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City of Plainfield v. New Jersey Dep't of Health and Senior Services

April 12, 2010


On appeal from the New Jersey Department of Health and Senior Services, Docket No. FR 080303-20-01.

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



Argued February 23, 2010

Before Judges Carchman, Parrillo and Lihotz.

Founded in 1877 in response to a public awareness of the need for a health-care facility, the Muhlenberg Hospital (later styled as the Muhlenberg Regional Medical Center) was established to serve the City of Plainfield (Plainfield) and its environs.*fn1 Muhlenberg was a important part of the community not only providing medical care but generating popular response and financial and volunteer support from its citizen-constituents. It inspired unique traditions such as the playing of Brahms' lullaby signaling the birth of a child. It thrived as Plainfield thrived, and its population base expanded. Over the years, Muhlenberg served tens of thousands of residents who looked to it as a critical community resource.

In recent years, Muhlenberg faced a new reality. Not unlike other hospitals in New Jersey, its medical, administrative and maintenance costs spiraled, its physical plant aged, and Plainfield's economic base deteriorated; soon Muhlenberg's prime source of revenue was no longer private-pay patients but those on government assistance. Instead of a thriving, fiscally-sound institution, Muhlenberg reflected declining admissions and mounting losses.

In 1997, Muhlenberg merged with the JFK Health System to form Solaris Health System, Inc. Despite attempts to rehabilitate the hospital, Solaris determined that it would close Muhlenberg. On March 3, 2008, Solaris applied to Heather Howard, the Commissioner of the Department of Health and Senior Services (the Department), for a certificate of need (CN) to shut down Muhlenberg as a general acute care hospital. By final decision dated July 29, 2008, Commissioner Howard granted Solaris's CN application, subject to eighteen conditions. Solaris surrendered Muhlenberg's license on August 22, 2008.

In this consolidated appeal, appellants Plainfield and Mayor Sharon Robinson-Briggs (collectively referred to as Plainfield), and the People's Organization for Progress and Restore Muhlenberg f/k/a Save Muhlenberg (POP) challenge the decision of Commissioner Howard to grant a CN to close the hospital. On appeal, appellants argue that the Commissioner's decision was arbitrary and capricious. Respondents maintain that the Commissioner's decision was properly substantiated; alternatively, they assert that the appeal is moot because appellants did not appeal from the Commissioner's denial of their request for a stay of the CN and Muhlenberg's closing.

During the pendency of the CN application, the Supreme Court decided In re Application of Virtua-West Jersey Hosp. Voorhees for a Certificate of Need, 194 N.J. 413 (2008) (Virtua), imposing certain obligations on the Commissioner when considering CN applications as applied to urban hospitals.

While we agree that Muhlenberg's closing renders this appeal as to the closing, per se, moot, we choose to address the merits and applying Virtua, we conclude that the Commissioner properly, not arbitrarily or capriciously, and subject to the conditions imposed, granted a CN to allow for the closure of Muhlenberg.


Consideration of the significant issues raised on appeal requires an expansive exposition of the facts derived from the record before the Commissioner. As we previously noted, Muhlenberg was established in Plainfield in 1877. In 2007, it was licensed for 282 medical/surgical beds, thirty obstetrics/gynecology beds, nineteen adult ICU/CCU beds, sixteen acute psychiatric beds, and eight adult closed acute psychiatric beds. It offered medical care, intensive care, basic obstetrics, inpatient psychiatric services, inpatient and outpatient surgery, therapeutic services, emergency care, home health services, acute hemodialysis services, cardiac catheterization, and primary and elective angioplasty. Muhlenberg also served as a teaching hospital, maintaining a residency program and a school of nursing.

Based upon 2006 census data, Muhlenberg's primary service area of North Plainfield, Plainfield and Scotch Plains encompassed an eight-mile radius containing a population of 329,184. Notably, based upon household income, Plainfield is considered a medically underserved area and 6.9% of households live below the poverty line. Indigent patients made up fourteen percent of Muhlenberg's total discharges, and minority patients approximately fifty to sixty percent.

