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Thinking Outside the Box on Challenging State DSH Subsidies [PODCAST]

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In this episode, we’re pleased to welcome Jim Robertson, Partner and Chair at Greenbaum, Rowe, Smith & Davis, to discuss thinking outside the box when challenging state DSH subsidies.

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Highlights of this episode include:

  • Takings Clause of the U.S. Constitution
  • Type of government action the takings clause protects private citizens against
  • Challenge government action in the context of hospital reimbursement
  • Court decisions specifically in the healthcare field

Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. Today, we’re pleased to welcome Jim Robertson, partner and chair of the healthcare law department at Greenbaum, Rowe, Smith & Davis. Jim is an experienced thought leader and trusted counsel in the healthcare industry, providing extensive expertise and Medicare, Medicaid, and disproportionate share hospital reimbursement. He was recently designated as Best Lawyers’ lawyer of the year in healthcare in the New York, New Jersey region for 2023. Jim obtained his JD from the Villanova University School of Law. He also received a bachelor’s in environmental and business economics from Cook College at Rutgers University. In this episode, we’re discussing thinking outside the box on challenging state DSH subsidies. Thank you for joining us today, Jim.

Jim Robertson: Thank you, Kelly. It’s really great to be here. Good morning.

Kelly: Good morning. Well, let’s jump in. So, what is the Takings Clause of the U.S. Constitution? And what protections does it provide?

Jim: Well, Kelly, you mentioned we’re going to be thinking out of the box, and we’re certainly going to be doing that this morning. So, I appreciate your comment on that. The takings clause is found in the Fifth Amendment of the United States Constitution. And it prohibits the federal government from taking private property for a public use without the payment of just compensation. The takings clause also applies to state and local governments through the Fourteenth Amendment. And similarly, most, if not every state constitution, has its own takings clause. So, for example, in New Jersey, the takings clause is found in article one, paragraph 20 of the New Jersey constitution. So that’s what we’re talking about. That’s the basic framework of the takings clause. And one of the purposes of the takings clause is to prohibit our federal, state, and local governments from forcing some people alone to bear public burdens, which in all fairness should be borne by the public as a whole. For example, if the government wants to build a highway for the public good and the highway needs to run through someone’s land, the government may take that person’s land to build the highway. But the government has to pay the landowner the fair market value of the land, which it has taken. The theory is that because the government is funded by all taxpayers, paying for the land means that the public as a whole is shouldering the financial burden of building the highway, rather than requiring that single landowner to give up his or her land without receiving any money for it.

Kelly: Very interesting. So, what type of government action does the takings clause protect private citizens against?

Jim: Well, the takings clause protects private citizens from the government physically taking any of their property. This is a very important protection that we’ve been given under our constitution because we all own some private property, right? The takings clause protects us all from having any of our property confiscated without the government paying for it. While the classic example is where the government takes a piece of real property to build a road, like the example I just gave you, the protection is not limited to real estate. The protection also prohibits the government from taking any personal property. So, the government can’t take your car or a watch or a diamond ring or your cell phone without paying you for it. And the takings clause can also prohibit the taking of intangible property, like, let’s say, a patent or a trademark or someone’s professional labor. The takings clause prohibits the government from requiring you to work for the government or someone else without paying you for your labor. And it also protects the government– or it protects you from the government taking any rights that you might have in property, so your right to possess the property, to use and dispose of your property as you see fit, as well as your right to exclude others who you don’t want on your property.

I’ll talk more about that right to exclude others a little bit later. But let me just say that the right to exclude others from your property is probably one of the most important of all rights. The takings clause also prohibits the government from requiring you, a private citizen, to give your property to someone else for their use. So it’s a pretty all-encompassing protection that we’re given. And then we can talk a little bit about how it gets applied as we go through some of the cases a little later on.

Kelly: That’s fascinating. Is there a difference between the government physically taking your private property and the government limiting your use of your private property?

