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

ACCEPTED
03-13-00526-CV
5276282
THIRD COURT OF APPEALS
AUSTIN, TEXAS
5/13/2015 6:15:17 PM
JEFFREY D. KYLE
CLERK

NO. 03-13-00526-CV
___________________________________________________________
FILED IN
IN THE COURT OF APPEALS 3rd COURT OF APPEALS
AUSTIN, TEXAS
5/13/2015 6:15:17 PM
THIRD COURT OF APPEALS DISTRICT JEFFREY D. KYLE
Clerk
___________________________________________________________

PHARMSERV, INC., Appellant

V.

THE TEXAS HEALTH AND HUMAN SERVICES COMMISSION and
OFFICE OF INSPECTOR GENERAL OF THE TEXAS HEALTH AND
HUMAN SERVICES COMMISSION, ET AL
Appellees
___________________________________________________________
On Appeal from the 261st Judicial District Court
of Travis County, Texas

Cause No. D-1-GN 12-001074-CV
.________________________________________________________

MOTION FOR REHEARING
________________________________________________________
Respectfully Submitted:
Jeff Avant
Avant & Mitchell, L. P.
700 Lavaca, Suite 1400
Austin, Texas 78701
Phone: (512) 478-5757
Facsimile: (512) 478-5404
E-mail: avantlaw@swbell.net

Hugh M. Barton
Hugh M. Barton, P.C.
603 West 13th St, Ste 1B
Austin, TX 78701
Telephone (512) 499-0793
Facsimile (512) 727-6717
E-mail:
bartonlaw@yahoo.com;

1
 TABLE OF CONTENTS

Table of Contents ..................................................................................................... 2

Index of Authorities ................................................................................................. 3

Argument and Authority ........................................................................................ 4

Point 1:
The Court of Appeals erred in holding that there is no jurisdiction to
consider Appellant’s complaints of ultra vires acts with request for
injunctive relief to compel Doug Wilson and Kyle Janek to set the
matter for a hearing. .................................................................................................. 6

Point 2:
The Court of Appeals erred in holding that there is not jurisdiction to
make determination of applicability of the statutes and rules to this
matter. ..................................................................................................................... 10

Point 3:
The Court of Appeals erred in holding that there is not jurisdiction to
make determination of validity and constitutionality of the statutes
and rules on the grounds that Appellant has not established a vested
property interest deserving protection and that Appellant was provided
opportunity to be heard at a meaningful time and in a meaningful
manner. .................................................................................................................... 12

Conclusion and Prayer .......................................................................................... 16

Certificate of Compliance with Tex. R. App. P. 9.4(i)(2)(D) and
word count .............................................................................................................. 17

Certificate of Service ............................................................................................. 17

Addendum:

Senate Bill 207 text as engrossed and passed by Senate ......................................... 18
Emphasis added to Section 9 adding Tex. Gov. Code §531.1203,
and Section 16 (see yellow highlighting)
2
 INDEX OF AUTHORITIES
Statutes
Tex. Hum. Res. Code §32.0291 ................................................................. 6, 6 fn 115
Tex. Hum. Res. Code §32.046 ................................................................................... 8
Uniform Declaratory Judgment Act, Civil Practice and Remedies
Code §37 ............................................................................................... 10, 11, 13, 14

Pending Legislation
Senate Bill 207 Section 9, 16 adding Tex. Gov. Code §531.1203 ............... 6, 12, 16
and addendum highlighted text as engrossed and passed by Senate

Administrative Rules;
1 TAC 354.1811(a) ............................................................................................. 7, 15
1 TAC 354.1891 and 1892 ....................................................................................... 15
1 TAC §371.1603(j)(2) ......................................................................................... 7, 8
1 TAC §371.1667 ..................................................................................... 6 fn 1, 7, 8
1 TAC 371.1709 ........................................................................................................ 8

Cases

Harlingen Family Dentistry, P.C. v. Texas Health & Human Servs.
Comm’n, 452 S.W.3d 479 (Tex. App.—Austin 2014, pet. filed.) ..................... 6 fn1

Texas Parks & Wildlife v Sawyer Trust, 354 S.W. 3d 384 (Tex. 2011) .................. 14

Montrose Mgmt. Dist. v 1620 Hawthorn, Ltd 435 S.W.3d 393 (Tex.
App. - Houston [14th Dist.] 2014, pet filed)............................................................ 15

3
TO THE HONORABLE THIRD COURT OF APPEALS:

Comes now Pharmserv, Inc. (“Pharmserv”) pursuant to Tex

Rule of Appellate Procedure 49 and requests that the Court reconsider

its appeal and moves for rehearing, showing as follows:

Argument and Authority

Issues in this case are of statewide importance to survival of not just

one pharmacy, but survival of the concept of small, full service pharmacies

serving retirees and other Medicaid patients. The unanticipated and truly

bizarre recent actions by the Health and Human Services Commission

(“HHSC”) and its department heads and staff and its Inspector General

(“OIG”) have made the existence of due process rights to independent

review an absolute necessity. Reliability and advisability of any provider

entering Medicaid Provider Contracts with the state are at risk. On the

micro scale, financial urgency is important. Without recognition of rights

protected by some rule, statute or the Texas or United State’s constitutions

– for the provider who does not engage in fraud – are of paramount

importance. Declarations on each of these questions are appropriate for

judicial review in this case.

4
 Prior to imposition of the unsupported payment hold, Appellant,

Pharmserv, Inc. was a small pharmacy which had found a niche of actually

delivering medications in an ethnically concentrated corner of the Houston

area. Many mobility limited customers were elderly or disabled and qualify

under the Medicaid program.

