Former Sec. 413.031(k) of Texas Labor Code is Constitutional

Tuesday, December 29, 2009 | 0

By James M. Loughlin

In a long-awaited decision, the 3rd Court of Appeals in Austin has declared that former Section 413.031(k) of the Workers’ Compensation Act is facially constitutional, reversing Travis County District Court Judge Stephen Yelenosky’s Dec. 7, 2006 judgment declaring former Section 413.031(k) facially unconstitutional because it does not provide the parties to a medical dispute an opportunity for an administrative hearing. However, the Court of Appeals affirmed Judge Yelenosky’s order denying the hospitals’ request to set aside the 1,406 medical fee-dispute decisions in which the hospitals sought additional reimbursement based on the invalidation of the 1992 Inpatient Hospital Fee Guideline.   

Case Background

Medical dispute decisions were once appealed to the State Office of Administrative Hearings (“SOAH”) for a contested case hearing before an administrative law judge.  However, effective Sept, 1, 2005, the Texas Legislature eliminated appeals to SOAH.  The legislature amended Section 413.031(k) to provide that a party dissatisfied with a medical dispute decision was required to appeal that decision directly to Travis County District Court by filing a suit for judicial review.  Pursuant to the amended statute, the case would be heard by a district court judge, applying the substantial evidence standard of review.  Under this standard of review, it is very difficult to reverse an agency’s decision based on its findings of fact.

Trial Court Proceedings

In January of 2006, various hospitals and hospital systems filed suit against the Division of Workers’ Compensation challenging the constitutionality of Section 413.031(k), as amended.  The challenge was brought in connection with the hospitals’ request to reverse 1,406 medical dispute decisions in which the hospitals sought additional reimbursement based on the invalidation of the 1992 Inpatient Hospital Fee Guideline. The decisions were all issued after the amendment of Section 413.031(k) and therefore, the hospitals were required to appeal those decisions by filing suit in district court.  However, the hospitals did not do so, arguing that because the statute was unconstitutional and therefore, void, they did not have to comply with the statute’s appeal requirements.  Various carriers intervened in the suit opposing the hospitals’ request to set aside the medical-dispute decisions on the grounds that the decisions became final when the hospitals failed to appeal the decisions within 30 days after receipt.  In addition, one of the carriers, Texas Mutual, also challenged the constitutionality of Section 413.031(k) of the Act.

The hospitals and Texas Mutual filed motions for summary judgment regarding their respective claims which were heard by Judge Stephen Yelenosky on Oct. 23, 2006.  The constitutional challenge to Section 413.031(k) was based on the argument that the statute, as amended, does not provide adequate due process.  Specifically, under the new process, the Division conducts a paper review, without an evidentiary hearing, and then judicial review of the division’s decision is limited to substantial evidence review of the administrative “record” developed by this paper review.  Because there is no evidentiary hearing the parties never get to conduct discovery, call witnesses, object to evidence, or otherwise develop a proper administrative record.  The carriers’ response to the hospitals’ argument that they did not have to appeal the decisions to prevent them from becoming final was that alleging that a statute is unconstitutional does not obviate the need to comply with the statute.   

Following the hearing, Judge Yelenosky declared that Section 413.031(k), as amended effective Sept. 1, 2005, is facially unconstitutional because it fails to afford parties to a medical dispute an opportunity for hearing in which witnesses are sworn and the parties can rebut adverse evidence and cross-examine witnesses before a final order is issued.  However, the judge denied the hospitals’ request to set aside, reverse, and remand to the division the 1,406 decisions issued by the division in which the division denied the hospitals’ requests for additional reimbursement. The hospitals then appealed the court’s judgment to the Texas 3rd Court of Appeals in Austin.   

Intervening Legislative Action

Following Judge Yelenosky’s judgment declaring the amended Section 413.031(k) facially unconstitutional, the Texas Legislature convened for its 80th regular session.  During that session, the legislature again amended Section 413.031(k) of the Texas Labor Code to restore the right to an administrative hearing in workers’ compensation medical disputes.  The amended statute became effective Sept. 1, 2007.  However, the statute, as amended effective Sept. 1, 2007, did not apply to the disputes still pending in district court that were appealed between Sept. 1, 2005 and Sept. 1, 2007.  Therefore, the amendment of Section 413.031(k) did not moot the challenge to the constitutionality of Section 413.031(k) as amended effective Sept. 1, 2005.          

The Court of Appeals Decision Addressed the Issue of Constitutionality

The 3rd Court of Appeals began its analysis by explaining that there are two types of challenges to the constitutionality of a statute: facial and as-applied.  The court explained that facial challenges are disfavored and generally permitted only in the context of the First Amendment:

A party seeking to invalidate a statute “on its face” bears a heavy burden of demonstrating that the statute is unconstitutional in all of its applications. To sustain a facial challenge, the challenging party must establish that the statute, by its terms, always operates unconstitutionally.  In contrast, a party making an as-applied challenge must only show that the statute, though generally constitutional, is unconstitutional because of the way in which it was applied to that party in a particular case.

HCA Healthcare Corp. et al. v. Texas Department of Insurance, et al., Case Number 03-07-00007-CV (Dec. 18, 2009) at p. 5, citations omitted.
 
The court noted that there are two types of medical disputes – medical fee disputes and medical necessity disputes and that the hospitals failed to show that the statute operates unconstitutionally in medical necessity disputes.  Therefore, the court held that former Section 413.031(k) is facially constitutional because the hospitals failed to meet their burden of showing that the statute is unconstitutional in all of its applications.    

Court Addresses the Review of 1,406 DWC Medical Dispute Resolution Decisions

The hospitals argued that they did not have to timely appeal the 1,406 medical dispute decisions by filing suit in district court within 30 days of the date the decisions were issued because they challenged the entire statute as being void.  The Court of Appeals rejected this argument holding that, “Alleging a constitutional violation or defect does not excuse a party from complying with applicable law, whether that law requires further administrative procedures or the filing of substantial evidence review appeals to preserve error.”  Therefore, the court affirmed Judge Yelenosky’s order denying the hospitals’ request to set aside the 1,406 medical-fee dispute decisions in which the hospitals sought additional reimbursement based on the invalidation of the 1992 Inpatient Hospital Fee Guideline.          

Effect of the Court’s Decision

Since Section 413.031(k) of the Texas Labor Code was amended again effective Sept. 1, 2007 to restore the right to an administrative hearing, the court of appeals’ decision only applies to medical fee disputes that were appealed directly to district court from a medical dispute decision, between Sept. 1, 2005 and Sept. 1, 2007, and that are still pending in district court. The court of appeals’ decision leaves open the possibility of an as-applied challenge to the former statute in individual cases.  In an as-applied challenge, the party only has to show that the statute is unconstitutional because of the way it was applied to that party in a particular case.  There may be plaintiffs in some direct-appeal cases currently pending in district court who decide to assert an as-applied challenge to the former statute to try and obtain an evidentiary hearing before the agency because of the difficulty in prevailing in district court under the substantial evidence standard of review. The court of appeals’ decision with regard to the 1,406 medical dispute decisions issued by the Division means that those decisions in favor of the carriers are final unless the court changes its opinion or is reversed by the Texas Supreme Court.   

The hospitals can challenge the Court of Appeals’ decision by filing a motion for rehearing with the court or filing a petition for review with the Texas Supreme Court. Until all avenues for further review have been exhausted, the court of appeals’ decision is not final and is subject to change.

James M. Loughlin, is a partner with the Austin-based law firm of Stone Loughlin & Swanson, LLP.