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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 public health services primarily used by low income populations." 28 N.J.R. 4698(a) (Nov. 4, 1996).

The regulations establish two requirements (also referred to in the record as "gates") that a DSH must satisfy in order to be considered for an HRSF allocation. N.J.A.C. 10:52-13.5(a)(1)(i). The first requirement (or gate) is:

The hospital's cases for the seven categories listed at (a)(l)(ii)(1) below [meaning the seven problem billed cases], priced at the Medicaid rate, divided by the hospital's Total Operating Revenue, expressed as a percentage, shall be equal to or greater than the median percentage for New Jersey Hospitals receiving Medicaid payments.

[N.J.A.C. 10:52-13.5(a)(1)(i)(1).]

The regulations do not expressly define the term "the Medicaid rate" other than to specify which year's rate is to be used. See, e.g., N.J.A.C. 8:82-7.1(b); N.J.A.C. 10:52-13.4; N.J.A.C. 10:52-13.5(a)(1).[4] However, they do state that the DRG reimbursement system is the general basis of Medicaid reimbursement to acute care general hospitals for inpatient services with discharge dates after August 3, 2009. N.J.A.C. 10:52-4.1(b), 10:52-14.1(a). They also provide an exception from DRG reimbursement for "distinct units" of acute care general hospitals that provide inpatient psychiatric care, by applying "Medicare principles" instead:

The Division will reimburse private psychiatric hospitals and distinct units of acute general hospitals for inpatient services (including the interim and final settlement) in accordance with Medicare principles of reimbursement. Distinct units of acute general hospitals are not reimbursed through the Diagnosis Related Groups (DRG) reimbursement system for inpatient services in acute care general hospitals.

[N.J.A.C. 10:52-4.2(e).]

Hoboken acknowledges that the 887 so-called "excluded cases" at issue in this appeal were such cases.

The second requirement (or "gate") for a hospital to be considered for an HRSF allocation is:

The hospital's charity care days plus the hospital's Medicaid and N.J. FamilyCare-Plan A days, divided by the hospital's total days, expressed as a percentage, shall be equal to or greater than the median percentage for New Jersey hospitals receiving Medicaid and N.J. FamilyCare-Plan A payments.

[N.J.A.C. 10:52-13.5(a)(1)(i)(2).]

Hoboken does not contest DMAHS's calculations relating to this second requirement. Hence, this appeal turns on the first requirement in N.J.A.C. 10:52-13.5(a)(1)(i)(1).

Each DSH is ranked by the percentage of total treatment costs that its problem billed cases represented. N.J.A.C. 10:52-13.5(a)(1)(iii). As we have already noted, the amount of the HRSF for 2011, as in all years, was a specific appropriation by the Legislature. Senate Bill 3000, 214th Leg. Sess., supra, at 106. Because total HRSF payments may not exceed the appropriation, see id. at 109, DMAHS allocates the additional payments to each DSH by rank until the HRSF appropriation is exhausted. N.J.A.C. 10:52-13.5(a)(1).


On July 14, 2010, DMAHS issued an initial 2011 HRSF payment schedule. Twenty-six of the sixty-five hospitals[5] listed in the schedule received an allocation, with Hoboken's allocation of $979, 803 being the lowest. Thirty-nine of the listed hospitals received no HRSF subsidy at all. On August 12, 2010, Hoboken filed an administrative appeal, contending that DMAHS had improperly excluded 887 cases that were among the seven categories of cases for which the HRSF was created. It asserted that the cases had a "Medicaid value" of $5, 442, 585, and that their inclusion would have yielded an HRSF allocation that was higher than the initial allocation by $1, 926, 627. Seven other hospitals that were allocated an HRSF payment also filed administrative appeals, as did one hospital that was denied an allocation.

On September 30, 2010, Hoboken's counsel wrote DMAHS to disagree with the position that the agency had taken during a September 24, 2010 conference call, namely, that the 887 cases had been excluded because they represented treatment provided in a so-called "Medicaid distinct-part-unit." Hoboken acknowledged that the 887 cases were mental health cases that it treated in a Medicaid "excluded unit." This meant that a unit of hospital operations had excluded those cases from DRG reimbursement because the hospital instead elected to have Medicaid pay for those cases in that unit on a Medicare-cost basis.

