AUTHORITY TO DEVISE PAYMENT SYSTEMS

OFFICES AND OFFICERS ‑- STATE ‑- HOSPITAL COMMISSION ‑- AUTHORITY TO DEVISE PAYMENT SYSTEMS

The Washington state hospital commission has the authority, under RCW 70.39.140, to devise and approve the use of alternative systems of payment to hospitals for services provided to health care recipients covered under Medicare, Medicaid, Industrial Insurance or similar programs which the payors under those programs may then, in the exercise of their legal authority, require such hospitals to utilize.

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                                                               November 12, 1976

Honorable Frank Baker
Executive Director
State Hospital Commission
120 East Union
Olympia, Washington 98504                                                                                                               Cite as:  AGLO 1976 No. 68

Dear Sir:

            By recent letter you have asked for our opinion on the following question regarding the authority of the Washington state hospital commission:

            ". . .  'Does the Hospital Commission have the authority to devise and approve the use of alternative systems of payment to hospitals for services provided to health care recipients covered under Medicare, Medicaid, Industrial Insurance or similar programs which the payors under those programs may then, in the exercise of their legal authority, require such hospitals to utilize?'"

            We answer this question in the affirmative for the reasons set forth in our analysis.

                                                                     ANALYSIS

            In posing the above question you have informed us of the following factual background:

            "In September 1975, the Social Security Administration, HEW, circulated a request for proposals soliciting State Hospital regulatory agencies and other organizations to submit proposals to establish experimental programs in prospective reimbursement for hospitals.  The Washington State Hospital Commission, after consultation with the Governor, the Department of Social and Health Services, and other related agencies and organizations, submitted a proposal to establish a prospective reimbursement demonstration project for Washington.  As a part of this proposal in response to specifications included in the request from Social Security Administration, the State Hospital Commission  [[Orig. Op. Page 2]] included a methodology for selection of a sample of hospitals for participation under the provisions of the payment system.  The final determination of payment systems as applied to a given hospital must by federal law and regulation remain the prerogative of Medicare under the Social Security amendments."

            You have then explained that:

            "The request for proposals from SSA also strongly encouraged participation by other third party payors, such as Medicare, Injured Workmen's Compensation, and Blue Cross.  The Hospital Commission proposal submitted to SSA included letters of commitment for participation in the demonstration project from the Department of Social and Health Services (Medicaid, Labor and Industries (Injured Workmen's Compensation), and Washington-Alaska Blue Cross)."

            In essence the hospital commission's plan, as you have then gone on further to describe it, involves the preparation by the commission of a methodology capable of use by the Social Security Administration and such other payors which describes procedures for identifying ". . . which hospitals might be selected for experimental or demonstration payment or reimbursement alternatives."  You have acknowledged, however, that the ultimate legal authority for implementing such alternative payment arrangements ". . . does and must continue to reside with the individual payor organization or agency. . . ."  Thus, the only question which you have asked us to rule upon is that of the authority of the hospital commission, in your words,

            ". . . to devise and approve the use of alternative systems of payment to hospitals for services provided to health care recipients covered under Medicare, Medicaid, Industrial Insurance or similar programs which the payors under those programs may then, in the exercise of their legal authority, require such hospitals to utilize?"

            Chapter 70.39 RCW codifies the provisions of chapter 5, Laws of 1973, 1st Ex.Sess., the purpose of which, as expressed in RCW 70.39.010, is

             [[Orig. Op. Page 3]]

            ". . . to promote the economic delivery of high quality and effective hospital health care services to the people by establishing a hospital commission with authority over financial disclosure and budget and prospective rate review and other related matters, which will assure all purchasers of hospital health care services that total hospital costs are reasonably related to total services, that hospital rates are reasonably related to aggregate costs, and that such rates are set equitably among all purchasers of these services without undue discrimination."

            Responsibility for carrying out this objective is vested by RCW 70.39.030 in a five‑member Washington state hospital commission.  Among the duties of the commission, as provided for by RCW 70.39.100, is the formulation of an accounting system for hospitals to utilize in identifying their costs for services and in submitting budget information to the commission from which hospital rates can be established in accordance with certain detailed procedures set forth in RCW 70.39.140 ‑ 70.39.160.  Accord, a further portion of RCW 70.39.010, supra, which declares it to be:

            ". . . essential that an effective cost control program be established which will both enable and motivate hospitals to control their spiraling costs.  It is the legislative intent, in pursuance of this declared public policy, to provide for uniform measures on a state‑wide basis to control hospital costs without the sacrifice of quality of service."

            RCW 70.39.140 then provides that:

            "From and after a date not less then twelve months but not more than twenty-four months after the adoption of the uniform system of accounting and financial reporting required by RCW 70.39.100, as the commission may direct, the commission shall have the power to initiate such reviews or investigations as may be necessary to assure all purchasers of hospital health care services that the total costs of a hospital are reasonably related to the total services offered by that hospital, that the hospital's aggregate revenues as expressed by rates are reasonably related to the hospital's aggregate costs; and that rates are set equitably among all  [[Orig. Op. Page 4]] purchasers or classes of purchasers of services without undue discrimination or preference.

            "In order to properly discharge these obligations, the commission shall have full power to review projected annual revenues and approve the reasonableness of rates proposed to generate that revenue established or requested by any hospital subject to the provisions of this chapter.  No hospital shall charge for services at rates other than those established in accordance with the procedures established hereunder.

            "In the interest of promoting the most efficient and effective use of hospital health care service, the commission may promote and approve alternative methods of rate determination and payment of an experimental nature that may be in the public interest and consistent with the purposes of this chapter.

            ". . ."

            This last quoted paragraph of RCW 70.39.140 is, in our opinion, determinative of your present question.  So long as the hospital commission, in dealing with the subject thereof, does nothing more than "promote and approve" the use of alternative payment systems and does not further attempt to require given hospitals to adopt and utilize a particular system the commission will, in our opinion, be operating within the scope and thrust of its authority under that statutory provision.  Conversely, as you have also acknowledged, the actual determination of which hospitals use which systems, etc., must be made by the respective payors in the exercise of their own legal authority ‑ whatever that authority may be.  Bearing that point in mind, we may, therefore, answer your question, as above set forth, in the affirmative.

            It is hoped that the foregoing will be of some assistance to you.

Very truly yours,

SLADE GORTON
Attorney General

PHILIP H. AUSTIN
Deputy Attorney General