Physicians' Specialty Hospital, LLC v. Arkansas Department of Human Services, Division of Medical Services And the Arkansas Hospital Association

Cite as 2023 Ark. App. 197ARKANSAS COURT OF APPEALS
DIVISION II
No. CV-22-197
Opinion Delivered April 5, 2023
PHYSICIANS’ SPECIALTY HOSPITAL, LLC APPEAL FROM THE WASHINGTON
APPELLANT COUNTY CIRCUIT COURT
[NO. 72CV-16-1370]
V.
ARKANSAS DEPARTMENT OF HUMAN HONORABLE CRISTI BEAUMONT,
SERVICES, DIVISION OF MEDICAL JUDGE
SERVICES; AND THE ARKANSAS
HOSPITAL ASSOCIATION
APPELLEES AFFIRMED
MIKE MURPHY, Judge
Physicians’ Specialty Hospital (PSH) appeals the decision of the Washington County
Circuit Court granting summary judgment on the issue of liability in favor of the Arkansas
Department of Human Services, Division of Medical Services (DHS). On appeal, PSH argues
that the circuit court erred in finding that the fee levied against it was a lawful assessment.
Oral argument was held, and all counsel present provided thoughtful discussion helpful to
this decision. We affirm.
On July 5, 2016, DHS commenced this action to recover unpaid assessments from
PSH totaling $873,173.28, pursuant to the Hospital Assessment Fee Program, found at
Arkansas Code Annotated sections 20-77-1901 et seq. (Repl. 2018). The stated purpose of
the program is “to levy an assessment fee on hospitals to improve health care access for the
citizens of Arkansas.” Act 562 of 2009. To do so, the program imposes a yearly assessment
on nonexempt Arkansas hospitals in an amount calculated as a percentage of each hospital’s
net patient revenue. Ark. Code Ann. § 20-77-1902.
The assessments are paid into a designated “Hospital Assessment Account,” which is
a part of the Arkansas Medicaid Program Trust Fund. Ark. Code Ann. § 20-77-1904. That
account is explicitly designated as “separate and distinct” from the General Revenue Fund
Account of the State Apportionment Fund, and funds in it are supplementary to the
Arkansas Medicaid Program Trust Fund. Id. “Moneys in the Hospital Assessment Account
shall not be used to replace other general revenues appropriated and funded by the General
Assembly or other revenues used to support Medicaid.” Ark. Code Ann. § 20-77-1904(d).
This money is matched by the United States Department of Health and Human Services,
Centers for Medicare and Medicaid Services (CMS) and then distributed back to the
participating hospitals pro rata to how many patients on Medicaid each hospital treats. Ark.
Code Ann. § 20-77-1904(d).
The parties agree that a great majority of the levied hospitals realize a net gain under
the program. PSH, however, does not. Over a four-year period, PSH alleges to have lost over
a million dollars to the program, whereas other hospitals have realized a net gain of twenty
million and more. Without question, if PSH accepted more Medicaid patients, it would
receive more in access payments. But, PSH argues, it is a specialty hospital (a term of art in
this area of law discussed in greater detail later) with twenty beds, “no real emergency room,”
and is “not equipped to ‘accept’ large numbers of Medicaid patients in order to make this
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system work.” PSH contends that because it is not “on the same footing” as “larger public
hospitals” it could never accept enough Medicaid patients to have its tax bear a reasonable
relationship to its assessment.
To that end, when DHS brought this action to recover unpaid assessment fees, PSH
counterclaimed, alleging that the assessment was (1) an illegal exaction, (2) in violation of
federal law, and (3) in violation of equal-protection principles. The counterclaim further
sought to recoup $717,713.74 of assessments already paid by PSH under the program.
