On appeal from Final Decision of the State Department of Health.
Botter, Pressler and O'Brien. The opinion of the court was delivered by Pressler, J.A.D.
[192 NJSuper Page 47] The New Jersey Health Care Facilities Planning Act, N.J.S.A. 26:2H-1 et seq., excludes from its definition of those health care facilities subject to its regulatory ambit "services provided by a physician in his private practice." N.J.S.A. 26:2H-2(b). "Private
practice" is not, however, defined either by the Act or its implementing regulations. These consolidated appeals involve three separate gynecological and obstetrics practices, each conducted by a group of three physicians, each offering first trimester abortion services as well as gynecological care and each conducted in physical circumstances indistinguishable from those commonly understood to constitute the offices of private practitioners. The issue raised by this appeal is whether these medical practices have forfeited their right to private-practice status and hence exemption from the Act by reason of the fact that each has contracted with a management corporation for the provision of a full range of non-professional office management services.
Following a hearing, the administrative law judge filed an initial decision concluding that these contracts did not alter the essential private-practice character of the three professional undertakings. The Commissioner disagreed, concluding that all three were health care facilities subject to the certificate of need and licensing requirements of the Act. The three management corporations appeal, and we reverse.
The facts respecting the conduct of these practices are essentially the same as to each and are not in substantial dispute. Illustratively, the practice known as Cherry Hill Women's Center is conducted by a professional corporation, KGD Ob-Gyn Associates (KGD), whose members are three physicians licensed to practice in New Jersey: Richard Sol Glick, Alan Kline and George Dainoff. These physicians also have a private office in Philadelphia and are employed as well at a licensed clinic in Philadelphia. The services they render in Cherry Hill consist of first trimester abortions and routine gynecological care. During the first three months of 1979, an average of approximately 175 abortions per month were performed. The Cherry Hill offices contain a lobby, a laboratory room, an examination room, a sterilizing room, a dressing room and bathroom, two procedure rooms, a physician's office, a general management office, a recovery room, a staff lounge and two counselling rooms.
KGD, when it first began its New Jersey practice, contracted with Cherry Hill Women's Center (Cherry Hill), a New Jersey corporation, for office management services. Entitled "Leasing and Administrative Services Agreement," the contract describes Cherry Hill as engaged in the business of providing physicians with medical offices, equipment, supplies, and administrative services and personnel and expressly disclaims Cherry Hill's engagement either generally or in respect of its arrangement with KGD "in the practice of medicine, nursing or any other professional service nor in the operation of a hospital or laboratory." Cherry Hill further undertakes "not to exert any control or supervision over the exercise by KGD Associates of the medical and surgical judgment and their rendering of professional services" and stipulates that while it will assist the physicians in obtaining such professional assistants as nurses, technicians, and counselors as KGD may require, nevertheless any such professional employees shall be under KGD's "employ, control and supervision" and KGD shall "be responsible for any additional orders, explanations, supervision and/or training" of any professional assistants. As to administrative and non-professional services required in the conduct of the practice, Cherry Hill's undertaking is to provide whatever is necessary, including "but not limited to: billing and collection from patients of physician's fees, administration of payroll and compensation of physician's assistants and employees, upkeep and maintenance of office space and utilities, ordering and purchase of equipment and supplies, storage of medical and other records, and payment of accounts payable as well as collection of accounts receivable."
In respect of the financial relationship between the physicians and the management corporation, the agreement provides as follows:
7. The parties agree that there shall be no illegal or unethical division of physician's fees, and that any sums collected for KGD Associates by the Cherry Hill Women's Center from a patient for the physician's professional services shall be the property of KGD Associates, ab initio.
8. KGD Associates agrees to pay the Cherry Hill Women's Center a sum to be agreed upon from time to time for use of the premises, equipment, supplies
and administrative services. Amounts due to the Cherry Hill Women's Center from KGD may be withheld by the former from sums collected on behalf of and for the latter.
With respect to the conduct of the practice pursuant to the agreement, it was the undisputed testimony of Dr. Glick that the contract adequately and correctly describes KGD's relationship with Cherry Hill as well as the operation of the center. In short, all medical judgments are made by or under the control and supervision of the physicians and the management company does not either directly or indirectly influence medical decisions. The physicians themselves determine whether or not to perform particular office procedures on particular patients, what protocols are to be followed in emergencies, and how many patients are to be seen. Patient records are owned and maintained by them. They cover the office nine days in every two-week period and are always on call for emergencies. In the absence from the office of all physicians, only general administrative work and some continuing counselling is performed.
The center employs an administrator, a receptionist, two medical assistants, one registered nurse and two licensed practical nurses. All employees work under the direct supervision and control of the physicians, who also retain the right to insist on the firing of unsatisfactory personnel. The counselors, also under the physicians' supervision, work pursuant to a written protocol established by the doctors. The office equipment is owned by the management company, which also leases the premises. The physicians make no capital investment in the office.
Patient fees are paid to Cherry Hill and deposited to its account. Only it has the authority to draw on that account. It pays all expenses and issues weekly checks to the physicians, providing them with year-end 1099 forms. It also maintains all financial records and periodically prepares cost-analysis reports for the physicians' inspection. It is, however, the physicians who prepare the fee schedules and they do so based on the fees charged in their other office. At the time of the hearing, the
standard fee for a first trimester abortion was $195, but that fee is reduced to $125 in the case of indigent patients. Management fees are determined in accordance with the agreement by means of annual negotiations. Based on KGD's experiences at its other office, it projects the profit per procedure after deduction of overhead and all other expenses, and this is the amount drawn by the doctors.
Patients come to the center through referrals from other physicians, social agencies, other patients and advertising which is done in newspapers, brochures and the yellow pages of the telephone directory. Ordinarily the advertisements do not carry the physicians' names, referring only to the center.
At the Women's Medical Center at Howell (Howell), management services of the nature provided by Cherry Hill are furnished by Women's Medical Center, a Florida corporation registered in New Jersey. These services were originally provided to a Dr. Mitoko, who returned to Kenya early in 1979. The practice was temporarily taken over by a Dr. Pelosi, but ultimately a new contract was entered into between the management corporation and three physicians: Dr. Sheldon Turkish, Dr. John Burger and Dr. Richard Glick. It was Dr. Turkish's testimony that Dr. Mitoko had originally asked him to cover for him while he was in Kenya. These two physicians knew each other and had previously worked together. When it appeared that Dr. Mitoko would be unable to return from Kenya, Dr. Turkish and his two physician partners decided to take over the Howell practice. They retain the same management company, which was already servicing another of their offices in Edison. Dr. Turkish further explained that since he started in private practice in 1968 there had been a substantial increase in the amount of administrative detail and paperwork required by private physicians which ...