Harford Memorial Hospital v. Health Services Cost Review Commission

Lowe, J., delivered the opinion of the Court. Having limited success in its appeal to the Circuit Court for Harford County, the Harford Memorial Hospital turns to this Court for respite from a decision of the Health Services Cost Review Commission. That Commission was established by the Legislature initially to cause the public disclosure of the financial position of hospitals, but subsequently to initiate investigation, to review and approve rates and to promote and approve alternate methods of rate determination. — the rate review — By expression of its intent, Md. Code, Art. 43, § 568H, and by delegation of its powers, § 568U, the Legislature authorized reviews and investigations purposed to assure purchasers of health care services that: —hospital costs are “reasonably” related to its service; —“the hospital’s aggregate rates are reasonably related to the hospital’s aggregate costs;” —“rates are set equitably among all purchasers or classes of purchasers of services without undue discrimination or preference.” Pursuant to such review, the statute goes on to say that: “In order to properly discharge these obligations, the Commission shall have full power to review and approve the reasonableness of rates established or requested by any hospital subject to the provisions of this subtitle. No hospital shall charge for services at a rate other than those established in accordance with the procedures established hereunder.” § 568U (b). ⁴⁹¹ Although more substantial powers are spelled out under other circumstances, such as when hospitals petition to increase rates, the issues here arose when on May 17, 1976, the Commission exercised its responsibility to review Harford Hospital’s existing rates and charges based on the budget year 1977. — telephone charges; admission charges; room rates — Among other issues not here relevant, the Commission requested that patients’ telephone charges be reported by allotted rates rather than computing generally and allowed for in the daily rate charges of the hospital.

On that issue, the trial judge affirmed the Commission. We agree with the trial judge for reasons he expressed. “The Hospital has been absorbing the costs of patient telephones in its rate structures. It says that it computes the cost at ten cents per day per patient and that it is simply not worth it to segregate this cost from the rates and bill it separately. Blue Cross concedes that if only ten cents were involved, there would be no controversy but, maintains that the Hospital has improperly allocated only $6,000.00 to the patient portion of operator assisted calls instead of what Blue Cross says is the true cost, $67,000.00.

The effect of the Commission’s ruling is to get at the bottom of the situation by excluding the cost of patient telephones as determined by its staff after review of the situation at the Hospital. In the divergence between the contentions of the Hospital and of Blue Cross, it does not seem arbitrary, capricious or unreasonable for the Commission to adopt a course of action which would get at the facts.” A second issue affirmed by the trial judge related to the inclusion of an admission charge to each patient admitted to the Hospital. Implicit in this recommendation by the Commission is the commensurate lowering of the daily room ⁴⁹² rates which heretofore reflected those revenues for which the admission charge was intended to compensate, i.e., communications, medical staff administration, and medical records, but as pointed out by the judge “ironically” not the admission office. Again we agree with the reasoning of the trial judge as set forth. “In greatly oversimplified lay terms it appears that the Commission is concerned that the traditional inclusion of overhead costs in daily room rates and other charges provides hospitals with a financial stake in prolonged patient stays.

By assuring the hospital that its overhead costs will, at least partially, be recouped through the admission charge, an incentive will be provided to ‘reduce excessive lengths of stay, marginal ancillary utilization, and will foster pre-admission testing.’ Looking for ways to ‘promote the most efficient and effective use of health care hospital service’ is one of the Commission’s reasons for existence. Section 568U (c)” Even if we did not agree wholeheartedly with the Commission, there is little room for change by us since “... its judgment is accorded the respect due an informed body that is aided by a competent and experienced staff... Our inquiry, then, is limited to a determination of whether there was illegality or unreasonableness in the commission’s action; when that inquiry is finished, judicial scrutiny ends and the judicial function in the rate rating process is over... In recognition of our limited role, therefore, we have repeatedly held that a reviewing court may not substitute its judgment for that of the commission.” Potomac Edison Co. v. PSC, 279 Md. 573, 582-583 (1977).