Errors do happen, but $916,000 in errors did not happen. If a

jurisdictional bar prevents Appellant from proving up the true figures this

pharmacy will close and its customers who need delivery service will have

to find another way. The defensive position of the recently discredited OIG

that it need give only kangaroo hearings will benefit no rational purpose

except, perhaps, to permit the OIG to claim that it is a successful watchdog

discovering Medicaid abuse, without risk that such bogus claims will be

refuted. Moreover, Appellees’ position requires the courts to ignore a

strained and wrong interpretation of the legislative scheme for management

of Medicaid contracts, which interpretation leads to an absurd, unworkable

and intolerable result.

This case has brought the problem to public light. Thirteen days after

this court’s memorandum opinion was issued, the Texas Senate approved,

5
with nary a single nay vote, Senate Bill 207 (see addendum) which contains

some attempt at a curative clarification of legislative intent that non-

fraudulent pharmacies in Pharmserv’s position must be given meaningful

discovery and a hearing to check the OIG’s math. SB 207 clarifies

legislative intent to provide due process and may save the Medicaid drug

program from failure, but may not be retroactive. Survival of this test case

plaintiff requires Appellant to respectfully request rehearing, upon the

following points.

Point 1

The Court of Appeals erred in holding that there is no jurisdiction
to consider Appellant’s complaints of ultra vires acts with request
for injunctive relief to compel Doug Wilson and Kyle Janek to set
the matter for a hearing.

The Appeals Court recognized at page 12 that the plain language of

Human Resources Code §32.0291 and former Rule 1 TAC 371.1667(b)

shows that they apply in cases involving sanctions, but erred in summarily

concluding that this payment hold does not arise from sanctions1.

1The Legislature did not grant HHSC authority to impose holds for mere program
violations - a concept already recognized by this court at footnote s 4 and 5 of
Harlingen Family Dentistry, P.C. v. Texas Health & Human Servs. Comm’n, 452
S.W.3d 479 (Tex. App.—Austin 2014, pet. filed.). The Sunset Commission
Report cited therein stated “This recommendation would not affect OIG’s existing
authority to pursue and recover overpayments”. (emphasis added)
6
 Grant of a hearing in a sanctions case is not discretionary. Executive

Commissioner Janek and Inspector General Wilson’s bald denial that the

payment hold applied here is a sanction is not supported by any correct

reference in the then existing or successor rules or the empowering statute.

Rule 1 TAC 354.1811(a) expressly states “Sanctions include, but are not

limited to, termination or suspension from participation, suspension of

payments, and recoupment of overpayments”.

That rule goes on to state “(b) On receipt of a written request, HHSC

provides an appeal to a pharmacy provider on whom HHSC sanctions have

been placed for a violation described in subsection (a) of this section”.

The above quoted language and provision for procedure to appeal it

is consistent with the provisions of 1 TAC §371.1603(j) (2) which sets out

that for payment holds “Imposition of sanctions triggers the due process

notice and hearing requirements.”

The above is also consistent with and bolstered by 1 TAC §371.1667

(“(a)The Inspector General affords, to any provider or person against

whom it imposes sanctions, all administrative and judicial due process

remedies applicable to administrative sanctions”) and its successor 1 TAC
7
§371.1709, titled “Payment Holds”. There is no express provision in 1

TAC §371.1667 or 1 TAC §371.1603(j) (2) that indicated inapplicability to

vendor drug cases. Having established that entitlement to a hearing was

promulgated in the rules, the courts have jurisdiction to interpret, apply and

grant injunctive or mandamus relief to compel the head of the department to

grant the hearing - as the published rule requires him to do.

The Human Resources Code provision that empowered the executive

commissioner to promulgate rules to address improper claims for

reimbursement in the vendor drug program used the same term -

“sanctions”.

“Sec. 32.046. SANCTIONS AND PENALTIES
RELATED TO THE PROVISION OF PHARMACY
PRODUCTS. (a) The executive commissioner of the
Health and Human Services Commission shall adopt rules
governing sanctions and penalties that apply to a provider
who participates in the vendor drug program or is enrolled
as a network pharmacy provider of a managed care
organization contracting with the commission under
Chapter 533, Government Code, or its subcontractor and
who submits an improper claim for reimbursement under
the program.” (emphasis added).

There is also factual component. The sanction character of the

payment hold at bar is a fact that clearly requires characterization as a

sanction. Almost none of the payment hold in this matter based in
8
“restitution”. Its basis is principally “early refills” or other technical

“program violations” that did not involve any charge for any good or

service not fully delivered by Pharmserv, Inc. Compounded by the voodoo

of 100X unexplained extrapolation, Pharmserv, which charged HHSC only

a small fee plus flow through of costs paid to its suppliers, incurs a penalty

which looks to be over $800,000 – though HHSC received the value of the

goods. The figures look unfair, to be sure. More importantly, the payment

hold is certainly acts as a sanction, even if the extrapolation were validly

derived. It is clearly not restitution or repayment of inflated or false

charges.

The pleading for injunctive/mandamus relief supports jurisdiction for

the courts to make determinations of the authority and duties of the OIG

and the commissioner of the HHSC under the guiding law, including

whether Pharmserv is entitled to hearing. The court may ultimately

determine that Pharmserv was not so entitled should it determine that the

legislature did intend to grant the OIG and the Commissioner of the HHSC

the power to refuse discovery and to refuse to allow any independent

review of its fuzzy math – or that they did not act ultra vires. However the

panel erred in ruling that there is not jurisdiction to make such

determination.

9
Point 2

The Court of Appeals erred in holding that there is not jurisdiction to
make determination of applicability of the statutes and rules to this
matter.

In determining whether the trial court has jurisdiction to make

Uniform Declaratory Judgment Act (“UDJA”) declaration on issues of

interpretation and correctness of application of administrative rules and the

empowering statutes, the Appeals Court correctly identified the weight

given to agency interpretations:

“When a statutory scheme is subject to multiple
interpretations, we should defer to an enforcing agency’s
construction if it is reasonable and in harmony with the
statute…

… We defer to an agency’s interpretation of its own rules
unless it is plainly erroneous or contradicts the text of the
rule or underlying statute.” (emphasis added).

