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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. State v. Valley Hospital (07/01/2005) sp-5919

State v. Valley Hospital (07/01/2005) sp-5919

     Notice:   This opinion is subject to correction  before
     publication  in  the  Pacific  Reporter.   Readers  are
     requested to bring errors to the attention of the Clerk
     of  the  Appellate  Courts, 303  K  Street,  Anchorage,
     Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
     e-mail corrections@appellate.courts.state.ak.us.


            THE SUPREME COURT OF THE STATE OF ALASKA

STATE OF ALASKA, DEPARTMENT    	)
OF HEALTH & SOCIAL SERVICES,   	)   Supreme Court No. S-11286
                               			)
               Appellant,      		)
                               			)   Superior Court No.
     v.                        			)   3AN-01-12301 CI
                               			)
VALLEY HOSPITAL ASSOCIATION,   	)   O P I N I O N
INC.,                          			)
                               			)
               Appellee.       		)   [No. 5919 - July 1, 2005]
                               			)


          Appeal  from the Superior Court of the  State
          of    Alaska,   Third   Judicial    District,
          Anchorage, John Suddock, Judge.

          Appearances:   Linda L. Kesterson,  Assistant
          Attorney General, Anchorage, Gregg D. Renkes,
          Attorney   General,  Juneau,  for  Appellant.
          John  F.  Sullivan, Inslee,  Best,  Doezie  &
          Ryder,   P.S.,   Bellevue,  Washington,   for
          Appellee.

          Before:   Bryner,  Chief  Justice,  Matthews,
          Eastaugh, Fabe, and Carpeneti, Justices.

          MATTHEWS, Justice.

I.   INTRODUCTION

          The  Alaska  Department of Health and  Social  Services

(DHSS) appeals a decision by the superior court directing DHSS to

recalculate  Valley Hospital Associations (Valleys) reimbursement

for  the cost of treating Medicaid patients.1  We agree with  the

superior  court that the rate set by DHSS was improper.   We  set

out  the  superior  court order below, and adopt  it  with  three

modifications.   Chief  among  these  modifications,  which   are

discussed  following the superior court order, are  that  (1)  we

          believe the rate-setting was arbitrary and capricious and do not

decide  its constitutionality, and (2) the superior court  should

not  have  directed  the method DHSS must  use  in  recalculating

Valleys  reimbursement rate.  We also reject DHSSs argument,  not

addressed  by  the  superior  court, that  a  prior  adjudication

precluded  Valley  from  challenging the validity  of  the  rate-

setting regulation.

II.  THE SUPERIOR COURT ORDER

                             ORDER

               Appellant   Valley   Hospital   (Valley)
          appeals  from a final, adverse administrative
          decision  of the State of Alaska,  Department
          of Health and Social Services (DHSS), denying
          Valleys   fiscal  year  2001  Medicaid   rate
          appeal.    DHSS  established  the   rate   in
          November 2000, based on data contained  in  a
          Medicaid cost report filed by Valley in  June
          2000.   DHSS set the rate pursuant to a newly
          proposed rule, subsequently enacted effective
          December  30, 2000, as 7 AAC 43.685.   Valley
          appealed   the  rate,  and  a  DHSS   hearing
          examiner  recommended  a  grant  of   summary
          judgment   against  Valley.    The   Director
          adopted    the    proposed    findings    and
          conclusions,  and Valley timely  appealed  to
          the Superior Court.
          
               The DHSS hearing examiners opinion held,
          as  a  matter of law, that the administrative
          rule under which the rate was computed, 7 AAC
          43.685,   was   not  facially  arbitrary   or
          unreasonable,  and that DHSS  comported  with
          the   rule  in  setting  Valleys  rate.   The
          examiner   concluded,  without  citation   to
          authority,  that  she lacked jurisdiction  to
          adjudicate Valleys claim of inadequate notice
          that the rulemaking process would result in a
          post  hoc  adoption  of a  deadline  that  in
          practical     effect     precluded      DHSSs
          consideration of up-to-date cost data,  which
          would  otherwise entitle Valley to  a  higher
          reimbursement rate.
          
               Valleys    dilemma   is   as    follows.
          Medicaid,  as  a payer of last  resort,  only
          reimburses  Medicaid providers  absent  other
          sources  of  payment, such  as  insurance  or
          liable  third parties.  At the time a patient
          is  admitted  to Valley, Medicaid eligibility
          may   be   unclear,  and  persons  ultimately
          determined  eligible may be initially  logged
          in  as  Medicaid  ineligible.  Unfortunately,
          Valleys  medical management computer software
          lacked  the  capacity to update or  reconcile
          the admittance logs; thus, the logs tended to
          under-report  the  annual  Medicaid   patient
          days,  and  ancillary  billings  for  patient
          services  and supplies billable to  Medicaid.
          Valley,  for lack of current data,  used  its
          log  data in its interim Medicare cost report
          filed in June 2000.
          
