No. 116,692
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
VIA CHRISTI HOSPITALS WICHITA, INC.,
Appellant,
v.
KAN-PAK LLC, et al.,
Appellees.
SYLLABUS BY THE COURT
1.
A rule or regulation adopted by an administrative agency may only be given
binding legal effect if the agency has complied with the requirements of the Rules and
Regulations Filing Act when it creates or amends the rule.
2.
The Filing Act requires the preparation and filing of an economic impact statement
assessing the economic effect of any amendment to an administrative rule or regulation.
3.
The failure by an administrative agency to assess the economic impact of an
amendment of an administrative regulation renders the amendment void and
unenforceable.
4.
The Judicial Review Act permits a court to grant relief if the agency action is
unreasonable, arbitrary, or capricious.
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5.
The enforcement of an accidentally amended rule, adopted in noncompliance with
the Filing Act, is an arbitrary or capricious action.
Appeal from Workers Compensation Board. Opinion filed August 25, 2017. Reversed.
Edward D. Heath, Jr., of Law Office of Edward D. Heath, Jr., of Wichita, for appellant.
Douglas C. Hobbs and Ryan D. Weltz, of Wallace, Saunders, Austin, Brown & Enochs,
Chartered, of Wichita, for appellees.
Before HILL, P.J., MCANANY and ATCHESON, JJ.
HILL, J.: This case illustrates why we have courts of law. There are times when
rules created haphazardly must not be enforced because the consequences flowing from
their enforcement nullify the good policy promoted by other, properly created rules. This
is especially true here, where the rule enforced by the Workers Compensation Hearing
Officer and then the Kansas Workers Compensation Appeals Board was unintended in its
creation—an accident at birth. Administrative agencies, for many reasons, must follow
established procedures in creating rules, and any enforcement of a rule not so created is
arbitrary and capricious and must be struck down.
The facts here are uncontested. In 2011, Darin Pinion received horrible burns
while he was working for Kan-Pak, LLC. Via Christi Hospitals Wichita, Inc. treated
Pinion for his burns. Kan-Pak's workers compensation insurance carrier was Travelers
Indemnity Company of America. Travelers contracted with Paradigm Management, LLC
to assume the claim. In turn, Via Christi billed Paradigm over a million dollars for
Pinion's medical treatment. Relying on the published 2011 Kansas Workers
Compensation Schedule of Medical Fees, Paradigm paid Via Christi just $136,451.60.
Via Christi contends the payment was short by almost $600,000.
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This dispute concerns a single sentence in the 2011 Kansas Department of Labor
Workers Compensation Schedule of Medical Fees. The year before, the 2010 fee
schedule introduced an independent methodology called the "stop-loss method" to
reimburse hospitals for "unusually costly services rendered during treatment to an injured
worker." The stop-loss method provided that if the total charges of an inpatient hospital
stay equaled or exceeded $60,000, the total charges were multiplied by 70 percent to
determine the allowed reimbursement. If charges did not reach the $60,000 stop-loss
threshold, then hospitals were reimbursed using the traditional Medicare Severity-
Diagnosis Related Group (MS-DRG) method.
This stop-loss methodology was again included in the 2011 fee schedule. But
unbeknownst to the Workers Compensation Division's manager of medical services and
the appointed medical administrator, who were in charge of shepherding the revisions
through the regulatory process, the published 2011 fee schedule also included this
statement: "If the MS-DRG level of reimbursement exceeds the $60,000 stop-loss
threshold, the facility shall be paid billed charges multiplied by seventy percent (70%) or
the MS-DRG level whichever is least; all other rules apply to making this determination."
(Emphasis added.) This small addition changed everything.
It appears that a small flaw was woven into the weft of a 232-page regulation. A
brief clause, tucked into a mountain of words, changed the meaning of a carefully
composed and thoroughly studied rule. It changed policy when no one in authority
intended the policy to be changed.
No one in this record can say how this rule was changed or why this rule was
changed, but they can say the rule was changed. It was promptly amended the next year,
eliminating the "whichever is least" language, preserving the stop-loss provision as it
originally was. Insurance companies that inquired about the "whichever is least"
provision were told by the Division's manager of medical services that it was an error and
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to ignore it. The insurance companies followed the advice and ignored the provision.
Apparently, no one told Paradigm to ignore it.
Paradigm, a workers compensation catastrophic case management utility that
manages and facilitates care coordination for injured workers, insists that it was only
required to reimburse Via Christi at the MS-DRG level and not the stop-loss level,
resulting in a $600,000 difference. In Paradigm's view, this was a properly published
regulation that must be enforced. It had no notice of any claims from the Workers
Compensation Division that the clause was accidentally inserted into the published rules
and, thus, was meaningless.
