SAMARATIN HEALTH SYSTEMS, et al., v. AHCCCS

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NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED BY APPLICABLE RULES. See Ariz. R. Supreme Court 111(c); ARCAP 28(c); Ariz. R. Crim. P. 31.24 IN THE COURT OF APPEALS STATE OF ARIZONA DIVISION ONE SAMARITAN HEALTH SYSTEM, an Arizona corporation dba Desert Samaritan Hospital, Good Samaritan Medical Center, Havasu Samaritan Regional Hospital, Maryvale Samaritan Hospital, Thunderbird Samaritan Hospital, and Page Hospital; ARROWHEAD HOSPITAL, an Arizona corporation; MEDICAL ENVIRONMENTS, INC., a California corporation dba Bullhead Community Hospital; CARONDELET HEALTH SERVICES, INC., an Arizona corporation dba Carondelet St. Joseph's Hospital and Carondelet St. Mary's Hospital; CASA GRANDE REGIONAL MEDICAL CENTER, an Arizona corporation; CHANDLER REGIONAL HOSPITAL, an Arizona corporation; MESA GENERAL HOSPITAL, an Arizona corporation dba Community Hospital Medical Center; SUN HEALTH CORPORATION, an Arizona corporation dba Del E. Webb Memorial Hospital and Walter O. Boswell Memorial Hospital; FLAGSTAFF MEDICAL CENTER, INC., an Arizona corporation; HEALTHWEST REGIONAL MEDICAL CENTER, an Arizona corporation; HOLY CROSS HOSPITAL AND HEALTH CENTER, INC., an Arizona corporation; JOHN C. LINCOLN HOSPITAL AND HEALTH CORPORATION, an Arizona corporation; KINGMAN HOSPITAL, INC., an Arizona corporation dba ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) No. 1 CA-CV 12-0031 DIVISION ONE FILED: 1/29/2013 RUTH A. WILLINGHAM, CLERK BY: mjt DEPARTMENT D MEMORANDUM DECISION (Not for Publication Rule 28, Arizona Rules of Civil Appellate Procedure) Kingman Regional Medical Center; MARCUS J. LAWRENCE MEDICAL CENTER, an Arizona corporation; MESA GENERAL HOSPITAL MEDICAL CENTER, INC., an Arizona corporation; LUTHERAN HEALTH NETWORK, an Arizona corporation dba Mesa Lutheran Hospital and Valley Lutheran Hospital; PARADISE VALLEY HOSPITAL, an Arizona corporation; PHOENIX BAPTIST HOSPITAL, an Arizona corporation; PHOENIX CHILDREN'S HOSPITAL, an Arizona corporation; PHOENIX MEMORIAL HOSPITAL, an Arizona corporation; SCOTTSDALE MEMORIAL HOSPITAL, an Arizona corporation; MERCY HEALTHCARE ARIZONA, an Arizona corporation dba St. Joseph's Hospital and Medical Center; SIERRA VISTA COMMUNITY HOSPITAL, an Arizona corporation; TUCSON MEDICAL CENTER, an Arizona corporation; UNIVERSITY MEDICAL CENTER CORPORATION, an Arizona corporation; YAVAPAI REGIONAL MEDICAL CENTER, an Arizona corporation; and YUMA REGIONAL MEDICAL CENTER, an Arizona Corporation, ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Plaintiffs/Appellees, ) ) v. ) ) ARIZONA HEALTH CARE COST ) CONTAINMENT SYSTEM ) ADMINISTRATION, an Agency of the ) State of Arizona; and TOM ) BETLACH (successor to Anthony ) Rodgers), in his capacity as ) Director, ) ) Defendants/Appellants. ) __________________________________) 2 Appeal from the Superior Court in Maricopa County Cause No. LC 2009-000282-001 The Honorable Crane McClennen, Judge REVERSED; REMANDED Gammage & Burnham, PLC By Cameron C. Artigue Richard B. Burnham George U. Winney Attorneys for Plaintiffs/Appellees Phoenix Johnston Law Offices PLC By Logan T. Johnston III Attorneys for Defendants/Appellants Phoenix J O H N S E N, Judge ¶1 The Arizona Administration Health ( AHCCCS ) Care appeals Cost from Containment the superior System court s determination that AHCCCS abused its discretion when it modified certain rates it paid hospitals for services for AHCCCS patients during the late 1990s. We conclude AHCCCS did not abuse its discretion in adopting the rates and reverse the judgment in favor of Samaritan Health Systems and other hospitals (collectively, Samaritan ) and remand for entry of judgment in favor of AHCCCS. FACTS AND PROCEDURAL HISTORY ¶2 AHCCCS administers Arizona s Medicaid program through a federal-state partnership pursuant to Title XIX of the Social 3 See 42 U.S.C. §§ 1396a et seq. (West 2013). 1 Security Act. At issue here is one aspect of the methodology AHCCCS developed in 1993 to reimburse hospitals between 1994 and 1999. for treating Medicaid patients This is the second time this case has come before this court in litigation spanning 17 years. ¶3 The methodology at issue reimbursed hospitals through two mechanisms. cases, was a The first mechanism, applicable to most patient tiered per diem rate under which AHCCCS paid hospitals a fixed amount for each day a patient in a particular class was hospitalized. The classes, called tiers, distinguished patients based on their condition and care, such as a maternity, surgery or intensive care. Sys. v. Ariz. Health Care Cost Samaritan Health Containment Sys. Admin., Ariz. 533, 535, ¶ 3, 11 P.3d 1072, 1074 (App. 2000). 