# Opposition Brief — Trustees of the Welfare Trust Fund, Local Union No. 475 v. Dunston, New Jersey Commissioner of Health

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386019_1270%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1993
- **Citation:** 510 U.S. 944

## Text

Nos. 93-115, 93-193, 93-194, 93-210

ar

SEP
In The

Supreme Court of the Hnited States

&
October Term, 1993

NYSA-ILA WELFARE FUND, et al.,

Petitioners,
VS.

FRANCIS J. DUNSTON, in her capacity as NEW JERSEY
COMMISSIONER OF HEALTH, et al.,

Respondents.

On Petition for Writ of Certiorari to the United States Court
of Appeals for the Third Circuit*

BRIEF IN OPPOSITION FOR RESPONDENT NEW
JERSEY HOSPITAL ASSOCIATION AND THE
RESPONDENT HOSPITALS _

FRANK R. CIESLA GLENN A. CLARK
Counsel of Record Counsel of Record
ELIZABETH DUSANIWSKYJ RIKER, DANZIG, SCHERER,
GIORDANO, HALLERAN HYLAND & PERRETTI
& CIESLA Attorneys for Respondent
Attorneys for Respondents The Valley Hospital
New Jersey Hospital Association One Speedwell Avenue
and the Respondent Hospitals Other Headquarters Plaza II
Than The Valley Hospital Morristown, N.J. 07962-1981
125 Half Mile Road (201) 538-0800

P.O. Box 190
Middletown, N.J. 07748
(968) 741-3900

* Case captions for additional petitions are referenced on inside front cover

NEW JERSEY CARPENTERS WELFARE FUND, et al.,
Péiitioners,
VS.

FRANCES J. DUNSTON, in her capacity as NEW JERSEY
COMMISSIONER OF HEALTH, et al.,

Respondents.

TRUSTEES OF THE WELFARE TRUST FUND, LOCAL
UNION NO. 475, et al.,

Petitioners,
VS.

FRANCES J. DUNSTON, in her capacity as NEW JERSEY
COMMISSIONER OF HEALTH, et al.,

Respondents.

UNITED WIRE, METAL & MACHINE HEALTH AND
WELFARE FUND, et al.,

Petitioners,
VS.
MORRISTOWN MEMORIAL HOSPITAL, et ai.,

Respondents.

QUESTIONS PRESENTED FOR REVIEW

1. Whether the Court of Appeals correctly applied this
Court’s prior precedents in holding that a generally applicable
hospital rate setting statute which is not intended to regulate the
conduct of self-insured employee benefit plans, does not single out
such plans for special treatment, does not predicate rights and
obligations upon the existence of such plans and does not dictate or
restrict the manner in which such plans administer their affairs, is
not preempted by the Employee Retirement Income Security Act of
1974 (“ERISA”), 29 U.S.C. § 1001, et seq.

2. Whether the Court of Appeals correctly applied this
Court’s prior precedents in holding that a generally applicable
hospital rate setting statute which adjusts the benefits and burdens
of economic life to promote the common good, does not impact
upon plan participants in an inappropriate way and which
constitutes a continuation of New Jersey’s long standing regulation
of health care matters, does not cause a taking of property without
just compensation in violation of the Fifth Amendment of the
United States Constitution.

ii
PARTIES TO THE PROCEEDINGS

All parties to these proceedings appear in the caption of the
decision of the United States Court of Appeals for the Third Circuit,
which is contained in petitioners’ appendix at pages A-l through A-
5. Because of the large number of parties, the list will not be
reproduced herein. In accordance with Supreme Court Rule 29.1, a
list of the respondents’ parent corporations and subsidiary
corporations that are not wholly owned is reproduced in the
appendix to this brief.

iil

TABLE OF CONTENTS
Page
Questions Presented for Review .................... i
POTUCSIOUNE FIDCOCGINGS nce eect cc ascereseveues il
EE ope heck ced acek cases ae eaek eet lil
POE nce cece scccereteseasseswesnss iv
UMOOUOUT GE TO COGS 2 nc ccc ce recneeseveneseues l
A. Hospital Rate-Setting in New Jersey ........... l
L. WCOMRDOMORISE CONS . ww. cen ccvcens es 4
2. EMO MICGICOTO COS SMI 2.0... cs ceveesses 6
De PURO OO oi ev civ ne versa eee 6
ee errr rrr ere errr rr ee 6
Las; RIN aos bp s0h.0e chee suse SSUES 7
ROOSONS TOT LIORYIME TIE WI on nw cece ccckeseesenass 9
I. Review by this Court is not available because the
Court of Appeals has not decided a federal question
in a way that conflicts with applicable decisions of
RGIS SED Ea ed oe ee ee RNS eae wae 9

II. The Third Circuit’s decision is not in conflict with
the decision of another United States Court of
PR. Sak ce ec cascWsnhetss War eeaexeu vane 18

lv

Contents

Page

III. The Third Circuit’s disposition of the NYSA-ILA

Welfare Fund’s takings claim is in full conformity

with standards previously delineated by this Court.
DEE Gis ses cess veer ceed ese nwcdevess 24

IV. This case does not present an important question of
federal law which should be settled by this Court. 27
a Sa 30

TABLE OF CITATIONS

Aetna Life Insurance Co. v. Borges, 869 F.2d 142 (2nd Cir.
1989), cert. denied, 493 U.S. 811 (1989) ............ 20

Arkansas Blue Cross and Blue Shield v. St. Mary's

Hospital, 947 F.2d 1341 (8th Cir. 1991), cert. denied,
SL EED cp cn cs cccesssscevnncecvses bg be

Atlas Corp. v. United States, 895 F.2d 745 (Fed. Cir. 1990),
cert. denied, 498 U.S.811(1990) ................. 25

Boise Cascade Corporation v. Peterson, 939 F.2d 632 (8th
gs REE ia eee 22

Borland v. Bayonne Hospital, 72 N.J. 152 (1977), cert.
i i Tee POO E ED oc oa a shee k en cavasees 2

Bricklayers Local No. 1. v. Louisiana Health Insurance,
eich Mey Ut Re Oe. ) eee 22

»
Contents
Concrete Pipe and Products v. Construction Laborers
Pension Trust, 113 S. Ct. 2264 (1993) .............. 24,

Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211
LRPOE Su o5 Kao e tesa es} se icbas cas neaeabkd eek bes 24,

District of Columbia v. Greater Washington Board of
Trade, 113 S.Ct. 580(1992) ..............04.8. 9,10, 17,

Fort Halifax Packing Company, Inc. v. Coyne, 482 U.S. 1
(EPPO) 65 6 ce res cche es vtssencdesuvessateunes 9,

General Electric v. Department of Labor, 891 F.2d 25 (2d
OR OT TE OTE, eM ree noe:

Gilbert v. Burlington Industries, Inc., 765 F.2d 320 (2nd
OR |) eer eres rr re Pr eer pr rey

TEPER TT CT TET CTT TCT ETE ORT Te Te ee 10, 11,

Penn Central Transportation Company v. New York City,

oe | ree errr ry srry are

Rebaldo v. Cuomo, 749 F.2d 133 (2nd Cir. 1984) ..............
aba eed a kek aaa eae ek eae ae 18, 19, 20, 21, 22,

Shaw v. Delta Airlines, Inc., 463 U.S.85 (1983) ........ 9,10

VI

Contents
Page
Traveler's Insurance Company v. Cuomo, 813 F. Supp. 996
(S.D.N.Y. 1993), appeal pending, No. 93-7194 (2nd
MOC RRC NT etek ey ask ree are eee eee ed te nen 23
United Health Services, Inc. v. Upstate Administrative
Services, 573 N.Y.S. 2d 851 (Sup. Ct. Broome Cty.
Leh LET TL LTE OE TERT OTT ETT TT TET TTT ee 23

United States v. Sperry Corporation, 493 U.S.52 (1989) . 25

Webb’s Fabulous Pharmacies v. Beckwith, 449 U.S. 155

EE ae A DWN iw th Valeue wae CA e Ms Bed 6 eas 27
Statutes Cited:
Pr a WMO. og gn on occ tbe caveacebonnks a7
SP a oa ake a ghee ee bee ee kan 7
ee UIE cca awine cscs neue obwaces 7
Se ec IY coco. ios ke od 086 ea Saeeee4 7
ARS OR oe eee 6
Renee OCOD Scone eee ceveueeeleeneueesbube 4,12
ew Me es St, a a” re l

Pees CE EOE 06 ob a ha es back eae s Oa eo 3

vil

Contents

a OOM 6c kas drs Obes UES ehaN ee eee ee
Peas ED ise vaca acca Soka cas cau be Renee
Pid hs SE OLN OMED icc apie eeneoeeres
ee 7) a rane oe?
PRs ERR 645.4 680k creer alee eee
Piel ls DY Ws sos ok ee ek dee eee
ek ee 8 8 Perr errr eee et
eae Te 646s ba eeu eRin eae eee
Rules Cited:

eprom Cour ae 10. 110) «ci ccnccc vi vevncevsnes
supreme Court Rule 10.1(c) ..... 0. cc cence cc cenes
ge. ers :
Other Authorities Cited:

eek RS err ran er errr

H.R. Rep. No. 25, 98th Cong., Ist Sess. 145, reprinted in,
1993 U.S. Code Cong. & Ad. News 143 ............

nto

viii

Contents

ew vom 't)) 8) BPOPEPeeTeeerVreTTTTirerir rr
aw Yon + | Oh POOR PePEREPeTTE rer Tree Terr
ee Ro 2) ws | | ererrere Terre Cree reer Te

eee wa || ON POPOL TRE L Teer Teer Te Tere

ee Some cS | rere err rr reer rer rere
Ped Ke, BGPP) sen cn een cece eassastsatestaes

APPENDIX

Appendix A— Corporate Designation of Respondents ..

Appendix B — Statutes Referenced .................

‘i

l
STATEMENT OF THE CASE

This case involves the issue of whether certain components of
New Jersey’s comprehensive statutory scheme governing hospital
rate setting are preempted by ERISA, 29 U.S.C. § 1001, et seq., or
create an unlawful taking of property without just compensation in
violation of the Fifth Amendment to the United States
Constitution.

A. Hospital Rate-Setting in New Jersey

New Jersey’s Health Care Facilities Planning Act, N.J.S.A.
26:2H-1, et seq. (the “Act”) was enacted by the New Jersey
Legislature in 1971.' The declared public policy underlying the
Act was:

that hospital and related health care 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 (1992).? (Respondents’ Appendix, infra, at A-
8). In order to attain cost-containment and efficiency, the Act
authorized the Commissioner of the New Jersey Department of

1. On Novémber 30, 1992, the Legislature enacted the Health Care
Reform Act of 1992, L. 1992, ch. 160. As a result of this legislation, the State of
New Jersey no longer regulates the establishment of hospital rates. While the
specific statutory provisions challenged herein have been superseded,
petitioners seek restitution of monies paid while those provisions were in effect,
and many hospitals have not been paid in full for services rendered pending the
final outcome of this litigation. As a result, the Court of Appeals determined that
this case was not moot.