Seeking the protection of the stop-loss, Via Christi sought a formal review of this
dispute under 2010 Supp. K.S.A. 44-510j. After a careful and very thorough review of all
the testimony, the hearing officer concluded that the addition of the "whichever is least"
provision in the 2011 fee schedule was unknowing, inadvertent, and unintentional. The
hearing officer would have declared the provision void and unenforceable but instead,
found he lacked authority to rule an administrative regulation void. The Kansas Workers
Compensation Appeals Board, after carefully reviewing the record, ruled that the hearing
officer was correct. In the end, it too is powerless to change the rules.
Without a doubt, both the hearing officer and the Board are correct; both are
powerless to change the rules. It is their task to enforce rules, not create them. The
hearing officers find facts and apply the rules to the facts and interpret the rules as the
circumstances of each case require. For its part, the Board will review the work of the
hearing officer and make whatever corrections are required. But indeed, they are
powerless to say, "This rule we will not enforce because it is wrong." To permit that
would reduce rulemaking to the whim, no matter how reasonable, of the hearing officer
or the Board. Nonetheless, rulemaking is one of the fundamental tasks assigned to our
administrative agencies. This process of rule creation is elaborate and painstaking. Many
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views are taken into account before the final rule is published. We now focus on
rulemaking by this agency.
Since 1990, the Kansas Legislature has required the director of the Division of
Workers Compensation to adopt rules and regulations which establish a schedule of
maximum fees for medical, surgical, hospital, dental, nursing, vocational rehabilitation,
or any other treatment or services provided to employees under the Workers
Compensation Act. See K.S.A. 1990 Supp. 44-510(a)(1); K.S.A. 2016 Supp. 44-510i(c).
The fee schedule must satisfy certain statutory directives of reasonableness and scope. It:
shall be reasonable;
shall promote health care cost containment and efficiency with respect to
the workers compensation health care delivery system;
shall be sufficient to ensure availability of such reasonably necessary
treatment, care, and attendance to each injured employee to cure and relieve
the employee from the effects of the injury; and
shall include provisions and review procedures for exceptional cases
involving extraordinary medical procedures or circumstances. K.S.A. 2016
Supp. 44-510i(c)(1).
The law calls on the director to appoint a specialist in health care services delivery
to assist in preparing the fee schedule. That person is referred to as the medical
administrator. See K.S.A. 2016 Supp. 44-510i(a)-(b). For this case, the medical
administrator was Dr. Terry A. Tracy. The statute also creates an advisory panel to assist
the director in establishing the fee schedule. K.S.A. 2016 Supp. 44-510i(d).
The director utilizes the Division's manager of medical services to shepherd
revisions to the fee schedule through the regulatory process. Here, that person was Anne
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Haught. Haught practiced as a registered nurse for 12 years and is a licensed attorney.
Haught also served as the director at certain points during this period.
The fee schedule is incorporated by reference into K.A.R. 51-9-7. By law, the fee
schedule must be updated at least every 2 years to ensure the schedule is "current,
reasonable and fair." K.S.A. 2016 Supp. 44-510i(c)(2).
Generally, the process for updating the fee schedule begins with the collection of
data from the top 20 insurance carriers in Kansas. Next, Division personnel meet with
those involved, like Via Christi, the Hospital Association, and the Medical Society to talk
about potential updates to the fee schedule. Their starting point is Medicare's Risk Base
Relative Value System. Proposed changes to the fee schedule are then presented to the
statutorily mandated advisory panel.
Following review by the advisory panel, proposed changes are sent to the National
Council on Compensation Insurance for pricing. The Council reviews the changes and
provides an estimate of how the changes will affect workers compensation insurance
premiums in Kansas. For example, regarding the 2010 fee schedule, the Council noted
that it reviewed for reasonableness the Kansas Department of Health and Environment's
estimate that the new hospital inpatient fee schedule (including the new stop-loss limit of
$60,000) would result in a savings in hospital inpatient costs. The Council's analysis is
then incorporated into the economic impact statement for the fee schedule changes. The
law requires an economic impact statement whenever a rule or regulation is proposed or
amended. See K.S.A. 2016 Supp. 77-416(b)(1). That is true here, as well.
The fee schedule then goes through the regulatory process beginning with
approval by the Department of Administration, followed by the Attorney General's
Office, and then it is set for a public hearing. The medical administrator or manager of
medical services testifies before the joint committee on rules and regulations. Finally,
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there is a public hearing. Upon completion of the regulatory process, K.A.R. 51-9-7 is
updated, incorporating the new fee schedule by reference. The fee schedule is published
effective January 1 of the next year.