198 The per diem rates were determined prospectively based on the statewide average cost of treating the various tiers of patients. ¶4 an The hospitals requested, and AHCCCS agreed, to provide alternate reimbursement mechanism for a small class of patients whose treatment was extraordinarily more expensive than others. claims, This mechanism applied to exceptionally high cost termed outliers. AHCCCS reimbursed hospitals for outlier claims by paying them a fixed percentage of the total 1 Absent material relevant revisions after the relevant date, we cite a statute s current version. 4 costs hospitals Id. at ¶ 5. incurred in treating particular cases. The percentage was based on the statewide ratio of total hospital costs to total charges. ¶5 these Id. Under a formula used by AHCCCS, a hospital claim was put into the outlier tier when the cost per day, excluding capital medical education, is in excess of greater of: and the a. The weighted average operating cost per day within a tier plus or minus three standard deviations, or b. The overall weighted average operating cost per day plus or minus two standard deviations across all tiers. Ariz. Admin. Code ( A.A.C. ) R9-22-101.84. As devised by AHCCCS, this formula was intended to put about one percent of all cases into the outlier tier. Because outliers were not paid at the per diem rates, AHCCCS did not include the outliers costs in calculating the per diem rates; to do so would have disproportionately raised the per diem rate. Ariz. at 535, ¶ 6, 11 P.3d at 1074. The Samaritan, 198 per diem rates therefore were based on the statewide average cost to hospitals of treating all non-outlier claims in a particular tier. ¶6 The present dispute stems from Id. AHCCCS s revisions of the outlier threshold between 1994 and 1998. annual When the methodology was developed in 1993, there was no statutory provision that explicitly provided for an outlier component to 5 the reimbursement scheme. The original enabling statute for the implementation system, of the Arizona Revised Statutes ( A.R.S. ) section 36-2903.01(J) (1993), only provided for per diem payments and periodic revisions to the per diem payments. At the time, the enabling statute in pertinent part provided: 1. For inpatient hospital stays, the administration shall use a prospective tiered per diem methodology . . . [including a] stop loss-stop gain or similar mechanism . . . [that ensures] that the tiered per diem rates assigned to a hospital do not represent less than ninety per cent of its 1990 base year costs or more than one hundred ten per cent of its 1990 base year costs, adjusted by an audit factor, during the period of March 1, 1993 through September 30, 1994. The tiered per diem rates set for hospitals shall represent no less than eighty-seven and one-half per cent or more than one hundred twelve and one-half per cent of its 1990 base year costs, adjusted by an audit factor, from October 1, 1994 through September 30, 1995 and no less than eighty-five per cent or more than one hundred fifteen per cent of its 1990 base year costs, adjusted by an audit factor, from October 1, 1995 through September 30, 1996. . . . An adjustment in the stop lossstop gain percentage may be made to ensure that total payments do not increase as a result of this provision. 2. For rates effective on October 1, 1994, and annually thereafter, the administration shall adjust tiered per diem payments for inpatient hospital care by the data resources incorporated market basket index for prospective payment system hospitals and shall also adjust payments to reflect changes in length of stay. 6 3. Subsequent to October 1, 1993, administration shall recalculate the diem payments every two to four years, determined by the administration, using updated data base of hospital claims encounters. the per as an and A.R.S. § 36-2903.01(J) (1993) (emphasis added). ¶7 per Under the statute, AHCCCS was obligated to adjust the diem rates annually to take into account inflation and changes in the length of hospitalizations, and every two to four years was required payments it incurred. pursuant became would to more broadly recalculate make to hospitals based on the costs per diem actually When AHCCCS first annually updated the per diem rates to clear A.R.S. that § 