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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.
