¹ System for Review and Approval of Certain Hospital Charges for Hospitals with a Fiscal Year Beginning after September 1, 1979, 114.1 CMR 13.00 (1979).

² Weiner, Reasonable Cost Reimbursement for Inpatient Hospital Services under Medicare and Medicaid: The Emergence of Public Control, 3 Am. J.L. & Med. 1, 4 (1979).Google Scholar The comparability principle that the groupings encompass first appears in the 1972 Amendments to the Medicare statute. 42 U.S.C. 1395 et seq. (1976).

³ See notes 23-30 infra and accompanying text. See generally Bauer, Hospital Rate SettingThis Way to Salvation?, 55 Milbank Mem. Fund Q. 117 (1977)Google Scholar. Not only have hospital costs increased, but the rate in increase in hospital costs has increased markedly. See Biles, Schramm, & Atkinson, Hospital Cost Inflation Under Rate Setting Programs, 303 New Eng. J. Med. 664, 667 (1980)Google Scholar [hereinafter cited as Biles]. See also Dowling, W., Prospective Rate Setting 9 (1977)Google Scholar; and Weiner, supra note 2, at 44.

⁴ See generally J. Feders, Medicare: The Politics of Federal Health Insurance 119-21(1977).

⁵ Presently, the federal government provides a supplement to a state Medicaid budget. 42 U.S.C. 1396 (1976). President Reagan's proposed budget cuts will cut back the federal contribution severely. See Wall St. J., Feb. 19, 1981, at 5, col. 1. These cutbacks will increase the burden on state programs and private insurers to cover the costs of health care.

⁶ See notes 31-41 infra and accompanying text. In the two years since its introduction in Massachusetts, subsequent modification of groupings-based rate regulation of charges may have contributed to the reduction of the rate of increase of hospital costs in Massachusetts. The rate declined more sharply in the first year the groupings were used in charge control for fiscal year 1980. Weiner, Containing Health Costs, Mass. Med. News, Nov. 21, 1980, at 19, col. 3.

⁷ A recent study reveals that mandatory rate setting has slowed the rate of increase in hospital costs. Biles, supra note 3, at 664. Rate setting, in addition to charge control, encompasses the setting, review or approval of actual rates of reimbursement for third party reimbursers. Mass. Gen. Laws Ann. ch. 6A, 32, 35-40 (West Supp. 1981). Although the Biles study did not differentiate between the impact of groupings based charge control and other elements of rate setting, it may be inferred that groupings contributed positively to the sharper decrease in hospital costs.

⁸ In Massachusetts other hospital cost control programs include rate setting for Medicaid, workers compensation, and rate review for Blue Cross reimbursement contracts. Mass. Gen. Laws Ann. ch. 6A, 32 (West Supp. 1981). See also note 12 infra.

⁹ Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981).

¹⁰ Agency regulations will be invalidated only if arbitrary or capricious in light of the purposes of the statute, or if unreasonable or irrational. Mass. Gen. Laws Ann. ch. 30A, 14 (West Supp. 1981). See notes 80-94 infra and accompanying text.

Immediately after promulgating the intial groupings, the RSC began to remedy the groupings inefficiency. See RSC, Executive Summary Fy 1981 Groups of Hospitals (Apr. 4, 1980). However, the state legislature has not yet addressed the weaknesses in the administrative process.

¹¹ Without uniform standards to measure units of hospital costs, comparison of the costs these units generate independently or as units, is ineffective. See notes 95-97 infra and accompanying text. In Massachusetts, regulations effective as o January, 1981 seek to increase this uniformity in reporting. See 114.1 CMR 4.00 (1981).

¹² For example, in Massachusetts, two other cost control regulatory tools are the Certificate of Need Program [hereinafter Con] and the Professional Standards Review Organizations [hereinafter PSROs]. The Con program seeks to control hospital costs by limiting hospital expenditures for changes in services and facilities. Mass. Gen. Laws Ann. ch. Ill, 25 (West 1976). PSROs impose sanctions against inefficient, uneconomical and ineffective health services. As an additional incentive, PSROs grant immunity in certain instances to providers in compliance with its standards. 42 U.S.C. 1320c (1976). See notes 88-89 infra and accompanying text. In Massachusetts, groupings fail to take into account what PSROs define as medically necessary services and identify as unnecessary medical services.

¹³ W. Dowling, supra note 3, at 9; Weiner, supra note 2, at 3.

¹⁴ Biles, supra note 3, at 667.

¹⁵ See generally W. Dowling, supra note 3, at 9.

Not all states use rate setting, Biles, supra note 3, at 664. To date, the following states implement some form of rate regulation: Arizona, Colorado, Connecticut, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Rhode Island, Washington and Wisconsin. Biles, supra note 3, at 665. According to one authority, as of 1977, about 35 prospective rate setting systems are currently in operation across the nation22 operated by Blue Cross plans, 9 by state agencies or commissions, and several by state hospital associations. W. Dowling, supra note 3, at 1. See also Bauer, supra note 3, note 37 infra. Participation in rate review and compliance with proposed rates is mandatory in Connecticut, Maryland, Massachusetts, New Jersey, New York and Washington. Arizona, Minnesota and Wisconsin mandate participation in rate review but permit voluntary compliance with proposed rates. Rhode Island mandates that hospitals negotiate and contact individually with Blue Cross and the State government for reimbursement rates. Biles, supra note 3, at 665. As of 1978, Illinois has enacted legislation creating a rate setting program, but had not yet implemented rate regulation. Biles, supra note 3, at 665. As of 1980, Illinois had rate setting legislation effective September 11, 1978 scheduled to be repealed effective October 1, 1982. Ill. Ann. Stat. ch. 111 1/2, 161-77 (Smith-Hurd Supp. 1978). Western Pennsylvania uses groupings to determine its Blue Cross rates. 2-6 Policy Analysis, Inc. Progress Reports (1978-79) [hereinafter cited as PAI Progress Reports]; see note 39 infra.

