Court Opinion

ID: 7300228
Source: CourtListenerOpinion
Date Created: 2022-07-25 20:46:40.289421+00
Date Added: 2024-06-11T16:19:26.954960
License: Public Domain

Handler, J.,
concurring. I find myself in agreement with the opinion of this Court. Recause of the novelty, complexity and importance of the issues involved in this litigation, I feel constrained to comment upon certain aspects of the controversy and the manifold problems which it presents.
I
The Health Care Facilities Planning Act of 1971, N. J. S. A. 26 :2H-1 et seq., represents a new governmental approach in this State for dealing with the acute social concerns over the escalating costs of hospital health care and services. It fashions a legislative and administrative regulatory format governing health care facilities and services which are deeply impressed with the public interest and general welfare. Primary responsibility for administering the State’s health care program is vested by the Act in the State Department of Health. The regulatory tools of the Commissioner of Health are directed to two majOT areas, economy and quality. Through the transfer of jurisdiction over hospital licensing from the former Department of Institutions and Agencies, the Department of Health oversees the quality of hospital care. N. J. 8. A. 26: 2H-12, -13, -19, -22. Cost-containment and efficiency are addressed through the certificate of need program which requires health care providers to demonstrate that any proposed creation or expansion of services is necessary, economical and consistent with the orderly development of adequate health care services, N. J. S. A. 26:2H-7 to 11; St. Vincent's Hospital v. Finley, 154 N. J. Super. 24 (App. *574Div. 1977); St. Joseph’s Hospital and Medical Center v. Finley, 153 N. J. Super. 214 (App. Div. 1977), certif. den. 75 N. J. 595 (1978); and through statutory provisions which authorized the Commissioner of Health, in cooperation with the Commissioner of Insurance, to certify and regulate certain costs of health care services. N. J. S. A. 26:2H-5, -18.1
In September 1974 the State notified hospitals that beginning in 1975 the State would implement its rate-review authority under the Act. In re 1975 Hospital Rate Review Program Guidelines, Report of Hearer, July 3, 1975, at 8 (hereafter Goldmann Report). Annual Hospital Review Program Guidelines, classified as temporary regulations (Guidelines), N. J. A. C. 8:31-14, -21, which set forth criteria for “reasonableness” used to review proposed hospital budgets, were promulgated in February 1975. These were accompanied by reporting conventions specified in the Standard Hospital Accounting and Rate Evaluation (SHARE) Manual, N. J. A. C. 8:31A-1.1, et seq.
The Guidelines applicable to this appeal (1976 Guidelines) required that in the Fall of 1975, hospitals submit proposed 1976 budgets with their approved 1975 budget figures and their projected actual 1975 costs. A departmental health economics analyst would then determine initially whether the requested rate increase, evaluated in terms of the hospital’s aggregate or “global budget”, exceeded the 1975 rate by a *575specified percentage and, if it did not, the increase would automatically be approved. 1976 Guidelines, §§ 5(c), 7. If it did the hospital’s request would be subjected to further review, entailing a comparison of the proposed budgeted operating costs for particular units of service (“cost centers”), with similar unit costs2 derived from comparable hospitals (“peer groups”).3 Id. § 5(d). Costs exceeding the median unit costs specified for the particular cost-center by a particular percentage (“challenge ratio”) would be deemed presumptively unreasonable, and then deducted from the adjusted budget base, Id. § 8 (taking into account volume changes, general inflation and other variables, Id. % 5(e-l)), and excluded from the calculation of the per diem “proposed administrative rate” for reimbursement by health service *576corporations, such as Blue Cross and Medicaid, for covered patients. Id. §§ 3, 5.
This administrative review procedure was followed in this case and resulted in a determination by the Commissioners of the Departments of Health and Insurance, based upon the findings, conclusions and recommendation of a hearing examiner, to disallow for reimbursement purposes the hospital’s budget requests for $124,871 to operate its emergency medical services and $12,000 for its newborn nursery services for the year 1977. In doing so, the agency rejected Kessler’s main contentions that it had been forced to incur the increased costs in both the emergency room and newborn nursery cost-centers in order to comply with Department of Health hospital licensing standards and that, in addition, several of the hospitals in its emergency room-peer grouping were not truly comparable because they were not in conformity to the licensing standards of the Department or because unique circumstances allowed them to conform by making less expensive staffing arrangements. The Appellate Division, however, accepted these contentions and set aside the agency determination. I believe the majority is correct in reversing the judgment of the Appellate Division.