36-2903.01(J)(2) the number of in claims 1994, beyond however, the it outlier threshold had become significantly greater than one percent of total claims. To maintain the number of outliers at about one percent of total claims, AHCCCS increased its outlier threshold annually from 1994 to 1998 by recalculating the threshold based on information it received from hospitals according to the standard deviation formula. statewide and AHCCCS codified this practice in 1997 by amending the Arizona Administrative Code to provide that: Update. Administration shall update the outlier cost thresholds and outlier charge thresholds for each hospital. The outlier cost thresholds are updated annually by recalculating the standard deviations based 7 on the claims and encounters used for the length-of-stay adjustment . . . . A.A.C. R9-12-711(A)(5)(b). ¶8 When AHCCCS raised the outlier thresholds annually between 1994 and 1998, it did not also recalculate the per diem rates applicable to non-outlier claims. The result was that claims that fell just below the newly adjusted outlier threshold were paid at a per diem rate calculated based on other lowercost claims. Samaritan adjusting the outlier hospitals $96,000,000 contends thresholds over the that AHCCCS s caused four manner AHCCCS years in to of underpay dispute. The disagreement over AHCCCS s increases in the outlier thresholds did not cease until the statute was modified in 1999 to freeze the thresholds in effect on October 1, 1999 and permit AHCCCS to adjust those thresholds annually only based on inflation. A.R.S. § 36-2903.01(J) (1999). ¶9 Samaritan outlier court threshold reversed, successfully modifications holding administrative remedies. P.3d at 1073. challenged in Samaritan the superior had four court, failed to annual but exhaust this its Samaritan, 198 Ariz. at 534, ¶ 1, 11 Samaritan then filed an administrative claim, arguing AHCCCS abused its discretion and acted arbitrarily and capriciously in raising the outlier thresholds. day evidentiary hearing, an administrative 8 law After a threejudge ( ALJ ) determined that AHCCCS did not act outside of its legal authority and did not abuse its discretion by increasing the outlier thresholds in the manner that they were increased each year from 1994 through 1998. The ALJ premised his decision on his finding that the evidence shows that in considering how to exercise its discretion regarding outlier rates, [AHCCCS] considered the definition of outlier in the State Plan and its intention to keep outliers at one percent of all claims. Further, AHCCCS was aware that it could not recalculate the per diem rates each year, so that was not an option. Also, because of the specific wording of the statute, [AHCCCS] had authority to adjust for inflation only the tiered per diem rates and not any other rates. Finally, [AHCCCS] determined that length-of-stay adjustments for outlier rates would be covered by annually updating the outlier thresholds because the database used for the outlier updates contained length-of-stay data. Thus, the evidence shows a reasoned choice by AHCCCS that cannot be characterized as arbitrary or capricious. ¶10 After decision in superior court, its the Director entirety, and the of AHCCCS Samaritan court adopted filed concluded a the ALJ s complaint AHCCCS abused in its discretion in modifying the outlier thresholds because [t]o the extent the legislature mandated that AHCCCS payment must relate to the hospitals costs for treating those patients, the revised system would no longer satisfy the legislative mandate. The court reasoned that because AHCCCS did not have the statutory 9 authority to recalculate the per diem rates annually pursuant to A.R.S. § 36-2903.01(J)(3) (1993), AHCCCS should have left the threshold where it was so that the per diem accurately reflected the average cost for those cases below the threshold. We have jurisdiction over AHCCCS s timely appeal pursuant to A.R.S. §§ 12-120.21(A)(1) (West 2013) and -2101(A)(1) (West 2013). DISCUSSION A. Legal Principles. ¶11 Pursuant to A.R.S. § 12-910(E) (West 2013), in reviewing an agency s action, a court shall affirm the agency action unless after reviewing the administrative record and supplementing evidence presented at the evidentiary hearing the court concludes that the action is not supported by substantial evidence, is contrary to law, is arbitrary and capricious or is an abuse of discretion. On appeal from a superior court s review of an administrative decision, we consider whether the agency action was supported by the law and substantial evidence and whether discretion. 