Argued and submitted September 21, 2012,
Resubmitted January 7, 2013.
On review from the Court of Appeals.[*] DHS 20091957, CA A145136
Cecil A. Reniche-Smith, Assistant Attorney General, Salem, argued the cause and filed the brief for petitioner on review. With her on the brief were John R. Kroger, Attorney General, and Anna M. Joyce, Solicitor General.
Samuel E. Sears of Larimer & Sears, Salem, argued the cause and filed the brief for respondent on review.
This is a contested-case proceeding in which the Department of Human Services (department or DHS) revoked a contractor's eligibility to provide home delivered meals to Medicaid clients because the contractor breached its contract with the department by failing to comply with certain food preparation and delivery standards. The contractor, Homestyle Direct, objected to the revocation, arguing that the standards in the contract are not enforceable because they should have been promulgated as administrative rules. The department rejected those arguments, concluding that whether the standards could have been promulgated as administrative rules is irrelevant to their enforceability as terms of a contract. The Court of Appeals reversed on the ground that, notwithstanding this court's decision in Coats v. ODOT, 334 Or 587, 54 P.3d 610 (2002), the department cannot enforce unpromulgated rules as terms of a contract. For the reasons that follow, we reverse the decision of the Court of Appeals and affirm the final order of the department.
A. The Home Delivered Meals Program
Title XIX of the Social Security Act, 42 USC § 1396 et seq., authorizes federal grants to states for medical assistance, known as Medicaid, to low-income persons who are age 65 or older, disabled, or members of families with dependent children. See 42 CFR § 430.0. Within a broad set of federal rules, states decide "eligible groups, types and ranges of services, payment levels for services, and administrative and operating procedures." Id. A participating state is required to submit a plan to the federal government "describing the nature and scope of its Medicaid program and giving assurances that it will be administered in conformity with" federal law. 42 CFR § 430.10. The states may contract with providers to furnish services under its Medicaid program. See 42 CFR 431.107(b). Such agreements must include commitments by the providers to keep adequate records, make certain disclosures, and comply with other standards. Id.
DHS administers such a Medicaid program. The program includes, among other things, a Home Delivered Meals (HDM) Program, which provides meals to disabled homebound individuals as a subsidized benefit under the Medicaid program. DHS contracts with nongovernment agency providers to prepare and deliver the meals, which DHS reimburses directly for their services. To qualify as an HDM provider, an individual or organization must meet applicable regulatory and licensing standards. See OAR 410-120-1260(5) (2008). Providers must submit an application to DHS for agency approval and must sign a "Provider Agreement" form to obtain reimbursement for their services. The signed form "constitutes agreement * * * to comply with all applicable * * * Provider rules and federal and state laws and regulations." OAR 410-120-1260(2). On completion of the application and execution of the Provider Agreement, the department issues a "provider number" to the applicant. OAR 410-120-1260(7). Issuance of the provider number "establishes enrollment of an individual or organization as a Provider for the specific category(ies) of services covered by the * * * application." OAR 410-120-1260(9).
Under the applicable administrative rules, the provider may terminate enrollment in the service program at any time. OAR 410-120-1260(15)(a). The department is also authorized to terminate or suspend a provider from enrollment in the program for, among other reasons, "[b]reaches of [the p]rovider agreement." OAR 410-120-1260(15)(b)(A). When the department determines that a provider has failed to meet the requirements of the agreement, it is authorized to suspend the provider number immediately. OAR 410-120-1260(16). The provider then is entitled to a contested case hearing to determine whether the provider number should be revoked. Id.
The relevant facts are not in dispute. Homestyle is an Idaho corporation that prepares frozen meals. In 2005, it applied for and obtained a provider number authorizing it to provide home-delivered meals to Medicaid recipients in Oregon. Homestyle prepared frozen meals and shipped them to Medicaid clients once or twice each month by United Parcel Service. The department then reimbursed Homestyle for the meals using Medicaid funds.
In October 2008, the department adopted new standards governing the HDM program. Among other things, the new HDM standards impose "[n]utrition [p]rovider [b]asic [r]equirements." Those include a requirement that "[n]utrition providers must be able to provide at least one hot meal or other appropriate meal at least once a day, five or more days per week." If the provider believes that delivering five or more hot meals each week is not feasible, the providers "must provide a written request to the State agency for approval of a lesser frequency of meal service." The meal provider is further required to "develop procedures for regularly (does not have to be daily) taking and documenting meal temperatures of the last meal served on each route." The new HDM standards note that the state health code requires a hot temperature of at least 140 degrees Fahrenheit.
In November 2008, the department notified all HDM providers of the new standards by sending a letter to each provider with a packet of documents including the new standards. The packet also included a new provider enrollment form. The department advised the recipients of the packet that each provider was required to complete the new provider enrollment form to continue receiving reimbursement for delivering HDM meals after January 31, 2009. The department stated that, after that date, providers who had not completed a new provider enrollment form and agreed to the new terms would no longer be eligible to participate in the program. It also stated that, "[b]y signing the provider enrollment form, providers agree to meet the * * * general provider standards as well as the attached Nutrition Program Standards. * * * Compliance is mandatory for payment."
The new provider enrollment form consisted of a single page, which included areas for providers to fill in current business and contact information, as well as a signature line. Immediately below the signature line, the form stated: "The Home Delivered Meal provider must comply with * * * the Medicaid Nutrition Standards published at http://www.dhs.state.or.us/spd/tools/cm/hdm/standards.pdf when providing Home Delivered Meals paid for by Medicaid. Compliance is mandatory for payment."
On November 21, 2008, Homestyle's owner, completed and signed the new provider enrollment form and returned the form to the department. Following that, however, Homestyle continued to prepare frozen meals for home delivery once or twice each month to Oregon Medicaid clients. It did not submit a written request to the department for permission to deliver meals less frequently than the HDM standards required. Homestyle also continued to have its frozen meals delivered by UPS package delivery service, whose drivers did not check the temperature of the food inside the delivered packages.
In April 2009, the Department of Human Services determined that Homestyle was not complying with the new HDM standards because, among other things, it had failed to provide hot meals, failed to provide meals at least five days each week without first seeking authorization to do so, and failed to perform temperature checks on delivered food. DHS issued a notice to Homestyle that it intended to revoke Homestyle's provider number, ending its right to receive reimbursement. Homestyle requested a contested case hearing as provided in OAR 410-120-1260(16).
At the hearing, Homestyle did not dispute that it had failed to meet the HDM standards as DHS had contended. Instead, it asserted that those standards were unenforceable because they amounted to unpromulgated administrative rules. In the alternative, Homestyle asserted that it had not breached the provider agreement because the provider agreement did not amount to a contract in the first place. According to ...