Image Api, LLC v. Cecile Young, Executive Commissioner of the Texas Health and Human Services Commission

Supreme Court of Texas
══════════
No. 22-0308
══════════

Image API, LLC,
Petitioner,

v.

Cecile Young, Executive Commissioner of the Texas Health and
Human Services Commission,
Respondent

═══════════════════════════════════════
On Petition for Review from the
Court of Appeals for the Seventh District of Texas
═══════════════════════════════════════

Argued November 29, 2023

CHIEF JUSTICE HECHT delivered the opinion of the Court.

By statute, the Texas Health and Human Services Commission
“shall” contract for “annual independent external financial and
performance audits” of Medicaid contractors, which “must be completed”
before the end of the next fiscal year. 1 The court of appeals held that

1 TEX. HUM. RES. CODE § 32.0705(b) (“The commission shall contract

with an independent auditor to perform annual independent external financial
and performance audits of any Medicaid contractor used in the commission’s
these requirements are “directory”, as opposed to “mandatory”, and thus
the commissioner did not act ultra vires in directing that a contractor be
audited years after the period covered. 2 Labels aside, conducting timely,
annual audits is not left to HHSC’s discretion and is in that sense
mandatory. But in this case, HHSC’s noncompliance with the statutory
mandate does not foreclose its use of the audit results. We therefore
affirm the part of the court of appeals’ judgment dismissing Image’s
claims arising from the 2016 audit. We reverse the part of the court of
appeals’ judgment dismissing the rest of Image’s suit and remand the
case to the trial court for further proceedings consistent with this
opinion.
I
HHSC “is the state agency designated to administer federal
Medicaid funds” 3 and other benefits programs, such as SNAP 4 and
TANF. 5 From 2009 to 2015, Image API, LLC provided services to HHSC

operation of Medicaid. The commission regularly shall review the Medicaid
contracts and ensure that: . . . (3) to the extent possible, audits under this
section are completed in a timely manner.”); id. § 32.0705(d) (“An audit
required by this section must be completed before the end of the fiscal year
immediately following the fiscal year for which the audit is performed.”).
2 683 S.W.3d 54, 62 (Tex. App.—Amarillo 2022).

3 TEX. GOV’T CODE § 531.021(a) (“The commission is the state agency

designated to administer federal Medicaid funds.”); TEX. HUM. RES. CODE
§ 32.021(a) (“The commission is the single state agency designated to
administer the medical assistance program provided in this chapter in
accordance with 42 U.S.C. Section 1396a(a)(5).”).
4 Supplemental Nutrition Assistance Program.

5 Temporary Assistance for Needy Families.

2
under the parties’ Document Processing Services Agreement. 6 Image’s
job was to manage a processing center for incoming mail related to
Medicaid and other benefits programs. This mail included benefits
applications submitted on paper, which Image sorted, scanned, and then
routed electronically to the appropriate place or person within HHSC’s
system.
The Agreement provided that HHSC would compensate Image
using its “retrospective cost settlement model”. HHSC made monthly
payments to Image based on Image’s estimated allowable costs plus a
reasonable profit, subject to monthly and annual reviews to reconcile the
payments with Image’s actual allowable costs. In this process, Image
was to provide HHSC access to its records, and HHSC was to conduct
its regular audits according to agreed procedures. Image was
contractually obligated to refund payments in excess of allowable costs.
From 2009 to 2015, HHSC identified overpayments and requested
corrections more than twenty times, and each time Image complied.
The Legislature has also made HHSC responsible for auditing
certain contractors. Section 32.0705(b) of the Human Resources Code
states that HHSC “shall contract with an independent auditor to
perform annual independent external financial and performance audits
of any Medicaid contractor used in the commission’s operation of
Medicaid.” 7 “Medicaid contractor” is defined in subsection (a), as we

6 The Agreement has been extended multiple times since this initial

contract term.
7 TEX. HUM. RES. CODE § 32.0705(b).

