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AGO 1983 No. 26 - November 23, 1983
AGO Opinion Header Image
Ken Eikenberry | 1981-1992 | Attorney General of Washington

OFFICES AND OFFICERS ‑- STATE ‑- HOSPITAL COMMISSION ‑- HOSPITALS ‑- RATES ‑- AUTHORITY OF HOSPITAL COMMISSION TO ESTABLISH BILLING SYSTEMS FOR REGULATED HOSPITALS 

(1) The Washington State Hospital Commission is not authorized to require hospitals to provide it with data involving diagnosis, procedures, age and sex of patients, total charges and file tracer numbers, unrelated to any currently authorized function or activity of the commission. 

(2) The Hospital Commission may not, under current law, require hospitals to bill their patients and/or payors on the basis of prospective fixed charges for a particular treatment as opposed to charges based on actual goods and services rendered. 

(3) The Hospital Commission may not, under current law, require all payors, including health care contractors, indemnity insurance carriers, and self-insured or private payors, to reimburse hospitals on the basis of prospective fixed charges for a particular treatment as opposed to charges based on actual goods and services rendered. 

(4) Assuming a system of reimbursement based upon prospective fixed charges for a particular treatment, the Hospital Commission may not, under current law, permit a hospital to retain excess revenues generated as a result of cost efficient practices by the hospital.

                                                              - - - - - - - - - - - - - 

                                                               November 23, 1983 

Honorable Maurice A. Click
Executive Director
Washington State Hospital Commission
711 South Capitol Way, FJ-21
Olympia, Washington 98504 

Cite as:  AGO 1983 No. 26                                                                                                                

 Dear Sir:

             By letter previously acknowledged you requested the opinion of this office on several questions pertaining to the authority of the Washington State Hospital Commission.  We paraphrase your questions as follows:

              [[Orig. Op. Page 2]]

            (1) Is the Hospital Commission authorized to require hospitals to provide health data involving diagnoses (principal and other), procedures (principal and other), age and sex of patients, total charges and file tracer numbers?

             (2) May the Hospital Commission require hospitals to bill their patients and/or payors on the basis of prospective fixed charges for a particular treatment as opposed to charges based on actual goods and services rendered?

             (3) May the Hospital Commission require all payors, including Blue Cross, health care contractors, indemnity insurance carriers, and self-insured or private payors, to reimburse hospitals on the basis of prospective fixed charges for a particular treatment as opposed to charges based on actual goods and services rendered?

             (4) Assuming a system of reimbursement based upon prospective fixed charges for a particular treatment, may the Hospital Commission permit a hospital to retain excess revenues generated as a result of cost efficient practices by the hospital?

             We answer each of these questions in the negative for the reasons set forth in our analysis below.

                                                                      ANALYSIS

             In posing the foregoing questions you have informed us that Medicare and Medicaid patients account for between 40 percent and 45 percent of total hospital charges in Washington.  In the past, hospitals have been reimbursed under both programs based upon the actual goods and services rendered by the hospital in the course of providing treatment to each eligible patient.

            Medicare, however, has initiated a new system of reimbursement for hospitals with fiscal years beginning on or after October 1, 1983.  That new system prospectively fixes the amount of reimbursement based upon the diagnosis in each case instead of the actual services rendered by the hospital.  Toward that end, Medicare has established 467 diagnostic related groups (hereafter DRGs) and has fixed the amount of reimbursement for each DRG.  Thus, hospitals will be reimbursed a set amount for a patient with a specific diagnosis irrespective of the actual goods and services  [[Orig. Op. Page 3]] rendered.  In theory, this system of reimbursement will provide an incentive for hospitals to cut costs since the hospital knows, in advance, the amount it will receive for the treatment of a particular patient.  Presumably, hospitals will attempt to provide treatment at or below the amount of reimbursement fixed for that DRG.1/

             In turn, assuming the authority to institute a DRG system, the Hospital Commission would prospectively fix the precise amount of reimbursement which each hospital would receive for its patients within each one of the 467 DRGs established by Medicare.  While the amount of reimbursement for different hospitals could be different‑-since the amounts could be "weighted" to reflect differences in geography, patient mix, etc.‑-the underlying system would coincide with the Medicare system.  The hospital would be required to live within the amount of reimbursement previously determined by the commission.  Hospitals would face the prospect of losses or profits in excess of those now permitted by the commission.

             As we understand the current budget and rate‑setting system, however, the Hospital Commission does not now direct hospitals or payors regarding the method of billing for a particular service or the method of payment.  Those are matters governed by the independent legal relationship between the hospital and the payor.  The commission only determines the total revenues that may be generated by a hospital for its next fiscal year.  See, RCW 70.39.140.  The hospital is then free to fix the specific amounts that will be billed for particular services so long as the hospital generates only the total approved revenue.

