TITLE 1.ADMINISTRATION

Part 4. OFFICE OF THE SECRETARY OF STATE

Chapter 71. GENERAL POLICIES AND PROCEDURES

Subchapter C. PURCHASING PROCEDURES

1 TAC §71.51

The Office of the Secretary of State proposes new §71.51, concerning historically underutilized businesses. The rule is proposed to comply with Texas Government Code, §2161.003, which requires state agencies to adopt the rules of the Building and Procurement Commission (formerly General Services Commission) relating to the Historically Underutilized Business (HUB) Certification Program.

Proposed new §71.51 adopts by reference the rules of the Building and Procurement Commission, Title 1 Texas Administrative Code, Chapter 111, Subchapter B, §§111.11 - 111.28, relating to the historically underutilized business certification program, and promotes full and equal business opportunity for all businesses in state contracting. The Secretary of State will continue to rely upon the Building and Procurement Commission to determine if a business is certified as a HUB.

Mary Jon Urban, Purchasing Manager, has determined that for the first five-year period the proposed rule is in effect there will be no fiscal implications for state or local government.

Ms. Urban also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will be the Secretary of State's continued compliance with Government Code §2161.002. There will be no cost to small business. There is no anticipated economic costs to persons who are required to comply with the rule.

Comments on the proposal may be submitted in writing, no later than 30 days after the date of publication of this notice to Mary Jon Urban, Section Manager, Purchasing Section, Office of the Secretary of State, P.O. Box 12887, Austin, Texas 78701, e-mail mjurban@sos.state.tx.us.

Statutory Authority: Texas Government Code, §2161.003.

The rule implements Texas Government Code, Chapter 2161.

§71.51.Historically Underutilized Businesses.

(a) The Secretary of State adopts by reference the rules of the Texas Building and Procurement Commission in 1 Texas Administrative Code, Chapter 111, Subchapter B, §§111.11 - 111.28 (relating to Historically Underutilized Business Certification Program). Certification of a business as a historically underutilized business remains the responsibility of the Building and Procurement Commission.

(b) The adoption of this rule is required by Texas Government Code, §2161.003 (as added by the 76th Legislature, effective September 1, 1999).

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 1, 2002.

TRD-200200657

David N. Roberts

General Counsel

Office of the Secretary of State

Earliest possible date of adoption: March 17, 2002

For further information, please call: (512) 463-5562


1 TAC §71.61

The Office of the Secretary of State proposes new §71.61, concerning procedures for Vendor Protests. The new rule establishes protest procedures consistent with those of the Building and Procurement Commission (formerly the General Services Commission). Chapter 2155 of the Government Code directs state agencies to adopt such procedures.

Mary Jon Urban, Purchasing Manager, has determined that for the first five-year period the rule is in effect there will be no fiscal implications for state or local government as a result of enforcing or administering the rule.

Ms. Urban also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated will be to clarify the procedures for formal protest by a vendor and dispute resolution. There will be no effect on small businesses. There are no anticipated economic costs to persons who are required to comply with the rule as proposed.

Comments on the proposal may be submitted in writing to Mary Jon Urban, Section Manager, Purchasing Section, Office of the Secretary of State, Purchasing, P.O. Box 12887, Austin, Texas 78711 or by e-mail to mjurban@sos.state.tx.us.

Statutory Authority: Texas Government Code, §2155.076.

This rule implements Texas Government Code, Chapter 2155.

§71.61.Protests/Dispute Resolution.

(a) Any actual or prospective bidder, offeror, or contractor alleging to have been aggrieved in connection with the solicitation, evaluation, or award of a contract may formally protest to the Division Director of the Administrative Services Division (the Director). Such protests must be in writing and received in the Director's office within 10 working days after the protesting party knows, or should have known, of the occurrence of the action, which is protested. Formal protests must conform to the requirements of this subsection and subsection (c) of this section, and shall be resolved in accordance with the procedure set forth in subsections (d) and (e) of this section. Copies of the protest must be mailed or delivered by the protesting party to the agency and other interested parties. For the purposes of this section, "interested parties" means all vendors who have submitted bids or proposals for the contract involved.

(b) In the event of a timely protest or appeal under this section, the Secretary of State's office shall not proceed further with the solicitation or with the award of the contract unless the Director makes a written determination that the award of contract without delay is necessary to protect substantial interests of the state.