II
Because the administrative proceedings called for by the Health Care Facilities Planning Act are somewhat novel and unusual, we ought to address first the standard of judicial review applicable to the agency -decisions arising under the Act. The Appellate Division professed to be aware that its scope of review was “traditionally limited” since the proceedings involved administrative expertise. It concluded, nevertheless, that the Department’s disposition was “without evidential foundation in the record and * * * [was] an arbitrary and capricious one.” 154 N. J. Super. at 155.
The rate-review proceedings under the Health Care Facilities Planning Act are designed in large measure to elicit *577quasi-legislative determinations analogous to prospective rate-making generally characteristic of regulated industries. See Permian Basin Area Rate Cases, 390 U. S. 747, 776-777, 88 S. Ct. 1344, 1364-1365, 20 L. Ed. 2d 312, 341-342 (1968); State v. N. J. Bell Tel. Co., 30 N. J. 16, 29-30 (1959); Central R. Co. of N. J. v. Department of Public Utilities, 7 N. J. 247, 257 (1951); Public Service Coordinated Transport v. State, 5 N. J. 196, 214 (1950). This administrative function ordinarily invokes judicial deference to the discretion exercised by the agency experts. Permian Basin Area Rate Cases, supra; see State v. N. J. Bell Tel. Co., supra; also FPC v. Moss, 424 U. S. 494, 500, 96 S. Ct. 1003, 1007, 47 L. Ed. 2d 186, 192 (1976). In certain contexts, it calls for a narrow scope of judicial review, one based simply upon whether or not the agency action is arbitrary or capricious. See Ethyl Corp. v. EPA, 176 U. S. App. D. C. 373, 409, 541 F. 2d 1, 37 (D. C. Cir.) cert. den. 426 U. S. 941, 96 S. Ct. 2663, 49 L. Ed. 2d 394 (1976). Even with respect to quasi-legislative action in the nature of administrative rate-making, however, our courts have generally insisted upon a level of agency performance more exacting than that which merely escapes the taint of caprice or arbitrariness. Permian Basin Area Rate Cases, supra, 390 U. S. at 790-792, 88 S. Ct. at 1372-1373, 20 L. Ed. 2d at 349-350; Public Service Coordinated Transport v. State, supra 5 N. J. at 223; In re Plainfield Union Water Co., 57 N. J. Super. 158, 167-168 (App. Div. 1959).
We should not in this case retreat to the less discriminating standard of review embraced by the concept of arbitrary and capricious action. There should be applied the time-tested precepts of judicial review of administrative action, that agency action proceed upon an evidential foundation and that the grounds of decision be fully revealed, see, e. g., In re Heller, 73 N. J. 292, 309 (1977); Mayflower Securities Co. v. Bureau of Securities, 64 N. J. 85, 92-93 (1973); State v. N. J. Bell Tel. Co., supra 30 N. J. at 29-30, 34; Central R. Co. v. Department of Public Utilities, supra 7 *578N. J. at 260-264; N. J. Bell Tel. Co. v. Communications Workers, 5 N. J. 354, 375-379 (1950); Public Service Coordinated Transport v. State, supra 5 N. J. at 223.
In confirming this judicial approach to the review of agency proceedings under the Health Care Facilities Planning Act, it is important that the courts be mindful that the problems of providing health care services and facilities are complex and controversial and that the Legislature has seen fit to commit the effectuation of the public policy in this area to the judgment of administrative specialists. The discretion delegated to the administrative experts must be accorded ample range and flexibility to fulfill the Legislature’s expectations and to accomplish the objectives of the legislative program. Cf. Vermont Yankee Nuclear Power Corp. v. National Resources Defense Council, Inc., 435 U. S. 519, 524, 543-544, 98 S. Ct. 1197, 1202, 1211-1212, 55 L. Ed. 2d 460, 467, 479-480 (1978); Kleppe v. Sierra Club, 427 U. S. 390, 412, 96 S. Ct. 2718, 2731, 49 L. Ed. 2d 576, 591-592 (1976); In re Redi-Flo Corp., 76 N. J. 21, 34-35 (1978); New Jersey Guild of Hearing Aid Dispensers v. Long, 75 N. J. 544, 562-563 (1978). As expressed in Permian Basin Area Rate Cases, supra, 390 U. S. at 776, 88 S. Ct. at 1364, 20 L. Ed. 2d at 341, “* * * the width of administrative authority must be measured in part by the purposes for which it was conferred.”
