patient is assigned to one of the 383 Diagnostic Related Groupings through the use of medically accepted techniques of diagnosis. The DRG system establishes upper and lower "trim points" -- expressed as numbers of days -- for each illness. These trim points represent normative bounds within which a patient assigned to a particular one of the 383 illnesses may be expected to remain in the hospital. If a patient remains in the hospital beyond the upper trim points, the hospital may bill for actual services rendered. Likewise, if a patient leaves before the period expressed by the lower trim point begins, the patient is charged for actual services. In most cases, however, the diagnosis assigned to a patient establishes the amount which may be paid to the hospital.
11. The application of the DRG system is being carried out over a period of years. Burlington County Hospital began to be governed by the DRG system in May, 1981. (Vol. 1, p. 22)
12. Physicians on the staff of HCP make efforts to keep HCP subscribers out of hospitals by delivery of preventive health care and education. (Vol. 1, p. 22)
13. Pre-admission testing is done by HCP personnel outside of hospitals. (Vol. 1, p. 22)
14. Efforts are made by HCP physicians to have subscribers who are in hospitals discharged therefrom as early as possible. (Vol. 1, p. 23)
15. HCP's main source of income is from subscriber premiums, which are established annually by contract between HCP and each subscriber. These premiums cannot be changed more often than once each year. (Vol. 1, pp. 24-25)
16. The imposition of the DRG system results in duplication of pre-admission testing where such testing results in a decision to hospitalize. Hospitals are required to engage in extensive testing in order to complete a diagnosis. To this extent, the DRG system makes pre-admission testing outside of hospitals wasteful and duplicative of testing performed at hospitals. (Vol. 2, pp. 38-39, 85) Pre-admission testing does, however, produce benefits for HCP in that it reduces the number of hospital stays for its subscribers, thus reducing HCP's expenses (Vol. 1, p. 31) and gives HCP the ability to verify or to dispute diagnoses made by hospitals, which form the bases for the hospitals' billing of HCP. (Vol. 1, pp. 45, 66)
17. The DRG system reduces fiscal incentives for HCP physicians to influence hospitals to discharge HCP subscribers as rapidly as possible once the subscribers in question have stayed in the hospital beyond the time established by the lower trim points of the illnesses assigned to the patients. (Vol. 1, p. 27) The DRG system does, however, provide an inducement for a hospital to reduce each patient's length of stay. (Vol. 2, pp. 63-64; Vol. 2, p. 87) Further, every physician has an ethical obligation to attempt to reduce each patient's length of stay. (Vol. 1, p. 32)
18. The imposition of the DRG system has caused HCP to pay more to Burlington County Hospital than it would have paid under its per diem contract. (Vol. 1, pp. 70-77) Plaintiff expected its hospital costs to rise 20% as a result of the DRG system, and this expectation was reflected in rates charged to subscribers beginning in January, 1981. (Vol. 1, pp. 102-105) Hospital costs to HCP rose at an annual rate of 30% during the first month of the DRG system at Burlington County Hospital, (Vol. 1, p. 75) and continued to rise at approximately the same rate during the second month. (Docket Entry #11) As a result of this misforecast of the amount that costs to HCP would rise due to the imposition of the DRG system, HCP has suffered financial reverses. (Vol. 1, pp. 92-96)
19. The assignment of a Diagnostic Related Grouping to each patient is subject to some degree of manipulation, and a hospital has an incentive to assign to each patient an illness which will result in the greatest amount of revenue for the hospital. (Vol. 1, pp. 65-66; Vol. 2, pp. 84-85, 123-24) Much of this manipulation would, however, be illegal, fraudulent and unethical. (Vol. 2, pp. 34-35) Any such manipulation may be monitored when patients have undergone pre-admission testing. (See para. 16, ante)
20. In April, 1980, the Secretary of Health and Human Services determined that HCP was not meeting the fiscal requirements to allow it to remain a federally qualified HMO. In order to remedy this, HCP was required to make efforts to negotiate per diem contracts with three hospitals and to make efforts to see that as many of HCP's subscribers as possible were treated under these contracts when hospitalization was required. HCP later became a fiscally sound operation within the meaning of the Health Maintenance Organization Act of 1973, and began to repay its loans to the federal government. HCP sought to be declared in compliance with federal directives in February, 1981, but has not been declared in compliance. HCP has been told informally that it would not be declared in compliance because of the financial reverses it has suffered since the imposition of the DRG system. (Plaintiff's Exhibit 4, and exhibits attached thereto; Volume 1, pp. 79-81: Vol. 2, pp. 7-15). Failure to be declared in compliance with the Secretary's directives has itself compounded the financial difficulties faced by HCP, in part because, without compliance, HCP loses statutory right to have membership in HCP offered to employees of many large private and public employers. 42 U.S.C. section 300e-11(b)(1).
21. Plaintiff has applied to the Hospital Rate Setting Commission for permission to pay a lower rate than other payors, but has failed to satisfy the Commission that it is entitled to the relief it seeks. Except for showing that HCP subscribers require fewer hospital services during a maternity stay than other patients, HCP failed to show that its subscribers required fewer hospital services during their stays than did other patients for any other Diagnostic Related Grouping. (State Defendants' Exhibit 2)
CONCLUSIONS OF LAW
Plaintiff argues that the application of the DRG plan to it is preempted by federal law because the plan interferes with HCP's ability to operate effectively as an HMO. Our starting point must be 42 U.S.C. section 300e-10, which is an enumeration of certain kinds of state laws which are rendered inoperative as against HMOs. This section, as amended in 1976, also sets forth certain duties of the Secretary of Health and Human Services which must be carried out with an eye towards preventing the enforcement of such state laws against HMOs. The section in its entirety reads as follows:
(a) In the case of any entity --
(1) which cannot do business as a health maintenance organization in a State in which it proposes to furnish basic and supplemental health services because that State by law, regulation, or otherwise --