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In the Matter of Certificate of Need For Humc North Hospital Englewood v. Commissioner of Health and Senior Services

December 4, 2012


On appeal from the Department of Health and Senior Services, Docket No. 110603-02-01.

Per curiam.


Argued September 24, 2012

Before Judges Sabatino, Fasciale and Maven.

In these two consolidated appeals, appellants Englewood Hospital and Medical Center ("Englewood") and The Valley Hospital, Inc. ("Valley") challenge a February 27, 2012 decision of the Commissioner of the Department of Health (the "Department"), granting a certificate of need ("CN") to Hackensack University Medical Center ("HUMC"). The CN authorizes HUMC to open a new 128-bed hospital in Westwood at the former site of Pascack Valley Hospital ("PVH"), which closed in November 2007. On appeal, Englewood and Valley contend that the Commissioner's decision was arbitrary and capricious, as well as procedurally defective.

Applying the well-established judicial deference that must be accorded to an administrative agency head acting within the agency's field of expertise, we affirm the Commissioner's decision. We also reject appellants' contention that the decision must be set aside because of alleged procedural deficiencies.


The extensive administrative record presents the following relevant chronology of events and statistic-laden factual contentions.

A. Events Leading to PVH's Closure

For forty-eight years, PVH, a 275-bed*fn2 general acute care hospital in Westwood, served the residents of northern Bergen County and other nearby communities. PVH's core service area included fourteen municipalities in the far northeastern corner of the county.

Eventually, PVH sustained a host of operational and financial problems. Between 2004 and 2007, PVH's patient volume declined by approximately 10%, resulting in a mere 35% daily occupancy rate in 2007. The hospital was on a pace to sustain operating losses of over $50,000,000 between 2004 and the end of 2007. PVH also was approximately $120,000,000 in debt. Part of PVH's operating losses arose from unfunded pension liabilities and the loss of a crucial health insurance contract. Much of its debt was due to an $80,000,000 construction project to expand and modernize the hospital.

On September 24, 2007, the Pascack Valley Hospital Association, Inc. ("PVHA"), which operated PVH, filed a bankruptcy petition. Four days later, PVHA submitted an application to the Department seeking a CN granting it permission to close PVH. Within that application, PVHA described the hospital's financial crisis. PVHA represented to the Department that there were available beds to accommodate PVH's patients at other Bergen County hospitals situated within a thirteen-mile radius of PVH. These other hospitals included:

(1) Valley, 5.9 miles away in Ridgewood; (2) Englewood, 8.2 miles away in Englewood; (3) Holy Name Hospital, 8.7 miles away in Teaneck; and (4) HUMC, 12.19 miles away in Hackensack.

Using the Department's methodology, PVHA noted that an average daily patient census of between 80% and 85% on an annualized basis represents what is considered full occupancy.*fn3

HUMC and Valley, by comparison to PVH's 35% occupancy rate, were then operating at above 85% capacity. PVHA further noted that Englewood and Holy Name then had occupancy rates of 72% and 67.5%, respectively.

While PVHA'S application seeking the Department's approval of the hospital's closure was pending, PVH gradually curtailed its services. The hospital ultimately ceased its operations on November 21, 2007.

B. The Department's December 28, 2007 Approval of PVH's

Closure and Its Aftermath

A little over a month later, on December 28, 2007, Fred Jacobs, who was then the Commissioner of the Department, approved PVHA's application. Commissioner Jacobs specifically found that the closure of PVH was "fiscally required" and that there was "sufficient bed capacity in Bergen County to enable the remaining health care system to bridge any gaps in services." Commissioner Jacobs was further persuaded that the closure of PVH would "strengthen the nearby hospitals located in PVH's service area by increasing their occupancy[.]" Nonetheless, Commissioner Jacobs expressly stated in his decision that PVHA would be allowed to retain PVH's license for twenty-four months, during which time any purchaser of PVH's assets could attempt to re-establish the hospital.

