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    TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN



    NO. 03-98-00376-CV

    Institute of Cognitive Development, Inc.; Develo-Cepts, Inc.; and Carroll Stroman,

    d/b/a Bitter Creek Farm, Appellants



    v.



    Texas Department of Mental Health and Mental Retardation,

    and Private Provider Association of Texas, Appellees







    FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT

    NO. 97-03086, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING

       Appellants, providers of care for the mentally retarded, sued in district court for a declaratory judgment that a rule (1) adopted by the Texas Department of Mental Health and Mental Retardation (the "Department") is invalid because: (1) the Department failed to adopt the Rule in substantial compliance with the Administrative Procedure Act ("APA") (2) and (2) the Rule violates statutory and constitutional prohibitions against retroactive application. At the conclusion of a trial on the merits, the district court rendered judgment against appellants on all claims for relief. We will reverse the district court judgment, render judgment in favor of appellants, and remand the issue of attorney's fees to the district court for further proceedings.

    THE CONTROVERSY

    Institute of Cognitive Development, Inc. ("Institute"), Develo-Cepts, Inc., and Carroll Stroman d/b/a Bitter Creek Farm ("Stroman") (collectively "appellants"), each own and operate intermediate care facilities for the mentally retarded ("ICF/MRs"). On December 24, 1996, the Texas Department of Mental Health and Mental Retardation (the "Department") published notice of proposed rules relating to the reimbursement of ICF/MRs in the Texas Register. The notice stated that the agency was considering adopting, among other rules, the following new rule: (3)



    § 406.156. Rate Setting Methodology



    (a) Types of facilities. There are two types of facilities for purposes of rate setting: state-operated and non-state operated. (5) Non-state operated facilities are further divided by classes that are determined by the size of the facility.



    (b) Classes of non-state operated services. A separate set of reimbursement rates are set for each class of non-state operated services. The three classes are large, medium, and small facilities. Large facilities are those with 14 or more Medicaid contracted beds. Medium facilities are those with 9-13 beds. Small facilities are those with eight or fewer Medicaid contracted beds.





    See 25 Tex. Admin. Code § 406.156 (1997). This proposed rule classifies ICF/MRs based upon the number of beds the facilities operate as Medicaid-contracted beds. ICF/MRs are then reimbursed by the Department based upon that classification. Small and medium-sized facilities are reimbursed at a higher per diem rate than large facilities. (6)

    Even before the rules were published for comment, the Department began to receive notice that certain facilities intended to reduce their number of Medicaid-contracted beds to place themselves in a more favorable reimbursement bracket. Appellant Institute in December 1996 requested a reduction in the number of its licensed beds from the Texas Department of Human Services ("TDHS"). (7) TDHS issued the Institute a new license to operate a thirteen bed facility on January 29, 1997. Appellant Develo-Cepts requested a reduction in the number of licensed beds for one of its facilities from fourteen to thirteen beds on December 30, 1996. TDHS issued Develo-Cepts a license to operate thirteen beds effective December 30, 1996. Appellant Stroman requested a reduction in the number of licensed beds from fifteen to thirteen on January 25, 1997. Stroman received the new license on January 29, 1997. The Department was notified of the change in status of each appellant.

    As a consequence of the notifications, the Department staff prepared an analysis of the budgetary implications to the Department if all eligible providers with fourteen or fifteen bed facilities were to reduce their licensed capacity to thirteen or fewer beds. Because the study indicated that there would be fewer beds available and that the available beds would be reimbursable at a higher rate than the Department's initial audit projected, on January 30, the Texas Board of Mental Health and Mental Retardation (8) (the "Board") adopted the following amended rule (9) with revisions to the rule set forth in italics:



    § 406.156. Rate Setting Methodology



    (a) Types of facilities. There are two types of facilities for purposes of rate setting: state-operated and non-state operated. Non-state operated facilities are further divided by classes that are determined by the size of the facility.



    (b) Classes of non-state operated facilities. There is a separate set of reimbursement rates for each class of non-state operated facilities, which are as follows.



    (1) Large Facility - A facility with a Medicaid certified capacity of 14 or more as of the first day of the full month immediately preceding a rate's effective date or, if certified for the first time after a rate's effective date, as of the date of initial certification.



    (2) Medium Facility - A facility with a Medicaid certified capacity of nine through 13 as of the first day of the full month immediately preceding a rate's effective date or, if certified for the first time after a rate's effective date, as of the date of initial certification.