Hoboken protested that DMAHS's omission of its "excluded unit" cases from the HRSF was a new practice and therefore a new rule that should have been the subject of rulemaking under the Administrative Procedure Act, N.J.S.A. 52:14B-1 to -30. In the alternative, Hoboken argued that DMAHS's failure to acknowledge an alleged change in its methodology created a factual dispute about what methodology was used, for which Hoboken was entitled to an evidentiary hearing in the Office of Administrative Law ("OAL").

On December 17, 2010, DMAHS issued its final agency decision, discerning no need for a hearing in the OAL. The Division found no legal error in its methodology of excluding the 887 cases from its calculations for Hoboken, on the ground that the regulations did not specifically allow or disallow that methodology. Further, the Division stated that the approach it was taking for the SFY 2011 allocation of HRSF was consistent with its past practice in determining HRSF allocations.

Soon after, DMAHS calculated a revised 2011 HRSF payment schedule, and released that schedule to the affected hospitals on December 23, 2010. The agency noted that its consideration of the administrative appeals revealed that its calculations for some hospitals other than appellant had improperly included cost-basis cases, or improperly excluded cases that were misidentified as being paid on a cost basis but that had actually been paid by DRG.

The revised schedule of subsidy allocations reflected figures that DMAHS recalculated for each of the listed hospitals. One such hospital, Lourdes Medical Center ("Lourdes"), which had initially been denied an HRSF payment, was found on the agency's second review to be more eligible under the dual-gate criteria than Hoboken. Therefore, Lourdes was allocated a payment, while Hoboken's initial allocation was vacated. Four of the other hospitals that had filed administrative appeals received an increased allocation, while three others received a lower allocation than they had initially received. Eighteen hospitals that had not appealed received a lower allocation than they initially received. The remaining thirty-eight hospitals continued to receive no allocation; only one of them had appealed.

On December 29, 2010, Hoboken filed an administrative appeal of DMAHS's revised schedule. Hoboken contended that the revised schedule involved changes in the data for Lourdes underlying the calculations for the revision, as well as for two other hospitals that nonetheless did not receive an allocation.

A consultant for Hoboken submitted a certification stating that DMAHS had represented during the second appeal that SFY 2011 was the first year for which DMAHS had the capacity to effect what had been its alleged longstanding intention to omit excluded-unit cases from the HRSF calculations. The consultant disagreed, asserting that DMAHS had sufficient data in prior years to effect the omission, and that DMAHS's failure to do so in SFY 2011 accordingly reflected a deliberate policy choice. Hoboken's consultant also maintained that DMAHS had never previously adjusted the data of any hospital that had not filed its own administrative appeal "unless there were across-the-board adjustments to all hospitals, " which he declared not to be the case for SFY 2011.

On April 29, 2012, DMAHS denied Hoboken's second administrative appeal. The agency supplemented its previous denial by explaining that it had the right and obligation to base a revised schedule for HRSF subsidies on a review of the data for all hospitals, not just those that had filed an administrative appeal. Thereafter, the entire HRSF allocation for SFY 2011 was apparently disbursed to the hospitals that were awarded subsidies under the revised schedule.


Hoboken subsequently filed the present appeal of the Division's final agency decision.[6] It fundamentally contends that the Division acted arbitrarily and capriciously in depriving it of an HRSF subsidy for SFY 2011. Among other things, it argues that the Division's omission of the 887 Medicaid excluded-unit mental health cases from the numerator of the grant formula was not authorized by statute or regulation, and a deviation from the Division's past practices. Hoboken also contends that the cases in a Medicaid excluded unit that are covered by "commercial payers" are not necessarily paid on a cost basis, and that the agency's assumption that Hoboken was paid above its costs in all 887 instances is incorrect.