In early 2008, the bankruptcy court approved the sale of PVH's real estate and assets to HUMC, which, along with its then-partner Touro University College of Medicine ("Touro"), had submitted the highest bid at auction. In October 2008, HUMC opened a satellite emergency department ("SED") on the PVH site, using its own license. Between October 2008 and August 2011, the SED treated 33,779 patients, 23,135 of whom were residents of PVH's core service area.

Meanwhile, in mid-2008, HUMC and Touro dissolved their partnership. HUMC then entered into a joint venture (known as the Pascack Valley Health System, L.L.C.) with Legacy Hospital Partners, Inc. ("LHP"), a private equity firm. They founded the joint venture with a goal to renovate and reopen PVH as "HUMC North," a modern, for-profit acute care community hospital with 128 single-occupancy beds.*fn4

HUMC and LHP developed this plan, in spite of the findings of a Commission on Rationalizing Health Care Resources ("the Reinhardt Commission"), indicating a lack of need for such a facility in the health planning region of Hackensack, Ridgewood, and Paterson (the "HRP region"), in which PVH was situated. In its January 2008 report, the Reinhardt Commission concluded, based primarily upon 2006 data, that the HRP region had an excess of 765 "maintained" hospital beds (i.e., "the equivalent of between [two] and [three] hospitals of the average bed size of hospitals now in that market area"). In calculating that figure, the Reinhardt Commission took into account the HRP region's hospital discharge rates. Those discharge rates were expected to increase through 2015 (according to a baseline analysis) or decrease through 2010 and then begin to rebound by 2015 (according to an adjusted analysis). The Reinhardt Commission observed that [a]lthough these numbers do not necessarily imply that [two] to [three] hospitals could be closed in the area without depriving New Jersey residents in the area of essential hospital services, it does suggest considerable slack in the market such that the patient loads of one or two "non-essential" hospitals could be absorbed by other hospitals in the market area.

However, the Reinhardt Commission added this significant caveat: if all hospitals in the area were deemed essential on the criteria used in this report, then no one hospital should be closed. Instead, hospitals with low occupancy ratios should reduce the number of beds they staff until most or all hospitals in the area approximated an occupancy ratio of 83%.

C. HUMC's 2008 CN Application Seeking to Reopen PVH

In July 2008, HUMC, acting on behalf of itself and LHP, filed a CN application with the Department, seeking a transfer of PVH's license and permission to reopen the Westwood hospital facility.*fn5 Because this application proposed transferring an existing license rather than establishing a new hospital in response to a call for CN applications, the Department deemed it unnecessary to make a preliminary finding of need. See generally N.J.A.C. 8:33-3.3 (addressing transfer applications). Even so, in evaluating whether to grant this requested approval, the Department was required to consider whether HUMC North was "necessary to provide required health care in the area to be served" and whether it would have "an adverse economic or financial impact on the delivery of health care services in the region." N.J.S.A. 26:2H-8. Englewood and Valley filed opposition to HUMC's application.*fn6

In May 2009, the Department determined that HUMC's CN application to transfer PVH's license was complete. It submitted the application to the State Health Planning Board ("SHPB"), which scheduled a public hearing on the matter for July 23, 2009. On July 7, 2009, sixteen days before the scheduled SHPB hearing, HUMC requested a deferment of the hearing for up to six months, pursuant to N.J.A.C. 8:33-4.7(a). According to HUMC, it requested the deferment so that HUMC could potentially "resolve Englewood's objections to the reopening of PVH" by presenting Englewood, which HUMC understood to be in financial trouble, with "opportunities for revenue enhancements and expense reductions."

Englewood and Valley maintain, however, that there were no such negotiations. Instead, they believed -- apparently based upon rumors reported in the news media -- that HUMC had requested the deferment because it had reason to believe that an unreleased report prepared by Department staff had recommended denial of HUMC's application. Englewood and Valley suspected that HUMC wished to have the matter revisited in 2010 after the 2009 statewide election.

