Nw. Youth Servs., Inc. v. Commonwealth

66 A.3d 301

NORTHWESTERN YOUTH SERVICES, INC., Adelphoi Village, Appalachian Youth Services, Inc., Hermitage House Youth Services, Inc., Pyramid Healthcare, Inc. and Tabor Children's Services, Appellees

v.COMMONWEALTH of Pennsylvania, DEPARTMENT OF PUBLIC WELFARE and Office of Children, Youth and Families, Department of Public Welfare, Appellants.

Supreme Court of Pennsylvania.

Argued Sept. 13, 2011.

Decided April 24, 2013.

Mark Alan Aronchik, Esq., Alva Catherine Mather, Esq., John Stephen Stapleton, Hangley Aronchik Segal & Pudin, P.C., Daniel M. Fellin, Esq., Doris M. Leisch, Esq., PA Department of Public Welfare, for Appellant.

James G. Collins, Esq., Cozen O'Connor, John A. Kane, Esq., Thomas Kelley, III, Esq., Kelley & Murphy, Joseph Patrick G. Murphy, Esq., for Appellee.

Before: CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ.

OPINION

Justice SAYLOR.^*

This is a direct appeal challenging the Commonwealth Court's determination that an administrative bulletin issued by the Department of Public Welfare is comprised of procedurally improper regulations.

I. Background

Per the Public Welfare Code,¹ county governments bear the responsibility for the delivery of adequate public welfare services to Pennsylvania's children who require them. See62 P.S. § 2305. County children and youth agencies often fulfill this duty through contracts with licensed private organizations. Appellees are non-profit entities furnishing out-of-home child welfare and/or juvenile justice services under such county contracts.

Appellants, the Department of Public Welfare and its Office of Children, Youth and Families (collectively, the “Department” or “DPW”), bear the broader responsibility to assure the provision of adequate child-welfare services throughout the Commonwealth. See62 P.S. § 701. To this end, the Code reposes a substantial component of the responsibility for financial administration in DPW, which—in coordination with the Governor and through recourse to the legislative appropriations process—must substantially reimburse counties for authorized expenditures. See62 P.S. §§ 704.1, 709.1. In turn, the Department pursues blocks of federal aid under Title IV–E of the Social Security Act, 42 U.S.C. §§ 670–679c. As considered below, on account of the federal overlay, substantial constraints are imported into the state scheme impacting Pennsylvania's child-welfare programming.

The present litigation against DPW was commenced by Appellees in the Commonwealth Court in July of 2009. Appellees filed an original jurisdiction petition for review challenging recent changes to the Department's practices and policies in determining appropriate reimbursement of county expenditures for out-of-home, child-welfare placement services. According to the petition, the reimbursement scheme—as reflected in the Code, in published Department regulations, and in previous administrative practices—embodied a needs-based budgeting process supplemented by compliance review via intermittent auditing of county and service provider records by the state agency. Appellees contended, however, that DPW, through a series of recent administrative bulletins, had unilaterally and inappropriately substituted a restrictive, statewide rate-setting process in place of the prior regime. Appellees also complained that, whereas previous practices emphasized recordkeeping and documentation by the counties, the bulletins imposed newly-minted, strict, and burdensome cost-reporting obligations on providers operating under county contracts. Furthermore, Appellees asserted, although the Department has erected rigorous new thresholds to reimbursement, it had not disclosed the criteria guiding its own assessment of allowable costs.

Appellees lodged substantive and procedural challenges, claiming that the changes effected by the bulletins were ultra vires and unconstitutional, or, alternatively, that DPW had failed to comply with mandatory regulatory-review procedures designed to ensure a meaningful opportunity for public participation and independent regulatory oversight.² Appellees sought declaratory and injunctive relief.

In defense, the Department acknowledged that it had modified certain of its practices for monitoring county child-welfare expenditures, but it explained that the changes were for good reason and had been implemented in a lawful manner. Beginning in 2003, the Department related, the federal government had conducted an audit of the Commonwealth's program for securing federal, Title IV–E funding. Based on the probe, the federal government took the position that some $220 million in payments for child-welfare services previously made to the Commonwealth were unjustified, either because the children receiving the services were ineligible under Title IV–E criteria, or since Commonwealth records contained insufficient documentation to support federal contributions. Accordingly, DPW noted, the federal government sought clawback repayments.