¹⁶ See W. Dowling, supra note 3, at 7-35; PAI Progress Reports, supra note 15.

¹⁷ The rate setting mechanisms vary by state. Responsibility for setting rates is often vested in a state regulatory body. For example, in Massachusetts the responsible entity is the RSC. The RSC determines the rates that hospitals may charge and the rates at which Medicaid, workers compensation and other state programs will reimburse hospitals. The RSC also reviews and approves the reimbursement rates established in contracts that hospitals have negotiated individually with Blue Cross. Mass. Gen. Laws Ann. ch. 6A, 32, 38, 40 (West Supp. 1981).

In other states, Blue Cross sets its rates or individually negotiates with a hospital a rate determined in the reimbursement contract. As of January, 1976, states having Blue Cross plans with rate setting or rate review programs included: Connecticut, Delaware, Indiana, Kentucky, Missouri, New Mexico, New York, North Carolina, Ohio, Oklahoma, Rhode Island, Wisconsin, Colorado, Michigan and Pennsylvania. In North Carolina, for example, Blue Cross sets rates but compliance with those rates remains voluntary. Bauer, supra, note 3, at 126-27. Rhode Island, for example, offers a hybrid form; the hospital negotiates directly with state government and Blue Cross for its rates. Id. at 133-34; Biles, supra note 3, at 665-66.

¹⁸ See W. Dowling, supra note 3, at 7. Initially, Medicare and Medicaid were retroactive reimbursement systems, under which the plans paid for actual cost incurred. This form of traditional reimbursement created problems of its own. It was inherently inflationary, failed to provide adequate allowance for capital costs, and provided incentives for inefficiency. Cleverly, Forward to W. Dowling, supra note 3, at vii. See also J. Feders, supra note 4.

Because traditional or retroactive reimbursement set the rates of reimbursement after costs were incurred, no incentive existed for hospitals to control costs and to perform efficiently. Thus, in their initial forms, Medicare and Medicaid provided incentives to raise rather than control high hospital costs. W. Dowling, supra note 3, at 13.

These problems prompted a switch to prospective rate setting as the preferred mode. See J. Feders, supra note 4. Prospective rate setting predetermines the rate at which such retroactive reimbursement programs pay and, in Massachusetts, the rate at which a hospital may charge for its services. The RSC sets the rates of hospital charges and evaluates the reasonable financial requirements of hospitals by assessing reasonable cost, in turn determined from total patient care charges and costs. By October 1, 1979 the RSC had to use groupings to define reasonable cost in setting the charges. Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981).

By contrast, although their rates are also based on reasonable cost, Blue Cross, Medicaid and workers compensation do not use groupings to determine reasonable cost. To date Massachusetts has not adopted.a groupings based methodology for Medicaid rates. See generally 114.1 CMR 19.00 (1980); Interview with Jack C. Keane, Commissioner, Rate Setting Commission and Steve Weiner, past Commissioner, Rate Setting Commission, in Boston (May 1981). See also notes 36-55 infra and accompanying text.

¹⁹ For a full explanation of covered Medicare, Medicaid and Blue Cross costs and the responsibility of the covered patient to pay, in some circumstances, the difference between cost and charge, see G. Annas, The Rights of Hospital Patients 179-93 (1975).

²⁰ Id. at 178-93.

²¹ Blue Cross recently adopted a reasonable cost standard of reimbursement similar to that of Medicare and Medicaid. Originally, Blue Cross was a charge based payor. The majority of Blue Cross programs now use reasonable cost rather than other criteria to set rates for reimbursement. Weiner, supra note 2, at 7. In many states, Blue Cross remains free to negotiate its rates of reimbursement with the individual hospital without additional review, but often adopts Medicare's definition of reasonable cost. These rates, although prospectively set and based on reasonable cost are denned differently. The amount that Blue Cross reimburses is determined by a separate program's assessment of the reasonableness of cost. Medicare and Medicaid do not reimburse for the full amount of the cost of the service. Instead, they reimburse a hospital prospectively for reasonable costs. Id. at 4.

Medicare establishes reasonable cost by comparing cost among similar hospitals. The Medicare rates of reimbursement are determined using a comparability methodology similar to groupings. The Medicare rate acts as a ceiling on reimbursement rates. 42 U.S.C. 1395 (1976). Commercial insurers, such as private sector insurance companies, offer to reimburse hospitals at their own determined set of reimbursement rates.

²² See Bauer, supra note 3, at 121-22; Weiner, supra note 2, at 30-31.

Before rate setting, a problem existed in cost shifting by major third party payors. Bauer, supra note 3, at 121. The charge based payors provide the source or reimbursement for charges in excess of costs and generate the income used to cover bad debts and free care not ordinarily covered in third party Medicare, Medicaid and Blue Cross contracts. Affiliated Hosps. Center, Inc. v. Rate Setting Comm'n, 7 Mass. App. Ct. 563, 565, 389 N.E.2d 744, 745 (1979).

²³ See W. Dowling, supra note 3, at 7; J. Feders, supra note 4, at 119-20.

²⁴ For a more detailed analysis of prospective individualized rate setting of'charges, see W. Dowling, supra note 3, at 10-37. For a description of the process for setting rates and charges individually in Massachusetts, see Affiliated Hosps. Center, Inc. v. Rate Setting Comm'n, 7 Mass. App. Ct. 563, 389 N.E.2d 744 (1979).

²⁵ Prior to adopting groupings, Massachusetts used a cost-to-charge ratio to determine budget rates. 114.1 CMR 13.00 (1979). See Weiner, supra note 2, at 32-33.

²⁶ Bauer, supra note 3, at 123.

²⁷ W. Dowling, supra note 3, at 8.