Jim: That’s an excellent question. [laughter] And courts have had a really hard time grappling with that distinction. But the short answer to your question is yes. There is a distinction between government action, which physically takes your property and government action, which limits the use or your use of your own property. So, let’s talk first about physical takings. Purely physical takings are really easy to spot. The government wants your land to build a highway, so it takes your land, physically takes it. However, there are other government actions that are not so obvious. Courts have identified actually three instances when government action is so severe that it amounts to a physical taking. And those three instances are when there has been a physical appropriation of private property by the government. So that’s one, physical appropriation. The second one is where there’s been a complete destruction of a property’s value. So, the government builds a dam and then floods an owner’s land, and then you can’t use the land anymore because it’s flooded. That would be a physical taking. Even though the government didn’t go and take it, what the government did caused you to lose the total value of your property. The third is when there’s been a physical invasion or occupation of your private property. And we’ll get to that a little bit later. But those three examples are what we call– are what we call per-se takings. In other words, the taking is intrinsic in the government action. And under those circumstances, they’ll be treated as a physical taking.

Okay, now getting back to your question, the difference between physical taking and the limitation on use. On the other hand, if the government merely limits your use of property but doesn’t shift the use to a third-party– we often see this in, let’s say, zoning ordinances where the government says to a landowner that you can’t build a commercial building in a residential zone or if you build a building, it can’t be any higher than a certain number of floors. The courts actually apply a different test in that circumstance. It’s called the ad-hoc test. And that test is very hard to satisfy. And it gives the government a lot of latitude to do what it wants to do. The test comes from a case. It’s a well-known case called Penn Central versus New York City. And in that case, there was a city ordinance, which classified Grand Central Terminal, which I’m sure many people know and will have been there as a historic landmark. And it prohibited the owner of the terminal from building a skyscraper above the terminal. The court was asked whether the ordinance went too far. In other words, “Did it go so far that it would actually be considered an appropriation or a complete destruction or a physical invasion of the property?” And the court said it didn’t. And when it said it did, it set forth a three-part test. And this is what courts will look at when you’re dealing with a limitation on use law, regulation, or ordinance.

One, it’ll look at the character of the government action. It’ll look at the economic impact of the regulation on the owner. And then it’ll look at the extent to which the law interferes with the owner’s investment backed expectations. And just me reciting that test, you probably have concluded that this is a really– this can be really convoluted. And it can take into account almost anything to justify the action that the government has taken. So, for instance, let’s go with the skyscraper example. If the owner can’t build the skyscraper above its building, then under the ad-hoc test, the court will say, “Well, does the owner own any other property?” And maybe you can build a skyscraper on another piece of property. So, we’re not going to find that this particular ordinance is a taking. Or when you bought the property, did you know that the government could regulate it? In other words, did you go into the ownership transaction knowing that it’s possible that the government can regulate it. That affects an owner’s investment-backed expectations. I mean, this is all very murky stuff. And it’s extremely difficult to overcome the burden of proof under the ad-hoc test, but there are those two tests, the per-se, taking tests, and the ad-hoc test.

Kelly: I’m learning so much today, Jim. So can the takings clause be used to challenge government action and the context of hospital reimbursement?

Jim: Well, I think, yes, I think the answer is yes. Remember what I said before about requiring some people alone to bear public burdens, which should be borne by the public as a whole. There’s a strong argument that assuring access to and receipt of healthcare and hospital is a quintessential public burden. When the law requires a hospital to provide care to patients, regardless of the patient’s ability to pay, and then further prohibits a hospital from seeking payment from the patient for the care that is provided, I would argue that an appropriation of the hospital’s property has occurred. And the government has to pay just compensation. The private property, which has been taken, includes, well, the costs that the hospitals incur, making sure that there’s professional staff available for the patient who can’t pay. We’re talking about the salaries that the hospitals lay out to their positions, nurses, social workers, pharmacists. The hospital’s private property also includes personal property, which is used and consumed by the patients while they’re in the hospital. The bed that they’re laying in is personal property. Diagnostic equipment, medical devices, medical supplies, medications, and food, all of this property is taken for the public use of treating patients who can’t pay.

