statutory language is that hospitals are immediately bound by final decisions of the hospital commission concerning rates.  Therefore, a final decision of the hospital commission approving or disapproving proposed rates for hospital districts cannot be altered in any way or amended by action of the hospital district commissioners.  However, the hospital district commissioners can appeal a rate decision of the hospital commission pursuant to WAC 261-40-200, etseq. before the decision becomes final and can seek judicial review of a decision pursuant to RCW 70.39.190 and chapter 34.04 RCW.

            Although hospital district commissioners cannot alter final decisions by the hospital commission there are certain actions that the hospital district commissioners can take to implement those decisions.  If the hospital commission approves the proposed rates for a hospital district, the hospital district will need to establish its charges to the public which are based on the approved rates.  This action is necessary because there is a difference between the rate approved by the hospital commission and the prices charged to the public by a hospital.  "Rate" is defined by WAC 261-40-015(5) as follows:

            "'Rate' means the revenue per defined unit of service for each revenue center identified in the Commission's publication entitled AccountingandReportingManualforHospitals adopted under chapter 261-30 WAC."

             [[Orig. Op. Page 9]]

            Therefore, the hospital commission approves a specific limit on the revenue per unit of service for each hospital under its jurisdiction.  The individual hospitals must then formulate a price schedule for their wide variety of services which produce revenue within the limits established by the hospital commission.

            If the hospital commission disapproves proposed rate changes by a hospital district, the district commissioners will need to take further action.  The hospital district must then propose a new rate schedule and submit it to the commission for approval unless the district is content to operate under previously approved rates.  In order to secure hospital commission approval of the new proposed rate schedule, the schedule should generate no more revenue than is sufficient to meet the expenditures approved by the hospital commission during its review of the district's budget.  Again, after approval of the rate schedule, the hospital district will need to establish its price schedule based on approved rates.

            As indicated above, your question about the implementation of hospital commission orders by hospital district commissioners cannot apply to hospital commission action on budgets.  The hospital commission does not have direct authority over hospital budgets and does not issue "orders" concerning budgets.  When the hospital commission reviews a budget its approval or disapproval of the expenditures contained in the budget is for the purpose of determining what expenditures will be considered by the commission when it is requested to approve a particular rate schedule.  A hospital district's budget must, of course, be amended if the hospital commission's disapproval of proposed rate changes reduces revenue available to the district.

            Question (4):

            Your fourth question concerns the effect of a rate increase which is disapproved by the hospital commission after it becomes effective.  This situation should cause no difficulty for the hospital district involved because it would occur only rarely under the regulatory scheme set out in chapter 70.39 RCW.  RCW 70.39.160 provides, in material part, as follows:

            "From and after the date determined by the commission pursuant to RCW 70.39.140, no hospital subject to the provisions of this chapter shall change or amend that schedule of rates and charges of the type and class which cannot be changed without prior approval of the commission, except in accordance with the following procedure: . . ."

             [[Orig. Op. Page 10]]

            Since changes in hospital rates generally go into effect only after commission approval, a hospital district will not typically encounter situations where a rate increase is "rescinded" by the commission.  The only exception to the prior approval of rates is contained in RCW 70.39.160(4) which permits the commission, in its discretion, to allow temporary rate increases where they are in the public interest prior to the formal approval process.

            InState ex rel. Puget Sound Navigation Co. v. Department of Transportation, 33 Wn.2d 448, 206 P.2d 456 (1949), the state supreme court held that a rate regulatory body could exercise a large measure of discretion in the area of temporary rates.  The court further held that the particular regulatory body which was involved therein had the authority to order refunds of amounts accruing to a regulated business as a result of a temporary rate increase that was later rescinded.  However, the regulatory body was not required to exercise that authority if it did not believe it to be appropriate.  Thus, a determination of the effect of a rescinded temporary hospital rate increase would similarly be a matter left to the hospital commission's discretion after a consideration of the facts in the particular case before it.  We note that the hospital commission would be bound by the limitation contained in RCW 70.39.150(2) which requires that the commission allow non-profit hospitals to charge reasonable rates which will permit them to render service on asolvent basis.

            We trust that the foregoing will be of assistance to you.

Very truly yours,

SLADE GORTON
Attorney General

MICHAEL E. TARDIF
Assistant Attorney General

                                                         ***   FOOTNOTES   ***

1/AGLO 1977 No. 7 [[to Francis D. Baker, Executive Director, State Hospital Commission, on February 18, 1977, an Informal Opinion, AIR-77507]]at p. 6.

2/Ibid, p. 7.

3/RCW 70.39.140 reads, in material part, as follows:

            "In order to properly discharge these obligations, the commission shall have full power to review projected annual revenues and approve the reasonableness of rates proposed to generate that revenue established or requested by any hospital subject to the provisions of this chapter.  No hospital shall charge for services at rates other than those established in accordance with the procedures established hereunder."  (Emphasis supplied.)

4/In this opinion we are using the term expenditures as a general term which includes, but is not limited to, such items as operating expense, income tax expense, deductions from revenue, and return on investment.

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