²⁸ Since prospective reimbursement guarantees a level of payment, no incentives exist to perform the service at less than the rate. More particularly, since the hospital is allowed to pocket the difference between the guaranteed rate and actual costs incurred, prospective rate setting itself has become a way for hospitals to raise capital. See Bauer, supra note 3, at 31-32; Weiner supra note 3, at 31; W. Dowling, supra note 3, 7-35; J. Feders supra note 4, at 54.

²⁹ See J. Feders, supra note 4, at 120-21; Weiner, supra note 2, at 31.

³⁰ Weiner, supra note 2, at 33.

³¹ See note 21 supra.

³² Weiner, supra note 2, at 33.

³³ In the groupings for fiscal year 1980 only mean ancillary and overhead costs were calculated. 114.1 CMR 13.00 (1979); Administrative Bulletin 13-2 (explaining 114.1 CMR 13.00 (1979) [hereinafter cited as Administrative Bulletin 13-2]. The groupings for fiscal year 1981 used mean ancillary, overhead and routine costs. 114.1 CMR 19.00 (1980). For further discussion of these terms, see notes 36-55 infra and accompanying text.

³⁴ A reasonable cost for groupings purposes is limited to two standard deviations from the mean cost. Excess above that amount is disallowed automatically for fiscal year 1980. 114.1 CMR 13.10(l)(d)(I) (1979). In contrast, for fiscal year 1981, reasonable cost is one standard deviation above the mean. Excess only subjects the hospital to review and audit to determine whether disallowance is warranted. 114.1 CMR 19.00 (1980).

That the fiscal year 1981 groupings resulted in no disallowances for 1981 may indicate either that the fiscal year 1980 groupings generated compliance uniformly among all hospitals within a year, or, more probably, that the 1981 groupings are still too tolerant. However, even the fiscal year 1980 groupings (based on 1976 costs) affected only .03% of hospital costs. See Consumer Health Advocacy Program, Memorandum to the Massachusetts Rate Setting Commission on Regulations 24 (1979) [hereinafter cited as CHAP-M]. The former is a more probable explanation considering the problems inherent in groupings for fiscal year 1980. See notes 42-43 infra and accompanying text.

³⁵ In Massachusetts, Blue Cross reimbursement contracts are subject to review by and approval of the RSC. The RSC, through, its approval power, compares Medicaid, Blue Cross and charge control definitions or reasonable cost and may use the reasonable cost definition from charge setting to evaluate the reasonable cost basis of Medicaid and Blue Cross rates. Cf. Mass. Gen. Laws Ann. ch. 6A, 32 (West Supp. 1981). However, to date groupings are used directly only to set charges and have not been used for setting Medicaid and state program rates of reimbursement. Interview with Jack C. Keane, supra note 18.

³⁶ 114.1 CMR 13.10(d)(l) (1979). See note 43 infra.

³⁷ Variables used to describe hospitals include, inter alia, location, teaching status, existence of residency and nursing programs, program mix, number of nurses, beds and services, length of stay, total patient days, occupancy, and percentage of Medicare, Medicaid and over-65 patients.

³⁸ Only a few groupings studies existed or were being developed when Massachusetts developed and adopted its groupings. These groupings studies used different variables to describe the hospitals and to identify similarities. No formal consensus existed on a correct set of variables.

One survey revealed the advantages of reimbursing hospitals according to their product. 1976-77 Annual Report of Massachusetts Rate Setting Commission 46 [hereinafter cited as First Ann. Rep.] (selected services and facilities weighted in combination to compare hospital products).

A second set of studies compared hospitals according to the services offered. The 1970 Berry study used forty variables describing facilities and services, teaching status, and accreditation to compare hospitals. The 1972 Edwards, Miller and Schumaker study grouped hospitals according to the frequency with which they performed twenty different hospital services. A 1973 study introduced the use of a service index in which services and facilities are factored into a groupings formula in cumulative progression. Id. at 46-48.

Another set of studies grouped hospitals according to the profile of patients and the hospitals performance of services in relation to the patient population. Id. at 46-67.

Another series of studies considered additional institutional variables, such as the case mix, class, outpatient activity, inpatient services, education, location and medical staff profiles. Id. at 46.

The Social Security Administration's model of groupings for Medicare purposes placed a hospital in one of five income groups and then placed the hospital in one of two location groups and finally in one of seven groups based on bed capacity. Massachusetts Rate Setting Commission, Grouping Hospitals for Cost Comparison, Report to Health Financing Administration Office, Office of Planning and Research 1-2 (1979-80).

The American Hospital Association grouped hospitals according to bed capacity. Twenty-five additional justifiable variables (such as product mix and characteristics of hospitals) and uncontrollable variables (such as socioeconomic and demographic groups served) further divided the groups. The model also weighted the variables. First Ann. Rep. at 47.

Five states developed groupings methods before the Massachusetts model appeared. The Colorado Medicaid model was a peer grouping model. RSC, 6 PAI Progress Reports, Grouping as a Mechanism for Hospital Cost Comparison (II) (Dec. 10, 1979), supra note 15. The New York model sought to establish routine ancillary cost ceilings. Cf. N.Y. Pub. Health Law 2803 (McKinney 1976). The New Jersey case mix model combined groupings analysis with case mix analysis. S. Weiner, Charge Control in Massachusetts; Impact, Design, and Implementation 200-201, paper presented to the American Medical Association (included in Health Care Planning seminar materials presented at Boston University School of Law, Spring, 1980). New Jersey developed what became known as Diagnosis Related Groups (DRGs). The Washington State Hospital Commission model used cluster analysis to group hospitals according to factors that best explained cost similarities and differences between hospitals. See generally 6 PAI Progress Reports, at 7. The Western Pennsylvania Blue Cross model developed a small set of variables for rate review. It sought to identify uncorrelated variables, related to cost and reported in the same way by all hospitals. Id. at 6.