Hoboken further argues that it was improper for DMAHS to allow Lourdes and other hospitals that had not pursued an administrative appeal from the agency's initial allocation to receive a larger HRSF subsidy in the second allocation. Hoboken contends that hospitals such as Lourdes waived their right to more favorable treatment because they had not administratively appealed the initial decision. Hence, Hoboken essentially urges that we nullify the second-round grants made to Lourdes and any other hospitals that did not appeal, thereby making those HRSF grant funds available for redistribution to Hoboken and other eligible applicants.

Although Hoboken's briefs on appeal are otherwise vague as to a requested remedy, we have gleaned from the appellate oral argument that Hoboken wants this court to reverse the Division's second allocation, in which Hoboken received no subsidy whatsoever, and to grant Hoboken the total subsidy that it originally had sought from the agency in its administrative appeal, i.e., $2, 714, 436. Hoboken does not explain specifically how the DMAHS should find a funded source for the alleged shortfall, although it suggested at oral argument that perhaps the agency could develop a method to take that sum out of subsequent fiscal year appropriations from the Legislature.

In response at oral argument, the Deputy Attorney General representing the Division stressed that the HRSF subsidy is a zero-sum, fixed legislative appropriation for a particular fiscal year, and that there are no surplus funds appropriated to cover the alleged shortfall if Hoboken prevailed on the appeal. The Deputy Attorney General also represented to us that the overall administration and criteria for HRSF funding have changed since SFY 2011, which also would complicate the fashioning of any remedy.

Given the conceded zero-sum and interdependent nature of the Legislature's HRSF appropriation for SFY 2011, we find it troublesome that Hoboken did not serve its notice of appeal upon the other potentially affected hospitals that received, or at least had sought, HRSF grants in SFY 2011. If, as Hoboken contends, the Division utilized a flawed methodology in its second allocation by erroneously omitting Medicaid excluded-unit cases from the funding formula, an appropriate correction could require an across-the-board recalculation of the entire $166.6 million appropriation. Presumably, all of the recipient hospitals have already spent their SFY 2011 grants, and would oppose having to refund any portions of their grants three years later.

In addition, Hoboken's argument that this court should invalidate the HRSF grants awarded to Lourdes and other hospitals that had not administratively appealed the agency's initial allocation is directly adverse to those non-appealing hospitals' financial interests. In fact, the original counsel for Hoboken in this dispute with DMAHS, who coincidentally also represented Lourdes, recognized that there was a conflict of interest between Hoboken and Lourdes, prompting Hoboken to retain its present substituted counsel.[7] Because of that identified conflict of interest, Hoboken reasons that Lourdes must be aware of the pendency of this appeal, and evidently has chosen not to participate. However, the same cannot be presumed as to other potentially affected hospitals.

In any event, we need not consider whether the other potentially affected hospitals in this zero-sum situation should have been notified or included in the appeal as necessary parties because we have concluded in Part II, infra, that the Division's final agency decision should be affirmed and the SFY 2011 grants for the HRSF left undisturbed.[8] We have noted our concerns about inclusivity, however, for the guidance of counsel in future cases involving interdependent State grants or zero-sum appropriations.



Our review of the issues raised on this appeal is limited. It is well-settled under case law that an administrative agency's decision generally should be sustained unless there is a "clear showing" that the decision is "arbitrary, capricious, or unreasonable, or that it lacks fair support in the record." In re Herrmann, 192 N.J. 19, 27-28 (2007) (citing Campbell v. Dep't of Civil Serv., 39 N.J. 556, 562 (1963)).

As the Supreme Court observed in Herrmann, "[t]hree channels of inquiry inform the appellate review function." Id. at 28. These inquiries are:

(1) whether the agency's action violates express or implied legislative policies, that is, did the agency follow the law; (2) whether the record contains substantial evidence to support the findings on which the agency based its action; and (3) whether in applying the legislative policies to the facts, the agency clearly erred in reaching a conclusion that could not reasonably have been made on a showing of the relevant factors.

[Ibid. (quoting Mazza v. Bd. of Trs., 143 N.J. 22, 25 (1995)).]