3
discuss fully below. 8 After imposing the audit requirement,
subsection (b) provides that the “commission regularly shall review the
Medicaid contracts and ensure” that various goals are met, including,
“to the extent possible, [that] audits under this section are completed in
a timely manner.” 9 Subsection (d) imposes a concrete deadline: “An
audit required by this section must be completed before the end of the
fiscal year immediately following the fiscal year for which the audit is
performed.” 10
In 2016, HHSC notified Image that an independent external firm
would conduct an audit of Image’s performance and billing for the years
2010 and 2011. Image cooperated fully with the audit, which was
completed in 2017. The auditors ultimately concluded that HHSC had
overpaid Image approximately $440,000 in costs relating to bonuses,
holiday pay, overtime, and other unauthorized labor expenses that
Image had incurred but that were not allowable under the Agreement. 11
HHSC wrote Image that to recoup the overpayments, it would begin
deducting $73,500 per month from payments on Image’s invoices and
would continue doing so for six months, until the total amount had been
recouped. 12

8 Id. § 32.0705(a).

9 Id. § 32.0705(b)(3).

10 Id. § 32.0705(d).

11 Subsequent audits for 2012 through 2014 found an additional $1.4

million in overpayments, which are also at issue. For simplicity, we refer to the
dispute here as being over the 2016 audit.
12 HHSC expressly invoked Section 9.01 of its Uniform Contract Terms

4
Image sued HHSC’s executive commissioner in her official
capacity for engaging in ultra vires conduct. 13 Image alleged that the
commissioner had no legal authority to conduct an untimely audit of
Image, a Medicaid contractor, in violation of Section 32.0705(d). It
sought a declaration that the 2016 audit for contract years 2010 and
2011 violated Section 32.0705(d). It also sought to enjoin HHSC from
conducting or relying on any noncompliant audit.
Image moved for summary judgment. HHSC 14 filed a plea to the
jurisdiction and a cross-motion for summary judgment, 15 asserting that
it is both immune from suit and entitled to judgment on the merits
because Image is not a Medicaid contractor under Section 32.0705(a)

and Conditions, which is incorporated into the Agreement. Section 9.01(a)
addresses the right of either party to set off in its invoice or payment “any
undisputed amount that a Party in good faith determines should be
reimbursed to it or is otherwise payable to it by the other Party”.
13 “[A] suit against a state official can proceed even in the absence of a

waiver of [sovereign] immunity” if the plaintiff pleads and proves that the
official “acted without legal authority or failed to perform a purely ministerial
act.” Hall v. McRaven, 508 S.W.3d 232, 238 (Tex. 2017) (quoting City of El Paso
v. Heinrich, 284 S.W.3d 366, 372 (Tex. 2009)).
14 Though the commissioner is the only named defendant, Image’s suit

challenges the conduct of the agency, and so we will refer to HHSC as if it were
the named defendant.
15 In an ultra vires case, “the jurisdictional inquiry and the merits
inquiry are [often] intertwined.” Chambers–Liberty Cntys. Navigation Dist. v.
State, 575 S.W.3d 339, 345 (Tex. 2019) (citing Tex. Dep’t of Parks & Wildlife v.
Miranda, 133 S.W.3d 217, 228 (Tex. 2004)). Where a statutory violation is
alleged, the court must “begin by considering the proper construction” of the
statute alleged to be violated “because whether the [defendant’s] conduct
constitutes [an] ultra vires action[] that falls within an exception to
governmental immunity depends on what the statute required of the
[defendant].” Sw. Bell Tel., L.P. v. Emmett, 459 S.W.3d 578, 583 (Tex. 2015)
(citing Miranda, 133 S.W.3d at 227-228).

5
and because the deadline for audits of Medicaid contractors in
Section 32.0705(d) is directory—or not judicially enforceable. The trial
court denied Image’s motion and HHSC’s plea to the jurisdiction but
granted HHSC’s motion for summary judgment and signed a final
judgment for the commissioner. The order does not give reasons for the
court’s ruling. Both parties appealed. 16
The court of appeals agreed with Image that it is a Medicaid
contractor under Section 32.0705(a), 17 but it also agreed with HHSC
that the one-year deadline in Section 32.0705(d) is directory and
therefore does not constrain the commissioner’s discretion. 18 Because of
its construction of subsection (d), the court held that HHSC’s plea to the
jurisdiction should have been granted. The court of appeals reversed
that part of the trial court’s judgment and rendered judgment
dismissing Image’s entire suit for want of jurisdiction. 19
Only Image seeks review. The issues are whether it is a Medicaid
contractor to which Section 32.0705 applies 20 and the consequences of

16 Although the trial court ruled for HHSC on the merits, HHSC
appealed on the ground that the court should have granted its plea to the
jurisdiction and dismissed the case.
17 683 S.W.3d at 60.