(c) A formal protest must be sworn and contain:

(1) a specific identification of the statutory or regulatory provision(s) that the action complained of is alleged to have violated;

(2) a specific description of each act alleged to have violated the statutory or regulatory provision(s) identified in paragraph (1) of this subsection;

(3) a precise statement of the relevant facts;

(4) an identification of the issue or issues to be resolved;

(5) argument and authorities in support of the protest; and

(6) a statement that copies of the protest have been mailed to identifiable interested parties.

(d) The Director shall have the authority, prior to appeal to the Secretary of State, to settle and resolve the dispute concerning the solicitation or award of a contract. The Director may solicit written responses to the protest from other interested parties.

(e) If the protest is not resolved by mutual agreement, the Director will issue a written determination on the protest.

(1) If the Director determines that no violation of rules or statutes has occurred, he shall so inform the protesting party and other interested parties by letter which sets forth the reasons for the determination.

(2) If the Director determines that a violation of the rules or statutes has occurred in a case where a contract has not been awarded, he shall so inform the protesting party, and other interested parties by letter which sets forth the reasons for the determination and the appropriate remedial action.

(3) If the Director determines that a violation of the rules or statutes has occurred in a case where a contract has been awarded, he shall so inform the protesting party and other interested parties by letter which sets forth the reasons for the determination, which may include nullifying the contract.

(f) The Director's determination on a protest may be appealed by an interested party to the Secretary of State. An appeal of the Director's determination must be in writing and must be received in the Secretary of State's office no later than 10 working days after the date of the Director's determination. The appeal shall be limited to review of the Director's determination. Copies of the appeal must be mailed or delivered by the appealing party to other interested parties and must contain an affidavit that such copies have been provided.

(g) The general counsel shall review the protest, Director's determination, and the appeal and prepare a written opinion with recommendation to the Secretary of State. Copies of the general counsel's recommendation shall be mailed to the appealing party, and other interested parties.

(h) When a protest has been appealed to the Secretary of State under subsection (f) of this section a decision issued in writing by the Secretary of State shall be the final administrative action of the agency.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 1, 2002.

TRD-200200658

David N. Roberts

General Counsel

Office of the Secretary of State

Earliest possible date of adoption: March 17, 2002

For further information, please call: (512) 463-5562


Subchapter E. NEGOTIATION AND MEDIATION OF CERTAIN CONTRACT DISPUTES

1 TAC §§71.81, 71.83, 71.85, 71.87, 71.91, 71.93, 71.95, 71.97, 71.99, 71.101, 71.103, 71.105, 71.107, 71.111, 71.113, 71.115, 71.117, 71.119, 71.121, 71.123, 71.125

The Office of the Secretary of State proposes new §§71.81, 71.83, 71.85, 71.87, 71.91, 71.93, 71.95, 71.97, 71.99, 71.101, 71.103, 71.105, 71.107, 71.111, 71.113, 71.115, 71.117, 71.119,71, 121, 71.123, and 71.125 relating to procedures for the negotiation and mediation of certain breach of contract claims asserted by contractors against the State of Texas pursuant to Section 9 of House Bill 826, 76th Legislature, Chapter 68 (1999) (codified at Government Code, Chapter 2260).

With the enactment of Chapter 2260, the legislature has established a new administrative process by which a contractor who enters into a written contract with a unit of state government for goods, services or projects, may pursue a breach of contract claim for damages. Chapter 2260 requires a contractor who asserts a breach of contract claim and the contracting unit of state government to attempt to resolve the contractor's claim and any counterclaim through negotiation, and authorizes, but does not require, the parties to mediate their dispute. If the contractor's claim is not resolved in its entirety within the statutory time frame, the contractor may request a contested case hearing before the State Office of Administrative Hearings ("SOAH"). Chapter 2260 authorizes the SOAH administrative law judge to render a non-appealable decision ordering the unit of state government to pay damages up to $250,000. If the contractor's claim exceeds $250,000, Chapter 2260 requires the administrative law judge to issue a written report of his or her findings to the legislature, recommending that the legislature either appropriate money to pay all or part of a valid claim or deny such appropriation and withhold consent to sue.

Section 2260.052(c) requires that units of state government with rulemaking authority adopt rules to establish negotiation and mediation provisions. The proposed rules provide such a process.

Section 71.81 states that this Subchapter E governs the negotiation and mediation of claims of breach of contract asserted by a contractor against a unit of state government. Section 71.83 defines terms as they relate to this chapter. Section 71.85 provides that the procedures in Subchapter E are prerequisites to filing suit under Civil Practice and Remedies Code, Chapter 107 and Government Code, Chapter 2260. Section 71.7 advises that the state has not waived sovereign immunity to suit or to liability.