2. Pertinent sections of the Act have been reproduced in respondents’
appendix.

2

Health (the “Commissioner”) to regulate certain costs of health
care services, including the establishment of hospital rates.
N.J.S.A. 26:2H-5, 26:2H-18, and 26:2H-18.1 (1992) (Resp. A-15-
23).

As originally enacted in 1971, the Act authorized the
Commissioner to set hospital rates only for individuals whose care
was paid for by Blue Cross and certain governmental programs,
such as Medicaid. L. 1971, c. 136, § 18. (Resp. A-23-24). The rates
were based on the actual cost of services provided by hospitals, a
method which furnished only limited incentives to improve
efficiencies in hospital operation. Under the 1971 Act, the state had
no authority over the rates that hospitals charged patients who had
private insurance coverage or the uninsured. Consequently, these
groups sometimes paid higher rates for the same services. See
generally Borland v. Bayonne Hospital, 72 N.J. 152, 159 (1977),
cert. denied, 434 U.S. 817 (1977).

In order to achieve greater control over the increasing cost of
hospital services, reduce the disparity in rates charged to patients
whose care was fully or partially paid for by different payors, and
alleviate the financial burden on hospitals serving indigent
patients, the New Jersey Legislature amended the Act by
establishing a new system of hospital rate-setting controlling
charges to all patients receiving hospital services. L. 1978, c. 83.’
Unlike the former system, Chapter 83 applied to all payors, not just
to individuals whose care was paid for by Blue Cross and
Medicaid. Chapter 83 contained an express recital that cost
containment was a stated objective of the Act. N.J.S.A. 26:2H-1
(1992). (Resp. A-8). The statute also had an express goal of
promoting the fiscal solvency of hospitals. Jd. Administration of
the new rate-setting system was delegated to the New Jersey
Department of Health (“DOH”).

3. These amendments have become known as “Chapter 83”.

The rate-setting system set a prospective rate of
reimbursement, in advance of actual treatment, which was a blend
of the statewide mean/standard costs developed by looking at the
resources consumed by the industry as a whole and the hospital-
specific resources and costs consumed in treating particular
illnesses, categorized as diagnosis related groups (“DRG”).
N.J.A.C. 8:31B-5.1. Each DRG reflected a wide variety of both
direct and indirect patient care costs. N.J.A.C. 8:31B-3.4. These
costs were derived from actual costs incurred by all acute care
hospitals during a particular base year, as updated for inflation and
certain other factors. N.J.A.C. 8:31B-2.5.‘ The quantification of
these costs into certain “financial elements” were used to develop
each hospital’s “preliminary cost base” and schedule of rates.
N.J.A.C. 8:31B-3.16.

The “preliminary cost base” was defined as that portion of a
hospital’s actual, current costs which may reasonably be required
to be reimbursed to a properly utilized hospital for the efficient and
effective delivery of appropriate and necessary health care services
of high quality required by such hospital’s mix of patients.
N.J.S.A. 26:2H-2.k (1992). (Resp. A-11). Each hospital received a
blend of its own costs and the mean/standard costs developed by
looking at the hospital industry as a whole. N.J.A.C. 8:31B-3.5.
Direct patient care costs in excess of the blend of the hospital’s own
costs and the mean/standard costs were “disincentives” which
were excluded from a hospital’s rates. Where, however, a
hospital’s costs were below the standard, the hospital nevertheless

4. In employing a DRG-based methodology, New Jersey's hospital rate-
setting system was similar to the hospital reimbursement system employed by
the Medicare program. Indeed, Medicare’s DRG-based methodology was
developed as a result of a review of demonstration projects employing this
methodology undertaken by the States of New Jersey and New York under the
authority of the Secretary of the U.S. Department of Health and Human Services.
See H.R. Rep. No. 25, 98th Cong., Ist Sess. 145, reprinted in 1983 U.S. Code
Cong. & Ad. News 143, 364.

4

received a proportion of the standard costs, thereby gaining an
increase or “incentive” in its rates. N.J.A.C. 8:31B-3.23(a).

The prospective nature of the rate-setting system and its
reliance on illness-related diagnosis related groups precluded the
establishment of rates that relied on a particular individual’s length
of stay, treatment and consumption of resources. For example, if a
patient was admitted for an appendectomy, a hospital could only
charge the patient the amount approved for the DRG classification
of appendectomy, and not the actual cost of all services provided to
the patient. Thus, the amount approved for a DRG classification
could actually be lower or higher than the actual cost of the
services that the patient received.

Each hospital’s schedule of rates, defined as the amount which
each hospital was permitted to charge per DRG, was approved by
New Jersey’s Hospital Rate Setting Commission (“HRSC”), at a
level sufficient to generate the amount of revenue required to cover
the revenue requirements of the preliminary cost base.

1. Uncompensated Care

Among the costs of doing business incurred by hospitals
operating within New Jersey are costs associated with the
provision of services to individuals who are unable to pay. These
costs are known as uncompensated care costs, incurred as a result
of a statutory requirement which specified that “access to quality
health care shall not be denied to residents of the state because of
their inability to pay for the care.” L. 1991, c. 183, § 1. (Resp. A-
24-25). Federal law similarly requires treatment of such patients.
Under 42 U.S.C. § 1395dd, hospitals must treat and stabilize
individuals in need of emergency care and women in active labor
regardless of whether or not they can pay. In addition, a state
licensure standard, N.J.A.C. 8:43G-5.2(c), specifies that hospitals
“shall not deny admission to patients on the basis of their inability

5

to pay”, while N.J.A.C. 8:43G-4.1(a)2 requires every New Jersey
hospital patient be accorded the right to “treatment and medical
services without discrimination based on race, age . . . ability to
pay, or source of payment.”

When Chapter 83 was originally enacted, uncompensated care
costs which a particular hospital incurred were borne entirely by
that particular hospital’s patients. Each hospital factored in
uncompensated care costs as a component of its rates in order to
meet this cost of doing business. As a result, hospitals serving a
large population of indigent patients were forced to charge
significantly higher rates than hospitals providing less
uncompensated care. The provision of a high proportion of
uncompensated care threatened the financial stability of hospitals
with high uncompensated care case loads.

New Jersey’s hospital reimbursement system sought to
alleviate the financial burdens imposed on hospitals through their
provision of unreimbursed care by requiring the cost of providing
such care to be considered in hospital rates charged to all patients.
Thus, N.J.S.A. 26:2H-18.d expressly provided that the reasonable
costs of hospital services to indigent patients and bad debts were
mandatory financial elements of a hospital’s preliminary cost base
which were to be included in the rates charged to all non-federal
payors. (Resp. A-20).

Monies utilized to reimburse hospitals for the provision of
uncompensated care were collected through the imposition of a
uniform charge which was added to each patient’s hospital bill.
The uniform charge amounts collected from all patients were then
remitted by the hospitals to a Trust Fund. All monies remitted to the
Fund were appropriated to the state Medicaid agency, which would
then reimburse hospitals for the amount of uncompensated care
that they actually provided.

2. The Medicare Cost Shift

Under N.J.S.A. 26:2H-18.1.c. (1992) (Resp. A-22), hospital
rates were also permitted to account for adjustments that resulted
from statutes and regulations affecting the delivery of health care.
Such adjustments were required to take into account the
effectiveness and efficiency of the health care delivery system as a
whole. The federal Medicare program does not pay the same rates
as were provided for under the New Jersey DRG reimbursement
system, since Medicare payment rates are established under a
separate federal statutory scheme. See 42 U.S.C. § 1395c et seq.
Accordingly, DOH created adjustments in the rates paid by non-
Medicare patients to account for the shortfall between what
Medicare would pay and the New Jersey DRG rate. N.J.A.C.
8:31B-3.73. This was known as the “Medicare cost shift.”

3. Payor Differentials

The HRSC was also permitted to grant differentials in
payment rates to a payor or class of payors. N.J.S.A. 26:2H-18.b
(1992) (Resp. A-18-19). If the HRSC granted a payor differential,
it had to be supported by evidence of “quantifiable economic
benefits rendered to the institution or to the health care delivery
system taken as a whole.” Under the authority of this provision, a
differential from the DRG rate was accorded to patients who had
health benefits coverage through certain payors, such as Blue
Cross and Blue Shield, as a result of the financial benefits to
society which are provided by the open enrollment programs
offered by such payors. The differentials were allocated among
patients covered by all payors other than Medicare so that a
hospital received from all payors net revenue equal to its
preliminary cost base.

B. ERISA Preemption

The Employee Retirement Income Security Act, popularly

7

known as ERISA, 29 U.S.C. § 1001, et seg., was enacted in 1974.
The subject of the ERISA statute is pension benefit plans and
employee benefit plans. ERISA contains a preemption clause
which provides that ERISA “shall supersede any and all state laws
insofar as they may now or hereafter relate to any employee benefit
plan” which is covered by ERISA. 29 U.S.C. § 1144(a).5 The
statute defines the term “state” to include any political subdivision,
agency or instrumentality of a state, while state law was defined to
include all laws, decisions, rules or regulations or other state action
having the effect of law. 29 U.S.C. §§ 1144(c)(1), 1144(c)(2).

C. Decisions Below

Commencing in 1990 and continuing through the first half of
1992, over a dozen self-insured employee benefit plans (“the
Plans”) and a number of individual Plan participants commenced a
series of civil actions (later consolidated) against the State of New
Jersey and most of the state’s acute care hospitals seeking an
injunction against the application to them of New Jersey’s hospital
rate setting statute. The Plans and their participants alleged that
certain provisions of the statutes and regulations applicable to
hospital rate setting were preempted by ERISA, denied the Plans
and their participants due process and equal protection under the
New Jersey and United States Constitutions, violated the Fifth
Amendment of the United States Constitution by creating a taking
of property without just compensation, and created an unlawful tax
and delegation of taxing authority. In particular, the Plans
challenged the inclusion in hospital rates of: (1) the
uncompensated care add-on; (2) the Medicare cost shift; and (3)
payor differentials.

On May 27, 1992, the District Court issued an Opinion and
Order which provided for the entry of a permanent injunction

5. This provision is also referred to as Section 514(a).

against the state defendants. (Pet. A-64-95). The District Court
enjoined enforcement of New Jersey’s hospital rate setting statute
and regulations to the extent that they allowed for the inclusion in
hospital rates charged to ERISA-covered plan participants of costs
attributable to the provision of uncompensated care, the Medicare
cost shift and payor differentials. While the court acknowledged
that no court had extended ERISA preemption to the extent of its
opinion, the court found that New Jersey’s hospital rate setting
statute “related to” ERISA plans, even though the statute did “not
mention benefit plans directly and [did] not regulate the terms and
conditions of any such plans explicitly”. (Pet. A-80). The court
rejected the plans’ constitutional claims. (Pet.A-85-92). The
injunction was stayed pending appeal. (Pet. A-19).

