Bos. Med. Ctr. Corp. v. Sec'y of the Exec. Office of Health & Human Servs.

Citation974 N.E.2d 1114,463 Mass. 447
Decision Date14 September 2012
Docket NumberSJC–11139.
CourtUnited States State Supreme Judicial Court of Massachusetts
PartiesBOSTON MEDICAL CENTER CORPORATION & another v. SECRETARY OF THE EXECUTIVE OFFICE OF HEALTH AND HUMAN SERVICES (and a consolidated case ).

463 Mass. 447
974 N.E.2d 1114

BOSTON MEDICAL CENTER CORPORATION & another 1
v.
SECRETARY OF THE EXECUTIVE OFFICE OF HEALTH AND HUMAN SERVICES (and a consolidated case 2).

SJC–11139.

Supreme Judicial Court of Massachusetts,
Suffolk.

Argued May 7, 2012.
Decided Sept. 14, 2012.


[974 N.E.2d 1119]


Donald K. Stern (Katie J. McLoughlin with him), Boston, for Boston Medical Center Corporation & another.

Janet Steckel Lundberg (Robert J. Griffin with her), Boston, for Holyoke Medical Center, Inc., & others.


Kenneth W. Salinger, Assistant Attorney General, for the defendant.

Present: IRELAND, C.J., SPINA, CORDY, GANTS, DUFFLY, & LENK, JJ.

GANTS, J.

[463 Mass. 448]In two separate actions filed in the Superior Court, seven Massachusetts hospitals (see note 4, infra, and accompanying[463 Mass. 449]text) and one managed health care organization that disproportionately provide medical care to the poor allege that the Secretary of the Executive Office of Health and Human Services (Secretary) has violated her obligation to reimburse them for the reasonable costs incurred in providing medical services to enrollees in MassHealth, the Massachusetts Medicaid program that is jointly funded by Federal and State legislative appropriations and serves the needs of those persons “whose income and resources are insufficient to meet the costs of necessary medical services.” Title XIX of the Social Security Act, codified at 42 U.S.C. § 1396–1 (Supp. IV 2010).3 A judge in the Superior Court granted the Secretary's motion for judgment on the pleadings in one case and the Secretary's motion to dismiss in the other, concluding as a matter of law that the plaintiffs could not prevail even if their allegations were true. The plaintiffs filed timely notices of appeal and on the parties' joint motion the appeals were consolidated in the Appeals Court. We transferred the cases to this court on our own motion, and now affirm the decisions denying the plaintiffs' claims.

General background. The plaintiffs in the first action are the Boston Medical Center Corporation (BMC) and the Boston Medical Center Health Plan, Inc. (Health Plan). According to the amended complaint, BMC is the largest provider of medical care to “underserved, low-income, and vulnerable populations in Massachusetts”; only nineteen per cent of its patients are covered by private insurers.

[974 N.E.2d 1120]

The Health Plan is a managed care organization that provides health care services to approximately 240,700 members, of whom approximately 170,000 are enrolled in MassHealth. The plaintiffs in the second action are Holyoke Medical Center, Inc., and two other hospitals (collectively, the Holyoke plaintiffs).4 The defendant in both actions is the Secretary, who administers MassHealth.

[463 Mass. 450]The judge allowed the Secretary's motion for judgment on the pleadings as to the complaint brought by BMC and the Health Plan in a carefully reasoned memorandum of decision and order. She allowed the Secretary's motion to dismiss as to the complaint brought by the Holyoke plaintiffs, stating that her legal analysis in the first case “applies here in nearly all respects” and addressing in her memorandum and order only the differences between the two cases.

In reviewing the judge's two orders, “we examine the same pleadings as the motion judge and therefore proceed de novo.” Dartmouth v. Greater New Bedford Regional Vocational Tech. High Sch. Dist., 461 Mass. 366, 373, 961 N.E.2d 83 (2012) (Dartmouth ) (motion to dismiss). See Wheatley v. Massachusetts Insurers Insolvency Fund, 456 Mass. 594, 600–601, 925 N.E.2d 9 (2010) (judgment on pleadings). Those pleadings include contracts and public documents that are referenced in the complaints and that were provided to the motion judge. See Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 45 n. 4, 809 N.E.2d 1017 (2004), citing Mass. R. Civ. P. 10(c), 365 Mass. 752 (1974). We accept as true the allegations in the complaints and draw every reasonable inference in favor of the plaintiffs. Curtis v. Herb Chambers I–95, Inc., 458 Mass. 674, 676, 940 N.E.2d 413 (2011), citing Warner–Lambert Co. v. Execuquest Corp., 427 Mass. 46, 47, 691 N.E.2d 545 (1998). “We consider whether the factual allegations in the complaint are sufficient, as a matter of law, to state a recognized cause of action or claim, and whether such allegations plausibly suggest an entitlement to relief.” Dartmouth, supra at 374, 961 N.E.2d 83, citing Iannacchino v. Ford Motor Co., 451 Mass. 623, 636, 888 N.E.2d 879 (2008). Because issues relevant to the plaintiff hospitals are distinct from issues raised by the Health Plan, we consider first the claims relevant only to the hospitals and then consider the additional claims raised by the Health Plan. We conclude by examining the remaining claims that are asserted by all plaintiffs.

