Amendment of N.J.A.C. 8:31B-3.31 and N.J.A.C. 8:31B-3.51, In re

• Decision Date: 26 June 1990
• Docket Number: B-3
• Citation: 575 A.2d 481,119 N.J. 531
• Parties: In re the AMENDMENT OF N.J.A.C. 8:3131 AND N.J.A.C. 8:3151 by the State of New Jersey Commissioner of Health and the State Health Care Administration Board. and In re the AMENDMENT OF N.J.A.C. 8:3131 by the State of New Jersey Commissioner of Health and the State Health Care Administration Board.
• Court: New Jersey Supreme Court

Page 531

119 N.J. 531

575 A.2d 481

In re the AMENDMENT OF N.J.A.C. 8:31B-3.31 AND N.J.A.C. 8:31B-3.51 by the State of New Jersey Commissioner of Health and the State Health Care Administration Board and In re the AMENDMENT OF N.J.A.C. 8:31B-3.31 by the State of New Jersey Commissioner of Health and the State Health Care Administration Board.

Supreme Court of New Jersey.

Argued Jan. 2, 1990.

Decided June 26, 1990.

Eileen O'Donnell, Deputy Atty. Gen., for appellant, Dept. of Health (Peter N. Perretti, Jr., Atty. Gen., atty.; James J. Ciancia, Asst. Atty. Gen., of counsel).

Murray J. Klein, for respondent, Warren Hosp. (Cohen, Shapiro, Polisher, Shiekman and Cohen, attys., Murray J. Klein, Lawrenceville, and Leonard Fishman, Philadelphia, Pa., on the brief).

The opinion of the Court was delivered by

STEIN, J.

This appeal concerns the facial validity of amendments to two regulations concerning New Jersey's hospital-rate-setting system promulgated by the Department of Health (Department) pursuant to the Health Care Facilities Planning Act (the Act). N.J.S.A. 26:2H-1 to -52. The amendments to one regulation, N.J.A.C. 8:31B-3.31, provide in essence that a hospital must "conditionally accept," or "not accept," its proposed Schedule of Rates in order to appeal for additional graduate medical resident positions by transfer between hospitals; moreover, any addition of such resident positions may not result in a change to a higher teaching-status peer group, thus precluding any beneficial change in rates that would ordinarily accompany enhancement of a hospital's teaching status. The challenged amendment to the second regulation, N.J.A.C. 8:31B-3.51(b)(4), provides that hospitals may appeal only under the "not accept" appeal option for increases in costs associated with an increase in the number of graduate medical residents above the number approved by the Hospital Rate Setting Commission for reimbursement for the period beginning July 1, 1985.

The Appellate Division concluded that the amendments to N.J.A.C. 8:31B-3.51(b)(4) are facially invalid because they "severely penalize" a hospital for exercising a statutory right of appeal by "exacting severe financial consequences," 227 N.J.Super. 386, 392, 547 A.2d 721 (1988), but declined to consider the validity of the amendments to N.J.A.C. 8:31B-3.31. Ibid. We granted certification, 114 N.J. 507, 555 A.2d 624 (1989), and now reverse.

I.

Warren Hospital (Warren) is a non-profit, general acute-care hospital located in Phillipsburg. In 1980 Warren established a family-practice residency program in an effort to respond to the need for additional family-practice physicians in the rural areas of Warren and Sussex counties. The program began as a coordinated effort between Warren and Overlook Hospital, located in Summit. At the inception of the program, Overlook Hospital provided training for first-year residents and Warren provided training for second- and third-year residents. The long-range plan was that Warren would gradually expand its program and train residents during all three years. The Department encouraged the establishment of Warren's family-practice residency program, which was partially funded by a grant from the Department of Higher Education. Rural areas, such as Warren County, have a particular need for family practitioners, who often set up practices in the areas where they trained as residents.

Between 1980 and 1985 the Department classified Warren as a non-teaching hospital for rate-reimbursement purposes. Although Warren engaged in teaching functions during those years, its family-practice program was not large enough to meet the Department's criteria for minor or major teaching hospitals. In 1986, however, Warren's program increased to over fifteen residents as a result of integration of first-year residents from Overlook Hospital into its program. Thus, for the first time, Warren's residency program qualified it as a minor teaching hospital under N.J.A.C. 8:31B-3.22(b)3. The amendments at issue affected Warren's ability to seek a higher teaching status based on the expansion of its residency program, its ability to appeal that issue, and its ability to recoup costs associated with the expansion of its family-practice residency program.

In June and July 1986, Warren filed appeals in the Appellate Division, facially challenging the amendments to both regulations; the appeals were consolidated.