18 Id. at 62.

19 Id.

20 Image argues that HHSC cannot assert this challenge because it did

not file its own petition for review. This is incorrect. “A party who seeks to alter
the court of appeals’ judgment must file a petition for review.” TEX. R. APP.
P. 53.1. The court of appeals’ judgment reversed the trial court’s denial of
HHSC’s plea to the jurisdiction and dismissed Image’s lawsuit for want of
jurisdiction. HHSC is content with that judgment and prays that it be affirmed.

6
HHSC’s failure to comply with the one-year deadline for audits.
II
We first consider whether Image is a Medicaid contractor. 21 A
“Medicaid contractor” is defined by Section 32.0705(a)(2) as “an entity
that . . . under a contract with the commission . . . performs one or more
administrative services in relation to the commission’s operation of
Medicaid, such as claims processing, utilization review, client
enrollment, provider enrollment, quality monitoring, or payment of
claims.” 22 Because the statute does not define “administrative services”,
the court of appeals looked to several dictionaries, which reflect that

Its argument that Image is not a Medicaid contractor is an alternative path to
affirmance.
As we have explained, in an ultra vires case, jurisdiction and merits are
intertwined. See supra note 15. Section 32.0705(d) imposes a deadline for
audits of Medicaid contractors, which are defined in subsection (a). If Image is
not a Medicaid contractor, then the 2016 audit did not violate subsection (d),
the commissioner did not act ultra vires, and sovereign immunity requires that
Image’s lawsuit be dismissed. See McRaven, 508 S.W.3d at 234, 243-244 (upon
concluding that McRaven did not act ultra vires, affirming the court of appeals’
judgment dismissing Hall’s suit for want of jurisdiction).
21 Whether Image meets the statutory definition of Medicaid contractor

is a mixed question of law and fact. Cf. Helix Energy Sols. Grp., Inc. v. Gold,
522 S.W.3d 427, 435 (Tex. 2017) (“A plaintiff’s status as a seaman under the
Jones Act is a mixed question of law and fact.” (citing Chandris, Inc. v. Latsis,
515 U.S. 347, 369 (1995))). When the facts are uncontroverted—as they are
here—the court may decide the mixed question as a matter of law. See BPX
Operating Co. v. Strickhausen, 629 S.W.3d 189, 196 (Tex. 2021). The “trial
court has no discretion in determining what the law is or applying the law to
the facts, even when the law is unsettled.” In re State Farm Lloyds, 520 S.W.3d
595, 604 (Tex. 2017) (cleaned up).
22 TEX. HUM. RES. CODE § 32.0705(a)(2). The definition excludes a
“health and human services agency as defined by Section 531.001, Government
Code”. Id. § 32.0705(a)(1).

7
administrative, when used as an adjective, connotes “office-y”,
secretarial, or ministerial tasks. 23 The court reasoned that Image’s work
of sorting, digitizing, and routing mail meets the basic definition of
administrative services. The court further reasoned that Image
performed its service “in relation to”—broadly speaking—HHSC’s
operation of Medicaid because the processed documents include
applications for Medicaid benefits. 24 Turning to the statute’s list of
examples, the court concluded that Image’s services facilitate “client
enrollment, at the very least”, pointing to HHSC’s request for proposal
(RFP) in response to which Image was hired. 25
The 100-page RFP states that HHSC is seeking a document-
processing vendor to make eligibility determinations for programs
including Medicaid more efficient. Under the heading “Mission
Statement”, the RFP states: “HHSC’s mission in this procurement is to
procure services that will assist in its efforts to modernize the eligibility
system and improve Texans’ access to health and human service
programs in a manner that assures the highest levels of quality,
accuracy and efficiency.” Under the heading “Mission Objectives”, the
RFP lists the programs, including Medicaid, for which it is seeking a
vendor “to support the determination of client eligibility”. Then it
continues: “The procurement of document processing services supports

23 See 683 S.W.3d at 58; see also TEX. GOV’T CODE § 311.011(a) (“Words

and phrases shall be read in context and construed according to the rules of
grammar and common usage.”).
24 See 683 S.W.3d at 58.

