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Northwest Covenant Medical Center v. Fishman

April 23, 2001


The opinion of the court was delivered by: Coleman, J.

Argued February 13, 2001

On certification to the Superior Court, Appellate Division.

The primary issue in this case is whether the Department of Health and Senior Services' (DHSS) refusal to reallocate Northwest Covenant Medical Center's (Northwest) 1997 charity care subsidy was a quasi-legislative decision. If so, then the forty- five day time limit for appealing an agency action does not apply and Northwest may maintain its appeal if not barred by laches.

The Appellate Division concluded that the DHSS's charity care subsidy decision was a quasi-judicial determination; thus, the court ruled that the forty-five day time limit applied and was not satisfied. Alternatively, the court ruled that even if the forty-five day time limit was inapplicable, Northwest's appeal should nonetheless be barred based on the doctrine of laches. We disagree and reverse. We hold that the DHSS decision was more quasi-legislative than quasi-judicial in nature. Hence, the forty-five day time limit does not apply and the equitable doctrine of laches does not bar Northwest's appeal.


In 1992, New Jersey enacted the Health Care Act (Act), which, in relevant part, subsidizes hospitals that serve a disproportionate number of low-income patients who are unable to pay their hospital bills. N.J.S.A. 26:2H-18.51 to -18.70. Charity care subsidies are distributed from the Health Care Subsidy Fund, N.J.S.A. 26:2H-18.58, and are calculated based on a statutory formula. N.J.S.A. 26:2H-18.58e (announcing total amount of charity care subsidy funds collectively available for eligible hospitals in a given year); N.J.S.A. 26:2H-18.59e (explaining statutory formula for allocating total subsidy amount among eligible hospitals). But even if a hospital qualifies for a subsidy, it does not necessarily receive a full "reimbursement" covering all of its actual charity care expenses; rather, a hospital receives only its proportionate share of the total subsidy funded by the Legislature for that year. Ibid. For 1997, the year involved in this case, the Legislature appropriated $300 million for charity care subsidy payments. N.J.S.A. 26:2H-18.59e. Northwest was one of sixty-seven hospitals that sought a share of the 1997 charity subsidy.

Hospitals seeking charity care subsidies are "required to submit all claims for charity care cost reimbursement . . . to the department in a manner and time frame specified by the Commissioner of Health and Senior Services." N.J.S.A. 26:2H- 18.59b(3). Pursuant to the Act, the DHSS contracted with the UNISYS corporation (UNISYS) to process charity care claims and price them at the appropriate Medicaid rate, as required under the Act. UNISYS developed the Essential Health Services Claims Pricing System Manual (ECPS Manual), which sets forth the manner and time frame for hospitals submitting subsidy claims.

The ECPS Manual encourages hospitals to submit claims for charity care on a monthly basis according to a schedule published by the DHSS. If a claim is submitted in a timely manner and accepted, UNISYS then issues a "remittance advice" to the hospital "by the 5th working day after the monthly adjudication cycle date." The ECPS Manual also provides that, "[i]f a submitter fails to receive the requested remittance tape(s) or if there are problems with the remittance tape(s), it is the responsibility of the submitter to notify UNISYS in writing within fourteen days from the remittance date." Furthermore, "[t]he individual provider is ultimately responsible for the accuracy and validity of every ECPS claim submitted for payment."

Northwest is a non-profit, acute care medical center comprised of three member hospitals: (1) St. Clare/Riverside (St. Clare), (2) Dover General, and (3) Walkill Valley General Hospital. A large percentage of St. Clare's patient population is indigent and it historically has received a substantial charity care subsidy. In 1995, St. Clare began submitting its charity care claims electronically and identified an Elmer Bean as its contact person.

On February 2, 1996, the DHSS issued a schedule of monthly submission and remittance statement dates for the processing of subsidy claims. The memorandum specifically noted that "[c]laims submitted after the Submission Cut-Off Date through the Adjudication Cycle Date will most likely process, but are not guaranteed to process for the upcoming adjudication cycle." On September 27, 1996, DHSS issued a letter stating that the claims submission deadline for 1997 charity care subsidies was October 18, 1996.

