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In re Hoboken University Medical Center's Revised State Fiscal Year 2011 Hospital Relief Subsidy Fund Allocation

Superior Court of New Jersey, Appellate Division

December 31, 2013



Argued December 3, 2013

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

Philip H. Lebowitz (Duane Morris LLP) of the Pennsylvania Bar, admitted pro hac vice, argued the cause for appellant Hoboken University Medical Center (Duane Morris LLP, attorneys; James J. Ferrelli, Mr. Lebowitz, and Erin M. Duffy, on the brief).

Molly Moynihan, Deputy Attorney General, argued the cause for respondent Division of Medical Assistance and Health Services (John J. Hoffman, Acting Attorney General, attorney; Melissa H. Raksa, Assistant Attorney General, of counsel; Ms. Moynihan, on the brief).

Before Judges Messano, Sabatino, and Hayden.


In this complex regulatory matter, appellant Hoboken University Medical Center ("Hoboken") challenges an April 29, 2012 final agency decision of the Division of Medical Assistance and Health Services ("DMAHS" or "the Division"). The final decision denied Hoboken's request to be one of the limited number of New Jersey hospitals receiving a subsidy for State Fiscal Year ("SFY") 2011 from the legislatively-appropriated Hospital Relief Subsidy Fund ("HRSF").

Hoboken argues that the Division's denial of its HRSF subsidy request is arbitrary and capricious in numerous respects, and inconsistent with the applicable statutory scheme and regulations. It also contends that the Division abruptly changed its pre-existing approach to calculating eligibility for the subsidy without appropriate rulemaking. Applying the deference we owe to the Division as an administrative agency within its sphere of expertise, we affirm.



The HRSF is an annual subsidy program for needy hospitals that the Legislature first established in 1993 following enactment of the 1992 Health Care Reform Act, L. 1992, c. 160; N.J.S.A. 26:2H-18.58 to -18.58i. The statute created the Health Care Subsidy Fund to provide funding for "charity care" and other "disproportionate share" payments, [1] such as the HRSF subsidy, to the hospitals. L. 1992, c. 160; N.J.S.A. 26: 2H-18.58 to -18.58i. The Legislature renewed the Health Care Subsidy Fund in 1996, directing that the "funds shall be distributed to eligible disproportionate share hospitals according to a methodology adopted by the Commissioner of Human Services" and "using hospital expenditure data for the most recent calendar year available[.]" L. 1996, c. 28, § 12. As explained, infra, the Commissioner and the DMAHS have adopted regulations to administer the HRSF program. See generally N.J.A.C. 10:52.

For SFY 2011, which was from July 1, 2010 through June 30, 2011, the Legislature appropriated $166.6 million for the HRSF. Although the SFY 2011 budget law, Senate Bill 3000, 214th Leg. Sess. (June 29, 2010) (enacted as L. 2010, c. 35), does not specify that appropriated figure for the HRSF, Hoboken does not dispute it. The budget law does, however, specify that the amount of HRSF funding was a specific appropriation, id. at 106, and that "total payments shall not exceed the amount appropriated[.]" Id. at 109.

To some extent, the HRSF subsidy program relates to concepts within the federally-subsidized Medicare and Medicaid laws. Without comprehensively explaining those federal concepts here, the following aspects are pertinent to our discussion.

Medicare, 42 U.S.C.A. §§ 1395 to 1395kkk-1, and Medicaid, 42 U.S.C.A. §§ 1396 to 1396w-5, are both part of the Social Security Act. Title 42, c. VII. Federal law implementing Medicaid includes numerous highly prescriptive requirements for state Medicaid plans to qualify for federal funding. Federal law also recognizes and provides for hospitals that "serve[] a disproportionate number of low income patients with special needs[.]" 42 U.S.C.A. § 1396b(i)(3). The relevant New Jersey law for health care funding references both Medicare and Medicaid, in particular the need to conform to the federal reimbursement practices and limits.

Medicare payments to hospitals for the "operating costs" of providing "inpatient hospital services" are limited to 110 percent of the average cost of such services "for all hospitals in the same grouping[.]" 42 U.S.C.A. § 1395ww(1)(A)(i) to (ii). Those "operating costs" include everything except "educational activities, " certain hemophilia services that are presumably addressed by other provisions, and capital and capital-related costs. 42 U.S.C.A. § 1395ww(a)(4).

