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decided: October 2, 1969.


Matter of Procaccino v. Stewart, Judges Burke, Bergan and Gibson concur with Chief Judge Fuld; Judge Scileppi dissents and votes to reverse and reinstate the judgment of Special Term in a separate opinion in which Judges Breitel and Jasen concur.

Author: Fuld

 Since, in our view, the Superintendent, in approving the increase in subscriber rates, acted neither in excess of his jurisdiction, in violation of lawful procedure nor in abuse of discretion or arbitrarily, the courts have no alternative but to confirm his determination (CPLR 7803).

On August 15, 1969 the Superintendent of Insurance approved an increase, averaging 43.3%, in the rates which the respondent Associated Hospital Service of New York (AHS) could charge its community-rated Blue Cross subscribers. The petitioners, seeking to annul that determination, contend that the Superintendent was without power to grant any increase in excess of a temporary "emergency" one of 33% and that, in any event, his decision was arbitrary.

Under subdivision 2 of section 255 of the Insurance Law, AHS is required, when it seeks to increase its rates, to submit a proposed schedule to the Superintendent of Insurance for his approval. The statute provides that such approval may be refused if the proposed rates are "excessive."*fn1 The petitioners do not argue that the proposed rates violate this standard but urge, instead, that a newly enacted amendment to section 2807 of the Public Health Law (L. 1969, ch. 957), coupled with section 254 of the Insurance Law, operates to limit the Superintendent, for the time being, to approval of a short term "emergency" increase.

These statutory provisions relate, not to the rates charged to the subscribers, but to the schedule of payments which AHS makes to hospitals for the services they provide. Section 2807 of the Public Health Law requires that, after December 31, 1969, such payments must be certified by the State Commissioner of Health as "reasonably related to the costs of efficient production of such service" and section 254 of the Insurance Law declares that they must be approved "as to reasonableness" by the Superintendent of Insurance. Despite the petitioners' contentions, there is nothing in these sections which purports to limit or circumscribe the Superintendent's power to approve schedules for subscriber rates pending the certification of hospital payments by the Health Commissioner. As the Superintendent noted in the course of his decision, "[there] is no required time sequence for regulatory approval of subscriber rates, on the one hand, and regulatory approval of hospital payment rates on the other." The approval of hospital payment rates, as certified by the Commissioner of Health under section 2807 of the Public Health Law, and the determination of reasonableness of proposed subscriber rates under section 255 of the Insurance Law appear to be procedurally independent and there is nothing in the legislation to prevent the Superintendent from acting upon a proposal to increase subscriber rates even though the Commissioner has not yet certified the rates for hospital payments.

[25 N.Y.2d 301 Page 306]

    --> Nor did the Superintendent abuse his discretion or act arbitrarily, as the petitioners insist, by approving (in August of 1969) an increase in AHS's subscriber rates which was to remain in effect through December 31, 1970, before the cost to it of hospital services became definitively known. At the time the application was made -- and this is conceded -- AHS was faced with imminent statutory insolvency and it did not appear that hospital payment schedules, under the new statutory formulation, would be available until some time in 1970. Under the circumstances, it was permissible, indeed essential, for the Superintendent to estimate such payments, basing his determination, as the record clearly demonstrates he did, upon reasonable cost projections. (Cf. People ex rel. Consolidated Water Co. v. Maltbie, 275 N. Y. 357, 368.) In fact, the only evidence adduced at the hearing relating to the cost projections adopted by the Superintendent was the testimony of the Deputy Commissioner of Health that such cost projections were, if anything, too conservative and too low. There is nothing in the record to support the inference -- which the petitioners seek to have the court draw -- that the implementation of the new system of computing hospital reimbursement rates (under amended section 2807) will result in such a significant change in AHS's over-all costs during the period of the rate increase here at issue as to justify labeling the Superintendent's determination arbitrary. Moreover, considering the expense and inconvenience -- both to AHS and its subscribers -- of a further rate change, it was entirely reasonable for the Superintendent to fix a rate that would be adequate for a 15-month period rather than the limited 4-month so-called "emergency" period proposed by the petitioners.

The order appealed from should be affirmed, without costs.


Order affirmed.

Scileppi, J. (dissenting). I vote to reverse and to reinstate the determination of Special Term for the reasons stated in the dissenting opinion below and in the opinion at Special Term. I merely add the following to further amplify my position.

