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In re Schedule of Rates for Barnert Memorial Hospital

Decided: February 10, 1983.


On certification to the Superior Court, Appellate Division.

For affirmance -- Chief Justice Wilentz and Justices Clifford, Schreiber, Handler and O'Hern. For reversal -- None. The opinion of the Court was delivered by O'Hern, J.


[92 NJ Page 33] The question here is whether a hospital's available philanthropic funds may be included as part of its working capital when the State fixes the hospital's initial rates under the hospital rate setting program set out in N.J.S.A. 26:2H-1 to -52. The dispute centers about N.J.S.A. 26:2H-18 d, as implemented by the Department's regulations, primarily N.J.A.C. 8:31B-4.16(a), which regulation effectively includes such philanthropic

funds as an element of initial working capital. We hold that the regulation is valid and affirm the judgment below denying the hospital the higher initial rates sought in order to create additional working capital.

Barnert Memorial Hospital (Barnert) is a unique institution. It was established in 1908 to serve the needs of the immigrant industrial workers of Paterson whose health care needs were not well understood or met by the medical community of that time. From its founding it has depended largely upon the generosity and private philanthropy of the community it serves to provide capital funds. As an inner-city hospital, Barnert finds it increasingly difficult to obtain such funds. Its concern over growing demands on its existing hard-earned resources prompts this appeal. Barnert wishes to preserve and maintain the integrity of its capital funds in order to meet pressing needs claimed to be inadequately funded under the current reimbursement system.

The State's comprehensive hospital rate setting and cost containment legislation, L. 1978, c. 83, amending the Health Care Facilities Planning Act, L. 1971, c. 136, became effective on July 20, 1978. Barnert was among the first 26 hospitals selected for phasing in the new rate schedules. The regulations of the Commissioner of Health provided that the schedule of rates would be issued on or before January 15, 1980. See N.J.A.C. 8:31B-3.2(b). On December 31, 1979, prior to the Commissioner's issuance of the rate schedule, the hospital transferred approximately $2 million in cash and securities to the Barnert Memorial Hospital Center Foundation, Inc. The foundation's funds were limited to the exclusive benefit of Barnert. Those funds are the subject of this litigation.

The regulations, in fixing rates, contemplate that each participating hospital would have or be provided with adequate initial working capital. N.J.A.C. 8:31B-4.46. Hospitals that did not have adequate initial working capital would receive a "one-time" adjustment to rates -- a "working cash infusion" -- so that

each hospital in the system would begin operations with reasonable working capital. N.J.A.C. 8:31B-4.47.

In Barnert's submission to the Department of Health in support of its application for a schedule of rates, it claimed a working cash deficiency of $1,014,000. The Department analyzed the submission and proposed a preliminary cost base and rates that did not include a working cash infusion because of the available philanthropic funds. Under N.J.A.C. 8:31B-3.32 the dispute was submitted to the Hospital Rate Setting Commission (HRSC or Commission) for determination. The Commission voted to deny Barnert a working cash infusion, finding that the Department had properly calculated working capital needs in accordance with the regulations and that Barnert had not established a special reason for departure from those regulations. The hospital appealed from the part of the Commission's final decision and rate order, dated March 11, 1981, that denied it a working cash infusion. In an unreported opinion the Appellate Division affirmed. That court disagreed with Barnert's argument that the statute requires a "blanket exclusion of all monies of philanthropic origin" and distinguished the one-time cash balance computation for working capital infusion from the rate computation based on prospective revenues. We granted certification. 89 N.J. 442 (1982).


L. 1978, c. 83 reflects a distinct and comprehensive approach to the problem of providing adequate medical care to the citizens of the State at reasonable costs. The Senate Committee's statement declares that it effects major changes in state law.

Prior law authorized the Commissioner to set rates only for Blue Cross and governmental programs, such as Medicaid. L. 1971, c. 136, ยง 18. However, the State had no authority over the rates that hospitals charged private insurance carriers or the uninsured. Consequently, these groups sometimes paid higher rates for the same services. See generally Borland v. Bayonne

Hosp., 72 N.J. 152, 159, cert. den., 434 U.S. 817, 98 S. Ct. 56, 54 L. Ed. 2d 73 (1977) (differing treatment not a denial of equal protection). The act extends the state's supervision ...

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