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HEALTH CARE PLAN OF NEW JERSEY, INC. v. SCHWEIKER

February 8, 1982

HEALTH CARE PLAN OF NEW JERSEY, INC., Plaintiff,
v.
RICHARD S. SCHWEIKER, Secretary, United States Department of Health and Human Services; JOANNE E. FINLEY, Commissioner, New Jersey Department of Health; NEW JERSEY HOSPITAL RATE SETTING COMMISSION, Defendants



The opinion of the court was delivered by: BROTMAN

 BROTMAN, District Judge

 This is an action in which plaintiff Health Care Plan of New Jersey, Inc., (hereinafter, "HCP") questions the constitutionality of the application to it of regulations propounded by the New Jersey Department of Health. HCP seeks to enjoin the defendants from continuing to enforce against HCP a state regulatory system which sets reimbursement rates for hospital services. The system is known as the "Diagnostically Related Group Prospective Case-Mix Hospital Reimbursement Regulatory System" (hereinafter, "the DRG system" or "the DRG plan"). The regulations implementing the DRG system are found at N.J.A.C. 8:31B-1, et seq. HCP claims that the DRG system is invalid as it pertains to hospital rates payable to HCP on the ground that it conflicts with the federal Health Maintenance Organization Act of 1973, as amended, 42 U.S.C. sections 300e through 300e-14, and the National Health Planning Resources and Development Act, 42 U.S.C. sections 300k through 300t, and that the system thereby violates the Supremacy Clause. U.S. Const., Art. VI, sec. 2. Plaintiff also alleges that the application of the DRG system violates HCP's constitutional rights as guaranteed by the Due Process and Equal Protection Clauses of the Fourteenth Amendment, as well as HCP's rights under the Contract Clause. U.S. Const., Amend. XIV and Art. I, sec. 10. This court has jurisdiction under 28 U.S.C. section 1331.

 Plaintiff seeks declaratory and injunctive relief against the defendants Finley, the New Jersey Department of Health, and the New Jersey Hospital Rate Setting Commission. Plaintiff also seeks to enjoin defendant Schweiker from his alleged failure to prevent the operation of the DRG system insofar as it impairs HCP's ability to meet its obligations under the Health Maintenance Organization Act, supra, and insofar as it interferes with any federal programs which are designed to promote the financial success of HCP and other health maintenance organizations.

 A two day hearing on plaintiff's application for preliminary injunctive relief was held. Following that, additional evidence was submitted and plaintiff's motion for consolidation of the trial on the merits with the first hearing was granted. Fed. R. Civ. P., Rule 65(a)(2). Accordingly, the court hereby enters these findings of fact and conclusions of law.

 FINDINGS OF FACT

 1. Plaintiff Health Care Plan of New Jersey, Inc., is a non-profit corporation organized and operating as a health maintenance organization under the New Jersey Health Maintenance Organizations Act. L. 1973, c. 337; N.J.S.A. 26:2J-1, et seq.

 2. Defendant Richard S. Schweiker, Secretary of the Department of Health and Human Services, is responsible for administering portions of the Health Maintenance Organization Act of 1973, as amended, 42 U.S.C. sections 300e through 300e-14, and the National Health Planning Resources and Development Act of 1974. 42 U.S.C. sections 300k through 300t.

 3. Defendants Joanne E. Finley, Commissioner of Health, the New Jersey Department of Health, and the New Jersey Hospital Rate Setting Commission, are state officials or agencies of New Jersey in charge of administering the DRG system under the authority of L. 1971, c. 136, sec. 18; N.J.S.A. 26:2H-18; as amended, L. 1978, c. 83, sec. 10, and under the authority of N.J.A.C. 8:31B-1, et seq.