³⁹ Case mix is a variable describing the institutional characteristics of patient case population. 4 PAI Progress Reports, supra note 15, at 9. For the elements which comprise the case mix variable in the Massachusetts study on groupings, see 6 PAI Progress Reports, supra note 38. Case mix is not reported consistently but is an important element of grouping. It could indicate efficiency or reflect a style of practice. One source of information is the measure of blood units per admission. Id. at 18.

⁴⁰ A variation of this model has been used in New Jersey. The New Jersey groupings (DRGs) created groups by using diagnosis made to profile a hospital.

⁴¹ See generally CHAP-M, supra note 34, at 6-11. Even a cursory view of the cost profile of the seven hospital groups indicates that the costs experienced by member hospitals within the same group range broadly and often seem more closely comparable with the costs of hospitals which are members of other groups. This suggests that the groups do not identify similar hospitals. In addition, the mean costs of the seven hospital groups are very close, particularly when the two standard deviation calculation is taken into account. This suggests an enormous amount of overlap between the hospital groups.

⁴² The initial Massachusetts groupings define reasonable cost as cost not exceeding two standard deviations or approximately 96.8% from the group's mean cost of each category of services. 114.1 CMR 13.10(d)(l) (1979). The groupings adjustment permits a hospital to budget only up through that amount. See 1l4.1 CMR 13.00 (1979). Briefly, the RSC multiplies a hospital's variance from the mean plus two standard deviations, by that hospital's adjusted admission. The RSC performs this for overhead and ancillary costs respectively, yielding distant gross overhead and gross ancillary disallowance. The RSC then sums these figures for a net disallowance. The final groupings disallowance, which translates to a budget cut, is the lower of the following net disallowances. Id.

One weakness of this process which diminishes the impact of these groupings is that the RSC divides individually determined adjusted admission figures into these costs to determine overhead costs per adjusted admission. 114.1 CMR 13.00 (1979). The admission adjustment need only be manipulated in a hospital's favor and the impact of the groupings decreases. Another weakness is that the disallowance formula and the groupings adjustment hide excessive costs. By aggregating the gross overhead and the gross ancillary disallowances to produce a net disallowance, the groupings process of comparison fails to target whether services in either category were performed efficiently. See notes 48-54 infra and accompanying text; see generally CHAP-M, supra note 34, at 18.

⁴³ 114.1 CMR 13.10(d)(1) (1979).

⁴⁴ Institutional variables are those which describe the hospital as an institution. These are unalterable elements such as location, number of residency programs, and size. Case mix is not an institutional variable.

⁴⁵ RSC, Sixth Quarter Progress Reports and Contract Deliverables 20 and 21 under Social Security Administration Contract to Study Groupings in Massachusetts.

The RSC planned to use departmental groupings to compare and to group hospitals. RSC Proposal for Contract with Social Security Administration, Department of Health Education and Welfare, to Study Groupings in Massachusetts, Best and Final Offer, 56-61 (September 14, 1976) [hereinafter cited as SSA proposal], CHAP-M, supra note 34 at 7.

⁴⁶ The RSC rejected institutional comparisons because it believed that hospital wide groupings alone may not provide comparable groups of specific departments. Internal RSC Memorandum to R. Berry from S. McEvoy, Grouping System to be Developed under SSA Contract (Dec. 11, 1975), particularly because of the varied pattern of teaching hospitals and case mix in Massachusetts hospitals. SSA Proposal, supra note 45, at 58.

Departmental analyses enable regulators to determine whether the relationship between costs and charges for individual services and departments is reasonable and whether these individual services are efficiently produced. First Ann. Rep., supra note 38, at 48. They permit the development of unit cost norms for groups of similar departments. Id. They facilitate effective and responsive charge and cost control by facilitating unit cost comparisons. SSA Proposal, supra note 45, at 58; Internal RSC Memorandum to R. Berry from S. McEvoy, Grouping System to be Developed under SSA Contract (Dec. 11, 1975). These comparisons consider the efficiency in production of the specific services notably many of the ancillaries apart from the more commonly identified aggregate output of a hospital such as patient days. First Ann. Rep., supra note 38, at 48.

Departmental comparisons avoid many of the problems which occur when comparing hospitals institutionally, particularly with presence of teaching programs and of case mix data. SSA Proposal, supra note 45, at 58; First Ann. Rep., supra note 38, at 48.

Departmental rate setting methodologies offer the RSC the opportunity to help improve health planning and resource allocation throughout the state and to more readily identify departments that have relatively high unit costs. SSA Proposal, supra note 45, at 58, First Ann. Rep., supra note 38, at 48.

⁴⁷ This institutional orientation, which masks the reasonableness of the cost of a service, reappears throughout the initial Massachusetts groupings formula. The groupings adjustment focuses on cost per admission in the entire hospital rather than on cost per unit of service in a department. The formula yields a reasonable cost per total admission including admissions unrelated to the service whose cost is being assessed. 114.1 CMR 13.01 (1979). Furthermore, the ceiling for disallowance is one percent of the hospital's operating cost. If the groupings disallowance exceeds one percent of the hospital's costs the latter figure determines the disallowance, in turn, tolerating greater costs.

⁴⁸ See CHAP-M, supra note 34, at 14 (identifying the problem of offsetting); notes 49-55 infra and accompanying text.

At least one authority has identified a potential danger of eliminating offsetting, also known as departmental cross-subsidization. As he states:

Tiscornia, Management Implications of Prospective Rate Setting, in W. Dowling, supra note 3, at 120. However, this view fails to recognize the role of the RSC as a cost control and planning agency. Offsetting, in this author's opinion, should not be allowed in a model groupings system.

⁴⁹ The other covered ancillary services are: operating room, recovery room, and oxygen therapy. 114.1 CMR 13.10(d)(2) (1979). Ancillary and overhead costs are to be measured by the direct patient operating costs per unit of service within the ancillary and overhead cost categories. 114.1 CMR 13.10(d)(2) (1979).

