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Paul Kimball Hospital Inc. v. Brick Township Hospital Inc.

Decided: June 24, 1981.

PAUL KIMBALL HOSPITAL, INC., A NOT-FOR-PROFIT CORPORATION OF THE STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT, AND REGIONAL HEALTH PLANNING COUNCIL; BERGEN-PASSAIC HEALTH SYSTEMS AGENCY; SOUTHERN NEW JERSEY HEALTH SYSTEMS AGENCY, INC. AND HUDSON HEALTH SYSTEMS AGENCY, INTERVENORS-PLAINTIFFS-RESPONDENTS,
v.
BRICK TOWNSHIP HOSPITAL, INC., A NOT-FOR-PROFIT CORPORATION OF THE STATE OF NEW JERSEY; AND JOANNE E. FINLEY, M.D., COMMISSIONER OF HEALTH OF THE STATE OF NEW JERSEY, DEFENDANTS-APPELLANTS, AND JOHN J. DEGNAN, ATTORNEY GENERAL OF THE STATE OF NEW JERSEY, INTERVENOR-DEFENDANT-APPELLANT



On appeal (A-58-80) from and certification (A-59-80) to the Superior Court, Appellate Division.

For reversal -- Justices Sullivan, Schreiber and Handler. Dissenting -- Justices Pashman and Clifford. The opinion of the Court was delivered by Schreiber, J. Pashman, J., dissenting. Justice Clifford joins in this dissenting opinion.

Schreiber

This litigation involves a constitutional attack on an amendment to the Health Care Facilities Planning Act ("Act"), N.J.S.A. 26:2H-1 et seq., which exempts certain nonprofit corporations from the requirement of obtaining an initial certificate of need to operate as a hospital. It is asserted that the amendment, N.J.S.A. 26:2H-7.1 (section 7.1), violates the State proscription against special legislation, N.J.Const. (1947), Art. IV, § VII, par. 9(8), and the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution.

These issues arose when plaintiff, Paul Kimball Hospital, Inc., a hospital located in Lakewood, instituted suit against the Brick Township Hospital, Inc. ("Brick") and Joanne E. Finley, Commissioner of Health. The amendment in question exempted from the Act's licensing requirement a nonprofit corporation which, before the effective date of the Act on August 21, 1971, had acquired land for a hospital to be located within a municipality which had appropriated funds for its construction as authorized by N.J.S.A. 44:5-10.2. The Attorney General intervened as a party defendant and the Regional Health Planning Council, Bergen-Passaic Health Systems Agency, Southern New Jersey Health Systems Agency, Inc. and Hudson Health Systems

Agency intervened as plaintiffs. The issues were decided on cross-motions for summary judgment. The trial court found the statute unconstitutional as special legislation and the Appellate Division affirmed.

The following factual picture emerges from the documents submitted on the motions for summary judgment, viewed favorably to the defendants in accordance with established doctrine regarding such motions. See Judson v. Peoples Bank & Trust Co., 17 N.J. 67 (1954).

A group of citizens residing in Brick Township organized Brick Township Hospital, Inc., a private nonprofit corporation, in May 1968 for the purpose of establishing and maintaining a hospital in the Township. Motivations for establishing the hospital were the long waiting periods for Township residents to obtain hospital beds and the need to travel distances beyond the municipality to various hospitals. On January 16, 1970 defendant purchased for $45,000 a 30-acre tract of land in the Township where the hospital was to be located. These funds had apparently been raised from private contributions. The municipal government of Brick Township, pursuant to N.J.S.A. 44:5-10.2, appropriated $50,000 each year from 1970 through 1975 toward the construction and operation of the hospital. Commencing in 1976 the annual appropriation was reduced to $25,000. In this manner $375,000 has been accumulated and is currently being held in escrow. Schematic drawings of the proposed hospital made by consultants depicted the general design of the building, designated the area and elevations and showed interior space allocation. In addition the consultants prepared a planning report that contemplated a 500-bed hospital, the first phase consisting of 110 beds.

All the activities described above had been accomplished before the Health Care Facilities Planning Act became effective. The uncontradicted affidavit of J. Robert Lackey, Director of the Office of Comprehensive Health Planning in the State Department of Health, states that the defendant had substantially

satisfied all the prerequisites for obtaining a license under N.J.S.A. 30:11-1, the law which preexisted the Health Care Facilities Planning Act.

The Health Care Facilities Planning Act radically altered the extent of regulation and control over health care facilities and services. Among other things the Act required procurement of a certificate of need for construction or expansion of a health care facility or for institution of new health care services. N.J.S.A. 26:2H-7. A certificate of need was not required for hospitals which had been or were being constructed on August 21, 1971.