 4(a). There are nine health maintenance organizations (hereinafter "HMOs") operating in the state of New Jersey under the provision of New Jersey's Health Maintenance Organizations Act, supra. Some of these HMOs, including HCP, are "federally qualified HMOs" within the meaning of 42 U.S.C. sections 300e(a) and 300e-5. (Plaintiff's Ex. 1, pp. 3-4.) Federal qualification allows an HMO to receive federal grants, loans, loan guarantees and contracts designed to defray the costs of feasibility surveys, 42 U.S.C. section 300e-2 planning and development, 42 U.S.C. section 300e-3, and initial operations. 42 U.S.C. sec. 300e-4.

 4(b). Before becoming federally qualified, an HMO must satisfy the Secretary of Health and Human Services that there exist or are anticipated adequate sources of revenue to support the services to be provided by the HMO. 42 U.S.C. section 300e-5(b)(3)(G). The HMO must also show that there exist or are anticipated adequate "financial arrangements and capabilities" of the HMO. 42 U.S.C. section 300e-5(b)(3)(I). In order to become federally qualified, an HMO is required to provide a number of "basic health services," including "inpatient and outpatient hospital services." 42 U.S.C. section 300e-1(1)(b).

 5. On June 1, 1976, HCP became a federally qualified HMO. (Cert. of C. Frederick Berger, para. 5). Since that date, HCP has received $1,605,557.00 in grants and $3,154,000.00 in loans from the Department of Health and Human Services. (Vol. 2, pp. 4-6). HCP is in debt to the federal government in the amount of approximately three million dollars. (Vol. 2, p. 6)

 6. HCP became ineligible for additional federal loans in May, 1981, because an HMO may only be assisted during the first sixty months following its federal qualification. (Vol. 1, pp. 79-80; vol. 2, p. 6). 42 U.S.C. section 300e-4(a)(1).

 7. Prior to the implementation of the DRG system, HCP had negotiated contracts with three hospitals whereby it paid the hospitals a per diem rate for services rendered by the hospitals for the care of HCP's subscribers. The three affiliated hospitals are Burlington County Hospital, Cooper Medical Center and Our Lady of Lourdes Hospital. From October, 1980, to May, 1981, 54 per cent of the days spent by HCP subscribers in hospitals were in Burlington County Hospital, 31 per cent in Cooper Medical Center, 5 per cent in Our Lady of Lourdes Hospital, and the rest in non-contracting hospitals. (Vol. 1, pp. 21, 30, 54.)

 8a. In 1978, the New Jersey Legislature passed L. 1978, c. 83, amending the Health Care Facilities Planning Act, N.J.S.A. 26:2H-1, et seq., and providing for the establishment of a comprehensive system of regulatory control over hospital rates. One of the purposes of this law was to redress the financial plight of inner-city hospitals which had incurred large costs caring for indigent patients. To that end the statute expressly provided for the inclusion of certain financial elements in the hospital rate structure which had not been recognized under the previous rate review system. These elements included indigency care costs, bad debts and working capital needs. N.J.S.A. 26:2H-18(d). Another purpose of the law was to permit effective limitation of hospital costs. (Vol. 2, pp. 71-72)

 8b. The 1978 New Jersey statute provides that all payment rates "shall be equitable for each payor or class of payors without discrimination or individual preference . . . ." The statute permits the Hospital Rate Setting Commission to grant differentials in the payment rates to a payor or class of payors for "quantifiable economic benefits rendered to the institution or to the health care delivery system taken as a whole." N.J.S.A. 26:2H-18(b).

 9. The New Jersey Department of Health propounded N.J.A.C. 8:31B-1, et seq., which implements the 1978 statute and which embodies the DRG system. This system establishes 383 Diagnosis Related Groupings, representing medical classifications of illnesses for which hospital patients are treated. Development of the DRG system was funded by a federal grant from the Social Security Administration. (Vol. 2, pp. 73-75) The federal government has been paying DRG rates to New Jersey health care providers for treatment of patients under the Medicare program, pursuant to a waiver of standard Medicare reimbursement principles. (Vol. 2, p. 85) 42 U.S.C. section 1395b-1(b).

 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 ...


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