220 Ariz. it was arbitrary, capricious or an abuse of Sharpe v. Ariz. Health Care Cost Containment Sys., 488, 492, ¶ 9, (quotation omitted). We Director s decision, which 207 P.3d therefore adopted the 741, focus ALJ 745 on (App. 2009) the AHCCCS decision entirety, rather than the superior court s decision. Id. in its While we give great weight to an agency s interpretation of a statute 10 or regulation it implements, we review an agency s application and interpretation of the law de novo, and therefore are free to draw our own legal conclusions in determining if the [agency] properly interpreted the law. Id. at 492, 494, ¶¶ 9, 18, 207 P.3d at 745, 747 (quotation omitted). ¶12 An agency acts arbitrarily and capriciously when it does not examine satisfactory the explanation relevant for its data action and articulate including a a rational connection between the facts found and the choice made. Motor Vehicle Mfrs. Ass n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quotation omitted). In the context of arbitrary a federal agency regulation, a rule is and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. Id. Under this analysis, the question is whether the agency has taken an action without consideration and in disregard for facts and circumstances; where there is room for two opinions, the action is not arbitrary or capricious if exercised honestly and upon due consideration, even though 11 it may be believed that an erroneous conclusion has been reached. Petras v. Ariz. State Liquor Bd., 129 Ariz. 449, 452, 631 P.2d 1107, 1110 (App. 1981). B. Given the Purpose of the Reimbursement Methodology and Governing Statutes, AHCCCS Did Not Abuse Its Discretion in Raising Outlier Thresholds. ¶13 Samaritan argues AHCCCS s modifications of the outlier thresholds during the four years in question were arbitrary and capricious because they violate[d] the rules of arithmetic and undermine[d] the concept of a cost-based system. Samaritan argues that because the reimbursement system is based on costs, AHCCCS s decision to raise the outlier thresholds without recalculating the per diem rates contradicts the essence of a cost-based system by forcing real costs to disappear from the system. It continues: Under the Motor Vehicle Manufacturers standard, AHCCCS relied on irrelevant factors and failed to think through important aspect[s] of the problem by making its definition of outliers the sole policy consideration. lost sight of other factors that were relevant AHCCCS to its decision namely, the rules of arithmetic in the context of a cost-based system. ¶14 We cannot accept Samaritan s argument, however, because it rests on a fundamental mischaracterization of the purpose of the cost-based reimbursement system. true that lowered AHCCCS s the amount decision it paid to raise the hospitals 12 While it is outlier under thresholds that payment mechanism, Samaritan points to nothing in the history or structure of the law requiring that hospitals must be reimbursed 100 percent of their costs for treating Medicaid patients. the contrary, the history of the 1993 methodology and To the language of the statute indicate that the per diem methodology was not intended to reimburse hospitals for all of the costs they incur in treating those patients. At the relevant time, § 36-2903.01(J)(1) (1993) provided that the initial rates shall be based upon hospital claims and encounter data for 1991-92. While costs, requiring the a payment statute did mechanism not specify based upon hospitals that AHCCCS reimburse hospitals for all of their costs. ¶15 The 1993 cost-based methodology was a replacement for another payment method known as Adjusted Billed Charges ( ABC ), which reimbursed hospitals a percentage of their total charges (as distinct from their costs) for treating a Medicaid patient. The legislation that mandated the ABC system provided that its purpose was to keep reimbursement constant with 1984 levels. Thus, whenever a hospital would increase its charged rates, AHCCCS would adjust a hospital-specific factor downward by the amount of the increase so that the result would be payment at the 1984 level. ¶16 In reality, with how ABC worked. neither AHCCCS nor Samaritan was happy As a practical matter, the methodology did 13 not hold reimbursements constant at 1984 levels because hospitals billed charges were rising faster than AHCCCS could adjust the rates it applied to