ARIZONA SOC. OF PATHOLOGISTS v. AHCCCS

• Decision Date: 22 January 2002
• Docket Number: No. 1-CA-CV 01-0029.,1-CA-CV 01-0029.
• Citation: 38 P.3d 1218,201 Ariz. 553
• Parties: ARIZONA SOCIETY OF PATHOLOGISTS, an Arizona corporation; Mallon-Alvarez Pathology Group, P.C., an Arizona corporation, Plaintiffs-Appellants, v. ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION, a State agency; Phyllis Biedess, in her official capacity as Director of AHCCCS, Defendants-Appellees.
• Court: Arizona Court of Appeals

38 P.3d 1218

201 Ariz. 553

ARIZONA SOCIETY OF PATHOLOGISTS, an Arizona corporation; Mallon-Alvarez Pathology Group, P.C., an Arizona corporation, Plaintiffs-Appellants, v. ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION, a State agency; Phyllis Biedess, in her official capacity as Director of AHCCCS, Defendants-Appellees.

No. 1-CA-CV 01-0029.

Court of Appeals of Arizona, Division 1, Department C.

January 22, 2002.

Gammage & Burnham, P.L.C. By John R. Dacey, Cameron C. Artigue, Phoenix, Attorneys for Plaintiffs-Appellants.

Johnston & Kelly, P.L.C. By Logan T. Johnston, Phoenix, Attorneys for Defendants-Appellees.

Snell & Wilmer, L.L.P. By Barry D. Halpern, Andrew F. Halaby, Phoenix, Attorneys for Amicus Curiae Arizona Medical Association.

Sidley Austin Brown & Wood By Jack R. Bierig, Richard D. Raskin, Chicago, IL, Attorneys for Amicus Curiae College of American Pathologists.

OPINION

RYAN, Judge.

¶ 1 This litigation concerns Arizona Health Care Cost Containment System's ("AHCCCS")¹ compensation of hospital-based pathologists for "indirect services." We conclude that AHCCCS did not have a lawful basis through a specific, applicable statute or properly promulgated rule for denying coverage of indirect pathology service claims. We therefore reverse the trial court's grant of summary judgment to AHCCCS on the claims of the Arizona Society of Pathologists ("Society")² and Mallon-Alvarez Pathology Group, P.C. ("Mallon-Alvarez").³

BACKGROUND

¶ 2 Pathologists are physicians who specialize in the analysis of bodily fluids and tissues. Pathology sometimes requires a physician's personal examination of a specimen or test result. Such examinations are considered "direct services." But pathologists who direct hospital laboratories also perform a variety of "indirect services" to ensure that test results are timely and reliable, such as medical direction and supervision, quality assurance, and consultation.

¶ 3 Billing for indirect services (or "professional component billing") is a practice accepted by some private insurers as an administrative convenience. Under this method, pathologists bill a nominal fixed fee for each lab test, regardless of the amount of time the pathologist devotes to that particular test. This type of billing spreads costs across all patients. It avoids the need to keep records for billing purposes about which single test results required, for example, further testing to determine the reason for an anomaly. Professional component billing essentially allows pathologists to charge a portion of their overhead to all patients.

¶ 4 AHCCCS circulates a newsletter called Claims Clues to those in the field of billing for health care claims. The June 1999 issue of Claims Clues contained an AHCCCS policy statement announcing that AHCCCS followed Medicare guidelines with respect to the reimbursement of pathology claims.⁴ The Medicare guidelines allow pathologists to bill for direct services, but not indirect services. 42 U.S.C. § 1395xx(a)(1) (1994); 42 C.F.R. § 405.515 (2000).

¶ 5 Applying these Medicare guidelines, a 1998 AHCCCS audit of hospital-based pathologists' claims revealed more than $1 million in "erroneous" pathology payments made by AHCCCS health plans to pathologists from January 1994 through December 1997. AHCCCS recommended that its health plans recoup payments for indirect services, stop paying future claims for indirect services, and refer cases in which pathologists sought payment for indirect services for civil monetary penalties or possible criminal prosecution. Four AHCCCS health plans subsequently initiated administrative actions or litigation against various pathologists, including Mallon-Alvarez.

¶ 6 Plaintiffs maintained that AHCCCS had improperly changed its policy regarding payment of pathology claims and that claims for indirect services were fully reimbursable. In September 1999, Plaintiffs filed a Petition for Rulemaking and Review of Substantive Policy Statement with AHCCCS in accordance with Arizona Revised Statutes ("A.R.S.") section 41-1033 (1999).⁵ The petition asked AHCCCS to "[r]eview the substantive Policy Statement ... regarding pathology claims for clinical laboratory services, and determine that such Policy Statement constitutes a rule that has not been promulgated as such, and is therefore null and void." Plaintiffs also asked AHCCCS to "[m]ake a final rule specific to pathology fees... that prescribes under what circumstances, if any, AHCCCS will follow Medicare criteria."