However, the Appeals Court erred in failing to recognize that:

(a) the HHSC and OIG’s new interpretation or construction of the

empowering statute is not reasonable nor in harmony with the legislative

intent in designing the system of empowering statutes;

(b) the agency’s interpretation of its own rules is plainly erroneous

and contradicts the text of the rule or underlying statute; and,
10
 (c) the new interpretation is not in harmony with the treatment of

fraudulent providers and whether those who are not accused of fraud should

be sanctioned at all.

(d) this situation is appropriate for judicial determination of the facts

and applicability of the rules and statutes upon the facts at bar.

Moreover, the pleading for UDJA type relief supports jurisdiction for

the courts to make those type determinations and rule whether the agency

construction is reasonable and agency interpretation is erroneous.

In this particular instance, the acts complained of (refusal to grant

meaningful discovery or hearing before an independent entity) are a recent

tactic and a recent wrong interpretation, clearly not intended by the

legislature, but dreamt up by an OIG run amok. The scheme to deny any

meaningful hearing to the non-fraud provider was certainly unknown prior

to the execution of the contract in issue. Otherwise only an ill-advised

business person would enter such agreement.

It appears that the entire Senate Chamber now sees the obviously

absurd results that “new interpretation” would bring about – if allowed to

11
stand, and has agreed to pass a clarification, or “cure”. (See Section 9 of

SB 207 [highlighted copy attached in the addendum] which passed the

Senate, 30-0 adding Government Code 531.1203 addressing concern about

secreted extrapolation methods and meaningful hearing - the specific

problem encountered by Appellant herein). See also Section 16 of SB 207,

which expressly requires the Commissioner of the HHSC to adopt rules

necessary to implement same). This is offered to show that the Appellees’

interpretation would provide a ridiculous, unintended and ultra vires result.

Point 3

The Court of Appeals erred in holding that there is not
jurisdiction to make determination of validity and
constitutionality of the statutes and rules on the grounds that
Appellant has not established a vested property interest deserving
protection and that Appellant was provided opportunity to be
heard at a meaningful time and in a meaningful manner.

Elements of two erroneous factual conclusions were cited as ground to

deny jurisdiction. One is the nature of the protected interest and the other is

that meaningful opportunity was provided (it was not).

Appellant has provided medications and services, at considerable

expense, to the state and federal designated recipients, in a manner that has

not been questioned as improper or as an overcharge in any way, yet

reimbursement for Appellant’s cost is being held. The property interests
12
involved far exceed mere contract rights – though the contract expressly

referenced due process. Pharmserv has complied with the state’s request

that it treat the State’s poor, its sick and its elderly and has been subjected to

ludicrous extrapolation and agency refusal to reveal the basis of same. The

undersigned does not typically engage in criticism of state agencies of staff.

It is informative, however that this scenario involves the very department

that has encountered staff members (reference news reports regarding Mr.

Nelson, Mr. Stick and Mr. Wilson), who have left office under the cloud of

widespread impropriety and abuse of power, accused of widespread use of

fraudulent figures and methods to inflate claims of Medicaid recoupments.

There is a substantial fact dispute about whether any meaningful

discovery or revelation of how the fuzzy math was performed in the audit

and no hearing whatsoever as to the sanction imposed. Yet the empowering

statutes seem to provide for due process for a provider to seek review the

basis of the sanction of payment hold were cited to the court, as were the

rules promulgated thereunder.

The Court of Appeals correctly notes that the UDJA does waive a

governmental entity’s immunity for a declaration construing a statute, that

13
the UDJA waives sovereign immunity for suits to challenge the validity of a

statute and the APA’s declaratory judgment provision allows Plaintiff to

challenge the validity and applicability of a rule. However, the Appeals

Court has erred in its conclusions that the declaratory relief requested is

based in some type of hidden agenda like those which were correctly

prohibited in the cited cases such as Texas Parks & Wildlife v Sawyer Trust,

354S.W. 3d 384 (Tex. 2011) [which involved a trust’s attempt to wrest title

to land from the state in order to take and sell gravel from a navigable

portion of the Red River]. The distinction is great. Pharmserv, Inc. does

not seek to wrest property from the state, but to get a meaningful hearing.

If a fair administrative hearing commences, Pharmserv will seek a ruling on

fuzzy math by the resoundingly discredited inspector general and staff.

However, such relief is permitted by statute and administrative rule and will

be granted or denied at the administrative level. Pharmserv seeks from the

court system only declaration of its rights to referral to a fair administrative

hearing, without any monetary strings, property interests or windfall

attached to such declaration. For that sole and genuine limited purpose, the

courts have jurisdiction to make declarations.

The Appeals court’s reliance upon precedent of a taxpayer suit

14
seeking to invalidate tax assessments in a water control district Montrose

Mgmt. Dist. v 1620 Hawthorn, Ltd 435 S.W.3d 393 (Tex. App. - Houston

[14th Dist.] 2014, pet filed) is also misplaced. Montrose Mgmt. proposes

that immunity exists from suit to control governmental actions that are

within the discretion of the actors. In stark contrast, Pharmserv does not

seek to control discretionary acts. Montrose Mgmt. does not serve to

prohibit this suit. Rather, it affirms that when there are fact questions

relating to determining issues of ultra vires acts, jurisdiction does lie (See

Mgmt. Dist. v 1620 Hawthorn, Ltd 435 S.W.3d 393, 413. Pharmserv, Inc.

seeks only a fair hearing. Referral to a hearing is not now nor has it ever

been discretionary.