In 1997, Muhlenberg merged with JFK Health System to create Solaris. According to Solaris, this merger was sought by Muhlenberg upon its realization that its ability to survive as an acute care hospital was in jeopardy. In addition to JFK Medical Center (JFK) in Edison and Muhlenberg, Solaris's affiliates included three JFK Hartwyck Nursing, Convalescent & Rehabilitation Centers, JFK Johnson Rehabilitation Institute, New Jersey Neuroscience Institute, the Whispering Knoll assisted living facility, Diabetes Center of New Jersey, Muhlenberg School of Nursing, Medical Imaging & Therapeutic Services, and the JFK MediPlex Surgery Center.

According to Solaris, in the ten years following the merger, it invested over $50,000,000 in: (1) upgrades to Muhlenberg's facilities and equipment; (2) physician recruitment; and (3) program development, including a new wound center, lithotripsy, elective angioplasty and a sleep lab. Through these investments, Solaris attempted to enable urban Muhlenberg "to compete with neighboring suburban hospitals for patient volume and payer mix." However, according to Solaris, despite these efforts, Muhlenberg was unable to attract new privately insured patients to the facility. Instead, between 2000 through 2007, medical/surgical acute admissions dropped 18.5% and obstetric utilization dropped nine percent. During the same years, the average daily census at Muhlenberg declined from 182 to 135 patients. Notably, though, in 2005, 2006 and 2007, the Muhlenberg emergency department saw 33,836, 33,583 and 34,512 patients, respectively. Only 18.2% of these emergency visits resulted in admission to the hospital. Solaris asserted that this indicated that the emergency department was primarily serving as a resource for non-acute diagnostic and treatment services.

Between 2000 and 2006, Muhlenberg consistently reported annual operating losses of $2,000,000 to $5,000,000. Solaris attributed these losses to Muhlenberg's declining admissions, and the fact that Muhlenberg drew upon a narrow geographic area that was overly dependent on government payers. Approximately seventy-one percent of Muhlenberg's patients, as opposed to the state average of fifty-nine percent, were dependent upon government payers (Medicare, Medicaid and charity) or were uninsured. Solaris subsidized these losses through JFK Health System entities with JFK being ultimately responsible for Muhlenberg's debt service and pension payments.

In addition, the staff recognized a new dynamic affecting the hospital. There was "increased competition and a shift of volume from hospital settings to freestanding, physician owned ambulatory care facilities." No longer subject to CN requirements, by 2008, nine diagnostic imaging facilities and five ambulatory surgery facilities were established in Muhlenberg's primary service area.

By 2007, Muhlenberg was operating at a maintained bed occupancy rate of less than sixty percent, and less than forty percent of its licensed bed capacity. Its annual operating loss had grown to $16,500,000. Solaris blamed this increase on new reductions in state funding and its disproportionate burden of caring for state-insured and uninsured patients. Solaris anticipated that Muhlenberg's deficit for 2008 would reach approximately $18,000,000. At the same time, Solaris estimated that a major capital infusion would be required over the next five to ten years to upgrade Muhlenberg's aging physical plant.

In November 2007, Solaris's Board of Directors authorized management to offer Muhlenberg for sale. Solaris engaged an investment banking firm to market the hospital. Although four to six entities expressed interest in purchasing Muhlenberg, no formal offers were ultimately submitted. According to Solaris, most of these potential purchasers were unable to demonstrate an adequate source of financing to purchase and operate the hospital.

On February 21, 2008, Solaris's Board of Trustees voted to close Muhlenberg. According to Solaris, its Board reached this difficult decision after spending nine months considering every possible scenario to avoid closure, including eliminating services and outsourcing. The Board ultimately concluded that Muhlenberg was not financially sustainable based upon: (1) the underutilization of services at Muhlenberg coupled with overwhelming financial pressures; (2) the inability of Solaris's other affiliates to continue to subsidize Muhlenberg's losses without jeopardizing Solaris's overall viability and the availability of healthcare services for both the Plainfield and Edison communities; and (3) the fact that, according to current estimates, Muhlenberg would need to increase its total patient volume by 110.7 percent over the next five years to break even -a seemingly impossible task.

