On appeal from the Superior Court, Appellate Division.
For modification -- Chief Justice Wilentz and Justices Clifford, Schreiber, Handler, Pollock, O'Hern and Garibaldi. Opposed -- None. The opinion of the Court was delivered by Schreiber, J.
The central issue in this case is whether a party who, though on notice of a proposed regulation, elects not to participate in the proceedings leading to adoption of the regulation may years later introduce evidence to attack the factual predicate of the regulation. This issue arose in a factual context in which plaintiff, Bergen Pines County Hospital (BPCH), questioned, among other things, the validity of regulations prescribing the methodology that was used to fix the rates paid to it for caring for medicaid patients in its long-term medical care facility. The Appellate Division remanded the proceedings to the Department of Health for submission of evidential proof and findings of fact justifying the regulations. The remand was also for the purpose of developing a record on several other items. We granted the Attorney General's motion for leave to appeal from that part of the Appellate Division order concerning the promulgation of "regulations governing the reimbursement of long term care facilities under the Medicaid program." The Attorney General has made it clear that his objection was to the attack that the regulations were arbitrary.
The procedural history of this case is complicated and intricate. Plaintiff, a health care facility owned and operated by Bergen County, has contested the rates fixed by the Department of Human Services, Division of Medical Assistance and Health Services (DMAHS), to be paid to BPCH for medicaid recipients who had been housed and maintained in BPCH's long-term care facilities*fn1 during periods between July 1, 1976
and June 30, 1981. BPCH's appeal for rate relief for periods prior to January 1, 1978 was denied by the Appellate Division because that appeal had been filed more than two-and-one-half years after the rates for those periods had been fixed. Those appeals were well beyond the 45 days within which the appeals should have been taken. R. 2:4-1(b). We denied BPCH's petition for certification to review that decision. However, the Appellate Division remanded several matters to the Department of Health for further hearings and fact findings concerning the rates applicable to periods commencing January 1, 1978. It is to be noted that DMAHS used a different method to fix rates after December, 1977, known as CARE (Cost Accounting and Rate Evaluation). The Attorney General's motion for leave to appeal concerned primarily the attack on the regulations. The issues before us relate only to the methodology prescribed in the regulations for determining rates to be paid on and after January 1, 1978.
Medicaid, Title XIX of the federal Social Security Act (Act), is a shared federal-state program under which the federal government contributes money to defray part of the cost of a broad range of services including long-term nursing care in appropriate facilities for eligible patients. Medicaid covers welfare recipients who come within one of the federal categories -- aged, blind, or disabled persons, or families with children deprived of parental support. 42 U.S.C.A. §§ 1396a(a)(10)(A)(i) (West 1983). At their option, states may expand the category of eligible persons. Id. § 1396a(a)(10)(A)(ii).
The Act prescribes numerous terms and conditions that the state must satisfy in order to qualify for the federal financial aid. One crucial condition is the existence of a state plan that, among other things, prescribes the manner in which rates for long-term nursing care for recipients of medicaid are to be
calculated. Id. § 1396a(a)(13). Each state's plan must be approved by the Secretary of Health, Education and Welfare*fn2 (Secretary). Id. §§ 1396, 1396a(b). The method in the state plan is then applied to each institution providing services to medicaid patients and payments are made accordingly.
The Act was amended in 1972 stating that, effective July 1, 1976,*fn3 state plans were to provide "for payment of the skilled nursing facility and intermediate care-facility services provided under the plan on a reasonable cost related basis, as determined in accordance with methods and standards which shall be developed by the State on the basis of cost-finding methods approved and verified by the Secretary [of HEW]." 42 U.S.C.A. § 1396a(a)(13)(E) (West 1976).*fn4 (Emphasis supplied).
