A federal court ruling last week effectively dismantled New Jersey's system of paying health-care costs, sending hospitals across the state into fiscal turmoil and forcing the postponement of at least two bond issues.
Judge Alfred M. Wolin of U.S. District Court in Newark last Wednesday invalidated the state's practice of tacking huge surcharges onto every hospital bill. The state uses a 19.1% surcharge to pay-health care costs for 823,000 uninsured residents and similar cost-shifting mechanisms to pay for other underfunded health programs.
Judge Wolin said federal union laws governing self-insurance funds preempt the state's reimbursement system, so the estimated 2.4 million patients covered by such funds no longer have to pay the surcharges.
The loss of those patients would strip about $737 million from New Jersey's Uncompensated Care Trust Fund and another $400 million from a different program that pays for underfunding by the federal government of the Medicare program.
"The ruling cuts at the foundation of the state's rate-setting system," said Glenn N. Wagner, vice president of credit research at Morgan Stanley & Co.
The court's decision is slated to take effect Friday, but Gov. Jim Florio said yesterday he would seek a stay of the ruling to give the administration and Legislature more time to find alternative financing.
A spokesman for the New Jersey Hospital Association said it supports a "well-thought out change of the current hospital reimbursement system, but Judge Wolin's June 5 timetable makes the prospect of orderly change virtually impossible." He said the impact of this ruling "could cause great concern regarding the financial health of New Jersey's hospitals and the status of their bond ratings."
Standard & Poor's Corp. on Monday issued a statement saying the court decision increases the uncertainty surrounding New Jersey's "already strained health-care environment."
Elie Radinsky, an associate director at Standard & Poor's, said the ruling could have "tremendous credit implications for the entire spectrum of not-for-profit health-care ratings." But he stressed there would be no "knee-jerk" rating actions in response to the ruling.
Robert Fuller, Standard & Poor's managing director for health-care ratings, said a major concern will be the transition period between the old system and whatever replacement is ultimately devised. One potential problem would be cash-flow difficulties the transition could create for individual hospitals, Mr. Fuller said.
John N. Goetz, manager of health-care finance at Moody's investors Service, said the immediate concern is to secure a stay of the judge's ruling.
"If there is not an extension allowing all the parties to come to a resolution of this problem, then Moody's will most likely place some if not all of the unehanced hospital revenue bonds under review," Mr. Goetz said.
Hospital analysts say the innercity facilities could be the most threatened by the ruling because they are the net beneficiaries of the surcharges.
Our Lady of Lourdes Hospital in Camden had planned to sell $47 million of bonds last week for a refunding and capital program, but delayed the sale until the uncertainties are resolved, according to Karen Baker, a senior project manager at the New Jersey Health Care Facilities Financing Authority, the conduit agency for the bond deal.
Underwood Memorial Hospital in Woodbury also put off its $15 million bond sale planned for last] Thursday, Ms. Baker said.
"We didn't feel we had enough information that we could present full disclosure to the investment community, and that's why we had to defer action," Ms. Baker said.
Bond issuers say they will wait until the governor devises a plan of action to deal with the crisis before testing the credit market waters with a bond issue.
The 19.1% surcharge that funded the Uncompensated Care Trust Fund was set to expire in June. But the system has been temporarily extended several times in the past and, despite an expected veto from Gov. Florio, lawmakers were preparing to delay finding a permanent solution to the question of uncompensated care with another extension.
Besides making the issue of an extension moot unless appeals are successful, the court's ruling has added an air of crisis to the debate about how to finance health-care costs in the state. Gov. Florio has scheduled meetings with legislative leaders for tomorrow, and the hospital association met with business and labor leaders earlier this week to find a way out of the mess.
"The urgency of this situation is undeniable," the governor says in letters to the legislative leadership. The court's ruling "makes clear that the state must put in place a new system for the funding of uncompensated care and for hospital reimbursement."
A payroll tax has been discussed as a possible replacement for the surcharges, but higher taxes are a political firestorm in New Jersey because of an ongoing battle between Republicans and Democrats over repealing tax increases the governor instituted in 1990.