SOUTH JERSEY HOSPITAL, INC. v. DEPARTMENT OF HEALTH AND SENIOR SERVICES

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0122-05T30122-05T3

A-1128-05T3

SOUTH JERSEY HOSPITAL, INC.,

Appellant,

v.

DEPARTMENT OF HEALTH AND

SENIOR SERVICES,

Respondent.

_______________________________________

 

Argued September 20, 2006 - Decided

Before Judges Stern, A. A. Rodr guez and Sabatino.

On appeal from Final Agency Decisions of the Department of Health and Senior Services.

Frank R. Ciesla, argued the cause for appellant (Giordano, Halleran & Ciesla, attorneys; Mr. Ciesla, of counsel; Ari G. Burd and Elizabeth Christian, on the brief).

Rachana R. Munshi, Deputy Attorney General, argued the cause for respondent (Anne Milgram, Acting Attorney General, attorney; Michael J. Haas, Assistant Attorney General, of counsel; Ms. Munshi, on the brief).

PER CURIAM

South Jersey Hospital, Inc. ("SJH") appeals final agency decisions of the Department of Health and Senior Services ("the Department") dated August 17, 2005 and October 5, 2005. Those administrative decisions denied SJH's challenge to the Department's allocation of the charity care component of disproportionate share hospital subsidies in State Fiscal Year ("SFY") 2005 and SFY 2006. In particular, SJH seeks review of the Department's determinations that, for the relevant fiscal years, none of the hospitals owned by SJH were located in one of the ten poorest municipalities in the State, and also that SJH was ineligible for a special charity care subsidy as the result of a hospital closure. Those determinations caused SJH to receive a lower subsidy rate for SFY 2005 and SFY 2006 than the rate it had sought from the Department. SJH filed separate appeals of those decisions, which we consolidated.

Guided by our limited standard of review of administrative agency determinations, and bearing in mind the Department's expertise in the technical subject matter before us, we affirm the Department's decisions.

I.

Pursuant to N.J.S.A. 26:2H-18.59, the State pays an annual charity care subsidy to eligible New Jersey hospitals, to help offset the costs of treating patients who lack insurance or the financial means to pay for their own care. The subsidy is calculated and administered by the Department pursuant to criteria set forth in the statute. As represented to us at oral argument, the total amount of the subsidies allocated by the Department for SFY 2005 was $583.4 million, a figure which has remained relatively constant from year-to-year.

On August 6, 2004, L. 2004, c. 113 was enacted, amending N.J.S.A. 26:2H-18.59 and -18.59e, and establishing new statutory provisions codified at N.J.S.A. 26:2H-18.59i. These new statutory provisions became effective as of July 1, 2004, and were intended to apply to the Department's charity care subsidy allocation for SFY 2005.

As it is accurately described in the Department's written decision, the revised statute, among other things, "established a policy for classifying and ranking hospitals [within the State] in two ways - [1] by hospital's location, and [2] by the percentage of the hospital's overall charges represented by charges for charity care patients - and then allocating charity care subsidy dollars using a formula based on the hospital's classification and/or ranking." Specifically, N.J.S.A. 26:2H-18.59ib(2) required that hospitals be ranked in the order of their relative charity care percentages ("RCCP"), calculated by dividing the amount of hospital-specific gross revenue for charity care patients by the hospital's total gross revenue for all patients. Ibid. Based upon those rankings, the nine hospitals with the highest RCCPs must receive 96% of each hospital's reimbursed documented charity care. Ibid. The hospital ranked tenth was to receive a 94% reimbursement. Ibid. Hospitals ranked eleventh and lower were to receive a subsidy at a rate two percentage points less than the hospital ranked immediately above them. Ibid. However, no hospital would receive a subsidy below a "floor" of 43%. Ibid.

The revised statute also contained a provision designed to benefit a targeted group of hospitals located in the State's ten poorest municipalities. See N.J.S.A. 26:2H-18.59ib(3). In particular, each hospital located in one of the State's ten municipalities with the lowest median annual household income, according to the most recent census data, was to receive a subsidy equal to 96% of its reimbursed documented charity care, even if that hospital might otherwise qualify for a lower subsidy using the RCCP ranking method.

