In re the 1976 Hospital Reimbursement Rate for William B. Kessler Memorial Hospital

Pashman, J.,

dissenting. The majority today holds that William B. Kessler Memorial Hospital (Kessler) will not be reimbursed for certain 1976 expenditures made in connection with its new-born nursery facilities. It also concludes that a remand is required in order to determine whether Kessler’s efforts to secure reimbursement for expenses attributable to its emergency center will suffer a similar fate.

I cannot subscribe to these results. In my opinion, Kessler’s decisions to incur the challenged expenses were *586 entirely reasonable given the circumstances here involved. The funds at issue were expended in good faith by the hospital in reliance upon regulations of the Department of Health and directives of the Department’s employees. Reimbursement was retroactively disallowed at the end of the year. The hospital should not now be penalized by having these costs excluded from the calculation of its 1976 per diem reimbursement rate. I therefore dissent from the holding which the majority has reached.

I

The Act

The Health Care Eaeilities Planning Act, N. J. S. A. 26:2H — 1 et seq., declares that:

* * * hospital . . . services of the highest quality, of demonstrated need, efficiently provided and properly utilized at a reasonable cost are of vital concern to the public health.

[N. J. S. A. 26:2H-1 (emphasis supplied)]

As in effect in 1976, 1 that Act directed the Commissioner of the Department of Health (DOH), in consultation with the Commissioner of Insurance, to, inter alia, “certify the *587 costs of providing health care services,” N. J. S. A. 26:2H-18(c), and to “approv[e] as to reasonableness” the rates at which hospital service corporations (i. e., Bine Cross) would reimburse health care facilities, N. J. 8. A. 26:2H -18(d) (emphasis supplied). Further, no hospital could expand its facilities without obtaining a certificate of need from the Commissioner -of Health who had to consider, inter alia, the availability of alternate services, availability of sufficient manpower, and possible economies and improvements in services to he anticipated from the operation of joint central services. N. J. 8. A. 26-2H-7, -8. Finally, no hospital could be operated without obtaining a license from the DOH which was conditioned on the hospital’s adoption of a uniform system of cost accounting, reports and audits. N. J. 8. A. 26:2H-12, N. J. A. O. 8:31A-1.1 et seq. 2

The focus of the Act was thus upon the “reasonableness” of particular expenditures made by a hospital ■ — ■ not only as to the rate which could be charged Blue Cross but also as to the need for new facilities to serve the public. 3 By deciding that no expenditures should be permitted for a particular service, the Department of Health could have effectively closed down a facility due to the absence of a public need. Clearly, the Department of Health was vested with fairly comprehensive regulatory control over hospitals to administer the State’s health policy.

In the present case, DOH ruled that the two challenged expense items were “unreasonable” and hence disallowed *588 reimbursement. A review of the events leading to Kessler’s incurring of these costs and the manner in which the Commission calculated its rates clearly shows that the Commissioner’s determination cannot be sustained. Hence, her judgment should be reversed.

II

Fixing the 1976 Rate

To carry out their rate setting functions, the Commissioners of Health and Insurance promulgated guidelines after extended hearings before retired Judge Sidney Goldmann who had been specially designated to hear that matter. Rates were to be set annually and prospectively. All hospital costs were allocated to eight general functional categories and within those categories to various cost centers. The emergency room was a cost center in the general category of Outpatient Care. N. J. A. C. 8:31A-2.3(a)l. Uew-born nursery was a cost center in the Inpatient Care classification. N. J. A. C. 8:3lA-2.2(a)3. Cost centers of comparable hospitals are grouped, and the median cost served as the base from which the reasonableness of a proposed charge was determined. 4 This method of calculating rates by use of peer groupings is practical and permissible provided that a hospital may seek and obtain relief from the disallowance of expenses to which it may be entitled. Compare Permian Basin Area Rate Cases, 390 U. S. 747 , 88 S. Ct. 1344 , 20 L. Ed. 2d 312 (1968).