Jurisdiction exists to determine the applicability and validity of the

sanctions aspects of §32.0291 of the Human Resources Code and former

rule 1 TAC §371.1667(b), 1 TAC §354.1811 and the silence of 1TAC

§354.1981-1892 as to the procedures for appeal and due process or apply to

the matter at bar. The courts should exercise their jurisdiction and declare

that Pharmserv Inc.’s statutory construction is wrong or right, or finds facts

as to the property rights of a non-fraudulent provider are the same or more

deserving a property interest entitling Pharmserv to at least the due process

which is afforded a fraudulent crook that has intentionally abused the system
15
to the detriment of the most vulnerable members of society in their weakest

moments of illness.

Conclusion and prayer

Appellant/Movant requests that the court favorably consider

this request for re-hearing, in light of the distinctions of case

precedent and the legislative intent shown by the current initiative

with SB 207, which seems rooted in recognition of the type of

problem encountered by a non-fraud provider.

The question at bar is jurisdiction. Appellant, to survive, needs

these issues to be determined, at least to get a chance to have the math

of the now discredited OIG office checked by some independent

entity, panel or jurist. The Medicaid drug program, to survive, needs

the same.

Respectfully Submitted
Jeff Avant
Jeff Avant (signed digitally)
AVANT & MITCHELL, L.
P.
700 Lavaca, Suite 1400
Austin, Texas 78701
Phone: (512) 478-5757

16
 Facsimile: (512) 478-5404
E-mail: avantlaw@swbell.net

/S/
Hugh M. Barton
State Bar No. 01853700
Hugh M. Barton, P.C.
603 West 13th St, Ste 1B
Austin, TX 78701
Telephone 512-499-0793
Fax 512-727-6717
E-mail:
bartonlaw@yahoo.com;

CERTIFICATE OF COMPLIANCE UNDER RULE 9.4(i)(2)(D)
OF THE TX. RULES OF APPELLATE PROCEDURE

By my signature below I certify that a computer assisted word count
of this Motion indicates that the number of countable words is 2,578,
from the beginning of page number 4 through the prayer, including
footnotes, and that the formatting is in size of at least 14 of the
commonly used font of Times New Roman, except footnotes, which
are size 12.

Jeff Avant
Jeff Avant (signed digitally)

CERTIFICATE OF SERVICE
By my signature below I certify that a true and correct copy of the
above and foregoing document was served on the following by email
and/or electronic filing on May 13, 2015:

Ms. Ann Hartley, Assistant Attorney General, of the Financial,
Tax and Litigation Section or the Texas office of the Attorney
General, 300 West 15th, 6th Floor, Austin, Texas 78711-2548 by
email to

Jeff Avant
Jeff Avant (signed digitally)

17
By: Hinojosa, et al. S.B. No. 207

A BILL TO BE ENTITLED

AN ACT

relating to the authority and duties of the office of inspector

general of the Health and Human Services Commission.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Section 531.1011(4), Government Code, is amended

to read as follows:

(4) "Fraud" means an intentional deception or

misrepresentation made by a person with the knowledge that the

deception could result in some unauthorized benefit to that person

or some other person[, including any act that constitutes fraud

under applicable federal or state law]. The term does not include

unintentional technical, clerical, or administrative errors.

SECTION 2. Section 531.102, Government Code, is amended by

amending Subsections (g) and (k), amending Subsection (f) as

amended by S.B. 219, Acts of the 84th Legislature, Regular Session,

2015, and adding Subsections (a-2), (a-3), (a-4), (a-5), (a-6), (f-

1), (p), (q), (r), (s), and (t) to read as follows:

(a-2) The executive commissioner shall work in consultation

with the office whenever the law requires the commissioner to adopt

a rule or policy necessary to implement a power or duty of the

office, including rules necessary to carry out a responsibility

under Subsection (a).

Page - 1 -
 S.B. No. 207
(a-3) The executive commissioner is responsible for

performing all administrative support services functions necessary

to operate the office in the same manner that the executive

commissioner is responsible for providing administrative support

services functions for the health and human services system,

including functions of the office related to the following:

(1) procurement processes;

(2) contracting policies;

(3) information technology services;

(4) legal services;

(5) budgeting; and

(6) personnel and employment policies.

(a-4) The commission's internal audit division shall

regularly audit the office as part of the commission's internal

audit program and shall include the office in the commission's risk

assessments.

(a-5) The office shall closely coordinate with the executive

commissioner and the relevant staff of health and human services

system programs that the office oversees in performing functions

relating to the prevention of fraud, waste, and abuse in the

delivery of health and human services and the enforcement of state

law relating to the provision of those services, including audits,

utilization reviews, provider education, and data analysis.

(a-6) The office shall conduct investigations independent of

the executive commissioner and the commission but shall rely on the

coordination required by Subsection (a-5) to ensure that the office

Page -2 -
 S.B. No. 207
has a thorough understanding of the health and human services

system for purposes of knowledgeably and effectively performing the

office's duties under this section and any other law.

(f)(1) If the commission receives a complaint or allegation

of Medicaid fraud or abuse from any source, the office must conduct

a preliminary investigation as provided by Section 531.118(c) to

determine whether there is a sufficient basis to warrant a full

investigation. A preliminary investigation must begin not later

than the 30th day, and be completed not later than the 45th day,

after the date the commission receives a complaint or allegation or

has reason to believe that fraud or abuse has occurred. [A

preliminary investigation shall be completed not later than the

90th day after it began.]

(2) If the findings of a preliminary investigation give

the office reason to believe that an incident of fraud or abuse

involving possible criminal conduct has occurred in Medicaid, the

office must take the following action, as appropriate, not later

than the 30th day after the completion of the preliminary

investigation:

(A) if a provider is suspected of fraud or abuse

involving criminal conduct, the office must refer the case to the

state's Medicaid fraud control unit, provided that the criminal

referral does not preclude the office from continuing its

investigation of the provider, which investigation may lead to the

imposition of appropriate administrative or civil sanctions; or

(B) if there is reason to believe that a recipient

Page -3 -
 S.B. No. 207
has defrauded Medicaid, the office may conduct a full investigation

of the suspected fraud, subject to Section 531.118(c).