25 Id. at 59.

8
the mission objectives described in this section.” Those objectives
include “obtain[ing] program and operational optimization of eligibility
determination[s]” for Medicaid and other programs.
The Document Processing Services Agreement incorporates the
RFP expressly. The Agreement also states that “HHSC’s procurement of
document processing services . . . will assist in its efforts to modernize
the eligibility system and improve Texans’ access to health and human
service programs in a manner that assures the highest levels of quality,
accuracy and efficiency.” In an exhibit to the Agreement containing
modifications to Image’s proposal, Image acknowledges potential
“increases in the number of Medicaid clients” and the effect of such an
increase on Image’s fees.
We agree with the court of appeals’ conclusion. The parties
dispute whether subsection (a)(2)’s inclusive example list modifies
“administrative services” or “operation of Medicaid”. But the examples
listed—“claims processing, utilization review, client enrollment,
provider enrollment, quality monitoring, or payment of claims”—are
both “administrative services” and HHSC’s “operation of Medicaid”. 26

26 A Medicaid handbook prepared by the Kaiser Commission on
Medicaid and the Uninsured states that:
Primary duties of a state Medicaid agency include:
• Informing individuals who are potentially eligible and
enrolling those who are eligible.
• Determining what benefits it will cover in which settings.
• Determining how much it will pay for covered benefits and
from whom it will purchase services.
• Processing claims from fee-for-service providers and making

9
The question is thus whether Image provides “administrative services
in relation to” one of these processes or one that is similar in kind or
class. 27 The RFP and the Agreement make clear that HHSC solicited
document-processing services so that it could make accurate eligibility
determinations faster, facilitating client enrollment. 28
HHSC argues that administrative services means managerial
services and that a Medicaid contractor “must have some role in the
actual management of HHSC’s Medicaid program.” As HHSC points out,

capitation payments to managed care plans.
• Monitoring the quality of the services it purchases.
• Ensuring that state and federal health care funds are not
spent improperly or fraudulently.
• Collecting and reporting information necessary for effective
program administration and accountability.
• Resolving grievances by applicants, enrollees, providers and
plans.
THE KAISER COMM’N ON MEDICAID & THE UNINSURED, THE MEDICAID
RESOURCE BOOK 130 (Jan. 17, 2003) [hereinafter MEDICAID RESOURCE BOOK],
https://www.kff.org/medicaid/report/the-medicaid-resource-book/.
27 In HILCO Electric Cooperative v. Midlothian Butane Gas Co., we said:

[T]he rule of ejusdem generis . . . provides that when words of a
general nature are used in connection with the designation of
particular objects or classes of persons or things, the meaning of
the general words will be restricted to the particular
designation. Thus, we hold that [the statutory phrase at issue in
that case] . . . is limited to purposes similar in kind or class to
the twenty-one identified categories.
111 S.W.3d 75, 81 (Tex. 2003) (citations omitted).
28 See MEDICAID RESOURCE BOOK, supra note 26, at 130 (including
“[i]nforming individuals who are potentially eligible and enrolling those who
are eligible” among the primary duties of a state Medicaid agency).

10
there are dictionary definitions that equate administrative or
administration with management or executive work. 29 In the
governmental realm, there are many instances in which administrative
is used in reference to managerial or skilled work, rather than routine
or helping work. 30
But importantly, administrative work is not always executive or
managerial work. “[W]ords can have more than one meaning. . . . The
fact that [a] word may sometimes be used to convey a different meaning
is the very reason why we look for its common, ordinary meaning.” 31 We

29 See, e.g., Administration, BLACK’S LAW DICTIONARY (11th ed. 2019)

(“The management or performance of the executive duties of a government,
institution, or business; collectively, all the actions that are involved in
managing the work of an organization.”); Administrative, BLACK’S, supra (“Of,
relating to, or involving the work of managing a company or organization;
executive.”).
30 For example, administrative agencies like HHSC are governmental

bodies, usually housed in the executive branch, “with the authority to
implement and administer particular legislation.” Agency, BLACK’S, supra note
29 (third definition). The head of the Office of Court Administration is its
“administrative director”. TEX. GOV’T CODE §§ 72.001(2), 72.012.
31 Jaster v. Comet II Constr., Inc., 438 S.W.3d 556, 563 (Tex. 2014)
(plurality op.). We explained:
To determine [an undefined statutory term’s] common, ordinary
meaning, we look to a wide variety of sources, including
dictionary definitions, treatises and commentaries, our own
prior constructions of the word in other contexts, the use and
definitions of the word in other statutes and ordinances, and the
use of the words in our rules of evidence and procedure.
Id.
Administrative services is not a commonly defined noun. But an
administrative assistant is “a person whose job is to support an executive,
group, department, or organization especially by handling administrative
tasks (such as data entry, correspondence, filing, and scheduling