On May 14, 1993, the Court of Appeals reversed the decision
of the District Court. (Pet. A-1-61). The Court of Appeals
concluded that New Jersey’s hospital rate setting law constituted a
generally applicable law which (1) is not intended to regulate the
affairs of ERISA plans; (2) neither singles out such plans for
special treatment nor predicates rights or obligations on the
existence of an ERISA plan; and (3) does not have the effect of
either dictating or restricting the manner in which ERISA plans
structure or conduct their affairs or impairing their ability to
operate simultaneously in more than one state. The Court of
Appeals expressed an unwillingness “to attribute to Congress and
Section 514 an intent to frustrate the efforts of the State, under its
police power, to regulate health care costs.” The court concluded
that it had found no case that had held a law fitting the
characteristics of the New Jersey hospital rate setting statute to be
preempted by ERISA, and it would decline to so hold. (Pet. A-30).

The Third Circuit also soundly rejected the Plans’ claims that
the challenged costs did not constitute an unlawful taking of
property without just compensation and affirmed the District
Court’s summary judgment for the defendants as to the Plans’

“
constitutional claims.® (Pet. A-22-23).

REASONS FOR DENYING THE WRIT
I.

REVIEW BY THIS COURT IS NOT AVAILABLE
BECAUSE THE COURT OF APPEALS HAS NOT
DECIDED A FEDERAL QUESTION IN A WAY THAT
CONFLICTS WITH APPLICABLE DECISIONS OF THIS
COURT.

Under Rule 10.1(c) of the Rules of the Supreme Court, a
Petition for a Writ of Certiorari may be granted if a United States
Court of Appeals has decided a federal question in a way that
conflicts with applicable decisions of this Court. No such conflict
has occurred as a result of the Third Circuit’s decision in United
Wire. Petitioners’ efforts to convince this Court otherwise
misconstrues the Court’s earlier, consistent holdings that only state
statutes which impact on ERISA benefit plans, not plan benefits or
plan beneficiaries, are subject to preemption by ERISA.

Under ERISA preemption analysis, a law “relates to” an
employee benefit plan if it has a connection with or reference to
such a plan. Shaw v. Delta Airlines, Inc., 463 U.S. 85, 96-97 (1983).
A state law that either directly or indirectly refers to, or otherwise
attempts to or succeeds in regulating or interfering in the
administration of employee benefit plans, relates to ERISA and is
preempted. Fort Halifax Packing Company, Inc. v. Coyne, 482
U.S. 1, 7-8 (1987). As recently as last term, however, this Court
reiterated that preemption does not occur if a state law has only a
“tenuous, remote or peripheral connection with covered plans, . . .
as is the case with many laws of general applicability.” District of

6. Petitioners’ equal protection, due process and tax law claims were
neither raised nor considered on appeal.

10

Columbia v. Greater Washington Board of Trade, 113 S. Ct. 580,
583 n. 1 (1992). See also Ingersoll- Rand v. McClendon, 498 U.S.
133, 139 (1990); Shaw, 463 U.S. at 100, n. 21.

Under the plain language of the statute and this Court’s
precedents, there must be a nexus between the ERISA-covered
plan and the state statute, regulation or cause of action being
challenged. In the absence of such a nexus, there can be no finding
of ERISA preemption. For example, in Fort Halifax, this Court
declined to find preemption of a Maine statute requiring employers
to provide a one-time severance payment to employees in the event
of a plant closing. As the Court noted, a crucial feature of ERISA’s
preemption provision is its deliberate use of the term “employee
benefit plan.” While the appellants in Fort Halifax argued that any
state law pertaining to an employee benefit listed in ERISA
necessarily regulates an employee benefit plan, the Court rejected
this distinction, finding the choice of words employed by Congress
to be deliberate:

Nothing in our case law, however, supports
appellant’s position that the word “plan”
should in effect be read out of the statute . . .
The words “benefit” and “plan” are used
separately throughout ERISA, and nowhere in
the statute are they treated as the equivalent of
one another. Given the basic difference
between a “benefit” and a “plan”, Congress’
choice of language is significant in its
preemption of only the latter.

Fort Halifax, 482 U.S. at 8. Similarly, in Mackey v. Lanier
Collection Agency, 486 U.S. 825 (1988), this Court refused to find
George’s general garnishment statute to be preempted, even
though the statute at issue prevented plan participants from
receiving their benefits and even though complying with
garnishment orders might burden the administration of the plan.

11

In Ingersoll-Rand Company v. McClendon, 498 U.S. 133
(1990), this Court considered a state cause of action which allowed
former employees to bring wrongful discharge suits based upon the
fact that the alleged reason for discharge was a desire not to make
payments to the employee out of an employee benefit plan.
Although the Court concluded that the state cause of action was
preempted by ERISA, the Court nevertheless reiterated that there
are limits to ERISA preemption. The Court reaffirmed its earlier
determination in Fort Halifax that under the plain language of the
ERISA statute, only state laws that relate to benefit plans are
preempted. /ngersoll-Rand, 498 U.S. at 139. The Court also noted
that under its decision in Mackey, the fact that collection might
burden the administration of a plan did not, by itself, compel
preemption. In finding that the state cause of action considered in
Ingersoll-Rand was preempted by ERISA, the Court drew the
following distinction between laws that are preemptec by ERISA
and those that are not:

We are not dealing here with a generally
applicable statute that makes no reference to,
or indeed functions irrespective of, the
existence of an ERISA plan, nor is the cost of
defending this lawsuit a mere administrative
burden. Here, the existence of a pension plan is
a critical factor in establishing liability under
the state’s wrongful discharge law.

Id. at 139-140. Thus, the Court did not retreat from its earlier
holdings that ERISA preemption is not without limits and that laws
which operate irrespective of the existence of ERISA plans can
survive a preemption challenge.

The Third Circuit’s decision is entirely consistent with this
Court’s prior decisions regarding the scope of ERISA preemption.
The court analyzed the impact that New Jersey’s rate setting statute
had on ERISA plans and concluded that the requisite nexus

12

between the challenged statute and the plans was lacking in this
case. This was entirely appropriate, since all that New Jersey’s
hospital rate setting scheme did was to establish a methodology of
setting hospital rates which calculated the price charged to hospital
patients for the services that they received irrespective of whether
or not they possessed health benefits coverage.’ As the Third
Circuit correctly found, New Jersey’s hospital rate setting statute
never dictated what an employee benefit plan must pay, and did not
require ERISA plans to cover a plan participant’s total hospital
costs. Under the statutory and regulatory scheme, plans remained
free to set their benefit levels without any reference to the state-
regulated DRG rate, and were free to pay whatever portion of an
individual’s hospital bill they deemed appropriate.* While the rate-
setting system did impact upon the price for hospital services paid
by plan participants, the system did not impose any requirements
on the plan itself.

Petitioners argue that there is a direct impact on the plan
because of the economic impact that payment of the challenged

7. Even individuals who were uninsured had amounts attributable to
uncompensated care, the Medicare cost shift and payor differentials included in
the rates they were charged by hospitals.

8. The provision of uncompensated care originates in part from federal
requirements specifying that hospitals must provide indigent care. 42 U.S.C.
§ 1395dd mandates hospitals to treat and stabilize individuals experiencing
emergency conditions (including women in active labor) irrespective of their
ability to pay. In addition, regulations under the federal Hill-Burton program
preclude hospitals receiving Hill-Burton funding from denying emergency
services to persons residing in the facility’s service area due to an inability to
pay. See 42 C.F.R. § 124.603. The uncompensated care add-on represented a
mechanism developed by the state to compensate hospitals for the costs of
providing these services. It would be inconsistent to find that one federal law
would preclude hospitals from recovering revenues needed to comply with the
requirement that they provide uncompensated care at the same time that another
federal law mandates that hospitals provide such care.

13

add-ons had on the plan and plan participants. This overlooks the
fact that this Court has never found a statute to be preempted
simply because it increases the price paid by plan participants for a
particular commodity.®

Petitioners’ analysis reflects a fundamental misunderstanding
of the mechanics of setting a price for hospital services. The cost of
providing uncompensated care and of discounts provided to
certain payors is no different from any other type of cost that
hospitals incur. As the Third Circuit accurately observed, a state’s
imposition of this cost of doing business is:

No different in kind, however, from any state
regulation that increases the cost of goods or
services that hospitals consume and pass on in
hospital costs, i.e. utility costs, the wages of its
employees, waste disposal costs, etc.

(Pet. A-26). In this regard, hospitals function just like any other
business, where prices established include not only operating
expenses but sufficient markup to cover theft, spoilage and
discounts provided to wholesale customers or during promotional
events. The payment of these costs does not constitute a payment
for the benefit of others, as petitioners allege, but merely
represents reimbursement to the hospitals to cover their costs of
doing business.

The fact that compliance with a state statute might indirectly
increase plan costs was held not to be a sufficient ground for

9. Petitioners assert that New Jersey’s statute thwarted the express
purpose of their plans because many plans have a purpose of paying 100% of a
participant's hospital bill. While this is a laudable goal, the State cannot be
required to set hospital rates at a level that will permit third party payors to cover
the full amount of a patient's bill. The issue raised by petitioners is an economic
issue, not an ERISA preemption issue.

14

preemption in this Court’s earlier decision in Mackey, where a
Georgia garnishment law was found not to be preempted by ERISA
despite the fact that “substantial administrative burdens and costs”
were incurred by the plans in complying the statute. Mackey, 486
U.S. at 831-32. Given the result in Mackey, the Third Circuit’s
conclusion that New Jersey’s statute is not preempted despite the
fact that it may increase the charges billed to ERISA plan
participants for hospital services is entirely consistent with this
Court’s prior decisions in this area.

No hospital bill purports to represent the actual cost of treating
a particular individual. There are many types of costs incurred by
hospitals that must be passed on to their patients which do not
necessarily relate to the specific resources that the particular
patient consumes. For example, hospital rates include amounts
attributable to capital costs incurred by hospitals for improvements
to a hospital facility. If a hospital constructs a pediatrics wing, it
can include some of the costs attributable to this construction and
the debt service payments associated with it in its rates. Thus, a 45
year old hospitalized for knee surgery may be paying a small
portion of the costs attributable to the construction of a new
pediatrics wing in his rates, even though this individual would not
receive any services in that wing. The Third Circuit concluded that
it is impossible for hospitals to set their prices in such a way as to
only provide a bill for the specific services rendered to an
individual patient. (Pet.A-31). This conclusion does not conflict
with any prior decision by this Court. Nothing in this Court’s
earlier decisions can be read as standing for the proposition that
ERISA plan participants may only be required to pay those
components of a price which relate specifically to identifiable
goods and services actually consumed by the plan participant.