The United States Secretary of Health and Human Services may adjust the payment percentage for particular hospitals to reflect various circumstances, 42 U.S.C.A. § 1395ww(a)(2), including "the special needs of psychiatric hospitals and of public or other hospitals that serve a significantly disproportionate number of patients who have low income or are entitled to [Medicaid] benefits[.]" 42 U.S.C.A. § 1395ww(a)(2)(B). The reimbursement provided to such hospitals is essentially calibrated on a cost basis, because any adjustment would be relative to the statutory "target amount" and schedule of allowable annual percentage increases. 42 U.S.C.A. § 1395ww(b).

For a state plan to qualify for federal funding, Medicare requires the state to make additional payments to hospitals that serve "a significantly disproportionate number of low-income patients, " for which indigent care payments from state and local governments exceed thirty percent of total "net inpatient care revenues." 42 U.S.C.A. § 1395ww(d)(5)(F)(i)(I) to (II). There is an overall limitation that the additional payment, or "payment adjustment, " must not exceed "the costs incurred during the year of furnishing hospital services . . . net of payments under this subchapter, other than under this section, . . . to individuals who either are eligible for medical assistance under the State plan or have no health insurance[.]" 42 U.S.C.A. § 1396r-4(g)(1)(A).

Medicare affords states a degree of discretion, by allowing them to devise their own "hospital reimbursement control system" that meets certain standards. 42 U.S.C.A. § 1395ww(c)(1). In particular, the state system may not result in "a significant reduction in the proportion of patients" receiving inpatient hospital services who lack sufficient insurance or other resources to pay for them, a "significant reduction" in the proportional admission of such patients, or a "refusal to provide emergency services" or "unusually costly or prolonged treatment" that the hospital was otherwise able to provide. 42 U.S.C.A. § 1395ww(c)(5)(C).

Medicaid likewise prohibits a hospital's significant reduction in the proportion of such needy patients. One way that Medicaid does so is by requiring a state system to provide increased payments to the hospitals that provide inpatient services to a "disproportionate share" of them. 42 U.S.C.A. § 1396r-4. As for the amount of reimbursements for those or any other services, Medicaid may not deny federal reimbursement on the ground that the state system relies on some methodology other than diagnostic-related groups ("DRG"), [2] or that the reimbursement would be higher under some other methodology than the one that the state system uses. 42 U.S.C.A. § 1395ww(c)(1).

The New Jersey Medical Assistance and Health Services Program, N.J.S.A. 30:4D-1 to -19.5, is New Jersey's Medicaid Program. N.J.S.A. 26:2H-18.52. DMAHS, a division within the Department of Human Services ("DHS"), administers it. N.J.S.A. 30:4D-4. The dual purposes of state Medicaid are to be a "last resource" for providing medical care to persons who cannot secure it at their own expense, and to obtain all benefits available under the Social Security Act. N.J.S.A. 30:4D-2. Accordingly, the DHS must provide whatever "medical assistance" is needed "in order to obtain federal matching funds for such purposes[.]" N.J.S.A. 30:4D-7(b).

For inpatient services rendered to patients discharged after August 3, 2009, the Division has reimbursed "acute care general hospitals" by DRG, using the DRG rates that it calculates pursuant to N.J.A.C. 10:52-14. N.J.A.C. 10:52-4.1(b). However, the Division reimburses "private psychiatric hospitals and distinct units of acute general hospitals for inpatient services . . . in accordance with Medicare principles of reimbursement, " and the regulations specify that those units are not reimbursed under the DRG system that would otherwise apply to inpatient services in such hospitals. N.J.A.C. 10:52-4.2(e).

The relevant "principles" for reimbursements that Medicare makes on a cost basis are that the costs reflect the "current costs of the individual provider, rather than costs of a past period or a fixed negotiated rate, " and that those current costs "include[] normal standby costs" and "the share of the total institutional cost that is borne by the program[.]" 42 C.F.R. § 413.5(a) (2013). See also 42 C.F.R. § 413.64(a) (2013) (for services reimbursed on a cost basis, providers are to receive "interim payments approximating the actual costs of the provider.")

