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Saint Barnabas Medical Center v. New Jersey Hospital Rate Setting Commission

Decided: January 14, 1987.


On appeal from the New Jersey Hospital Rate Setting Commission.

Antell and Long. The opinion of the court was delivered by Long, J.A.D.


Saint Barnabas Hospital Medical Center (St. Barnabas) here challenges a determination of the New Jersey Hospital Rate Setting Commission (HRSC) denying it an adjustment in its rate schedule with respect to the issue of residents' salaries.

The case arose under the Health Care Facilities Planning Act, N.J.S.A. 26:2H-1 et seq., which provides that hospital rates of reimbursement are subject to regulation. A detailed history of the Act which constitutes the backdrop for this appeal is set forth in Riverside General v. N.J. Hosp. Rate Setting Commission, 98 N.J. 458, 461-464 (1985). The rules originally adopted under the Act were known as the Standard Hospital Accounting and Rate Evaluation (SHARE) Manual. N.J.A.C. 8:31A-1.1 et seq. In 1980, a new comprehensive system of rate-setting regulations was adopted pursuant to the Act, incorporating many aspects of the SHARE manual. N.J.S.A. 26:2H-4.1(b).

The rate-setting system is designed to set a prospective rate of reimbursement in advance of actual treatment, which is related to the hospital resources consumed in treating particular illnesses, categorized as Diagnosis Related Groupings (DRGs), see N.J.A.C. 8:31B-3.4; 8:31B-5.1. Each DRG reflects a wide variety of different kinds of costs associated with hospital care. These costs are derived from the actual expenses incurred by a hospital during a base year and reported to the Department of Health, N.J.A.C. 8:13B-3.16. The reported costs are allocated generally between two major categories: (1) direct patient care costs, such as the salaries and fringe benefits for nurses, dietitians and other employees engaged in the direct delivery of patient care, see N.J.A.C. 8:13B-3.21, 8:31B-4.32, and (2) indirect patient care costs, or the institutional overhead expenses for managerial, educational (including

residents in teaching programs), research and maintenance functions, see N.J.A.C. 8:31B-3.24(a). Both direct and indirect patient care costs are then screened for reasonableness by comparison with a standard developed for the hospital's peer group as a major teaching, minor teaching or non-teaching hospital, N.J.A.C. 8:31B-3.22, 8:31B-3.24. Although the screening formulae differ between direct patient care costs and indirect patient care costs, both categories are governed by a system of "incentives" and "disincentives" designed to promote hospital efficiency by containing costs.

Driving this system is the principle that if a hospital's costs are below the standard, it is operating more efficiently than its peers and should be rewarded with an "incentive." In such a case, the hospital is entitled to charge rates designed to provide it with income in excess of its costs in the amount of the incentive. N.J.A.C. 8:31B-3.24(b). Conversely, if a hospital's costs exceed the standard, it is deemed not to be operating as efficiently as it peers and is penalized with a "disincentive." In such a case, its rates will be set at a standard which will yield revenues less than the hospital's costs. N.J.S.A. 26:2H-2(d); N.J.A.C. 8:31B-3.7 to -3.39.

The screening of residents' costs is the specific area at issue here. Methodologically, the overall costs for residents' salaries as reported by the hospital are broken down into a unit cost and measured against the median unit cost of the hospitals in the peer group. If the hospital's unit cost exceeds 10% of the median (the "reasonable cost limit"), the excess amount is disallowed. N.J.A.C. 8:13B-3.24(d). The unit of service for converting total costs for hospital residents (the "RSD" cost center) is denominated in the regulations as a Full Time Equivalent (FTE) N.J.A.C. 8:31B-3.24(d). The regulations further prescribe that the hospital's reporting of costs for residents should be in accordance with the definitions specified in the SHARE system, N.J.A.C. 8:31B-4.117 note. In turn, the SHARE regulations call for the reporting of the total hours paid to residents and the use of 2080 hours per year as the

gauge for a FTE. N.J.A.C. 8:31A-2.1(a)(4), 8:31A-3.1(a)(128), 8:31A-4.1(a)(15).

Put another way, each year the hospital reports the total number of hours worked by all residents. This figure, which is ordinarily tracked on a computer, is made up of time fragments because residents usually rotate in and out of the hospital for brief periods throughout the year. The computer picks up the number of weeks each resident spends at the hospital, multiplies that number by a set hourly figure per week, totals the figures for all residents and records them. This number is then divided by the 2080-FTE, to obtain the number of full time equivalent working residents. The number of residents is then divided into the total dollars paid to all residents which gives the cost per unit (RSD) or the residents' yearly salary. This cost per unit is then compared to that of other hospitals in the group and if it is over 10% higher than the median cost the excess is excluded from reimbursement. N.J.A.C. 8:31(B)24.

On April 30, 1983, St. Barnabas submitted its actual cost data forms for 1982 for the purposes of developing the hospital's 1984 schedule of rates. On these forms, St. Barnabas reported having 116.5 full-time residents who worked a total of 227,279 salaried hours during 1982. In arriving at 116.5 full-time residents, St. Barnabas used a screening figure of 1950 annual hours, as opposed to the 2080-FTE standard prescribed by the regulation. This figure (1950) was calculated by ...

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