(f-1) The office shall complete a full investigation of a

complaint or allegation of Medicaid fraud or abuse against a

provider not later than the 180th day after the date the full

investigation begins unless the office determines that more time is

needed to complete the investigation. Except as otherwise provided

by this subsection, if the office determines that more time is

needed to complete the investigation, the office shall provide

notice to the provider who is the subject of the investigation

stating that the length of the investigation will exceed 180 days

and specifying the reasons why the office was unable to complete

the investigation within the 180-day period. The office is not

required to provide notice to the provider under this subsection if

the office determines that providing notice would jeopardize the

investigation.

(g)(1) Whenever the office learns or has reason to suspect

that a provider's records are being withheld, concealed, destroyed,

fabricated, or in any way falsified, the office shall immediately

refer the case to the state's Medicaid fraud control

unit. However, such criminal referral does not preclude the office

from continuing its investigation of the provider, which

investigation may lead to the imposition of appropriate

administrative or civil sanctions.

(2) As [In addition to other instances] authorized under

state and [or] federal law, and except as provided by Subdivisions

Page -4 -
 S.B. No. 207
(8) and (9), the office shall impose without prior notice a payment

hold on claims for reimbursement submitted by a provider only to

compel production of records, when requested by the state's

Medicaid fraud control unit, or on the determination that a

credible allegation of fraud exists, subject to Subsections (l) and

(m), as applicable. The payment hold is a serious enforcement tool

that the office imposes to mitigate ongoing financial risk to the

state. A payment hold imposed under this subdivision takes effect

immediately. The office must notify the provider of the payment

hold in accordance with 42 C.F.R. Section 455.23(b) and, except as

provided by that regulation, not later than the fifth day after the

date the office imposes the payment hold. In addition to the

requirements of 42 C.F.R. Section 455.23(b), the notice of payment

hold provided under this subdivision must also include:

(A) the specific basis for the hold, including

identification of the claims supporting the allegation at that

point in the investigation, [and] a representative sample of any

documents that form the basis for the hold, and a detailed summary

of the office's evidence relating to the allegation; [and]

(B) a description of administrative and judicial

due process rights and remedies, including the provider's option

[right] to seek informal resolution, the provider's right to seek a

formal administrative appeal hearing, or that the provider may seek

both; and

(C) a detailed timeline for the provider to pursue

the rights and remedies described in Paragraph (B).

Page -5 -
 S.B. No. 207
(3) On timely written request by a provider subject to a

payment hold under Subdivision (2), other than a hold requested by

the state's Medicaid fraud control unit, the office shall file a

request with the State Office of Administrative Hearings for an

expedited administrative hearing regarding the hold not later than

the third day after the date the office receives the provider's

request. The provider must request an expedited administrative

hearing under this subdivision not later than the 10th [30th] day

after the date the provider receives notice from the office under

Subdivision (2). The State Office of Administrative Hearings shall

hold the expedited administrative hearing not later than the 45th

day after the date the State Office of Administrative Hearings

receives the request for the hearing. In a hearing held under this

subdivision [Unless otherwise determined by the administrative law

judge for good cause at an expedited administrative hearing, the

state and the provider shall each be responsible for]:

(A) the provider and the office are each limited to

four hours of testimony, excluding time for responding to questions

from the administrative law judge [one-half of the costs charged by

the State Office of Administrative Hearings];

(B) the provider and the office are each entitled

to two continuances under reasonable circumstances [one-half of the

costs for transcribing the hearing]; and

(C) the office is required to show probable cause

that the credible allegation of fraud that is the basis of the

payment hold has an indicia of reliability and that continuing to

Page -6 -
 S.B. No. 207
pay the provider presents an ongoing significant financial risk to

the state and a threat to the integrity of Medicaid [the party's

own costs related to the hearing, including the costs associated

with preparation for the hearing, discovery, depositions, and

subpoenas, service of process and witness expenses, travel

expenses, and investigation expenses; and

[(D) all other costs associated with the hearing

that are incurred by the party, including attorney's fees].

(4) The office is responsible for the costs of a hearing

held under Subdivision (3), but a provider is responsible for the

provider's own costs incurred in preparing for the hearing

[executive commissioner and the State Office of Administrative

Hearings shall jointly adopt rules that require a provider, before

an expedited administrative hearing, to advance security for the

costs for which the provider is responsible under that

subdivision].

(5) In a hearing held under Subdivision (3), the

administrative law judge shall decide if the payment hold should

continue but may not adjust the amount or percent of the payment

hold. Notwithstanding any other law, including Section

2001.058(e), the decision of the administrative law judge is final

and may not be appealed [Following an expedited administrative

hearing under Subdivision (3), a provider subject to a payment

hold, other than a hold requested by the state's Medicaid fraud

control unit, may appeal a final administrative order by filing a

petition for judicial review in a district court in Travis County].

Page -7 -
 S.B. No. 207
(6) The executive commissioner, in consultation with the

office, shall adopt rules that allow a provider subject to a

payment hold under Subdivision (2), other than a hold requested by

the state's Medicaid fraud control unit, to seek an informal

resolution of the issues identified by the office in the notice

provided under that subdivision. A provider must request an

initial informal resolution meeting under this subdivision not

later than the deadline prescribed by Subdivision (3) for

requesting an expedited administrative hearing. On receipt of a

timely request, the office shall decide whether to grant the

provider's request for an initial informal resolution meeting, and

if the office decides to grant the request, the office shall

schedule the [an] initial informal resolution meeting [not later

than the 60th day after the date the office receives the request,

but the office shall schedule the meeting on a later date, as

determined by the office, if requested by the provider]. The

office shall give notice to the provider of the time and place of

the initial informal resolution meeting [not later than the 30th

day before the date the meeting is to be held]. A provider may

request a second informal resolution meeting [not later than the

20th day] after the date of the initial informal resolution

meeting. On receipt of a timely request, the office shall decide

whether to grant the provider's request for a second informal

resolution meeting, and if the office decides to grant the request,

the office shall schedule the [a] second informal resolution

meeting [not later than the 45th day after the date the office

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receives the request, but the office shall schedule the meeting on