The Health Care Subsidy Fund, a New Jersey program which is different from the HRSF, provides support to "disproportionate share hospitals" for their "charity care and other uncompensated care." N.J.S.A. 26:2H-18.58. State law defines a "disproportionate share hospital, " or "DSH, " as a hospital so designated by the Commissioner of Human Services "pursuant to" the federal Medicaid statutes, including 42 U.S.C.A. §§ 1396a and 1396b, as well as pursuant to N.J.A.C. 10:52-13. N.J.S.A. 26:2H-18.52; N.J.A.C. 10:52-1.2. The regulations establish two thresholds for designation as a DSH. N.J.A.C. 10:52-13.1(a). The first threshold is having "a Medicaid inpatient hospital utilization rate that is one standard deviation above the mean Medicaid utilization rate for hospitals receiving Medicaid payments in the State[.]" Ibid. The second is having "a low-income utilization rate above 25 percent[.]" Ibid.[3]

"Charity care, " another relevant concept, is defined under New Jersey law as "care provided at disproportionate share hospitals that may be eligible for a charity care subsidy pursuant to this act." N.J.S.A. 26:2H-18.52. Charity care determinations are of a patient's eligibility, not of a hospital's reimbursement, and there is no reference to the unit in which the patient was treated other than emergency room care. See N.J.A.C. 10:52-11. "A charity care claim shall be valued at the same rate paid to that hospital by the Medicaid program, " except that nonemergency services provided in an emergency room are reimbursed "at a rate appropriate for primary care[.]" N.J.S.A. 26:2H-18.59(f)(2). The payments are made annually, and they are to be "calculated and distributed in accordance with all applicable Federal laws and regulations." N.J.A.C. 10:52-13.2.

The hospitals that are designated as DSHs are eligible for payments from the "Charity Care Component" of the Health Care Subsidy Fund according to the documented dollar amount of charity care that they provide, as adjusted to reflect Medicaid pricing. N.J.S.A. 26:2H-18.59e(a)(1), 26:2H-18.59i; N.J.A.C. 10:52-13.4(b), (c). Those dollar amounts are used in calculations that also involve a hospital's overall "operating margin" to determine each hospital's "profitability factor" relative to all hospitals. N.J.S.A. 26:2H-18.59e; N.J.A.C. 10:52-13.4. Hospitals are ranked annually in the order of each one's ratio for "gross revenue for charity care patients" to "total gross revenue for all patients." N.J.S.A. 25:2H-18.59i(b)(1).

DMAHS issues a "Charity Care Subsidy Payment Schedule" of Health Care Subsidy Fund payments for all hospitals, and a hospital may administratively appeal the entire schedule on the ground that it failed "to reflect specific charity care claims[.]" N.J.A.C. 10:52-13.4(f)(1). If a hospital fails to submit an appeal with the prescribed supporting documentation within fifteen days, it is deemed to have "forfeited" the right to appeal and to have "accepted" the Charity Care Subsidy Payment Schedule. N.J.A.C. 10:52-13.4(f)(2).

For such an administrative appeal, DMAHS conducts a "detailed review with the hospital" of its documentation, N.J.A.C. 10:52-13.4(f)(4), and thereafter renders "detailed findings on the factual and legal issues concerning whether an adjustment to the Charity Care Subsidy Payment Schedule is warranted." N.J.A.C. 10:52-13.4(f)(5). The regulations detail the information that the hospital pursuing the appeal may submit, without indicating how the interests of, or implications for, other hospitals are to be considered. See N.J.A.C. 10:52-13.4(f)(2) to (4).

A DSH that is allocated a Health Care Subsidy Fund payment may also receive "additional disproportionate share payments" from the HRSF based on its percentage of patients in seven categories, namely, those with "HIV, mental health, tuberculosis, substance abuse and addiction, complex neonates, HIV as a secondary diagnosis, and mothers with substance abuse." N.J.A.C. 10:52-13.5(a), (a)(1)(ii)(1). Those seven have been called "problem billed categories" of treatment, and the purpose of the HRSF is "to fund important ...

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