the hospitals charges. And hospitals were concerned at what they saw as the prospect of a continually widening gap between charges and reimbursement. ¶17 Two 1988 studies recommended replacing the charge- based system with the 1993 cost-based system; the cost-based system was designed as a prospective payment system that would set fixed rates for services into the future, thus encouraging efficiencies. statute, Nothing however, in the suggested legislative that the history cost-based or per the diem methodology would result in AHCCCS reimbursing hospitals for 100 percent of expert for their costs AHCCCS methodology, in who fact, in was treating involved testified a Medicaid in before patient. developing the ALJ that the the An 1993 new system was never intended to reimburse hospitals their costs for every service they provided. ¶18 The text of A.R.S. § 36-2903.01(J)(1) further reflects the notion that hospitals were not to be reimbursed for all of their costs. The statute implemented a stop-loss/stop-gain provision for the three years following the implementation of the new hospital. system that delimited AHCCCS s payments to each For example, from 1993 to 1994, AHCCCS could not reimburse any hospital less than 90 percent or more than 110 14 percent of its 1990 costs. A.R.S. § 36-2903.01(J)(1). Similarly, for the periods from 1994 to 1995 and 1995 to 1996, AHCCCS s payments were mandated to be between 87.5 percent and 112.5 percent and 85 percent and 115 percent of a hospital s 1990 costs, respectively. ¶19 Id. On appeal, Samaritan dismisses the stop-loss/stop-gain mechanism as a temporary backstop for hospitals with aboveaverage operating costs because after 1996, hospitals were to be reimbursed according to the statewide per diem average. While this is literally true, Samaritan s argument ignores the statutory provision requiring AHCCCS to recalculate the statewide average every two to four years, as determined by the administration. A.R.S. § 36-2903.01(J)(3). Thus, in enacting the statute, the legislature recognized that to the extent that costs rose, it would be two to four years before the per diem rates would be recalculated in response. ¶20 Further confirmation that the AHCCCS payment mechanism was not intended to guarantee that hospitals would be reimbursed for all of their costs is the explicit requirement in the Code of Federal Regulations that a state s Medicaid payments do not in the aggregate exceed what would have been paid under Medicare principles of reimbursement. The Medicare principle, in turn, requires reimbursement of only the lesser of reasonable costs or charges. 42 C.F.R. § 447.272 (West 2013). 15 ¶21 Nevertheless, Samaritan contends that notwithstanding that the Arizona statute did not obligate AHCCCS to specially treat an outlier tier of the most expensive patient cases, once AHCCCS did implement unilaterally raise the the outlier outlier component, threshold in it a could manner resulted in shortfalls in per diem reimbursements. not that Samaritan argues the agency s decision to maintain the class of outliers as the most expensive one percent of cases was arbitrary and capricious. ¶22 This argument fails to recognize the purpose of the outlier component and the role it played in the wider statutory scheme. The outlier was one aspect of an otherwise complex, interconnected reimbursement system intended in part to contain hospital costs. The legislature s intent to contain costs can be seen within the statutory scheme. 2903(B)(4) (West 2013) notes For example, A.R.S. § 36- that the administrator of the system has a responsibility to develop a complete system of accounts and controls designed to provided through ensure unreasonably . assess cost the alternate medical . the . the system including covered that health and system . The are to the through not used administrator effectiveness approaches services for and the 16 system of in medical services unnecessarily shall health provision provisions periodically implications covered order or health to of and reduce unnecessary expert unreasonable testified mechanism AHCCCS or was and the only others utilization. outlier one of favoring component several the of Further, the variables, hospitals, that AHCCCS s reimbursement some favoring made up the entire reimbursement scheme. ¶23 Given that a purpose of the program is to limit the costs of care, we cannot conclude AHCCCS acted arbitrarily by deciding it would reimburse only the most expensive one percent of cases at the