11
are also obligated to “read [statutory terms] in context”. 32 Doing so, we
think that if the Legislature had meant to limit the definition of
Medicaid contractor to one who takes a lead in managing Medicaid, it
would have said so expressly.
HHSC also argues that the parties’ course of dealing confirms
that Image is not a Medicaid contractor, pointing to a checkbox section
of the parties’ Agreement. One box that could have been checked but
wasn’t discusses the financial and performance audits required by
Section 32.0705. The implication is that if the parties had considered
Image to be a Medicaid contractor, the box would have been checked.
Whatever evidentiary value the unchecked box may have, 33 it cannot
overcome the language in the RFP and the Agreement acknowledging
Image’s role in assisting HHSC to optimize and modernize its eligibility-
determination system.
We hold that Image is a Medicaid contractor under
Section 32.0705(a).
III
We turn to whether the court of appeals erred in its conclusion
that the audit deadline imposed by Section 32.0705(d) is directory. The

appointments)”. Administrative assistant, MERRIAM-WEBSTER (online version,
last visited June 17, 2024); see also Administrative assistant, WIKIPEDIA (last
visited June 17, 2024) (stating that an administrative assistant is “[i]n most
instances . . . identical to the modern iteration of the position of secretary”).
32 TEX. GOV’T CODE § 311.011(a).

33 None of the checkboxes in this section are checked, including the box

next to the section requiring Image to procure and maintain certain insurance
coverage.

12
statute provides:
(b) The commission shall contract with an independent
auditor to perform annual independent external
financial and performance audits of any Medicaid
contractor used in the commission’s operation of
Medicaid. The commission regularly shall review the
Medicaid contracts and ensure that:
...
(3) to the extent possible, audits under this section
are completed in a timely manner.
...
(d) An audit required by this section must be completed
before the end of the fiscal year immediately
following the fiscal year for which the audit is
performed. 34
The 2016 audit undeniably failed to meet the deadline in subsection (d).
The court of appeals agreed with HHSC that subsection (d)’s
deadline is “mere[ly] a suggestion”. 35 The court acknowledged that “a
common man would read [‘must’] as being mandatory”. 36 But relying on
this Court’s caselaw, the court reasoned that the statute’s lack of a
penalty for noncompliance “creates the presumption that ‘must be
completed’ is directory, as opposed to mandatory.” 37 This presumption
is “buttressed by other considerations”, the court explained, including
HHSC’s heavy workload:
Construing “must be completed” as authorizing only a year

34 TEX. HUM. RES. CODE § 32.0705(b)(3), (d) (emphases added).

35 683 S.W.3d at 60.

36 Id. at 61.

37 Id.

13
to begin and finish the annual audit could well hamper [the
statute’s] objective, given the plethora of other business
conducted by the Commission. Unless one forgets, we are
dealing with a bureaucracy engaged in many activities and
serving many functions. 38
Thus, “in the end,” the lack of noncompliance penalty, coupled with
HHSC’s “many activities and . . . functions”, led the court “to forgo the
common man’s interpretation of ‘must’” and hold that subsection (d) “is
directory, as opposed to mandatory.” 39
A
The distinction between mandatory and directory timing
provisions derives from our caselaw. 40 The usual case involves a statute
or rule requiring an act to be performed within a certain amount of time
prior to or during litigation or an administrative process—e.g., service
of process on a state agency within thirty days of the filing of a petition
for judicial review, 41 holding a hearing on property forfeiture within
thirty days of the defendant’s answer, 42 or filing a declaration of water
use in an agency by a specified date 43—and a party who failed strictly to

38 Id.

39 Id. at 61-62.

40 See, e.g., Chisholm v. Bewley Mills, 287 S.W.2d 943, 945 (Tex. 1956)

(“There is no absolute test by which it may be determined whether a statutory
provision is mandatory or directory.”).
41 AC Ints., L.P. v. Tex. Comm’n on Env’t Quality, 543 S.W.3d 703 (Tex.