In this frame of reference, agency determinations should be sustained by courts on review if they are supported in the record by evidence which can fairly be regarded as adequate and reliable, .taking into account the purposes of the governmental effort, the nature of the administrative function, the complexity of the subject matter, the type and quality of evidence customarily available in the health care field, and the need for administrative expertise in resolving controversies and effectuating the policies of the statute. In view of the significance and importance, as well as the newness, of the governmental action in this area, the grounds upon which the administrative agency has acted, its reasoning, and the *579manner in which the evidence of record has been transmuted into ultimate conclusions should be clearly disclosed and carefully explained. Cf. SEC v. Chenery Corp., 332 U. S. 194, 196-197, 67 S. Ct. 1575, 1577, 91 L. Ed. 1995, 1999 (1947); Eastern Central Motor Carriers Assoc. v. United States, 321 U. S. 194, 205-212, 64 S. Ct. 499, 505-508, 88 L. Ed. 668, 677-680 (1944). See generally, Stewart, “Vermont Yankee And the Evolution of Administrative Procedure”, 91 Earv. L. Rev. 1805 (1978); Byse, “Vermont Yankee and the Evolution of Administrative Procedure: A Somewhat Different Yiew”, Id. at 1823; K. Davis, Administrative Law Treatise, ch. 6, §§ 6:35-6:37 (2d ed. 1978).
These guiding principles lead, I respectfully suggest, to the conclusion that the determination of the Commissioners in this case was essentially correct. Giving full respect to the agency expertise, the Court can be satisfied that the administrative decision was based on reliable evidence demonstrating that Kessler’s projected costs for its emergency room facility and newborn nursery were presumptively unreasonable in accordance with the regulatory criteria of the Departmental Guidelines and that the hospital had not produced countervailing proofs sufficient to overcome that presumption or establish the reasonableness of these costs. Nevertheless, it is proper to point out that the agency decision did suffer from a failure to explain adequately the factual basis and criteria it applied for its rejection in toto of the hospital’s request, for increased costs for the operation of its emergency room facility. I join the majority, therefore, in sustaining the agency determination with respect to the costs relating to the newborn nursery facility but in requiring a remand to reconsider the budget request for the emergency room facility.
Ill
Since we have concluded, under the appropriate standard of judicial review, that the agency has not explained the basis for its determination with respect to the emergency *580care budget request, some further observations may be of assistance on the remand.
Kessler contended, apart from the reasonableness of the actual costs of operations, it was unfairly compared with other hospitals which were not providing the same high quality emergency medical services as it was doing in optimum or maximum compliance with departmental regulations. In projecting this argument, the hospital appears to be quarreling in part with the operative regulations of the Guidelines themselves. Its contentions, so understood, were improperly raised and improvidently considered by the court below. 154 N. J. Super. at 154.
Under the Health Care Facilities Planning Act, the Commissioners of Health and Insurance, as noted, had been charged with the responsibility of approving for “reasonableness” the reimbursement rate paid by hospital service corporations to hospitals and other health care facilities. It is expressed, as a matter of strong legislative policy, that
hospital * * r 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. fl. A. 26:2H — 1].
This Court has already determined that these standards are sufficiently definite to guide the Commissioners in their exercise of the rate-review authority delegated under the Health Care Facilities Planning Act. Borland v. Bayonne Hospital, 72 N. J. 152, 158, cert. den. 434 U. S. 817, 98 S. Ct. 56, 54 L. Ed. 2d 73 (1977).
The Commissioners had determined to exercise their delegated powers to achieve the “reasonable cost” goal of the Act by instituting a rate-review program that defines the “reasonableness” of hospital costs for a particular service in terms of group norm costs incurred for the service by “com*581parable” providers.4 Cost-benefit concerns are integral to “reasonable cost”, as emphasized in the policy declaration of the Act,5 and, as petitioners assert, cost-containment is central to the concept of “reasonable cost”. “The pivotal mechanism * * * for controlling costs * * * is the prospective basic rate for routine services as determined by the use of hospital comparison groups and previous hospital experience.” S. Law, Blue Gross: What Went Wrong (1974) 106 (discussing the Yew York plan).
By asserting that its peers were not truly comparable because of the “diversity * * * as to how each hospital organizes and manages its particular activities * * *”, in effect Kessler was seeking to secure an individualized review of its budget. This approach to peer comparison, however, has already been rejected:
*582The Guidelines do not assume that hospitals are so similar as to be identical; they do not recognize cost differences between and among hospitals, and the statistical comparisons represent as reasonable an approach to relating costs to services offered as is presently possible.