"When an agency's decision meets [these] criteria, then a court owes substantial deference to the agency's expertise and superior knowledge of a particular field." Ibid. (citations omitted). An agency thus is entitled to a "strong presumption" that its action was reasonable. In re Vey, 272 N.J.Super. 199, 205 (App. Div. 1993), aff'd o.b., 135 N.J. 306 (1994). The presumption is "even greater" when the action in question involved "specialized and technical matters" within the agency's expertise. Ibid.

The focus of Hoboken's appeal is upon DMAHS's interpretation and application of the HRSF regulations, rules which the agency itself had previously promulgated. In such a context, we "must give great deference to an agency's interpretation and implementation of its rules enforcing the statutes for which it is responsible" unless they are "plainly at odds with the statute[s]." In re Freshwater Wetlands Prot. Act Rules, 180 N.J. 478, 488-89 (2004) (citations omitted). "'An agency's interpretation of its own rule is owed considerable deference because the agency that drafted and promulgated the rule should know the meaning of that rule.'" In re Freshwater Wetlands Gen. Permit No. 16, 379 N.J.Super. 331, 341-42 (App. Div. 2005) (quoting Essex Cnty. Bd. of Taxation v. Twp. of Caldwell, 21 N.J.Tax. 188, 197 (App. Div.), certif. denied, 176 N.J. 426 (2003)).

We recognize that this deference has its limits. "Administrative regulations, of course, cannot alter the terms of a legislative enactment or frustrate the policy embodied in the statute." N.J. State Chamber of Commerce v. N.J. Election Law Enforcement Comm'n, 82 N.J. 57, 82 (1980) (citations omitted). Furthermore, as Hoboken repeatedly stresses in its brief, an agency is bound to follow its regulations. Cooper Univ. Hosp. v. Jacobs, 191 N.J. 125, 143 (2007); In re CAFRA Permit No. 87-0959-5, 152 N.J. 287, 308 (1997).


The primary argument Hoboken presses is its contention that DMAHS acted unfairly by omitting the 887 Medicaid "excluded unit" mental health cases from the numerator of the "Gate One" calculation under N.J.A.C. 10:52-13.5(a)(1)(i)(1), the regulation that defines the first requirement for a DSH to be considered for a HRSF allocation. Here, the Division utilized data from 2008 collected by the New Jersey Department of Health ("DOH") from the reporting hospitals, pursuant to a September 19, 2008 memo from a DOH official.[9]

The designation of a "distinct unit" of an acute care hospital as a Medicaid "excluded unit" appears only in the caption of N.J.A.C. 10:52-4.2, [10] rather than in any substantive provision of the regulations. Hoboken has implicitly accepted the equivalence of those two terms, as it uses the term "a Medicaid 'excluded unit'" to describe the distinct unit in which it treated the 887 mental health cases in question. As the parties appear to agree, a hospital may freely choose to treat and bill cases within a Medicaid "excluded unit" rather than be paid at the DRG reimbursement rates. Such a decision entails an election of cost-basis reimbursement allowed pursuant to 42 U.S.C.A. § 1395ww(b) rather than DRG reimbursement. The Division's position is that when a hospital chooses to treat certain cases as Medicaid excluded-units rather than be reimbursed at DRG rates, it will be paid, on average, at or above its actual costs for the services provided. Consequently, the Division maintains that no HRSF subsidy is warranted for such excluded cases, because an objective of the HRSF program is to provide hospitals with additional financial relief when they are not recovering their costs for the services.

Hoboken contends that N.J.A.C. 10:52-13.5(a)(1)(i)(1) must be read to preclude the Division from omitting Medicaid excluded-unit cases from the numerator in the formula. The hospital maintains that the regulation contains no such explicit "carve-out" authority, nor does the language in N.J.A.C. 10:52-4.2(e) obligating the Division to reimburse "distinct units" within acute general hospitals for inpatient services "in accordance with Medicare principles of reimbursement."

We agree that the complex regulatory language is not patently clear on its face for resolving this dispute of interpretation. Nevertheless, we are satisfied that the Division, applying its expertise in Medicaid, Medicare, HRSF, and other subsidy programs, has adopted a reasonable construction of the wording of the applicable rules, one that is consonant with the overall policy objectives of the statutory scheme.