2018).
42 State v. $435,000.00, 842 S.W.2d 642 (Tex. 1992).

43 Edwards Aquifer Auth. v. Chem. Lime, Ltd., 291 S.W.3d 392 (Tex.

2009).

14
comply. When construing such a provision, we first ask whether the
statute expresses the timing requirement in mandatory language. Does
it say that the act “shall” or “must” be performed within the prescribed
time? “[I]n a statute”, these words “are generally understood as
mandatory terms that create a duty or condition.” 44 Or does it instead
say only that the act “may” or “should” be performed, indicating that it
is directory? 45
When mandatory language is used, the question becomes “what
consequences follow a failure to comply.” 46 The answer turns on whether
a particular consequence is “explicit” in the text 47 or “logically necessary
to accomplish the statute’s purpose”. 48 If a particular consequence is
either, then “the courts will apply that consequence.” 49 If no particular
consequence is explicit or logically necessary, then we decline to create
a statutory consequence for noncompliance, because that “is the
Legislature’s job, not ours.” 50
The mandatory–directory distinction can be confusing. We have

44 AC Ints., 543 S.W.3d at 709 (citing Helena Chem. Co. v. Wilkins, 47

S.W.3d 486, 493 (Tex. 2001)); see also Smith v. Spizzirri, 144 S. Ct. 1173, 1177
(2024) (“[T]he use of the word ‘shall’ ‘creates an obligation impervious to
judicial discretion.’” (quoting Lexecon Inc. v. Milberg Weiss Bershad Hynes &
Lerach, 523 U.S. 26, 35 (1998))).
45 TEX. GOV’T CODE § 311.016(1) (“‘May’ creates discretionary authority

or grants permission or a power.”).
46 AC Ints., 543 S.W.3d at 709 (quoting $435,000.00, 842 S.W.2d at 644).

47 Id. at 714.

48 Id. at 713.

49 Id.

50 Id.

15
labeled statutes using mandatory language as directory in the absence
of an explicit or logically necessary consequence for noncompliance. 51
And “[a]lthough the word ‘shall’ is generally construed to be mandatory,
it may be and frequently is held to be merely directory.” 52 But we have
never equated directory with discretionary. To the contrary, we have
expressly disavowed such a reading. Recently, we said:
Our law contains many such commands for agencies to
undertake ministerial actions within a stated time,
without any further statutory guidance on what happens if
the command is broken. Such commands are part of the
law; whether they prescribe a consequence, and whether
they are characterized as “mandatory” or “directory,” they
are not mere suggestions to be disregarded. 53
A statute requiring that an act be performed within a certain
time, using words like shall or must, is mandatory. Whether the statute
imposes a specific penalty for noncompliance is a separate question, but
a mandatory timing provision is not rendered otherwise by the statute’s

51 See id. at 714 (“Because the Legislature expressed no particular
consequence for failing to meet that deadline and none is logically necessary,
we presume that the Legislature intended the requirement to be directory
rather than mandatory . . . .”); Chisholm, 287 S.W.2d at 945 (“If the statute
directs, authorizes or commands an act to be done within a certain time, the
absence of words restraining the doing thereof afterwards or stating the
consequences of failure to act within the time specified, may be considered as
a circumstance tending to support a directory construction.”).
52 Chisholm, 287 S.W.2d at 945; see also AC Ints., 543 S.W.3d at 708

(quoting Chisholm).
53 In re Stetson Renewables Holdings, LLC, 658 S.W.3d 292, 295 (Tex.

2022); see also AC Ints., 543 S.W.3d at 714 (“[J]ust because a provision . . . is
directory does not make it a mere suggestion that can be disregarded at will.”).

16
failure to state a penalty for noncompliance. 54 Applying these principles,
Section 32.0705(d) is mandatory because it states that a statutorily
required audit “must be completed” within the time prescribed.
B
HHSC argues that subsection (b)(3) authorizes it to complete
audits performed under Section 32.0705 later than the deadline in
subsection (d). Subsection (b) states that “[t]he commission regularly
shall review [its] Medicaid contracts and ensure that” certain
benchmarks are met, including that “(3) to the extent possible, audits
under this section are completed in a timely manner.” As HHSC
acknowledges, we must read subsections (b) and (d) together, “giving
effect to each provision so that [neither] is rendered meaningless or mere
surplusage.” 55
HHSC tries to harmonize the provisions this way:
“[S]ubsection (b)(3) directs that the audit be conducted in a timely
fashion but provides HHSC with authority to conduct an audit
afterwards”, whereas “subsection (d) directs what ‘timely’ means”. But
this reading cannot be correct because it renders meaningless
subsection (d)’s statement that an audit “must be completed” by the end
of the fiscal year following the audit year.