outlier rate. C. ¶24 Samaritan s Contention that AHCCCS Should Have Adjusted the Outlier Threshold for Inflation Does Not Comport With the Methodology s Goal of Containing Costs. Samaritan does not argue AHCCCS should have recalculated the per diem each year; it recognizes that A.R.S. § 36-2903.01(J)(3) did not authorize AHCCCS to recalculate the per diem rates annually. It contends, however, that rather than reset the outlier threshold annually to include only about the most expensive one percent of cases, AHCCCS should have adjusted the outlier cost threshold year to year based on inflation. So, for example, if costs rose five percent, Samaritan would have had AHCCCS raise the outlier threshold by five percent. This would mean the outlier threshold would have moved in tandem with the annual adjustment of per diem payments under A.R.S. § 362903.01(J)(2) to take into account inflation. 17 ¶25 While AHCCCS rationally might have adjusted the outlier threshold as Samaritan suggests, we cannot conclude it acted arbitrarily by determining instead to maintain the outlier threshold at about the upper one percent of the patient cases. Following guidance from the United States Supreme Court, Arizona courts long have held that an agency does not act arbitrarily and capriciously merely because there is a difference of opinion as to what the agency should have done, as long as a decision was reached after due consideration and upon a rational basis. Griffith Energy, L.L.C. v. Ariz. Dep t of Revenue, 210 Ariz. 132, 136, ¶ 19, 108 P.3d 282, 286 (App. 2005). ¶26 Griffith argument. which illustrates the in Samaritan s A taxpayer in that case challenged the methodology by the state depreciating Department personal of property at Id. at 133, ¶ 1, 108 P.3d at 283. to flaws adopt a valuation table for Revenue electric ( ADOR ) valued generation plants. A state statute allowed ADOR depreciation, and the agency chose a table that depreciated the value of the property over 25 years. Id. at ¶ 4. adopted a 15-year The taxpayer asserted ADOR should have depreciation table instead. Id. at ¶ 5. Rejecting the taxpayer s argument, this court pointed out that given the legislature s grant of authority to ADOR to adopt such a table, the taxpayer s disagreement with the table ADOR adopted did not demonstrate an abuse of discretion. 18 Id. at 136-37, ¶¶ 19, 24, 108 P.3d at 286-87. We noted, If ADOR exercised its discretion honestly and upon due consideration, and its decision was supported by substantial evidence, the tax court was required to uphold ADOR s adoption of the Table even if the court disagreed with ADOR s decision. P.3d at 285. Id. at 135, ¶ 16, 108 The court recounted that ADOR presented evidence that it selected a twenty-five-year depreciation life after gathering information from a variety of sources. Among other things, ADOR obtained information from new merchant and incumbent providers of electric generation services in Arizona, including Taxpayer, reviewed a depreciation study prepared on behalf of Pinnacle West Energy Corporation, and surveyed all other states to determine that they assigned life spans to electric generation plants ranging between twenty and thirty years. ADOR also hired independent experts to research and report on the life of a combined cycle plant. . . . Based on all this evidence, ADOR adopted a twentyfive-year life span for electric generation personal property . . . . Id. at 136, ¶ 20, 108 P.3d at 286. raised its outlier thresholds between Similarly, here, AHCCCS 1994 and 1998 after considering a number of factors, including the state Medicaid plan s definition of outliers, A.R.S. § 36-2903.01(J), and the goal of containing costs. Accordingly, the agency s actions cannot be characterized as unsupported by substantial evidence or without due consideration. 19 ¶27 Impliedly acknowledging decision to the Samaritan adjust argues that outlier AHCCCS the validity thresholds simply should AHCCCS s some in of fashion, have raised the threshold to account for inflation, rather than recalculating the threshold to maintain the number of outlier cases at about one percent. Samaritan argues AHCCCS acted arbitrarily and capriciously because its decision to maintain the threshold at one percent shortchanged Samaritan by $96 million. ¶28 But Samaritan is reimbursement as AHCCCS based system. points on out, unsupported Samaritan that calculation assumptions calculated about its loss by the by assuming every case it contends should be treated as an outlier