As stated above the rate making scheme contemplated that rates would be fixed annually in advance. This accords with the general policy that rates should be set prospectively. The specific method followed for determining the 1976 rates *589 was prescribed by DOH guidelines which were promulgated in October 1975 for the 1976 Hospital Rate Review Program. Under the guidelines hospitals submitted their proposed 1976 budgets, their 1975 budgets and actual 1975 costs. A DOH analyst then suggested proposed rates in each cost center, any one or more of which the hospital need not accept. The hospital had 30 days to appeal the analyst’s determination and present its position before a hearing examiner. After the hearing officer had filed his report, the Commissioners of Health and Insurance “determine[d] and approve[d] the final administrative rate.” The guidelines limited the bases upon which the Commission could adjust final rates to five specific reasons, including volume variances, actual measured inflation of supplies and some economic factor items improperly excluded. No adjustment could be made for any other errors or mistakes in the rate making process and there was no allowance for regulatory lag or indecisiveness by DOH in interpreting its own regulations.

In this case hearings on Kessler’s appeal were not held until July 20, 1976. The undated Hearing Examiner’s report was not issued until September 22, 1976 and the State Commissioner of Health related her concurrence in the Hearing Examiner’s findings by letter dated December 10, 1976. The 1976 final administrative rate was set in a letter by the Commissioners of Health and Insurance dated December 13, 1976. By that time, of course, Kessler had in good faith expended the monies questioned herein for medical care in its emergency room and new-born nursery.

Ill

Emergency Center Costs

Kessler is located in a rural area on the outskirts of Hammonton, New Jersey. It is, however, situated near major highways carrying traffic to and from the Philadelphia metropolitan area and the New Jersey resorts of Atlantic City, Ocean City, and points south. Moreover, it constitutes *590 the only hospital within a 20-mile radius. Hence, a significant number of patients — mostly victims of automobile accidents —- are treated in Kessler’s emergency room.

Prior to 1975 Kessler staffed its emergency room with interns • — ■ i. e., non-licensed physicians — at a salary of $4.70 per hour. These interns divided their time between the emergency center and other hospital departments, including obstetrics, pediatrics, the new-born nursery, and the out-patient clinic.

In November of 1974, Mrs. Lydia Pabian — a DOH field representative —■ inspected Kessler’s emergency facilities in response to a complaint that an alleged rape victim had been unable to receive emergency treatment from a licensed physician. Mrs. Pabian cited the hospital for a violation of a state licensing regulation providing that:

[a]ll hospitals shall provide 24-hour licensed physician coverage in the emergency department according to a plan established by the medical staff and/or approved by the governing board. There shall be a licensed physician responsible for the prompt and efficient treatment of all emergency patients [.]

[Manual of Standards for Hospital Facilities, H. J. A. C. 8:43B-l.ll(q) (7) (ii)]

Pabian told Kessler officials that pursuant to the regulation, the hospital i(had to have twenty-four hour licensed physicians in the emergency room.” She further stated that compliance could not be achieved by using doctors who doubled as resident physicians for in-house patients, since the prime concern of an emergency room physician had to be the emergency room. Einally, she informed Kessler that exceptions to this rule would be made only in the case of hospitals with a very low volume of emergency patients (less than 6,000 per year). Kessler’s annual emergency room visits were in excess of 11,000.

In order to comply with the licensing regulation as “construed” by Mrs. Pabian, Kessler discontinued its intern program in July 1975 and hired full-time licensed physicians *591 whose sole responsibility was to provide around-the-clock emergency room coverage. These physicians were paid at a rate of $18.50 per hour. As a result Kessler’s annual emergency center physician costs increased from $47,000 to $200,000.

At the hearing below, on July 20, 1976, Dr. Solomon Goldberg — DOH’s Director of Licensing Certification, and Standards for Health Facilities — maintained that, contrary to Kessler’s belief, the regulation at issue did not require that licensed physicians be present in the emergency room at all times. Although such a state of affairs might be “optimal,” he contended that around-the-clock physician presence was “not a mandate.” Instead, all that was required was a plan to provide 24-hour emergency room coverage. So long as a licensed physician was at all times able to reach the center within five minutes of an emergency, this requirement would be satisfied.