⁵⁰ The other covered overhead services are: operation of plant, dietary and cafeteria, nursing service administration, medical records, and library. 114.1 CMR 13.10(d)(2) (1979).

⁵¹ CHAP-M, supra note 34, at 14.

⁵² See Administrative Bulletin 13-2, supra note 33.

⁵³ CHAP-M, supra note 34, at 14.

⁵⁴ For fiscal year 1980 budgets, based on 1976 costs, only three hospitals would experience disallowances for proposed charges, equivalent to only 0.03% of all hospital costs. 114.1 CMR 13.00 (1979) and Administrative Bulletin 13-2, supra note 33. See generally, CHAP-M supra note 34.

Ineffectiveness of the initial groupings appears in additional ways. Failure to provide explicit statements both in regulations and in response to demands prior to the public hearing on the regulations of the criteria for the groupings suggests that the RSC lacked such criteria or at least was unwilling to expose them to public scrutiny. The RSC hinted at its own inadequacies when it stated that deficiencies in hospital data prevented integration of routine hospital costs, one of three types of hospital costs, into the groupings. Administrative Bulletin 13-2, supra note 33. Subsequent regrouping of the hospitals immediately following promulgation of the initial groupings-based rate regulations similarly indicates that rational and meaningful groupings may not have been well conceived. For regroupings, see RSC, Executive Summary Fy 1981 Groups of Hospitals (Apr. 4, 1980).

In the hearings on the regulations, the RSC acknowledged its intention that the charge control regulations based on hospital groupings have de minimis impact. Public Hearing on Proposed Regulation 114.1 CMR 13.00: Transcripts Before RSC (Aug. 13, 1979). See also Affidavit of Jack C. Keane in Opposition to Plaintiff's Motion for a Preliminary Injunction, at 14, Mass. Hosp. Ass'n, Inc. v. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979); Unsigned RSC Memorandum, Chapter 409 Background and Rationale for Changes Proposed for Fy 1980 Regulations (June 13, 1979), cited in CHAP-M, supra note 34.

Several reasons explain the minimal impact of the initial groupings. The RSC may have desired to change rate setting gradually (in keeping with a legislative policy of gradual regulation) so legislation could be implemented effectively and coherently and so administrative bodies could fashion some techniques before employing them. For a discussion of the legislative policy of regulatory gradualism, see Werner, Participatory Procedure and Political Support for Hospital Cost Containment Programs: Limits of an Open Administrative Process, 57 N.C.L. Rev. 301, 336 (1981)Google Scholar; CHAP-M, supra note 34, at 1. Other possible reasons include an effort to insure that groupings could be refined before an irreversible, clumsy process was set in motion and susceptibility to political pressure.

⁵⁵ The RSC took the cost figures from those reported in the yearly cost reports filed by the hospitals with the RSC. Massachusetts at one time considered using a variable to distinguish justifiable from unjustifiable costs for groupings. However, the RSC dropped the idea apparently in an effort to promulgate timely groupings. See PAI Progress Reports, supra note 15.

⁵⁶ Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981).

⁵⁷ One month prior to the promulgation of the groupings based rate regulations, the RSC and its research analysts expressed doubts as to the viability of the groupings and even the susceptibility of Massachusetts hospitals to groupings and comparison in any form. See PAI Progress Reports, supra note 15: RSC, Sixth Progress Reports and Contract Deliverables 16 and 18 under Social Security Administration Contract to Study and Develop Groupings in 1979; see Application for Extension of Time of SSA-HEW Grant to Study and Develop Groupings for Massachusetts, RSC to SSA (1979).

⁵⁸ That groupings for fiscal year 1980 differed radically from the groupings for fiscal year 1981 undermines the validity of the original assignments of hospitals to groups. Unlike the fiscal year 1980 groupings which produced six groups of similar hospitals, the fiscal year 1981 groupings produced additional smaller groups representing subdivisions of the fiscal year 1980 groups and repositioning several hospitals entirely. The groupings comparisons for 1980 were based on 1978 cost; the comparisons for 1981 were based on 1979 costs. See 114.1 CMR 13.00 (1979); Administrative Bulletin 13-2, supra note 33; 114.1 CMR 19.00 (1980); RSC, Executive Summary Fy 1981 Groups of Hospitals (Apr. 4, 1980).

The radical change evidenced by the need to fractionate the initial groups may indicate an inherent invalidity in the initial groupings, and in the methodology for assigning hospitals to comparison groups. This is likely since the original institutional characteristics on which the original assignments were made could not have changed that drastically in one year to warrant regrouping, even if the fiscal year 1981 groupings attempted a more departmental orientation.

⁵⁹ See generally, 4 PAI Progress Reports, supra note 15.

⁶⁰ See, Mass. Gen. Laws Ann. ch. 6A, 32-40 (West Supp. 1981) (authorizing collection of data). See generally correspondence between MHA and RSC over the period of the formation of the groupings, 1976 through 1979.

⁶¹ See Mass. Gen. Laws Ann. ch. 6A, 32-40 (West Supp. 1981).

⁶² Pursuant to Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981), the MHA, the HSA representatives, commercial insurers, and the hospitals are designated as consultees with whom the RSC are to consult in developing the groupings methodology.

⁶³ The RSC records on the development of the groupings fail to indicate that anything more than formal or unsolicited comments were considered. In fact, the MHA initiated litigation against the RSC claiming that the RSC never provided the statutory consultees the right of consultation. See Complaint, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979); see also notes 73-91 infra and accompanying text.

The public hearing on August 13, 1979, one and a half months before the groupings based regulations were promulgated, was the only formal meeting at which all consultees had. the opportunity to make known their views. Public Hearing on Proposed Regulation 114.1 CMR 13.00; Transcripts Before RSC (Aug. 13, 1979).

