Pennsylvania Supreme Court Strikes Down Default Rate for Medical Assistance Out-of-Network Emergency Services as Unconstitutional

On December 27, 2005, the Supreme Court of Pennsylvania issued a unanimous ruling in The Hospital & Healthsystem Assoc. of Pennsylvania et al. v. Pennsylvania Dep't. of Public Welfare, No. 219 MAP 2003, a case in which Duane Morris' Lewis Olshin argued on behalf of the Petitioners; in addition, David Loder, Lisa Clark, Katherine Kelton and Seth Goldberg were on the briefs.

The state Supreme Court ruling invalidated a provision in the 2002 General Appropriations Act ("2002 GAA") that set a default reimbursement rate for out-of-network emergency services provided to enrollees of Medical Assistance ("MA") managed care organizations ("MCOs"). The decision is extremely favorable for Pennsylvania healthcare providers, which are required by law to provide emergency services to all patients, including patients who participate in an MCO, regardless of whether a provider has a contractual arrangement with a particular MCO to provide services. In the view of healthcare providers, a "default rate" discourages the free and fair negotiations between providers and payors because the rate acts as a standard against which reasonable payment is measured. The Court's nullification of the default rate, as imposed through the 2002 GAA, reaffirms the open contracting principles that underlie managed care. The Court agreed with The Hospital & Healthsystem Association of Pennsylvania ("HAP") and member hospitals Crozer-Keystone Health System, Susquehanna Health System and The Washington Hospital that the default rate language conflicted with existing law regarding proper reimbursement for out-of-network emergency services, and therefore was unconstitutional as included in a general appropriations bill.

The 2002 GAA provided that where a healthcare provider is not under contract with the MA MCO in which an emergency patient is enrolled, the provider's reimbursement is capped at the Pennsylvania Department of Public Welfare's fee-for-service ("FFS") rate for that service. HAP and its member hospitals sought to enjoin enforcement of this default rate language, on the grounds that the addition of the default reimbursement provision in the 2002 GAA constituted unconstitutional "logrolling," that is, the addition of substantive language in a general appropriations act, in violation of Article III, Section 11 of the Pennsylvania Constitution. In addition, the Petitioners alleged that the provision conflicted with the Pennsylvania Healthcare Quality and Accountability Act, 40 P.S. §§ 992.2101 et seq., ("Act 68") which mandates that all managed care organizations, including MA MCOs, must reimburse providers "all reasonably necessary costs" for the provision of out-of-network emergency services. Moreover, HAP and its hospitals contended that the language in the 2002 GAA granted DPW the authority to set rates in the MA managed care program, in conflict with the express delegation of regulatory authority to the Department of Health and the Pennsylvania Insurance Department under Act 68.

In holding the default rate language in the 2002 GAA unconstitutional, the Pennsylvania Supreme Court overturned a prior ruling of the Commonwealth Court, which had upheld the provision, finding that the court below had ignored "obvious conflicts" between Act 68 and the default rate language. The Pennsylvania Supreme Court adopted the Biles test as the proper measure of whether language in an appropriations act constitutes permissible incidental language or improper substantive language in violation of Article III, Section 11. Pursuant to the Commonwealth Court's 1979 ruling in Biles v. DPW, 403 A.2d 1341 (Pa. Cmwlth. 1979), language in an appropriations bill "must be germane to the appropriations, must not conflict with existing law, and it must not extend beyond the life of the appropriations bill itself." For its part, the DPW agreed that the Biles test is the appropriate measure for constitutionality of language in a general appropriations bill, but argued that the default language was merely incidental language and did not conflict with Act 68 under the second prong of the Biles test.

The Pennsylvania Supreme Court held that the 2002 GAA failed to meet the second prong of the test, which is "directed at preventing the legislature from altering existing legislation through an appropriations act as opposed to accomplishing such an amendment through the normal legislative course." The Pennsylvania Supreme Court found that the default rate "effected a substantive change to Act 68," and resulted in a change in the existing regulatory authority relating to reimbursement of emergency services under MA managed care. For these reasons, the default language constituted "an improper attempt by the legislature to amend Act 68 in violation of the second prong of the Biles test."

The Pennsylvania Supreme Court clarified that Act 68's mandate of "all reasonably necessary costs" does not necessarily equal the DPW's FFS reimbursement rate. The Court found that in the absence of a specific rate, providers' right to negotiate reimbursement for out-of-network services is implicit in the Act. The Court also relied upon the Superior Court's decision in Temple Univ. Hosp. v. Health Management Alternatives, Inc., 832 A.2d 501 (Pa. Super. 2003), in which that court "reject[ed] the assertion that DPW's default fee-for-service rates necessarily equal reasonable costs for the provision of hospital services in the absence of a specific rate." In Temple, the Superior Court addressed what constitutes a "reasonable" rate of reimbursement for services provided to MA MCO enrollees in the absence of a contract between a hospital and the MA MCO. While Temple did not involve Act 68, the Superior Court had applied equitable principles and concluded that the reasonable value of services in the absence of a contractual rate equals the value paid by the relevant community, or the average contractual rates paid by commercial insurance companies and federal healthcare programs. Because Temple did not specifically involve Act 68, the Pennsylvania Supreme Court did not adopt the Superior Court's ruling, but rather cited it as authority for the proposition that the DPW's default FFS rates do not per se represent the "reasonable cost" of providing services.

The Pennsylvania Supreme Court's decision also affirmed the Commonwealth Court's ruling that HAP and the hospitals had standing to challenge the default rate because member hospitals were directly harmed by the loss of the right to negotiate for reimbursement for out-of-network emergency services. The Pennsylvania Supreme Court further ruled that "[p]ursuant to the 2002 GAA, [providers] are paid according to a non-negotiated default schedule of payments. Previously, they were paid in accordance with Act 68, which specifically did not set forth a default rate of reimbursement."

The ruling is a significant gain for healthcare providers in Pennsylvania that must provide emergency services to all patients, regardless of whether a patient belongs to an MCO with which the hospital has a contract. The Pennsylvania Supreme Court's decision preserves the right of providers to negotiate with plans to be reimbursed for all reasonably necessary costs and recognizes the inherent differences between reimbursement under the DPW's FFS system and the MA managed care system in the Commonwealth.

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