
    In the Matter of Presbyterian Hospital in the City of New York, Appellant, v Hollis S. Ingraham, as Commissioner of Health of the State of New York, et al., Respondents. In the Matter of Presbyterian Hospital in the City of New York, Appellant, et al., Petitioners, v Hollis S. Ingraham, as Commissioner of Health of the State of New York, et al., Respondents. In the Matter of Benedictine Hospital et al., Petitioners, and St. Vincent’s Hospital and Medical Center of New York, Appellant, v Hollis S. Ingraham, as Commissioner of Health of the State of New York, et al., Respondents.
    Argued April 27, 1976;
    decided June 3, 1976
    
      
      Jeffrey A. Barist, W. Neil Thomas, III, Allan L. Gropper and Joel K. Van Wynen for appellants.
    
      Louis J. Lefkowitz, Attorney-General (Jesse J. Fine and Samuel A. Hirshowitz of counsel), for Hollis S. Ingraham, Commissioner of Health, and another, respondents.
    
      Donald B. Da Parma, Robert A. Bicks, Alan C. Drewsen, Beverly I. Katz and John L. Shurtleffior Associated Hospital Service of New York, respondent.
   Memorandum. Determinations affirmed, with costs, on the opinion of Mr. Justice Myles J. Lane at the Appellate Division in the first-entitled proceeding with the following added comments.

Neither the voluntary hospitals nor the Associated Hospital Service (AHS) fall into the usual categories of regulated private enterprises or regulated public utilities. They are quasi-public corporations emburdened with public responsibilities offset by governmentally granted privileges and tax exemptions. Theoretically, it could be argued, and legally sustained, that the voluntary hospitals are entitled to reimbursement limited to the allocated cost of providing services for AHS subscribers. Instead, by statute and regulation the AHS subscribers through the reimbursement scheme are required also to contribute-to nonincome producing services required of the voluntary hospitals from which the paying subscribers may and usually receive no benefit (Public Health Law, § 2807, subd 3; 10 NYCRR, former 86.2 [d]). Hence, the balancing adjustment of the several elements in the AHS formula, as, for example, in the case of the Community Service Factor.

It is simplistic to treat the problem, as do the appellants, as if this were a utility rate regulation case or AHS were a private insurance enterprise. Moreover, the reimbursement rate to the hospitals although fixed in the first instance by AHS, must be approved by both the Superintendent of Insurance and the Commissioner of Health. Their review, as noted by Mr. Justice Lane at the Appellate Division, is subject only to the test of rationality, that is, whether their determinations were arbitrary or capricious.

The nub of the vexing problem is that hospital costs have been spiraling out of reach of an economically tolerable rate-structure for AHS, that is, the rate-structure under which it charges premiums to subscribers. Some of these costs have nothing to do with the costs directly allocable to the services rendered to the subscriber.

Neither AHS nor the subscribers owe a duty morally or legally, except for the statute now applied, to support the hospitals, but only to pay an allocable share of that support, not less than the cost of the services received by the subscribers, who are paying patients. To avoid external supervision of the hospitals, the statutory plan provides for prospective ceilings, calculated on an adjusted past experience, on the reimbursement to them, and the hospitals are obliged to keep their prospective expenditures within the range of AHS reimbursement plus whatever other sources of funds they have. The alternative might well be the direct regulation of costs and services in hospitals by outsiders, a prospect obviously to be abhorred. In this context it borders on the unacceptable, for courts on their own to presume to solve the difficult economic and professional problems involved in providing good and efficient hospital services, or to decide how much of a hospital’s nonincome producing services should be paid by paying patients. That is the task of the experts, in this case, the two State departments which, under the statute, oversee the rates charged by AHS and received by it and the reimbursement rates it must pay to hospitals. If their determinations are rational that should be the end of the judicial inquiry.

Matter of Proccacino v Stewart (25 NY2d 301) is hardly relevant to the problem at hand. It involved the converse, namely, the increase of subscribers’ charges payable to AHS to meet its obligations and yet maintain its required surplus. The dissent in that case turned on the absence of proof to justify the high and thus far uncontrolled hospital costs on which the increased charges were based.

Appellants in effect challenge the purpose of the statute and its prospective ceilings and confuse the aggregate of their costs and how that aggregate is to be shared by AHS subscribers in excess of the cost of services to these paying patients. Moreover, they misapply the complicated formula which is designed to measure in some fair degree the allocation of a burden of ballooning hospital costs spawned only in part by inflation but mostly by hospital excesses in a reimbursed nonprofit setting and the failure of hospital users to identify the share of the cost borne by them through the premiums they pay as a group. As with regular insurance the premium-paying public may think it costs them little or nothing so long as the insurer pays the bill.

Fuchsberg, J. (dissenting in part).