Section 71.91 sets out the requirements and procedures of the notice of claim of breach of contract that contractor must assert. Section 71.93 sets out the requirements and procedures of the counterclaim that the unit of state government must assert. Section 71.95 announces that the parties must negotiate to settle the dispute. Section 71.97 provides a timetable as it relates the negotiations between the contractor and the unit of state government. Section 71.99 describes how the parties may conduct the negotiation. Section 71.101 addresses the parties' settlement approval procedures. Section 71.103 announces the requirements of any resulting settlement agreement. Section 71.105 states how the parties shall handle the costs of negotiations. In the event that the breach of contract claim is not resolved in its entirety. Section 71.107 specifies the process by which a contractor may seek resolution of the dispute by SOAH.

Section 71.111 sets the parameters for mediation by a neutral third party of breach of contract claims and counterclaims. Section 71.113 discusses the qualifications, immunities, and duties of a mediator. Section 71.115 pertains to the confidentiality of a mediation and any resulting final settlement agreement. Section 71.117 states how the parties shall handle the costs of mediation. Section 71.119 addresses the parties' settlement approval procedures. Section 71.121 details the handling of any resulting settlement agreement. Section 71.123 states that a final settlement agreement must comply with the provisions of §71.103 of this subchapter. Section 71.125 provides that if mediation does not resolve the dispute the contractor may request that the claim be referred to SOAH in accordance with §71.107 of this subchapter.

Jim Beck, Division Director, Administrative Services Division, has determined that for each year of the first five years that the proposed rules are in effect:

A. the additional estimated cost to the state or to local governments as a result of enforcing or administering the rules will be zero because the rules impose no additional burden on anyone;

B. the estimated reductions in costs to the state or to local governments as a result of enforcing or administering the rules will be zero because the rules impose no additional burden on anyone;

C. the estimated loss or increase in revenue to the state or to local governments as a result of enforcing or administering the rules will be zero because the rules impose no additional burden on anyone.

Mr. Beck has also determined that for each year of the first five years that the proposed rules are in effect, the benefit to the public will be the more timely and efficient resolution of contract disputes between contractors and units of state government. The legislature by enacting Chapter 2260 has determined that such process, with the potential to recover monetary damages for proven contractual breaches, is of public benefit.

The proposed rules will have no adverse economic effect on small or large businesses and/or persons that contract with the state. In the past, sovereign immunity prevented breach of contract claims against the state and the only process available to the public for resolution of such a claim was to seek and obtain legislative consent to sue. Chapter 2260 and these proposed rules will provide a process by which claims for breach of contract and counterclaims can be asserted and resolved.

The negotiation provisions themselves will impose no economic cost to persons required to comply with the proposed rules because they do not require the use of any particular negotiation mode or method. The proposed rules require only that the parties negotiate to resolve their dispute, and the mode or method of negotiation can be as simple or as complex as the parties decide. The proposed rules specify that absent an agreement to the contrary, the parties are responsible for costs they individually incur in a negotiation or other alternative dispute resolution process.

Similarly, the mediation provisions themselves will impose no economic cost to persons required to comply with the proposed rules unless the parties choose to mediate. If the parties do so, the rules specify that, absent an agreement to the contrary, the parties will share the costs of the mediator and each will be responsible for whatever additional costs they decide to incur for items such as document reproduction, attorneys' fees, experts' fees and consultants' fees.

The Office of the Secretary of State requests comments on the proposed rules from any interested person. Comments may be submitted, in writing, no later than 30 days after the date of publication of this notice to Dan Procter, Section Director, Texas Register Section, P.O. Box 13824, Austin, Texas 78711-3824, or faxed to (512) 463-5569, or e-mailed to dprocter@sos.state.tx.us.

Statutory Authority: Government Code, Chapter 2260.052(c).

The proposed new chapter affects Texas Government Code, Chapter 2260.

§71.81.Purpose and Application.

This subchapter governs the negotiation and mediation of a claim of breach of contract asserted by a contractor against a unit of state government under the Government Code, Chapter 2260. This chapter is binding upon units of state government without general rulemaking authority.

§71.83.Definitions.

The following words and terms, when used in this chapter, shall have the following meaning, unless the context clearly indicates otherwise:

(1) Chief administrative officer--The Secretary of State, Assistant Secretary of State or other executive officer responsible for the day to day operations of a unit of state government.