    (3) Small Facility - A facility with a Medicaid certified capacity of eight or fewer as of the first day of the full month immediately preceding a rate's effective date or, if certified for the first time after a rate's effective date, as of the date of initial certification.





    The Board also adopted a preamble which was incorporated into the Board's order of January 30, 1997. The preamble included the following explanation for the added language in section 406.156(b):



    The department responds that the classes of facilities were determined based on data collected by an independent consultant and resulting estimates of the cost of operating various size facilities. The department further responds that the definitions have been clarified to provide that a facility's size will be determined as of the first day of the full month immediately preceding a rate's effective date in order for the department to more accurately project program costs and allocate program resources during the rate setting process.





    (Emphasis added). The establishment of the certification date to precede the effective date of the rule became known as the "look back period."

    At the Board meeting on January 30, 1997, the Board adopted the revised rule and the reimbursement rates for state and non-state owned ICF/MRs. The rates, which represented an increase over the rates received by appellants the previous year, were made retroactive and effective as of January 1, 1997. The application to appellants of the revised rule's one-month qualification period in section 406.156(b)(1) prior to the Rule's effective date resulted in the fixing of the number of certified beds as of December 1, 1996. From January 1, 1997, then, in the case of Develo-Cepts and January 29, 1997, for the Institute and Stroman, through the remainder of the year, the Department applied the amended provisions of section 406.156(b)(1) to appellants and reimbursed them as if they were providers with fourteen or more beds under the new rate structure.

    The issue presented is whether the Rule is unlawfully retroactive as applied to appellants because it establishes a date on which the facilities are classified that is prior to the adoption and the effective date of the Rule. Appellants contend that because they reduced their number of beds by the effective date of the Rule, they should be reimbursed at the higher rate for medium-sized facilities, and that the Rule is impermissibly retroactive. The Department contends that the Rule is not unlawfully retroactive because it does not impair a vested right. Because we conclude that section 22.019(a) of the Texas Human Resources Code prohibits the retroactive application of a rule, we conclude that the Department's application of the Rule to classify appellants as large facilities based on their bed capacity on December 1, 1996, before the adoption and the effective date of the Rule, was unlawfully retroactive as applied to these appellants.



    DISCUSSION

    Appellants challenge section 406.156(b) on three grounds: (1) that the Rule was not adopted in substantial compliance with the Texas Administrative Procedure Act; (2) that the Rule violates section 22.019(a) of the Texas Human Resources Code, which expressly prohibits retroactive application of rules, standards, guidelines, or policy interpretations; and (3) that the Department's retroactive application of the Rule is unconstitutional because it impairs vested rights of the appellants. We hold that the "look back provision" of the Rule is retroactive as it applies to appellants and that it thus violates section 22.019(a) of the Texas Human Resources Code. Because we conclude that section 22.019 is dispositive of the issues before us, it is unnecessary to reach the first and third issues.



    Section 22.019(a) of the Texas Human Resources Code  

    The Texas Legislature conferred upon TDHS the duty to set ICF/MR rates annually and to independently adopt by rule the methodology used by the Department in setting rates for ICF/MR facilities. (10) The legislature also provided procedural protections of the rights of Medicaid contract providers and recipients. In 1987, the legislature enacted the following section:



    Section 22.019. Due Process Procedures



    (a) The department may not retroactively apply a rule, standard, guideline, or policy interpretation.

    (b) The department shall adopt any changes in departmental policy in accordance with the rule-making provisions of the Administrative Procedure and Texas Register Act . . . . The department shall use periodic bulletins and indexes to notify contractors of changes in policy and to explain the changes. The department may not adopt a change in departmental policy that takes effect before the date on which the department notifies contractors as prescribed by this subsection.



    (c) The board shall adopt a rule requiring the department to respond in writing to each written inquiry from a contractor not later than the 14th day after the date on which the department receives the inquiry. (11)





    In 1991, the legislature moved the authority to set rates to the Texas Health and Human Services Commission and authorized the Commission to delegate and transfer the rate-setting and other regulatory functions attendant to the provision of ICF/MR services to the Department. With the transfer of function to the Department, the legislature in 1995 confirmed that:

    the transfer of the powers and duties relating to the operation of a Medicaid program included a transfer of all applicable powers and duties provided by Chapters 21, 22, and 32, Human Resources Code, that relate to the operation of the Medicaid program, including the power and duty to set rates. (12)





    Thus, the legislature confirmed that the Department was authorized to set rates for ICF/MR providers, but that it was also subject to all other duties inherent in the operation of a Medicaid program.

