Pharmserv, Inc. v. Tex. Health & Human Servs. Comm'n

• Decision Date: 09 April 2015
• Docket Number: NO. 03-13-00526-CV,03-13-00526-CV
• Parties: Pharmserv, Inc., Appellant 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; and Stuart W. Bowen, Jr., in his Official Capacity as Inspector General, Appellees
• Court: Texas Court of Appeals

Pharmserv, Inc., Appellant 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 Healthand Human Services Commission; and Stuart W. Bowen, Jr.,¹in his Official Capacity as Inspector General, Appellees

NO. 03-13-00526-CV

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

April 9, 2015

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 261ST JUDICIAL DISTRICT

NO. D-1-GN-12-001074, HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDING

MEMORANDUM OPINION

Pharmserv, Inc., appeals from the trial court's order granting the pleas to the jurisdiction of the Texas Health and Human Services Commission (HHSC); the Office of the Inspector General of HHSC (OIG); Kyle Janek, HHSC Commissioner; and Stuart W. Bowen, Jr., Inspector General, (sometimes collectively HHSC) and dismissing Pharmserv's claims. Pharmserv brought an action under the Uniform Declaratory Judgments Act (UDJA) asserting ultra vires and contract claims and an alternative challenge to the validity of certain statutes and seeking declarations of its rights under certain rules and statutes and the parties' contract. See Tex. Civ. Prac. & Rem. Code § 37.004. Pharmserv also asserted a rules challenge under § 2001.038 of theAdministrative Procedure Act (APA). See Tex. Gov't Code § 2001.038. For the reasons that follow, we affirm in part and reverse and remand in part.

STATUTORY AND REGULATORY FRAMEWORK

HHSC is the agency designated to administer the Texas Medicaid program. See Tex. Hum. Res. Code § 32.021(a); Tex. Gov't Code § 531.021(a). Licensed pharmacies may enroll as providers in the Medicaid program and are reimbursed by HHSC under the Vendor Drug Program. See Tex. Hum. Res. Code § 32.029; 1 Tex. Admin. Code §§ 354.1801-.1941 (Tex. Health & Human Servs. Comm'n,² Pharmacy Services). Under HHSC rules, providers participating in the Vendor Drug Program are subject to audit to determine any deviations from the program or "exceptions." See 1 Tex. Admin. Code § 354.1891 (Vendor Drug Providers Subject to Audit) (outlining procedures for audit and appeal). If a provider disagrees with the audit findings, it may present additional information, and if it still disagrees, it may appeal and be afforded an informal hearing or additional "desk review." See id. § 354.1891(c).

Once HHSC accepts the audit results, it notifies the provider, details the exceptions, and requests payment within 30 days. See id. § 354.1892 (Exception Notification). If the provider does not make restitution within 30 days, a vendor hold is placed on the provider's payment claims. See id.; see also id. § 354.1815 (2003) (Reasons for Placing a Pharmacy on Vendor Hold), repealed 37 Tex. Reg. 9905-06 (2012) (proposed Oct. 12, 2012) (Former 1 Tex. Admin. Code § 354.1815) (authorizing vendor hold in certain circumstances including failure to pay restitution in allottedtime).³ HHSC has also adopted rules for imposing administrative sanctions on pharmacy providers for ethics violations. See id. § 354.1811 (Sanctions).

As participants in the Medicaid program, pharmacy providers are also subject to regulation by HHSC through its general authority under Chapter 531 of the Government Code and Chapter 32 of the Human Resources Code. See generally Tex. Gov't Code §§ 531.001-.988; Tex. Hum. Res. Code §§ 32.001-.256. Through its OIG, HHSC is responsible for investigating fraud and abuse and enforcing state laws related to the Medicaid program. See Tex. Gov't Code § 531.102(a); 1 Tex. Admin. Code § 371.11 (Office of Inspector General: Purpose and Scope). HHSC and OIG may conduct audits, investigations, and prepayment reviews of claims for reimbursement. See Tex. Gov't Code § 531.102(h)(4), (5); Tex. Hum. Res. Code § 32.0291(a)(1); 1 Tex. Admin. Code § 371.19 (Office of Inspector General: Investigation). OIG may assess administrative penalties or sanctions for program violations. See Tex. Gov't Code § 531.102(h)(1) (OIG may assess administrative penalties); Tex. Hum. Res. Code § 32.021(e) (requirements for rules governing penalties); 1 Tex. Admin. Code §§ 371.11(a), (c)(1) (Office of Inspector: Purpose and Scope) (OIG may impose sanctions and assess administrative penalties), .1643 (2005) (Use of Sanctions), repealed 37 Tex. Reg. 7998 (2012) (proposed Aug. 10, 2012) (listing sanctions that may be imposed for non-exclusive list of program violations found in 1 Tex. Admin. Code § 371.1617 (2005), repealed 37 Tex. Reg. 7999 (2012) (proposed Aug. 10, 2012)) (Former 1 Tex. Admin. Code § 371.1617).

