On appeal from New Jersey Department of Health; Superior Court, Chancery Division, Essex County, and Superior Court, Chancery Division, Morris County.
Before Judges J.h. Coleman, Thomas and Levy.
The opinion of the court was delivered by COLEMAN, P.J.A.D.
Under the Health Care Facilities Planning Act, as amended by L. 1978, c. 83, N.J.S.A. 26:2H-1 et seq., administrative regulations were promulgated to institute and implement a Diagnosis Related Group (DRG) method of payment or reimbursement to hospitals for inpatient care. A second system was established, under the authority of Chapter 83, known as State-qualified utilization review organizations (UROs), "to ensure that the hospital services which are provided are appropriate, necessary, and of high quality." N.J.A.C. 8:31B-3.76 (a).
On November 30, 1992, the Health Care Reform Act of 1992, L. 1992, c. 160, codified at N.J.S.A. 26:2H-18.51 et seq., was enacted into law. Sections 40 and 41 of Chapter 160 repealed some of the provisions of Chapter 83 which formed the statutory basis for some of the regulations pertinent to this appeal. Significantly, the Health Care Reform Act abolished the DRG payment system effective January 1, 1993, established a "transition year" methodology for 1993, and deregulated the hospital reimbursement system effective January 1, 1994.
These appeals focus on whether the hospitals were required to permit State-qualified UROs to conduct reviews during the 1993 transition year and whether the hospitals were required to pay for those reviews. The period between January 1, 1993, and December 31, 1993, is the transition year. N.J.S.A. 26:2H-18.53a. In recognition of the fact that the Health Care Reform Act made major changes in the system for hospital reimbursements, some of which became effective January 1, 1993, counsel for the New Jersey Hospital Association (Hospital Association) sought guidance from the Department of Health (DOH). On January 22, 1993, counsel for the Hospital Association sent a letter to the DOH asking for clarification of the DOH's position regarding the functions of State-qualified URO's and the method of paying them during 1993. The DOH responded in a memorandum dated April 2, 1993, which forms the basis for the appeals. It informed the hospitals how URO's were to function during 1993 and why the hospitals were expected to collect sufficient funds from payors to pay for the URO services.
The Hospital Association filed an appeal on April 27, 1993, under docket number A-4132-92T3, from the DOH memorandum. We permitted two State-qualified UROs, Axiom Review, Inc. (Axiom), and Peer Review Organization of New Jersey, Inc. (Peer Review), to intervene in that appeal. In addition, Axiom filed a Verified Complaint in the Chancery Division against Barnert Memorial Hospital and twenty other hospitals. The Hospital Association was permitted to intervene. These hospitals and the Hospital Association have appealed, by leave granted, under docket number A-342-93T3, from an order directing the hospitals to permit Axiom to conduct its utilization review functions for 1992 and 1993 and to pay Axiom for services to be rendered. We stayed the payment provisions of the order pending appeal.
On September 28, 1993, another URO, North Jersey Physicians Review, Inc., obtained an order directing Morristown Memorial Hospital to allow that URO access to patient records to perform its utilization reviews pursuant to N.J.A.C. 8:31B-3.76. Morristown Memorial Hospital has filed an appeal from that order, by leave granted, under docket number A-778-93T3F. We now consolidate all three appeals for Disposition.