⁶⁴ For example, fiscal year 1980 groupings omitted routine costs from the groupings and cost comparisons because the data was unavailable in a form that the RSC could use. This diminished the utility of the groups since the hospitals are compared on less than full information. No calculation of reasonable routine cost control occurred.

⁶⁵ See, e.g., R. Fellmeth, The Interstate Commerce Omission: The Public Interest and the ICC 136-90 (1970).

⁶⁶ On the value of participation of the public and interest groups in dealing with the problem of cost control, see generally Weiner, supra note 2, at 58; Cramton, The Why, Where and How of Broadened Public Participation in the Administrative Process, 60 Geo. L.J. 525 (1972)Google Scholar; Gellhorn, Public Participation in Administrative Proceedings, 81 Yale L.J. 359 (1972)Google Scholar.

⁶⁷ In Massachusetts, at most weak support existed for implementation of Chapter 409, the basic rate setting program. See Weiner, Containing Health Costs, Mass. Med. News, Jan. 20, 1981, at 15, col. 1. One authority has characterized industry sentiment as industry pressure to slow the pace of Chapter 409 implementation . CHAP-M, supra note 34, at 1.

However, at least one authority asserts that the hospitals were early backers of the rate setting concept in general. She reports that the hospitals perceived at least three advantages to rate setting in the early 1970s before actual implementation: 1) that external authority would realize that the rises in hospitals operating costs were beyond the hospital administrators control; 2) that cash flow problems would improve and that revenues could be predicted; and 3) that cost shifting by third party payors would diminish. Bauer, supra note 3, at 123.

⁶⁸ Weiner, Containing Health Costs, Mass. Med. News, Jan. 20, 1981, at 19, col. 3.

⁶⁹ See Public Hearing on Proposed Regulation 114.1 CMR 13.00; Transcripts Before RSC (Aug. 13, 1979).

⁷⁰ CHAP-M, supra note 34, at 1.

⁷¹ See Complaint, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979). .

⁷² See generally Weiner, Federal State Conflicts over Health Programs, Mass. Med. News, Jan. 20, 1981, at 15, col. 5.

⁷³ See Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981). See also Plaintiff's Reply Memorandum of Its Motion for Partial Summary Judgment at 2, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979). Hospitals incentives to challenge regulations with so little deleterious impact on them may be to preserve the hospitals consultation rights for future development of groupings with potentially greater impact.

Such a case arose in Massachusetts recently, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979). The litigation turned on the meaning of the term consultation as used in the statute authorizing the RSC to develop groupings in consultation with designated groups or consultees. Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981). As defendant, the RSC asserted that consultation merely meant informing itself of the consultees' views and had the legislature intended a more active role, it would have used different statutory language. In addition, it argued that absent indication of a more restrictive definition, the courts should not create a right in the consultees that exceeds the natural statutory inference, especially where such a definition would unduly hinder the RSC in its work. Defendant's Memorandum in Opposition to Plaintiff's Motion for Partial Summary Judgment, at 6, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979) and cases cited therein. Defendants asserted that they did provide for consultation with the MHA. Affidavit of Peter Hiam in Opposition to Plaintiff's Motion for Preliminary Injunction, at 2, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979).

Plaintiffs argued that defendant's definition of the term consultation is a meaningless construction which, if intended, would not have required writing the term into the statute since defendant's version of consultation would be satisfied with the requisite public hearing on these regulations. Plaintiff's Reply Memorandum in Support of Motion for Partial Summary Judgment, at 4, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979), citing Town of Milton v. Mass. Bay Transp. Auth., 356 Mass. 467, 253 N.E.2d 844 (1969) (consultation occurs where two or more people deliberate together, confer, and discuss a particular matter; a court need not adopt the most restrictive definition); see also Affiliated Hosps. Center, Inc. v. Rate Setting Comm'n, 7 Mass. App. Ct. 563, 565, 389 N.E.2d 744, 745 (1979).

Plaintif also argued that consultation ultimately involves parties in the process of substantive decision-making. Plaintiff's Reply Memorandum in Support of Motion for Partial Summary Judgment, at 6, Mass. Hosp. Ass'n, Inc. v. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979). Courts have construed the consultation right in other cases to mean meaningful consultation at stages early enough to affect agency decisions. See Mass. Hosp. Ass'n v. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979). To support its claim that the RSC denied timely participation in the decisionmaking process, plaintiff argued that the RSC failed to consult with it and that the RSC never provided it with the source data and analyses indicating the research performed to develop the groupings and that not until the public hearing on the proposed regulations did the RSC provide a rationale for the groupings. Id. at 2. Until the hearing, the RSC did not make available to the consultees a report of the groupings prepared four months prior to the hearing. Public Hearing on Proposed Regulation 114.1 CMR 13.00; Transcripts Before RSC (Aug. 13,1979).

⁷⁴ This type of legal challenge asserts that regulations having such minimal impact are of no legal significance. Under the assumption that the statutory mandate called for regulations with legal significance, the challenge asserts that when an agency promulgates regulations without legal significance, it has failed to comply with its statutory mandate to promulgate regulations.

In Massachusetts, one could argue that the RSC failed to comply with its statutory mandate when it promulgated groupings having an intentionally minimal effect. See CHAP-M, supra note 34, at 5. As CHAP-M argued, courts have long regarded such minimal, activity as lacking the legal significance requisite to constitute compliance with the statutory mandate to promulgate regulations. See Goss v. Lopez, 419 U.S. 565, 576 (1975); Ghiglione v. School Comm., 376 Mass. 70, 378 N.E.2d 984 (1978) (grievance hearing conducted by school committee pursuant to its collective bargaining agreement not subject to open meeting law requiring open meetings for collective bargaining sessions).