(2) Contractor--Independent contractor who has entered into a contract directly with a unit of state government. The term does not include:

(A) A contractor's subcontractor, officer, employee, agent, or other person furnishing goods or services to a contractor;

(B) An employee of a unit of state government; or

(C) A student at an institution of higher education.

(3) Day--A calendar day. If an act is required to occur on a day falling on a Saturday, Sunday, or holiday, the first working day which is not one of these day should be counted as the required day for purpose of this act.

(4) Parties--The contractor and unit of state government that have entered into a contract in connection with which a claim of breach of contract has been filed under this chapter.

(5) Unit of state government or unit--The state or an agency, department, commission, bureau, board, office, council, court, or other entity that is in any branch of state government and that is created by the constitution or a statute of this state, including a university system or institution of higher education. The term does not include a county, municipality, court of a county or municipality, special purpose district, or other political subdivision of this state.

§71.85.Prerequisites to Suit.

The procedures contained in this chapter are exclusive and required prerequisites to suit under the Civil Practice and Remedies Code, Chapter 107, and the Government Code, Chapter 2260.

§71.87.Sovereign Immunity.

This chapter does not waive a unit of state government's sovereign immunity to suit or liability.

§71.91.Notice of Claim of Breach of Contract.

(a) A contractor asserting a claim of breach of contract under the Government Code, Chapter 2260, shall file notice of the claim as provided by this section.

(b) The notice of claim shall:

(1) be in writing and signed by the contractor or the contractor's authorized representative;

(2) be delivered by hand, certified mail return receipt requested, or other verifiable delivery service, to the officer of the unit of state government designated in the contract to receive a notice of claim of breach of contract under the Government Code, Chapter 2260; if no person is designated in the contract, the notice shall be delivered to the unit's chief administrative officer; and

(3) state in detail:

(A) the nature of the alleged breach of contract, including the date of the event that the contractor asserts as the basis of the claim and each contractual provision allegedly breached;

(B) a description of damages that resulted from the alleged breach, including the amount and method used to calculate those damages; and

(C) the legal theory of recovery, i.e., breach of contract, including the relationship between the alleged breach and the damages claimed.

(c) The notice of claim shall be delivered no later than 180 calendar days after the date of the event that the contractor asserts as the basis of the claim.

§71.93.Agency Counterclaim.

(a) A unit of state government asserting a counterclaim under the Government Code, Chapter 2260, shall file notice of the counterclaim as provided by this section.

(b) The notice of counterclaim shall:

(1) be in writing;

(2) be delivered by hand, certified mail return receipt requested or other verifiable delivery service to the contractor or representative of the contractor who signed the notice of claim of breach of contract; and

(3) state in detail:

(A) the nature of the counterclaim;

(B) a description of damages or offsets sought, including the amount and method used to calculate those damages or offsets; and

(C) the legal theory supporting the counterclaim.

(c) The notice of counterclaim shall be delivered to the contractor no later than 90 calendar days after the unit of state government's receipt of the contractor's notice of claim.

(d) Nothing herein precludes the unit from initiating a lawsuit for damages against the contractor in a court of competent jurisdiction.

§71.95.Duty to Negotiate.

The parties shall negotiate in accordance with the timetable set forth in §71.97 of this subchapter (relating to Timetable) to attempt to resolve all claims and counterclaims filed under this chapter. No party is obligated to settle with the other party as a result of the negotiation.

§71.97.Timetable.

(a) Following receipt of a contractor's notice of claim, the chief administrative officer of the unit of state government or other designated representative shall review the contractor's claim and the unit's counterclaim, if any, and initiate negotiations with the contractor to attempt to resolve the claim and counterclaim.

(b) Subject to subsection (c) of this section, the parties shall begin negotiations within a reasonable period of time, not to exceed 60 calendar days following the later of:

(1) the date of termination of the contract;

(2) the completion date, or substantial completion date in the case of construction projects, in the original contract; or

(3) the date the unit of state government receives the contractor's notice of claim.

(c) The unit of state government may delay negotiations until after the 180th day after the date of the event giving rise to the claim of breach of contract by:

(1) delivering written notice to the contractor that the commencement of negotiations will be delayed; and

(2) delivering written notice to the contractor when the unit is ready to begin negotiations.

(d) The parties may conduct negotiations according to an agreed schedule as long as they begin negotiations no later than the applicable deadlines set forth in subsections (b) or (c) of this section, whichever is applicable.