These appeals require some historical understanding of hospital reimbursements for inpatient care and the functions of UROs prior to December 31, 1992. The Health Care Facilities Planning Act of 1971, L. 1971, c. 136, established a prospective hospital rate setting scheme for Blue Cross and certain federally funded programs such as Medicaid. The Act was amended in 1978 because of spiraling costs of institutional care. Riverside Gen. Hosp. v. New Jersey Hosp. Rate Setting Comm'n, 98 N.J. 458, 460-461, 487 A.2d 714 (1985). These amendments, known as Chapter 83, declared a public policy of cost containment of hospital rates. The cost containment contemplated by Chapter 83 was to be achieved primarily by shortening patients' hospital stays. In re Schedule of Rates for Barnert Memorial Hosp., 92 N.J. 31, 35-36, 455 A.2d 469 (1983). The system was designed to set a "prospective rate of reimbursement" (that is, in advance of the actual provision of services to patients). In re Amendment of N.J.A.C. 8:31B-3.31, 119 N.J. 531, 536 (1990). In addition, unlike its predecessors, Chapter 83 extended the State's supervision and control of hospital rates to all "payors" of hospital services, including the uninsured. N.J.S.A. 26:2H-18(b) and (c). The term "payor" has commonly been used in the health care industry to refer to anyone who pays for health care services, such as patients, commercial insurance companies (i.e., Prudential), hospital service plans (i.e., Blue Cross), and state and federally funded benefits programs (i.e., Medicaid and Medicare).
Chapter 83 also created a Hospital Rate Setting Commission (HRSC), with power to approve the rates for all payors. N.J.S.A. 26:2H-4.1. More will be said later about the function of the HRSC.
In terms of payment, Chapter 83 employed the DRG method or reimbursement. In re Schedule of Rates for Barnert Memorial Hosp., supra, 92 N.J. at 36. That is, various medical procedures were divided into DRGs and a rate was assigned to each. United Wire, Metal & Mach. Health and Welfare Fund v. Morristown Memorial Hosp., 995 F.2d 1179, 1189 (3d Cir.), cert. denied, U.S. , 114 S. Ct. 382, 126 L. Ed. 2d 332, 114 S. Ct. 383 (1993). Under the DRG system, instead of charging payors the actual costs incurred for treating an individual patient, a hospital was required to charge the DRG rate which was designated for a particular classification for that hospital. Ibid. Regulations were promulgated to implement Chapter 83 and codified at N.J.A.C. 8:31B-1.1 et seq.
A URO is defined as "a group of physicians within a designated geographical area who review the health care provided to patients in area hospitals. Physicians may be assisted by other health care professionals." N.J.A.C. 8:31B-3.77. As we stated earlier, the regulations created a URO system as well as a system for reimbursements to hospitals under DRG. This dual system was established in N.J.A.C. 8:31B-3.76, which provides:
(a) P.L. 1978, c. 83 provides that reasonable payment may be made only for "appropriate and necessary health care services of high quality required by (each) hospital's mix of patients." In order to discharge this statutory obligation, two systems are required: The reimbursement system, payment by the case, establishes reasonable rates for patients who are correctly assigned to a Diagnosis Related Group (DRG). A utilization review organization system is required to ensure that the hospital services which are provided are appropriate, necessary, and of high quality.
(b) This section sets forth minimum qualification criteria for utilization review organizations, prescribes the qualification procedure, and establishes a method for financing organizations which qualify. The criteria are designed to delineate the respective roles of payment and review so as to capitalize on the strengths of each. In this way, the systems may complement one another to the greatest degree, thereby promoting "effectiveness and efficiency of the health care system as a whole." (Emphasis added).
URO's are qualified by the DOH, N.J.A.C. 8:31B-3.80, and once that status is achieved, "the URO shall have access to only those hospital patient records for which [the particular URO] has direct review responsibility." N.J.A.C. 8:31B-3.76(c). But "each inpatient in each hospital selected by the Commissioner [of Health] pursuant to [Chapter 83], must be subject to review by a qualified utilization review organization concerning the necessity and appropriateness of inpatient admission and continuing stay." N.J.A.C. 8:31B-3.78(a). A State-qualified URO is generally independent from the hospital it reviews, except where it provides a form of delegated review in which the hospital performs certain review functions and the URO serves in a monitoring and oversight capacity. N.J.A.C. 8:31B-3.80(a)(2). We have been informed that many delegated review plans have been approved by the DOH.
The enactment of Chapter 160 meant that some of the statutory provisions of Chapter 83, which formed the basis for some of the regulations dealing with UROs, were either repealed or invalidated. General recognition of that fact prompted the inquiry ...