No one disputes that Massachusetts fiscal year 1980 groupings had an intentionally minimal effect. Public Hearing on Proposed Regulation 114.1 CMR 13.00; Transcripts Before RSC (Aug. 13, 1979); Unsigned RSC Memorandum, Chapter 409 Background and Rationale for Changes Proposed for Fy 1980 Regulations, at 7 (June 13, 1979), cited in CHAP-M, supra note 34; Affidavit of Jack C. Keane in Defendant's Memorandum in Opposition to Plaintiff's Motion for a Preliminary Injunction, at 14, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979).

⁷⁵ In this type of challenge, aggrieved hospitals or cost control groups assert that budget review and charge regulations, based on ineffective irrational groupings constitute arbitrary, capricious, and unreasonable agency action. Actions for declaratory relief and injunctions against the groupings may be brought for any of the aforementioned reasons. See notes 71, 72 supra and accompanying text.

Agency regulations will be invalidated in Massachusetts if arbitrary or capricious, Grocery Mfrs. of America, Inc. v. Department of Pub. Health, 1979 Mass. Adv. Sh. 2291, 393 N.E.2d 881 (1979); Greenleaf Fin. Co. v. Small Loans Reg. Bd., 377 Mass. 282, 385 N.E.2d 1364 (1979); or if unreasonable, Levy v. Board of Registration and Discipline in Med., 1979 Mass. Adv. Sh. 1, 392 N.E.2d 1036 (1979); or irrational, Fioravanti v. State Racing Comm'n, 6 Mass. App. 299, 375 N.E.2d 722 (1978). Declaratory relief remains the appropriate form of challenge to agency regulations. Compare Mass. Gen. Laws Ann. ch. 30, 7 (West Supp. 1981) with Mass. Gen. Laws Ann. ch. 30A, 14 (West Supp. 1981) on adjudication standards.

Under Massachusetts law, any provider of health care services or other party affected by the regulations can challenge the regulations, cf. Mass. Gen. Laws Ann. ch. 30, 7 (West Supp. 1981); Mass. Gen. Laws Ann. ch. 231A, 1 et seq. (West 1976); Mass. Atty. Gen., at 109 (Jan. 12, 1978). This would include the statutory consultees. See Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981).

⁷⁶ See White Dove, Inc. v. Director of Div. of Marine Fisheries, 1980 Mass. Adv. Sh. 1043, 403 N.E.2d 1169 (1980) (for an agency's regulations to be valid, only some rational relation between the regulation and the empowering statute is needed); Fioravanti v. State Racing Comm'n, 6 Mass. App. 299, 375 N.E.2d 722 (1978) (regulation struck down where cannot be supported by any reasonably conceived rational basis).

⁷⁷ Grocery Mfrs. of America, Inc. v. Department of Pub. Health, 1979 Mass. Adv. Sh. 2291, 393 N.E.2d 881 (1979) (invalidated agency regulation for arbitrariness or capriciousness of regulation, not because unsupported by substantial evidence); Levy v. Board of Registration and Discipline in Med., 1979 Mass. Adv. Sh. 1, 392 N.E.2d 1036 (1979) (valid if reasonably related to purposes of the enabling legislation); Greenleaf Fin. Co. v. Small Loans Reg. Bd., 377 Mass. 282, 385 N.E.2d 1364 (1979) (regulations valid where not arbitrary or capricious).

⁷⁸ In Massachusetts, once the agency reaches the threshold of rationality, courts will not overturn a reasonable construction of a regulatory statute adopted by the agency charged with its enforcement. Affiliated Hosps. Center Inc. v. Rate Setting Comm'n, 7 Mass. App. Ct. 563, 579, 389 N.E.2d 744, 752 (1979), citing School Comm. of Springfield v. Board of Eduo, 362 Mass. 417, 441 n.22, 287 N.E.2d 438, 455 n.22 (1972) quoting Investment Co. Inst. v. Camp, 401 U.S. 617, 626-27 (1971).

As long as the RSC can show that the data they had supported their groupings, it will suffice even though the data was inadequate to form more effective groupings. This should refute inferences created by delayed public explanation for and rationale of groupings. The RSC can satisfy the rational relation test by showing that, after trying different combinations and criteria for groupings, statistical analyses supported the hospital groups and the criteria for grouping hospitals, based on the data available. Such quantitative support refutes charges of arbitrariness or capriciousness in agency action according to the judicial standard of review. See data contained in 1-8 PAI Progress Reports, supra note 15, and RSC, Executive Summary Fy 1981 Groups of Hospitals (Apr. 4, 1980).

⁷⁹ See Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979); note 74 supra and accompanying text.

⁸⁰ Id.

⁸¹ Id.

⁸² See Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981). Pursuant to this statute, the legislature delegated the task of developing and implementing a method for grouping hospitals to be used in charge control.

⁸³ See Affiliated Hosps. Center, Inc. v. Mass. Rate Setting Comm'n, 7 Mass. App. Ct. 563, 389 N.E.2d 744 (1979).

⁸⁴ Id.

⁸⁵ Id. at 575-76, 389 N.E.2d at 750-51.

⁸⁶ Id.

⁸⁷ Id. at 573-74, 389 N.E.2d at 750.

⁸⁸ See Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981).

⁸⁹ Affiliated Hosps. Center, Inc. v. Mass. Rate Setting Comm'n, 7 Mass. App. Ct. 563, 575-76, 389 N.E.2d 744, 750-51 (1979).

⁹⁰ Id. at 575, n.23, 389 N.E.2d at 750, n.23.

⁹¹ Under Massachusetts law, the RSC has the authority to define the consultation right; the agency has considerable leeway in interpreting the statutory language that the agency is charged with enforcing. See Grocery Mfrs. of America, Inc. v. Department of Pub. Health, 1979 Mass. Adv. Sh. 2291, 393 N.E.2d 881 (1979).