a later date, as determined by the office, if requested by the

provider]. The office shall give notice to the provider of the

time and place of the second informal resolution meeting [not later

than the 20th day before the date the meeting is to be held]. A

provider must have an opportunity to provide additional information

before the second informal resolution meeting for consideration by

the office. A provider's decision to seek an informal resolution

under this subdivision does not extend the time by which the

provider must request an expedited administrative hearing under

Subdivision (3). The informal resolution process shall run

concurrently with the administrative hearing process, and the

informal resolution process shall be discontinued once the State

Office of Administrative Hearings issues a final determination on

the payment hold. [However, a hearing initiated under Subdivision

(3) shall be stayed until the informal resolution process is

completed.]

(7) The office shall, in consultation with the state's

Medicaid fraud control unit, establish guidelines under which

[payment holds or] program exclusions:

(A) may permissively be imposed on a provider; or

(B) shall automatically be imposed on a provider.

(7-a) The office shall, in consultation with the state's

Medicaid fraud control unit, establish guidelines regarding the

imposition of payment holds authorized under Subdivision (2).

(8) In accordance with 42 C.F.R. Sections 455.23(e) and

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(f), on the determination that a credible allegation of fraud

exists, the office may find that good cause exists to not impose a

payment hold, to not continue a payment hold, to impose a payment

hold only in part, or to convert a payment hold imposed in whole to

one imposed only in part, if any of the following are applicable:

(A) law enforcement officials have specifically

requested that a payment hold not be imposed because a payment hold

would compromise or jeopardize an investigation;

(B) available remedies implemented by the state

other than a payment hold would more effectively or quickly protect

Medicaid funds;

(C) the office determines, based on the submission

of written evidence by the provider who is the subject of the

payment hold, that the payment hold should be removed;

(D) Medicaid recipients' access to items or

services would be jeopardized by a full or partial payment hold

because the provider who is the subject of the payment hold:

(i) is the sole community physician or the

sole source of essential specialized services in a community; or

(ii) serves a large number of Medicaid

recipients within a designated medically underserved area;

(E) the attorney general declines to certify that a

matter continues to be under investigation; or

(F) the office determines that a full or partial

payment hold is not in the best interests of Medicaid.

(9) The office may not impose a payment hold on claims

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for reimbursement submitted by a provider for medically necessary

services for which the provider has obtained prior authorization

from the commission or a contractor of the commission unless the

office has evidence that the provider has materially misrepresented

documentation relating to those services.

(k) A final report on an audit or investigation is subject to

required disclosure under Chapter 552. All information and

materials compiled during the audit or investigation remain

confidential and not subject to required disclosure in accordance

with Section 531.1021(g). A confidential draft report on an audit

or investigation that concerns the death of a child may be shared

with the Department of Family and Protective Services. A draft

report that is shared with the Department of Family and Protective

Services remains confidential and is not subject to disclosure

under Chapter 552.

(p) The executive commissioner, in consultation with the

office, shall adopt rules establishing criteria:

(1) for opening a case;

(2) for prioritizing cases for the efficient management

of the office's workload, including rules that direct the office to

prioritize:

(A) provider cases according to the highest

potential for recovery or risk to the state as indicated through

the provider's volume of billings, the provider's history of

noncompliance with the law, and identified fraud trends;

(B) recipient cases according to the highest

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potential for recovery and federal timeliness requirements; and

(C) internal affairs investigations according to

the seriousness of the threat to recipient safety and the risk to

program integrity in terms of the amount or scope of fraud, waste,

and abuse posed by the allegation that is the subject of the

investigation; and

(3) to guide field investigators in closing a case that

is not worth pursuing through a full investigation.

(q) The executive commissioner, in consultation with the

office, shall adopt rules establishing criteria for determining

enforcement and punitive actions with regard to a provider who has

violated state law, program rules, or the provider's Medicaid

provider agreement that include:

(1) direction for categorizing provider violations

according to the nature of the violation and for scaling resulting

enforcement actions, taking into consideration:

(A) the seriousness of the violation;

(B) the prevalence of errors by the provider;

(C) the financial or other harm to the state or

recipients resulting or potentially resulting from those errors;

and

(D) mitigating factors the office determines

appropriate; and

(2) a specific list of potential penalties, including

the amount of the penalties, for fraud and other Medicaid

violations.

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(r) The office shall review the office's investigative

process, including the office's use of sampling and extrapolation

to audit provider records. The review shall be performed by staff

who are not directly involved in investigations conducted by the

office.

(s) At each quarterly meeting of any advisory council

responsible for advising the executive commissioner on the

operation of the commission, the inspector general shall submit a

report to the executive commissioner, the governor, and the

legislature on:

(1) the office's activities;

(2) the office's performance with respect to performance

measures established by the executive commissioner for the office;

(3) fraud trends identified by the office; and

(4) any recommendations for changes in policy to prevent

or address fraud, waste, and abuse in the delivery of health and

human services in this state.

(t) The office shall publish each report required under

Subsection (s) on the office's Internet website.

SECTION 3. Section 531.1021(a), Government Code, as amended

by S.B. No. 219, Acts of the 84th Legislature, Regular Session,

2015, is amended to read as follows:

(a) The office of inspector general may issue [request that

the executive commissioner or the executive commissioner's designee

approve the issuance by the office of] a subpoena in connection

with an investigation conducted by the office. A [If the request

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is approved, the office may issue a] subpoena may be issued under

this section to compel the attendance of a relevant witness or the

production, for inspection or copying, of relevant evidence that is

in this state.