actually would be reimbursed as an outlier. As AHCCCS s expert made clear, however, regardless of where the threshold is set, not every claim identified as an outlier is reimbursed as such. In fact, identifying a claim as an outlier is only one step in the overall scheme of how a hospital is reimbursed for such a claim. AHCCCS s expert testified that Samaritan s calculation did not take into consideration other payments by third parties and quick pay, slow pay, and some of the other adjustments that are made assertion to final about reimbursement. the harm it As suffered a result, because Samaritan s of AHCCCS s decision to maintain the outlier threshold at about one percent of patient cases is overstated. 20 ¶29 Second, Samaritan s current assertions are not premised on any of the flaws it identified in the proceedings before the ALJ. In those proceedings, Samaritan s expert submitted two reports, one in 1995 and another in 2002, each of which criticized recalculate patient the AHCCCS methodology per diem rates to fell below take the for into newly failing account adjusted to costly outlier As noted, however, Samaritan now recognizes that by law annually. million AHCCCS that cases thresholds. the could not Accordingly, was untied have recalculated Samaritan s to its analysis criticisms of per of the diem loss rates of $96 reimbursement system. D. Samaritan s Reliance on Judulang v. Holder Is Inapposite. ¶30 (2011), Samaritan relies on Judulang v. Holder, 132 S. Ct. 476 as support for its contention that AHCCCS acted arbitrarily and capriciously in raising the outlier thresholds. In that case, the Supreme Court struck down as arbitrary and capricious ( BIA ) the of deportation practice granting proceedings of the Board discretionary less of Immigration relief frequently than to Appeals aliens in in exclusion proceedings under an approach known as the comparable-grounds rule. Id. at 479. The Supreme Court determined that while the BIA may have had a legitimate reason for providing discretionary relief less frequently in deportation 21 proceedings than in exclusion proceedings, its adoption of the comparable-grounds approach was an abuse of discretion because it did not award discretionary relief in a rational way. Id. at 485. Samaritan analogizes Judulang to the present case, arguing that AHCCCS s alteration of the outlier thresholds was not rational, meaning it was arbitrary and capricious. ¶31 Samaritan misunderstands the import of Judulang to the present case. The Court premised its Judulang decision on the purpose of the federal immigration laws. The Court explained that the comparable-grounds approach had no connection to the goals of the deportation process or the rational operation of the immigration laws. Id. at 487. The approach did not rest on any factors relevant to whether an alien (or any group of aliens) should be deported. ¶32 Id. Contrary to the premise of Samaritan s argument, it is not the central purpose of the AHCCCS reimbursement scheme to ensure that hospitals are reimbursed for all of their costs. The decision by AHCCCS that Samaritan challenges was consistent with the goals of the reimbursement system. E. ¶33 Samaritan May Not Now Raise Its Due-Process Argument. Samaritan argues its due-process rights were violated by the AHCCCS grievance process, in which it contends the AHCCCS Director is both the defendant and the judge. 41-1092.08(B), (F) (West 2013) 22 (grievance See A.R.S. § system); Pavlik v. Chinle Unified Sch. Dist. No. 24, 195 Ariz. 148, 152, ¶ 12, 985 P.2d 633, 637 (App. 1999) (due-process). Such an argument, however, must be raised first in the administrative proceeding. See Phoenix Children s Hospital v. Ariz. Health Care Cost Containment Sys. Admin., 195 Ariz. 277, 282, ¶ 18, 987 P.2d 763, 768 (App. 1999) one of first the seek review. ). ( Allowing parties to build a factual record is policies a remedy underlying from the the agency requirement before that seeking parties judicial Because Samaritan failed to raise this contention in the administrative proceeding, we will not address it. CONCLUSION ¶34 For the reasons set forth above, we reverse the judgment in favor of Samaritan and remand for entry of judgment in favor of AHCCCS. Contingent on compliance with Arizona Rule of Civil Appellate Procedure 21, AHCCCS may recover its costs of appeal. /s/ DIANE M. JOHNSEN, Judge CONCURRING: /s/ ANDREW W. GOULD, Acting Presiding Judge /s/ DONN KESSLER, Judge 23

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