DHS moved for summary judgment on the issue of liability, which the circuit court
granted. In that order, the court wrote that the program does not involve a “public fund”
under article 16, section 13 of the Arkansas Constitution and that it is not a “tax.” The court
explained that “[t]he actual benefit of the [program] is maximized federal contribution, with
greater payment to Medicaid hospital providers,” resulting in lessened expenses for hospitals
and Arkansans. It found that PSH benefits from the payments from the program directly in
proportion to its Medicaid discharges. The court further found that the program, fees, and
payments are fair and reasonable and in compliance with federal regulations and the CMS
waiver requirements. Finally, the court found that the program is rationally based on
legitimate government objectives, and PSH did not demonstrate any equal-protection
violations.
PSH timely appealed the grant of summary judgment.
As we have often stated, summary judgment is to be granted by a circuit court if the
pleadings, depositions, answers to interrogatories and admissions on file, together with
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affidavits, if any, show that there is no genuine issue of material fact and that the moving
party is entitled to judgment as a matter of law. Ark. R. Civ. P. 56; Gonzales v. City of DeWitt,
357 Ark. 10, 14–15, 159 S.W.3d 298, 301 (2004). The purpose of summary judgment is not
to try the issues but to determine whether there are any issues to be tried. Fryar v. Roberts,
346 Ark. 432, 57 S.W.3d 727 (2001).
Summary judgment is to be granted by a circuit court only when there are no genuine
issues of material fact to be litigated and the moving party is entitled to judgment as a matter
of law. Id. Once a moving party has established a prima facie entitlement to summary
judgment, the opposing party must meet proof with proof and demonstrate the existence of
a material issue of fact. Id. On appeal, we determine if summary judgment was appropriate
by deciding whether the evidentiary items presented by the moving party in support of its
motion leave a material fact unanswered. Id. This court views the evidence in a light most
favorable to the party against whom the motion was filed, resolving all doubts and inferences
against the moving party. Id. Our review is not limited to the pleadings—we also focus on the
affidavits and other documents filed by the parties. Id. After reviewing undisputed facts,
summary judgment should be denied if, under the evidence, reasonable men might reach
different conclusions from those undisputed facts. Allen v. Allison, 356 Ark. 403, 413, 155
S.W.3d 682, 689 (2004).
I. Fee or Tax
PSH does not argue that there are material facts in dispute; instead, it contends that
the court erred in its application of the facts to the law. It first explains that the circuit court
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erred in finding that the fee imposed by the program is not a “tax.” The distinction is
important because unless the fee is a “tax,” PSH’s illegal-exaction arguments automatically
fail.
Illegal-exaction lawsuits in Arkansas are authorized under article 16, section 13 of the
Arkansas Constitution, which provides, “Any citizen of any county, city or town may institute
suit on behalf of himself and all others interested, to protect the inhabitants thereof against
the enforcement of any illegal exactions whatever.” An illegal exaction is defined as any
exaction that either is not authorized by law or is contrary to law. McCafferty v. Oxford Am.
Literary Project, Inc., 2016 Ark. 75, at 2–3, 484 S.W.3d 662, 664. Two types of illegal-exaction
cases can arise under article 16, section 13: “public funds” cases, where the plaintiff contends
that public funds generated from tax dollars are being misapplied or illegally spent; and
“illegal tax” cases, where the plaintiff asserts that the tax itself is illegal. Id. PSH challenges
the assessment as an “illegal tax” exaction case. To bring an illegal-exaction claim based on
an “illegal tax,” the exaction must be a tax and not a fee. Morningstar v. Bush, 2011 Ark. 350,
at 6–7, 383 S.W.3d 840, 845.
The distinction between a tax and a fee is that government imposes a tax for general-
revenue purposes, but a fee is imposed in the government’s exercise of its police powers. Rose
v. Ark. State Plant Bd., 363 Ark. 281, 292, 213 S.W.3d 607, 616–17 (2005). Taxing power is
usually exercised to provide funding for public services at large, while police power is usually
exercised to cover the cost of administering a regulatory scheme or providing a service. See
generally Morningstar, supra. A fee may be assessed for providing a service without obtaining
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public approval. Id. In order not to be denominated a tax by the courts, a governmental levy
of a fee must be fair and reasonable and bear a reasonable relationship to the benefits
conferred on those receiving the services. Id.