Following these statutory amendments, on August 6, 2004, the Department issued a memorandum to hospitals notifying them of the charity care subsidy allocation for SFY 2005. The Department calculated those subsidy allocations based upon the statutory language of P.L. 2004, c. 113, as codified at N.J.S.A. 26:2H-18.59i, in conjunction with existing administrative rules at N.J.A.C. 10:52-7, -11, -12 and -13 that were not affected by the 2004 statutory changes. The allocations were calculated based upon historical data reported from SFY 2002. On August 5, 2005 the Department issued a memorandum allocating equivalent subsidies to SJH for SFY 2006.

SJH, as of July 1, 2004, was the owner and operator of two separately-licensed acute care facilities in Cumberland County. Those facilities then were SJH-Bridgeton, located at 333 Irving Street in Bridgeton, and SJH-Newcomb, located at 45 South State Street in Vineland. SJH had formerly operated another acute-care facility in Cumberland County, SJH-Millville, which had ceased providing acute care in 2001.

On August 8, 2004, SJH opened another acute care facility in Cumberland County, SJH-Regional, located at 1505 West Sherman Avenue in Vineland. Pursuant to certificates of need initially sought by SJH in 1999 and subsequently approved by the Department in 2004, SJH-Bridgeton and SJC-Newcomb ceased providing acute care services as of August 8, 2004, and their acute care patients were transferred to the new Vineland facility at SJH-Regional. On August 17, 2004, SJH surrendered the acute care licenses of SJH-Bridgeton and SJH-Newcomb. Instead of providing acute care, SJH-Bridgeton and SJH-Newcomb continued to provide other medical services, such as ambulatory care and psychiatric services.

The discontinuation of acute care of SJH-Bridgeton was particularly significant to SJH's charity care subsidy entitlement, in that the City of Bridgeton is classified under census data as one of the ten poorest municipalities in the State of New Jersey, whereas the City of Vineland, where SJH-Newcomb and SJH-Regional are located, is not within that top ten ranking.

In its August 6, 2004 memorandum allocating statewide charity care subsidies for SFY 2005, the Department allocated to "South Jersey Hospital," as a singular entity, a charity care subsidy of 43% of RCCP, which was the minimum subsidy allowable under the revised statute. That allocation did not treat SJH as a hospital located within one of the State's ten poorest municipalities. The Department reached that determination because it considered SJH-Bridgeton "to no longer have the legal capacity to operate as a general hospital in New Jersey," even though SJH-Bridgeton continued to provide other off-site services that complemented the acute care provided in Vineland at SJH-Regional. In support of its reasoning, the Department noted that a general hospital must have the licensed authority and capacity to provide twenty-seven different professional services, facilities and functions, as formerly enumerated in N.J.A.C. 8:43C-2.12 (repealed July 1, 2006). Accordingly, the Department aggregated the charity care data reported in 2002 for SJH-Bridgeton with that of SJH-Newcomb, and determined that SJH's combined overall ranking would entitle it to the 43% minimum statutory rate of reimbursement.

In the course of its August 17, 2005 administrative determination, the Department rejected SJH's claim that it should have received a special subsidy payable to certain "closed" hospitals pursuant to N.J.A.C. 10:52-13.7(b), (c) and (d). Specifically, the Department denied that request for the following reasons:

After careful consideration, the Department determined it was not appropriate to use N.J.A.C. 52:10-13.7 at all to "reallocate" SJH-Bridgeton's charity care subsidies because it was not practical, and had the potential to lead to an inequitable result for SJH. The SFY 2005 charity care allocation was required by L. 2004, c. 71 to be based on the 2002 documented charity care data, which SJH had submitted on a combined basis (as was permissible at the time of the submission), and which the Department could not disaggregate. Because of that, the Department was not able to calculate a charity care subsidy for SJH-Bridgeton and SJH-Newcomb separately, and consequently, could not reallocate their respective charity care subsidies separately either.

Even if the 2002 data for SJH-Bridgeton and SJH-Newcomb feasibly could be disaggregated, the Department further recognized that granting separate SFY 2005 subsidies to SJH for SJH-Bridgeton and SJH-Newcomb under the "closed hospital" regulations set forth at N.J.A.C. 10:52-13.7(b) would have logically precluded SJH's new facility at SJH-Regional from likewise receiving a subsidy. As the Department's final decision explained:

[I]f the Department took that stance [of treating SJH-Bridgeton and SJH-Newcomb as closed hospitals], then SJH-Regional would not have been eligible to receive a reallocation of the charity care subsidy associated with the closed hospitals. As specified at N.J.A.C. 10:52-13.7(b), a hospital is only eligible to receive the reallocation of a charity care subsidy if the hospital was entitled to receive a subsidy in its own right in the same fiscal year in which the closed hospital was last engaged in business. Because charity care subsidies are based on historical data (which the Department believes is predictive of a hospital's future need for subsidy), and a hospital in its first year will not have historical data on which to base a charity care subsidy, a new hospital will not be entitled to receive a charity care subsidy in the first year of its operations. Thus, if SJH-Regional were classified as a new hospital, rather than as the relocated SJH-Newcomb, SJH-Regional would not have been eligible to receive any of the reallocated charity care subsidy from SJH-Bridgeton (and SJH-Newcomb) in any event.