As we have previously noted, our Legislature requires administrative conformity to federal Medicare and Medicaid law in order to maximize federal assistance to the state Medicaid program. Much of the federal law addresses the avoidance of reimbursements that exceed the allowable cost. To ameliorate the impact of that general objective on the DSHs, both federal and state law contain provisions to reduce the relative burden that arises from such hospitals' disproportionate share of the seven problem-billed patient categories.

The Division acted faithfully to these stated objectives by choosing to omit the general category of Medicaid excluded-unit cases from the numerator in the HRSF funding formula The approach the agency has selected endeavors if not with perfect precision to channel the HRSF subsidy to the hospitals that need it most or serve the neediest patients The Division's categorical approach to exclude all excluded-unit cases also appears to be administratively less burdensome than performing a case-by-case analysis of whether Hoboken actually was paid above its costs on all 887 excluded cases We reject Hoboken's mantra that the agency "violated its own regulations" because the regulations do not clearly support Hoboken's own interpretation

We are unpersuaded by Hoboken's contention that the Division acted arbitrarily because some of the 887 excluded-unit cases were charged to insurance companies or other commercial payors We recognize that it is conceivable that in some of those cases the payor might not have paid the hospital the full costs of treating the patient although Hoboken has not substantiated that contention with specific billings In any event this argument which is essentially a claim that the Division's categorical omission of excluded-unit cases is over-inclusive is unavailing

Governmental action is not automatically invalid simply because it fails to include or exclude with precision all persons or instances having shared characteristics. See, e.g., Bd. of Educ. of Piscataway Twp. v. Caffiero, 86 N.J. 308, 324-25, appeal dismissed, 454 U.S. 1025, 102 S.Ct. 560, 70 L.Ed.2d 470 (1981); N.J. State League of Municipalities v. State, 257 N.J.Super. 509, 519 (App. Div. 1992), certif. dismissed, 133 N.J. 423 (1993). Instead of requiring such precision, it is generally sufficient that the government's classification scheme has a "rational justification." N.J. State League of Municipalities, supra, 257 N.J.Super. at 519. Although the Division's omission of all 887 excluded-unit cases from the funding calculation may have swept in some instances where Hoboken was not paid its full costs of patient care, the agency's categorical approach is sufficiently reasonable to withstand judicial scrutiny. The Division's construction and application of the regulation was not manifestly arbitrary or capricious, especially given the deference we owe to the agency's expertise in this complex regulatory area.


Hoboken separately argues that DMAHS erred by adjusting the data for Lourdes even though Lourdes did not administratively appeal the HRSF allocations. It maintains that any hospital that failed to administratively appeal is deemed to have accepted the entire HRSF payment schedule, and that DMAHS never violated that practice until now. We reject these contentions.

"[A]dministrative tribunals possess the inherent power of reconsideration of their judicial acts, except as qualified by statute[, ] . . . by necessary implication to serve the statutory policy." Handlon v. Town of Belleville, 4 N.J. 99, 106 (1950) (citing McFeely v. Bd. of Pension Comm'rs, 1 N.J. 212 (1948)). Accord Schulmann Realty Grp. v. Hazlet Twp. Rent Control Bd., 290 N.J.Super. 176, 187 (App. Div. 1996). "Because the power to correct and revise enables governmental agencies to better serve and implement statutory policy, the denial of this authority when exercised 'for good and sufficient cause would run counter to the public interest.'" Ibid. (quoting Handlon, supra, 4 N.J. at 107. That authority includes "the inherent power to reopen or to modify and to rehear orders that have been entered." Burlington Cnty. Evergreen Park Mental Hosp. v. Cooper, 56 N.J. 579, 600 (1970); see also In re Van Orden, 383 N.J.Super. 410, 419 (App. Div. 2006) (noting an agency's "power to reopen proceedings").

