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Children''s Hospital of Philadelphia v. Director

Decided: January 27, 1993.

CHILDREN'S HOSPITAL OF PHILADELPHIA, PETITIONER-APPELLANT,
v.
DIRECTOR, DIVISION OF MEDICAL ASSISTANCE AND HEALTH SERVICES, NEW JERSEY DEPARTMENT OF HUMAN SERVICES, RESPONDENT-RESPONDENT



On appeal from a final decision of the Division of Medical Assistance and Health Services.

Havey, Stern and Brochin. The opinion of the court was delivered by Brochin, J.A.D.

Brochin

[261 NJSuper Page 618] Children's Hospital of Philadelphia is a Pennsylvania hospital. New Jersey pays it for providing medical services to New Jersey Medicaid patients. In accordance with N.J.A.C. 10:52-1.17(b), the rate at which it is compensated for providing those

services is the pertinent Diagnosis Related Group (DRG) rate established by the appropriate Pennsylvania administrative agency.

Children's Hospital was a party to federal court litigation in which Pennsylvania's system for establishing DRG rates for its hospitals was held to violate federal law because the system resulted in compensating hospitals at rates that were not "reasonable and adequate to meet costs incurred by efficiently and economically operated facilities," particularly those serving disproportionate numbers of low-income patients with special needs. Temple University v. White, 729 F. Supp. 1093 (E.D.Pa.1990) (holding that plan did not comply), 732 F. Supp. 1327 (ordering interim relief), aff'd 941 F.2d 201 (3rd Cir.1991), cert. denied, U.S. , 112 S. Ct. 873, 116 L. Ed.2d 778 (1992). As the result of that litigation, to which New Jersey was not a party, Pennsylvania retroactively increased Children's Hospital's DRG rates. Children's Hospital then applied to the New Jersey Division of Medical Assistance and Health Services to be paid the difference between the compensation that it had received for services which it had provided to New Jersey Medicaid patients during its 1989, 1990, and 1991 rate years, calculated at the DRG rates then prevailing, and the compensation to which it would be entitled on the basis of its retroactively increased rates. Relying on N.J.A.C. 10:52-1.17(e),*fn1 the Division declined to consider the application on its merits because Children's Hospital had filed its claim more than 20 days after the close of the rate years during which the services were rendered.

Children's Hospital has appealed. We hold that the Division's regulations do not justify its ruling. We therefore reverse the decision appealed from and remand this matter to the Division for consideration on the merits. An explanation of our ruling requires a Discussion of the framework of federal law within which our State's Medical Assistance Program operates.

Pursuant to the New Jersey Medical Assistance and Health Services Act, N.J.S.A. 30:4D-1 et seq., New Jersey compensates approved hospitals for providing necessary services to indigent, medically eligible New Jersey residents. Under the federal Medicaid Act, 42 U.S.C.A. § 1396 et seq., the Federal Government reimburses the State for part of the cost. By accepting this financial assistance, New Jersey obligates itself to comply with the terms of the Medicaid Act and the pertinent regulations promulgated by the Secretary of Health and Human Services. Wilder v. Virginia Hospital Assn., 496 U.S. 498, 502, 110 S. Ct. 2510, 2513, 110 L. Ed.2d 455, 462 (1990).

A state participating in the Medicaid program must compensate hospitals for services provided to Medicaid patients at rates that are "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities," that "take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs," and that "assure that individuals eligible for medical assistance have reasonable access (taking into account geographic location and reasonable travel time) to inpatient hospital services of adequate quality. . . ." 42 U.S.C.A. § 1396a(a)(13)(A); Temple University v. White, 941 F.2d 201, 207 (3rd Cir.1991) A participating state must also provide a review procedure "to ensure the proper and efficient payment of claims and management of the program. . . ." 42 U.S.C.A. § 1396a(a)(37). Federal regulations implementing these statutory provisions require a participating state to "pay for services furnished in another State [to an eligible resident of the participating state] to the same extent that it would pay for services furnished within its boundaries," 42 CFR § 431.52(b), and to

provide hospitals dissatisfied with their compensation the opportunity to obtain review of "payment rates." 42 C.F.R. § 447.253(c); see West Virginia University Hospitals, Inc. v. Casey, 885 F.2d 11, 30-2 (3rd Cir.1989), aff'd 499 U.S. , 111 S. Ct. 1138, 113 L. Ed.2d 68 (1991) (considering and affirming only the Circuit Court's limitation of the award of experts' fees).

West Virginia University Hospitals, Inc. v. Casey, supra, demonstrates that a state participating in the Medicaid program is responsible for assuring that its compensation to out-of-state hospitals is "reasonable and adequate" in accordance with Federal law and that out-of-state hospitals dissatisfied with their compensation must have an opportunity to obtain review. Like New Jersey, Pennsylvania used a DRG system to determine charges for hospital care. Its procedure for formulating rates for in-state hospitals "took into account the situation of hospitals which serve a disproportionate number of low income patients with special needs," 42 U.S.C.A. § 1396a(a)(13)(A), by assigning each hospital to one of seven rate groups; an in-state hospital with a disproportionate share of low income patients was assigned to a group whose members were paid at a higher rate. But every out-of-state hospital was compensated at the average compensation rate for all in-state hospitals; no consideration was given to whether the out-of state hospital cared for a disproportionate share of low income patients. The Court of Appeals held that this aspect of Pennsylvania's program was invalid because it resulted in compensation to out-of-state hospitals that was not "reasonable and adequate" within the meaning of Federal law.

The United States District Court, West Virginia University Hospitals, Inc. v. Casey, 701 F. Supp. 496 (M.D.Pa.1988), whose decision was affirmed by the Court of Appeals, ruled that the Pennsylvania Medicaid program was also invalid on two other grounds. It found that if Pennsylvania continued to pay inadequate compensation, West Virginia University Hospitals would be unwilling to treat ...


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