54 See Stetson, 658 S.W.3d at 297 (“[E]ven when there is no judicially

enforceable consequence of a broken deadline, a mandatory deadline can still
be both mandatory and far from pointless.”); Chem. Lime, 291 S.W.3d at 404
(“We have said that the word ‘must’ is given a mandatory meaning when
followed by a noncompliance penalty but this does not suggest that when no
penalty is prescribed, ‘must’ is non-mandatory.” (cleaned up)).
55 TIC Energy & Chem., Inc. v. Martin, 498 S.W.3d 68, 74 (Tex. 2016)

(citing City of San Antonio v. City of Boerne, 111 S.W.3d 22, 25 (Tex. 2003)).

17
This reading is also undermined by the statute’s history. 56 What
is now Section 32.0705 was enacted in 1999 as Section 12.0123 of the
Health and Safety Code. 57 Section 12.0123 contained the text in
subsections (a) through (c) of Section 32.0705, but there was no
subsection (d). Section 12.0123(b)(3) stated that the Commission
“regularly shall review its Medicaid contracts and ensure that[] . . . to
the extent possible, audits under this section are completed in a timely
manner”, 58 but “timely” was not defined. In 2015, the Legislature moved
Section 12.0123 to Section 32.0705 of the Human Resources Code and
amended it to add subsection (d). 59 If the Legislature had intended for
HHSC to retain discretion on the timing of its audits of Medicaid
contractors, it would not have amended the statute to say that the audits
“must be completed” by a specific deadline.
Finally, subsections (b)(3) and (d) can be harmonized to give effect
to the plain language of each. The focus of subsection (b) is on HHSC’s
duty to arrange for an annual independent external audit of its Medicaid
contractors and on what its Medicaid contracts should say about these

56 The history of the legislation is not the same thing as legislative
history. See Pruski v. Garcia, 594 S.W.3d 322, 328 n.2 (Tex. 2020) (citing Ojo
v. Farmers Grp., Inc., 356 S.W.3d 421, 445 n.31 (Tex. 2011) (Willett, J.,
concurring in part)). “Variations in enacted text can lend helpful interpretive
context” because “they boast the imprimatur of the Legislature as a whole.” Id.
(quoting Ojo, 356 S.W.3d at 445 n.31).
57 Act of May 29, 1999, 76th Leg., R.S., ch. 1411, § 1.10, 1999 Tex. Gen.

Laws 4761, 4766.
58 Id.

59 Act of March 26, 2015, 84th Leg., R.S., ch. 1, § 3.0016, 2015 Tex. Gen.

Laws 1, 154-155.

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audits. Because “text cannot be divorced from context”, 60
subsection (b)(3) requires HHSC to “regularly . . . review [its] Medicaid
contracts and ensure that” they support the timeliness benchmark.
Subsection (d) then tells HHSC what timeliness is and sets a hard
deadline: each audit “must be completed” by the end of the fiscal year
following the audit year.
We reject HHSC’s contention that subsection (b)(3) transforms
subsection (d)’s (later enacted) “must” into a “may”.
IV
HHSC’s 2016 audit of Image thus failed to comply with the
deadline in Section 32.0705. We turn finally to the consequences of that
failure.
To avoid usurping the Legislature’s authority, when an agency
fails to comply with a statutory duty, the Judiciary may impose only
consequences that are explicit in the statutory text or “logically
necessary to accomplish the statute’s purpose”. 61 The “logically
necessary” test is text-based too. We do not “choos[e] legal consequences
without any direction from the text.” 62 Doing so risks “trespass[ing]
beyond the judicial realm and into the policy decisions that are proper
for the [Legislature].” 63 And courts must be especially vigilant when

60 Worsdale v. City of Killeen, 578 S.W.3d 57, 69 (Tex. 2019).

61 AC Ints., 543 S.W.3d at 713.

62 Id.; see Chem. Lime, 291 S.W.3d at 404 (“The EAAA does not suggest

that an applicant can be fined for a late filing or that the water allocated should
be reduced accordingly. The only penalty the EAAA suggests is that late
applications will not be considered.”).
63 Stetson, 658 S.W.3d at 293.