SECTION 4. Section 531.113, Government Code, is amended by

adding Subsection (d-1) and amending Subsection (e) as amended by

S.B. 219, Acts of the 84th Legislature, Regular Session, 2015, to

read as follows:

(d-1) The commission's office of inspector general shall:

(1) investigate, including by means of regular audits,

possible fraud, waste, and abuse by managed care organizations

subject to this section;

(2) establish requirements for the provision of training

to and regular oversight of special investigative units established

by managed care organizations under Subsection (a)(1) and entities

with which managed care organizations contract under Subsection

(a)(2);

(3) establish requirements for approving plans to

prevent and reduce fraud and abuse adopted by managed care

organizations under Subsection (b);

(4) evaluate statewide fraud, waste, and abuse trends in

Medicaid and communicate those trends to special investigative

units and contracted entities to determine the prevalence of those

trends; and

(5) assist managed care organizations in discovering or

investigating fraud, waste, and abuse, as needed.

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(e) The executive commissioner, in consultation with the

office, shall adopt rules as necessary to accomplish the purposes

of this section, including rules defining the investigative role of

the commission's office of inspector general with respect to the

investigative role of special investigative units established by

managed care organizations under Subsection (a)(1) and entities

with which managed care organizations contract under Subsection

(a)(2). The rules adopted under this section must specify the

office's role in:

(1) reviewing the findings of special investigative

units and contracted entities;

(2) investigating cases where the overpayment amount

sought to be recovered exceeds $100,000; and

(3) investigating providers who are enrolled in more

than one managed care organization.

SECTION 5. Section 531.118(b), Government Code, is amended to

read as follows:

(b) If the commission receives an allegation of fraud or

abuse against a provider from any source, the commission's office

of inspector general shall conduct a preliminary investigation of

the allegation to determine whether there is a sufficient basis to

warrant a full investigation. A preliminary investigation must

begin not later than the 30th day, and be completed not later than

the 45th day, after the date the commission receives or identifies

an allegation of fraud or abuse.

SECTION 6. Section 531.120(b), Government Code, is amended to

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read as follows:

(b) A provider may [must] request an [initial] informal

resolution meeting under this section, and on [not later than the

30th day after the date the provider receives notice under

Subsection (a). On] receipt of the [a timely] request, the office

shall schedule the [an initial] informal resolution meeting [not

later than the 60th day after the date the office receives the

request, but the office shall schedule the meeting on a later date,

as determined by the office if requested by the provider]. The

office shall give notice to the provider of the time and place of

the [initial] informal resolution meeting [not later than the 30th

day before the date the meeting is to be held]. The informal

resolution process shall run concurrently with the administrative

hearing process, and the administrative hearing process may not be

delayed on account of the informal resolution process. [A provider

may request a second informal resolution meeting not later than the

20th day after the date of the initial informal resolution meeting.

On receipt of a timely request, the office shall schedule a second

informal resolution meeting not later than the 45th day after the

date the office receives the request, but the office shall schedule

the meeting on a later date, as determined by the office if

requested by the provider. The office shall give notice to the

provider of the time and place of the second informal resolution

meeting not later than the 20th day before the date the meeting is

to be held. A provider must have an opportunity to provide

additional information before the second informal resolution

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meeting for consideration by the office.]

SECTION 7. Sections 531.1201(a) and (b), Government Code, are

amended to read as follows:

(a) A provider must request an appeal under this section not

later than the 30th [15th] day after the date the provider is

notified that the commission or the commission's office of

inspector general will seek to recover an overpayment or debt from

the provider. On receipt of a timely written request by a provider

who is the subject of a recoupment of overpayment or recoupment of

debt arising out of a fraud or abuse investigation, the office of

inspector general shall file a docketing request with the State

Office of Administrative Hearings or the Health and Human Services

Commission appeals division, as requested by the provider, for an

administrative hearing regarding the proposed recoupment amount and

any associated damages or penalties. The office shall file the

docketing request under this section not later than the 60th day

after the date of the provider's request for an administrative

hearing or not later than the 60th day after the completion of the

informal resolution process, if applicable.

(b) The commission's office of inspector general is

responsible for the costs of an administrative hearing held under

Subsection (a), but a provider is responsible for the provider's

own costs incurred in preparing for the hearing [Unless otherwise

determined by the administrative law judge for good cause, at any

administrative hearing under this section before the State Office

of Administrative Hearings, the state and the provider shall each

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be responsible for:

[(1) one-half of the costs charged by the State Office

of Administrative Hearings;

[(2) one-half of the costs for transcribing the hearing;

[(3) the party's own costs related to the hearing,

including the costs associated with preparation for the hearing,

discovery, depositions, and subpoenas, service of process and

witness expenses, travel expenses, and investigation expenses; and

[(4) all other costs associated with the hearing that

are incurred by the party, including attorney's fees].

SECTION 8. Section 531.1202, Government Code, is amended to

read as follows:

Sec. 531.1202. RECORD OF AND CONFIDENTIALITY OF INFORMAL

RESOLUTION MEETINGS. (a) On the written request of a provider,

the [The] commission shall, at no expense to the provider who

requested the meeting, provide for an informal resolution meeting

held under Section 531.102(g)(6) or 531.120(b) to be recorded. The

recording of an informal resolution meeting shall be made available

to the provider who requested the meeting. The commission may not

record an informal resolution meeting unless the commission

receives a written request from a provider under this subsection.

(b) Notwithstanding Section 531.1021(g) and except as

provided by this section, an informal resolution meeting held under

Section 531.102(g)(6) or 531.120(b) is confidential, and any

information or materials obtained by the commission's office of

inspector general, including the office's employees or the office's

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agents, during or in connection with an informal resolution

meeting, including a recording made under Subsection (a), are

privileged and confidential and not subject to disclosure under

Chapter 552 or any other means of legal compulsion for release,

including disclosure, discovery, or subpoena.