    Appellants contend that the Rule is impermissibly retroactive in violation of section 22.019(a) of the Human Resources Code, which prohibits the retroactive application of rules, standards, guidelines, and policy interpretations. (13) The Department responds that section 22.019(a) is merely a codification of the constitutional principle that a law is unlawfully retroactive only when vested rights are destroyed or impaired. See Southwestern Bell Tel. Co. v. Public Util. Comm'n, 615 S.W.2d 947, 956 (Tex. Civ. App.--Austin 1981, writ ref'd n.r.e.). While article 1, section 16 of the Texas Constitution expressly forbids retroactive legislation, it has been consistently construed not to invalidate all retroactive legislation. Under our state charter, only retroactive laws affecting "vested rights" that are legally recognized or secured are invalid. See Texas Water Rights Comm'n v. Wright, 464 S.W.2d 642, 648-49 (Tex. 1971). This Court has applied that principle to administrative rules. See, e.g., Grocers Supply Co. v. Sharp, 978 S.W.2d 638, 643 (Tex. App.--Austin 1998, pet. denied); Texas Dep't of Health v. Long, 659 S.W.2d 158, 160 (Tex. App.--Austin 1983, no writ).

    The majority of cases analyzing the retroactive application of statutes address the nature of the right impaired and whether the right is "vested." In Wright, the Texas Supreme Court addressed both issues: whether the rule in question was retroactive in effect and whether vested rights were affected. The court recognized that a statute that has a definite impact on rights created before the effective date of the statute and that allows an agency to take into consideration conduct occurring before the effective date of the statute possesses a retroactive effect. Wright, 464 S.W.2d at 648-49. Recognizing that most statutes operate to change conditions and that not every retroactive law is unconstitutional, the court stated:



    Mere retroactivity is not sufficient to invalidate a statute. The fact that a statute authorizes the consideration of events that occurred prior to the effective date of the statute does not compel disapproval of the enactment, provided the affected parties were afforded a reasonable time to protect their interests.





    Id. at 648 (emphasis added). The court concluded that the retroactive effects of the statute did not require its invalidation, in part because those subject to the statute were "afforded a reasonable time" after the enactment of the provision to take such action as would preserve their rights. Id.

    All of appellants' facilities were licensed as thirteen bed facilities prior to the adoption of the Rule. By reimbursing the appellants based on their licensed capacities as of December 1, 1996--nearly a month before the Rule was proposed, two months before the Rule was adopted and over three months before it became effective--the Department clearly applied the Rule to conduct prior to the Rule's effective date as well as the date of adoption. Here, the action taken by appellants prior to the effective date of the Rule did not protect their interests, but worked to their detriment. Because of the "look back period" and the establishment of December 1, 1996 as the date on which each facility's status was determined, appellants' reduction in numbers of beds served only to reduce the number of beds subject to the lower per diem rate of facilities classified as large.

    The Department asserts that section 22.019(a) is a mere codification of the constitutional principle that a law is unlawfully retroactive only when vested rights are affected. It argues that the language of the statute embraces the vested right principle protected by the Texas Constitution. And by that route of argument, it concludes that the Rule is not unlawfully retroactive because appellants did not have a vested right which was destroyed or impaired by its enactment.

    To determine legislative intent, we turn first to the seemingly straightforward language of the statute and principles of traditional statutory construction. "The meaning of the statute must, in the first instance, be sought in the language in which the act is framed, and if that is plain, . . . the sole function of the court is to enforce it according to its terms." Caminetti v. United States, 242 U.S. 470, 485 (1917). If possible, then, we are to discern legislative intent from the plain meaning of the words of the statute and enforce a provision as written. See City of Austin v. L.S. Ranch, 970 S.W.2d 750, 752 (Tex. App.--Austin 1998, no pet.). If the statute is clear and unambiguous, then the court is to apply the statute according to the plain meaning of the words employed by the legislature. See Cail v. Service Motors, Inc., 660 S.W.2d 814, 815 (Tex. 1983). The court must not look to any one phrase, clause or sentence of the Act, but to the entire Act itself. See Willingham v. Hagerty, 553 S.W.2d 137, 140 (Tex. Civ. App.--Amarillo 1977, no writ). Only when it is necessary to give effect to the clear legislative intent may we insert additional words or requirements into a statutory provision. See Mauzy v. Legislative Redistricting Bd., 471 S.W.2d 570, 572 (Tex. 1971). And, as a general rule, the legislature is never presumed to have done a useless act. See Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 540 (Tex. 1981).