For reasons unexplained, Northwest did not submit monthly claims for St. Clare as directed, but instead submitted claims for the entire year's cycle on October 18, 1996. Several other hospitals also submitted their claims based on the entire year's cycle. Moreover, St. Clare's charity care claims data contained numerous errors that prevented UNISYS from processing the claims; hence, a remittance advice was not issued. A dispute exists over whether UNISYS attempted to contact Elmer Bean, Northwest's designated contact person regarding charity claims, concerning the erroneous charity data that Northwest submitted for St. Clare. Despite that dispute, the DHSS, in an attempt to avoid a total loss by St. Clare, calculated the hospital's charity care subsidy by using Northwest's "aggregate pricing ratio." In other words, the DHSS used data from Northwest's other member hospitals to calculate a charity care subsidy amount for St. Clare. That subsidy was substantially less than the amount Northwest anticipated receiving for St. Clare.

On February 18, 1997, Northwest contacted UNISYS and was informed that St. Clare's request that its subsidy be determined using its hospital-specific data was rejected. On February 24, 1997, Northwest responded that it had not previously been told of any errors and requested that the Director of the Health Care Financing System recalculate the subsidy with the proper data. Despite Northwest's protest, three days later on February 27, 1997, the DHSS issued a memorandum to all sixty-seven participating hospitals detailing the charity care subsidies for 1997. St. Clare was awarded a subsidy of $5.7 million, a shortfall of about two million dollars from that which it would have received had its claims been properly submitted. That same day, Northwest made a direct appeal to Leonard Fishman, the DHSS Commissioner, to increase St. Clare's subsidy.

At the same time, Northwest began pursuing a legislative solution. Northwest arranged a March 3, 1997, meeting with New Jersey State Senator Robert Littell and the DHSS. The DHSS staff explained to Senator Littell that recalculating St. Clare's subsidy would not be possible because it would take money from hospitals less able to self-subsidize their charity care. Charity care under the Act is a zero sum system, such that an increase for one hospital causes all other hospitals to realize a decrease. Because only $300 million was allotted for 1997, the DHSS observed that any increase to St. Clare would require recoupment from the other sixty-six hospitals that received subsidies. Senator Littell then requested that the DHSS calculate the figure that St. Clare would have been entitled to had it submitted a correct claim.

With corrected data from St. Clare, Commissioner Fishman responded to Senator Littell on May 29, 1997, by informing him of the amount that St. Clare would have received. The Commissioner also indicated that he would like to work with you and the Department of Human Services to determine whether any supplemental payments to Northwest Covenant Health Systems could be structured so as to draw down additional federal funds. According to federal rules, St. Clare's is one of the three hospitals in the State that [has] received more in subsidy payments in [State Fiscal Year 1997] than the federal government will permit the State to claim for federal match. Therefore any supplemental amounts would have to be paid after July 1, 1997 to have any possibility of federal matching funds.

Shortly thereafter, Senator Littell sponsored a supplemental appropriation for Northwest in the 1998 fiscal year budget. But on June 27, 1997, Governor Whitman exercised a line-item veto and excised the supplemental funding.

Northwest did not seek a stay of payment of the 1997 charity care subsidies. Consequently, the payments were made between February 1997 and January 1998 in accordance with the allocation calculated by UNISYS. Northwest filed its notice of appeal with the Appellate Division on December 22, 1997. Northwest explains the delay in filing the appeal as follows:

After the legislative initiative failed, we expected that the Departments would correct Northwest Covenant's allocation, because the Departments had already calculated the additional amount due Northwest Covenant, and more than one-half of the monthly payments remained to [be] made. Additionally, when we received Commissioner Fishman's May 29, 1997 letter to Senator Littell, we believed the Department of Health had recognized that it had an obligation to pay Northwest Covenant the additional amount of charity care funding. In the letter, Commissioner Fishman said that the Department of Health wanted to work with Northwest Covenant to see that additional funds were paid to Northwest Covenant. The letter did not limit the discussion to providing additional funds through the legislative process. Rather, the letter simply said that the Department of Health would work with Northwest Covenant to provide additional funds, as long as the funds could be provided in the next fiscal year. And if the Departments were not going to correct the allocation, we expected that the Departments would at least respond to our letters in which we formally requested that the allocation be corrected.