             It is against this factual background that we now proceed to answer each of your four questions.

              [[Orig. Op. Page 4]]

            Question (1):

             You first ask whether the Hospital Commission may require hospitals to provide certain information which is deemed essential to the implementation of a DRG reimbursement system.2/

              Our analysis begins with certain general legal principles.  A state agency may not define its own authority.  The legislature is the sole source of that authority.  Agencies only have those powers which are expressly granted and those powers necessarily or fairly implied in or incident to the powers expressly granted.  State ex rel. Holcomb v. Armstrong, 39 Wn.2d 860, 239 P.2d 545 (1952).  Implied powers must be essential to the declared objects and purposes of the agency‑-not simply convenient but indispensable.

             With these points in mind we next turn to the statutes which authorize the commission to require hospitals to provide it with certain information.  We begin with RCW 70.39.110 which requires hospitals to submit annual reports.  That statute provides, in part,

             "(1) Each hospital shall file annually with the commission after the close of the fiscal year:

             "(a) A balance sheet detailing the assets, liabilities, and net worth of the hospital;

             "(b) A statement of income and expenses;

             "(c)Such other reports of the costs incurred in rendering services as the commission may prescribe

             ". . ."

             "(4) All reports, except privileged medical information, filed under this chapter shall be open to public inspection.

             "(5) The commission shall have the right of inspection of hospital books, audits, and recordsas reasonably  [[Orig. Op. Page 5]] necessary to verify hospital reports."  (Emphasis supplied)

             Next to be noted is RCW 70.39.150, under which the commission is directed to

             ". . .

             "(1) Compile allrelevant financial and accounting data in order to have available the statistical information necessary to properly conduct rate review and approval.  Such data shall include necessary operating expenses, appropriate expenses incurred for rendering services to patients who cannot or do not pay, all properly incurred interest charges, and reasonable depreciation expenses based on the expected useful life of the property and equipment involved.  The commission shall define and prescribe by rule and regulation the types and classes of charges which cannot be changed except as provided by the procedure contained in RCW 70.39.160 and it shall also obtain from each such hospital a current rate schedule as well as any subsequent amendments or modifications of that schedule as it may require.

             ". . ." (Emphasis supplied)

             Also, the commission is authorized by RCW 70.39.180 to

             ". . .

             "(2) Hold public hearings, conduct investigations, and subpoena witnesses, papers, records, and documents in connection therewith.  The commission may administer oaths of affirmations in any hearing or investigation.

             "(3) Exercise, subject to the limitations and restrictions herein imposed, all other powers which are reasonably necessary or essential to carry out the expressed objects and purposes of this chapter."

            By these statutes the legislature has granted broad powers to gather information; however, it is equally clear that the purpose of those broad powers is to permit the commission to verify the accuracy of the information which is submitted by hospitals as a part of the existing rate‑setting process.  The commission cannot gatherany information for any purpose.  There must be a nexus  [[Orig. Op. Page 6]] between the desired information and the authorized activity of the Hospital Commission.

             The ability of the commission to require hospitals to produce the kinds of information referred to in your first question thus depends upon its authority to institute a DRG system as above described.  For the reasons next set forth in our analysis of your second and third questions, however, we conclude that the commission is not presently authorized to institute such a system.  And, therefore, we also must conclude the commission is not authorized to require the production of information solely for the purpose of instituting that sort of system.

             Questions (2) and (3):

             Your second and third questions address two facets of the same issue:  I.e., whether the Hospital Commission is authorized to require hospitals, or their payors, to adhere to a particular system of reimbursement‑-a DRG system? We conclude that the legislature has not granted the requisite authority‑-based primarily on our understanding that the implementation of a DRG system would in essence require the commission to fix the specific amount which a hospital could charge for a particular service and, in addition, fix the amount of reimbursement by payors for that service.

             In AGLO 1976 No. 68 (copy enclosed) we concluded that the commission lacked the requisite statutory authority to require the adoption of an experimental reimbursement system by certain hospitals.  While the commission was authorized to "promote and approve" such "experimental" systems under RCW 70.39.140, the decision to adopt any such systems depended entirely upon the legal relationships between the hospitals and their payors.

             We recognize in the instant case that the DRG system may not be "experimentaly" within the terms of RCW 70.39.140.  That is, the DRG system would be a uniform, statewide system for all hospitals and payors for the foreseeable future.  This is a distinction without a difference, however, for the legislature has granted only limited authority to "promote and approve" any alternative system of reimbursement.  The implementation of a DRG system would require that the commission mandate its adoption by all hospitals and payors‑-not just promote and approve its use.