PSH first argues that because in some reports and depositions DHS refers to the
access fee as a tax, the circuit court necessarily erred when it did not find the assessment to
be a tax. However, the fact that the levy is labeled a “ fee,” not a “tax,” is not binding, and
this court looks to the true character of the levy to determine which it is. Id.
In Rose, the levies at issue were collected to fund a boll-weevil-eradication program,
and it was important that the assessments were “only charged to those persons who will
directly benefit from the eradication program, namely the cotton growers in the eradication
zone,” and that the money collected was not deposited into the state’s general revenue or the
Plant Board’s revenue. “Moreover,” the court wrote, “the fees do not exceed the estimated
costs proposed by the [cotton grower organizations], and they bear a reasonable relationship
to the benefits conferred on the growers. Accordingly, we affirm the trial court’s conclusion
that the fees levied by the Board under the Act are not taxes[.]” Rose, 363 Ark. at 292, 213
S.W.3d at 617.
Similarly, in Holman v. City of Dierks, 217 Ark. 677, 678, 233 S.W.2d 392, 393 (1950),
an annual $4 sanitation charge per business and residence was held to be a fee “for services
to be rendered,” and not a tax, when it was collected and used to pay for fogging the city
three times year with insecticide. However, in City of North Little Rock v. Graham, a “public
safety fee” added to residents’ water bills was a “tax” because its purpose was to increase
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police salaries, which the court wrote was more of a “means of raising revenue to pay
additional money for services already in effect,” instead of a specific, special service or
scheme. 287 Ark. 547, 549, 647 S.W.2d 452, 453 (1983).
PSH argues that, here, the hospital assessments imposed under the program are
charged to and paid by the hospitals, “which derive no direct benefit from the assessments.”
PSH instead contends that the Medicaid recipients are the true beneficiaries, but they are
not the ones paying the assessment. We are not so persuaded. Here, the money collected is
deposited into a Hospital Assessment Account, separate and distinct from the general
revenue. It is collected with the purpose of being matched with federal funds and
redistributed to those same levied hospitals on the basis of the amount of Medicaid patients
each hospital treats. Medicaid provides funding for medical services to the poor. Frew ex rel.
Frew v. Hawkins, 540 U.S. 431, 433 (2004). Accordingly, the fees at bar are collected for a
specific purpose that bears a reasonable relationship to the benefits conferred on those
levied: defraying the hospital costs associated with treating Medicaid patients. See, e.g., id. (“A
hospital that treated an unusually high number of low-income patients therefore would be
treating an unusually high number of patients who tend to be sicker, and to cost more to
treat, than others.”). The court did not err, as a matter of law, when it determined that the
program assessments are fees and not taxes.
II. Federal Compliance and the CMS Waiver
PSH next challenges the finding that the assessment complies with the relevant
federal regulations and the CMS waiver. The Hospital Assessment Fee Program was designed
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to take advantage of a federal program providing additional funding for treating Medicaid
patients. Under this federal program, hospital-provider taxes must be broad based and
uniformly applied, but federal law permits a state to request a waiver of the broad-based
requirement, including the uniformity requirement from the CMS. 42 U.S.C. §
1396b(w)(3)(E); 42 C.F.R. §§ 433.68(c)(3), 433.72 (2008) WL 42 CFR §§ 433.68, 433.72.
CMS has discretion to approve such waivers upon a showing that the net impact of the
provider fee is generally redistributive in nature, and the amount of the provider fee is not
directly correlated to payments for items or services with respect to which the provider fee is
imposed. 42 U.S.C. § 1396b(w)(3)(E)(ii); 42 C.F.R. §§ 433.68(c)(2), 433.72(b).