               Historically,  this  inaccuracy  of  the
          logs expressed in the interim cost report had
          no  effect  on the annual rate determination.
          This  was  because Valley provided  DHSS  its
          actual  Medicaid  eligible  billings  via  an
          electronic  billing procedure, on  a  routine
          basis.  A DHSS computer periodically compiled
          these  billings in a report termed the  MR-O-
          14.   This compilation accurately established
          the  patient days and ancillary billings, and
          DHSS  historically  relied  on  that  report,
          rather  than the lesser sum reported  in  the
          interim   cost  report  deriving   from   the
          inaccurate   Valley   logs,   to   set    the
          reimbursement  rate both  for  routine  (room
          rate)  and  ancillary (procedures,  supplies)
          rates.
          
               That changed in 2000.  Valley filed  its
          Medicare  cost report in June 2000, utilizing
          log  data rather than the more accurate MR-O-
          14  printout.  It could not use  the  latter,
          because even though DHSS had produced the MR-
          O-14   at   that  time,  it   had   not   yet
          disseminated it to Valley.  It  did  so  July
          17,  2000.  In early September, 2000,  Valley
          used   the  accurate  MR-O-14  data  in   its
          Medicaid  year-end report, filed  with  DHSS.
          In   November   of  2000,  a  DHSS   employee
          preliminarily calculated the Valley  Medicaid
          rate  based  on the accurate cost figures  in
          the   MR-O-14  report,  arriving  at  a  rate
          acceptable  to Valley; but that  outcome  was
          shortly to change.
          
               One  month after Valleys June 2000  cost
          filing, on July 17, 2000, DHSS promulgated  a
          proposed  rule change, under which  its  rate
          determination would endure for  four,  rather
          than   one,  years.   During  the  rulemaking
          process,  the proposal evolved  in  a  manner
          detrimental  to  Valley.   The  final   rule,
          effective  December 30, 2000,  provided  that
          the MR-O-14 data would be used solely for the
          routine   rate   (room   charge),   but   not
          necessarily  for  the  ancillary  rate.   The
          ancillary  rate would be derived solely  from
          facility  supplied information  submitted  no
          later tha[n] June 15, 2000.
          
               The  hearing examiners opinion,  adopted
          by the director, found that Valleys June 2000
          Medicare  cost  report was  the  only  timely
          submitted,  facility-generated  data.    Even
          though DHSS possessed the more accurate M[R]-
          O-14  report  before the deadline,  and  even
          though  the data in that report was facility-
          generated, the hearing officer found that the
          report   itself   was  an  agency   generated
          document,   and   thus   not   eligible   for
          consideration under 7 AAC 43.685.   This  was
          so,  even though the same report, had it been
          received  by Valley before the deadline,  and
          then  resubmitted as support for its Medicare
          cost  report,  would have  been  accepted  as
          facility-generated  data  for  rate   setting
          purposes, justifying a higher rate.
          
               The detriment to Valley from the use  of
          the log based, rather than electronic billing
          based,  data,  may approximate $700,000  over
          the  four  year period.[2]  Valley  complains
          that  it  had no notice, before the rule  was
          promulgated in final form in the  late  fall,
          that  DHSS  would alter course and  establish
          the ancillary portion of the FY 2001 rate  by
          disregarding the MR-O-14 report in  favor  of
          inferior   data.   It  therefore  alleges   a
          violation  of  its  constitutional  right  to
          procedural due process in the form of  timely
          notice  of the rule change, with an attendant
          opportunity to cure the filing defect.  While
          Valley  considers the June 15 annual deadline
          to  be  arbitrary,  it is  fully  capable  of
          prospective  compliance  with  the  deadline.
          Therefore,  this case in the  first  instance
          presents  a  question of  procedural,  rather
          than substantive, due process.
          
               DHSS  argues that Valley, as a  scofflaw
          filing  an  inaccurate Medicare cost  report,
          deserves its fate.  The agency makes no claim
          that the rate it set is in fact accurate,  or
          superior  in  integrity to a rate established
          by accurate data; instead, it argues that the
          composite  rate structure falls within  broad
          standards  of general fairness,  even  though
          Valley was de facto treated disparately  from
               other Medicaid providers who were able to
          accurately report their cost data.
          