In addition, while the court will scrutinize the interpretation of the consultation right, it is reluctant to impose its interpretation on the agency. Cf. Justice William Young, Corrected Memorandum on Plaintiff's Motion for Partial Summary Judgment, at 2, Mass. Hosp. Ass'n, Inc. v. Mass. Rate Setting Comm'n, No. 36162 (Suff. Sup. Ct. 1979).

⁹² See notes 36-55 supra and accompanying text.

⁹³ Groupings do not affect directly reasonable cost reimbursement under Medicare, Medicaid, or Blue Cross. However, groupings indirectly do affect reimbursement rates. The groupings are used for informational purposes in reviewing rate of Medicaid reimbursement and Blue Cross reimbursement. See notes 13-36 supra and accompanying text.

In addition, the greater the charges allowed under budget review, the greater will be the demand on such third party payors as Medicaid and Blue Cross to meet those charges. See generally Weiner, Containing Health Care Costs, Mass. Med. News, Nov. 21, 1980, at 19, col. 3.

⁹⁴ This applies equally to any state trying to use groupings.

⁹⁵ See notes 56-72 supra and accompanying text.

⁹⁶ The Progress Reports prepared in developing the groupings indicate the need for uniform reporting. See 1-8 PAI Progress Reports, supra note 15. CHAP-M has already suggested the need for uniform reporting. CHAP-M, supra note 34, at 18. The Massachusetts RSC was considering such ,a proposal for the second groupings. RSC, Executive Summary Fy 1981 Groups of Hospitals (Apr. 4, 1980). This author includes the proposal here not as an original proposal, but as an essential requirement of the proposed model for groupings-based rate setting.

For example, the New York Comparability Model, analogous to groupings, utilizes uniform reporting for its cost comparison data. N.Y. Pub. Health Law 2803 (McKinney 1976); N.Y. Health Regs. Ch. II, 86-1.3 (1980).

⁹⁷ In Massachusetts, the RSC earlier proposed uniform reporting standards and a manual. An earlier form appeared before the first groupings were promulgated but after they were prepared. 114.1 CMR 4.00, 4.90 (1979). See PAI Progress Reports, supra note 15; RSC, Executive Summary Fy 1981 Group of Hospitals (Apr. 4, 1980). Currently, the RSC has developed and implemented Uniform Reporting Standards. 114.1 CMR 4.00 (1981). Its recent amendment will permit more departmental comparisons to occur by clarifying such elements as standard units of measure and by defining what a cost center contains; see 114.1 CMR 4.00 (1980).

The groupings for fiscal year 1981 used a departmental admission mix as an effort toward an increasingly departmental, less institutional orientation than the fiscal year 1980 groupings. 114.1 CMR 19.00 (1980). The ineffectiveness of even the fiscal year 1981 groupings arises from other elements which should not detract from the fiscal year 1981 progress in using uniform reporting and routine, ancillary and overhead costs to develop more departmental groupings. See 114.1 CMR 19.00, 19.03 (1980); note 88 infra.

⁹⁸ See notes 36-55 supra and accompanying text.

⁹⁹ 114.1 CMR 19.04(1980).

¹⁰⁰ See notes 36-55 supra and accompanying text.

¹⁰¹ PSROs are created pursuant to 42 U.S.C. 1320 it seq. (1974).

Should current proposals to abolish PSROs succeed, hospitals internal review and utilization committees could provide an alternate determination of necessity. See Wasted Health Dollars, Evaluation of Professional Standards Review Organizations, Hearing Before Subcomm. on Oversight and Investigations of the Comm. on Interstate and Foreign Commerce, House of Representatives, 96th Cong., 2d Sess. (1980).

¹⁰² This author proposes that reasonable cost as denned by the groupings should be the same definition of reasonable cost used by Medicare, Medicaid, Blue Cross and other third party payors. Although the RSC has indicated interest in so doing, it had not implemented such a system as of September 1981. See Werner, supra note 37, at 199-200.

However, such a uniform definition of reasonable cost denned by groupings cannot be mandated lawfully at present. In Massachusetts, statutory authority only allows the RSC to review and approve Blue Cross proposed rates of reimbursement as negotiated with the individual hospitals; it does not authorize the RSC to define reasonable cost for Blue Cross. Mass. Gen. Laws Ann. ch. 176A, 5 (West 1976) and Mass. Gen. Laws Ann. ch. 6A, 32-40 (West Supp. 1981). Such a proposed uniform definition creates a potential federalstate conflict. The state may not impose its definition of reasonable cost on Medicare programs. Medicare may not impose its definition of reasonable cost on Medicaid programs. Medicaid remains free to define reasonable cost as long as it does not exceed Medicare's definition of reasonable cost for rates of reimbursement. See notes 13-36 supra and accompanying text; Mass. Gen. Laws Ann. ch. 6A, 32 (West Supp. 1981); 42 U.S.C. 1395 et seq. (1976).

Recent trends indicate an increasing tendency to maintain separate definitions of reasonable cost for Medicare and Medicaid. See Weiner, Federal State Conflicts Over Health Programs, Mass. Med. News, Jan. 26, 1981, at 15, col. 4.

¹⁰³ See notes 36-55 supra and accompanying text; 114.1 CMR 13.00, 13.10(d)(1)-(4) (1979); Administrative Bulletin 13-2, supra note 33.

¹⁰⁴ See Mass. Gen. Laws Ann. ch. 6A, 40 (West Supp. 1981). For the regulatory process governing regulations promulgated on the record, see Mass. Gen. Laws Ann. ch. 30A, 1-10A (West Supp. 1981).

¹⁰⁵ At present no obligation exists to present consultees with the proposed groupings prior to hearings, the first meaningful opportunity for discussion.

¹⁰⁶ As long as the RSC provides legitimate reasons for rejecting the suggestions, it is free to reject the contributory view, under the definition of consultation.