Brick requested permission from the Department of Health to construct the phase I facility without a certificate of need. Initially the Department ruled Brick did not qualify for the exemption. Subsequently, the Department decided to reconsider this decision and held a hearing for that purpose. The hearing officer recommended that Brick's activity prior to the effective date of the Act did not warrant the exemption. The recommendation was submitted to the Commissioner of Health, who did not act on the recommendation because Brick had in the meantime applied for a certificate of need. The Commissioner recognized "a need for some beds in the area," but denied the application for a certificate of need. However, she granted Brick permission to construct a full range ambulatory care facility. The denial was subject to review by the Health Care Administration Board and the applicant was entitled to a hearing prior to the Board's determination. N.J.S.A. 26:2H-9. Brick sought such a hearing and review. While the hearing was pending, the Legislature passed N.J.S.A. 26:2H-7.1 which reads as follows:

Any nonprofit entity chartered by the State of New Jersey as a nonprofit corporation pursuant to Title 15 of the Revised Statutes, which had been so chartered and had acquired land for the purpose of constructing a hospital prior to the effective date of the act to which this act is a supplement, and when the land so acquired by such nonprofit corporation is located within a municipality that has provided an appropriation for the construction of a health care facility as authorized by P.L.1954, c. 266 (C. 44:5-10.2), then the proposed hospital of

such nonprofit corporation shall be exempt from the requirement of section 7 of P.L.1971, c. 136 (C. 26:2H-7) relating to a certificate of need.

This section effectively exempted Brick from obtaining a certificate of need for construction of its phase I facility. It placed Brick in the same category as other facilities which on August 21, 1971 existed, were under construction, or had submitted construction plans to the Department.

The law was drawn with the Brick situation in mind. When introduced into the Assembly, the Statement attached to the Bill read as follows:

This bill is narrowly drawn to permit certain proposed health care facilities exemption from the requirement to obtain a certificate of need under the Health Care Facilities Planning Act. The bill would have the effect of enabling a hospital to be built in Brick Town, Ocean county. [Senate Institutions, Health and Welfare Committee, Statement to Assembly Bill 369 (1978)]

Both the trial court and the Appellate Division concluded that the amendment constituted special legislation in contravention of Art. IV, § VII, par. 9(8) of the New Jersey Constitution. Finding that the purpose of the Health Care Facilities Planning Act was to prevent costly and unnecessary duplication of health care facilities, N.J.S.A. 26:2H-1, the trial court reasoned that the amendment by eliminating the requirement of a certificate of need did not comply with this purpose. Since no rational relationship existed between the amendment and the stated objective of the Act, the amendment was invalid as special legislation and violated the equal protection of the law required by the Fourteenth Amendment.

The Appellate Division acknowledged that the test of whether a law is special legislation is the same as that which determines whether there is a denial of equal protection under the Fourteenth Amendment. It stated that this standard requires an analysis of the purpose and object of the enactment and whether the classification rests upon any rational or reasonable basis relevant to the purpose and object of the act. Recognizing that the grandfather clause embodied in the amendment may have been intended to further the legislative purpose in N.J.S.A. 44:5-10.2, the Appellate Division nevertheless found

that exclusions of situations where the land was located beyond the municipal boundaries or where no municipal funds were appropriated were illogical and unreasonable. Therefore the classification did not rest upon any rational or reasonable basis and the provision constituted special legislation.

Brick and the Attorney General filed notices of appeal. Brick also filed a petition for certification which was granted. 85 N.J. 113 (1980).

I.

The Health Care Facilities Planning Act substantially expanded governmental control and regulation over hospitals. The legislation was enacted to effectuate the public policy that "hospital and related health care services of the highest quality, of demonstrated need, efficiently provided and properly utilized at a reasonable cost are of vital concern to the public health." N.J.S.A. 26:2H-1. No hospital was to be constructed or expanded until a certificate of need had been obtained. N.J.S.A. 26:2H-7. The certificate was not be to issued unless the "action proposed . . . [was] necessary to provide required health care in the area to be served, [could] be economically accomplished and maintained, and [would] contribute to the orderly development of adequate and effective health care services." N.J.S.A. 26:2H-8. Moreover no agency of the State or of any municipal government was permitted to approve the grant of funds for a health care facility constructed or expanded in violation of the Act. N.J.S.A. 26:2H-7. Furthermore, each facility had to obtain a license to operate, N.J.S.A. 26:2H-12 a(1), and a license could only be issued if the institution's premises, equipment and personnel were "fit and adequate," N.J.S.A. 26:2H-12 b(2). Uniform systems of cost accounting, reports and audit had to be established and maintained. N.J.S.A. 26:2H-12 a(2). A long range plan, reviewable annually, for health care facilities compatible with the State Health Plan, had to be prepared. N.J.S.A. 26:2H-12 a(4). Payments by government agencies for

health care services provided by a hospital were subject to reasonable rates to be fixed by the State Commissioner of Health. N.J.S.A. 26:2H-18 c; see In re 1976 Hosp. Reimbursement Kessler Mem. Hosp., 78 N.J. 564 (1979).

The Act did not require that certificates of need be obtained for existing hospitals, although a certificate would be needed for any future expansion or construction. This exception grew out of the definition in the Act of "construction" as

the erection, building, or substantial acquisition, alteration, reconstruction, improvement, renovation, extension or modification of a health care facility, including its equipment, the inspection and supervision thereof; and the studies, surveys, designs, plans, working drawings, ...


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