The petitioners candidly admit that they do not challenge the
underlying DRG reimbursement feature of New Jersey’s hospital
reimbursement statute, an admission that is fraught with an
inherent and obvious contradiction. Under the DRG system, a

15

price was set for a particular type of service irrespective of the
length of time that the patient stays in the hospital. Thus, a patient
hospitalized for an appendectomy would receive the same bill
irrespective of whether the patient stayed in the hospital 2, 4 or 6
days, absent any complicating factors which would have justified
an additional payment. Because this system is based on an average
cost per case, and not the actual cost incurred by a particular
patient, utilization of a DRG system means that all patients will
have costs included in their hospital rates which are attributable to
others. Indeed, participants in the petitioners’ plans directly
benefited from this system of averages if they stayed in the hospital
longer than the average period of time for a particular DRG, since
the DRG would be calculated based upon a review of the costs
associated with the average number of days of hospitalization for
that illness. The very foundation of a DRG-based system is the
provision of positive and negative incentives for hospitals to
reduce costs. Petitioners cannot be permitted to selectively retain
the benefits of the state’s efforts to make health care affordable,
while avoiding any perceived burdens in participating in the
system. In either case, the State’s pricing structure affects the
relationship between the hospital and the plan participant, not the
relationship between the hospital and the plan.

Petitioners assert that they are forced to subject their plan to
conflicting forms of administration and that they are forced to
abide by inconsistent regulations. However, the record is devoid of
any evidence that hospital rates are uniform among all other states,
and that New Jersey is somehow unique. The cause of the
administrative difficulties and inconsistencies referenced by
petitioners does not flow from the peculiar features of New
Jersey’s hospital rate setting system, but the fact that hospital
prices can vary substantially among different states, or even within
different geographic regions of a particular state. Hospital rates
will, of necessity, be affected by such varying factors as
differences in wage costs, as well as differences in the price of
purchasing the commodities used by hospitals. As the Third Circuit

16

noted, the petitioners would always be subject to these inherent
inconsistencies, regardless of the nature of the reimbursement
system utilized or the components contained therein.

The petitioners’ flawed analysis also overlooks the fact that
the challenged components of the DRG rate are components of
hospital rates in all states, not just New Jersey. Several other states
which regulate hospital rate-setting include the cost of providing
uncompensated care in the rates. See, e.g., N.Y.P.H.L. § 2807-c.
The Third Circuit’s conclusion that state regulation of hospital
pricing is not likely to make interstate operation of an ERISA plan
more difficult is entirely consistent with this Court’s prior
decisions. This Court has never held that either ERISA-covered
plans or their participants must be permitted to pay the same price
for a particular service in different states, even though there may be
legitimate reasons for prices varying from one state to another.
Hospitals which set their own rates in a non-regulated setting
include costs attributable to charity care, bad debt, Medicare
shortfalls and payor discounts in their rates as costs of doing
business. Indeed, the District Court acknowledged this by stating
that “Even if New Jersey did not enact Chapter 83, hospitals would
still charge plaintiffs for uncompensated care. . . so that they could
comply with their statutory obligations to provide hospital care for
everyone regardless of that person’s ability to pay.” (Pet.A-92). It
defies logic to suggest that costs which would normally be
included in hospital charges in the absence of state regulation
cannot be included in the rates charged to ERISA plan participants
if the same costs are established pursuant to state statute. To find
New Jersey’s system to be preempted by ERISA would raise a
serious question regarding the ability of a state to take any action
regarding regulation of hospital rates, since the mere action of
setting rates which will be paid by participants in ERISA-covered
plans could arguably cause such plans to structure benefits in a
particular manner.

Petitioners assert that because the statute includes a reference

;
3

17

to “union welfare plan identification cards”, the statute expressly
references ERISA plans and is therefore preempted. The reference
in question simply provides that a hospital shall not be reimbursed
for the cost of providing uncompensated care unless it interviews
each patient admitted to determine whether the patient is covered
by health insurance, as documented by such items as “a union
welfare plan identification card or claim form.” N.J.S.A. 26:2H-
18.31. All that the statute does is require verification of whether
third party insurance is available to pay all or part of a patient’s bill.
It does not regulate the amount of coverage or set the rate that must
be paid, and does not impose any additional burdens upon plan
administrators. In short, this provision causes no impact on the
plan at all, whether direct or indirect. Thus, as the Third Circuit
correctly found, this reference should be regarded as without legal
consequence for preemption purposes, and is_ therefore
distinguishable from the references contained in the statutes
analyzed by this Court in its FMC and District of Columbia
decisions.'°

Petitioners also contend that their participants derived no
benefit from the existence of the challenged components in New
Jersey’s hospital rates and that their participants bore a
disproportionate share of the burden in covering these costs. It is
not true that plan participants derived no benefit from inclusion of
these costs in hospital rates. Without coverage of these legitimate
business costs, hospitals could not survive. Therefore, plan
participants did derive a direct benefit from these costs because
payment of these costs helped to provide hospitals with sufficient
cash flow to keep their doors open.

New Jersey’s hospital rate setting statute did place a large

10. The references to self-funded union plans in the Department of
Health's Patient Appeal Policy also should not result in a finding of preemption.
The Patient Appeal Policy does not regulate the plans or the rates they are
charged, or cause any impact on the plan administrator.

18

Share of the burden of paying for uncompensated care upon
individuals who have the resources to pay for such care. However,
while the fact that individuals who pay for hospital services bear a
larger share of the overall cost of providing such services may be
unfair or debatable from a social policy point of view, this does not
give rise to a violation of ERISA. Plainly, ERISA does not address
the rights of plan participants as consumers. As this Court has
repeatedly held, the only impact the ERISA preemption provision
is concerned with is the impact that a statute or a state cause of
action has on the plan itself. The Third Circuit’s decision is,
therefore, in full accord with this Court’s prior decisions
respecting ERISA preemption, since the Third Circuit concluded
that any impact on the plan itself, a necessary prerequisite to a
finding of ERISA preemption, was absent here.

II.

THE THIRD CIRUIT’S DECISION IS NOT IN
CONFLICT WITH THE DECISION OF ANOTHER
UNITED STATES COURT OF APPEALS.

Under Supreme Court Rule 10.1(a), this Court may exercise
its discretion and grant a Petition for a Writ of Certiorari when a
United States Court of Appeals has rendered a decision in conflict
with the decision of another United States Court of Appeals on the
same matter. The requisite conflict between the Circuits is lacking
in this case. The only Court of Appeals decision to address an issue
similar to those present in this case was Rebaldo v. Cuomo, 749
F.2d 133 (2nd Cir. 1984), a case whose reasoning was followed by
the Third Circuit in reaching its decision in United Wire. While
petitioners may seek to characterize other cases as being in conflict
with the decision of the Third Circuit, these cases are either trial
court decisions or deal with different issues and, therefore, do not
create a direct conflict.

Rebaldo is the only Court of Appeals decision which deals

19

with the issue of ERISA preemption in the context of a review of a
hospital rate setting statute. The statute at issue in Rebaldo
prohibited hospitals from establishing inpatient charges for self-
insured employee benefit plans that were different than the charges
authorized by a state statute. The Second Circuit sustained the New
York statute against an ERISA preemption challenge. The Second
Circuit's decision in Rebaldo was premised upon two findings: (1)
that a state statute cannot be found to be preempted by ERISA
unless it “purports to regulate the terms and conditions of an
employee benefit plan” and (2) that a state statute which
constitutes a generally applicable exercise of a state’s police
powers should not be found preempted by ERISA if it only affects a
plan in a tenuous, peripheral or remote manner. The Third Circuit
followed the second prong of the Rebaldo court’s analysis. Thus,
there is uniformity among the circuits with respect to the issue of
whether a generally applicable hospital rate-setting statute should
be viewed as preempted by ERISA.

Petitioners attempt to gloss over the fact that no conflict
between the circuits is present here by arguing that the decision in
Rebaldo has been effectively overruled by subsequent decisions of
this Court and other lower courts. Rebaldo and United Wire are the
only circuit court decisions dealing specifically with the issue of
whether a generally applicable hospital rate setting statute is
preempted by ERISA. Even if it were assumed for the sake of
argument that Rebaldo was no longer good law, all that this would
mean is that United Wire would stand on its own as the only Court
of Appeals decision dealing with this particular issue. Thus, the
requisite conflict between the circuits would still be lacking.

Moreover, the portion of the Rebaldo decision upon which the
Third Circuit relied has not been overruled. The Rebaldo court’s
first rationale for finding no preemption has been narrowed by this
Court’s decision in /ngersoll-Rand, which held that a state cause of
action which was predicated on the existence of an employee
benefit plan could be preempted even if it did not purport to

20

regulate the terms and conditions of ERISA plans. However, the
Supreme Court has not overruled the second and more important
prong of the Second Circuit’s analysis in Rebaldo. The state cause
of action at issue in Ingersoll-Rand was not a generally applicable
law which functioned irrespective of the existence of an ERISA
plan. Indeed, both in /ngersoll-Rand and the more recent District
of Columbia decision, this Court was careful to make an express
note of the fact that it was not dealing with a generally applicable
statute which affected a plan in a “tenuous, remote or peripheral”
manner. Thus, Rebaldo has not been overruled by subsequent
decisions of this Court.

The portion of the Rebaldo holding relied on by the Third
Circuit has also never been overruled by the Second Circuit. In
Aetna Life Insurance Company v. Borges, 869 F.2d 142 (2nd Cir.
1989), cert. denied, 493 U.S. 811 (1989), the Second Circuit
reaffirmed this portion of its Rebaldo holding. While there is a
footnote in the Second Circuit’s decision in Smith v. Dunham- Bush
Inc., 959 F.2d 6, 9 n.3 (2nd Cir. 1992) referencing Rebaldo, the
Court noted only that Rebaldo could no longer be invoked for the
proposition that a state law is preempted “only if it relates to and
purports to regulate an ERISA plan.” (Emphasis in original).
However, the court in Smith never addressed Rebaldo’s holding
that a generally applicable state law cannot be preempted if its
relationship with an ERISA plan is too tenuous, remote or
peripheral to satisfy the “relate to” test.

Petitioners attempt to create a conflict between the circuits
where none exist by arguing that several courts have found state
laws to be preempted even where they can be categorized as
generally applicable state laws involving an exercise of the state’s
police powers. These cases do not involve an exercise of the state’s
police power to regulate health care matters, and while the statutes
analyzed in these other cases were generally applicable exercises
of the state’s police power, they had a concrete and direct impact on
the plan. Thus, the decisions in these cases have not overruled the

21

portion of the Rebaldo decision relied on by the Third Circuit, and
do not create a conflict either with Rebaido or with the Third
Circuit’s decision in United Wire.

For example, in General Electric v. Department of Labor, 891
F.2d 25 (2d Cir. 1989), the Second Circuit held that a state law
which required an employer to either bring the cost of its
prescribed benefits into equivalence with the cost of local
prevailing benefits or to pay the additional cost directly to
employees was preempted by ERISA. However, while a labor law
could be characterized as a generally applicable exercise of the
State’s police powers, the majority opinion in General Electric did
not analyze the statute’s status as such a law. Moreover, the law’s
affect on the plan was neither tenuous nor remote, because the plan
was specifically told that it either had to pay benefits or maintain
detailed records showing that another form of equivalent
compensation was provided. In contrast, New Jersey’s hospital
rate setting system neither required plans to provide a particular
level of benefits nor required a plan to establish how its
participants’ health care costs are otherwise being paid for.