[Goldmann Report at 32] .6
Cf. E. I. du Pont de Nemours Co. v. Train, 430 U. S. 112, 126-133, 97 S. Ct. 965, 974-977, 51 L. Ed. 2d 204, 216-220 (1977); Permian Basin Area Cases, supra, 390 U. S. at 768-769, 88 S. Ct. at 1360-1361, 20 L. Ed. 2d at 336-337; FPC v. Texaco, 377 U. S. 33, 44, 84 S. Ct. 1105, 1112, 12 L. Ed. 2d 112, 119 (1964).
Moreover, the evidence of alleged improper peer grouping, as applied in this case, was slight. If a hospital were allowed, on such an insubstantial showing, to contest the peer group comparison in a rate-review hearing, the administrative proceeding could well become unmanageable. Furthermore, the hospital is not deprived of its opportunity to contest factually the agency rejection of its budget request and to justify by independent proof the reasonableness of the additional costs it seeks.
It is important in assessing the strength of the hospital’s attack upon the application of the peer group mechanism to remember that the Department is not engaged in rate-making as such. It is administering a cost-containment program relating not to the establishment of a fair rate of return but solely to reimbursement rates applicable to patients covered by hospital service corporations. The hospital is not deprived *583of its managerial prerogatives to set rates for other patients, nor is it threatened with the unconstitutional loss of property. Compare In re Intrastate Industrial Sand Rates, 66 N. J. 12, 23—24 (1974); In re New Jersey Power & Light Co., 9 N. J. 498, 535 (1952); Atlantic City Sewerage Co. v. Board of Public Utility Comm’rs., 128 N. J. L. 359, 367-371 (Sup. Ct. 1942), aff'd o.b. 129 N. J. L. 401 (E. & A. 1943). Accordingly, I agree with the Court that, while the Commissioners should not have omitted to refer to this particular argument of the hospital concerning the unfairness of the basic peer grouping, this failure was not significant and need play no part in the remand proceedings.
Kessler also argues that its actual costs for the emergency room operations were predicated upon its compliance with departmental regulations and consequently these costs must be deemed “reasonable” and allowable for reimbursement purposes.
It cannot be overstressed that the policy declaration of the Act emphasizes cost-efficiency as much as quality. N. J. S. A. 26:2H — 1. Read carefully, it adjures that the “vital concern” to the State is only those high quality health care facilities and services that are needed, efficiently provided, properly utilized and reasonably priced. By implication, the State is not concerned with encouraging quality health care that is unneeded, inefficiently provided, underutilized, and not reasonably priced. The paramount objective of the Act is to promote only those “highest quality” health care services that are justifiable in a cost-benefit sense. The certificate of need program accomplishes this goal by placing a direct check on proposed expansion programs. N. J. S. A. 26:2H-7 to 11. The rate-review program, N. J. S. A. 26:2H-5,-18, attempts to achieve this goal through the more difficult process of manipulating and influencing the incentives in the third-party reimbursement mechanism so that health care providers are rewarded for cost-efficient and penalized for cost-extravagant behavior.
*584To the extent operating costs reflect the cost of compliance with departmental regulations governing the quality of health care, they must he assayed within the cost-containment framework of the regulatory scheme. When cost-of-compliance is tendered in a rate-review proceeding to justify a budget increase, the agency is entitled to demand substantial or persuasive proof from the hospital that these costs in fact are compelled and constitute the necessary, unavoidable and irreducible costs of compliance.
It does not appear that Kessler marshalled persuasive proofs on this issue. The language of the departmental regulation governing emergency medical services, N. J. A. O. 8:43 B-l.ll ,(q) (7) (ii), does not mandate that there be licensed physicians on emergency medical duty 34 hours every day. The departmental enforcement of that regulation does not reflect such an interpretation or application. The actual practice among comparable hospitals reveals different levels of adherence to the regulation and the testimony at the hearing demonstrates an administrative understanding that does not demand the kind of overfulfillment of the regulatory standard undertaken by Kessler. Equally unconvincing is the hospital’s position that it was compelled by the Department, through a field representative, to comply with the emergency care regulation at this very costly level. The field representative merely cited Kessler for a deficiency because it had been using interns in the emergency room; she did not insist that deficiency be rectified by the hiring of full-time, 34-hour-per day, licensed physicians. Moreover, she herself did not understand that the regulation called for this saturated implementation and her own experience in the field with respect to emergency room facilities indicated that much more modest modes of emergency room operations were employed by most hospitals. Additionally, the hospital was dealing not with a supervisor or superior administrator in the licensing division but only with a field representative with respect to a deficiency arising out of a single incident. *585And, though, it may have overreacted at first to the deficiency citation, the hospital learned promptly upon the initial rejection of its emergency room budget request that its proposed method of compliance would not be regarded as a satisfactory, cost-efficient way to comply with departmental standards for furnishing emergency care services.