Section 2807 of the Public Health Law, as amended (L. 1969, ch. 957), when read with section 254 of the Insurance Law requires the Superintendent of Insurance to obtain a certification from the Commissioner of Health prior to the approval of hospital rates. Respondents argue, however, that the failure to obtain such certification in no way precludes the Superintendent from approving subscriber rate increases pursuant to the power granted him by section 255 (subd. 2) of the Insurance Law. I cannot agree. While it is true that there is no express statutory mandate requiring certification as a prerequisite to an increase in subscriber rates, it is clear that such was the legislative intent (Red Hook Cold Stor. Co. v. Department of Labor, 295 N. Y. 1, 7).

Under subdivision 2 of section 255 of the Insurance Law, the Superintendent is given the power to grant or deny proposed subscriber rate increases on the basis of whether or not the proposed rates are "excessive, inadequate or unfairly discriminatory". Now if the Superintendent is precluded from determining hospital rates prior to the Commissioner's certification (Public Health Law, § 2807; Insurance Law, § 254) and AHS' principal cost of operation is hospital reimbursement,*fn* how can the Superintendent ever determine the excessiveness of a proposed rate increase prior to certification? The answer is simply that he cannot.

As was stated in Matter of Thaler v. Stern (44 Misc. 2d 278, 286), the case involving the last AHS "temporary" rate increase: "There would be no need for subscriber rate increases were it not for two factors: firstly, there has been a significant increase in utilization of hospital services by AHS subscribers and secondly, and more importantly, there has been a tremendous increase in the reimbursable cost of hospital services." (Emphasis added.)

Even assuming, however, that the Superintendent was not statutorily precluded from granting a rate increase prior to certification, it is my opinion that the Superintendent's determination was nevertheless arbitrary.

Everyone agrees that the Superintendent acted properly in taking emergency measures to maintain AHS' statutory solvency. On remand from Special Term, however, the Superintendent determined that an increase of 33% would suffice to achieve that end. The question necessarily raised is upon what basis could the Superintendent project an additional increase of 10.3% through 1970. Special Term determined that there was no rational basis and limited the temporary increase (33%) to 30 days after the Commissioner certified the new reimbursement formula. In reversing Special Term the Appellate Division concluded that the mere fact that Special Term determined that the projected period was too long could hardly be viewed as an abuse of discretion. The majority then proceeded to espouse the oft-stated rule that a reviewing court "may not substitute its judgment for that exercised, if properly done, by the administrative agency".

This case, however, does not involve a mere disagreement with an administrative agency as to the propriety of a hasty determination. In such a situation, notwithstanding the fact that, with the benefit of hindsight, a more reasonable result might have been achieved had the determination been postponed to a future date, the rule that the court may not substitute its judgment for that of the agency would apply. In the instant case, however, there was no rational basis at all to support the Superintendent's determination.

As originally enacted, section 2807 only required that hospital costs be "reasonably related to the costs of providing [hospital] service". This language allowed AHS to pay hospitals on the basis of their actual costs. In amending section 2807 the Legislature sought to do away with the cost-plus reimbursement formula and substitute a statutory standard requiring the Commissioner to certify only those hospital costs that were "reasonably related to the costs of efficient production" of the hospital (L. 1969, ch. 957). The legislative intent was clear: to reduce the skyrocketing hospital costs which would enure to the benefit of the subscribers. The Superintendent, however, made his projected rate increase of 43.3% through 1970 not on the basis of the new formula (effective Jan. 1, 1970) but rather on the basis of the cost-plus reimbursement formula which becomes obsolete on December 31, 1969.

In support of that determination, the majority opinion takes the position that: "Under the circumstances, it was permissible, indeed essential, for the Superintendent to estimate such payments, basing his determination, as the record clearly demonstrates he did, upon reasonable cost projections." What is overlooked is that it was impossible for the Superintendent to make a "reasonable cost projection" for 1970 since the rates of reimbursement under the new formula were not available at the time he made his determination.

In conclusion, I would merely add that the primary reason for the emergency measures taken by the Superintendent was to maintain the statutory solvency of AHS. This end was clearly accomplished by Special Term and no contention has been made that solvency would in any way be jeopardized if the judgment of Special Term be reinstated. The absence of any other cogent reason why we should sustain this clearly arbitrary determination leads me to conclude that the order of the Appellate Division should be reversed and the judgment of Special Term reinstated.

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