During the time frame relevant to this appeal, HHSC and OIG were authorized to impose, without prior notice, a "payment hold" on Medicaid reimbursements upon receiving "reliable evidence" of "fraud or wilful misrepresentation" by the provider. See Act of May 28, 2011, 82d Leg., R.S., ch. 879, § 3.11, sec. 351.102(g)(2), 2011 Tex. Gen. Laws 2228, 2234-35 (amended 2013) (current version at Tex. Gov't Code § 531.102(g)(2)) (OIG shall impose hold) (Former Tex. Gov't Code § 531.102(g)(2)); Act of June 2, 2003, 78th Leg., R.S., ch. 198, § 2.103, sec. 32.0291(b), 2003 Tex. Gen. Laws 611, 690 (amended 2013) (current version at Tex. Hum. Res. Code § 32.0291(b)) (HHSC may impose hold) (Former Tex. Hum. Res. Code § 32.0291(b)).⁴ A provider subject to such a hold could request an expedited administrative hearing before the State Office of Administrative Hearings (SOAH). See Former Tex. Gov't Code § 531.102(g)(3) (HHSC shall file request for expedited hearing with SOAH upon timely written request by provider); Former Tex. Hum. Res. Code § 32.0291(c) (same). In addition, HHSC had adopted rules providing for payment holds without prior notice in certain other circumstances. See 1 Tex. Admin. Code § 371.1709.⁵

FACTUAL AND PROCEDURAL BACKGROUND

Pharmserv is a pharmacy that serves Medicaid patients under written contract with HHSC as part of the Vendor Drug Program. In 2010, HHSC, through OIG, conducted a performance audit of Pharmserv covering the period from June 2006 through May 2008 and determined that Pharmserv owed the state more than $900,000. See id. § 354.1891. Based on a random sample, HHSC found 127 exceptions and extrapolated to reach the total amount owed. Pharmserv disagreed with the audit results and appealed. HHSC agreed to hold an informal hearing. See id. § 354.1891(c). The hearing was held and then continued at Pharmserv's request while Pharmserv sought more information. HHSC responded to the request for additional information and informed Pharmserv that its final response was due November 30, 2011. On December 29, 2011, HHSC informed Pharmserv that the audit was being upheld, that Pharmserv had 30 days to pay in full or reach an agreement with HHSC for a payment plan, and that failure to pay or arrange a payment plan would result in a vender hold on Pharmserv's future claims. See id. § 354.1892 (providing for vendor hold if restitution not received within 30 days of notice); Former 1 Tex. Admin. Code § 354.1815(2) (listing failure to make restitution revealed by audit as basis for vendor hold). The notice letter further stated that it was the only notice Pharmserv would receive.

Pharmserv responded by offering to pay a "compromise" amount and asking for a hearing under former rule 371.1669. See 1 Tex. Admin. Code § 371.1669 (2005) (Notice of Appeal), repealed 37 Tex. Reg. 7889-90 (2012) (proposed Aug. 10, 2012) (Former 1 Tex. Admin. Code § 371.1669) (procedure for appeal of administrative sanctions). HHSC informed Pharmserv that the appeal rights described in former rule 371.1669, which applied to administrative sanctions taken as the result of program violations under former rule 371.1617, are not applicable in the vendor drug audit context. HHSC referred Pharmserv to the applicable rules, rules 354.1891 and 354.1892, and stated that Pharmserv had been afforded the informal hearing envisioned by section 354.1891. Although the parties disagree as to the effective date, a payment hold was placed on Pharmserv's reimbursement claims.

Pharmserv filed suit against HHSC and OIG and against Janek and Bowen in their official capacities arguing that HHSC had violated Pharmserv's due process rights, asserting ultra vires and contract claims, and seeking declarations of its rights under former section 32.0291 of the Human Resources Code, Chapter 354 of Title 1 of the Administrative Code, and the parties' contract. See Tex. Civ. Prac. & Rem. Code § 37.004. HHSC and OIG filed a plea to the jurisdiction arguing that Pharmserv's claims against them are barred by sovereign immunity that is not waived by the UDJA. Janek and Bowen filed pleas to the jurisdiction contending that Pharmserv had not stated a valid ultra vires claim because the actions complained of were valid exercises of their discretion, that Pharmserv had not pleaded a valid claim based on denial of due process, and that there is no jurisdiction under the UDJA because Pharmserv did not challenge the validity of a statute. At the hearing on the pleas, HHSC argued that Pharmserv had not pleaded a rules challenge.Following the hearing but prior to the trial court's ruling, Pharmserv filed a fifth amended petition to "clarify" that it was asserting (1) a rules challenge to rules 354.1891 and 354.1892 on the ground that they do not provide due process and (2) an alternative challenge to the validity of former section 32.0291 of the Human Resources Code and Chapter 531 of the Government Code. See Former Tex. Hum. Res. Code § 32.0291 (providing for prepayment reviews and postpayment holds); see generally Tex. Gov't Code §§ 531.001-.9871 (governing HHSC's authority over Medicaid program). The trial court granted the pleas, and this appeal followed.

STANDARD OF REVIEW AND APPLICABLE LAW

A plea to the jurisdiction challenges the court's authority to decide a case. Heckman v. Williamson Cnty., 369 S.W.3d 137, 149 (Tex. 2012). A plea questioning the trial court's subject...