An agency's reconsideration of its orders is, however, "conditioned by the demands of procedural due process for the protection of private and public interests." Handlon, supra, 4 N.J. at 107. "There cannot be a substantial change in the rights of the parties without a hearing on notice." Ibid. (citations omitted).

We applied these principles in another case that presented the somewhat-comparable situation of whether a State agency's payment schedule for a fixed legislative appropriation could be revised when only one of the affected hospitals appealed. Univ. of Med. & Dentistry v. Grant, 343 N.J.Super. 162 (App. Div. 2001) ("UMDNJ"). UMDNJ concerned the agency's allocation of the Legislature's fixed appropriation for fiscal year 2000 to the Charity Care Component of the Health Care Subsidy Fund. Id. at 165. We upheld the agency's use of the data that all hospitals had submitted to both the current and former contractors, which the agency engaged to audit the hospitals' reported charity care expenses, rather than to use only the data that the hospitals submitted to the former contractor. Id. at 166-71. We also denied the claim that the agency had failed to use the most recent available audit charity care data for the appellant, partly on the basis that the claimed impropriety did not alter the appellant's eligibility for an allocation or prejudice it in any other way. Id. at 171-73.

In UMDNJ, we did grant the appellant's claim that the agency had priced its outpatient charity care at the Medicaid rates, which generally meant "the lesser of the reasonable cost or the customary charges." Id. at 173. We found that the appellant was entitled to the exception for public hospitals that furnished such services at a "nominal charge, " which invoked a different methodology that yielded a higher "Medicaid rate" and would therefore have increased the appellant's allocation. Id. at 173-74. The agency proposed applying the exception only prospectively, but we found no legal impediment to a retroactive adjustment in order to provide "that which may be justly due and owing" to the appellant for being a "nominal charge provider." Id. at 174-75.

Hence, in UMDNJ we recognized the importance that an allocation of funds be legally sound with regard to an appellant's status as a provider of services at no charge or nominal charge, and that no hospital receive an unjustified windfall at the appellant's expense. Therefore, a retroactive reopening of the matter to make a correction was awarded.

In a similar vein, in Alexian Brothers Hospital v. State, Department of Health, Hospital Rate Setting Commission, 242 N.J.Super. 411, 412-13 (App. Div. 1989), we concluded that the Hospital Rate Setting Commission ("the Commission") had failed to follow the DOH's regulations in setting hospital reimbursement rates. The dispute in Alexian Brothers focused upon a labor equalization factor that was used in "cost efficiency comparisons." Id. at 414. Although the hospitals were not competing in Alexian Brothers for shares of a fixed appropriation, we required refunds from the hospitals that had been overpaid in prior years due to incorrect application of the regulations. Id. at 419-21. We recognized that such refunds were "potentially onerous, " and allowed the Commission to provide for them on remand by any reasonable means including "prospective adjustments staged over a several year period." Id. at 420-21. However, we nonetheless insisted that "[m]ere practical difficulties cannot excuse the necessity to abide by the statutory and regulatory scheme, particularly where demonstrable financial injury has been caused without affording opportunity for correction." Id. at 419.

UMDNJ and Alexian Brothers aptly illustrate that a State agency allocating funds to hospitals should have the inherent ability to reopen prior allocations in order to make an appropriate correction that will further statutory and regulatory objectives. Here, the Division acted reasonably in revising its initial funding allocation across-the-board, regardless of whether a particular hospital had or had not filed an administrative appeal. We need not decide whether the Division had an absolute obligation to do so once it discovered that some excluded-unit cases had been included in the initial calculation for one or more of the potential subsidy recipients. However, the Division should not be faulted for attempting to treat all hospitals consistently and for administering the program in its totality in an evenhanded manner, irrespective of whether all initially dissatisfied hospitals had pursued an appeal.

When the Division's permissible recalculations were done, Hoboken unfortunately lacked sufficient priority under the formula criteria, relative to other hospitals, to continue to receive a subsidy. The change in outcome from the first calculations to the second, although understandably disappointing for Hoboken, was produced through a fair process. We therefore reject Hoboken's suggestion that we nullify the subsidy awarded to Lourdes, or to any other recipient hospital that had not filed an administrative appeal. Hoboken is simply not entitled to the approximately $2.7 million recovery it seeks, regardless of the potential source or sources.