In New Jersey, we call these patients charity-care patients because it’s under a statute called charity-care statute. In this circumstance, the government mandates that some third-party other than the hospital – third-party here is the charity-care patient – gets to use the hospital property and the hospital cannot exclude them from its facility if they need care. In my mind, this results in an appropriation of hospital property and a physical invasion or occupation of hospital property. And that fits the definition of a per-se taking.

Kelly: That makes a lot of sense. What United States Supreme Court cases support the position that a government mandate that hospitals provide care to anyone regardless of ability to pay would entitle the hospital to just compensation for that care?

Jim: Well, believe it or not, there’s presently no United States Supreme Court case addressing a taking of hospital property by the government. So, the question is open because the supreme courts are highest court in the nation. So, whatever the Supreme Court decides in the hospital context will be the law for the rest of the nation. But a good place to start, believe it or not, is 1982. There was a case called Loretto versus Teleprompter Manhattan Cable Corporation. In that case, there was a New York law that required landlords to permit a cable television company to install cable equipment in their apartment buildings. The US Supreme Court found a per-se taking occurred because a permanent physical invasion of the landlord’s property existed by requiring the installation of the cable box and the cable wiring, even though the cable box was only a size of about a shoe box and the cable wiring was only 30-feet long and a half an inch in diameter. It was still a per-se taking.

Five years later, after Loretto, a case called Nollan vs. the California Coastal Commission was decided. In that case, the Supreme Court found that an easement, which was imposed by the California Coastal Commission as a condition of granting a permit to build a home, was a per-se taking. So, what had happened in that case is there was a homeowner who applied for a building permit and the Coastal Commission came back and said, “Listen, you got to put an easement on your property,” which would permit the public to travel over the private owners’ property to access a public beach. The court held that the easement itself constituted a permanent physical invasion, even though no specific person or object would continuously occupied that easement. The permanent physical occupation existed because individuals were given a permanent right to pass to and fro over that property and it could be continuously traversed by as many people who wanted to go to the beach. So even though there was no particular person that stationed themselves on that easement, the court still held that that easement was a per-se taking.

Okay. So now, that kind of sets the stage. Now you have two more very important cases. In 2015, the Supreme Court decided a case known as Horne versus the Department of Agriculture. In that case, there was a California regulation that required raisin growers to hand over to the government a substantial portion of their raisin crop every year. And it was done in order to stabilize market prices for the raisins. In some years, believe it or not, the raisin growers were required to turn over as much as 47% of their crop. The government can do anything with the raisin. It could donate them. It could sell them. It could dispose of them. If it sold the raisins, then the net proceeds were deducted to cover government expenses and then the remaining amount would be rebated back to the growers. So, the government argued in that case that it was a raisin reserve requirement. That’s what they called it. It was not a taking because the raisin growers voluntarily participated in the regulated raisin market. But the court didn’t buy it, and the court said, “No, that position is wrong as a matter of law.” And it required the government to pay for all the raisins that it took.

Okay. Final case. Most recently, in 2021, the Supreme Court decided a case called Cedar Point Nursery vs. Hassid. And in that case, they reviewed the impact of a California labor regulation, requiring union organizers to be given access to a private agricultural property for four four-day periods, so four times a year, 30 days per period for three hours a day. So, for that period of time, union organizers can go on the property and try to organize a union. So, a large strawberry grower claimed that the union organizers entered its property and disturbed its operations. And the court found that the regulation was a per-se taking. And the reason why is it– and I’ll quote the court, “It appropriated a right to physically invade the grower’s property and to literally take access to the property.”

So, getting back to your question about whether the takings clause can be used in a hospital context, I would argue like the beachgoers and Nollan, charity-care patients present a continuous and aggregate stream of people into the hospital. Like the union organizers in Cedar Nursery, charity-care patients cannot be excluded from the hospital’s facility. Even though no single charity-care patient is permanently occupying a hospital bed, a permanent occupation of the hospital’s property exists nonetheless. So, I would argue that a regulation, which requires a hospital to provide care to anyone, regardless of ability to pay, grants those patients a permanent continuous and unfettered right to occupy hospital property and receive services and treatment, which would amount to a per-se taking of hospital property.

