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Radiological Society of New Jersey v. New Jersey State Department of Health

Decided: March 10, 1986.


On appeal from New Jersey State Department of Health, Hospital Rate Setting Commission.

Fritz, Gaynor and Baime. The opinion of the court was delivered by Baime, J.A.D.


This is an appeal from a determination of the Hospital Rate Setting Commission (Commission) requiring that providers obtain a certificate of need as a prerequisite to reimbursement for CT scanning and MRI services*fn1 furnished to hospital inpatients. The Commission's decision was rendered in the form of a Department of Health (Department) policy statement which was adopted following a series of hearings at which selected members of the industry and the Public Advocate were invited to attend and provide comments. Appellant, the Radiological Society of New Jersey, contends that the Commission's decision encompassed de facto rule-making in violation of the requirements of the Administrative Procedure Act (N.J.S.A. 52:14B-1 et seq.). It is also argued that the policy enunciated by the Commission constitutes an unlawful intrusion into the private practice of medicine and, thus, contravenes the provisions of the Health Care Facilities Planning Act (N.J.S.A. 26:2H-1 et seq.). We disagree and affirm.

A description of the applicable statutes and regulations is necessary for a full understanding of the issues presented. Both the Department of Health and the Commission operate under the aegis of the Health Care Facilities Planning Act. That statutory scheme was enacted in 1971 in order to "promote the financial solvency of hospitals and similar health care facilities" and contain the spiraling cost of inpatient and outpatient medical care. N.J.S.A. 26:2H-1. As a means of implementing that articulated public policy, the Department was charged with the responsibility of certifying institutional "schedules of rates, payments, reimbursement, grants and other charges for health care services" in New Jersey. N.J.S.A. 26:2H-5b(2). The Commission was established under the auspices of the Department to "approve or adjust the preliminary

cost base, and . . . approve an appropriate schedule of rates for all hospitals. . . ." N.J.S.A. 26:2H-4.1b.

Although the Commission lacks rule-making authority, it is authorized by statute to "consider adjustments to the certified revenue bases and schedule of rates" of health care facilities and to conduct "public hearings in order to obtain the evidence required to support its conclusions and determinations." N.J.S.A. 26:2H-18.1c. The review proceedings authorized by the Act are "designed in large measure to elicit quasi-legislative determinations analogous to prospective rate-making generally characteristic of regulated industries." In re 1976 Hosp. Reimbursement Kessler Mem. Hosp., 78 N.J. 564, 576-577 (1979) (Handler, J., concurring). The program is also intended to insure that health care resources are effectively utilized. The rate review program attempts to achieve this goal through the process of "manipulating and influencing the incentives in the third-party reimbursement mechanism so that health care providers are rewarded for cost-efficient and penalized for cost-extravagant behavior." Id. at 583.

Another significant cost containment component of the Act is the certificate of need program. N.J.S.A. 26:2H-7 to 11. This program requires providers to demonstrate that any proposed creation or expansion of services is necessary, economical and will contribute to the orderly development of adequate health care facilities. N.J.S.A. 26:2H-8. A critical aspect of the program is N.J.S.A. 26:2H-7 which provides that:

No health care facility shall be constructed or expanded, and no new health care services shall be instituted after the effective date of this act except upon application for and receipt of a certificate of need as provided by this act. No agency of the State or of any county or municipal government shall approve any grant of funds for, or issue any license to, a health care facility which is constructed or expanded, or which institutes a new health care service, in violation of the provisions of this act.

This provision is designed to assure cost-efficiency as much as quality. Stated another way, the paramount objective of the Act is to "promote only those 'highest quality' health care services that are justifiable in a cost-benefit sense," In re 1976

Hosp. Reimbursement Kessler Mem. Hosp., supra, 78 N.J. at 583, and N.J.S.A. 26:2H-7 accomplishes this goal by placing a direct check on proposed expansion programs.

The certificate of need program established by the Act interfaces with federal statutes and regulations. Specifically, the National Health Planning and Resources Development Act of 1974 imposes the requirement that, as a condition of federal funding, states administer a certificate of need program consistent with standards promulgated by the Secretary of the United States Department of Health and Human Services. 42 U.S.C. § 300m-2(a)(4)(B). See also S.Rep.No., 96-96, 96th Cong., 1st Sess. 5, reprinted in 1979 U.S.Code Cong. & Ad. News 1306 at 1310. In 1979, the federal statute was amended to require that "any person [who] enters into a contractual arrangement to acquire major medical equipment" costing in excess of $150,000 must notify the state agency of his "intent to acquire such equipment and of the use that will be made of the equipment."*fn2 42 U.S.C. § 300m-6(e)(2)-(3). The amendatory legislation also provides that "a certificate of need shall not be required for the acquisition of major medical equipment which will not be owned by or located in a health care facility unless. . . the [s]tate [a]gency finds . . . that the equipment will be used to provide services for inpatients of a hospital." 42 U.S.C. § 300m-6(e)(1)(A) (emphasis added). These amendments were intended "to broaden [s]tate certificate of need requirements to include expensive equipment regardless of location if [such] equipment [is to] be used to provide services on a regular basis to inpatients of hospitals." S.Rep.No. 96-96, supra, 1979 U.S.Code Cong. & Ad. News at 1378. This purpose was made manifest by the Senate report accompanying the amendments which contains the following comment:

The conferees note that in order for a certificate of need program to be acceptable . . . it must provide for the review and approval of the acquisition of

major medical equipment that will be used to provide services to patients who are inpatients of a hospital at the time the service was provided. . . . The conferees want to make clear that this provision is a minimum requirement of an acceptable certificate of need program. . . . [ Id. at 1450].

In an effort to comply with this minimum federal requirement, the New Jersey Department of Health revised its regulations for the certificate of need program on August 6, 1981.*fn3 See Forward to N.J.A.C. 8:33-1. The Department adopted N.J.A.C. ...

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