[Emphasis in original.]

Lastly, the Department rejected SJH's contention that it was entitled to an enhanced subsidy for SFY 2005 under the theory that SJH-Bridgeton used to be an acute care facility located in one of the State's ten poorest municipalities. The Department decided that granting an enhanced subsidy to SJH in these circumstances would not be consistent with the legislative intent of N.J.S.A. 26:2H-18.59i:

[A]lthough the law is silent regarding calculation of a subsidy for a closed hospital located in one of the lowest income municipalities and any process for redistributing such funds, the Department does not believe that the Legislature intended for any hospitals not otherwise eligible for the enhanced subsidy to obtain direct benefits of the enhanced subsidy by virtue of another hospital's closure, especially if the hospitals were not both in one of the lowest income municipalities. Indeed, the Department does not believe it would be within the spirit of N.J.S.A. 26:2H-18.59i (or L. 2004, c. 71) to award a closed hospital an enhanced subsidy at all, given that the closed hospital would not be providing general hospital services to any patients. Rather, the Department believes that the spirit of the law is for the enhanced subsidy amount to be allocated to the highest-ranked actively operating general hospital within the lowest income municipality (as determined by the relative DCC of all of the actively operating general hospitals within that lowest income municipality), as opposed to being allocated to a closed hospital and then reallocated pursuant to N.J.A.C. 10:52-13.7.

Had it been the intent of the Legislature to have the charity care funding follow the residents of the lowest income municipalities to facilities outside of the lowest income municipalities, the Department believes that the Legislature could have said so. The Legislature did not. As noted, N.J.S.A. 26:2H-18.59i does not address the "reallocation" issue, but L. 2004, c. 71 suggests that all allocations of the SFY 2005 charity care funds had to be made in accordance with the bifurcated methodology set forth at N.J.S.A. 26:2H-18.59i. Thus, the Department assumed that only the closing hospital's subsidy amount as calculated in accordance with the N.J.S.A. 26:2H-18.59ib(2) ranking methodology should be reallocated among hospitals located outside of the lowest income municipalities.

[Emphasis omitted.]

The Department's final decision of October 5, 2005 relied upon

similar reasoning for its SFY 2006 allocation.

Following its receipt of the Department's August 17, 2005 and October 5, 2005 final determinations, SJH filed the present consolidated appeals.

II.

We begin our analysis by repeating well-established principles governing the judicial review of State administrative agencies. Our role as an appellate court is restricted to four inquiries:

(1) whether the agency's decision offends the State or Federal Constitution; (2) whether the agency's action violates express or implied legislative policies; (3) whether the record contains substantial evidence to support the findings on which the agency based its action; and (4) whether in applying the legislative policies to the facts, the agency clearly erred in reaching a conclusion that could not reasonably have been made on a showing of the relevant factors.

[George Harms Const. CO. v. Turnpike Auth., 137 N.J. 8, 27 (1994).]

Because no constitutional issues are before us, our review only concerns the latter three inquiries.

On the whole, "[o]ur function is to determine whether the administrative action was arbitrary, capricious or unreasonable." Burris v. Police Dep't, Township of W. Orange, 338 N.J. Super. 493, 496 (App. Div. 2001) (citing Henry v. Rahway State Prison, 81 N.J. 571, 580 (1980). See also Aqua Beach Condominium Ass'n. v. Dept. of Cmty Affairs, 186 N.J. 5, 16 (2006). The burden of demonstrating that the agency's action was arbitrary, capricious or unreasonable rests upon the party challenging the administrative action. In Re Arenas, 385 N.J. Super. 440, 443-44 (App. Div. 2006); McGowan v. New Jersey State Parole Bd., 347 N.J. Super. 544, 563 (App. Div. 2002); Barone v. Dep't. of Human Servs., Div. of Med. Asst., 210 N.J. Super. 276, 285 (App. Div. 1986), aff'd, 107 N.J. 355 (1987).