(e) Subject to subsection (f) of this section, the parties shall complete the negotiations that are required by this chapter as a prerequisite to a contractor's request for contested case hearing no later than 270 days after the unit of state government receives the contractor's notice of claim.

(f) The parties may agree in writing to extend the time for negotiations on or before the 270th day after the unit of state government receives the contractor's notice of claim. The agreement shall be signed by representatives of the parties with authority to bind each respective party.

(g) The contractor may request a contested case hearing before the State Office of Administrative Hearings (SOAH) pursuant to §71.107 of this subchapter (relating to Request for Contested Case Hearing) after the 270th day after the unit receives the contractor's notice of claim, or the expiration of any extension agreed to under subsection (f) of this section.

(h) The parties may agree to mediate the dispute at any time before the 270th day after the unit of state government receives the contractor's notice of claim or before the expiration of any extension agreed to by the parties pursuant to subsection (f) of this section. Sections 71.111, 71.113, 71.115, 71.117, 71.119, 71.121, 71.123, and 71.125 of this subchapter shall govern the mediation.

(i) Nothing in this section is intended to prevent the parties from commencing negotiations earlier than the deadlines established in subsections (b) and (c) of this section, or from continuing or resuming negotiations after the contractor requests a contested case hearing before SOAH.

§71.99.Conduct of Negotiation.

(a) Negotiation is a consensual bargaining process in which the parties attempt to resolve a claim and counterclaim. A negotiation under this subchapter may be conducted by any method, technique, or procedure authorized under the contract or agreed upon by the parties. The parties may conduct negotiations with the assistance of one or more neutral third parties. The parties may choose to mediate their dispute in accordance with §§71.111, 71.113, 71.115, 71.117, 71.119, 71.121, 71.123, and 71.125 of this subchapter.

(b) To facilitate meaningful evaluation and negotiation of the claims and any counterclaims, the parties may exchange relevant documents that support their respective claims, defenses, counterclaims or positions.

§71.101.Settlement Approval Procedures.

The parties' settlement approval procedures shall be disclosed prior to, or at the beginning of negotiations. To the extent possible, the parties shall select negotiators who are knowledgeable about the subject matter of the dispute, who are in a position to reach agreement and who can credibly recommend approval of an agreement.

§71.103.Settlement Agreement.

(a) A settlement agreement may resolve an entire claim or any designated and severable portion of a claim.

(b) To be enforceable, a settlement agreement must be in writing and signed by representatives of the contractor and the unit of state government who have authority to bind each respective party.

(c) A partial settlement does not waive a contractor's rights under the Government Code, Chapter 2260, as to the parts of the claim that are not resolved.

§71.105.Costs of Negotiation.

Unless the parties agree otherwise, each party shall be responsible for its own costs incurred in connection with a negotiation, including, without limitation, the costs of attorneys' fees, consultant's fees and expert's fees.

§71.107.Request for Contested Case Hearing.

(a) If a claim of breach of contract is not resolved in its entirety through negotiation or mediation in accordance with this chapter on or before the 270th day after the unit receives the notice of claim, or after the expiration of any extension agreed to by the parties pursuant to §71.97(f) of this subchapter (relating to Timetable), the contractor may file a request with the unit of state government for a contested case hearing before SOAH.

(b) A request for a contested case hearing shall state the legal and factual basis for the claim, and shall be delivered to the chief administrative officer of the unit of state government within a reasonable time after the 270th day or the expiration of any written extension agreed to pursuant to §71.97(f) of this subchapter.

(c) The unit of state government shall forward the contractor's request for contested case hearing to the SOAH within a reasonable period of time, not to exceed thirty days, after receipt of the request.

(d) The parties may agree to submit the case to the SOAH before the 270th day after the notice of claim is received by the unit of state government if they have achieved a partial resolution of the claim or if an impasse has been reached in the negotiations and proceeding to a contested case hearing would serve the interests of justice.

§71.111.Agreement to Mediate.

The parties may agree to mediate a claim through an impartial third party. For purposes of this subchapter, "mediation" is assigned the meaning set forth in the Civil Practice and Remedies Code, §154.023. The mediation is subject to the provisions of the Governmental Dispute Resolution Act, Government Code, Chapter 2009. The parties may be assisted in the mediation by legal counsel or other individual.

§71.113.Qualifications and Immunity of the Mediator.

The mediator shall possess the qualifications required under the Civil Practice and Remedies Code, §154.052, be subject to the standards and duties prescribed by the Civil Practice and Remedies Code, §154.053 and have the qualified immunity prescribed by the Civil Practice and Remedies Code §154.055, if applicable.