The assessment-fee program, as it is written in Arkansas, provides that some hospitals
may be exempted from the assessment imposed, necessarily requiring a CMS waiver.
Hospitals excluded from paying the fee in Arkansas include (1) hospitals that are not
privately operated hospitals (that is, government-run hospitals); (2) hospitals licensed by DHS
as rehabilitation hospitals; and (3) specialty hospitals. Ark. Code Ann. § 20-77-1905. A
“specialty hospital” as defined in the Arkansas Code as any hospital that “limits services
primarily to children and qualifies as exempt from the Medicare prospective payment system
regulation; or is primarily or exclusively engaged in the care and treatment of patients with
cardiac conditions.” Ark. Code Ann. § 20-77-1901.
Due to the presence of these exemptions, once the legislation passed, DHS sought a
waiver of the broad-based requirements from CMS. According to the waiver-request letter,
the recently adopted legislation at issue was attached. CMS granted the waiver request. In
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the return correspondence from CMS granting the waiver, the language discussing the
exemptions mirrors the language and structure of Ark. Code Ann. § 20-77-1905. The waiver
provided the following:
(i) Hospitals that are not privately operated are excluded from the tax;
(ii) Rehabilitation hospitals are excluded from the tax;
(iii) Specialty hospitals are excluded from the tax;
Section 1903(w)(3)(E) of the Act specifies that the Secretary shall approve broad-based
(and uniformity) waiver applications if the net impact of the tax is generally
redistributive and that the amount of the tax is not directly correlated to Medicaid
payments.
PSH argues that “specialty hospital” as it is defined in the Arkansas Code is not the
same as a “specialty hospital” as it is defined in the Social Security Act, and it cites 42 U.S.C.
§ 1395nn(h)(7) for the proposition that “specialty hospital” as it was used in the CMS waiver
meant hospitals treating patients with cardiac or orthopedic conditions or patients receiving
surgery. We are not persuaded. “Specialty hospital” is not defined in the Social Security Act
anywhere beyond section 1395nn(h)(7), where it is addressed as only “for purposes of this
section,” a section dedicated to discussion of limitations of certain physician referrals. Nor
is there indication that CMS was referring to this definition from 42 U.S.C. § 1395nn(h)(7)
when it was agreeing to exempt “specialty hospitals” when replying to the waiver request
specifically sought due to the legislature’s exemptions located in Arkansas Code Annotated
section 20-77-1905.
PSH additionally argues that the assessment was not uniformly applied because, when
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calculating the assessment, DHS used different-year cost reports and revenue percentages for
different hospitals. The record, however, established that DHS used the most recently
audited cost reports it had available to calculate the assessment for each hospital in the state
of Arkansas, a policy uniformly applied. Regarding the different percentages, Arkansas Code
Annotated section 20-77-1902(a)(2) explains that the assessment rate is
determined annually based upon the percentage of net patient revenue needed to
generate an amount up to the nonfederal portion of the upper payment limit gap plus
the annual fee to be paid to Medicaid under § 20-77-1904(f)(1)(C), but in no case at
a rate that would cause the assessment proceeds to exceed the indirect guarantee
threshold set forth in 42 C.F.R. § 433.68(f)(3)(i).
So, while the result may have amounted to a “different percentage” for each hospital, it was
again calculated using a method applied uniformly to all the hospitals. The circuit court’s
finding that the assessment complies with the relevant federal regulations and the CMS
waiver was not erroneous.
III. Equal Protection
Finally, the circuit court dismissed PSH’s equal-protection counterclaim. The equal
protection provisions of the Arkansas Constitution are applied using the same test as is
applied in evaluating claims under the federal Equal Protection Clause. Streight v. Ragland,
280 Ark. 206, 655 S.W.2d 459 (1983). It is settled law in Arkansas that to bring an Equal
Protection claim to challenge an assessment fee or state tax, there must be, at a minimum,
factual allegations that similarly situated payers are treated differently and there is no
hypothetical rational basis for the different treatment. U.S. Const. amend. 14, § 1; Ark.
