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In re Adoption of N.J.A.C.

August 10, 2009


On appeal from the Department of Banking and Insurance.

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



Argued January 26, 2009

Before Judges Carchman, R. B. Coleman and Sabatino.

N.J.S.A. 39:6A-4.6 requires the Commissioner of the Department of Banking and Insurance (the Department) to set a physicians' fee schedule, pursuant to which providers of medical care to accident victims are paid. The fee schedule "shall incorporate the reasonable and prevailing fees of 75% of the practitioners within the region." N.J.S.A. 39:6A-4.6. To implement the statutory mandate, the Department promulgated new regulations and amendments to N.J.A.C. 11:3-29, as well as a personal injury protection (PIP) physician's fee schedule. Appellants Alliance for Quality Care, Inc., the New Jersey Association of Osteopathic Physicians and Surgeons, Orthopaedic Surgeons of New Jersey, the Interventional Pain Society, Atlantic Orthopedic Associates, the Medical Society of New Jersey, the New Jersey Association of Ambulatory Surgery Centers and the New Jersey State Society of Anesthesiologists, challenge the Department's amendments, rules, regulations and fee schedule as violative of the statute. Respondent the Department, as well as intervenors the American Insurance Association, the Insurance Council of New Jersey and the Property Casualty Insurers Association of New Jersey, assert that the rules, regulations and schedule are statutorily appropriate.

We conclude that the rules, regulations and fee schedule are valid; however, as to N.J.A.C. 11:3-29.4(e)(1), we conclude that the use of the specific Ingenix UCR database for the reasons set forth, infra, should be enjoined pending further action by the Department. In all other respects, we affirm.



We provide a brief procedural synopsis of this appeal. On September 5, 2006, after eliciting pre-proposal comments pursuant to N.J.S.A. 52:14B-4(e) and N.J.A.C. 1:30-5.3(a), the Department proposed new rules and amendments to N.J.A.C. 11:3-29, which would modify the physicians' fee schedule for reimbursement to medical providers, by publishing them in the New Jersey Register. 38 N.J.R. 3437(a) (September 5, 2006).

On August 29, 2007, the Commissioner adopted the new and amended rules, and on August 31, 2007, he filed a notice of adoption of the rule proposal with the Office of Administrative Law, with an effective date of October 1, 2007. Appellants challenged the adoption of the rules,*fn1 intervenors were granted leave to intervene, and we granted a stay of the implementation of the rules pending our review.


To place this appeal in appropriate context, we provide a history of PIP reimbursement legislation and its implementation. The "No Fault Act," N.J.S.A. 39:6A-1 to -35, was enacted in 1972. It had four objectives: "1) prompt reparation to accident victims[;] 2) cost containment of automobile insurance[;] 3) availability of insurance[;] and 4) easing of the judicial caseload." Cobo v. Market Transition Facility, 293 N.J. Super. 374, 384 (App. Div. 1996). To meet the objectives, N.J.S.A. 39:6A-4 mandated that every standard automobile liability insurance policy contain PIP benefits for the payment of medical benefits, without regard to negligence, liability or fault, to the named insured and members of his or her household who sustained bodily injury as the result of contact with an automobile.

In 1988, the Legislature enacted N.J.S.A. 39:6A-4.6 as a "cost containment measure." In re the Failure by the Dep't of Banking and Ins. to Transmit a Proposed Dental Fee Schedule to the OAL for Publication in the N.J. Register, 336 N.J. Super. 253, 256 (App. Div.), certif. denied, 168 N.J. 292 (2001); L. 1988, c. 119, § 10. This provision required the Commissioner to promulgate a medical fee schedule on a regional basis for the reimbursement of PIP claims. L. 1988, c. 119, § 10, as amended by L. 1988, c. 156, § 4. As initially adopted, the Commissioner was required to base the claims on "the type of service provided" and was to review the fee schedules biennually. Ibid.

In 1990, the Fair Automobile Insurance Reform Act (FAIRA) was enacted to reform the motor vehicle insurance system to "achieve economy and lower insurance costs." In re Failure to Adopt, supra, 336 N.J. Super. at 256; L. 1990, c. 8. As part of the reform, N.J.S.A. 39:6A-4 was amended to require, among other things, that the PIP reimbursement rates established within the fee schedule "incorporate the reasonable and prevailing fees of 75% of practitioners within the region." L. 1990, c. 8, § 7. If there were fewer than fifty specialists within a region, the fee schedule would "incorporate the reasonable and prevailing fees of the specialist providers on a statewide basis." Ibid. The law still required that the Commissioner review the schedules biennially. Ibid. FAIRA also prohibited health care providers from demanding or requesting any payment in excess of those permitted in the fee schedules. Ibid.