Although this is not a rate making question, see § 568U (d), it is a review by a Commission which “may promote and approve alternative methods of ⁴⁹³ rate determination and payment of an experimental nature that may be in the public interest and consistent with the purposes of this subtitle” § 568U (c), and that appears precisely what they have done thus far. The costs which relate to the services are neither inequitable nor discriminatory, but rather disclose and certify to the reasonableness of the rates by such disclosure.- § 568H (1). — out-of-county patient surcharge — Because Harford County had floated and was paying the bonded indebtedness incurred in building the Hospital, Harford Hospital proposed a surcharge for out-of-county residents applicable to the principal and interest on bonds being paid by county residents. The surcharge was to be paid to the county; however, the Commission did not approve it because it believed “Harford Memorial should undertake an extensive fund raising program in Cecil County and the resultant contributions can be used to reduce the operating expenses of the Hospital.” While we are not as enamoured with the Commission’s views as we might like, we are compelled to affirm, persuaded again by the cogency of the trial judge’s opinion which, encapsulated, said that the Hospital’s “... arguments are unimpressive, for all the Hospital... proposed was that the Hospital be asked to be a collecting agent for the benefit of Harford County so that Cecil County users would shoulder some of the burdens now shouldered by Harford County users. But even though the concept is eminently fair, it has little to do with hospital rates.

Appealing as it is to Harford County taxpayers, it amounts to little more than a forced exaction from Cecil County residents to permit the Hospital to make a voluntary contribution to Harford County’s government. The Commission cannot be said to have ⁴⁹⁴ exceeded its authority in declining to sanction this arrangement.” — funded depreciation v. capital facilities allowance — Although the attempt by the Hospital to recompense the county for its outlay by surcharging its neighboring county residents has some appeal as indicative of a concern for past moral obligation, the Hospital seems even more concerned for its future needs. Since we again find the trial judge properly affirmed the Commission in accordance with the standard of review prescribed in the Administrative Procedure Act, Md. Code, Art. 41, § 255 (f), we will use his explanation of the next issue. “Historically, the Hospital has allowed for the replacement of its capital assets through what it calls standard depreciation and has included the sum so calculated as part of its costs in setting its charges. The depreciation is funded, that is, the money is actually set aside in a fund where it earns income which is plowed back into the fund or used for replacement purchases.

The commission on the other hand has rejected the Hospital’s use of funded depreciation and has required the use of a Capital Funds Allowance (‘CFA’) whereby the Hospital sets aside enough currently to accumulate sufficient money to cover a twenty percent down payment on replacements of facilities and equipment. The rationale is that today’s patients should not pay for tomorrow’s replacements, or at least should not be required to pay more than is reasonably necessary to keep the Hospital’s finances in sufficiently sound condition to make a down payment on future acquisitions. The remaining cost of such acquisitions would be defrayed on a current basis by the patients actually using the facilities. The Hospital complains that the Commission based its decision, not on facts related to Harford ⁴⁹⁵ Memorial’s situation, but on the theories outlined in position papers prepared by the Commission’s staff and on the prepared testimony of an accountant delivered in another case.

The Commission, says the Hospital, has ignored the fact that under the depreciation method, today’s patients are paying for facilities they are actually using. This is in contrast to the CFA approach by which today’s patient pays for facilities to be used by tomorrow’s patients. Furthermore, the CFA approach is more appropriate to preserve the financial integrity of those hospitals which cannot afford replacements because of past failure to provide a depreciation reserve than it is for Harford Memorial which has consistently and soundly funded its future needs. Thus, says the Hospital, the Commission is favoring an absolute rule over the case-by-case approach commanded by Health Cost Services Review Commission v. Franklin Square Hospital 280 Md. 233, 240-241 (1977).

In effect, we have a battle of accounting theories. The Hospital’s case, in sum, is that its use of funded depreciation has met the objectives of the CFA approach and is reasonable. The Commission says that the CFA approach is a sounder one and, furthermore, the Hospital’s funded depreciation is improperly based because much of it is calculated on funds supplied by the County which shouldn’t be included in the Hospital’s depreciation base to begin with.” The trial judge decided this question by a single paragraph. “This Court is ill-prepared to decide a controversy involving the relative merits of two accounting theories. The CFA theory adhered to by the Commission seems plausible and the record facts brought out by the Hospital do not persuade me that the Hospital’s historically used method is so superior as to require overruling the Commission.