             Finally, such a DRG system would require that the commission be authorized to regulate the practices of the payors.  However,  [[Orig. Op. Page 7]] the present law is devoid of any such authority.  And we adhere to the view stated in AGLO 1976 No. 68 that the relationship between hospitals and their payors is not within the current jurisdiction of the commission.

             Question (4):

             Your final question asks us to assume that a DRG system has nevertheless been implemented‑-by the hospitals themselves.  It is anticipated that some hospitals would, as a result, introduce cost-efficient measures which could produce profits in excess of the levels which the commission now approves.  You have asked whether the commission could, under the existing statute, permit hospitals to retain such "excess" profits.

             The relevant statute, RCW 70.39.150, directs the commission (among other things) to:

             ". . .

             "(2) Permit any nonprofit hospital subject to the provisions of this chapter to charge reasonable rates which will permit the hospital to render effective and efficient service in the public interest and on a solvent basis.

             "(3) Permit any proprietary profit-making hospital subject to the provisions of this chapter to charge reasonable rates which will permit the hospital to render effective and efficient service in the public interest and which includes an allowance for a fair return to stockholders based upon actual investment or, if the hospital elects, upon the fair value of the investment of the effective date of this section:  PROVIDED, That once the election is made it may not be changed without the approval of the commission."

             In its discretion, the commission must determine those rates which permit nonprofit hospitals to operate "on a solvent basis" and those rates which permit the stockholders of a profit-making hospital a "fair return."  Presumably this determination would be generally applicable to all the hospitals in either of the two categories;i.e., for example, a "fair return" on investments would be a uniform criteria which would be applied to all profit-making hospitals.

              [[Orig. Op. Page 8]]

            In our opinion, the commission could not permit a hospital to retain profits which exceeded the amounts which had previously been determined to represent either a "fair return" for profit-making hospitals or the amount necessary for nonprofit hospitals to operate "on a solvent basis."  It is clear that the legislature has simultaneously established ceilings on the amount of profit which the commission may allow hospitals and also guaranteed that hospitals need not operate at a loss.  While the commission is given the discretion to fix that profit ceiling for hospitals, it has no discretion to permit the ceiling to be raised for a particular hospital due to its cost efficiencies or, for that matter, any other reason.

             We further believe the recent decision in United Nursing Homes v. McNutt, 35 Wn.App. 632, ___ P.2d ___ (1983) supports this conclusion.  There, DSHS was required by statute to set prospective rates for nursing homes "which may reasonably be expected to reimburse in full for actual allowable costs."  RCW 74.46.420.  DSHS was to audit each nursing home to determine the allowable costs.  If the audit showed in excess of rate payments over allowable costs, DSHS would recoup the excess; however, if the nursing home suffered a deficit, there was no additional reimbursement‑-and the nursing home suffered a loss.

             The Court of Appeals held the above‑quoted language of RCW 74.46.420 required DSHS to reimburse all actual allowable costs.  It rejected the argument that the statute only required DSHS to set reasonable prospective rates which nursing homes were then required to accept as the total reimbursement.

             We believe your question raises a similar issue.  The statute governing the authority of the Hospital Commission, RCW 70.39.150, is, by comparison to the statute in theUnited Nursing Homes case, less ambiguous.  The Hospital Commission is directed to allow specific amounts for each of the two kinds of hospitals in this state.  We do not believe that the Court would sustain any reimbursement scheme which allowed either more, or less, than those amounts.

             Conclusion:

             The federal government has determined that the implementation of a DRG system will likely result in lower costs for those required to pay for hospital care.  Such a system, however, represents a radical departure from the existing regulatory scheme in this state.  We are unable to find sufficient authority for the  [[Orig. Op. Page 9]] Hospital Commission to implement such a different system without specific legislative approval and authorization.  We are, however, ready to provide assistance to you in drafting possible legislation to implement a DRG system.

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

 Very truly yours,
KENNETH O. EIKENBERRY
Attorney General

THOMAS G. HOLCOMB, Jr.
Assistant Attorney General

                                                         ***   FOOTNOTES   ***

 1/You have also informed us that the Department of Social and Health Services, as the agency responsible for the administration of the Medicaid program, has indicated that it intends to implement a similar system during 1984.

 2/Although we recognize that the desired information could be relevant to the existing budget and rate‑setting process, for the purpose of this opinion we will assume that the only reason supporting the request is that it is necessary to implement the new DRG reimbursement system.

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