The hospitals' claims. 1. Background. The rates paid by MassHealth for medical services provided by hospitals generally are [463 Mass. 451]established by contract between the hospital and the Secretary. G.L. c. 118G, § 11. Since 1991, the Secretary has established payment rates for hospitals through an annual rate setting process. The Secretary publishes a Request for Applications (RFA) that informs each hospital of the payment rates for each MassHealth-eligible patient that the hospital may treat, as well as the methodology used to calculate each hospital's payment rates. The RFA, at least for rate year 2009,5 is an approximately one hundred page document that primarily focuses on describing the

[974 N.E.2d 1121]

types of hospital services that will be “reimbursed” by MassHealth, and the methodology used by the Secretary to calculate various reimbursement rates to be paid for different types of care. Under G.L. c. 118E, § 36, and the terms of the RFA, a hospital that enters into a contract to accept MassHealth patients must agree to accept, “as payment in full,” the amounts paid under these rates.

One rate at issue in this lawsuit and defined in the RFA is the “Standard Payment Amount Per Discharge” (SPAD). A SPAD payment is a flat-fee paid by the Secretary for the first twenty days of inpatient care, regardless of the reason for the hospitalization or the actual cost incurred by the hospital to care for the admitted patient, and regardless whether the patient actually remains in the hospital for twenty days. A second rate at issue is the “Payment Amount Per Episode” (PAPE), which similarly is a flat-fee paid by the Secretary for outpatient care. The rate of the SPAD or PAPE payment determines whether a hospital makes a profit or takes a loss on the care of MassHealth patients.

The SPAD and the PAPE rates differ for each hospital, because the rates adjust the Statewide average costs of providing service with a complicated algorithm based in part on a hospital's particular “casemix.” 6 A hospital's “casemix index” is defined in the RFA as a “categorization of a hospital's patient population according to criteria approved by [the Secretary] including, [463 Mass. 452]but not limited to, primary and secondary diagnoses, primary and secondary procedures, illness severity, patient age and source of payment.” The index is intended to take into account the differences among hospitals in the types of medical problems they treat and the patient populations they serve that will affect their average costs, so that a hospital that treats more serious or complex medical problems requiring expensive procedures or longer hospitalizations, or that treats patient populations in poorer health or with special needs will have SPAD and PAPE rates above the Statewide average.7

An appendix to the RFA is a document titled “MassHealth Hospital Contract” (contract), which is a ten-page form contract. If a particular hospital accepts the RFA, including the detailed description of payment rates, the hospital executes and returns the RFA and contract indicating its acceptance. Either party is allowed to terminate the contract with at least thirty days, prior written notice for any reason.

According to the terms of the contract, the Secretary “may revise payment rates, methodology [and] may amend any term of this [c]ontract, as it determines necessary” and with few exceptions not relevant to this appeal, “shall provide the [hospital] with [thirty] days' written notice prior to implementing any amendment to the terms of the contract.” If the hospital does not respond to a proposed amendment, the Secretary “may exercise [her] discretion either to terminate for cause ... or continue the [hospital's] participation,” in which

[974 N.E.2d 1122]

case the Secretary “shall notify the [hospital] whether pre- or post-amendment methodology, rates, and [c]ontract provisions shall apply.”

BMC and the Holyoke plaintiffs are disproportionate share hospitals, which means that at least sixty-three per cent of their “gross patient service revenue” comes from Medicare, Medicaid, free care, or other government payors. 8G.L. c. 118G, § 1. [463 Mass. 453]Under G.L. c. 118G, § 11 ( a ), “[f]or disproportionate share hospitals, the [Secretary] shall establish rates that equal the financial requirements of providing care to recipients of medical assistance.” “Financial requirements” is defined as “a hospital's requirement for revenue which shall include, but not be limited to, reasonable operating, capital and working capital costs, the reasonable costs of depreciation of plant and equipment and the reasonable costs associated with changes in medical practice and technology.” G.L. c. 118G, § 1.

As alleged by the plaintiffs, the Secretary issued the rate year 2009 RFA in August, 2008, but amended the RFA on September 19, raising payment rates. On October 1, the Secretary issued a “Notice of Final Agency Action,” lowering payment rates and stating that the calculation of payment rates would be “derived from the statewide average hospital cost per admission in rate year 2006, standardized for casemix...

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