The ⁴⁹⁶ Commission has obviously found that the specifics have not rebutted the general rule.” We agree that he reached the right result, but will expand upon his reasoning. The issue is not which of two accounting theories is the best. The accounting methodology is of no concern except as its result is reflected in the rate structure. Obviously, in order to fund the scheduled depreciation, these funds must come from rates which are the primary income of the Hospital.

The question then is whether the present hospital patients should provide completely for the facilities for future patients, or whether those patients in the future should pay for the cost of the new facility as it is then being used by them. In light of the fact that the present Hospital is for all practical purposes a gift from the present day Harford taxpayers, in the spirit of fair play it is not unreasonable, inequitable or discriminatory for present day patients — many of whom are the taxpayers donors themselves — to benefit, rather than to preserve that gratuity for future patients when the recycling program comes to an end. Nor is it the burden of the Hospital to persuade the trial judge that the Hospital’s “historically used method” is superior to the one promoted by the Commission. Even if the judge was so persuaded, that is not the test and he would have no right to substitute his judgment for that of the Commission.

The Court of Appeals made it abundantly clear in Blue Cross v. Franklin Sq. Hosp., 277 Md. 93, 110-113 (1976), that it is the Commission’s opinion which of two or more rate structures is best designed to assure fair costs and fiscal integrity, whether one is a standard applied by the Commission or even an experimental procedure developed by it. Unless the Commission’s opinion violates one of the criteria permitting reversal or modification in Art. 41, § 255 (f), the trial judge must affirm. The judge so decided and we agree.

That neither the trial judge nor we on appeal may choose, was more expressly recognized in the court’s opinion relating to the Hospital’s proposal for paying the costs of equipment purchases. The explicit reasoning in the opinion on this aspect ⁴⁹⁷ of the rate structure is appropriate as well to the previous issue. “The CFA concept applies not only to buildings but also to equipment. It appears that the Hospital’s cash requirements for equipment amounted in 1977 to some $519,100.00 but the CFA allowance was but $214,256.00. Part of the resulting shortfall was to be met by use of interest income on building and equipment funds and the addition of leasing costs to the CFA formula allowance, but there still remained some $89,918.00 of cash requirements to be included in the rate structure.

The Commission staff recommended that this $89,918.00 be allowed because the Hospital had spent below the current year’s CFA in the three prior years. Because equipment purchases vary widely from year to year, the Commission staff felt it reasonable to permit the Hospital to include the $89,918.00 in current rates. Blue Cross, however, opposed the staff recommendation and asked that the equipment purchases in excess of the CFA be paid from the Hospital’s considerable surplus, which had built up over the years. This invasion of the Hospital’s principal would reduce the total funds on hand from 124 days of expected revenue to 118 days of expected revenue.

Since the Commission had ruled in the South Baltimore General Hospital case that reducing principal to 35 days of expected revenue was reasonable, Blue Cross argues that there is nothing unreasonable in requiring the Hospital to dip into its surplus to the extent of only six days of expected revenue and that to do otherwise, would be unfair to today’s patient. The Commission agreed with Blue Cross and denied the extra allowance. The Hospital says that its way of doing things was reasonable, just as the Commission’s own staff had found, and that in the absence of competent evidence that the expense was ⁴⁹⁸ unreasonable, the Commission had no right to adopt Blue Cross’ theory. But my task is not to choose between two alternatives if both of them are reasonable.

There is nothing inherently unreasonable about the Commission’s decision to force the Hospital to use some of its accumulated financial fat to defray the expenses in question rather than to recoup them through current patient charges. It is true that by doing so the Commission has made present patients the beneficiaries of money paid by past patients to the Hospital’s depreciation reserve and of the largess of charitable donors. But the alternative would be to charge present