    By its very language, section 22.019(a) expressly prohibits the retroactive application of rules and policy interpretations of the Department. We are cited to no authority for the proposition that the legislature intended merely to codify the constitutional prohibition against retroactive laws which incorporated a vesting requirement. Unlike the Texas Constitution, this statute has no apparent vesting requirement. Appellants contend that section 22.019(a) could not be more plain in its meaning. We agree. There is no ambiguity in the language of section 22.019(a) that would allow this Court to intuit the limitation urged by the Department. Unless exceptional circumstances dictate otherwise, "when we find the terms of a statute unambiguous, judicial inquiry is complete." Burlington N. R.R. Co. v. Oklahoma Tax Comm'n, 481 U.S. 454, 461 (1987) (citing Rubin v. United States, 449 U.S. 424, 430 (1981)).

    Certainly, a comparison of the language of the two provisions does not provide support for the Department's argument. Article I, section 16 of the Texas Constitution provides that "no. . . retroactive law . . . shall be made." The statute provides: "The department may not retroactively apply a rule, standard, guideline or policy interpretation." Tex. Hum. Res. Code Ann. § 22.019(a) (West 1990) (emphasis added). There is no commonality in language that would warrant the interpretation that the statute is derived or based upon the constitutional provision. In addition, under the Code Construction Act, the term "may not" "imposes a prohibition and is synonymous with 'shall not.'" Tex. Gov't Code Ann. § 311.016(5) (West 1998).

    Even apart from the clear and unambiguous language of the statute, we conclude that the legislature's intent is clear. When we examine the subsection in its context, we find no reason to question its meaning. Located in a section entitled "Due Process Procedures," subsection (a) precedes two subsections that deal with similar concerns. Thus, section 22.019(b) requires that changes in departmental policy are to be adopted in accordance with the APA and that the agency is to use periodic bulletins and indexes to notify contractors of changes in policy and to explain changes. Further, "[t]he department may not adopt a change in departmental policy that takes effect before the date on which the department notifies contractors as prescribed by this subsection." Tex. Hum. Res. Code Ann. § 22.019(b) (West 1990). Subsection (c) requires the adoption of a rule necessitating the Department to respond in writing within fourteen days of receipt to each written inquiry from a provider. Each of the three subsections manifests a concern with notice to contractors and the prospective application of the Department's rules and policies.

    The Department argues that if we accept appellants' interpretation that section 22.019(a) does not require an impairment of a vested right, such a construction would thwart the plain purpose of the legislature in its enactment of Chapters 21, 22, and 32 of the Human Resources Code. The Department specifically calls our attention to section 32.0322 of the Human Resources Code, which authorizes the Department to adopt a rule allowing the consideration of a provider's criminal history in determining the provider's eligibility to participate in a Medicaid program. (14) It contends that if we adopt appellant's construction of section 22.019(a) the Department will be prohibited from considering an applicant's criminal history prior to the law's enactment. We believe this fear is unfounded.

    Traditional principles of statutory construction make clear that when two statutes conflict irreconcilably, the later-enacted statute controls, and further that courts are enjoined to harmonize and give effect to both enactments if at all possible by assigning to each a meaning that will permit both to stand in harmony. See Tex. Gov't Code Ann. § 311.025(a) (West 1988); Commissioners Court v. Criminal Dist. Attorney, 690 S.W.2d 932, 936 (Tex. App.--Austin 1985, writ ref'd n.r.e.). We do not find them necessarily in irreconcilable conflict. In any event, section 32.0322, which was enacted in 1997, would control since it is the later-enacted statute. (15)

    Moreover, a valid exercise of the police power by the legislature to safeguard the public safety and welfare can prevail over a finding that a law is unconstitutionally retroactive. See Barshop v. Medina County Underground Water Dist., 925 S.W.2d 618, 637-38 (Tex. 1996); Texas State Teachers Ass'n v. State, 711 S.W.2d 421, 424 (Tex. App.--Austin 1986, writ ref'd n.r.e.). While that issue is not before us, we assume without deciding that it is well within the police power of the State to adopt standards for the licensing and eligibility of persons applying to enroll as providers under the State's medical assistance program. We need not address each possible incongruity in application of the two statutes.