In Arkansas Blue Cross and Blue Shield v. St. Mary’s Hospital,
947 F.2d 1341 (8th Cir. 1991), cert. denied, 112 S. Ct. 2305 (1992),
the Eighth Circuit held that an Arkansas statute that allowed a plan
participant to assign benefits to health care providers, thus forcing
plans to honor all assignments of benefits made by plan
participants, was preempted by ERISA. While the court stated in
its opinion that a state law’s relationship to traditional state
authority was not relevant to the question of whether a state statute
relates to ERISA plans, the court went on to determine that this
factor “is a policy consideration useful in deciding borderline
questions of ERISA preemption,” and analyzed the state statute at
issue by reviewing the state’s interest in enforcing it. Arkansas
Blue Cross, 947 F.2d at 1350. Moreover, unlike the statute at issue
in this case, the statute analyzed in Arkansas Blue Cross directed

22

plan administrators where benefits could be paid. This was a direct
requirement imposed on the plans, and thus clearly could not be
said to impact plans in a tenuous or remote manner.

The Eighth Circuit relied on Gilbert v. Burlington Industries,
Inc., 765 F.2d 320, 327 (2nd Cir. 1985) and Boise Cascade
Corporation v. Peterson, 939 F.2d 632 (8th Cir. 1991) as authority
for its conclusion in the Arkansas Blue Cross case regarding
ERISA preemption. In both of these cases, however, the courts
found that in order to avoid preemption, a statute representing the
exercise of a traditional police power must also affect a plan in only
a tenuous, remote or peripheral manner. Gilbert, 765 F.2d at 327,
Boise Cascade, 939 F.2d at 639. This is the same reasoning utilized
by the Rebaldo court. These cases similarly cannot be relied on as
authority for the proposition that a conflict in the circuits exists
regarding Rebaldo’s enduring premise."!

Petitioners also rely on several lower court decisions where a
generally applicable hospital rate setting law was found preempted
and argue that a conflict is created by the existence of these
decisions. First of all, the existence of these cases does not warrant
further review by this Court, since this Court’s rules do not permit
the Court to exercise its discretion and grant a Petition for a Writ of
Certiorari when there is a conflict between a Court of Appeals anda

11. Petitioners also reference Bricklayers Local No. 1 v. Louisiana Health
Insurance, 771 F. Supp. 771 (S.D. La. 1991), a District Court case. There, a
Louisiana statute required plans to pay a $2 service charge as part of an
individual's hospital bill. The funds were utilized to fund a catastrophic health
insurance program. The Louisiana statute made the patient’s insurance
arrangement directly responsible for payment of the service charges and further
required that payment of these charges had to be a “mandated benefit covered by
an individual's insurance plan.” The District Court decided that the statute was
preempted. The Louisiana statute did not affect the plans in a tenuous or
peripheral manner, since the service charge was levied directly on the plan, and
the plan had no discretion as to whether to pay it or not.

23

lower court. Secondly, the analysis employed to strike down the
hospital rate setting statutes at issue in each of these cases is
seriously flawed.

In Traveler's Insurance Company v. Cuomo, 813 F. Supp. 996
(S.D.N.Y. 1993), appeal pending, No. 93-7194 (2nd Cir.), a federal
District Court in New York invalidated certain aspects of New
York’s hospital rate setting scheme on ERISA preemption grounds
and expressly stated that it would not follow Rebaldo. However,
the District Court’s decision in that case relied heavily on the
decision of the District Court in the within matter, which was
subsequently reversed by the Third Circuit. Petitioners also
reference the state trial court decision in United Health Services,
Inc. v. Upstate Administrative Services, 573 N.Y.S. 2d 851 (Sup.
Ct. Broome Cty. 1991). The reasoning in United Health was based
on a flawed premise. The court concluded that plan administrators
were subjected to conflicting state regulations by virtue of the
challenged statutory provision, since a plan which limited payment
to the reimbursement of “actual expenses” would provide a
different percentage level of coverage in New York than in a state
that did not set reimbursement rates as New York did. This analysis
presupposed that hospital rates in all states would have to be set in
an identical manner in order to withstand scrutiny under ERISA,
and overlooks the fact that things such as wage rates, material costs
and the costs of doing business can differ dramatically in different
parts of the United States.

Because there is no conflict between the circuits as to the
portion of the Rebaldo holding relied on by the Third Circuit, and
because this portion of the Rebaldo court’s decision has not been
overruled, it is clear that petitioners cannot demonstrate the
existence of a conflict between the circuits which would justify the
grant of their petition for a Writ of Certiorari.

24

III.

THE THIRD CIRCUIT’S DISPOSITION OF THE
NYSA-ILA WELFARE FUND’S TAKINGS CLAIM IS IN
FULL CONFORMITY WITH STANDARDS PREVIOUSLY
DELINEATED BY THIS COURT.

Both the District Court and the Court of Appeals concluded
that the inclusion of certain costs in the state regulated rates
charged by New Jersey hospitals did not deprive petitioners of
their property without just compensation in violation of the Fifth
Amendment. Petitioner NYSA-ILA Welfare Fund has sought
Supreme Court review of the lower courts’ disposition of this
issue. Since the lower courts decided this issue in conformity with
existing Supreme Court precedent, there is no conflict between the
Third Circuit’s decision and existing decisions of this Court. In
addition, there is no Court of Appeals decision which conflicts
with the Third Circuit’s resolution of this issue, and it does not raise
an important question of federal law which has not previously been
addressed by this Court. Therefore, no further review by this Court
is available.

N.J.S.A. 26:2H-18.d (1992) provided that the reasonable cost
of hospital services to indigent patients, as well as bad debts, were
to be included as mandatory financial elements of a hospital’s
preliminary cost base. (Resp. A-20-21). Clearly, the inclusion of
such costs in hospital rates does not amount to a physical taking of
property. As a result, a less stringent “regulatory takings” analysis,
rather than a per se takings analysis, applies to the statutes and
regulations being challenged by petitioners. Concrete Pipe and
Products v. Construction Laborers Pension Trust, 113 S. Ct. 2264,
2290 (1993).

This Court has held that the takings clause is not violated
simply because legislation requires one person to use his or her
assets for the benefit of another. Connolly v. Pension Benefit

25

Guaranty Corp., 475 U.S. 211, 223 (1986). Moreover, requiring
money to be spent in a particular way does not constitute a taking.
See United States v. Sperry Corporation, 493 U.S. 52 (1989); Atlas
Corp. v. United States, 895 F.2d 745, 756 (Fed. Cir. 1990), cert.
denied, 498 U.S. 811 (1990). Evaluation of whether governmental
regulation of property constitutes a taking requires an ad hoc
factual inquiry into the circumstances of each case. Connolly, 475
U.S. at 224. This Court has identified three factors which are to be
analyzed in making such a determination. These are: (1) the
character of the governmental action; (2) the economic impact of
the regulation on the claimant; and (3) the extent to which the
regulation has interfered with distinct investment-backed

expectations. Penn Central Transportation Company v. New York
City, 438 U.S. 104, 124 (1978).

The nature of the challenged governmental action here is the
inclusion of uncompensated care costs and the costs of the
Medicare shortfall and payor differentials in the hospital bills
given to all patients. In order to enable hospitals to remain in
operation and to provide care to all in need of hospital services, the
state reasonably determined that the costs of this care should be
spread among all hospital patients. As a result, the Third Circuit
concluded that New Jersey’s rate system merely “adjusts the
benefits and burdens of economic life to promote the common
good,” a factor which militates against the finding that a taking has
occurred. Concrete Pipe, 113 S. Ct. at 2290, quoting Connolly, 475
U.S. at 225.

Petitioner asserts that a taking occurred because the
uncompensated care add-ons paid by ERISA plan participants
were paid into a fund managed and controlled by a state
bureaucracy. The utilization of this mechanism by the state plainly
does not result in the permanent appropriation of private assets.
The trust fund mechanism referred to was merely a conduit utilized
to fairly distribute collected uncompensated care monies to

26

hospitals.'* These monies were not retained by the state. Monies
attributable to the Medicare cost shift and payor differentials went
directly to hospitals as a component of their hospital rates, and
therefore cannot be considered to be appropriated by the state for
its own use.

As both the District Court and the Court of Appeals found,
plan participants received a clear, specific economic benefit from
New Jersey’s hospital rate setting system. Therefore, the system’s
economic impact on them is not so severe as to justify a finding that
a taking has occurred. The amount of money paid by plan
participants is not determined on an ad hoc basis, since amounts
attributable to uncompensated care, the Medicare cost shift and
payor differentials were directly related to an individual plan
participant’s hospital bill. Even in the absence of state regulation of
hospital costs, hospitals would have to recoup these costs, because
they would go out of business if they failed to do so. By ensuring
the recovery of such costs and enabling hospitals to stay in
business, New Jersey’s hospital rate setting scheme thus protected
the interests of ERISA plan participants (and users of hospital
services generally) in maintaining access to health care. In
addition, to the extent that individual plan participants might not
have sufficient assets to pay their full hospital bill, the inclusion of
the costs attributable to bad debts within hospital rates would have
resulted in coverage of a portion of their bills.

Because hospital rate setting has long been heavily regulated
on both the federal! and state levels due to its technical complexity,
the District Court and Court of Appeals were correct in finding that
New Jersey’s hospital rate setting statute did not interfere with
“reasonable investment-backed expectations.” As this Court has

12. Petitioner’s oblique reference to the state’s use of the trust fund
mechanism as a vehicle for obtaining federal matching funds from the Medicaid
program is irrelevant to a takings analysis, as such funds are clearly not private
monies.

27

previously held, reasonable investment-backed expectations
under the takings clause must amount to more than a “unilateral
expectation.” Webb’s Fabulous Pharmacies v. Beckwith, 449 U.S.
155, 161 (1980).

New Jersey’s inclusion of uncompensated care costs and costs
attributable to the Medicare cost shift and payor differentials was a
long standing feature of New Jersey’s state regulated hospital rate
setting system. More importantly, as the District Court expressly
found, if hospitals established their rates under a free market,
competitive system, the challenged components could clearly be
included as a portion of the hospital’s overall reasonable charge.
(Pet. A-92). Given the mechanics of hospital pricing, petitioners
cannot reasonably assert that they have a vested right in having the
hospital rates they pay exclude such costs.

Since the Third Circuit’s decision conforms with prior
decisions of this Court as to petitioner’s takings claims, there is no
valid reason for this Court to revisit the conclusions reached by the
lower courts as to these claims.

IV.

THIS CASE DOES NOT PRESENT AN IMPORTANT
QUESTION OF FEDERAL LAW WHICH SHOULD BE
SETTLED BY THIS COURT.

Petitioners urge the Court to grant their Petitions because of
the current national interest in health care reform. They also
contend that the Court needs to review this case because of pending
legislative initiatives in a number of states concerning hospital rate
setting.

No matter how much interest may be engendered by health
care issues at the moment, these circumstances clearly do not

28

warrant this Court’s review. First of all, this case does not present a
novel issue that has not previously been addressed by the Supreme
Court. While the specific, narrow issue of ERISA preemption in
the context of hospital rate setting has not been addressed, this
Court has had occasion to review the general question of whether a
state statute should be found preempted by ERISA numerous
times. In deciding these cases, the Court has fashioned a test which
requires that the state statute must impact upon the ERISA plan,
rather than plan participants or plan benefits, in order for it to be
found preempted. All that the Third Circuit did was to apply the
analysis previously reached by the Court in these cases in
concluding that New Jersey’s hospital rate setting statute did not
impact upon the plan in a manner which would require preemption.