Before this amendment many states had elected to reimburse nursing homes on a flat-rate basis so that some nursing homes were being overpaid, while others were "paid too little to support the quality of care that medicaid patients" were expected to need and receive. S.Rep. No. 92-1230, 92d Cong., 2d Sess. 287 (1972). Overpayment permitted reimbursement of expenses for unnecessary items such as luxury services, and created little incentive to employ the most efficient and economical
methods, "with the result that the State's Medicaid dollars [did] not go as far as they could to provide needed medical care." 41 Fed.Reg. 27,300 (1976). It was to ameliorate these problems that Congress enacted the amendment. Underpayment placed economic pressure on facilities to provide lower quality care, to compel non-medicaid patients to subsidize the cost of caring for medicaid patients, or to refuse to accept medicaid patients. Id.
Subject to the limitation that a reasonable cost-related basis be central to the rate guidelines, Congress contemplated that the states would have flexibility to develop methodologies to determine the costs of all elements that constitute the care rendered to the medicaid patient and to determine reasonable cost-related reimbursement for that care. S.Rep., supra, at 287. HEW has stated that Congress' intent was that "[s]tates have great flexibility in determining classes in setting class rates, as long as their criteria and rates are reasonable." 41 Fed.Reg. 27,304 (1976).
The Secretary's regulations implementing the amendment provided that the state plan must not result in payment rates "lower than rates that the [state] agency reasonably finds to be adequate to reimburse in full the actual allowable costs of a facility that is economically and efficiently run." 42 C.F.R. § 447.302(b) (1978). The Secretary, as noted above, was also required to review and approve a state's cost-finding, rate-setting, and reimbursement methodologies to assure compliance with this standard. See Alabama Nursing Home Ass'n v. Harris, 617 F.2d 388, 394 (5th Cir.1980); S.Rep., supra, at 287 ("The methods would have to be approved and validated by the Secretary.").
Reimbursement on a reasonable cost-related basis does not mean that each facility will be paid its actual costs. The legislative history makes clear that states may set their payment rates at a level that would reimburse institutions only for those costs that the state finds reasonable. The Senate Report
declared that reasonable cost-related methodology, for example, could be determined on "a geographical basis, a class basis, or on an institution-by-institution basis." S.Rep., supra, at 287-88. The Secretary has acknowledged that:
An efficiently operated facility that provides services under the plan at a cost less than the class rate will in effect make a profit equal to the difference. On the other hand, a facility that is not economically operated may incur actual costs of more than the class rate; thus, a class rate can be used as an incentive for efficiency and economy. [41 Fed.Reg. 27,300, 27,304 (1976).]
New Jersey entered the medicaid program following passage of the Medical Assistance and Health Services Act (the New Jersey Act). N.J.S.A. 30:4D-1 to -19. A primary stated purpose of the New Jersey Act was "to obtain all benefits for medical assistance provided by the Federal Social Security Act" for those whose "resources are determined to be inadequate to secure quality medical care at their own expense." N.J.S.A. 30:4D-2.
The New Jersey Act established DMAHS within the Department of Human Services as the "single State agency" obligated to perform the administrative functions required for participation in the medicaid program through the promulgation of rules and regulations. N.J.S.A. 30:4D-4, -5. The New Jersey Act requires DMAHS to pay for medical assistance, including authorized nursing or intermediate care facility services, to qualified applicants. N.J.S.A. 30:4D-6. DMAHS was also authorized to pay for these services to the extent permitted by the New Jersey Act and the rules and regulations promulgated thereunder. N.J.S.A. 30:4D-6c.
The Commissioner of the Department of Human Services is authorized to submit to the Secretary of HEW "a plan for medical assistance [including a method for setting reimbursement rates], as required by" the federal law. N.J.S.A. 30:4D-7a. The Commissioner issues or may cause DMAHS to issue rules, regulations, and administrative orders "to secure for the
State of New Jersey the maximum Federal participation that is available with respect to a program of medical assistance, consistent with fiscal responsibility and within the limits of funds available for any fiscal year, and to the extent ...