    Section 22.019(a) is unique. The legislature has prohibited the retroactive application of rules, standards, guidelines and policy interpretations in this administrative context alone. Appellants contend that no other agency--other than those overseeing Medicaid providers--is prohibited from such retroactive application by an explicit statute. Because of the extensive regulation of ICF/MRs by various agencies and the consequences of the failure of an entity to comply with a rule, standard, guideline or policy interpretation, the legislature could well determine that it should prohibit the retroactive application of these various agency determinations and require prospective application with notice as set forth in subsection (b). In light of the statute itself, the context of its application, the words employed, and traditional principles of statutory construction, we find that the legislature intended to give providers fair notice of changes in departmental rules and policies. We conclude that section 22.019(a) prohibits the retroactive application of section 406.156(b) as to these appellants. (16)

    Attorney's Fees

    Appellants' final issue challenges the district court's denial of attorney's fees. The decision to grant or deny attorney's fees in declaratory judgment actions is within the district court's discretion. Commissioners Court v. Agan, 940 S.W.2d 77, 81 (Tex. 1997). Because our disposition of the case on appeal substantially affects the district court's judgment, it could also affect its decision as to the award of attorney's fees. Accordingly, we reverse that portion of the district court's judgment that denies attorney's fees to appellants and remand the cause to the district court for reconsideration in light of our disposition.



    CONCLUSION

    We reverse the district court's judgment and render judgment in favor of appellants. We remand the cause to the district court to exercise its discretion as to whether attorney's fees should be awarded.





    Jan P. Patterson, Justice

    Before Justices Jones, Kidd and Patterson

    Reversed and Rendered in Part; Reversed and Remanded in Part

    Filed: June 30, 1999

    Do Not Publish

    1. See 25 Tex. Admin. Code § 406.156(b) (1997) (the "Rule").

    2. See Tex. Gov't Code Ann. § 2001.001-.902 (West 1999).

    3. At the same time, the Department was also conducting a notice and comment period to obtain public input on the rates at which to reimburse ICF/MRs during 1997. (4)

    4. " - " §

    5. Appellants' facilities are all non-state operated facilities.

    6. For example, the per diem rate payable for intermittent care in a small facility in 1997 was $121.19, for a medium facility was $101.80, and for a large facility was $79.27.

    7. The license division of the Texas Department of Human Services ("TDHS") is responsible for issuing licenses to operate ICF/MR facilities.

    8. The Department is composed of the Texas Board of Mental Health and Mental Retardation, the commissioner of mental health and mental retardation, and a staff under the direction of the commissioner. See Tex. Health & Safety Code Ann. § 532.001(a) (West Supp. 1999). The Board shall adopt rules and develop basic and general policies to guide the Department. Id. § 532.015(a) (West 1992).

    9. The amended rule, containing the "look back period," was never published for comment. It was published as a final rule in the Texas Register on March 14, 1997, and became effective by operation of law on March 25, 1997. See 22 Tex. Reg. 2763-64 (1997).

    10. See Tex. Hum. Res. Code Ann. § 32.0381 (West 1990).

    11. See Tex. Hum. Res. Code Ann. § 22.019 (West 1990).

    12. See Act of March 23, 1995, 74th Leg., R.S., ch. 6, § 1(c)(3), 1995 Tex. Gen. Laws 27, 28.

    13. See Tex. Hum. Res. Code Ann. § 22.019(a) (West 1990).

    14. Section 32.0322(b) provides: "The department by rule shall establish criteria for revoking a provider's enrollment or denying a person's application to enroll as a provider under the medical assistance program based on the results of a criminal history check." Tex. Hum. Res. Code Ann. § 32.0322 (West Supp. 1999).

    15. A statute may be repealed by implication. See McInnis v. State, 603 S.W.2d 179, 183 (Tex. 1980). Thus, where a later enactment is intended to embrace all the law upon the subject with which it deals, it repeals all former laws relating to the same subject. Id. But a new statute "should be construed so that its operation will harmonize with existing laws, unless a contrary intention is clearly manifested by its provisions." Id. at 184-85.

    16. Since we have sustained appellants' position with respect to their declaratory judgment action, we need not reach the other issues regarding the validity of the Rule generally. Section 2001.038(a) provides, in pertinent part: "The validity or applicability of a rule . . . may be determined in an action for declaratory judgment if it is alleged that the rule or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the plaintiff." Tex. Gov't Code Ann. § 2001.038(a) (West 1999) (emphasis added). No provider other than appellants can complain about the retroactive application of the Rule because it will have been in effect for some time when rates are adjusted again and the statute of limitations has run on the institution of any new procedural challenges to the Rule. See id. § 2001.035(b) (statute of limitations expires two years from effective date of rule). Accordingly, we conclude that the Rule in invalid as applied to appellants only.

    er attorney's fees should be awarded.