United Wire, Metal & Machine Health & Welfare Fund v. Morristown Memorial Hosp.

• Decision Date: 06 July 1992
• Docket Number: Civ. A. No. 90-2639.
• Citation: 793 F. Supp. 524
• Court: U.S. District Court — District of New Jersey
• Parties: UNITED WIRE, METAL & MACHINE HEALTH AND WELFARE FUND, et al., Plaintiffs, v. MORRISTOWN MEMORIAL HOSPITAL, et al., Defendants.

793 F. Supp. 524

UNITED WIRE, METAL & MACHINE HEALTH AND WELFARE FUND, et al., Plaintiffs, v. MORRISTOWN MEMORIAL HOSPITAL, et al., Defendants.

Civ. A. No. 90-2639.

United States District Court, D. New Jersey.

May 27, 1992.

As Amended July 6, 1992.

Ronald E. Wiss, David A. Schrader, Wolff & Samson, Roseland, N.J., Albert G. Kroll, Verona, N.J., Thomas W. Gleason, New York City, Louis Pechman, Lambos & Giardino, Newark, N.J., David Grossman, Schneider, Cohen, Solomon, Leder & Montalbano, Cranford, N.J., Thomas V. Jardine, Joseph R. Pagano, Jardine & Pagano, Springfield, N.J., James R. Zazzali, Zazzali, Zazzali, Fagella & Nowak, Newark, N.J., for plaintiffs.

Benjamin Clarke, Sr. Deputy Atty. Gen., Eileen C. Stokley, Deputy Atty. Gen., Trenton, N.J., for defendants.

Frank Ciesla, Elizabeth Dusaniewskyj, Giordano, Halleran & Ciesla, Middletown, N.J., for defendant/intervenor.

OPINION

WOLIN, District Judge.

Currently before the Court are defendants' and plaintiffs' cross-motions for summary judgment. Initially, this Court finds that the Eleventh Amendment does not prevent this Court from deciding any claims brought against the state agencies and the officials employed by the State of New Jersey. Likewise, this Court finds that New Jersey's hospital rate setting mechanism does not constitute a tax, and therefore the Tax Injunction Act does not foreclose this Court from deciding the issues before it.

This Court will grant defendants' motions for summary judgment as to plaintiffs' federal constitutional claims. This Court further holds, however, that ERISA pre-empts certain provisions included in New Jersey's scheme for regulating hospital rates and the regulations promulgated thereunder. Therefore, this Court finds that New Jersey's hospital rate setting scheme is unenforceable. Due to the potential impact of its decision, this Court will stay its Order for a period of ten days to afford the parties an opportunity to appeal the Court's ruling to the Third Circuit Court of Appeals.

I. INTRODUCTION

Several self-insured union employee welfare benefit plans (the "Benefit Plans") qualified under the Employee Retirement Income Security Act, 29 U.S.C. § 1002 et seq., as amended ("ERISA") and their participants (the "individual plaintiffs") (collectively the "plaintiffs"), have brought an action in which they seek a declaration that New Jersey's scheme for setting hospital rates is invalid.¹ Plaintiffs argue that this Court must strike down the method New Jersey utilizes for determining hospital rates on both federal and state constitutional grounds and because ERISA preempts the state statute.

The gravamen of the complaint focuses on charges included within the hospital billing procedure which are in excess of a patient's "actual hospital costs." These include: costs of care for the indigent, charges to pay a hospital's bad debts, subsidies for the medicare program, and fees to reimburse hospitals for discounts given by the hospitals to other types of benefit plans.

This Court has jurisdiction over plaintiffs' claims brought under the United States Constitution, ERISA and the Taft-Hartley Act pursuant to 28 U.S.C. § 1132. This Court has jurisdiction over plaintiffs' causes of action that arise under New Jersey's Constitution under the principles of pendent jurisdiction and supplemental jurisdiction, 28 U.S.C. § 1367.

In the exercise of its discretion, however, this Court declines to consider the Carpenter's Union's claim that this Court should force the Hospital Defendants to reimburse the charges paid by the Carpenter's Union under protest. The Court declines to exercise its pendent jurisdiction and supplemental jurisdiction over this state law claim in the interest of comity. The Carpenter's Union argues that the fees should be reimbursed because they were paid under compulsion — the hospital rate setting regulation forces a hospital to institute collection actions against parties who refuse to pay DRG rates. The New Jersey State Courts have never faced this issue. Moreover, the Hospital Defendants commenced related actions, which are currently pending in New Jersey, in which they seek reimbursement from plaintiffs who failed to pay the contested charges. In view of the interrelatedness of these actions, this Court will defer to the New Jersey State Courts.² Venue is proper in this district under 28 U.S.C. § 1391.

