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Cobo by Hudson Physical Therapy Services v. Market Transition Facility by Material Damage Adjustment Corp.

August 15, 1996

TITO COBO, DAVID CARRENO, NORMA CANTOS AND JOSE FERNANDEZ, BY THEIR ASSIGNEE, HUDSON PHYSICAL THERAPY SERVICES, PLAINTIFF-RESPONDENT/CROSS-APPELLANT,
v.
MARKET TRANSITION FACILITY, BY ITS SERVICING CARRIER, MATERIAL DAMAGE ADJUSTMENT CORP., DEFENDANT-APPELLANT CROSS-RESPONDENT. LYDIA RIVERA AND KESHA FINLEY, BY THEIR ASSIGNEE, HUDSON PHYSICAL THERAPY SERVICES, PLAINTIFF-RESPONDENT CROSS-APPELLANT, V. NEW JERSEY AUTOMOBILE FULL INSURANCE UNDERWRITING ASSOCIATION, BY ITS SERVICING CARRIER, MATERIAL DAMAGE ADJUSTMENT CORP., DEFENDANT-APPELLANT CROSS-RESPONDENT.



On appeal from the Superior Court, Law Division, Special Civil Part, Somerset County.

Approved for Publication August 15, 1996.

Judges Petrella, Skillman and Eichen. The opinion of the court was delivered by Eichen, J.A.D.

The opinion of the court was delivered by: Eichen

The opinion of the court was delivered by

EICHEN, J.A.D.

In 1993, Hudson Physical Therapy Services (HPTS) filed thirteen separate actions in the Special Civil Part against The Market Transition Facility (MTF) and the New Jersey Automobile Full Insurance Underwriting Association (JUA), by their servicing carriers, Warner Insurance Systems (Warner) and its sub-contractor Material Damage Adjustment Corporation (MDA) (collectively defendants). HPTS brought the suits as assignee of the rights of various individual insureds injured in automobile accidents under their automobile insurance policies to compel increased personal injury protection (PIP) benefit payments for physical therapy services HPTS had rendered to the insureds. HPTS operates from a facility in Jersey City and is engaged in the business of providing physical therapy services to patients, 70% of whom have their charges paid through the No-Fault provisions of their automobile insurance policies.

The thirteen suits were consolidated for discovery and case management. Thereafter, six "test cases" *fn1 from the original thirteen suits were selected for a non-jury trial to determine whether HPTS's fees charged to these PIP claimants were reasonable and in accordance with applicable law. The parties stipulated that the court's determination as to the reasonable and appropriate fees on the six test cases would be binding on all other claims against defendants by HPTS. *fn2

The fee dispute arose after HPTS changed its billing method for PIP claimants in July 1990 from one involving a flat fee for each treatment session to a modality-based billing method involving separate fees for each procedure performed during a visit. After HPTS changed to a modality-based billing method, the Commissioner of Insurance (the Commissioner) adopted regulations, N.J.A.C. 11:3-29.1 to -29.6, *fn3 establishing regionally-based medical fee schedules for reimbursing health care providers like HPTS, N.J.A.C. 11:3-29.1. The medical fee schedules set fee rates consistent with a modality-based billing method. N.J.A.C. 11:3-29.6. The regulations also established a formula for calculating reimbursement when multiple procedures are performed on the same patient by the same provider during the same visit (the multiple procedures reduction formula). N.J.A.C. 11:3-29.4(f). *fn4 After the regulations were adopted on January 25, 1991, HPTS conformed its modality-based billing method to the medical fee schedules set forth in N.J.A.C. 11:3-29.6 (the PIP schedules). *fn5 When HPTS conformed its billing to the PIP fee schedules, it applied the multiple procedures reduction formula. At first, in utilizing the formula, HPTS applied the formula anew for each separate body part or region that was treated in the same visit. After the regulations were amended on April 6, 1992, HPTS applied the formula to all procedures performed in one visit regardless of whether the procedures were performed on the same or different body parts.

Four different billing periods were at issue in the six cases as follows: (1) May 3, 1990 to June 30, 1990 (Period I) (when HPTS billed treatment sessions at a flat fee rate of $75); (2) July 1, 1990 to January 25, 1991 (Period II) (when HPTS billed on a modality basis at the rate of $20 to $25 for each procedure performed during a session); (3) January 25, 1991 to April 6, 1992 (Period III) (when HPTS billed procedures at the PIP fee schedule rate, and applied the multiple reduction formula anew for each separate body part or region treated in the same visit); and (4) April 6, 1992 to the present (Period IV) (when HPTS billed procedures at the PIP fee schedule rate and applied the multiple reduction formula to all procedures performed in one visit regardless of body part).

The MTF and the JUA declined to pay the modality-based claims on the grounds that the PIP fee schedules merely established the upper limit on medical bills and that, under the regulations, the insurer was obligated to pay no more than "the provider's usual, customary and reasonable fee," as stated in N.J.A.C. 11:3-29.4(a). Defendants asserted that HPTS's usual, customary and reasonable fee was its earlier flat rate, not the modality-based fees. Defendants also asserted that, to the extent HPTS was entitled to bill them at the limit established by the PIP fee schedules, they had misapplied the multiple procedures reduction formula during Period III.