¶ 7 The AHCCCS Director denied Plaintiffs' petition. AHCCCS concluded that the Policy Statement merely applied existing law to the facts particular to pathology services rendered in a hospital setting. Specifically, AHCCCS stated that indirect services could not be compensated because A.R.S. § 36-2918(A) (1993) made it unlawful to bill AHCCCS for services not provided, and Arizona Administrative Code ("A.A.C.") Rule R9-22-712(A)(2) (1997) deemed the services in question provided by the hospital, not the physician.

¶ 8 Plaintiffs appealed this decision to the Governor's Regulatory Review Council ("GRRC")⁶ under A.R.S. § 41-1033. Plaintiffs asked GRRC to determine that the Policy Statement was an improperly promulgated rule. AHCCCS opposed this appeal arguing, among other things, that the Policy Statement was merely an interpretation of A.R.S. § 36-2918.

¶ 9 GRRC reversed AHCCCS's decision, finding that the Policy Statement and "the AHCCCS practice of following Medicare guidelines" was a "rule" as defined by A.R.S. § 41-1001 (1999). Under A.R.S. § 41-1033(C), "[i]f the [GRRC] ultimately decides the agency practice or statement constitutes a rule, the practice or statement shall be considered void."

¶ 10 Following the GRRC decision, Plaintiffs asked AHCCCS to advise its health plans that the Policy Statement was void, to provide coverage for indirect services, and to promulgate a formal rule regarding payment of pathology services. Plaintiffs also asked the health plans to withdraw their recoupment claims. Some of the plans refused to do so, and AHCCCS continues to deny coverage for indirect services, relying on A.R.S. § 36-2918.

¶ 11 Plaintiffs then filed this lawsuit against AHCCCS. The lawsuit sought a declaratory judgment confirming GRRC's decision that the Policy Statement is an illegal and unenforceable rule, and an injunction prohibiting AHCCCS's continued enforcement of the Policy Statement and ordering it to pay for indirect services. AHCCCS filed a motion to dismiss, arguing lack of subject matter jurisdiction and failure to state a claim. Plaintiffs opposed that motion, and filed a motion for summary judgment. AHCCCS then filed a cross-motion for summary judgment, relying on A.R.S. § 36-2918(A) as support for its denial of claims for indirect services.

¶ 12 The trial court decided to treat AHCCCS's initial motion to dismiss as a motion for summary judgment, and ordered supplemental briefing on certain issues by the parties. After the supplemental briefing, the trial court denied Plaintiffs' motion for summary judgment, and granted AHCCCS's cross-motion for summary judgment. The court ruled, alternatively, that it was without subject matter jurisdiction to grant Plaintiffs' requested relief; that Plaintiffs had failed to state a claim for relief; that injunctive relief was inconsistent with the AHCCCS statutory scheme and A.R.S. § 12-1802 (1994); that declaratory relief was inappropriate; and that billing of indirect services in the hospital setting is not a bill for "an item or service provided as claimed" under A.R.S. § 36-2918. The court also declined to accept jurisdiction of the case if it was recast as a special action. Plaintiffs appealed from that ruling raising four issues, which we address in turn.

DISCUSSION

I. Jurisdiction

¶ 13 The superior court concluded it lacked subject matter jurisdiction over Plaintiffs' complaint. We review de novo a dismissal for lack of jurisdiction. Harris v. Harris, 195 Ariz. 559, 561, ¶ 6, 991 P.2d 262, 264 (App.1999).

¶ 14 Plaintiffs' action originated as a GRRC proceeding under A.R.S. § 41-1033(B) to determine whether the Policy Statement was an invalid rule. GRRC concluded that it was. Once GRRC concludes that an "agency practice or statement constitutes a rule, the practice or statement shall be considered void." A.R.S. § 41-1033(C). When AHCCCS continued to deny claims for indirect pathology services, Plaintiffs filed this lawsuit to enforce the GRRC decision.

¶ 15 AHCCCS argues that A.R.S. § 41-1033(D) precludes Plaintiffs from appealing the GRRC decision. At the time this action was initiated, that statute provided: "A decision by the agency pursuant to this section is not subject to judicial review." A.R.S. § 41-1033(D). AHCCCS contends that in Phoenix Children's Hospital v. Arizona Health Care Cost Containment System Administration, 195 Ariz. 277, 987 P.2d 763 (App.1999), this court relied on that statute to hold that the superior court is precluded from re-examining the GRRC's determination that an agency practice or policy statement does, or does not, constitute an invalid rule.

¶ 16 But neither A.R.S. § 41-1033(D) nor the Phoenix Children's decision applies here. Those authorities pertain to a party's attempt to circumvent the mandate of former A.R.S. § 41-1033⁷ that the relevant agency or the GRRC, not the courts, decide "whether an agency practice or policy constitutes a `rule' that must be promulgated under the APA rulemaking process." Phoenix Children's,195 Ariz. at 281, ¶ 14, 987 P.2d at 767; see A.R.S. § 41-1033.

¶ 17 Here, Plaintiffs are not challenging the GRRC's decision that the Policy Statement constitutes an invalid rule. Rather, they are trying to enforce that decision. Accordingly, the authorities relied upon by AHCCCS are inapplicable.

¶ 18 Plaintiffs' superior court action was based on a provision of the Arizona Administrative Procedure Act ("APA"), A.R.S. §§ 41-1001 to-1067 (1...