The significance of the Third Circuit’s decision has largely
been eclipsed by subsequent developments in New Jersey. The
State of New Jersey deregulated hospital rate setting effective
January 1, 1993. L. 1992, c. 160. Asa result, any decision the Court
might reach would have no impact whatsoever on the
establishment of hospital rates in New Jersey, since that function is
no longer state regulated. The only remaining “live” issue between
the parties relates to the question of whether plans should have to
pay the full DRG rate for services rendered during the period that
this litigation was ongoing. While final resolution of this issue
might be important to the individual parties from a financial
perspective, it clearly does not present the Court with an ongoing
issue of such national importance that review by this Court is
warranted.

Finally, the fact that there are pending legislative initiatives
with respect to the issue of hospital rate setting in a number of
states does not warrant further review by this Court. While health
care reform may indeed be a pressing national issue, this court is
not in the business of rendering advisory opinions. Yet this is
tantamount to what petitioners are seeking when they requested
review of this case because of pending state legislative initiatives.

ee eee eet ee oe

29

Given the large number of federal court decisions in existence
where an ERISA preemption claim was addressed, it is more than
likely that this Court will have the opportunity to revisit the limits
of its prior preemption decisions again in the future. Accordingly,
this is not a case which presents a special or novel issue that would
warrant Supreme Court review.

30

CONCLUSION

Because petitioners have failed to establish that they meet the
requirements for the grant of a Petition for a Writ of Certiorari, it is
respectfully requested that the Court deny the Petitions for a Writ
of Certiorari.

Respectfully submitted,

FRANK R. CIESLA

Counsel of Record
ELIZABETH DUSANIWSKYJ
GIORDANO, HALLERAN

& CIESLA

Attorneys for Respondents

New Jersey Hospital Association
and the Respondent Hospitals
Other Than The Valley Hospital
125 Half Mile Road

P.O. Box 190

Middletown, N.J.07748

(908) 741-3900

GLENN A. CLARK

Counsel of Record

RIKER , DANZIG, SCHERER,
HYLAND & PERRETTI
Attorneys for Respondent

The Valley Hospital

One Speedwell Avenue
Headquarters Plaza II
Morristown, N.J.07962-1981
(201) 538-0800

la

APPENDIX A — CORPORATE DESIGNATION OF

RESPONDENTS

In accordance with Rule 29.1, respondents state that they have the

10.

following corporate parent-subsidiary relationships:
Atlantic City Medical Center; No parent or subsidiaries.

Nathan and Miriam Barnert Memorial Hospital d/b/a
Barnert Hospital; No parent or subsidiaries.

Bayonne Hospital; No parent or subsidiaries.

Bayshore Community Hospital; Parent - Bayshore Health
Care Services, Inc.; No subsidiaries.

Burdette Tomlin Memorial Hospital; Parent - Cape Health
System, Inc.; No subsidiaries.

Chilton Memorial Hospital; Parent - Memorial Health
Foundation (formerly known as Chilton Memorial
Corporation); No subsidiaries.

Christ Hospital; Parent - Christ Hospital Health Services
Corporation; No subsidiaries.

Clara Maass Medica! Center; Parent - Clara Maass Health
Systems, Inc.; No subsidiaries.

Community Medical Center; Parent - Community
Memorial Health Services; No subsidiaries.

Cooper Hospital/University Medical Center; Parent -
Cooper Health Care; No subsidiaries.

11.

14.

17.

18.

2a
Appendix A
Deborah Heart and Lung Center; No parent or subsidiaries.

Dover General Hospital & Medical Center; Parent - Lake
Area Health System; No subsidiaries.

East Orange General Hospital; Parent - Essex Valley Health
Care; No subsidiaries.

Englewood Hospital and Medical Center; Parent -
Englewood Health Care Foundation, Inc.; No subsidiaries.

Hackensack Medical Center; Parent - Hillcrest Health
Service System, Inc.; No subsidiaries.

Hackettstown Community Hospital; No parent or
subsidiaries.

Helene Fuld Medical Center; Parent - Helene Fuld
Healthcare; No subsidiaries.

Holy Name Hospital; No parent or subsidiaries.

Hunterdon Medical Center; Parent - Hunterdon Hea!thcare
System, Inc.; No subsidiaries.

Irvington General Hospital; Parent - Beth Health Care
Services Corporation; No subsidiaries.

Jersey Shore Medical Center; Parent - Modern Health
Affiliates, Inc.; No subsidiaries.

22.

23.

26.

27.

28.

29.

30.

31.

32.

3a

Appendix A

Community Hospital Group, Inc. d/b/a The JFK Medical
Center; Parent - JFK Health Systems; No subsidiaries.

Kennedy Memorial Hospitals-University Medical Center;
Parent - Kennedy Health Care Foundation; No subsidiaries.

William B. Kessler Memorial Hospital; No parent or
subsidiaries.

Kimball Medical Center; Parent - Kimball Health Care
Corporation; No subsidiaries.

The Medical Center of Ocean County, Inc.; Parent - The
Ocean Health System, Inc.; No subsidiaries.

The Mercer Medical Center; No parent or subsidiaries.

Memorial Hospital of Burlington County; Parent -
Memorial Health Alliance, Inc.; Subsidiary - Women’s
Auxiliary Board to Memorial Hospital of Burlington
County.

Monmouth Medical Center; Parent - Mid-Atlantic Health
Group, Inc.; No subsidiaries.

Morristown Memorial Hospital; Parent - Memorial Health
Foundation, Inc.; No subsidiaries.

The Mountainside Hospital; Parent - Mountainside
Hospital Healthcare, Inc.; No subsidiaries.

Muhlenberg Regional Medical Center; Parent - The
Huntington Foundation; Subsidiaries - Muhlenberg
Auxiliary, Inc.; and Muhlenberg Foundation, Inc.

aa.

37.

38.

39.

40.

41.

42.

43.

de

Appendix A

Newark Beth Israel Medical Center; Parent - Beth Health
Care Services Corporation; No subsidiaries.

New Jersey Hospital Association; No parent or
subsidiaries.

Newton Memorial Hospital; Parent - North Jersey Health
Care Corp.; No subsidiaries.

The Hospital Center at Orange; No Parent; Subsidiaries -
HCO Plus; Meals on Wheels; Orange Mountain Health
Care; OMH Services; Zorah; and 323 Central Avenue.

Our Lady of Lourdes Medical Center; Parent - Our Lady of
Lourdes Health Care Services, Inc.; Subsidiaries - Osborne
Family Health Center, Inc.; and Our Lady of Lourdes
School of Nursing.

Overlook Hospital; No parent or subsidiaries.

Palisades General Hospital; No parent or subsidiaries.

Pascack Valley Hospital; Parent - Well Care Group, Inc.;
No subsidiaries.

The General Hospital Center of Passaic; Parent -
Healthcare Continuum, Inc.; No subsidiaries.

The Medical Center at Princeton; No parent or subsidiaries.

Rahway Hospital; Parent - Recovery Healthsystems, Inc.;
No subsidiaries.

44.

45.

46.

47.

48.

49.

50.

|

YF

»

54.

Sa

Appendix A

Raritan Bay Medical Center; Parent - Raritan Bay Health
Service Corporation; No subsidiaries.

Riverview Medical Center; Parent - Riverview Health Care

Robert Wood Johnson University Hospital; Parent - RWJ
Healthcare Corporation; No subsidiaries.

Kennedy Memorial Hospitals at Saddle Brook, Inc.; Parent
- Kessler Rehabilitation Corporation; No subsidiaries.

Shore Memorial Hospital; Parent - Shore Memorial Health
Foundation, Inc.; No subsidiaries.

Somerset Medical Center; Parent - Somerset Health Care
Corporation; No subsidiaries.

South Amboy Memorial Hospital; Parent - South Amboy
Memorial Hospital Association; No subsidiaries.

South Jersey Hospital System; Parent - Cooperative Health
Care of Southern New Jersey, Inc.; Subsidiary -
Community Health Care, Inc.

St. Barnabas Medical Center; Parent - St. Barnabas
Corporation; No subsidiaries.

St. Clare’s/Riverside Medical Center; Parent - SSM
Healthcare Ministry Corporation; No subsidiaries.

St. Elizabeth Hospital; No parent or subsidiaries.

55.

56.

ae.

58.

59.

60.

61.

62.

63.

64.

65.

6a

Appendix A

St. Francis Hospital; Parent - Franciscan Health System of
New Jersey, Inc.; No subsidiaries.

St. James Hospital; Parent - Cathedral Health Services,
Inc.; No subsidiaries.

St. Joseph’s Hospital & Medical Center; No parent or
subsidiaries.

St. Mary Hospital; Parent - Franciscan Health System of
New Jersey, Inc.; No subsidiaries.

St. Michael’s Medical Center; Parent - Cathedral Health
Services, Inc.; No subsidiaries.

St. Peter’s Medical Center; No parent or subsidiaries.

Union Hospital; Parent - Mega Source, Inc.; No
subsidiaries.

United Hospitals Medical Center; No parent or
subsidiaries.

Underwood-Memorial Hospital; Parent - Underwood-
Memorial Health Systems, Inc.; No subsidiaries.

The Valley Hospital; Parent - Valley Care Corp.; Subsidiary
- Valley Health Services, Inc.

Wallkill Valley Hospital & Health Centers; Parent - Sisters
of Sorrowful Mothers; No subsidiaries.

66.

67.

68.

69.

70.

Ta
Appendix A

Warren Hospital; Parent - Warren Hospital Health Services
Corporation; No subsidiaries.

Wayne General Hospital; Parent - North Jersey Meditech;
No subsidiaries.

West Hudson Hospital; Parent - Trico Health Care, Inc.; No
subsidiaries.

West Jersey Hospital; Parent - West Jersey Health System;
No subsidiaries.

Zurbrugg Memorial Hospital; Parent - Zurbrugg Health
Foundation; No subsidiaries.

8a
APPENDIX B — STATUTES REFERENCED
N.J.S.A. 26:2H-1

26:2H-1. Declaration of policy

It is hereby declared to be the public policy of the State that
hospital and related health care 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. In order to
provide for the protection and promotion of the health of the
inhabitants of the State, promote the financial solvency of
hospitals and similar health care facilities and contain the rising
cost of health care services, the State Department of Health, which
has been designated as the sole agency in this State for
comprehensive health planning under the “National Health
Planning and Resources Development Act of 1974” (Federal Law
93-641),' as amended and supplemented, shall have the central,
comprehensive responsibility for the development and
administration of the State’s policy with respect to health planning,
hospital and related health care services and health care facility
cost containment programs, and all public and private institutions,
whether State, county, municipal, incorporated or not incorporated
serving principally as residential health care facilities, nursing or
maternity homes or as facilities for the prevention, diagnosis, or
treatment of human disease, pain, injury, deformity or physical
condition, shall be subject to the provisions of this act.