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Const. art. 2, §§ 2, 3; Rose, supra. Although this case does not involve a tax, the case law
analysis of an equal-protection claim challenging an assessment fee and tax is the same. Rose,
supra.The equal-protection clause permits classifications that have a rational basis and are
reasonably related to a legitimate government purpose. Otis v. State, 355 Ark. 590, 142
S.W.3d 615 (2004). Equal protection does not require that persons be dealt with identically;
it only requires that classification rest on real and not feigned differences, that the
distinctions have some relevance to the purpose for which the classification is made, and
that their treatment be not so disparate as to be arbitrary. Id. When reviewing an equal-
protection challenge, it is not this court’s role to discover the actual basis for the legislation.
Id. Rather, we consider whether there is any rational basis that demonstrates the possibility
of a deliberate nexus with state objectives so that legislation is not the product of arbitrary
and capricious government purposes. Id. If a rational basis exists, the statute will withstand
constitutional challenge. Id. Under the rational-basis test, legislation is presumed
constitutional and rationally related to achieving any legitimate governmental objective
under any reasonably conceivable fact situation. Eady v. Lansford, 351 Ark. 249, 92 S.W.3d
57 (2002). The burden is on the party challenging the legislation to prove its
unconstitutionality. Id.Again, the Hospital Assessment Fee Program was enacted with the stated purpose of
levying an assessment fee on hospitals to improve health-care access for the citizens of
Arkansas. That program excepts some hospitals from paying the fee. PSH argues that there
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is no rational basis for treating it (an orthopedic hospital) differently than the exempted
hospitals. However, “[i]nherent in the power to tax is the power to discriminate in taxation.”
Leathers v. Medlock, 499 U.S. 439, 451 (1991); we cannot strike down an entire classification
merely because it is underinclusive. Medlock v. Leathers, 311 Ark. 175, 179, 842 S.W.2d 428,
430–31 (1992). One of the reasons suggested by the amicus and DHS for not exempting a
hospital like PSH includes the hypothesis that orthopedic specialty hospitals do not
adequately serve Medicaid-eligible patients throughout the state; therefore, they were not
excluded from the assessment fee to encourage them to serve Medicaid-eligible patients. This
is a conceivable rational basis sufficient to satisfy equal protection. Medlock, 311 Ark. 175,
842 S.W.2d 428.
Importantly, nothing in the statute prevented PSH from taking advantage of the
obvious benefits of the statute. PSH could have taken on more Medicaid patients, but it did
not. PSH’s failure to do so does not make the entire statute unconstitutional. See Landers v.
Stone, 2016 Ark. 272, at 16, 496 S.W.3d 370, 380 (explaining that an argument that “laws
are underinclusive, by allowing a select few to briefly evade their strictures, provides no
reason at all to hold that the statutes are unconstitutional”); see also City of Marion v. Baioni,
312 Ark. 423, 428, 850 S.W.2d 1, 4 (1993) (rejecting equal-protection argument that the city
treated nonresident users of water and sewer differently than residents). We give “great
deference to the General Assembly in the legislation of taxation where the clear intent of the
statute is to raise revenue and not to discriminate among similarly situated individuals.”
Medlock, 311 Ark. at 180, 842 S.W.2d at 431.
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Affirmed.
HARRISON, C.J., and BARRETT, J., agree.
Murphy, Thompson, Arnold, Skinner & Castleberry, by: Kenneth P. “Casey” Castleberry; and
Everett Law Firm, by: John C. Everett, for appellant.
Leslie Rutledge, Att’y Gen., by: Maryna Jackson, Sr. Ass’t Att’y Gen., for separate
appellee Arkansas Department of Human Services.
Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., by: Megan D. Hargraves and Cara
D. Butler, for separate appellee Arkansas Hospital Association.
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