After the second to last payment for the year was made in mid-December 1997, without any of the additional amount due being paid, we finally concluded that the Departments were not going to correct the error in the allocation. At that point, we decided that Northwest Covenant would have to sue to obtain the Charity Care funding that it was due. On December 22, 1997, this appeal was filed.

Northwest moved for summary judgment and the DHSS filed a cross-motion to dismiss the appeal as untimely and as barred by the doctrine of laches. The Appellate Division denied both motions in an order dated July 30, 1998, but ordered "a limited remand to the Commissioner for [the] purpose of affording the opportunity for [Northwest] to make a record containing the factual and legal contentions it relied on and for the issuance of findings of fact and conclusions of law to enable [the c]court to complete its review."

In response to the remand order, the Commissioner on August 21, 1998, requested Northwest's counsel to submit to him "a written statement of the factual and legal contentions" that Northwest will rely upon and the "evidence that supports Northwest Covenant's factual and legal contentions[,] . . . including the submission of accurate and timely data."

On the remand, Commissioner Fishman denied Northwest's request for recalculation of the 1997 charity care subsidies on October 19, 1998. The Commissioner found that "St. Clare's submissions of pricing tapes to UNISYS on October 18, 1996, were so technically flawed and grossly deficient that they failed to conform to submission specifications," and thus a remittance advice was not issued. He further stated that Northwest did not "exercise due diligence and neglected its duty to correct [its] errors," and that

the extraordinary remedy of recouping and redistributing 1997 charity care subsidy payments should not be undertaken in a case of this nature due to the limitations of the legislative appropriation. Since charity care is a zero sum system and was limited by a $300 [m]illion legislative appropriation in 1997, any additional payments to St. Clare's would necessitate recoupment of monies from sixty-six hospitals. Most significant is the fact that nearly 90% of the monies would come from hospitals that were less able to self-subsidize[] their own charity care.

Thereafter, Northwest submitted three additional certifications to the DHSS. In response, Commissioner Fishman filed a supplemental decision on October 30, 1998, finding that irrespective of whether Northwest was informed by UNISYS that its submission was deficient, Northwest should have known that there were problems with St. Clare's claim because it received a "remittance advice" for the other two hospitals in its system, but not for Northwest. Commissioner Fishman specifically noted that "Northwest Covenant had an obligation to contact the Department immediately in order to determine the status of [St. Clare's] submission," but failed to do so.

On November 14 and 17, 1998, Northwest once again submitted certifications to Commissioner Fishman. The DHSS objected, and Commissioner Fishman declined to reopen the matter.

Without reaching the merits of Northwest's appeal, the Appellate Division in an unpublished opinion rejected Northwest's claim for an increased subsidy because Northwest had not filed its appeal within forty-five days of the commissioner's memorandum detailing the amounts to which each hospital was entitled. See R. 2:4-1(b) (providing that appeals from a state administrative agency's final decision must be taken within forty-five days). Alternatively, the Appellate Division held that Northwest's claim was barred by the doctrine of laches. The court noted that, "[t]o allow appellant to bring suit now would, in effect, reward it for not pursuing recoupment during the period of time when the other hospitals were being paid and could best absorb the pro rata reduction in the amount of their allocation." The court further stated that, "[e]ven if one were to choose the latest time to begin the running of the forty-five days, it would not be subsequent to June 27, 1997, the date the Governor exercised her line-item veto."

The court also concluded that the DHSS's decision was quasi-judicial because it involved "[Northwest]'s individual claim based upon the submission of figures by and peculiar to [Northwest], not the interpretation of a rule and the manner in which its interpretation affects appellant as an individual entity." Therefore, the court ruled that Northwest was subject to the forty-five day time limit for filing an appeal.

