Society of the New York Hospital v. Whalen, 47 N.Y.2d 839 (1979)

Regulations governing hospital reimbursement rates by Blue Cross, promulgated by the Commissioner of Health, are valid if they have a rational basis and are adopted in accordance with proper procedures, but regulations lacking such a basis or not properly adopted are invalid.

Summary

This case concerns the validity of regulations issued by the Commissioner of Health regarding reimbursement rates for hospital services provided to Blue Cross subscribers. Several hospitals challenged the regulations, arguing they were improperly made retroactive, lacked a rational basis, and were not adopted following proper procedure. The Court of Appeals upheld most of the regulations, including the 100% expense ceiling, but invalidated the regulation eliminating 10% of intern and resident compensation due to the lack of Hospital Review and Planning Council approval and evidentiary basis.

Facts

In the fall of 1975, Blue Cross submitted proposed reimbursement formulas for 1976 to the Commissioner of Health. The Commissioner, anticipating revised regulations, continued the 1975 rates on an interim basis. New regulations were adopted on May 28, 1976, and made effective retroactively to January 1, 1976. These regulations included a limit on a hospital’s base-year expenses and a 10% reduction in the compensation of interns and residents. Several voluntary hospitals claimed that their 1976 reimbursement rates, under the new regulations, were lower than the 1975 rates.

Procedural History

The hospitals initiated an Article 78 proceeding challenging the regulations. Special Term initially dismissed the proceeding based on the statute of limitations, but the Appellate Division reversed and remanded. On remand, Special Term upheld the regulations, and the Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

Issue(s)

1. Whether the regulations promulgated in May 1976 and applied in November 1976 could be applied retroactively to January 1, 1976.
2. Whether regulation 86-1.14(b), which limited a hospital’s base-year expenses, had a rational basis.
3. Whether regulation 86-1.26, which eliminated 10% of the compensation of interns and residents, was validly adopted and had a rational basis.
4. Whether the four-month statute of limitations began on the promulgation of the regulations in May 1976.

Holding

1. Yes, because the legislature intentionally removed statutory bars to retroactive rate-fixing to permit the revised regulations to take effect retroactively for the entire year 1976.
2. Yes, because it was not irrational for the commissioner to relate reimbursement computations to the weighted average cost experienced by all hospitals in the same grouping to contain hospital costs.
3. No, because the regulation was not approved by the State Hospital Review and Planning Council, and there was no evidentiary basis for the 10% reduction.
4. No, because the hospitals could not know whether they would be prejudiced by the regulations until the administrative procedures were completed and individual rates could be projected.

Court’s Reasoning

The court found that the legislative suspension of prior notice requirements regarding rate-fixing allowed for retroactive application of the 1976 regulations. The court also determined that the 100% expense ceiling had a rational basis as a cost-control measure, aligning with the Cost Control Act of 1969’s objective to restrict reimbursement to costs “reasonably related to the costs of efficient production of such service.” However, the court invalidated the 10% reduction in intern and resident compensation, citing the lack of approval from the State Hospital Review and Planning Council, which Public Health Law § 2803 explicitly requires for such regulations. The court also found no evidentiary basis for selecting 10% as the portion of salaries not directly related to hospital services, deeming the determination arbitrary. The court stated, “absent a predicate in the proof to be found in the record, the unsupported determination by the commissioner must also be set aside as without rational basis and wholly arbitrary”. Finally, the court held that the statute of limitations did not begin to run until the individual hospitals could assess the impact of the new rates.