Solaris's Board believed that a consolidation of acute care services represented the most efficient use of limited resources to meet the needs of Plainfield's residents. It also asserted that an orderly closure was preferable to a chaotic bankruptcy.

It admitted, though, that "[i]ndigent minority and other medically underserved patients have clearly relied on Muhlenberg . . . for healthcare services . . . . The closure of Muhlenberg . . . will require special diligence and sensitivity to ensure that medically underserved and indigent patients continue to have comparable access to healthcare services."

Solaris filed an application for a CN to close Muhlenberg as a general acute care hospital. Solaris required $70,000,000 in borrowing to both close Muhlenberg and upgrade its JFK facilities in Edison. This included $18,500,000 to retire outstanding tax exempt debt owed on Muhlenberg, $15,000,000 to fund pension obligations for Muhlenberg employees, $8,000,000 to fund severance for displaced Muhlenberg employees, and $6,500,000 to fund stranded and closing costs. The remaining $22,000,000 would be spent on upgrades to JFK in Edison. It further explained that it intended to close all of Muhlenberg's inpatient medical/surgical, ICU, obstetrics, and psychiatric beds, plus all related diagnostic and treatment services. Muhlenberg's internal medicine residency program, which provided coverage for indigent patients, would also have to close. Solaris planned to relocate Muhlenberg's Wound Care Center, bariatric surgery program, cardiac catheterization lab, and sleep lab to JFK. In recognition of the heavy usage of Muhlenberg's emergency department, Solaris proposed to maintain a satellite emergency department (SED), with attendant basic imaging and lab services, at the campus. It also intended to continue offering on-site hemodialysis service (operated by contractor DeVita), and to keep Muhlenberg's school of nursing open.

Solaris identified nine other hospitals in the vicinity of Muhlenberg that could absorb displaced patients: (1) JFK (5.46 miles away with an average travel time from Muhlenberg of eighteen minutes); (2) Robert Wood Johnson University Hospital at Rahway (7.57 miles away, twenty-two minute average travel time); (3) Overlook Hospital (9.78 miles away, twenty-four minute average travel time); (4) Saint Peter's University Hospital (10.37 miles away, twenty-nine minute average travel time); (5) Raritan Bay Medical Center at Perth Amboy (10.46 miles away, twenty-nine minute average travel time); (6) Robert Wood Johnson University Hospital (10.81 miles away, thirty-three minute average travel time); (7) Somerset Medical Center (11.56 miles away, thirty-one minute average travel time); and (8) Trinitas - Jersey Street Campus (13.08 miles away, thirty-eight minute average travel time); (9) Raritan Bay Medical Center At Old Bridge (20.14 miles away, thirty-nine minute average travel time). Solaris noted that the occupancy rates at these hospitals ranged from forty-five percent to eighty-seven percent for maintained beds.

Plainfield has a federally qualified Neighborhood Health Center (NHC-Plainfield) in the community, with six satellite locations, five of which were also in Plainfield, that provides health services to local residents. These health services include: abnormal pap follow-up; annual exams; birth control education; birth control/family planning; breast exam; cancer screening (Pap test); counseling for birth control, pregnancy options, STD, tubal ligation, vasectomies, depo-provera; emergency contraception; Hepatitis B vaccine; high blood pressure screening; HIV/AIDS testing and counseling; HPV vaccine; immunizations; male health services; menopause/midlife services; post-abortion exams; pregnancy education, testing and counseling; sexually transmitted infection testing and treatment; urinary tract infection diagnosis and treatment; and vaginal infection testing and treatment.

Twenty-five to thirty percent of Muhlenberg's patients would be admitted to JFK in Edison. To handle the increased volume, Solaris proposed to: (1) renovate and expand its cardiac suite; (2) reopen twenty-six unstaffed beds and rededicate five additional rooms for patient use; (3) add a new thirty-eight bed unit; and (4) expand its emergency department. Solaris claimed that it had made efforts to reduce the average length of patient stays at JFK in order to free up beds, but given the eighty-seven percent occupancy rate for obstetric beds at ...

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