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Riverside General Hospital v. New Jersey Hospital Rate Setting Commission

Decided: February 20, 1985.

RIVERSIDE GENERAL HOSPITAL, RESPONDENT,
v.
NEW JERSEY HOSPITAL RATE SETTING COMMISSION, APPELLANT



On certification to the Superior Court, Appellate Division.

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

Garibaldi

The issue here is whether there is sufficient credible evidence to support the determination of the New Jersey Hospital Rate Setting Commission (Commission) to exclude the costs of pension and dental plans of Riverside General Hospital (Riverside) from the calculation of that hospital's reimbursement rates. The Commission's determination was made pursuant to the Health Care Facilities Planning Act, N.J.S.A. 26:2H-1 to -52.

In 1981, the hospital rate setting program authorized under a 1978 amendment to the Health Care Facilities Planning Act of 1971, N.J.S.A. 26:2H-1 to -52 (Health Care Act), first became applicable to Riverside. The Health Care Act was enacted in 1971 in response to widespread public concern over the spiraling costs of institutional health care. In the Matter of the 1976 Hospital Reimbursement Rate for William B. Kessler Memorial Hospital, 78 N.J. 564, 567 (1979). The declared public policy underlying the Act was:

that hospital and related health care services of the highest quality, of demonstrated need, efficiently provided and properly utilized at a reasonable cost are of vital concern to the public health. [ N.J.S.A. 26:2H-1.]

The 1971 law authorized the Commissioner of Health to set rates only for Blue Cross and governmental programs such as Medicare and Medicaid. L. 1971, c. 136, para. 18. The method

employed for determining the rates focused primarily on the actual costs for services projected by the hospital, and furnished a limited number of incentives to improve efficiencies in hospital operation.

In 1978, the Health Care Act was substantially amended by L. 1978, c. 83, effective July 20, 1978. Among the major changes effected by the Amendment was the express statement in the public policy section of the Act that cost containment is now an objective of the Act. N.J.S.A. 26:2H-1. Moreover, the 1978 Amendment created a Hospital Rate Setting Commission with the power to approve rates for all payors of hospital services and altered the manner in which these rates are first prepared and proposed to hospitals, and then adjusted. Senate Institutions, Health & Welfare Committee, Statement to Senate, No. 446 (1978).

Stated simply, the Amendment establishes a three-step system for the setting of hospital rates. First, the Commissioner of Health proposes for each hospital a preliminary cost base*fn1 -- that proportion of its expenses that the Commissioner determines deserves to be covered by the hospital's charges to its patients. N.J.S.A. 26:2H-2(k). The preliminary cost base is annually increased by an economic factor to account for inflation. N.J.S.A. 26:2H-18.1(b). Then, the Commissioner of Health proposes for each hospital a "certified revenue

base"*fn2 -- an amount determined by the Commissioner that must be reimbursed to the hospital. N.J.S.A. 26:2H-2(l). Finally the hospital's rates are approved by the Commission, based on the hospital's certified revenue base figure. N.J.S.A. 26:2H-4.1(b). The preliminary cost base, the certified revenue base, and the schedule of rates are determined in accordance with regulations adopted by the Commissioner of Health with the approval of the Health Care Administrative Board. N.J.S.A. 26:2H-2(k), -18(b). However, they must ultimately be approved by the Commission. N.J.S.A. 26:2H-4.1(b).

The regulations setting forth the method by which a hospital's preliminary cost base is determined are found at N.J.A.C. 8:31B-3.1 to -3.90. It is provided therein that two of the components of the preliminary cost base are reasonable direct patient care costs and reasonable indirect patient care costs. N.J.A.C. 3:31B-3.2. Direct patient care costs include, among other things, salaries and fringe benefits for employees associated with rendering care directly to patients, such as nurses, laboratory technicians, therapists, dietitians, and housekeeping personnel. Indirect patient care costs include those costs such as institutional overhead expenses for managerial, educational, research and maintenance functions, including salaries and fringe benefits for staff associated with hospital functions. All hospital costs, such as salaries and fringe benefits, are allocated between direct and indirect costs. The precise method of allocation is described in N.J.A.C. 8:31B-3.18.

As stated previously, a key feature of the 1978 Amendment was the declared public policy of the Act to contain hospital costs. The method used to achieve this containment objective

also sought to increase the efficiency of the hospital's operations through a system of "incentives" and "disincentives" set forth in the regulations. Under this method, an individual hospital's costs in particular functions are compared to those of other hospitals operating within a certain area. Both a hospital's direct and indirect patient care costs are screened against a standard developed for that hospital's peer group.

The disincentives and incentives in the area of direct patient care cost are not arrived at by an analysis of the costs of particular items or services. Rather, the incentives and disincentives are determined by comparing a particular hospital's historic or base year costs for each separate Diagnosis Related Group (DRG)*fn3 to the standard by peer group for each DRG. See N.J.A.C. 8:31B-3.23. The regulations are designed to establish a prospective rate of reimbursement related to the measure of hospital resources consumed for each particular illness and identified as a price per case by DRG. N.J.A.C. 8:31B-5.1.

For example, if a hospital exceeds the standard in a particular DRG by $100 per case and has 10 such cases per year, the total disincentive for that DRG is $1,000. If, on the other hand, the same hospital renders the same at a cost below the standard in another DRG by $20 per case and has 1,000 such cases per year, the total incentive for that DRG would be $20,000. Assuming the two examples cited above were the only cases in which the hospital deviated from the standard, it would have a direct patient care incentive of $19,000.

If a hospital's costs are below the standard, it is deemed to be operating more efficiently than its peers and has an "incentive." In such a case, the hospital is entitled to charge rates that are designed to provide it with income in excess of its costs

in the amount of the incentive. N.J.A.C. 8:31B-3.64(a)(3). Conversely, if a hospital's costs exceed the standard, it is deemed not to be operating as efficiently as its peers and has a "disincentive." In such a case, its rates will be set at the standard so that the hospital will not be paid for its inefficiencies. See N.J.S.A. 26:2H-2(k); N.J.A.C. 8:31B-3.7 to -3.39. Thus, the rates allowed will yield revenues less than the hospital's costs.

I

Riverside General Hospital is a 224 bed, acute care, full service hospital located in Secaucus, New Jersey. Riverside, a partnership with 140 ...


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