     In  an  administrative appeal, the Court
reviews   factual  findings  for   sufficient
evidentiary support.1  A deferential rational
basis  standard applies to questions  of  law
requiring  agency expertise.2  For all  other
questions   of   law,  however,   the   Court
substitutes  its own judgment in  a  de  novo
review.3

     The    requirements   of   the    Alaska
Constitutions due process clause,  Article  I
7,   apply  in  an  administrative  setting.4
Alaska  has adopted the three-part  balancing
test  outlined  in Mathews  v.  Eldridge5  to
determine  whether administrative proceedings
satisfy due process.  The Court considers:

     First,  the  private interest  that
     will  be  affected by the  official
     action;  second,  the  risk  of  an
     erroneous   deprivation   of   such
     interest   through  the  procedures
     used,  and the probative value,  if
     any,  of  additional or  substitute
     procedural safeguards; and finally,
     the Governments interest, including
     the   function  involved  and   the
     fiscal  and administrative  burdens
     that  the  additional or substitute
     procedural    requirement     would
     entail.6
     
     Applying this test to the present  case,
the   rigid  application  of  7  AAC   43.685
proposed  by  DHSS  cannot  stand.    Valleys
interest  in full reimbursement for  Medicaid
patients,  achieved by a rate that accurately
reflects   Valleys  costs,  is   great;   the
difference stands close to $700,000 over four
years.   This  loss easily  could  have  been
averted  by  administrative safeguards.   Had
DHSS  merely  allowed Valley to  rectify  its
data once it received notice of the change, a
more   just   and  proper  rate  would   have
resulted.

     DHSS  has invested time and effort  into
the propagation of rule 7 AAC 43.685, and  it
has  an  interest in preserving  its  effect.
Nonetheless, to rigidly apply the  rule  here
would  violate Valleys procedural due process
rights.

     DHSS  and  Valley did not  come  to  the
     present  dispute as strangers;  the  two
entities     have    a    long    established
relationship.  In this instance, Valley acted
as it always had done.  The cost report filed
in June had always been irrelevant, and there
was  no  reason for Valley to think otherwise
this  time.   Valley reasonably expected  the
same  treatment it had received  in  previous
years.

     There was no reason for Valley to expect
the  cost  report to dictate the  2001  rate,
when everyone understood the cost report data
to  be  faulty.   Even from the  outset,  the
proposed  rule failed to indicate the  weight
of  the  June report.  When the present  rule
became  formalized long after  all  deadlines
had  passed, it drastically changed from  the
expectations  of the parties.  As  a  result,
Valley  must  be  afforded an opportunity  to
correct its understandably erroneous data.

     By  requiring Valley to provide accurate
information  by June 15, 2000, and  informing
Valley  of  this  requirement several  months
after the fact, DHSS exceeds its authority to
act  retroactively.  AS 44.62.240 limits such
retroactive action when an agencys regulation
is   primarily  legislative,  as  opposed  to
primarily  interpretative.  Such  legislative
regulations have prospective effect only.  As
the  firm  deadline for financial submissions
mandated  by  7  AAC 43.685 falls  under  the
former  category, AS 44.62.240 prohibits  the
retroactive application suggested by Valley.

     When  similar  situations have  occurred
elsewhere in the country, courts have  agreed
that procedural due process requires agencies
to  consider  the  actual  costs  to  medical
facilities,  rather than strictly  adhere  to
regulatory    schemes   that    underestimate
reimbursements.   As one  federal  court  has
stated,   As  a  general  matter,   when   an
adjudicating agency retroactively  applies  a
new  legal  standard that  departs  radically
from  the agencys previous interpretation  of
the   law,  the  agency  must  give  entities
regulated by the agency proper notice  and  a
meaningful opportunity to adjust.7

     In  Mississippi, for example, a  nursing
facilitys computer glitch caused the facility
to   underreport  patient   costs   by   over
$700,000.    The  Mississippi   Division   of
     Medicaids   regulations  provided   that
assessment   errors   could   be    corrected
prospectively  from the date  of  correction.
As  a  result, although the nursing  facility
corrected  its  data, and all parties  agreed
that  Medicaid patients were treated  at  the
facilitys cost, Medicaid refused to reimburse
the  facility  for its losses accrued  before
the date of correction.8

     The  court acknowledged that the agencys
own   regulations   forbade   a   retroactive
reimbursement.  The court held, however, that
due  process  considerations  outweighed  the
strict interpretation of the regulations.9

     In   another   case,  a  federal   court
similarly held that sudden changes in  policy
may  not  be binding upon regulated entities.
In    St.   Lukes   Methodist   Hospital   v.
Thompson,10  a hospital applied for  Medicare
reimbursement for atypical services using the
same  criteria  upon which it had  relied  in
prior  years.  While such requests had always
been  approved  previously,  this  time   the
request  was  denied on the basis  of  a  new
interpretation  of  an  existing  regulation.
While   the  court  acknowledged  an  agencys
authority    to   reevaluate   an    existing
interpretation, it stressed that such  sudden
changes  would receive little deference  upon
review.11

     The rate setting procedure set forth  in
7  AAC  43.685, as applied to Valleys  fiscal
year  2001 Medicaid rate, violate[s]  Valleys
procedural due process rights.  Thus,  Valley
is  excused  from  literal compliance.   DHSS
will  calculate the 2001 rate  based  on  the
accurate  M[R]-O-14, as it has  historically.
Subsequent rates will be calculated according
to 7 AAC 43.685.