II. BACKGROUND

In 1971 New Jersey enacted the Health Care Facilities Planning Act (the "Act"), a hospital rate setting scheme for Blue Cross and certain federally funded programs such as Medicaid. L.1971 c. 136 § 18. Rates were based primarily on a hospital's actual costs for each patient who participated in the programs encompassed by the law. In 1978, New Jersey passed a statute that amended the 1971 legislation and, in part, mandated rate setting for all payors. L.1978 c. 83 ("Chapter 83"). Chapter 83 contained a dual purpose: to "contain the rising costs of health care services, and to ensure the financial solvency of hospitals."

Chapter 83 designed an interconnected regulatory system to embrace its purposes. Chapter 83 gave the Commissioner of Health (the "Commissioner") responsibility for overall supervision and administration of the hospital rates. The Commissioner, in conjunction with the Health Care Administration Board (the "Board"), proposes the rate schedule and determines, in accordance with the statute, the types of charges that should be included in hospital rates. Additionally, the law created the New Jersey Hospital Rate Setting Commission (the "Commission"). The Commission approves hospital rates. N.J.S.A. 26:2H-4.1; 26:2H-18.1; 26:2H-18.9; N.J.A.C. 8:31B-3.72; N.J.A.C. 8:31B-3.39. The New Jersey Department of Health (the "DOH") oversees the Commission and administers the rates.

In order to help contain costs, Chapter 83 set hospital rates prospectively, instead of upon actual cost. Under Chapter 83, various procedures are divided into diagnostic related groups ("DRG"), and a rate is assigned to each DRG. Instead of charging actual costs incurred by a hospital for treating an individual patient, the hospital has to charge the DRG rate which is designated for that classification. Despite the calculation of bills without regard to actual costs, a hospital bill still reflects a charge that previously represented actual costs. This charge is categorized as "total costs." A "DRG" charge also appears on a patient's bill.

A particular hospital's DRG rate consists of a weighted average of the cost incurred by that specific hospital to treat a particular illness and the average cost incurred by hospitals throughout the state to treat the condition. Accordingly, this system penalizes a hospital that incurs costs greater than that allocated to a particular DRG category and rewards hospitals that provide more efficient services for a particular DRG.³

Additionally, as part of its DRG rate, a hospital must include a charge for uncompensated care. Uncompensated care consists of both care to the indigent and expenses that result from bad debts. N.J.S.A. 26:2H-18.d; N.J.A.C. 8:31B-3.41; 8:31B-7.1. This charge stems from a hospital's mandate to admit anyone regardless of his or her ability to pay.⁴ Only hospital patients incur costs for uncompensated care. In order to receive funds for uncompensated care a hospital must determine whether a patient has any health insurance.

Furthermore, hospitals that treat patients who have Medicare can recoup only the amount allotted by the Medicare system for the particular treatment. Medicare invariably pays less than the DRG rate allocated for a particular condition. N.J.S.A. 26:2H-18.1c, however, permits the Commissioner with the approval of the Board, "to adjust the DRG rate to account for costs incurred by statutes and regulations that affect the delivery of health care." Pursuant to this statute, the Commissioner, with the Board's approval, enacted N.J.A.C. 8:31B:3.73. This regulation allows the hospitals to include in their DRG rate an amount necessary to recover the difference between the Medicare rate of payment and the DRG rate. These costs are borne by non-medicare patients.

Moreover, Chapter 83 allows the Commission to decrease hospital costs for certain classes of payors. In particular, the Commission may grant a "payor differential" if it is supported by a "quantifiable economic benefit such as the degree of promptness and volume of payment to the hospital." N.J.S.A. 26:2H-18b. Pursuant to this provision, the Commission has granted a 2.2% discount to plans such as Blue Cross. None of the Benefit Plans currently receive such a discount. Only the Carpenter's Union Trust Fund (the "Carpenter's Union"), has requested such a discount. The Commission has not yet reached a decision as to the Carpenter's Union's application.

In addition to the 2.2% discount the Commission grants an 11% discount to plans with open enrollment. Because the Benefit Funds must limit their enrollment to union members and their families, the Benefit Funds cannot receive this discount. The bills of patients who did not belong to plans that received these discounts were increased in order to supply hospitals with the reduced income they lost because of the discounts. N.J.A.C. 8:31B-3.39.

Regulations, promulgated in accordance with the rate setting scheme, contain an appeal process for individuals whose DRG costs exceed their total costs by $250.00. Individuals who have third party insurance that does not reimburse the hospital according to DRG rates or that contains a deductible are not eligible to appeal. Accordingly, none of the individual plaintiffs can avail themselves of the appeal process.

The Benefit Plans do not provide the same type of payments for hospital costs incurred by their members. For example, the District Council of Ironworkers of Northern New Jersey Welfare Fund (the "IWF") Benefit Plan covers 95% of the actual hospital costs incurred by its...