While the Department clarified that it was contesting the federal government's claims, it stressed the need for improved documentation connected with county child-welfare contracts to avoid jeopardizing future federal-funding increments. DPW also highlighted that the flexible needs-based budgeting process was never a license for counties to make unauthorized or undocumented expenditures. Rather, the Department observed, it has always maintained the authority—and the duty—to undertake child-eligibility and cost-allowability reviews.³

In furtherance of the above position (and alongside other contentions), the Department advanced preliminary objections asserting a demurrer. These were overruled, in material part, by the Commonwealth Court via a single judge memorandum. The court referenced existing statutes and codified regulations requiring DPW to reimburse counties for a substantial percentage of their costs,⁴ reasoning that these did not allow that payments might be conditioned on providers' conferral of extensive cost data. In this regard, the court acknowledged the Department's statutory authority to visit and inspect children's institutions and examine all matters related to their administrationand management, see id. § 911(a)(2), but it found that these expressed powers did not subsume the regimented submission of the newly required information on prescribed forms. The court also concluded, with reference to DPW's general licensing authority,⁵ that there was no sanction for the mandates contained in the agency's bulletins. Finally, the Commonwealth Court rejected the Department's contention that its published regulation pertaining to reviews and audits of contracted service providers, see55 Pa.Code § 3170.106(a),⁶ authorizes a requirement for cost-data reporting.

Appellees, for their part, pursued summary relief under Rule of Appellate Procedure 1532(b), asserting that there were no material factual disputes and their right to relief was clear. The Commonwealth Court agreed and awarded judgment in Appellees' favor. See Nw. Youth Servs., Inc. v. DPW, 1 A.3d 988 (Pa.Cmwlth.2010). In doing so, the court focused on the question of whether the prevailing Department bulletin should have been vetted through the formal procedures for promulgation of valid legislative regulations. See supra note 2.

Initially, the Commonwealth Court discussed the difference between agency substantive regulations and statements of policy, observing that the distinction turns on whether the agency pronouncement creates a binding norm. See Nw. Youth Servs., 1 A.3d at 993 (citing PHRC v. Norristown Area Sch. Dist., 473 Pa. 334, 350, 374 A.2d 671, 679 (1977) (explaining that valid substantive rules establish standards of conduct and carry the force of law, whereas policy statements convey future intentions without binding effect)). In making this assessment, the court considered the language of the pronouncements contained in the bulletin, the manner in which the Department had implemented them, and their effect on administrative discretion. See id. (referencing factors delineated in Cash Am. Net of Nev., LLC v. Commonwealth, 978 A.2d 1028, 1033 (Pa.Cmwlth.2009) ( en banc ), aff'd,607 Pa. 432, 8 A.3d 282 (2010)).

In terms of the bulletin's language, the Commonwealth Court rejected the Department's position that mere guidelines were entailed. Instead, the court indicated, “a review of the Bulletin's plain language establishes that it is replete with mandatory, restrictive language that is indicative of a regulation.” Nw. Youth Servs., 1 A.3d at 993. As examples, the court referenced the bulletin's admonitions that: “the maximum levels of state and federal reimbursement approved by the Department are binding on the counties”; “expenditures above the level of Departmental participation and those services funded without Departmental approval shall be the fiscal responsibility of the county”; a provider's “[f]ailure to submit a complete set of contract documentation forms within the appropriate time frame will result in the county receiving a maximum allowable financial participation that is based on the incomplete information”; and compliance with detailed instructions for completion of a cost allocation plan with regard to institutionalresidential facilities “is mandatory.” See id. at 993–94 (quoting DPW, Office of Children, Youth and Families Bulletin No. 3170–09–02, at 3–4, 13, 80 (Issued Aug. 25, 2009)) (emphasis omitted). The court analogized such language to requirements which the Department had couched as policy statements in connection with medical assistance programming, but which had been deemed by the Commonwealth Court to be procedurally invalid regulations. See id. at 994–95 (citing Eastwood Nursing & Rehab. Ctr. v. DPW, 910 A.2d 134 (Pa.Cmwlth.2006)).

As to the second factor—implementation—the Commonwealth Court similarly found that the Department intended for the bulletin's prescriptions to be treated, not as...