§71.115.Confidentiality of Mediation and Final Settlement Agreement.

(a) A mediation conducted under this subchapter is confidential in accordance with the Government Code, §2009.054.

(b) The confidentiality of a final settlement agreement to which a unit of state government is a signatory that is reached as a result of the mediation is governed by the Public Information Act, Government Code, Chapter 552.

§71.117.Costs of Mediation.

Unless the parties agree otherwise in writing, each party shall be responsible for its own costs incurred in connection with a mediation, including without limitation, costs of document reproduction, attorney's fees, consultant fees and expert fees. The cost of the mediator shall be divided equally between the parties.

§71.119.Settlement Approval Procedures.

The parties prior to the mediation shall disclose the parties' settlement approval procedures. To the extent possible, the parties shall select representatives who are knowledgeable about the subject matter of the dispute, who are in a position to reach agreement, and who can credibly recommend approval of an agreement.

§71.121.Initial Settlement Agreement.

Any settlement agreement reached during a mediation shall be signed by representatives of the contractor and the unit of state government, and shall describe any procedures that the parties must follow to obtain final and binding approval of the agreement.

§71.123.Final Settlement Agreement.

A final settlement agreement reached during or as a result of a mediation that resolves an entire claim or counterclaim, or any designated and severable portion of a claim or counterclaim, shall comply with §71.103 of this subchapter (relating to Settlement Agreement).

§71.125.Referral to State Office of Administrative Hearings.

If mediation does not resolve the claim to the satisfaction of the contractor, the contractor may request that the claim be referred to SOAH in accordance with §71.107 of this subchapter (relating to Request for Contested Case Hearing.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 1, 2002.

TRD-200200659

David N. Roberts

General Counsel

Office of the Secretary of State

Earliest possible date of adoption: March 17, 2002

For further information, please call: (512) 463-5562


Part 15. HEALTH AND HUMAN SERVICES COMMISSION

Chapter 355. MEDICAID REIMBURSEMENT RATES

Subchapter J. PURCHASED HEALTH SERVICES

4. MEDICAID HOSPITAL SERVICES

1 TAC §355.8063

The Health and Human Services Commission (HHSC) proposes amendments to §355.8063. The proposed amendments add language to allow for supplemental payments to high volume inpatient hospital service providers and to implement cost-containment provisions mandated by the 77th Texas Legislature.

Background.

Article II, section 33 of the Special Provisions Relating to All Health and Human Services Agencies contained in the General Appropriations Act (Act of May 22, 2001, 77th Leg., R.S.) directs HHSC to implement certain cost containment initiatives for the Texas Medicaid program. These initiatives include, but are not limited to, initiatives specified in section 33. HHSC proposes to achieve some of the cost containment required by section 33, in part, through the adoption of the changes in the reimbursement of inpatient hospitals proposed in this amendment.

Section-by-section analysis.

This amendment proposes a change to subsections (n) and (p) of section 355.8063. The proposal changes the language of paragraph (n)(2) of section 355.8063 by suspending for the period April 1, 2002 through August 31, 2003 the application of a cost-of-living index to rates paid to general acute hospitals under the Medicaid Diagnosis-related Group (DRG) reimbursement methodology. The proposal changes also paragraph (p)(1) to reduce the payment percentage for day outlier payments from 70% to 60% and paragraph (p)(2) to reduce the payment percentage for cost outlier payments from 70% to 60%. New subsection (t) addresses the provision of supplemental payments to certain high-volume hospitals.

Fiscal Impact.

Don Green, Chief Financial Officer, has determined that during the first five years that the proposed rules will be in effect, there will be fiscal implications for state and local governments as a result of enforcing or administering the proposed rules. Estimated net savings to the state arising from the cost containment provisions of the proposed rules will be: $14,823,200 in State Fiscal Year 2002; $33,676,800 in State Fiscal Year 2003; $0 in State Fiscal Year 2004; $0 in State Fiscal Year 2005; and, $0 in State Fiscal Year 2006. Local governments will experience a loss of revenue as a result of the cost-containment provisions of the proposed rules. Estimated loss of revenue to local governments is: $6,477,635 in State Fiscal Year 2002; $28,872,266 in State Fiscal Year 2003; $0 in State Fiscal Year 2004; $0 in State Fiscal Year 2005; and, $0 in State Fiscal Year 2006. Local governments will incur additional costs to administer the supplemental payments provisions of these rules; however, additional revenues will offset any such costs which are estimated to be minimal. Additional revenue to local governments with hospitals serving high-volumes of Medicaid and uninsured patients as a result of the supplemental payments provisions is estimated to be: $67,700,000 in State Fiscal Year 2002; $70,000,000 in State Fiscal Year 2003; $72,500,000 in State Fiscal Year 2004; $75,000,000 in State Fiscal Year 2005; and, $77,600,000 in State Fiscal Year 2006.

