St. Joseph's Hosp. Health Center v. Department of Health of State of N.Y.

• Decision Date: 08 July 1998
• Docket Number: No. 1,1
• Citation: 677 N.Y.S.2d 194,247 A.D.2d 136
• Parties: , 1998 N.Y. Slip Op. 6725 ST. JOSEPH'S HOSPITAL HEALTH CENTER, et al., Respondents, v. DEPARTMENT OF HEALTH OF STATE OF NEW YORK, Mark R. Chassin, M.D., as Commissioner of Health of State of New York, Rudy F. Runko, as Director of Division of Budget of State of New York, Appellants, and Beth Israel Medical Center, Buffalo General Hospital, Erie County Medical Center, Lawrence Hospital, Long Island Jewish Medical Center, Montefiore Medical Center, Mt. Sinai Hospital, Presbyterian Hospital in City of New York and St. Francis Hospital, Intervenors-Appellants. (Appeal)
• Court: New York Supreme Court — Appellate Division

Page 194

677 N.Y.S.2d 194

247 A.D.2d 136, 1998 N.Y. Slip Op. 6725

ST. JOSEPH'S HOSPITAL HEALTH CENTER, et al., Respondents, v. DEPARTMENT OF HEALTH OF STATE OF NEW YORK, Mark R. Chassin M.D., as Commissioner of Health of State of New York, Rudy F. Runko, as Director of Division of Budget of State of New York, Appellants and Beth Israel Medical Center, Buffalo General Hospital, Erie County Medical Center, Lawrence Hospital, Long Island Jewish Medical Center, Montefiore Medical Center, Mt. Sinai Hospital, Presbyterian Hospital in City of New York and St Francis Hospital, Intervenors-Appellants. (Appeal No. 1.)

Supreme Court, Appellate Division,

Fourth Department.

July 8, 1998.

Dennis C. Vacco, Peter Crary by Victor Paladino, Albany, for Department of Health, Mark Chassin, and Rudy F. Runko, appellants.

Whiteman, Osterman & Hanna by John J. Henry, Jr., Albany, for intervenors-appellants.

Costello, Cooney & Fearon, LLP by Frances Ciaroullo, Syracuse, for first eleven named hospital respondents.

Rosenman & Colin, LLP by Joseph Willey, New York City, for respondent New York City Health and Hospitals Corp.

Nixon, Hargrave, Devans & Doyle, LLP by Thomas D'Antonio, Garden City, for remaining hospital respondents.

Before DENMAN, P.J., and LAWTON, WISNER, BALIO and BOEHM, JJ.

BALIO, Justice:

Plaintiffs in these two appeals consist of 39 general hospitals in locations throughout the State of New York who seek a judgment declaring that a portion of the regulation promulgated by respondent Department of Health of the State of New York (DOH) regarding Medicaid hospital reimbursement for bad debts and the costs of charity care (BDCC) (10 NYCRR 86-1.11[g][7], [p][7] ) is unconstitutional and contrary to the enabling statutes (Public Health Law § 2807-a [8][e]; § 2808-c [4][e] ) and that DOH's implementation of that regulation is arbitrary and capricious and contrary to law. ¹ Plaintiffs also seek to enjoin permanently further implementation of that portion of the regulation at issue and to be reimbursed moneys previously recouped from them by the State pursuant to that regulation.

These appeals are from judgments (each denominated "order and judgment") of Supreme Court granting plaintiffs' motions for summary judgment, declaring that portion of the regulation invalid, permanently enjoining DOH from implementing the regulations and directing DOH to reimburse plaintiffs for moneys previously recouped. We conclude that the regulation is valid and enforceable and that, with two exceptions, the court erred in concluding that DOH improperly implemented the regulation.

FACTUAL BACKGROUND

After undertaking a comprehensive study of various hospital financing mechanisms, in 1980 the Council on Health Care Financing (Council) submitted to the Governor and Legislature its recommendations for the financing of hospital inpatient care. Based upon the Council's recommendations, the Legislature enacted Public Health Law § 2807-a (now § 2808-c), adopting the New York Prospective Hospital Reimbursement Methodology (NYPHRM I) for reimbursing general hospitals for the cost of providing inpatient care under the Medicaid program during rate years 1983, 1984 and 1985 (see, L.1982, ch. 536). Historically, hospitals attempted to recoup losses sustained in BDCC cases by increasing the medical rate charged to paying patients. In order to discourage hospitals from "passing on" their BDCC to those patients who could afford to pay, NYPHRM I included a methodology for raising money to reimburse general hospitals for the financial burden incurred in providing care to patients unwilling or unable to pay for their care. Essentially, NYPHRM I authorized the Commissioner of Health of the State of New York (Commissioner) to certify an inpatient revenue cap, i.e., the maximum amount that a hospital could receive for providing inpatient services. Each general hospital was required to add on to the allowable rates charged to third-party payors, including Medicare, Medicaid, Blue Cross and other private insurers, a percentage of its inpatient care rate. When third-party payors paid an inpatient's account, the money representing the add-on charge was placed in the BDCC pool of funds for the region in which the hospital was located.