In 1997, the Legislature amended N.J.S.A. 39:6A-4.6. L. 1997, c. 151, § 33. The new law stated that "the Commissioner may contract with a proprietary purveyor of fee schedules for the maintenance of the fee schedule, which shall be adjusted biennially for inflation and for the addition of new medical procedures." Ibid. Additionally, the new law provided:

The fee schedule may provide for reimbursement for appropriate services on the basis of a diagnostic related (DRG)*fn2 payment by diagnostic code where appropriate, and may establish the use of a single fee, rather than an unbundled fee, for a group of services if those services are commonly provided together. In the case of multiple procedures performed simultaneously, the fee schedule and regulations promulgated pursuant thereto may also provide for a standard fee for a primary procedure, and proportional reductions in the cost of the additional procedures. [Ibid.]

In 1998, the Legislature passed the Automobile Insurance Cost Reduction Act (AICRA), N.J.S.A. 39:6A-1 to -35, which was a further attempt to "preserve the no-fault system" and "reduc[e] unnecessary costs." N.J.S.A. 39:6A-1.1(b). Under N.J.S.A. 39:6A-1.2, the Commissioner was given the power to "promulgate any rules and regulations . . . deemed necessary in order to effectuate the provisions of this amendatory and supplementary act."

The first PIP physicians' fee schedule was adopted in January 1991, under N.J.A.C. 11:3-29. 23 N.J.R. 536 (Feb. 19, 1991). It listed 1,100 medical procedures identified by Current Procedural Terminology (CPT) codes. 23 N.J.R. 539-71 (Feb. 19, 1991). The reimbursement fees were ceilings; if the provider's usual, customary, and reasonable (UCR) fee was less than the ceiling, the provider had no right to the higher fee set forth in the fee schedule. N.J.A.C. 11:3-29.4(a). An insurer's obligation to pay for any service or equipment not listed on the fee schedule was not to exceed "the [provider's] usual, customary and reasonable fee." N.J.A.C. 11:3-29.4(a). See Cobo, supra, 293 N.J. Super. at 384-85.

Several adjustments were made over the next nine years. See 25 N.J.R. 3466 (Aug. 2, 1993), 28 N.J.R. 3962 (Aug. 19, 1996), and 29 N.J.R. 887 (March 17, 1997). In 1997, after the law was changed to allow the Commissioner to "'contract with a proprietary purveyor of fee schedules,'" the Department contracted with Ingenix to revise the fee schedule. 32 N.J.R. 4332(a) (Dec. 18, 2000). "Ingenix assembled New Jersey specific data from both proprietary and public data bases of billed and charged fees to develop the new proposed fee schedules." Ibid.

In December 2000, the Department proposed changes that represented a shift in policy. Up until that time, the fee schedule was based on data regarding "'billed' fees, that [was], the fee charged or set forth on the bill by providers and submitted to health insurers (and ultimately reported by them to commercial compilers of health care fee data)." Ibid. The fee schedules "were created as a statistical reflection of this billed fee data at the 75th percentile . . . ." Ibid.

The Department noted that during the years the fee schedules had been in effect, it had "become apparent" that there was "an increasing difference between fees billed by health care providers and the fees actually accepted by them as payment for services rendered." Ibid. The Department noted that the amount charged on the Explanation of Benefits (EOB) form was "almost always higher than the payment to the provider by the health benefit carrier." Ibid.

The Department attributed the difference between the billed fees and the paid fees to "several causes including: a) the prevalence of government-sponsored medical programs such as Medicare and Medicaid, which reimburse[d] health care providers at a level lower than the level of fees billed;" b) a substantial amount of medical fees that were paid to providers by health service corporations, which were paid at a level lower than the 75th percentile of billed fees; and c) the significant increase over the previous ten years of physicians who had entered into contractual arrangements that set agreed fees with health benefit carriers or networks that were at a discount of the physicians' usual fees. Ibid.

Citing the purpose of the medical fee schedule statute as containing costs while providing a fair level of reimbursement for services, the fee schedule proposed in 2000 used actual levels of reimbursement paid to health care providers, including those paid by government programs, participating provider agreements and other contractual arrangements between physicians and health care plans to develop the schedule incorporating the reasonable and prevailing fees of 75% of practitioners. Ibid.

The Department's use of paid fees rather than billed fees was challenged and upheld in Coalition for Quality Health Care v. New Jersey Department of Banking and Insurance, 358 N.J. Super. 123, 126-31 (App. Div. 2003) ("Coalition III").

Another amendment in the 2000 rules imposed a daily fee cap of $90 for CPT codes that were commonly billed together. 33 N.J.R. 1592, 1597 (May 21, 2001). This change was also challenged and upheld in Coalition III, supra, 358 N.J. Super. at 132-34.

In a companion case decided the same day, because of deficient notice and substantial deviation from the rule proposal, we reversed the Department's adoption of the physicians' fee schedule and remanded to the Department for reproposal, new notice and public hearing. In re the Commissioner's Failure to Adopt 861 CPT Codes, supra, 358 N.J. Super. at 139, 147. Despite the procedural infirmities, we did not void the adopted fee schedule, and the schedule remained in effect pending further agency action. Id. at 147.