Other Impact.

Mr. Steve Lorenzen, Director of Rate Analysis, has determined that for each year of the first five years the rules are in effect, the public benefit anticipated from adoption of the proposed rules will be to provide HHSC with greater flexibility in determining supplemental payments and maintaining cost-effective reimbursement. There is no anticipated impact on small businesses or micro-businesses to comply with the rules as proposed. This was determined by interpretation of the rule that small businesses and micro-businesses will not be required to alter their business practices in order to comply with the rule as proposed. There are no anticipated economic costs to persons who are required to comply with the rules as proposed. There is no anticipated impact on local employment.

Written comments on the proposal may be submitted to Scott Reasonover, Manager, Rate Analysis, Texas Health and Human Services Commission, 12555 Riata Vista Circle, Bldg. #3, Austin, Texas 78727-6404. Mr. Reasonover can be reached also by e-mail at Scott.Reasonover@tdh.state.tx.us or by telephone at (512) 338-6464. Comments must be received within 30 days of publication of this proposal in the Texas Register . A public hearing is scheduled for Tuesday, February 19, 2002 from 2:00 pm to 5:00 pm. The hearing will be held in the Public Hearing Room, Health and Human Services Commission, 12555 Riata Vista Circle, Bldg. #3, Austin, Texas 78727-6404. To comply with federal regulations, a copy of the proposal is being sent to each Texas Department of Human Services (DHS) office where it will be available for public review upon request.

Under Section 2007.003(b) of the Texas Government Code, HHSC has determined that Chapter 2007 of the Texas Government Code does not apply to this section. Accordingly, HHSC is not required to complete a takings impact assessment regarding this section.

The amendments are proposed under the Government Code, §531.033, which provides the Commissioner of HHSC with the authority to adopt administrative rules to implement the duties of HHSC; the Human Resources Code, §32.021, and the Government Code, §531.021(a), which provide the HHSC with the authority to administer the federal medical assistance (Medicaid) program in Texas; and, the Government Code, §531.021(b), which provides HHSC with the authority to propose and adopt rules governing the determination of Medicaid reimbursements.

The proposed amendments affect the Human Resources Code, Chapter 32 and the Government Code, Chapter 531.

§355.8063Reimbursement Methodology for Inpatient Hospital Services

(a) - (m) (No change.)

(n) Adjustments to base year claims data.

(1) (No change.)

(2) The department or its designee updates the standard dollar amount each year for each payment division by applying a cost-of-living index to the standard dollar amount established for the base year. For admissions during the period April 1, 2002 through August 31, 2003 no cost-of-living index will be applied. The index used to update the standard dollar amounts is the greater of:

(A) - (B) (No change.)

(o) (No Change.)

(p) Day and cost outliers. Effective for inpatient hospital services provided on or after July 1, 1991, the HHSC [ department ] or its designee pays day or cost outliers for medically necessary inpatient services provided to clients less than age one in all Title XIX participating hospitals and clients less than age six in disproportionate share hospitals, as defined by the HHSC [ department ], that are reimbursed under the prospective payment system. For purposes of outlier payment adjustments, disproportionate share hospitals are defined as those hospitals identified by the department during the previous state fiscal year as disproportionate share hospitals. If an admission qualifies for both a day and a cost outlier, only the outlier resulting in the highest payment to the hospital is paid. (Note: This subsection does not address reimbursement for the provision of other necessary inpatient hospital services under the Early and Periodic Screening, Diagnosis, and Treatment Program, as required by the Omnibus Budget and Reconciliation Act of 1989.)