SECTION 9. Subchapter C, Chapter 531, Government Code, is

amended by adding Sections 531.1023, 531.1024, 531.1027, and

531.1203 to read as follows:

Sec. 531.1023. COMPLIANCE WITH FEDERAL CODING GUIDELINES.

The commission's office of inspector general, including office

staff and any third party with which the office contracts to

perform coding services, shall comply with federal coding

guidelines, including guidelines for diagnosis-related group (DRG)

validation and related audits.

Sec. 531.1024. HOSPITAL UTILIZATION REVIEWS AND AUDITS:

PROVIDER EDUCATION PROCESS. The executive commissioner shall by

rule develop a process for the commission's office of inspector

general, including office staff and any third party with which the

office contracts to perform coding services, to communicate with

and educate providers about the diagnosis-related group (DRG)

validation criteria that the office uses in conducting hospital

utilization reviews and audits.

Sec. 531.1027. PERFORMANCE AUDITS AND COORDINATION OF AUDIT

ACTIVITIES. (a) Notwithstanding any other law, the commission's

office of inspector general may conduct a performance audit of any

program or project administered or agreement entered into by the

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commission or a health and human services agency, including an

audit related to:

(1) contracting procedures of the commission or a health

and human services agency; or

(2) the performance of the commission or a health and

human services agency.

(b) The office shall coordinate the office's audit activities

with those of the commission, including the development of audit

plans, the performance of risk assessments, and the reporting of

findings, to minimize the duplication of audit activities. In

coordinating audit activities with the commission under this

subsection, the office shall:

(1) seek input from the commission and consider previous

audits conducted by the commission for purposes of determining

whether to conduct a performance audit; and

(2) request the results of an audit conducted by the

commission if those results could inform the office's risk

assessment when determining whether to conduct, or the scope of, a

performance audit.

Sec. 531.1203. RIGHTS OF AND PROVISION OF INFORMATION TO

PHARMACIES SUBJECT TO CERTAIN AUDITS. (a) A pharmacy has a right

to request an informal hearing before the commission's appeals

division to contest the findings of an audit conducted by the

commission's office of inspector general or an entity that

contracts with the federal government to audit Medicaid providers

if the findings of the audit do not include findings that the

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pharmacy engaged in Medicaid fraud.

(b) In an informal hearing held under this section, staff of

the commission's appeals division, assisted by staff responsible

for the commission's vendor drug program who have expertise in the

law governing pharmacies' participation in Medicaid, make the final

decision on whether the findings of an audit are accurate. Staff

of the commission's office of inspector general may not serve on

the panel that makes the decision on the accuracy of an audit.

(c) In order to increase transparency, the commission's

office of inspector general shall, if the office has access to the

information, provide to pharmacies that are subject to audit by the

office or an entity that contracts with the federal government to

audit Medicaid providers information relating to the extrapolation

methodology used as part of the audit and the methods used to

determine whether the pharmacy has been overpaid under Medicaid in

sufficient detail so that the audit results may be demonstrated to

be statistically valid and are fully reproducible.

SECTION 10. The following provisions are repealed:

(1) Section 531.1201(c), Government Code; and

(2) Section 32.0422(k), Human Resources Code, as amended

by S.B. 219, Acts of the 84th Legislature, Regular Session, 2015.

SECTION 11. Notwithstanding Section 531.004, Government Code,

the Sunset Advisory Commission shall conduct a special-purpose

review of the overall performance of the Health and Human Services

Commission's office of inspector general. In conducting the

review, the Sunset Advisory Commission shall particularly focus on

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the office's investigations and the effectiveness and efficiency of

the office's processes, as part of the Sunset Advisory Commission's

review of agencies for the 87th Legislature. The office is not

abolished solely because the office is not explicitly continued

following the review.

SECTION 12. Section 531.102, Government Code, as amended by

this Act, applies only to a complaint or allegation of Medicaid

fraud or abuse received by the Health and Human Services Commission

or the commission's office of inspector general on or after the

effective date of this Act. A complaint or allegation received

before the effective date of this Act is governed by the law as it

existed when the complaint or allegation was received, and the

former law is continued in effect for that purpose.

SECTION 13. Not later than March 1, 2016, the executive

commissioner of the Health and Human Services Commission in

consultation with the inspector general of the office of inspector

general shall adopt rules necessary to implement the changes in law

made by this Act to Section 531.102(g)(2), Government Code,

regarding the circumstances in which a payment hold may be placed

on claims for reimbursement submitted by a Medicaid provider.

SECTION 14. As soon as practicable after the effective date

of this Act, the executive commissioner of the Health and Human

Services Commission shall adopt the rules establishing the process

for communicating with and educating providers about diagnosis-

related group (DRG) validation criteria under Section 531.1024,

Government Code, as added by this Act.

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SECTION 15. Sections 531.120 and 531.1201, Government Code,

as amended by this Act, apply only to a proposed recoupment of an

overpayment or debt of which a provider is notified on or after the

effective date of this Act. A proposed recoupment of an

overpayment or debt that a provider was notified of before the

effective date of this Act is governed by the law as it existed

when the provider was notified, and the former law is continued in

effect for that purpose.

SECTION 16. Not later than March 1, 2016, the executive

commissioner of the Health and Human Services Commission in

consultation with the inspector general of the office of inspector

general shall adopt rules necessary to implement Section 531.1203,

Government Code, as added by this Act.

SECTION 17. If before implementing any provision of this Act

a state agency determines that a waiver or authorization from a

federal agency is necessary for implementation of that provision,

the agency affected by the provision shall request the waiver or

authorization and may delay implementing that provision until the

waiver or authorization is granted.

SECTION 18. This Act takes effect September 1, 2015.

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