In response to Failure to Adopt, in 2005, the Department began the process of formulating amendments and additions to the physicians' fee schedule through "discussions with interested parties" concerning a pre-proposal draft dated July 8, 2005.

The Department contracted again with Ingenix, which provided information on paid fees at the 80th percentile in preferred provider organizations (PPOs). 38 N.J.R. 3437(a) (September 5, 2006). For comparison to other payers, the Department looked at the Medicare Part B participating provider fee schedule (MPFS), the use by other states of fee schedules based on a multiple of the MPFS and the New York Worker's Compensation and No Fault Fee Schedule. Ibid.

The Department determined that because the MPFS was "extremely comprehensive" and "resource based," it was appropriate to calculate the new physicians' fee schedule "as percentages of the current Medicare fee schedule." Ibid. The Department used a "multiplier" of 120% of the MPFS because it "corresponded well to much of the paid fee data collected . . . [.]" Ibid. The Department explained that using the MPFS was an appropriate base for calculating the PIP fees because:

The Centers for Medicare and Medicaid Services (CMS) with input from the provider community, calculate a relative value unit (RVU) for the physician work, practice expenses and malpractice premium expense for each Current Procedural Terminology (CPT) code. These RVUs are then adjusted by a geographic practice cost index (GPCI) that reflects the impact of the costs of physician work, practice expenses and malpractice cost in a specific geographic region. The result is multiplied by a dollar amount known as the Medicare conversion factor to produce the fees for each Medicare region. [Ibid.]

The draft also defined, for the first time, ambulatory surgery centers (ASCs), facilities where ambulatory surgical cases are performed separate and apart from any other facility (such as a hospital) license. Because Ingenix lacked a database of facility fees for ASCs, the Department gathered and examined the MPFS for ASC facility fees which had recently been set by CMS. Ibid.

Other changes in the first draft included: 1) the addition of over 1000 CPT codes (the fees for which were calculated by multiplying the Medicare rate by 120%); 2) the reduction of the fee regions from three to two; 3) the setting of the UCR reimbursement amount for services or equipment not on the fee schedules at 120% of Medicare rates; 4) the redefinition of the multiple procedures reduction formula to apply only to surgical procedures and to conform it to the Medicare standard of 100% for the first procedure, 50% for the second procedure, and 25% for the third procedure; 5) the reimbursement of physicians' services provided in trauma units at Level I and II trauma hospitals to 120% of the fee schedule or 140% of Medicare for those procedures not on the fee schedule; and 6) the expansion of the list of CPT codes subject to the daily maximum.

The Department held thirteen meetings and several conference calls with interested parties concerning the draft proposal. The Department received a number of complaints from surgeons and emergency care physicians, who threatened to stop treating auto accident victims due to the low and, in their view, arbitrary fees for PIP services. Many challenged the use of the Medicare fee schedule as a basis for the PIP fee schedule. Objectors included physicians and interest groups such as The Association of Trial Lawyers of America, (ATLA-NJ). In addition to specific objections as to the use of Medicare rates, ATLA-NJ also objected to using data from Ingenix to determine the multiplier of the fee schedule, claiming that Igenix "is a proprietary database that does not disclose the origin of data or method of fee calculation." Others, such as Atlantic Orthopaedic Associates, objected to the limits placed on multiple procedures, noting that injuries from auto accidents result in more complex injuries than those sustained in other ways, making the patient more difficult to treat, and therefore, each individual injury needed to be separately addressed and reimbursed.

During this initial draft review period, the Department received new fee data from a proprietary database of actual PIP reimbursements paid by several automobile insurance carriers during 2004; it was later updated to include 2005 figures. 39 N.J.R. 4126(c) (October 1, 2007). This database was compiled by Consolidated Services Group (CSG), a vendor hired by insurers to evaluate and approve certain treatment and care paths prior to administration of medical services to PIP patients (as required by AICRA). The CSG paid-fee data detailed the average amounts actually paid by the auto insurers to providers for medical services. The payments were divided into payment categories, sorted by CPT code, and included the number of times each medical procedure or service was reimbursed. Ibid. Although in 2005 the information was considered proprietary, in August 2007, the Department received permission to make the data public and did so.

The Department concluded that the data was "sufficient for the development of a comprehensive fee schedule . . . [.]" It compared the fees on the draft PIP fee schedule with the fee information from the insurers and found "a high correlation with most of the fees at 130 percent of the MPFS." Ibid. However, the Department also found that certain groups of CPT codes "reflecting specialty services were reimbursed by the auto insurers at much higher levels." Ibid. The Department therefore used the CSG paid-fee data to increase the physicians' fee schedule for those codes "to a level equivalent to what auto insurers paid to providers for these services." Ibid. The Department believed "that using the fees paid to providers by auto insurers for the general fee level and using the RVU system to rank the payments by level of effort is the best way of setting fees that meet the statutory standard." Ibid.

The Department circulated a second pre-proposal draft to interested parties on August 29, 2005. Based on comments from providers concerning the additional administrative costs of treating PIP patients, the Department "raised the percentage to ...

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