N.J.S.A. 26:2H-2

26:2H-2. Definitions

The following words or phrases, as used in this act, shall have
the following meanings, unless the context otherwise requires:

1. 42U.S.C.A. § 300k et seq.

9a

Appendix B

a. “Health care facility” means the facility or institution
whether public or private, engaged principally in providing
services for health maintenance organizations, diagnosis of
treatment of human disease, pain, injury, deformity or physical
condition, including, but not limited to, a general hospital, special
hospital, mental hospital, public health center, diagnostic center,
treatment center, rehabilitation center, extended care facility,
skilled nursing home, nursing home, intermediate care facility,
tuberculosis hospital, chronic disease hospital, maternity hospital,
outpatient clinic, dispensary, home health care agency, residential
health care facility and bioanalytical laboratory (except as
specifically excluded hereunder) or central services facility
serving one or more such institutions but excluding institutions
that provide healing solely by prayer and excluding such
bioanalytical laboratories as are independently owned and
operated, and are not owned, operated, managed or controlled, in
whole or in part, directly or indirectly by any one or more health
care facilities, and the predominant source of business of which is
not by contract with health care facilities within the State of New
Jersey and which solicit or accept specimens and operate
predominantly in interstate commerce.

b. “Health care service” means the preadmission, outpatient,
inpatient and postdischarge care provided in or by a health care
facility, and such other items or services as are necessary for such
care, which are provided by or under the supervision of a physician
for the purpose of health maintenance organizations, diagnosis or
treatment of human disease, pain, injury, disability, deformity or
physical condition, including, but not limited to, nursing service,
home care nursing and other paramedical service, ambulance
service, service provided by an intern, resident in training or
physician whose compensation is provided through agreement
with a health care facility, laboratory service, medical social

10a

Appendix B

service, drugs, biologicals, supplies, appliances, equipment, bed
and board, but excluding services provided by a physician in his
private practice or by practitioners of healing solely by prayer, and
services provided first aid rescue and ambulance squads as defined
in the “New Jersey Safety Highway Act of 1971,” P.L. 1971, c. 351
(C. 27:5F-1 et seq.).

c. “Construction” means the erection, building, or substantial
acquisition, alteration, reconstruction, improvement, renovation,
extension or modification of a health care facility, including its
equipment, the inspection and supervision thereof; and the studies,
surveys, designs, plans, working drawings, specifications,
procedures, and other actions necessary thereto.

d. “Board” means the Health Care Administration Board
established pursuant to this act.

e. “Commission” means the Hospital Rate Setting
Commission established pursuant to this act.

f. “Government agency” means a department, board, bureau,
division, office, agency, public benefit or other corporation, or any
other unit, however described, of the State or political subdivision
thereof.

g. “Statewide Health Coordinating Council” means the
Statewide Health Coordinating Council formed under the
provisions of Federal Law 93-641, as amended and supplemented. '

h. “Health Systems Agency” means an officially recognized
health systems agency formed under the provisions of Federal law
93-641 as amended and supplemented.’

1. 42U.S.C.A. § 300k et seq.

2. 42U.S.C.A. § 300/-1

lla
Appendix B

i. “Department” means the State Department of Health.
j. “Commissioner” means the State Commissioner of Health.

k. “Preliminary cost base” means that proportion of a
hospital’s current cost which may reasonably be required to be
reimbursed to a properly utilized hospital for the efficient and
effective delivery of appropriate and necessary health care
services of high quality required by such hospital’s mix of patients.
The preliminary cost base initially may include costs identified by
the commissioner and approved or adjusted by the commission as
being in excess of that proportion of a hospital’s current costs
identified above, which excess costs shall be eliminated in a timely
and reasonable manner prior to certification of the revenue base.
The preliminary cost base shall be established in accordance with
regulations proposed by the commissioner and approved by the
board.

l. “Certified revenue base” means the preliminary cost base
adjusted by the commission, as appropriate and necessary pursuant
to regulations proposed by the commissioner and approved by the
board, to provide for the financial solvency of a hospital which is
properly utilized and which delivers, effectively and efficiently,
appropriate and necessary health care services of a high quality
required by its mix of patients.

m. “Provider of health care” means an individual (1) whois a
direct provided of health care service in that the individual’s
primary activity is the provision of health care services to
individuals or the administration of health care facilities in which
such care is provided and, when required by State law, the
individual has received professional training in the provision of
such services or in such administration and is licensed or certified

12a

Appendix B

for such provision or administration; or (2) who is an indirect
provider of health care in that the individual (a) holds a fiduciary
position with, or has a fiduciary interest in, any entity described in
subparagraph b(ii) or subparagraph b(iv); provided, however, that
a member of the governing body of a county or any elected official
shall not be deemed to be a provider of health care unless he is a
member of the board of trustees of a health care facility or a
member of a board, committee or body with authority similar to
that of a board of trustees, or unless he participates in the direct
administration of a health care facility; or (b) received, either
directly or through his spouse, more than one-tenth of his gross
annual income for any one or more of the following:

(i) Fees or other compensation for research into or
instruction in the provision of health care services;

(ii) Entities engaged in the provision of health care
services or in research or instruction in the provision of
health care services;

(iii) Producing or supplying drugs or other articles
for individuals or entities for use in the provision of or in
research into or instruction in the provision of health care
services;

(iv) Entities engaged in producing drugs or such
other articles.

n. “Private long-term health care facility” means a nursing
home, skilled nursing home or intermediate care facility presently
in operation and licensed as such prior to the adoption of the 1967
Life Safety Code by the State Department of Health in 1972 and
which has a maximum 50-bed capacity and which does not
accommodate Medicare or Medicaid patients.

13a

Appendix B
N.J.S.A. 26:2H-4.1

26:2H-4.1. Hospital rate setting commission

a. There is hereby established in the State Department of
Health a Hospital Rate Setting Commission which shall consist of
five members, three of whom shall be appointed by the Governor
with the advice and consent of the Senate for terms of 4 years. Of
the initial appointees, one shall serve for a term of 2 years and one
for a term of 3 years. No member shall be eligible for appointment
for more than two full consecutive terms. Two of the members
appointed by the Governor shall be consumers of health care
services who are not providers of health care services, and one
shall have experience in hospital administration or finance. The
Commissioners of the State Departments of Health and Insurance
or their designated representatives, who shall be officials with the
rank of deputy or assistant commissioner, shall serve as ex-officio
voting members of the commission. The commission shall
annually select a chairman from among its members. Three
members of the commission shall constitute a quorum and no
action of the commission shall be taken except upon the
affirmative vote of a majority of its members.

The appointed members of the commission shall each receive
compensation at $150.00 per day. The commission members shall
also be entitled to reasonable expenses incurred in the performance
of their duties. Any such member may be removed from office by
the Governor, for good cause shown. Any vacancy occurring in the
membership of the commission for any cause shall be filled in the
same manner as the original appointment but for the unexpired
term only. A member shall otherwise continue to serve after
expiration of his term until a new appointment is made.

Ida

Appendix B

The commission shall select an executive secretary and the
commissioner shall provide to the commission such clerical staff,
supplies and equipment as may be necessary for it to faithfully
discharge its duties.

The commission shall be established and its members
appointed by January 1, 1979.

b. The commissioner shall determine the order in which
hospitals shall have their preliminary cost base and appropriate
schedule of rates approved by the commission. The commissioner
shall propose and the commission approve or adjust the
preliminary cost base, and the commission shall approve an
appropriate schedule of rates for ali hospitals by January 1, 1983.
The schedule of rates shall be reasonable and sufficient to provide
the revenue requirements of the preliminary cost base and shall be
adjusted from time to time, as appropriate, to reach the certified
revenue base.

The commission shall certify the revenue base, provided the
conditions described in subsections k. and /. of section 2 of this act
has been met, and shall perform such other duties as are specified
elsewhere in this act.

A hospital shall continue to be reimbursed under the rate
setting system in effect on the day preceding the effective date of
this act, except as said system is amended by regulation, until the
commission approves the hospital’s preliminary cost base.

1Sa
Appendix B
N.J.S.A. 26:2H-5

26:2H-5. Powers of commissioner

a. The commissioner, to effectuate the provisions and
purposes of this act, shall have the power to inquire into health care
services and the operation of health care facilities and to conduct
periodic inspections of such facilities with respect to the fitness
and adequacy of the premises, equipment, personnel, rules and
bylaws and the adequacy of financial resources and sources of
future revenues.

b. The commissioner, with the approval of the board, shall
adopt and amend rules and regulations in accordance with the
Administrative Procedure Act, P.L. 1968, c. 410 (C. 52:14B-1 et
seq.) to effectuate the provisions and purposes of this act, including
but not limited to: (1) the establishment of requirements for a
uniform Statewide system of reports and audit relating to the
quality of health care provided, health care facility utilization and
costs; (2) certification by the department of schedules of rates,
payments, reimbursement, grants and other charges for health care
services as provided in section 18; and (3) standards and
procedures relating to the licensing of health care facilities and the
institution of additional health care services.

c. The commissioner may enter into contracts with any
government agency, institution of higher learning, voluntary
nonprofit agency, or appropriate planning agency or council; and
such entities are authorized to enter into contracts with the
commissioner to effectuate the provisions and purposes of this art.

d. The commissioner may provide consultation and
assistance to health care facilities in operational techniques,

16a

Appendix B

including but not limited to, planning, principles of management,
and standards of health care services.

e. At the request of the commissioner, health care facilities
shall furnish to the Department of Health such reports and
information as it may require to effectuate the provisions and
purposes of this act, excluding confidential communications from
patients.

f. The commissioner may institute or cause to be instituted in
a court of competent jurisdiction proceedings to compel
compliance with the provisions of this act or the determinations,
rules, regulations and orders of the commissioner.

g. Notwithstanding any rules and regulations governing
private long-term health care facilities and enforcing the 1967 Life
Safety Code, as amended and supplemented, the commissioner
shall permit third floor occupancy of such facilities by owners,
members of their immediate families, and licensed professionals
employed at such facilities.

N.J.S.A. 26:2H-12

26:2H-12. Health care facility; requirements for operation;
license; application; fees; issuance; renewals

a. No health care facility shall be operated unless it shall: (1)
possess a valid license issued pursuant to this act, which license
shall specify the kind or kinds of health care services the facility is
authorized to provide; (2) establish and maintain a uniform system
of cost accounting approved by the commissioner; (3) establish
and maintain a uniform system of reports and audits meeting the
requirements of the commissioner; (4) prepare and review

17a

Appendix B

annually a long range plan for the provision of health care services,
which plan shall be compatible with the State Health Plan
established pursuant to the “National Health Planning and
Resources Development Act of 1974” (Federal Law 93-641)' as
related to medical health services, health care services, and health
manpower; and (5) establish and maintain a centralized,
coordinated system of discharge planning which assures every
patient a planned program of continuing care and which meets the
requirements of the commissioner which requirements shall,
where feasible, equal or exceed those standards and regulations
established by the Federal Government for all federally-funded
health care facilities but shall not require any person who is not in
receipt of State or Federal assistance to be discharged against his
will.

b. (1) Application for a license for a health care facility shall
be made upon forms prescribed by the department. The department
shall charge such nonrefundable fees for the filing of an
application for a license and any renewal thereof, as it shall from
time to time fix in rules or regulations; provided, however, that no
such fee shall exceed $2,000.00. The application shall contain the
name of the health care facility, the kind or kinds of health care
service to be provided, the location and physical description of the
institution, and such other information as the department may
require. (2) A license shall be issued by the department upon its
findings that the premises, equipment, personnel, including
principals and management, finances, rules and bylaws, and
standards of health care service are fit and adequate and there is
reasonable assurance the health care facility will be operated in the
manner required by this act and rules and regulations thereunder.

