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United Hospitals Medical Center v. State

February 22, 2002

UNITED HOSPITALS MEDICAL CENTER, HOSPITAL CENTER AT ORANGE, ST. FRANCIS MEDICAL CENTER, ST. PETER'S MEDICAL CENTER, ST. MARY'S HOSPITAL (PASSAIC), ELIZABETH GENERAL MEDICAL CENTER, CHILTON MEMORIAL HOSPITAL, DEBORAH HEART & LUNG CENTER, NEWCOMB MEDICAL CENTER, CATHEDRAL HEALTHCARE SYSTEM, INC., ST. FRANCIS HOSPITAL (JERSEY CITY), MOUNTAINSIDE HOSPITAL, PALISADES GENERAL HOSPITAL, GRADUATE HEALTH SYSTEM-RANCOCAS HOSPITAL, ST. MARY'S HOSPITAL (HOBOKEN), MORRISTOWN MEMORIAL HOSPITAL, OVERLOOK HOSPITAL, AND HACKETTSTOWN COMMUNITY HOSPITAL, APPELLANTS,*FN1
v.
THE STATE OF NEW JERSEY AND WILLIAM WALDMAN, COMMISSIONER, DEPARTMENT OF HUMAN SERVICES, RESPONDENTS



Before Judges Skillman, Wallace, Jr. and Carchman.

The opinion of the court was delivered by: Skillman, P.J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted September 17, 2001

On appeal from Department of Human Services, Division of Medical Assistance and Health Services.

The issue presented by this appeal is whether regulations governing the Medicaid reimbursement rates for inpatient hospital care, adopted by the Division of Medical Assistance and Health Services in 1995 and 1997, conformed with a federal law, commonly referred to as the Boren Amendment, which required a state's Medicaid rates to be "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated [hospitals]." 42 U.S.C.A. § 1396a(a)(13)(A) (repealed 1997). We conclude that the regulations complied with the Boren Amendment and therefore affirm their validity.

The Medicaid program, established by Title XIX of the Social Security Act, is a joint federal-state program designed to provide medical care for indigent, disabled and elderly persons. 42 U.S.C.A. § 1396. Although states are not required to participate, a state that chooses to participate must operate its program in compliance with the federal statute and regulations. Harris v. McRae, 448 U.S. 297, 301, 100 S. Ct. 2671, 2680, 65 L. Ed. 2d 784, 794 (1980).

At the federal level, the Medicaid program is administered by the Department of Health and Human Services, through the Health Care Financing Administration (HCFA). In New Jersey, the program is administered by the Division of Medical Assistance and Health Services, Department of Human Services. N.J.S.A. 30:4D-4.

A state that participates in the Medicaid program must submit a "state plan" for HCFA's approval describing the "methods and standards" by which providers of Medicaid services will be reimbursed. See 42 C.F.R. § 447.252(b). If a state decides to change its standards and methods, it must submit a "[s]tate plan amendment." See 42 C.F.R. § 447.256.

Until 1981, the Medicaid program paid hospitals the "reasonable costs" of services actually provided to Medicaid inpatients. Thus, the actual costs incurred by hospitals in treating Medicaid patients were reimbursed, regardless of differences in costs or efficiencies among hospitals.

In an effort to contain the spiraling costs of Medicaid for inpatient hospital care and other medical services and to allow states more flexibility in designing Medicaid programs, Congress enacted the Boren Amendment as part of the 1981 Omnibus Budget Reconciliation Act, Pub. L. No. 97-35. Under this law, the "reasonable cost" methodology was replaced with a new standard under which states were required to pay rates "which . . . are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities." 42 U.S.C.A. 1396a(a)(13)(A) (repealed 1997).

Prior to 1995, the Medicaid reimbursement rate for inpatient hospital services in New Jersey was determined by what was commonly called the Diagnosis Related Group (DRG) methodology. See In re Barnert Mem'l Hosp. Rates, 92 N.J. 31, 36 (1983). This reimbursement rate "consist[ed] of a weighted average of the costs incurred by the hospital in treating a given condition and the average cost incurred by hospitals throughout the state to treat that condition." United Wire, Metal & Mach. Health & Welfare Fund v. Morristown Mem'l Hosp., 995 F.2d 1179, 1189 (3d Cir.), cert. denied, 510 U.S. 944, 114 S. Ct. 382, 126 L. Ed. 2d 332 (1993).

However, based on a study conducted in 1994, the Division concluded that the use of this weighted average had resulted in New Jersey hospitals receiving Medicaid payment that substantially exceeded their costs. The Division also concluded that many New Jersey hospitals were not being "efficiently operated" and were incurring "unreasonably high levels of costs" even after accounting for case mix and wage differences.

To address these problems, the Division decided to adopt a new methodology for determining hospitals' Medicaid reimbursement rates. Therefore, the Division proposed amended rules, 27 N.J.R. 34 (January 3, 1995), which changed the "average cost" standard previously used to a "median cost plus five percent" standard. This change was formally adopted in March 1995. 27 N.J.R. 908 (March 6, 1995); N.J.A.C. 10:52-5.4 (1995). The Division subsequently submitted a state plan amendment to the HCFA, which described the new methodology and assured the HCFA that it met the Boren Amendment standards. The Division determined the appellants' 1995 reimbursement rates in accordance with this new methodology.

In 1996, the Division decided to modify its new methodology by substituting a "median cost" standard for the "median cost plus five percent" standard established under the 1995 plan amendment. In explaining this modification, the Division stated that the "median cost plus five percent" standard was only a transitional provision designed "to give hospitals time to pursue strategies to improve their efficiencies" before adoption of the "median cost" standard. 29 N.J.R. 350, 352 (Jan. 21, 1997). This modification was formalized by amended regulations proposed in September 1996, 28 N.J.R. 4022 (Sept. 3, 1996), and adopted in January 1997. 29 N.J.R. 350. The Division again submitted a state plan amendment to the HCFA which assured the federal agency that this modification met the Boren Amendment standards. Although the Division did not formally adopt the amended regulation substituting the ...


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