III.     DISCUSSION

We  adopt  the  superior  courts  opinion,  with  three

modifications:

1.   We  have  avoided passing on the  superior  courts

constitutional holding, because we believe that  7  AAC

43.685  was  arbitrary  and capricious  as  applied  to

Valley.   This  is  consistent  with  our  practice  of

reaching  constitutional  issues  only  when  the  case

cannot   be  fairly  decided  on  statutory  or   other

grounds.3

          As  a  preliminary  matter, we  believe  DHSS  properly

interpreted  its regulation to require use of Valleys  previously

submitted log data in calculating reimbursement rates.4  We  also

believe  that, as an abstract proposition, DHSS might  reasonably

choose  to  base  future reimbursement on data submitted  without

prior  awareness of the uses to which that data  might  be  put.5

But  the fundamental problem with what DHSS has done is that here

the  data  appeared to be inaccurate, and DHSS knew this  at  the

time  it  calculated  the  rate  facts that  Valley  alleged  and

substantiated  in  the proceedings before the  commissioner,  and

Medicaid staff never denied.6

          If Valleys experience were representative, 7 AAC 43.685

might  well be invalid. The statute then in effect required  DHSS

to  base  reimbursement  on  a fair  rate  for  reasonable  costs

incurred  by  the  facility.7  Although we have  said  that  this

statute required reimbursement reasonably related to the Medicaid

costs  of  an  efficiently  run  facility  rather  than  any  one

facilitys  actual  costs,8  we believe  that  a  regulation  that

significantly  under-compensated  every  facilitys  actual  costs

would  be presumptively inconsistent with the statute.  Put  into

the terms that we have used to review agency action generally,  a

regulation  that  significantly under-estimated  most  facilities

reasonable   costs  would,  absent  some  cogent   justification,

persuade  us  that DHSS had not taken a hard look at the  salient

problems  and  had  not  genuinely engaged in  reasoned  decision

making.9

          Yet  the  record  does not adequately disclose  whether

other hospitals had the same problem that Valley had.  On the one

hand,  we  have  found some indication in the  notice-and-comment

record  that  other  hospitals log data might  also  have  under-

estimated  Medicaid costs; it certainly seems natural  to  assume

that  other  hospitals  had  the same problems  keeping  patients

          Medicaid status up-to-date.  And based on our own review of the

administrative  record,  it  also  appears  that  DHSS  did   not

meaningfully  respond to a comment that pointed out this  problem

when it was raised in the notice-and-comment process.  But on the

other  hand, any evidence about other hospitals log data has  not

been developed by the parties, and Valley has not discussed other

hospitals  situations or any procedural defects in the rulemaking

process.   Therefore, although the foregoing gives us  reason  to

question whether DHSS took the required hard look at the problems

inherent  in relying on log data when it wrote 7 AAC  43.685,  we

think  it  would be unwise for us to use this case to  invalidate

the regulation.