Alternatively, the court held that even if Northwest's appeal was not time-barred under Rule 2:4-1(b), its delay in seeking judicial relief until December 27, 1997, triggered the doctrine of laches. The Appellate Division was of the view that Northwest was aware in February 1997 that increasing its subsidy would decrease the subsidies of other hospitals, and that Northwest could have sought temporary restraints or emergent relief from the Commissioner pursuant to N.J.A.C. 1:1-12.6(a). Although Northwest's pursuit of an alternate political solution was rational, the court reasoned that "there is no reasonable explanation why [Northwest] waited an additional six months to file this appeal and, even at that, [did] not ask for a stay."


Northwest contends that the DHSS's decision not to reallocate the 1997 charity care subsidy after the Governor vetoed the supplemental appropriation encompassed de facto rule- making or quasi-legislative action, thereby making the forty-five day limit contained in Rule 2:4-1(b) inapplicable. It also argues that the doctrine of laches does not apply because, as a matter of policy, the DHSS does not require a stay of payments pending a reallocation determination.


Generally, an agency acting formally may do so through rule- making, which is quasi-legislative, or through adjudication, which is quasi-judicial. In re Request for Solid Waste Utility Customer Lists, 106 N.J. 508, 518 (1987). Because the DHSS could have used either procedure, the starting point of our analysis of whether Northwest's appeal to the Appellate Division was timely must be our Rules of Court. "Appeals from final decisions or actions of state administrative agencies or officers . . . shall be taken within 45 days from the date of service of the decision or notice of the action taken." R. 2:4-1(b). The comment to that rule states that "this rule applie[s] only to the quasi- judicial actions and decisions of state administrative agencies adjudicating the rights of particular individuals, [the Legislature] having rejected a proposal that a time period also be prescribed for seeking review of the quasi-legislative actions of such agencies." Pressler, Current N.J. Court Rules, comment 2 on R. 2:4-1 (2001). Thus, the forty-five day rule applies only to an agency's quasi-judicial decisions that adjudicate the rights of a particular individual. Northwest asserts that the DHSS's final decision not to reallocate was quasi-legislative.

Next, we focus on how to distinguish quasi-legislative agency actions from quasi-judicial agency actions. An agency's action is quasi-legislative in nature

if it appears that the agency determination, in many or most of the following circumstances, (1) is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group; (2) is intended to be applied generally and uniformly to all similarly situated persons; (3) is designed to operate only in future cases, that is, prospectively; (4) prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter, and (6) reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy. [Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 331-32 (1984).]

All six of those factors need not be present to characterize an agency's action as quasi-legislative. Id. at 332. The Administrative Procedure Act generally defines an administrative rule as any "agency statement of general applicability and continuing effect that implements or interprets law or policy." N.J.S.A. 52:14B-2(e).

Similarly, an agency determination can be regarded as a "rule" when it effects a material change in existing law. This feature relates not only to fairness to the individual party actually before the agency but to other persons as well. When an agency's determination alters the status quo, persons who are intended to be reached by the finding, and those who will be affected by its future application, should have the opportunity to be heard and to participate in the formulation of the ultimate determination. [Metromedia, supra, 97 N.J. at 330 (citations omitted).]

When determining whether an agency decision is a quasi- judicial act, "[t]he crucial question[] [is] whether the fact finding involves a certain person or persons whose rights will be directly affected." Cunningham v. Department of Civil Serv., 69 N.J. 13, 22 (1975). Indeed, agencies engaged in quasi-judicial decision-making must "consider evidence and apply the law to facts as found, thereby exercising a discretion or judgment judicial in nature on evidentiary facts." Handlon v. Town of Belleville, 4 N.J. 99, 105 (1950). "The nature of the factual inquiries may be dispositive or assist in the disposition of the issue." Cunningham, supra, 69 N.J. at 22.

As an alternative to acting formally through rulemaking or adjudication, administrative agencies also may act informally. Texter v. Department of Human Servs., 88 N.J. 376, 383-84 (1982) (citing David L. Shapiro, The Choice of Rulemaking or Adjudication in the Development of Administrative Policy, 78 Harv. L. Rev. 921, 923 (1965)). Although not easily defined, informal agency action is any determination that is taken without a trial-type hearing, including investigating, publicizing, negotiating, settling, advising, planning, and supervising a regulated industry. ...

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