Eight regions were established, and within each region, general hospitals were divided into two sectors: (a) major public hospitals and (b) voluntary nonprofit, private proprietary, and public general hospitals other than major public hospitals. ² Money generated by the add-on charge to inpatient care rates for each general hospital was deposited in the regional BDCC pool in the region where the hospital was located. NYPHRM I required DOH to determine each hospital's reimbursement rate for inpatient services provided to BDCC patients prospectively based upon an established base year. For example, each hospital's BDCC reimbursement rate for 1983 was determined by the amount of the hospital's BDCC need during the base year 1981, and each hospital was notified of that rate at least 60 days before the start of 1983. NYPHRM I further provided for the distribution of regional BDCC pool funds pursuant to the established reimbursement rate.

NYPHRM I also included an additional component, commonly referred to as "maintenance of effort" (MOE), within the BDCC reimbursement methodology. MOE is designed to encourage each general hospital to "maintain[ ] its effort * * * of providing care to those unable or unwilling to pay for care" and to discourage each hospital from shifting the BDCC burden to other hospitals within the area or region by authorizing the DOH to reallocate the regional BDCC pool funds if it finds that there has been a change in the proportional amount of the BDCC need provided by the hospitals. Public Health Law § 2808-c (4)(e) (also referred to as the MOE statute) authorizes such a reallocation, as follows:

"An annual review shall be conducted pursuant to rules and regulations adopted by the [C]ouncil and approved by the [C]ommissioner with respect to [BDCC] need within each * * * region * * *. If within such a region there is a definitive finding as a result of such review that there has been a change in the proportional amounts of [BDCC] provided by (i) major public general hospitals and (ii) voluntary non-profit, private proprietary and public general hospitals, other than major public general hospitals, the allocation of resources made available under this paragraph shall be adjusted pursuant to the rules and regulations adopted pursuant to this paragraph so as to reflect this change."

In 1982, the Commissioner promulgated a regulation that essentially mirrored the above-quoted statutory provision. In 1984, the Commissioner promulgated 10 NYCRR 86-1.11(g)(7), which includes the methodology for computing the MOE reallocation for rate years 1983, 1984 and 1985. Essentially, the MOE methodology authorized DOH to recoup a portion of the BDCC funds previously distributed to those hospitals that did not maintain their efforts with respect to BDCC cases and redistribute those funds to hospitals that maintained their effort in providing such care.

Prior to rate year 1986, DOH had the authority to establish Medicare reimbursement rates pursuant to an agreement with the Federal government. Because that agreement expired at the end of 1985, DOH could not impose an add-on to the inpatient rate for Medicare patients after rate year 1985 to fund the regional BDCC pools. With respect to the BDCC reimbursement methodology, the Legislature revised NYPHRM I to impose an assessment on gross revenues of general hospitals (see, L.1985, ch. 807, § 4). That assessment replaced the charge added on to the Medicare rates, and the funds generated by the assessment were placed in a State-wide BDCC pool. With respect to other third-party payors, the revised New York Prospective Hospital Reimbursement Methodology (NYPHRM II) continued the procedure of add-ons to the inpatient care rates as a means of funding the regional BDCC pools. NYPHRM II, which applied to rate years 1986 and 1987, contains language identical to NYPHRM I in authorizing MOE reallocations for each rate year (see, Public Health Law § 2807-a [8][e] ). The Commissioner promulgated a revised MOE regulation, which set forth the base year that would be used with respect to each rate year but otherwise continued the MOE reallocation methodology (10 NYCRR 86-1.11[p][7] ).

Prior to 1994, DOH circulated draft MOE reallocation calculations with the Hospital (now Healthcare) Association of New York State and certain other provider groups and asked that the draft calculations be shared with member facilities for review, verification and comment. In January 1994, DOH advised each general hospital of the MOE reallocation calculations for rate years 1983 through 1987 and asked each hospital to report any errors to DOH. Some facilities did report errors in data to DOH and corrections were made. In June 1994, DOH commenced the reallocation process by recouping funds from those hospitals that, according to the MOE calculations, had failed to maintain their BDCC need efforts pursuant to the 1984 MOE regulation (10 NYCRR 86-1.11[g][7] ) and revised MOE regulation (10 NYCRR 86-1.11[p][7] ).

In these actions, plaintiffs challenge the validity of the MOE regulations and also contend that the conduct of DOH in implementing the MOE reallocation process was arbitrary and capricious.

CONSTITUTIONALITY AND VALIDITY OF MOE REGULATIONS:

"RETROACTIVE RATE-MAKING"

Public Health Law § 2807(7) requires the Commissioner to notify each hospital of the approved reimbursement rate "at least sixty days prior to the beginning of an established rate period for which the rate is to become effective" and, thus, prohibits retroactive rate-making (see, Matter of Jewish Home & Infirmary of Rochester v. Commissioner of N.Y. State Dept. of Health, 84 N.Y.2d 252, 260, 616 N.Y.S.2d 458, 640 N.E.2d 125). Plaint...