          But  the  validity  of  the  regulation  and  of  DHSSs

interpretation of it does not mean that DHSSs treatment of Valley

was  reasonable.   Although an agency does not act  illegally  in

most   cases  where  the  neutral  application  of  a  reasonable

regulation has a harsh result, there is some authority suggesting

that  adherence to a valid regulation can be illegal  when  there

are   unusual  circumstances  that  make  such  adherence  highly

unreasonable.   For example, a few federal cases  have  suggested

that an agency violates the federal Administrative Procedure  Act

when  it  refuses  to waive a policy of general  application  for

reasons  that  are so insubstantial as to render that  denial  an

abuse  of discretion.10  Additionally, the United States  Supreme

Court  has  at  times  implied  that the  federal  Administrative

Procedure  Act requires agencies to provide a process  to  obtain

waivers  of  general policies,11 although there is  also  a  more

recent  decision  by  the  Court  rejecting  this  argument   for

situation-specific reasons.12  And Valley has provided us with  a

decision  by  the Mississippi Supreme Court, also  cited  by  the

superior court, which holds that an agency acted arbitrarily  and

capriciously  in  refusing to correct an  error  in  a  facilitys

reimbursement  data,  even though the correction  was  apparently

prohibited by the applicable regulations.13

          Under  the unusual circumstances of this case, we think

DHSS  was required to make an exception to 7 AAC 43.685,  and  to

use  some more reasonable method of calculating Valleys ancillary

charges.   This is so for a combination of four reasons:  (1)  as

already  noted, we have at least some doubt whether 7 AAC  43.685

was  in fact validly promulgated; (2) even in the course of  this

litigation,  DHSS has not provided any compelling  reason  (e.g.,

some  significant administrative or methodological advantage)  to

prefer using facilities previously submitted log data over  other

sources  of information; (3) though not per se irrational,  there

is  an  inherent risk of errors anytime an agency relies on  data

submitted without notice of the uses to which the data  might  be

put;  and (4) most importantly, at the time it calculated Valleys

reimbursement rate, DHSSs Medicaid staff appeared to  have  known

that there was a significant discrepancy between Valleys log data

and  the MR-O-14 report, and that using the log data would result

in  a lower reimbursement rate.  To borrow the terms used in  the

federal  cases,  we think DHSSs reasons for using  the  log  data

under these circumstances are so insubstantial as to render  [its

rate-setting] an abuse of discretion.14

          We   hasten  to  add  that  agencies  will  seldom  act

improperly  by  adhering  to  their regulations,  even  when  the

results  in  individual cases are harsh.  In addition,  regulated

parties  should request an exception from an agencys  application

of  the  rule  (which  Valley appears not to  have  done)  before

seeking  such  relief via litigation; agencies should  give  such

requests  a hard look but are not required to author an essay  in

response.15   But  here we are convinced that Valley  suffered  a

substantial injustice, offset by no compelling justification.  We

therefore   agree  with  the  superior  court  that  DHSS   acted

improperly in calculating Valleys 2001 reimbursement rate.

     2.     Notwithstanding  this  conclusion,  we  believe   the

superior  court  should  not  have  directed  DHSS  to  calculate

[Valleys] 2001 rate based on the accurate MR-O-14 report.  Courts

     reviewing agency action usually direct the agency  to  grant

particular relief only where the agency has no discretion to  act

in  any other manner, and then only when the court concludes that

a remand to the agency would produce substantial injustice in the

form  of  further delay of the action to which the petitioner  is

clearly  entitled.16   At  oral  argument,  counsel  for   Valley

acknowledged the general rule but argued that the superior courts

mandate to DHSS should nonetheless be affirmed to avoid the delay

inherent in further agency proceedings.

          We reject this approach, which would direct DHSS to re-

calculate the rate using MR-O-14 data, because it is not clear to

us  that  the only reasonable way to calculate Valleys  ancillary

charge  reimbursement is to rely solely on  the  MR-O-14  report.

For  example,  Medicaid staff submitted evidence  in  the  agency

proceedings  that the MR-O-14 has historically been  used  as  an

audit  tool,  and  that it would be improper to set  rates  based

exclusively on the MR-O-14 report without using other sources  to

verify  whether its data are correct.  In response, Valley  cites

acknowledgments  by  Medicaid staff that the  MR-O-14  is  fairly

reliable, and that the staff had begun to rely more and  more  on

MR-O-14 data to set rates in the period before the new regulation

was  promulgated.   But Valleys points do not necessarily  refute

the staffs objection about verification; a fairly reliable source

of  data  is  not  necessarily  one  that  can  be  used  without

verification.   Even  so,  we might agree  with  Valley  and  the

superior  court about the reliability of the MR-O-14 if  we  were

able to exercise de novo review on a full record.  But we are not

in  this  position.   Instead, we are  essentially  reviewing  an

agency  decision,  which  was  elicited  by  the  staffs  summary

judgment motion, and which did not include any findings of  fact.

We  therefore  think it would be improper for us to re-write  the

rate  in  a  way  that resolves this factual dispute  in  Valleys

favor.

          We trust that the commissioners office will take up the

          re-calculation of Valleys rate promptly, just as it appears to

have  promptly  adjudicated  Valleys challenge  to  the  original

rate.17   In  doing so, the agency should adopt a fair  rate  for

reasonable  costs  incurred  by the facility,18  using  the  most

accurate data now reasonably available.

     3.   We also reject DHSSs argument that a prior adjudication

precludes Valley from challenging the regulation.

          The  purported  prior adjudication began  with  Valleys

administrative appeal from the commissioners order.  This  appeal

included  claims that (a) 7 AAC 43.685 was invalid  and  (b)  the

commissioner  had not properly interpreted the  regulation.   The

appeal  was  originally  heard  by Superior  Court  Judge  Donald

Hopwood,  who  accepted briefing on the merits but  then  decided

that  he  did not have jurisdiction to hear that part of  Valleys

appeal  challenging the validity of the regulation.  He dismissed

those claims pursuant to DHSSs motion, suggested that Valley file

a   separate   declaratory   judgment  action   challenging   the

regulation,  and  stayed  the rest of the administrative  appeal.