Necessarily, this rulemaking is a careful, methodical process. Here, the fee
schedule begins with the collection of data, and amendments are then drafted by medical
experts who consult with various stakeholders about the effect of any changes. A
National Council reviews the schedule to estimate the possible effects of the schedule on
workers compensation insurance premiums. The changes are then reviewed by the
Department of Administration and the Kansas Attorney General. Sworn testimony is
offered and considered. Public hearings are conducted and considered. Nothing is left to
chance. But as in all human endeavors mistakes are made. Fortunately, there are
standards created by the law that serve as a gauge to measure these rules.
A rule or regulation adopted by an administrative agency may only be given
binding legal effect if it has complied with the requirements of the Rules and Regulations
Filing Act. See K.S.A. 2016 Supp. 77-415. One of the primary requirements for a new
rule, such as the 2011 fee schedule, is an economic impact statement from the agency
proposing the rule. This is set out in K.S.A. 2016 Supp. 77-416(b)(1). There are four
considerations listed in the statute; but we focus primarily on subsection (b)(1)(C) that
requires the agency to describe the costs affected by the proposed rule, who shall bear
them, and how much will they be.
That determination of costs by the agency was not done here for the inserted
"whichever is least" language amending the 2011 fee schedule. There was no study
conducted of the costs of this amendment; no estimation of how much; nor was it
announced upon whom the costs were going to fall. While there was an economic impact
report contemporaneously filed with the schedule, it did not assess the impact of the
"whichever is least" language. In other words, by failing to estimate the costs affected by
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the inclusion of this language and, thus, amending the rule, the amendment failed to
comply with the Filing Act. Failure to comply with the Filing Act breaks the rules of
rulemaking and leads to court excision of improperly promulgated rules. This principle
has been recognized before.
For example, in American Trust Administrators, Inc. v. Kansas Insurance Dept.,
273 Kan. 694, Syl., 44 P.3d 1253 (2002), the Kansas Supreme Court held the
Commissioner of Insurance had authority to regulate stop-loss insurance offered to self-
funded employer health plans. But the Commissioner's attempt to regulate the stop-loss
policy in the particular case was void for failure to follow procedures outlined in K.S.A.
77-415 et seq. The Commissioner based the refusal to approve the petitioner's insurance
policy on a widely distributed bulletin that was not properly promulgated under K.S.A.
77-415 et seq. The court held a widely distributed bulletin was not a valid substitute for a
properly promulgated rule or regulation. 273 Kan. at 704. Consequently, the
Commissioner's attempt to regulate the stop-loss policy was void. 273 Kan. at 694. The
agency's failure to comply with the Filing Act here seems similar to the failure of the
commissioner in American Trust Administrators. Actions enforcing improperly
promulgated rules are void.
Before we conclude, we turn briefly to what seems obvious. Insertion of this
"whichever is least" language guts the stop-loss provision created the year before in the
2010 fee schedule. The phrase clearly contravenes the stated purpose of the stop-loss
method. With that method, if the total charges exceed the stop-loss amount ($60,000),
then the facility can be paid 70 percent of the billed charges. But with the "whichever is
least" limitation, the stop-loss would never kick in. The hospital could actually only
receive the lesser MS-DRG reimbursement amount. The stop-loss cannot be "an
independent reimbursement methodology that will reimburse the hospital for unusually
costly services rendered during treatment to an injured worker" if the "whichever is least"
sentence is given effect.
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The legislature created our administrative agencies to regulate particular segments
of our government. Charged with such great tasks, the agencies must collect all pertinent
data, seek competent expert assistance, study all the conditions, and then create workable
regulations and rules that carry out the broad policies of the legislature or those policies
the legislature has delegated to the agency to create and develop. Such rulemaking is no
easy task; too many people and too many economic interests are affected by these rules to
leave this to chance—that is, to the accidental insertion of one small phrase in a 232-page
regulation.
If we were to approve the Board's ruling and enforce this rule, our holding would
be as arbitrary as the Board's. Essentially, we would be saying that it is a rule; therefore,
it must be enforced even though it was created accidentally. Once created, rules are not
indestructible. The Judicial Review Act permits this court to grant relief if the agency
action is unreasonable, arbitrary, or capricious. See K.S.A. 2016 Supp. 77-621(c). The
enforcement of an accidentally created rule is the very picture of an arbitrary or
capricious action, and we reverse the Board's ruling enforcing it.
Reversed.
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