1. 42U.S.C.A. § 300K et seq.

18a
Appendix B

c. A license issued before the effective date of this act to a
health care facility for its operation, upon the first renewal date
thereafter, may be extended for a 1 year period of time, provided
the facility then meets the requirements for licensure at the time
said license was issued and submits an acceptable plan to meet
current requirements at the end of said period of time.

N.J.S.A. 26:2H-18

26:2H-18. Payments by government agency or hospital
service corporation; determination of rates

a. No government agency and no hospital service corporation
organized under the laws of the State and no other purchasers of
health care services shall purchase, pay for or make reimbursement
or grant-in-aid for any health care service provided by a health care
facility unless at the time the service was provided, the health care
facility possessed a valid license or was otherwise authorized to
provide such service.

b. Payment by government agencies other than those made
through the Medical Assistance and Health Services Act, P.L.
1968, c. 413 (C. 30:4D-1 et seq.), and payment by hospital service
corporations organized under the laws of this State for health care
services provided by a hospital shall be at reasonable rates
approved by the commission as provided for by regulations
proposed by the commissioner and approved by the board.

The schedule of rates shall be reasonable and sufficient to
provide the revenue requirements of the certified revenue base of a
hospital, considering the health care system as a whole and based
on financial elements approved by the commissioner. Nothing
herein shall be construed to prohibit the Commissioner of Human

19a
Appendix B

Services from contracting with the Commissioner of Health for the
commission to approve rates, on behalf of the Commissioner of
Health, by which hospitals are reimbursed pursuant to the Medical
Assistance and Health Services Act, P.L. 1968, c. 413 (C. 30:4D-1
et seq.). Rates of payment by hospital service corporations
organized under the law of this State for health care services
provided by a hospital shall be set by the commission. Payment by
all other purchasers of health care services provided by a hospital
shall be at reasonable rates approved by the commission as
provided in this act. All payment rates shall be equitable for each
payor or class of payors without discrimination or individual
preference except for quantifiable economic benefits rendered to
the institution or to the health care delivery system taken as a
whole. In addition to other such benefits which the commission
may consider, it shall consider the following, if found to be
quantifiable: (1) degree of promptness and volume of payments to
hospitals so that hospitals are provided with funds for current
financing of their services; and (2) broad provision of health
insurance coverages which are not otherwise affordable or
obtainable at premium rates which are not self-supporting. In
determining the quantifizble economic benefits to which
consideration shall be given in approving payment rates, the
commission may consider overall financial benefits to society
which are provided by programs offered by a payor or class of
payors.

c. Payment by government agencies other than those made
through the Medical Assistance and Health Services Act, P.L.
1968, c. 413 (C. 30:4D-1 et seq.), and payment by hospital service
corporations organized under the laws of this State for health
services provided by health care facilities other than hospitals shall
be at reasonable rates set by the commissioner based on financial
elements approved by him; provided, however, that nothing herein

20a

Appendix B

shall be construed to prohibit the Commissioner of Human
Services from contracting with the commissioner for the setting of
rates by which health care facilities other than hospitals are
reimbursed pursuant to the Medical Assistance and Health
Services Act, P.L. 1968, c. 413 (C. 30:4D-1 et seq.). Rates of
payment by hospital service corporations organized under the laws
of this State for health care services provided by a health care
facility other than hospitals shall be set in consultation with the
Commissioner of Insurance.

d. The financial elements of the preliminary cost base and of
the certified revenue base shall include the reasonable cost of the
following, as defined in regulations proposed by the commissioner
and approved by the board: direct patient care; principal and
interest payments; paid taxes, excluding income taxes;
educational, research and training programs, not otherwise paid
for by the State; the provision of health care services to individuals
unable to pay for them for reasons of indigency; bad debts,
provided adequate recovery procedures are _ followed;
preservation, replacement and improvement of facility and
equipment subject to appropriate planning requirements; and
reasonable working capital. Said financial elements may include,
where applicable and appropriate, a reasonable return on
investment where a hospital is operating efficiently and
effectively. In determining proposed payments to hospitals, the
commissioner shall take into account a facility’s income from all
sources, including specific purpose grants and other funds from
governmental sources, but excluding income and principal from
board or donor restricted funds, gifts and special fund raising
projects.

To establish and maintain a fair and equitable system for
determining such payments, the commissioner shall require each

2la

Appendix B

health care facility to report such financial, statistical and patient
information as may be required, in accordance with a uniform
system of reporting established by him. The commissioner may
propose regulations for approval by the board which assess
penalties for failure to report such information within such time as
may be prescribed therein.

N.J.S.A. 26:2H-18.1

26:2H-18.1. Preliminary cost base, certified revenue base or
schedule of rates; adjustments; determination and
review by commission; regulations

a. The commission shall make the determinations and hear
appeals provided for in this act in a timely manner pursuant to
regulations proposed by the commissioner and approved by the
board. Such regulations shall be presented to the Standing
Legislative Committees on Institutions, Health and Welfare for
final approval within 1 year following establishment of the
commission pursuant to the provisions of this act, and shall remain
in effect in the form proposed by the commissioner and approved
by the board until the provisions of such regulations are enacted
into law as amendments to this act. Such regulations shall require
that in the event the commission does not perform its duties within
the time period specified therein the commission may permit a
hospital to make a temporary reasonable change in rates which
shall be effective immediately, when it deems it in the public
interest to do so. Notwithstanding such temporary change in rates,
the review procedure set forth in this section shall be conducted by
the commission as soon thereafter as is possible.

b. Pursuant to regulations proposed by the commissioner and
approved by the board, the commissioner shall propose and the

22a
Appendix B

commission shall make automatic periodic adjustments to each
preliminary cost base or certified revenue base for changes in
economic factors reasonably calculated to provide for the effects
of general economic inflation or deflation; for industry wide
changes in the efficiency of delivering health care services; and for
each hospital’s actual changes in volume and case-mix, which are
necessary and appropriate. The commission shall approve an
appropriate change in the schedule of rates to reflect these
adjustments.

c. Pursuant to regulations proposed by the commissioner
and approved by the board, the commission shall consider
adjustments to the certified revenue bases and schedules of rates,
provided such adjustments: (1) result from statutes and regulations
affecting the delivery of health care; and (2) may affect one or more
hospitals. Such adjustments shall take into account the
effectiveness and efficiency of the health care delivery system as a
whole. Where appropriate the commission may sit en banc and
hold public hearings in order to obtain the evidence required to
support its conclusions and determinations. In the case of such
hearings the commission shall provide actual notice to the affected
planning and licensing authorities and hospitals, and to the
commissioner and the Public Advocate.

d. Pursuant to regulations proposed by the commissioner and
approved by the board, all other changes in the commission’s
determinations shall require a review by the commission in a
public hearing of the entire preliminary cost base or certified
revenue base and schedule of rates. Determinations of the
commission may be appealed by hospitals, the commissioner, the
Public Advocate, affected planning, licensing or inspection
agencies and payors, and other affected parties, and shall be
conducted as contested proceedings under the Administrative

23a
Appendix B

Procedures Act, P.L. 1968, c.410(C. 52:148-1 et seq.). During the
pendency of any appeal, the schedule of rates approved by the
commission pursuant to sections 5 and 10 of this act! shall remain
in effect.

In all appeals, the burden of proof shall be on the petitioner.
All determinations rendered hereunder shall be consistent with
regulations and shall set forth in detail the commission’s reasoning
and conclusions regarding the parties and considerations specified
in this act.

P.L. 1971, c. 136, § 18

* * *

18.

a. No government agency and no hospital service corporation
organized under the laws of the State shall purchase, pay for or
make reimbursement or grant-in-aid for any health care service
provided by a health care facility unless at the time the service was
provided, the health care facility possessed a valid license or was
otherwise authorized to provide such service. i

b. Payment by government agencies for health care services
provided by a health care facility shall be at rates established by the
commissioner, based on elements of costs approved by him.

c. The Commissioner of Health in consultation with the
Commissioner of Insurance shall determine and certify the costs of
providing health care services, as reported by health care facilities,
which are derived in accordance with a uniform system of cost

1. Sections 26:2H-4.1, 26:2H-18.

24a
Appendix B

accounting approved by the Commissioner of Health. Said
certification shall specify the elements and details of costs taken
into consideration.

d. Payment by hospital service corporations, organized under
the laws of this State, for health care services provided by a health
care facility shall be at rates approved as to reasonableness by the
Commissioner of Insurance with the approval of the
Commissioner of Health. In establishing such rates, the
commissioners shall take into consideration the total costs of the
health care facility.

P.L. 1991, c. 187, § 1
CHAPTER 187

1.' (New section) The Legislature finds and declares that:

a. Access to quality health care shall not be denied to
residents of the State because of their inability to pay for the care; -
there are many residents of the State, particularly those with
incomes below the federal poverty level, who cannot pay for
needed hospital care and in order to ensure that these persons have
equal access to hospital care it is necessary to maintain a
mechanism which will ensure payment of uncompensated hospital
care; and to protect the fiscal solvency of the State’s general
hospitals, as provided for in P.L. 1971, c. 136(C. 26:2H-1 etal.), it
is necessary that all payers of heaith care services share equally in
the payment of uncompensated care on a Statewide basis.

b. The “New Jersey Uncompensated Care Trust Fund,”
created pursuant to P.L. 1986, c. 204, and continued pursuant to

L N.J.S.A.26:2H-18.24.

25a
Appendix B

P.L. 1989, c. 1 (C. 26:2H-18.4 et seq.), which law expired on
December 31, 1990, by which hospitals were able to collect their
reasonable cost of approved uncompensated care, resulted in
unobstructed access to health care for reidents without insurance
who otherwise are unable to afford care.

c. Having received and thoroughly reviewed the reports
issued by the Commissioner of Health and the Governor’s
Commission on Health Care Costs on uncompensated care, its
economic implications and various means of financing
uncompensated care, it is evident that provision for a trust fund is
necessary, with modifications, to ensure access to hospital care for
those who cannot afford to pay and the fiscal solvency of hospitals.
At the same time, the State should take further actions to: provide
more comprehensive Medicaid coverage for the medically
indigent, reduce the rate of increase in health insurance premiums
and explore and implement various initiatives to reduce the
amount of uncompensated care in this State without impairing
access to care.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386019_1270%3A2. Public record. Not legal advice.