Valley   duly  filed  a  separate  declaratory  judgment   action

challenging  the  validity of the regulation on both  substantive

and   procedural  grounds.   But  Valleys  declaratory   judgment

complaint  also  included at least some claims  touching  on  the

commissioners interpretation of the regulation  i.e., claims that

remained   pending  (and  stayed)  before  Judge  Hopwood.    The

declaratory judgment action was assigned to Superior Court  Judge

Peter  Michalski,  and he granted DHSSs motion to  dismiss  these

overlapping claims, on the ground that they were still pending in

the  administrative appeal.  The parties then stipulated that the

rest  of  the  declaratory  judgment action  was  dismissed  with

prejudice,  subject however to the important caveat  that  [t]his

stipulation  does  not  apply  to  Valley  Hospital  Associations

administrative  appeal of its fiscal year  2001  rate  .  .  .  .

Valley then returned to its administrative appeal, which owing to

a  change  of  venue was now being heard by Superior Court  Judge

          John Suddock instead of Judge Hopwood.  Valley moved to lift the

stay  and  requested oral argument on the merits briefs submitted

to  Judge Hopwood years before, which included challenges to  the

validity  of  the  regulation; DHSS did not  oppose  the  motion.

Judge Suddock heard oral argument and issued the opinion set  out

above.19

          The normal rule is that claim preclusion (res judicata)

precludes  a  subsequent suit between the same parties  asserting

the  same  claim for relief when the matter raised was  or  could

have  been decided in the first suit. 20  Although our precedents

occasionally include broad statements that stipulated  dismissals

have  the  same  res  judicata effect as a final  judgment  after

trial,21  we  believe that in practice preclusion should  operate

more  narrowly  where the parties have not tried the  case  to  a

conclusion  and  have attempted to terminate  only  part  of  the

dispute.   Specifically,  in  cases  where  the  parties  dismiss

certain  claims  but  express an agreement  to  preserve  certain

disputes  for future litigation, the only claims that  should  be

precluded  by  the  agreement are those claims that  the  parties

intended  to  preclude from future litigation.22  In making  this

determination, we will read the parties agreement to dismiss  the

claims   as  if  it  were  a  contract,  and  resolve  cases   of

impenetrable  obscurity in favor of the party  seeking  to  avoid

preclusion.23  This rule seems the fairest way to prevent parties

from  being  surprised  by expansive judicial  interpretation  of

intentionally narrow agreements.

          Under  this standard, we think the stipulated dismissal

did not preclude Valley from continuing to challenge the validity

of  the  regulation.   The question is what  claims  the  parties

intended  to  dismiss by the stipulation.  The  stipulation  says

that   it   does   not  apply  to  Valley  Hospital  Associations

administrative  appeal  of  its fiscal  year  2001  rate.   DHSSs

briefing to this court fails even to refer to, much less explain,

this  language.  It is true that the language could  be  read  to

          manifest an intent to exempt only those administrative claims

that  survived  Judge  Hopwoods jurisdictional  dismissal   i.e.,

claims attacking the interpretation of the regulation rather than

claims  challenging the validity of the regulation.   But  it  is

also  plausible to read the language as covering all  the  claims

originally  asserted  in the administrative appeal,  which  would

include  the  challenge  to the validity  of  the  regulation  as

applied  to Valley.  The parties might have expected that  Valley

would  re-assert these claims once a new venue and  a  new  judge

were  obtained, an impression strengthened by the fact that  this

is what actually happened (i.e., DHSS and Valley agreed to submit

the  appeal  to  Judge  Suddock on the old merits  briefs,  which

included  challenges to the validity of the  regulation).   Given

these  circumstances,  and  given  that  ambiguities  should   be

resolved  against  preclusion, we believe  that  it  is  fair  to

conclude  that  Valley was properly not precluded from  asserting

its claim that the rate-setting regulation was invalid.

IV.  CONCLUSION

          The  order  of  the superior court is AFFIRMED,  except

that  we VACATE the superior courts order to re-calculate  Valley

Hospitals reimbursement rate using the MR-O-14 report.  We REMAND

the  case to the Department of Health and Social Services so that

it may set a rate in a manner not inconsistent with this opinion.

_______________________________
     1     This  appeal  is  not from a final order  because  the
superior  court  remanded  the case to  the  agency  for  further
action.  See City & Borough of Juneau v. Thibodeau, 595 P.2d 626,
629 (Alaska 1979) (the decision of the superior court, acting  as
intermediate  appellate  court, which  reversed  lower  court  or
administrative agency and remanded for further proceedings was  a
non-final order).  This appeal is therefore improper but we treat
it  as an interlocutory petition for review in order to guide the
proceedings on remand and avoid further delay.  See Tlingit-Haida
Regl Elec. Auth. v. State, 15 P.3d 754, 761 (Alaska 2001).