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asked to “[f]ashion[] an extratextual judicial remedy against the
executive branch”, for doing so “creates a serious risk that the courts will
intrude into the prerogatives of both other branches.” 64
Image concedes that a Medicaid contractor is liable in damages
for fraudulent overcharges or payments in breach of contract. HHSC has
made no such allegation against Image. Nor has Image disputed the
overcharges found in HHSC’s 2016 audit. Absent allegations of
misconduct, Image argues, the consequence for a late audit under
Section 32.0705(d) must be that HHSC cannot recoup payments
identified as unallowable. This consequence is not explicit in the text,
but Image argues it would serve Chapter 32’s general purposes of
“enabl[ing] the state to provide medical assistance on behalf of needy
individuals and . . . to obtain all benefits for those persons authorized
under the Social Security Act or any other federal act.” 65 Disallowing
recoupment of overpayments, Image argues, would serve this purpose
by motivating HHSC to conduct timely audits, as it regularly does
anyway under the retrospective cost settlement model for paying
contractors. A contractor found to have charged HHSC costs for which
reimbursement is not allowed can make adjustments when the
overcharge is found in regular reviews or an annual audit when it can
be difficult, as in this case, to repay overcharges years before. In Image’s
view, audits within the statutory deadline would ensure timely error
correction, aid HHSC as a good steward of the public funds it is

64 Id. at 297.

65 TEX. HUM. RES. CODE § 32.001.

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entrusted to administer, and maximize state funds available for medical
assistance. HHSC should be able to use the results of late audits only
prospectively, Image argues, ensuring that overcharges are corrected
going forward.
Image’s arguments are not unreasonable, but that is not the test
for determining the consequences of an untimely audit under
Section 32.0705(d). The test for a consequence not expressed in the
statute is that it be “logically necessary” to give effect to the statute.
Disallowance of recoupment does not give effect to Section 32.0705(d),
much less Chapter 32 as a whole. There is no textual clue whatsoever
that the result Image urges is what the Legislature intended. 66 An
injunction prohibiting HHSC from collecting overpayments found by the
2016 audit would therefore be error.
We leave open the possibility that a Medicaid contractor could sue
to stop an untimely audit from proceeding. But Image did not object to
the 2016 audit at the time and complied with it fully. And, as we have
noted, Image has not disputed the audit’s findings.
We thus conclude that Image’s action for a declaration that
HHSC’s 2016 audit was ultra vires and void, and for an injunction
prohibiting HHSC from using the result of the audit or recouping
overcharges from Image, must be dismissed. Because Image’s request

66 See Stetson, 658 S.W.3d at 296-297 (“Here, the 90-day deadline is

unaccompanied by any textual indication that the Comptroller’s failure to act
could in any way suspend the legislature’s unambiguous command that
program eligibility must end on December 31.”).

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for relief regarding prospective audits has not been adjudicated, 67 we
remand the case to the trial court for further proceedings. 68
* * * * *
We hold that Image is a Medicaid contractor under
Section 32.0705(a), and that the deadline in Section 32.0705(d) for
auditing HHSC’s Medicaid contractors is mandatory, but that HHSC’s
failure to meet the deadline does not preclude it from using the result of
the audit or pursuing recoupment of overcharges found in the audit. We
affirm the part of the court of appeals’ judgment dismissing Image’s
claims arising from the 2016 audit for lack of jurisdiction, we reverse
the part of the judgment dismissing the remainder of Image’s suit, and
we remand to the trial court for further proceedings consistent with this
opinion.

Nathan L. Hecht
Chief Justice

OPINION DELIVERED: June 21, 2024

67 Image’s Second Amended Petition “seeks a declaration that HHSC

may not commence any future audit of Plaintiff’s performance under the
contract later than ‘the end of the fiscal year immediately following the fiscal
year for which the audit is performed.’”
68 HHSC has not argued that even if we determine that Image is a
Medicaid contractor, the Agreement’s audit provisions gave HHSC
independent authority to audit Image after the deadline prescribed by
Section 32.0705(d). Accordingly, we express no view on that issue.

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