It would appear that the Commissioners were entitled on this record to consider that the hospital had not overcome the regulatory presumption of unreasonableness with respect to its requested emergency room operating costs. We are unenlightened, however, as to whether they so viewed the evidence before them. No findings were made or conclusions drawn to indicate that such a determination was reached. Furthermore, no attention was paid to the hospital’s claim that it had no available alternatives in furnishing emergency medical care. It is entirely appropriate therefore that the agency on remand address the issue of costs of compliance and whether the hospital has made a sufficient evidential showing by substantial and persuasive evidence. Moreover, if in the judgment of the agency there has been a failure of proof, attention should be focused on whether some portion of the requested budgetary increase should be allowed as reasonable to the extent such increased costs are realistically attributable to overcoming deficiencies and improving the quality of emergency care services subject to the cost-containment considerations of the Act.
Justice Mountain joins in this opinion.

A recent amendment to the Health Care Facilities Planning Act, L. 1978, c. 83, effective July 20, 1978, while maintaining the basic cost control scheme o£ the initial act, has modified the jurisdictional arrangements and slighlty altered the review procedures under the act. Rate review is now placed primarily in the hands of a Hospital Rate Setting Commission under the auspices of the Department of Health which is to regulate rates in accordance with the new statutory scheme creating “preliminary cost base[s]” and “certified rate base[s]”. N. J. S. A. 26:2H-4.1. That amendment, of course, is not applicable to this case.

The unit cost was derived by dividing total allowable costs in the cost-center by a predefined unit of service, such as patient days or number of visits. The unit cost was then ranked with those of the peer group hospitals to derive a “median” reasonable unit cost. Guidelines § 6; Exhibit I.

According to the Goldmamm, Report at 19 “[t]he approach [of the Guidelines] to determining the reasonableness of operating costs involves a multi-faceted analysis of the functions of a particular hospital within a group or groups of hospitals. This analysis comprises three essential elements which may, in summary, be described as (1) data definition by cost centers, peer groupings and units of service; (2) a method for measuring reasonableness by base period costs, cost increases and employee compensation levels, and finally, (3) the quantification of the Guidelines.”
The Guidelines classified cost-centers into different levels according to the degrees of comparability deemed to exist among hospitals for the particular service. § 6. Level 1 cost-centers, defined as those for which a “good deal of commonality exists among similar hospitals”, were grouped or clustered for aggregate tests of reasonableness. Id. §§ 6(a), 7. Level 2 cost-centers, defined as those for which “some commonality exists among similar hospitals and for which units of service are available”, id. § 6(b), were analyzed separately. Id. § 7. Both the emergency room and the newborn nursery, at issue in this appeal, were classified as level 2 centers. Id., § 12; Exhibit I.

A fundamental assumption of the regulatory approach adopted in New Jersey and other states that have enacted programs of partial economic regulation to contain escalating health care costs has been that inappropriate incentives in the third-party reimbursement mechanism have been a major cause of inflation in the hospital industry. See generally, Weiner*, “ ‘Reasonable Cost’ Reimbursement for Inpatient Hospital Services Under Medicare and Medicaid: The Emergence of Public Control”, 3 Am. J. L. & Med. 1 (1977); Enthoven, “Consumer-Choice Health Plan I”, 298 New Engl. J. Med. 650 (Blarch 23, 1978) ; Havighurst, “Health Care Cost-Containment Regulation: Prospects and an Alternative”, 3 Am. J. L. <& Med. 309 (1977). The “reasonable cost” concept implied in state hospital rate-regulation programs is constrained by a variety of factors, notably economy, measured in terms of the entire system, of the costs of comparable providers, and of the hospital’s own internal efficiency. See, e. g., Weiner, supra.

The statute, as recently amended, emphasizes the responsibility of the Department of Health to further the “State’s policy with respect to health . . . care facility cost containment programs” and the legislative goal to “contain the rising cost of health care services” as well as to “promote the financial solvency of hospitals and similar health care facilities”. N. J. S. A. 26:2H-1, as amended L. 1978, c. 83.

inherent in the peer comparison approach is “[t]he assumption * * * that, with regard to routine costs, there should be no significant deviations among comparable providers. Holding constant those criteria which account for significant deviations (size, location, and so on), in the absence of extraordinary circumstances, any major difference would relate to the efficiency of the hospital’s operations. * * * The system provides an incentive to hospitals to reduce routine costs toward the group norm.” Weiner, supra, 3 Am. J. Law & lied. at 25.