     2     Editorial  note:  The superior court accepted  Valleys
representation that the under-reimbursement resulting from use of
the log data exceeded $700,000.  This estimate was based on DHSSs
representation  that  it  would  continue  to  calculate  Valleys
reimbursement  for 2004 based on adjustments to  the  2001  rate.
But  since  then  DHSS  has  agreed  to  calculate  Valleys  2004
reimbursement  using  new  data, with  the  result  that  Valleys
estimate of its loss has diminished to $535,949.

1    DeYoung v. NANA/Marriott, 1 P.3d 90, 94
(Alaska 2000).

2    Tesoro Alaska Petroleum Co. v. Kenai
Pipe Line Co., 746 P.2d 896, 903 (Alaska
1987).

3    Id.

4    Balough v. Fairbanks North Star Borough,
995 P.2d 245, 266 (Alaska 2000).

5    424 U.S. 319 (1976).

6    Whitesides v. State, Dept of Public
Safety, Div. of Motor Vehicles, 20 P.3d 1130,
1135 (Alaska 2001).

7    Alabama v. Shalala, 124 F. Supp. 2d
1250, 1264 (M.D. Ala. 2000).

8    See Beverly Enters. v. Miss. Div. of
Medicaid, 808 So.2d 939 (Miss. 2002).

9    Id. at 942.

10   182 F. Supp. 2d 765, 768 (N.D. Iowa
2001).

11   Id. at 779-80.

3   See, e.g., Kenai Peninsula Fishermans Co-op. Assn, Inc.
v.  State, 628 P.2d 897, 908 (Alaska 1981) (Because  we
find  that  the  policy  was not adopted  according  to
proper [Administrative Procedure Act] procedures, we do
not  feel  it  is  proper to reach  the  constitutional
validity of the actual policy adopted.).

     4    The question is whether the department acted reasonably
in  construing 7 AAC 43.685 to require it to calculate  ancillary
charges  from  the Medicaid log data in Valleys Medicare  report.
We  review an agencys interpretation of its own regulations under
the  reasonable  and  not  arbitrary  standard.  .  .  .   [This]
deferential  standard  of  review properly  recognizes  that  the
agency  is  best  able to discern its intent in promulgating  the
regulation at issue. Stoshs I/M v. Fairbanks N. Star Borough,  12
P.3d   1180,   1183  (Alaska  2000)  (citations  omitted).    The
regulation says that the ancillary charge component of  the  base
rate  must be calculated from facility-reported data (as  opposed
to  department-generated  data).  See 7 AAC  43.685(b)(7)(B)  and
(b)(9)(B).  Other sections of the regulation suggest that the MR-
O-14 report is to be regarded as department-generated rather than
facility-reported, and also suggest that the only other data that
might  be  used should come from Medicaid log data in a facilitys
Medicare  report.   Specifically, 7  AAC  43.685(a)(4)  at  times
refers  to the MR-O-14 as department-generated data, and  advises
use of data submitted under 7 AAC 43.679, which is the regulation
requiring  facilities to submit the Medicare  report  from  which
Valleys  Medicaid log data was ultimately extracted.  See  7  AAC
43.679(c).   This  characterization  of  the  MR-O-14  report  as
department-generated is significant, because the only other  data
that  might qualify as facility-reported is (a) the log  data  in
Valleys  Medicare report, and (b) Valleys daily billings  to  the
department.   But Valley concedes the unwieldiness of  using  the
daily  billings,  and also that daily billings  are  not  in  the
Medicare report submitted under 7 AAC 43.679(c).  Accordingly, we
think  it was reasonable for staff to conclude that the log  data
was  the  only  data the regulation authorized staff  to  use  to
calculate  Valleys ancillary cost reimbursement, i.e.,  the  only
facility-reported  data available by June 15.   In  addition,  we
note  that the notice-and-comment record indicates that  Medicaid
staff  and  the  facilities submitting comments appreciated  that
ancillary  charges  would  be calculated  using  log  data.   All
citations  to  DHSS  regulations  in  this  opinion  are  to  the
regulations  in  effect in December 2000,  when  DHSS  calculated
Valleys reimbursement rate.

     5     See, e.g., Regions Hosp. v. Shalala, 522 U.S. 448, 456
(1998);  Presbyterian Med. Ctr. of Univ. of Pa.  Health  Sys.  v.
Shalala, 170 F.3d 1146, 1150-51 (D.C. Cir. 1999).