Kelly: Those are some interesting examples. Are there any court decisions specifically in the healthcare field, which hold that a requirement to provide free care as a taking?

Jim: Well, this is where the rubber meets the road because, like I said before, there’s no United States Supreme Court case that addresses this. But there are two lower court cases in the healthcare context, which are not good for the hospitals, by the way. But they predate some of the more recent Supreme Court cases like the Horne case and the Cedar Nursery case and in my view can be distinguished on their facts. So let me give you an idea of what those cases are. The first one is a federal circuit court case out of the state of Maine. And it’s called Franklin Memorial Hospital versus Harvey. There, a hospital challenged as unconstitutional under the takings clause a Maine statute requiring the hospital to provide charity care, which it calls free care, the patients, regardless of ability to pay. Sounds kind of familiar to the New Jersey statute. Rather than viewing the statute as an appropriation of hospital property, as I would view it, the circuit court instead viewed the statute as merely regulating how the hospital may use its property. You now know what happens when a regulation is viewed as a limitation on use, right? The government action is subject to that ad-hoc test. And it becomes very hard to prove. So, finding under the ad-hoc test that no physical invasion occurred, the court held that the hospital is not required to serve low-income patients because it may choose to stop being a hospital, which is what makes it subject to Maine’s free care laws.

Okay. [laughter] Now think about that for a moment, Kelly, right? If a hospital has been using its property to provide services to the public or in some cases, 50, 75, 100 years– some of these hospitals are over 100 years old. Under the Franklin Memorial Hospital case that I just brought to your attention, the government can come in and say, “Hey, you, hospital, you have to now pick a percentage, 50%, 75%, even a 100% of your hospital facility to provide free care to anyone who needs the care.” And a hospital has to do it because our Franklin Memorial Hospital case up in Maine said, “The hospital can just simply stop using its property as a hospital.” That can’t be the law.

And I would say– and I would suggest that it’s not the law because the Horne case, which is the raisin grower case, flatly rejected that argument. You remember, I discussed Horne where the raisin growers were forced to turn over their crop to the government. Well, the government actually argued in that case that there was no taking because the raisin growers could avoid the regulation by planting a different crop or selling their grapes to make juice or wine or they could do a whole bunch of things with their property. Every so often, Kelly, every so often, our Supreme Court gets really sassy in its written opinions. [laughter] And it got sassy in this opinion. It rejected the government’s argument. And it said with tongue in cheek that, quote, “Let them sell wine. It’s probably not much more comforting to the raisin growers than similar retorts have been to others throughout history.” Obviously, they were invoking Marie Antoinette’s retort, “Let them eat cake.” Remember that? And that was a callous solution to France’s starving population during the famine. But the Horne court made that point. It’s not good enough to make that argument. The notion that there cannot be a per-se taking because you can use your property for something else is dead. That’s a dead argument. So, the argument that was made in Franklin Memorial Hospital, I would suggest, is dead.

Now let me talk about one more case. It came out of California. It’s a circuit court case from California called Sierra Medical Services Alliance vs. Kent. In that case, there was a California statute that required ambulance providers to provide emergency transportation, irrespective of the patient’s ability to pay. And that was held not to be a taking by the court. Again, the court found that that law was a limitation on the use of property and therefore subject to – what? – ad-hoc test, right, which is the difficult task to satisfy. But that case is distinct with–the law in that case is distinguishable from, let’s say, the charity-care statute in New Jersey because the California law, while it required that the emergency service be provided without first questioning the patient’s ability to pay, the law also required the patient or the patient’s representative to execute an agreement to pay after the services were rendered. So, there was a vehicle to actually receive money and payment for the services. No such ability to get paid after the fact exists for the services that are provided to charity-care patients under a state’s free care law, or at least I should say, under New Jersey’s free care law. So, I think both those cases that were decided in the healthcare context are distinguishable. And I think the United States Supreme Court is changing or evolving the law in favor of private property owners. So we really got to keep an eye on the development of this case law over the next few years.