The Hearing Examiner, on September 22, 1976, found that Dr. Goldberg’s construction of the relevant regulation was the proper one. As a result, he concluded that $124,871 of the increased costs incurred by Kessler to comply with the regulation were unnecessary, and hence unreasonable. He, as does the majority, deemed it irrelevant that these expenditures were made in reliance upon Mrs. Pabian’s admonishments.

Whether the correct interpretation of the regulation at issue is that propounded by Dr. Goldberg or that espoused by Mrs. Pabian in 1974 is irrelevant to the proper disposition of this case. What is important is that Kessler acted reasonably at the time in incurring the increased emergency room costs. The regulation on its face is ambiguous as to whether around-the-clock physician presence in the emergency room is required. The ambiguity was apparently cleared up — from the hospital’s standpoint — by Mrs. Pabian’s statements in 1974. To now label “unreasonable” a cost incurred in direct response to a DOH representative’s construction of an ambiguous regulation penalizes Kessler for attempted good faith *592 compliance with DOH quality standards. What is “unreasonable” is to expect that Kessler should have acted otherwise.

Finally, a few words must be said concerning the propriety of the “peer group” comparison to which Kessler was subjected. Kessler’s emergency room expenditures were initially singled out as “presumptively unreasonable” because these costs exceeded the median emergency center costs incurred by Kessler’s peer hospitals. At the hearing below, Mrs. Pabian testified that of the eleven hospitals in Kessler’s peer group two did not have emergency rooms; one had an emergency room but did not provide for 24-hour coverage; and one was only in the process of instituting 24-hour coverage. All four of these hospitals were thus in violation of state licensing regulations. See N. J. A. G. 8:43B-l.ll(q),(7).

While the majority may be correct in pointing out that no two hospitals will ever be identically situated, see ante at 571 -572, it is somewhat absurd to compare the emergency room costs incurred by Kessler to man an around-the-clock center with those incurred by hospitals lacking an emergency center. And yet the Hearing Examiner never responded to Kessler’s contentions that these members of its peer group were not comparable insofar as emergency room costs were concerned. In refusing to consider these claims, the Hearing Examiner acted arbitrarily and unreasonably. It should be noted that apart from these proceedings Kessler had no opportunity to question the peer groupings utilized for this cost center. To foreclose that opportunity may well infringe on its due process rights.

IV

New-Born Nursery Center Costs

As with the challenged emergency room costs, the $12,000 in expenditures made in connection with Kessler’s new-born nursery derived from the hospital’s attempt to comply with state licensing regulations. Moreover, its decision to incur these costs was entirely reasonable given the circumstances here involved.

*593 In 1973-1974 four obstetricians joined Kessler’s staff. As a result of the new patients they referred to the hospital, births and new-born patient days increased dramatically. In 1975 and 1976, however, these four physicians resigned, precipitating a 400-day decrease in annual patient days. At the time of the hearing below, approximately 300 deliveries a year were being made at Kessler. The hospital’s new-born facilities were therefore underutilized.

Irrespective of this underutilization, state standards required the hospital to provide full-time registered nurse coverage in its nursery facilities. The applicable regulation, N. J. A. O. 8:43B-8.4, provides:

(a) Separate personnel shall be assigned to the obstetrical service which shall be under direct supervision of a registered professional nurse at all times. If the caseload does not justify the total time of one nurse on each tour of duty, exception may be made by action of the hospital licensing board after submission and approval of written techniques. In the event that exception is granted, such techniques shall be posted in the obstetrical unit and all personnel instructed.

(b) There shall be at all times, day and night, registered professional nurse supervision of the nursing care of mothers and infants, and such other nursing supervision and coverage as is required.

As soon as Kessler realized that it had overestimated the number of 1976' births (due to the unforeseeable resignation of four obstetricians), it tried to increase its “delivery rate” and “occupancy rate” by seeking to attract new physicians to the OB/GYN Department. The hospital — in order to minimize costs while the nursery was underutilized — also petitioned DOH for an exemption from the registered nurse requirement of subsection (a) of the above regulation. This request was denied. Einally, when Kessler’s 1976 efforts to increase the delivery rate proved unsuccessful and it was apparent that the hospital’s new-born center would remain underutilized during the foreseeable future, Kessler officials discontinued the nursery department.