     6     DHSS argues that it was not required to refute Valleys
evidence  about  the  problems with the log data  in  the  agency
proceedings,  because the commissioner accepted  staffs  argument
that  log data could be used regardless of accuracy, and  granted
staffs summary judgment motion on that basis.  According to DHSS,
even  if  we  believe  that staff was not  entitled  to  rely  on
inaccurate data, we should remand the case to the commission  for
additional  fact-finding on whether the log  data  was  accurate.
But  our  view  of  the proceedings is that staff  conceded  that
Valleys  log data represented a Failure to Keep Accurate Records,
in  the words of a section heading from staffs reply brief to the
commissioner.   In any event, the terms of our remand  give  DHSS
discretion  to  set any rate that is a fair rate  for  reasonable
costs incurred by the facility, using the most accurate data  now
reasonably available.  It may be possible to use log data in  re-
calculating the rate, but in doing so DHSS should come  to  grips
with  the  considerable evidence submitted  by  Valley  that  its
previously submitted log data is not accurate.

     7    AS 47.07.070(a) (2000).

     8     State,  Dept  of Health & Soc. Servs.,  Medicaid  Rate
Commn v. Hope Cottages, Inc., 863 P.2d 246 (Alaska 1993).

     9     State  v.  Kenaitze Indian Tribe, 83 P.3d  1060,  1067
(Alaska 2004).

     10    Bellsouth Corp. v. FCC, 162 F.3d 1215, 1224 (D.C. Cir.
1999)  (quoting Thomas Radio Co. v. FCC, 716 F.2d 921, 924  (D.C.
Cir. 1983)) (upholding agencys refusal to grant waiver).

     11   FPC v. Texaco, Inc., 377 U.S. 33, 39 (1964) (the agency
properly  refused  request for increases in  natural  gas  rates,
where  request included substantive terms forbidden by  rule  and
the applicant did not show reasons why in the public interest the
rule should be waived).

     12   FCC v. WNCN Listeners Guild, 450 U.S. 582 (1981).  This
case  upheld  the  FCCs adoption of a policy to  rely  on  market
forces  rather  than overt regulation to regulate the  format  of
radio  stations, and rejected the argument that  the  agency  was
required  to  make exceptions to the market forces  policy  as  a
safety  valve.   The court reasoned that it was  proper  for  the
agency  to determine that safety valves would involve the  agency
in too much subjectivity, given the elusive and difficult factors
involved   in  determining  the  acceptability  of   changes   in
entertainment  format.  Id. at 601.  Justice Marshall  argued  in
his  dissent  that  our  cases have  indicated  that  an  agencys
discretion to proceed in complex areas through general  rules  is
intimately connected to the existence of a safety valve procedure
that  allows  the agency to consider applications for  exemptions
based  on special circumstances.  Id. at 609.  See also 1 Richard
J.  Pierce, Administrative Law Treatise  6.6, at 358-59 (4th  ed.
2002) (discussing the federal cases cited above).

     13    Beverly Enters. v. Miss. Div. of Medicaid, 808 So.  2d
939, 942-43 (Miss. 2002).

14   Bellsouth Corp., 162 F.3d at 1224.

     15   Id.

16    3  Richard  J. Pierce, Administrative Law  Treatise   18.1,
at  1323-24  (4th  ed. 2002).  Cf. Jones v. Commercial  Fisheries
Entry  Commn,  649 P.2d 247, 251 (Alaska 1982) (where  an  agency
adjudicated   a   limited   entry  permit   application   without
considering whether special circumstances applied, the case would
be remanded to agency for reconsideration).

17    Valley  was  first  notified of the reimbursement  rate  in
December   2000.   The  final  order  of  the  DHSS  commissioner
approving the rate and rejecting Valleys challenge was in October
2001.

     18   AS 47.07.070(a) (2000).

19    Although  DHSS  now  claims that the  stipulated  dismissal
of   the  declaratory  judgment  action  precluded  Valley   from
challenging the validity of the regulation, it is unclear whether
this  argument  was  raised with Judge Suddock.   Judge  Suddocks
notes  of  the argument do not mention possible claim preclusion,
and DHSS appears to have been content to rely on its prior merits
briefs, without submitting additional papers to Judge Suddock  on
the claim preclusion issue.

     20    Robertson v. American Mechanical, Inc., 54  P.3d  777,
780  (Alaska  2002)  (quoting State v. Smith,  720  P.2d  40,  41
(Alaska 1986)).

     21   Tolstrup v. Miller, 726 P.2d 1304, 1306 (Alaska 1986).

     22    DeNardo  v. Calista Corp., 111 P.3d 326,  332  (Alaska
2005).

     23    18A  Charles Alan Wright et al., Federal Practice  and
Procedure  4443, at 273-75 (2d ed. 2002):
          Preclusion  also  should  be  denied  if  the
          parties have found it desirable to settle  on
          terms that finally dispose of one part  of  a
          single claim but that expressly leave another
          part   of   the   claim  open   for   further
          litigation.  Inevitably, courts must struggle
          with  the uncertain consequences of ambiguous
          settlement  agreements  and  judgments.   The
          conflicting   pressures  are  apparent,   but
          impenetrable  obscurity  is  likely   to   be
          resolved against preclusion.