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Alexian Brothers Hospital v. State

Decided: December 8, 1989.

ALEXIAN BROTHERS HOSPITAL, CLARA MAASS MEDICAL CENTER, COLUMBUS HOSPITAL, EAST ORANGE GENERAL HOSPITAL, ELIZABETH GENERAL MEDICAL CENTER, THE HOSPITAL CENTER AT ORANGE, ST. ELIZABETH HOSPITAL, APPELLANTS,
v.
STATE OF NEW JERSEY, DEPARTMENT OF HEALTH, HOSPITAL RATE SETTING COMMISSION, RESPONDENTS



On appeal from a final decision of the Hospital Rate Setting Commission of December 9, 1988.

Pressler and Landau. The opinion of the court was delivered by Landau, J.A.D.

Landau

[242 NJSuper Page 412] This is an appeal by Alexian Brothers Hospital, Clara Maass Medical Center, Columbus Hospital, East Orange General Hospital, Elizabeth General Medical Center, The Hospital Center at Orange, and St. Elizabeth Hospital (Hospitals) from a final

decision of the Hospital Rate Setting Commission (the Commission) dated December 9, 1988, characterized by the hospitals as one in which the Commission declined to require the New Jersey Department of Health to correct an error affecting the equalization factor used in development of preliminary cost bases by each of these hospitals for 1984 through 1986.*fn1 The result of the Department's failure to apply its own Labor Market Area regulations, N.J.A.C. 8:31B-3.22(c), (d), it is urged, significantly reduced the level of reimbursement to which the hospitals were entitled during those rate years and also impacted upon their incentive/disincentive performance.

Hospitals seek to have this determination reversed as legally erroneous on the merits, and also as violative of the rule making requirements of the Administrative Procedure Act.

The Department of Health and the Commission say that this application is merely an untimely request to reopen and modify many past decisions, and that it was a reasonable exercise of discretion to decline to reopen years 1984-86 after so long a period of time, particularly as the door was left open for further application upon a showing of egregious harm.*fn2

The statutory setting in which the Commission functions is the Health Care Facilities Planning Act. N.J.S.A. 26:2H-1 to 26:2H-26. A comprehensive discussion of its operation under the statutory scheme is contained in Riverside General v. N.J. Hosp. Rate Setting Comm'n, 98 N.J. 458, 487 A.2d 714 (1985). See also In re Barnert Memorial Hospital Rates, 92 N.J. 31, 455 A.2d 469 (1983). In general the Commission is required to

establish rates of reimbursement for hospitals, subject to regulations adopted by the Department, with the approval of a statutorily created Health Care Administration Board. The Commission must provide for a schedule of rates which is both "reasonable" and sufficient to meet the revenue requirements of what is known as the "preliminary cost base," defined as:

[T]hat proportion of a hospital's current cost which may reasonably be required to be reimbursed to a properly utilized hospital for the efficient and effective delivery of appropriate and necessary health care services of high quality required by such hospital's mix of patients. The preliminary cost base initially may include costs identified by the commissioner and approved or adjusted by the commission as being in excess of that proportion of a hospital's current costs identified above, which excess costs shall be eliminated in a timely and reasonable manner prior to certification of the revenue base. The preliminary cost base shall be established in accordance with regulations proposed by the commissioner and approved by the board.

N.J.S.A. 26:2H-2(k).

N.J.A.C. 8:31B-3.1 to 8:31B-3.87 comprise the regulations established for computation of the preliminary cost base, building (for the years in question) upon base year 1982, with economic adjustments including application of a labor equalization factor, see N.J.A.C. 8:31B-3.22(c), (d), to direct and indirect patient care cost.

The labor equalization factor is designed to make more fair the process of cost efficiency comparisons among hospitals by geographically grouping them into eleven Labor Market Areas. These Labor Market Areas are enumerated in N.J.A.C. 8:31B-3.22(d)(2) and (3). A further refinement enables comparison of a major teaching hospital with a major teaching hospital peer, and similar comparisons among minor teaching and non-teaching hospital peers. See N.J.A.C. 8:31B-3.22(b). Costs for direct or indirect patient care which are higher than the standard developed are excluded from the costs allowed to the extent of deviations as "disincentives," while a hospital which generates lower than standard costs benefits from receipt of ...


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