*594 The Hearing Examiner found, however, that had Kessler so requested, DOIT- — due to the low number of births in the hospital — would have relaxed the requirements of subsection ,(b) of the above regulation and allowed Kessler to utilize licensed practical nurses instead of registered nurses in its new-born center. Hence, he concluded that Kessler had unreasonably expended $12,000 in order to secure the services of registered nurses.

The Hearing Examiner’s conclusions in this regard fail to withstand close scrutiny. First, the "nursery” subsection of the relevant regulation, unlike subsection (a), does not indicate that its requirements can be relaxed by DOH officials. The Hearing Examiner’s conclusions are thus premised upon an “unwritten” exception to DOIT regulations. A hospital should not be penalized because its officials are not fully cognizant of every unwritten exception to the written regulations. If DOIT wishes to provide exemptions to certain of its requirements, the wording of the regulation should clearly indicate that such exemptions are available.

More importantly, Kessler would not have qualified under this unwritten exception even had it requested a relaxation of the regulations. Testimony below demonstrated that DOH would allow licensed practical nurses to be substituted for registered nurses only if there were no more than two babies in the nursery at any one time. Although Kessler averaged only 300 births per year, these births were not evenly spaced. Surveys revealed that the hospital’s nursery population varied from one to four babies.

The picture that emerges is one in which Kessler officials acted reasonably in the face of unforeseeable events. When 1976 birth projections proved erroneous due to staff resignations, the hospital attempted to attract new physicians as well as keep its new-born costs at the lowest level permissible under state regulations. As soon as Kessler realized that un-derutilization could not be remedied, it abandoned its facilities.

*595 Kessler should not now be penalized by having $12,000 excluded from the calculation of its 1976 per diem reimbursement rate. Hospital officials are not infallible and, as a result, birth projections are often erroneous. The most that one can expect is that when an error is discovered, officials will deal with the situation in as reasonable a manner as possible.

Y

Conclusion

One of the goals underlying the Health Care Facilities Planning Act is that of insuring that hospitals are run as efficiently as possible without a decrease in the quality of medical treatment. As such, under the Act “unreasonable” expenditures made by hospitals are not to be reimbursed by hospital service corporations. In the present case Kessler acted in an entirely reasonable manner when incurring the two challenged cost items. I would therefore hold that the hospital is fully entitled to reimbursement.

Justice Schreiber joins in this opinion.

Mountain and Handler, JJ., concurring in the result.

For reversal and remandment — Chief Justice Hughes and Justices Mountain, Sullivan, Clieeord and Handler — 5.

For affirmance — Justices Pashman and Schreiber — 2.

Subsequent to the occurrence of the events here at issue, the Legislature passed an amendment to the Act. L. 1978, c. 83. Although the focus of the Act remains that of containing the costs of health care services, the amendment has modified both the criteria to be utilized in determining the permissibility of cost reimbursement as to particular items and the body charged with review of hospital costs. Henceforth, a new entity designated as the Hospital Rate Setting Commission will have primary responsibility for determining the rates at which health care facilities will be reimbursed by hospital service corporations. N. J. 8. A. 26:2H-4-.l. Further, the reasonableness of costs incurred by a hospital will be gauged in terms of a “preliminary cost base” and a “certified rate base.” N. J. S. A. 26:2H-2k, -2l; 26:2H-18; 26:2H-18.1. This amendment has prospective effect only and is therefore inapplicable to the facts of the present case.

The requirements that hospitals obtain certificates of need from the Commissioner of Health prior to the expansion of facilities and that they adopt a uniform system of accounting as a condition to licensing have not been changed by the recent amendment to the Act. See N. J. S. A. 26:2H-7, -8, -12.

Under the new amendment to- the Act, the standard of reasonableness is retained, although the method by which the reasonableness of particular expenditures is to be determined has been altered. See note 1, supra.

The newly established Hospital Rate Setting Commission, see note 1, stipra, has not as of yet promulgated guidelines to be utilized in determining the reasonableness of costs incurred by hospitals in future years.