By these two consolidated proceedings the petitioning voluntary (charitable) hospitals sought judicial review of various aspects of the methodology of rate-making relied upon by the State agency respondents in fixing the price which respondent Associated Hospital Service of New York (AHS), a private insurance company organized pursuant to article IX-C of the Insurance Law, was to pay for hospital services furnished by the hospitals to AHS subscribers.

In 1969, in large part in response to the alarming escalation of hospital rates (see Procaccino v Stewart, 25 NY2d 301, 308 [especially dissent of Judges Scileppi, Breitel and Jasen]), the Legislature enacted what is appropriately known as the "Cost Control Act of 1969”, to the end that those costs produced by inefficient, wasteful and perhaps needlessly indulgent hospital practices not be permitted to form a base for the computation of rates (L 1969, ch 957). Indeed, it specifically required that the reimbursement rates certified by the Commissioner of Health to the Superintendent of Insurance be "reasonably related to the costs of efficient production of [hospital] service” (Public Health Law, § 2807, subd 3). Regrettably, however, that intent of the statute appears to have been ignored and, without making any effort to ascertain or measure actual efficiency or waste, the commissioner recommended, and the superintendent promulgated, rates which the hospitals’ figures show to be a gross understatement of their costs.

Accordingly, in addition to affirming the Appellate Division’s order insofar as it granted partial relief to the hospitals, I would grant at least the following further relief:

1. Reimbursement for a proportionate share of the "Community Service Factor” during the years 1971 to 1973. This factor covers emergency and outpatient services charitable hospitals provide to the community without regard to cost. It is not disputed here that, prior to 1970, Associated Hospital Services (AHS) reimbursed hospitals for its fair share of the losses these institutions incur in providing uninsured outpatient and emergency care to the community. In 1970, however, pursuant to what it read as authorization in the Cost Control Act, AHS decided that it would only pay a limited part of its proportionate share of those costs. Moreover, despite the fact that hospitals must fund depreciation expenses, it instituted an accounting method under which depreciation figures were counted as income but not as expenses and under which income from private-room patients was counted twice. This method produced a setoff against community service costs so that AHS, by its calculations, ended up owing nothing at all. Mr. Justice Yesawich, in his dissenting opinion at the Appellate Division, justifiably described that accounting method as "bizarre” (p 497).

For some 30 years prior to the passage of the Cost Control Act, AHS, proportional to the number of inpatient days its subscribers accounted for, had paid a fair share of such costs. When, in 1974, the Legislature, to prevent further evasion of the community service obligation by continued misreading of the statute, mandated the resumption of such proportional payments, subject only to a reasonable ceiling (L 1974, ch 1061, as amd by L 1974, ch 1062), the accompanying expression of legislative history made abundantly clear that the continuance of community service payments had been contemplated when the original Cost Control Act was passed as well (L 1974, ch 1061, § 1, and accompanying Legislative Memorandum).

Thus, the language of section 2807 of the Cost Control Act of 1969 should not have been read as authorization to discontinue payments against community service costs. The payments were not a voluntary subsidy within the discretion of AHS. They were mandatory. The costs of serving the community are just as much a part of the "cost of business” (L 1974, ch 1061, § 1) of a hospital as are its expenses for maintaining laboratories, equipment, and staff, all of which concededly are properly averaged across the number of inpatient days to arrive at the amount AHS must reimburse a hospital per patient day of AHS insured patients. It follows that the commissioner’s failure to require payments for the community service costs in 1971-1973 was arbitrary.

2. Readjustment of the reimbursement formula to take into account the known actual inflation figures for 1973 rather than the AHS gross underestimate based on a three-year weighted average which, Alice-in-Wonderland-like, unrealistically ignored the limited value of figures of past years at a time of rampant inflation. While, subsequently, the commissioner capitulated on the inflation figures for wages, conforming them to actual inflation rates, he did not do so for nonwage items. In my view, it cannot be said that an arbitrary underestimate of the ravages of inflation is related to the "efficient” cost of medical services.

I believe it should be added that these items are particularly oppressive in view of the fact that, as I read it, today’s affirmance sanctions an overall formula for rate-fixing which arrives at its conclusions by substituting for the statute’s intended salutary exaction of savings through efficiency a blunderbuss approach which it is difficult to say is invulnerable to petitioners’ charge that it is arbitrary and confiscatory and thereby imperils the quality of the health care available to our citizens.

Chief Judge Breitel and Judges Jasen, Gabrielli, Jones and Cooke concur; Judge Fuchsberg dissents in part and votes to modify in a separate opinion; Judge Wachtler taking no part.

In the first above-entitled proceeding: Judgment affirmed, with costs, in a memorandum.

In the second and third above-entitled proceedings: Order affirmed, with costs, in a memorandum.  