In December 2009, HUMC requested the Department to confirm that the Permit Extension Act of 2008 (the "PEA"), N.J.S.A. 40:55D-136.1 to -136.6, applied to extend until January 1, 2011 the twenty-four-month period that PVHA had been permitted by Commissioner Jacobs to retain PVH's hospital license. While that administrative request was pending, HUMC also filed a declaratory judgment action in the Law Division against the Department, seeking a declaration to the same effect. The Department rejected HUMC's argument for such an extension; deeming the PEA inapplicable to PVH's license. HUMC thereafter abandoned its declaratory action. PVH's license consequently expired, and HUMC withdrew its deferred 2008 CN application.

D. The Department's 2011 "Limited" CN Call

A fixed statewide call for CNs for new general hospitals was scheduled for April 1, 2011, in accordance with N.J.A.C. 8:33-4.1(a)(2). Hoping to obtain such a CN for the Westwood site in its own right, HUMC filed a petition in December 2010 asking the Department to issue a specific call for CN applications to open a new acute care hospital in Bergen County. According to HUMC, it filed this petition "to advise the Department of HUMC's intention to file the 2011 CN and to ask the Department not to cancel or modify the fixed call in a way that would hinder HUMC's ability to apply for licensure." In its petition, HUMC asserted that, after taking into account the recent regional hospital closures, there would be a need for 187 acute care beds in Bergen County in 2015. Englewood and Valley submitted opposition to the petition.

In February 2011, the Department issued a notice advising that the "certificate of need call for new general hospitals scheduled to take place on April 1, 2011 . . . is hereby cancelled." That notice went on to state that "[i]n lieu of the April 1, 2011 general call for proposed new general hospitals, the Department is providing notice of a limited certificate of need call as described [later in the notice]." (Emphasis added). The Department explained that it was initiating this "limited" call in light of documentation from HUMC "indicating that there may be a potential need for a new general hospital in [Bergen County] of approximately 125 beds."*fn7

The Department made clear in its notice that only one new hospital to be situated in Bergen County would be considered for approval pursuant to the limited call. The Department emphasized that [i]issuance of this call does not constitute a finding of need by the Department for any new general hospital affected by the call, and the Department reserves the right to disapprove all applications submitted in response to the call if the Department determines that they have not satisfactorily demonstrated need or otherwise compl[ied] with the requirements of N.J.S.A. 26:2H-8, N.J.A.C. 8:43G-1.1, et seq. and N.J.A.C. 8:33-1.1, et seq.

The Department's notice further provided that all CN applications responding to the limited call were to be submitted by June 1, 2011. Among other things, the applicants had to demonstrate that they could license a proposed project within two years of any CN approval. The Department further invited competing hospitals to provide opposing submissions addressing the anticipated impact of any new hospital proposed in response to the limited call.

E. HUMC's 2011 CN Application to Authorize HUMC North

On June 1, 2011, HUMC applied to the Department for a CN to open what it identified as "HUMC North" at the PVH site in Westwood by a then-projected opening date of late 2012. The proposed 128-bed, single-occupancy, for-profit hospital would consist of eighty-seven medical/surgical beds, eighteen obstetric beds, eighteen ICU/CCU beds, and five intermediate bassinets, plus a new low-risk catheterization laboratory. If approved, the new facility would offer inpatient and same-day surgery operating rooms, cystoscopy rooms, MRI services, CT Scan services, and acute hemodialysis services.

HUMC intended for HUMC North to be clinically integrated with its main campus in Hackensack, with substantial overlap in the medical staff. Professional standards at both locations would be enforced through a joint clinical integration plan. HUMC North would accept all Medicare, Medicaid, and emergency patients, regardless of their ability to pay. Building on its existing role as the primary provider of charity care in Bergen County, HUMC ...

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