We lastly examine Hoboken's claim that the Division's exclusion of its Medicaid excluded-unit cases from its revised HRSF calculations was a new practice that amounted to a new rule, which thus required rulemaking. Hoboken argues that the new rule changed DMAHS's policy on determining HRSF subsidies, and that it was entitled to an opportunity to comment before being affected. We reject this contention because it is insufficiently substantiated.

We recognize that it is well-established that "'[a]n agency many not use its power to interpret its own regulations as a means of amending those regulations or adopting new regulations.'" E.B. v. Div. of Med. Assistance & Health Servs., 431 N.J.Super. 183, 206-07 (App. Div. 2013) (quoting Venuti v. Cape May Cnty. Constr. Bd. of Appeals, 231 N.J.Super. 546, 554 (App. Div. 1989)).

Under the seminal case of Metromedia, Inc. v. Director, Division of Taxation, 97 N.J. 313 (1984), an agency determination amounts to the establishment of rule

if it appears that the agency determination, in many or most of the following circumstances, (1) is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group; (2) is intended to be applied generally and uniformly to all similarly situated persons; (3) is designed to operate only in future cases, that is, prospectively; (4) prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter; and (6) reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy.

[Id. at 331-32 (emphasis added).]

DMAHS's disposition of appellant's administrative appeals could not amount to the announcement of a new rule under the Metromedia factors unless it was indeed a departure from prior practice. The record furnished to us by Hoboken, which has the burden of proof on its claim of a Metromedia violation, fails to demonstrate "a material and significant change from a clear, past agency position[.]" Id. at 331. Hoboken's consultant represents that the Division did not omit Medicaid excluded-unit cases from the HRSF calculation in past years. However, the documentation provided in Hoboken's appendix is insufficient to demonstrate whether that putative failure in prior years was a deliberate choice by the agency, rather than simply a mistake that the agency would have corrected if it had been made aware of it.

The consultant asserts that the agency's past practices were indeed deliberate, but he refers to supporting documentation that Hoboken has not submitted on appeal, and without which his opinions cannot be tested. The absence of such documentation, and of explanations that expressly cite to it, leaves this claim of a deliberate change in practice insufficiently developed for meaningful assessment. See Dempsey v. Alston, 405 N.J.Super. 499, 519 (App. Div.), certif. denied, 199 N.J. 518 (2009) (an appellate court cannot credit a "contention" for which a party "failed to provide any evidence"); State v. Hild, 148 N.J.Super. 294, 296 (App. Div. 1977) (an appellate court need not make "an independent examination of the record" on behalf of party that fails to support its legal argument "with appropriate record reference").

Moreover, the September 19, 2008 memorandum from DOH instructing hospitals about the proper submission of data from psychiatric-rehabilitation units states, contrary to Hoboken's position, that the memorandum was issued to "clarify the process" for such data submission, and was "for reporting and data collection purposes only and . . . independent of any reimbursement policies."

Even if, hypothetically, appellant had furnished us with competent documentary substantiation of the Division's alleged change in practice, we are unpersuaded that the Metromedia analysis necessarily required formal rulemaking in this context. For example, it is not obvious that the Division's method of calculating the numerator in the funding formula encompasses "a large segment of the regulated or general public, rather than an individual or narrow select group" Metromedia supra 97 N.J. at 331 Nor is it patently evident that the method of calculation amounts to a "legal standard or directive" Ibid In any event we need not reach these fine points of analysis because of the limitations of the inadequate record supplied on appeal

Lastly as a practical matter a remand for rulemaking concerning the SFY 2011 methodology may be an unwarranted expense of time and effort for we have been advised at oral argument that the HRSF has been significantly changed by ensuing legislation and administrative initiatives Hence the prospective utility of such a rulemaking exercise may be nil or at best limited For these many reasons we reject Hoboken's argument that rulemaking was or is an essential component for the resolution of this case


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