With respect to SJH's claim that the Department has misapplied the pertinent statutes and regulations concerning charity care subsidies, we note that "[i]t is settled that '[a]n administrative agency's interpretation of statutes and regulations within its implementing and enforcing responsibility is ordinarily entitled to our deference.'" Wnuck v. New Jersey Div. of Motor Vehicles, 337 N.J. Super. 52, 56 (App. Div. 2001) (quoting In re Appeal by Progressive Cas. Ins. Co., 307 N.J. Super. 93, 102 (App. Div. 1997)). "Absent arbitrary, unreasonable or capricious action, the agency's determination must be affirmed." Wnuck, supra, 337 N.J. Super. at 56 (citing R & R Mktg., L.L.C. v. Brown-Forman Corp., 158 N.J. 170, 175 (1999)). Nonetheless, we are not, of course, bound by the agency's opinions on matters of regulatory law. Levine v. State, Dep't of Transp., 338 N.J. Super. 28, 32 (App. Div. 2001) (citing G.S. v. Dep't of Human Servs., Div. of Youth and Family, 157 N.J. 161, 170 (1999)); see also Mayflower Sec. v. Bureau of Sec., 64 N.J. 85, 93 (1973).

Viewed through this prism of deference, we are satisfied that the Department's charity care subsidy allocation to SJH for SFY 2005 and SFY 2006 is supported by substantial evidence, is neither arbitrary nor capricious, and is consistent with the terms of the applicable statutes and regulations. If anything, we perceive that the Department endeavored to be fair to SJH in dealing with a rather dynamic situation, one in which acute care operations were being shifted out of Bridgeton and Vineland facilities to a new acute care facility in Vineland that lacked a track record of charity care experience.

First, we concur with the Department that SJH was not entitled to an enhanced charity care subsidy for SFY 2005 or SFY 2006 under N.J.S.A. 26:2H-18.59ib(3) arising out of SJH-Bridgeton's former acute care operations in one of the State's ten poorest municipalities. SJH argues that SJH-Regional, which succeeded SJH-Bridgeton's acute care functions, substantially served the same patient population that the Bridgeton hospital used to serve. That may be so, but the statute turns not on the residency of the patients, but the location of the hospital itself. The wording of the statute could not be any plainer:

(3) Notwithstanding the provisions of paragraph (2) of this subsection [involving RCCP rankings] to the contrary, each of the hospitals located in the 10 municipalities in the State with the lowest median annual household income according to the most recent census data, shall be ranked from the hospital with the highest hospital-specific reimbursed documented charity care to the hospital with the lowest hospital-specific reimbursed documented charity care. The hospital in each of the 10 municipalities, if any, with the highest documented hospital-specific charity care shall receive a charity care payment equal to 96% of its hospital-specific reimbursed documented charity care.

[N.J.S.A. 26:2H-18.59ib(3) (emphasis added).]

The statute requires the hospital to be "located" in one of the State's ten poorest municipalities. It does not include hospitals located outside of such a qualifying municipality that happen to serve patients who themselves reside in the poor municipality. If the Legislature had wanted to benefit such hospitals, it surely knew how to express that concept in the statute. It did not. Indeed, if the Legislative had more broadly defined the enhanced subsidy in N.J.S.A. 26:2H-18.59ib(3) to sweep in hospitals that "serve" patients from the ten poorest municipalities, the subsidy likely would have extended to scores of suburban hospitals in the denser areas of New Jersey, rather than being targeted to the urban hospitals physically located in the poorest municipalities.

We also regard as reasonable the Department's treatment of SJH-Bridgeton as a facility ineligible for an enhanced subsidy in SFY 2005, despite the fact that SJH-Bridgeton's acute care operations did not cease until August 8, 2005, two days after the Department's August 6, 2005 memorandum allocating charity care subsidies for SFY 2005. The Department implicitly regarded SJH-Bridgeton's brief continuation of acute care operations in that fiscal year as de minimis, and we will not disturb its sensible determination. Additionally, SJH-Bridgeton provided no acute care whatsoever in SFY 2006.

SJH strongly disagrees with the Department for not attempting to have the reported charity care data from fiscal year 2002 disaggregated, so that the date for SJH-Bridgeton could be isolated from that of SJH-Newcomb. The record is unclear as to exactly how much time and effort would be needed to locate the relevant data sources, make the necessary calculations, and verify their accuracy. We defer to the Department's assessment as to the administrative infeasibility of such a task.