Kelly: Most definitely. So how would a hospital prove a takings clause challenge? And what would be the remedy if the hospital prevails on such a challenge?

Jim: Well, as you can probably– as you’ve probably guessed by now, the goal in any court case at this point is to convince a court to apply the per-se takings test. And to do so, the hospital would need to prove that there’s either been a physical appropriation of its property, a complete destruction of his property, or a physical invasion or occupation of the hospital’s property. So, I keep coming back to New Jersey. Let me do that again. So, in New Jersey, when a charity-care patient comes to the hospital, the hospital is required by law to provide whatever care that patient needs. And it’s also prohibited by law from seeking payment from the patient afterwards. Hospital property is appropriated and used to treat these patients. And you’d have to prove what that hospital property is. So, we would prove that at the hospital property that’s used, some of it can be used again, some of it is completely destroyed. So, if you have, for instance, medications, intravenous solutions, bandages, food, implantable devices, those are all completely destroyed, right? Pieces of property. So that fits the test about complete destruction. Now, if you have property that’s reusable, that property is still appropriated for the patient’s care. So, we’re talking about property like medical equipment, imaging machines, hospital beds, the time and effort and skill of the medical staff who provides the care, all of that type of property, even though reusable is appropriated for the use for the care for that patient.

So, that’s a physical appropriation. So, it meets that standard. So now we’ve met two of three instances where a per-se taking would apply. Okay, let’s take the last one, physical invasion. Charity-care patients physically come into the hospital property, i.e., they physically invade the hospital property. I don’t want to– it sounds a little derogatory when you talk about the word invade. But what we’re talking about is they are given the right to enter and occupy the hospital facility and receive care. So, they occupy the physical spaces. They occupy examination rooms, treatment rooms, operating rooms, and the hospital bed itself. In fact, if you take certain reports that are audited by the state, you can determine in any given year the average number of hospital beds occupied per day by non-paying patients. I’ve actually undertaken that exercise. And I’ve determined that some hospitals on average have a significant number. In some hospitals, as many as 75 non-paying patients per day on any given day in the hospital beds.

So, remember the Nollan case that I just described that’s the public easement running across the property to access the beach? That was a per-se taking. This is no different than that. When you’re talking about charity-care patients in a hospital, no single patient is permanently lying in a hospital bed. But when you aggregate the number of days that these patients are there, you find out that 50 or 75 beds per year are permanently appropriated to non-paying patients. And remember the union organizers in the Cedar Nursery Case? The hospital cannot exclude charity-care patients if the patients need hospital care. And just like the agricultural landowners in Cedar Nursery, hospitals are not going to be able to exclude charity-care patients, just like they couldn’t exclude the union organizers. So, while providing free care, the people who can’t afford it economically, needy people, it may be a laudable social goal. The societal burden should be borne by everyone, not just the hospitals. That’s the argument that I would make for per-se taking. Now, what’s the remedy? Once a per-se taking is found to have occurred, then the damages are the fair market value of the hospital property taken to provide the care. It’s very simple. You just look at the fair market value of all the hospital property, and that is the dollar figure that the government has to pay. So that’s how you prove a per-se case.

For an ad-hoc test, if a hospital is not successful in convincing a court to view the provision of free care to charity-care patients as a per-se taking, the hospital can still establish a taking under the ad-hoc test. It’s a much different analysis. And the court considers those three factors: the nature of the government action, economic impact on the hospital, and whether the investment-backed expectations are interfered with by the government action. So, let’s just take the first factor, the character of the government action. What’s going to happen there is that a court will find that it’s not an appropriation, it’s not a per-se taking, it’s merely a limitation on the use of property. And then you need to prove that the limitation on use goes too far and it places an unreasonable burden of care, a burden for caring for charity-care patients on the hospital. Then the second and third factor, a little bit tricky too. The hospital for the second factor, which is economic impact, would need to show that whatever little government money it receives fails to compensate it sufficiently. So the most effective way to do this is to use cost and payment data from– in New Jersey, we have disproportionate share hospital surveys. And you can get that data from those surveys. And you compare the costs associated with the hospital care to the money that you receive, the reimbursement, either charity-care subsidies or other reimbursement for those patients. And you can calculate the shortfall in the reimbursement.