The Appellate Division agreed with Warren's contention that the amendments to N.J.A.C. 8:31B-3.51(b)(4) are invalid because they conflict with the statutory provision granting hospitals the right to appeal the sufficiency of their reimbursement rates. 227 N.J.Super. at 391, 547 A.2d 721. Pursuant to N.J.S.A. 26:2H-18.1a, "the [Hospital Rate Setting] Commission shall make the determinations and hear appeals provided for in this Act in a timely manner pursuant to regulations proposed by the [C]ommissioner [of Health] and approved by the [Health Care Administration] Board." The Appellate Division concluded that the amendments to N.J.A.C. 8:31B-3.51(b)(4) subvert the legislative intent to provide an effective avenue of appeal by relegating hospitals seeking to attain higher peer-group classifications to the "not accept" option. According to the court, "[i]t would not be realistic for [a hospital] to select the 'not accept' option, because the losses associated with that choice will never be offset by a successful appeal." 227 N.J.Super. at 392, 547 A.2d 721. The court concluded that "[b]y subverting the appeals process, these amendments frustrate the aims of the Health Care Facilities Planning Act, from which the [Department] and HRSC receive their authority to promulgate regulations." Ibid.

Warren also argued that the amendments to N.J.A.C. 8:31B-3.31 conflict with the Act's general purpose of providing equal access for all people to quality health care, including those in rural areas where more residents are needed. The Appellate Division declined to address the validity of the amendments to N.J.A.C. 8:31B-3.31 "because the [Hospital Rate Setting Commission] has the power to consider each hospital's eligibility on a case-by-case basis and modify actions taken in strict accordance with these regulations when such actions would produce unjust results for individual institutions." Ibid.

II.

The issue before us can be understood only in the context of the underlying statutory scheme and the departmental regulatory standards designed to implement it. The Act fashions a detailed regulatory scheme that governs health-care facilities and the provision of health-care services. Prompted by the "spiraling costs of institutional health care," Riverside Gen. Hosp. v. New Jersey Rate Setting Comm'n, 98 N.J. 458, 460, 487 A.2d 714 (1985), the Legislature sought to ensure the provision of quality health care at a reasonable cost. Substantially amended in 1978, L.1978, c. 83, the Act's major revisions reflected the legislative determination that cost-containment was "of vital concern to the public health." N.J.S.A. 26:2H-1. The Act delegates to the Department primary responsibility for the development and administration of a coherent health-care program, and vests authority to adopt reasonable rules and regulations to effectuate the purposes of the Act in the Commissioner of Health (Commissioner), subject to approval of the Health Care Administration Board (HCAB). N.J.S.A. 26:2H-52.

The Commissioner is to propose for each hospital a "preliminary cost base" and a Schedule of Rates established in accordance with duly-adopted regulations. N.J.S.A. 26:2H-18.1b. The Act confers on the Hospital Rate Setting Commission (HRSC) the power to approve and adjust hospital-reimbursement rates proposed by the Commissioner. N.J.S.A. 26:2H-4.1a. Further, HRSC is designated as the body required to hear hospital appeals concerning rate-reimbursement issues. N.J.S.A. 26:2H-18.1a.

The comprehensive rate-setting system, N.J.A.C. 8:31B-3.1 to -3.90, is designed to set a prospective rate of reimbursement, in advance of actual treatment, that is related to the hospital resources consumed in treating particular illnesses, described as Diagnosis Related Groupings (DRG). See N.J.A.C. 8:31B-3.4; N.J.A.C. 8:31B-5.1. The costs for which a hospital will be reimbursed are derived from the actual expenses incurred by the hospital during a base year, in this case 1982, and reported to the Department. N.J.A.C. 8:31B-2.5; N.J.A.C. 8:31B-3.16; N.J.A.C. 8:31B-4.6(c).

Hospital costs are allocated between two general categories, direct patient-care costs and indirect patient-care costs. Direct patient-care costs include the salaries and fringe benefits provided to employees engaged in the direct delivery of patient care. N.J.A.C. 8:31B-3.21; N.J.A.C. 8:31B-4.32. Indirect patient-care costs include costs associated with the hospital's managerial, educational, research, and maintenance functions, including costs associated with the establishment and maintenance of graduate medical education. N.J.A.C. 8:31B-3.24(a). Both direct and indirect patient-care costs are screened for reasonableness by comparison with a standard developed for the hospital's "peer group," determined on the basis of the hospital's classification as either a major-teaching, minor-teaching, or non-teaching hospital. N.J.A.C. 8:31B-3.22; N.J.A.C. 8:31B-3.24. To be classified as a major or minor teaching hospital, a hospital must have a specified number of residents (fifteen), and the residencies must be in certain clinical areas. N.J.A.C. 8:31B-3.22(b). Costs that exceed the particular screening standard are excluded from the hospital's rates as "disincentives."

After screening the financial elements of a hospital's current cost base, the Commissioner adds adjustments for "projected economic factors" as well as a capital facilities allowance. N.J.A.C. 8:31B-3.20. The resulting amounts, after these adjustments, represent the ...