(1) To establish day outliers, the HHSC [ department ] or its designee first removes from the current base year data those admissions whose actual lengths of stay are greater than or equal to plus or minus three standard deviations from the arithmetic mean length of stay for each DRG. The department or its designee then recomputes the arithmetic mean length of stay and the standard deviations for each DRG. Inpatient days which exceed two standard deviations beyond the arithmetic mean length of stay for the DRG are eligible for a day outlier. Payment is based on 70% of a per diem amount of a full DRG payment. For admissions during the period April 1, 2002 through August 31, 2003 payment is based upon 60% of a per diem amount of a full DRG payment. The per diem amount is established by dividing the full DRG payment amount by the arithmetic mean length of stay for the DRG. [ For admissions occurring in the 1994-1995 biennium (September 1, 1993, through August 31, 1995), payment is based on 75% of a per diem amount of a full DRG payment. ]

(2) To establish cost outliers, the HHSC [ department ] or its designee first determines what the amount of reimbursement for the admission would have been if the HHSC [ department ] or its designee reimbursed the hospital under similar methods and procedures used in the Social Security Act, Title XVIII, as amended, effective October 1, 1982, by Public Law 97-248, Tax Equity and Fiscal Responsibility Act (TEFRA). The HHSC [ department ] or its designee then determines the outlier threshold by using the greater of the full DRG payment amount multiplied by 1.5 or an amount determined by selecting the lesser of the universe mean of the current base year data multiplied by 11.14, or the hospital's standard dollar amount multiplied by 11.14. The hospital's standard dollar amount is the amount that the HHSC [ department ] or its designee uses to reimburse the hospital under the prospective payment system. The outlier threshold is subtracted from the amount of reimbursement for the admission established under the TEFRA principles. The HHSC [ department ] or its designee multiplies any remainder by 70% (60% for admissions during the period April 1, 2002 through August 31, 2003) to determine the actual amount of the cost outlier payment. [ For admissions occurring in the 1994-1995 biennium (September 1, 1993, through August 31, 1995), the department or its designee multiplies any remainder by 75% to determine the actual amount of the cost outlier payment. ]

(3) (No change.)

(q) - (s) (No change.)

(t) Notwithstanding other provisions of this subchapter and subject to the availability of funds, supplemental payments will be made each state fiscal year in accordance with this subsection to eligible hospitals that serve high volumes of Medicaid and uninsured patients.

(1) Supplemental payments are available under this subsection for inpatient hospital services provided by a publicly-owned hospital or hospital affiliated with a hospital district in Bexar, Dallas, Ector, El Paso, Harris, Lubbock, Nueces, Tarrant, and Travis on or after July 6, 2001.

(2) State funding for supplemental payments authorized under this subsection will be limited to and obtained through intergovernmental transfers of local or hospital district funds. The supplemental payments described in this subsection will be made in accordance with the applicable regulations regarding the Medicaid upper limit provisions codified at 42 C.F.R. §447.272.

(3) The publicly-owned hospital or hospital affiliated with a hospital district in a county listed in paragraph (t)(1) of this section that incurs the greatest amount of cost for providing services to Medicaid and uninsured patients, will be eligible to receive supplemental high volume payments. The supplemental payments authorized under this subsection are subject to the following limits:

(A) In each state fiscal year the amount of inpatient supplemental payments and outpatient supplement payments may not exceed the hospital's "hospital specific limit," as determined under §355.8065(f)(2)(D) of this chapter (relating to Reimbursement to Disproportionate Share Hospitals (DSH)); and

(B) The amount of inpatient supplemental payments and fee-for-service Medicaid inpatient payments the hospital receives in a state fiscal year may not exceed Medicaid inpatient billed charges for inpatient services provided by the hospital to fee-for-service Medicaid recipients in accordance with 42 CFR §447.271.

(4) An eligible hospital will receive quarterly supplemental payments. The quarterly payments will be limited to one-fourth of the lesser of:

(A) The difference between the hospital's Medicaid inpatient billed charges and Medicaid payments the hospital receives for services provided to fee-for-service Medicaid recipients. Medicaid billed charges and payments will be based on a twelve consecutive-month period of fee-for-service claims data selected by HHSC; or

(B) The difference between the hospital's "hospital specific limit," as determined under §355.8065(f)(2)(D) of this chapter (relating to Reimbursement to Disproportionate Share Hospitals (DSH)) and the hospital's DSH payments as determined by the most recently finalized DSH reporting period.

(5) For purposes of calculating the "hospital specific limit" under this subsection, the "cost of services to uninsured patients" and "Medicaid shortfall", as defined by Texas Administrative Code §355.8065(b)(5) and (16), will be adjusted to fully offset Medicaid payments including inpatient and outpatient supplemental payments.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 4, 2002.

TRD-200200669

Marina S. Henderson

Executive Deputy Commissioner

Health and Human Services Commission

Earliest possible date of adoption: March 17, 2002

For further information, please call: (512) 424-0576