On appeal from the Health Care Administration Board, Department of Health.
Shebell, Gaynor and A. M. Stein. The opinion of the court was delivered by Arnold M. Stein, J.s.c. (temporarily assigned).
In these consolidated appeals, appellant Warren Hospital (Warren) challenges the validity of amendments to certain rate reimbursement regulations promulgated by respondent Department of Health (DOH or Department) through the Health Care Administration Board (HCAB).
On April 21, 1986, HCAB promulgated amendments to N.J.A.C. 8:31B-3.31 and 3.51, and on July 7, 1986, adopted an additional amendment to section 3.31.
On October 5, 1987, further amendments to 3.31 were adopted by HCAB. Warren filed a notice of appeal from these amendments on November 17, 1987. A motion to consolidate this appeal with those previously docketed was granted on March 28, 1988.
Warren contends, inter alia, that these amendments are invalid because the appeal mechanism set forth therein conflicts with the intent of the enabling statute, and because they are arbitrary and capricious.
We reverse because the appeal procedure conflicts with the statutory right of appeal afforded to hospitals pursuant to N.J.S.A. 26:2H-18.1 of the Health Care Facilities Act. N.J.S.A. 26:2H-1 et seq. Because we rule the amendments invalid on this ground, we do not reach the substantive question of whether they are arbitrary.
The HCAB, established by N.J.S.A. 26:2H-4, acts in conjunction with the State Commissioner of Health to "adopt and amend rules and regulations in accordance with the Administrative Procedure Act . . . to effectuate the provisions and purpose of this act, including but not limited to: . . . (2) certification by the department of schedules of rates, payments, reimbursement, grants and other charges for health care services. . . ." N.J.S.A. 26:2H-5b.
Pursuant to this legislative authority, the Department and HCAB promulgated N.J.A.C. 8:31B-3.1 et seq., Procedural and Methodological Regulations. This rate-setting system is designed to set a prospective rate of treatment, in advance of actual treatment. The rate is related to the hospital resources consumed in treating particular illnesses, categorized as Diagnosis Related Groups (DRG). N.J.A.C. 8:31B-5.1 et seq. The current cost base for an institution includes both direct and indirect patient care costs. Direct patient care costs include salaries and fringe benefits for nurses, dietitians and other non-physicians engaged in the direct delivery of patient care. N.J.A.C. 8:31B-3.21; Riverside General v. N.J. Hosp. Rate Setting Com'n, 98 N.J. 458, 462 (1985). Indirect services include education, research, administrative, utilities and general services. See N.J.A.C. 8:31B-3.24; Riverside General, 98 N.J. at 462. Costs for residency programs are classified as "indirect." N.J.A.C. 8:31B-3.24(a).
Hospitals are classified in "peer groups" as either major teaching, minor teaching, or non-teaching, with each category specifying the criteria the hospital must meet. N.J.A.C. 8:31B-3.22(b). The hospitals within each peer group submit various data on costs of operation which the Department analyzes to develop a standard for each group's reasonable operating costs. N.J.A.C. 8:31B-2.5. The Department uses the cost data it collects in one year to establish a base year (N.J.A.C. 8:31B-3.16), which is then utilized to calculate prospectively the reimbursement rates for successive years. Adjustments are made each year for various economic factors. The resulting amount
represents the "preliminary cost base" for each hospital. N.J.A.C. 8:31B-3.7. The Commissioner also transmits to the hospital a proposed schedule of rates which is designed to produce sufficient revenue to correspond to the cost base. Ibid. Authority is given to the Hospital Rate Setting Commission (HRSC), pursuant to N.J.S.A. 26:2H-4.1, to either approve or ...