Moreover, we concur with the Department's conclusion that even if such disaggregation were accomplished and separate SFY 2005 and SFY 2006 charity care subsidies were awarded for SJH-Bridgeton (using a 96% reimbursement rate) and for SJH-Newcomb (using a 43% reimbursement rate), on the theory that those facilities were "closed" hospitals, those dual allocations would then have imperiled the justification for SJH-Regional to receive, as a new hospital, any charity care subsidy for SFY 2005 and SFY 2006.

The Department's administrative decision correctly observes that N.J.A.C. 10:52-13.7(b)(1) provides that "[t]o be eligible for a portion of [a] closed hospital's charity care allocation . . . [t]he hospital shall have received a charity care subsidy allocation under the methodology set forth in N.J.S.A. 26:2H-18.59e [the allocation formula that preceded the August 2004 statutory amendments] . . . during the State Fiscal Year in which the closed hospital ceased operations as a general hospital[.]" Id. SJH-Regional, as a new hospital which did not exist in the relevant data-collection year of 2002, would not have qualified in its own right under N.J.S.A. 26:2H-18.59e, or under the successor statute, N.J.S.A. 26:2H-18.59i, for a charity care subsidy in SFY 2005. That is so because the statutory charity care subsidy formula is tied to data for charity care claims submitted to the Department "for the most recent calendar year." See N.J.S.A. 26:2H-18.59i(a)(1) and (2). As of August 2005, SJH-Regional had no such charity care claims data for "the most recent calendar year," i.e., 2004.

Hence, SJH-Regional would not have qualified to inherit, in effect, SJH-Bridgeton's former subsidy. Had the Department awarded such an enhanced subsidy to SJH-Regional, it may well have risked objections from other hospitals, whose own allocations from the finite pool of funds for charity care subsidies might have been adversely affected. Instead, the Department crafted a solution that neither gives SJH a windfall for its new facility at SJH-Regional in Vineland nor unduly penalizes it for moving its acute care treatment operations out of Bridgeton.

We have fully considered all of the remaining arguments advanced by SJH and determined that they lack sufficient merit to warrant further discussion. R. 2:11-3(e)(1)(E).

In sum, SJH has failed to overcome the "strong presumption of reasonableness [that] must be accorded [to an] agency's exercise of its statutorily delegated duties." In re Certificate of Need Granted to the Harborage, 300 N.J. Super. 363, 380 (App. Div. 1997).

Affirmed.

 

The State Fiscal Year runs from July 1 to June 30.

SJH also has operated a fourth facility, SJH-Elmer, in Salem County, whose operations and charity care subsidy are not germane to this appeal.

We note from the appendix that the majority of New Jersey hospitals received this same 43% subsidy.

Although the precise sums are not contained in the record, we were advised by SJH's counsel at oral argument that the Department's decision resulted in SJH receiving about "seven figures less" than what it claims it is entitled to in SFY 2005 charity care subsidies. We also learned at oral argument that SJH has filed an appeal of the Department's allocation for SFY 2007, for which SJH received the same subsidy that it received in SFY 2005 and SFY 2006. We do not address any new or distinct issues here that may be involved in that appeal.

We recognize that the Department used fiscal year data from Fiscal Year 2002, rather than 2004, to calculate the subsidies for SFY 2005 and SFY 2006. No one challenges that source of data in this appeal, and we presume that 2002 is the nearest calendar year for which the Department had reliable data to use for this purpose.

We are not persuaded by SJH's argument that SJH-Regional deserves SFY 2005 and SFY 2006 subsidies based on the fact that it has the same corporate parent as SJH-Bridgeton. The relevant statutes and regulations pertain to "hospitals," not to their owners or business affiliates.

We also discern no basis in the record to compel the Department to make an "alternative distribution" of a closed hospital's DSH Funds under N.J.A.C. 10:52-13.7(f), which must be predicated upon an agreement between the Commissioner of Health and Senior Services and the Commissioner of Human Services that such alternative distribution is necessary for "maintaining beneficiary access to health care services." Ibid. No such joint agency determination appears in the record, nor is there sufficient evidence before us to require one to have been made. We also note that the Department of Human Services is not a party to this litigation.

(continued)

(continued)

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A-0122-05T3

October 31, 2006