And the greater the delta is between the hospital’s costs and the charity-care funding that it receives through the subsidies, the more likely the hospital is able to establish a severe detrimental economic impact. I’ve also done this analysis. And you wouldn’t believe how small some of the reimbursement turns out to be for charity care. And in some cases, hospitals receive only 12 cents on the dollar that they spend in caring for these patients. So, if a court decides that 12 cents on the dollar is enough funding for the hospital, then I guess there’s not much you can do about that. But I would suggest, given what I’m seeing coming out of the United States Supreme Court, that 12 cents on a dollar is going to be a severe economic impact that has to be addressed by the takings clause. So, there’s one more factor, and I’ll just go through it really quickly for you. It’s the interference with the investment-backed expectations. So, to prove that you can compare certain of the hospital’s financial benchmarks against industry-wide accepted ratios. So, for example, a hospital can show that because of its under-compensation, it performed below national medians for such ratios as profitability or liquidity or debt-to-capitalization. And as a result, they failed to meet the median standards for investment-grade credit.

The idea being that once you’ve determined a hospital’s lost revenue from charity-care patients, you can compare the hospital’s actual net income to what its net income would have been, had the hospital received the revenue. You can compare days cash on hand to what it would have been if it had received the charity-care revenue. You can determine how much higher the hospital’s long-term debt was that it needed to be, had the lost revenue been used to reduce borrowing. This analysis can also demonstrate where the lack of reimbursement resulted in a hospital’s ability to attain, let’s say, a median-level performance standard as compared to other hospitals in the United States or whether the hospital even meets an investment-grade rating of BBB rating for the financial performance indicators.

So, in short–or in long, I guess, at this point, Kelly, and thank you for letting me explain all this. A hospital would need to prove, one, that it received reimbursement less than its costs of the care provided to charity-care patients, two, that the hospital’s failure to receive reimbursement at least equal to its cost negatively impacted the financial performance of the hospital. And you can measure that through those ratios that I mentioned, profit margin, days cash on hand, and debt-to-capitalization. All these poor financial indicators that have been suffered by hospitals as a result of being underfunded by the government negatively impacts the goal of having and maintaining access to quality healthcare. Consequently, the government’s requirement to provide free care to the charity-care population would go too far and become a taking, even under the ad-hoc test. So, to wrap it up, all I’m saying is that if we have a societal issue with patients not being able to pay for their care, that societal issue should not be placed squarely on the shoulders of the hospitals. It’s up to all of us, all of our residents, all of our taxpayers to pitch in and make sure that the care gets paid for. And that happens through the takings clause because the hospital property is used for the public use of providing the care and the hospital deserve to be paid for the appropriation of their property. So that’s it in a nutshell, Kelly.

Kelly: Wow, that’s a lot of great information. I mean, thank you so much for joining us today, Jim. We really do appreciate all of this very valuable information you shared with us.

Jim: I appreciate you having me today. I’m happy to be part of your program. And I wish you and BESLER the very best.

Kelly: Well, thank you. If a listener wants to learn more or contact you to discuss this topic further, how best can they do that?

Jim: Well, sure. Again, my name is Jim Robertson, and the law firm where I’m a partner is called Greenbaum, Rowe, Smith & Davis. My email address – probably the best way to get a hold of me – is jrobertson@greenbaumlaw.com. And you can certainly go to our website, our Greenbaum Law website. You can find me there as well.

Kelly: Great. And thank you so much for joining us today again, Jim. And thank you, all, for joining us for this episode of The Hospital Finance Podcast. Until next time…

[music] This concludes today’s episode of the Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.com/podcasts. The Hospital Finance Podcast is a production of BESLER | SMART ABOUT REVENUE, TENACIOUS ABOUT RESULTS.

 

If you have a topic that you’d like us to discuss on the Hospital Finance podcast or if you’d like to be a guest, drop us a line at update@besler.com.

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