At trial, HPTS presented evidence that on July 1, 1990, HPTS changed its billing method from a flat rate of $75 per visit to a modality basis. By doing so, HPTS asserted that the modality method of charging was established at that time as HPTS's usual customary and reasonable practice. They also asserted that when the PIP fee schedules were adopted on January 25, 1991 and HPTS again changed its billing method to conform to those schedules, the resulting charges were essentially the same as in Period II and, therefore, the HPTS fees based upon the PIP fee schedules were its usual, customary and reasonable fees for Periods III and IV.

Defendants countered that HPTS's usual, customary and reasonable fee throughout all four periods was its flat rate, and not the subsequent modality-based rates. As an illustration, defendants presented a comparison of the total cost of services for the six test-case plaintiffs showing that under the flat fee basis in June 1990 (Period I), the total charges would have been $14,505 as compared with $31,109 in July 1990 (Period II), and $33,989 in February 1991 when the fee schedules were adopted (Period III). Thus, defendants argued billing under the modality-based rate is double that under the flat-fee rate.

The trial court held that HPTS's fees for physical therapy services rendered to plaintiffs during each of the four billing periods were its usual, customary and reasonable fees, even though they increased substantially when HPTS changed its billing method. The court then awarded HPTS counsel fees as a successful claimant suing for PIP benefits. However, it also held that HPTS misapplied the regulation's multiple procedures reduction formula between January 1991 and April 1992 (Period III), resulting in an overcharge to defendants. Following trial, the court denied defendants' motion to allow them to file a counter-claim for recoupment or set off of any payments made to HPTS in excess of the amount determined by the court to be reasonable.

On appeal, defendants make the following arguments: (1) the trial court's holding that HPTS's billings were reasonable was not supported by statutory and regulatory law or by sufficient credible evidence in the record; (2) the trial court improperly denied defendants' application to reserve a claim for recoupment or set-off of any excess payments; and (3) the trial court improperly awarded counsel fees to HPTS. HPTS cross-appeals, arguing that the trial court erred in ruling that it improperly applied the multiple reduction formula during Period III. With the exception of paragraph three of the judgment which determined that HPTS erroneously applied the multiple reduction formula during Period III, we reverse the judgment. On the cross-appeal, we affirm paragraph three of the judgment.

We need not detail the extensive trial testimony concerning how HPTS arrived at its modality-based method of billing; in essence, HPTS offered various explanations, including convenience and the need for greater efficiency. *fn6 Essentially, HPTS denied changing its billing method in anticipation of the adoption of the regulations. HPTS's comptroller testified that he did not become aware of New Jersey's proposal to establish PIP fee schedules until late December 1990, shortly before the schedules went into effect, and that only after the schedules became effective in January 1991, did HPTS change from its own modality-based billing method to a modality-based method that conformed to the fee schedules. Defendants presented evidence to the contrary, namely that many providers were aware the fee schedules were coming and changed from the flat fee based billing practice to the modality-based billing method before the PIP fee schedules were first promulgated, in anticipation of them.

Additionally, defendants presented evidence to demonstrate that HPTS's fees were unreasonable for the geographic region in which HPTS was located. The evidence consisted of their auditors' recommendations which were based on data from trade publications, Medicare schedules, fee surveys and the results of audits of actual provider bills. Based on this data, the auditors recommended that reasonable fees for services provided by HPTS were in the range of $60 to $70 per visit.

For Period I, May 3, 1990 to June 30, 1990, the court found that HPTS's usual, customary practice was to charge a $75 flat rate. The court found there was no testimony to indicate that the rate was unreasonable. (Defendants are not appealing this aspect of the court's decision.)

For Period II, July 1, 1990 to January 25, 1991, the court found that it was the usual, customary practice of HPTS to charge not only PIP carriers but also workers' compensation and major medical carriers on a modality basis. Relying on the comptroller's testimony, it referred to modality-based billing as "the more correct accounting procedure to tie the service rendered to the mode of treatment." Although the court recognized that after the change to modality-based billing, HPTS's bills went up "dramatically," it observed that the billing method was "rationally related to the physical therapy services that were rendered," especially when one considers that the services were rendered to automobile accident victims who typically are injured in multiple body regions, noting that "with three or four modalities of treatment per region, the bills are going to go up." The court also noted that defendants were unable to justify the reasonableness of a $60 flat fee.

For Period III, January 25, 1991 to April 6, 1992, the court found that HPTS's usual, customary practice was to bill all insurers//--PIP, Workers' Compensation, and Major Medical carriers//--per modality using the rates set by the fee schedules. The court concluded that the fee schedules themselves were "evidence of the intent of the Department of Insurance that physical therapists list the variety of modes of treatment that were rendered." However, the court found HPTS had incorrectly applied the multiple procedures reduction formula separately for each different body part or region treated, rather than to all procedures performed in one visit regardless of the body part or region. Thus, the court concluded HPTS would have to recalculate the third-period bills and reduce them accordingly.

The court found that HPTS's billing practices in Period IV were "appropriate, usual, and customary billing practices" for all the insurers it dealt with. Furthermore, the court determined that whether HPTS's rates were reasonable was "answered by the fee schedule.... It sets forth what the reasonable rate is for that mode of physical therapy treatment."

The court found that the setting of flat rates by defendants' auditors "effectively undermined the Department of Insurance fee schedule and the authorization of [N.J.S.A. ] 39:6A-4.6." The court concluded that defendants' auditors were ignoring the judgment of the Department, which was based on its analysis of millions of bills of health care providers ...


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