STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

HUMANA OF FLORIDA, INC., )

d/b/a HUMANA HOSPITAL )

KISSIMMEE, )

)

Petitioner, )

)

vs. ) CASE NO. 84-1939

)

DEPARTMENT OF HEALTH AND ) REHABILITATIVE SERVICES AND ) CENTRAL FLORIDA SURGICAL )

AMBULATORY CENTER, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice a formal hearing was held in the above case before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on November 12 and 13, 1984, in Orlando, Florida.

APPEARANCES

For Petitioner: John H. French, Jr., Esquire

James C. Hauser, Esquire Post Office Box 1876 Tallahassee, Florida 32302

For Respondent: Douglas L. Mannheimer, Esquire

Post Office Drawer 11300 Tallahassee, Florida 32302-3300

For Respondent/ Robert B. Worman, Esquire Applicant: Post Office Box 1764

Orlando, Florida 32802 BACKGROUND

This matter arose when respondent, Department of Health and Rehabilitative Services, issued its proposed agency action to grant a certificate of need to respondent/applicant, Central Florida Surgical Ambulatory Center, to construct and operate a freestanding, ambulatory surgical center in Kissimmee, Florida.

By petition filed with respondent on May 9, 1984, petitioner, Humana of Florida, Inc. d/b/a Humana Hospital Kissimmee, requested a formal hearing pursuant to Subsection 120.57(1), Florida Statutes, to contest the proposed action.

Petitioner, who owns and operates an acute care hospital facility in Kissimmee, contended that the proposed facility would result in "unnecessary duplication of outpatient services," an "underutilization of existing provider of outpatient surgical services," and a resulting financial harm to its facility.

The matter was referred to the Division of Administrative Hearings by respondent on May 25, 1984 with a request that a Hearing Officer be assigned to conduct a formal hearing. By notice of hearing dated June 22, 1984, the final hearing was scheduled for November 19, 20 and 21, 1984 in Tallahassee, Florida. At the request of the parties, the final hearing was rescheduled to November 12 and 13, 1984 in Orlando, Florida.

At the final hearing petitioner presented the testimony of James A. Shanks, James L. Moore, Larry McDonald and Richard Baehr and offered petitioner's exhibits 1-9; all were received in evidence. Exhibit 6 is the deposition of W. Eugene Nelson. Respondent presented the testimony of Herbert E. Straughn and offered respondent's exhibits 1-5; all were received in evidence.

Respondent/applicant presented the testimony of Dr. John Rao, Dr. Antonio Ramirez and Jerry Roth, and offered respondent/applicant's exhibits 1-6; all were received in evidence except exhibit 6 upon which a ruling was reserved. Exhibit 5 is the deposition of Robert Snyder.

The transcripts of hearing (five volumes) were filed on January 2, 1985.

Proposed findings of fact and conclusions of law were originally due on February 1, 1985. At the request of the parties this time was extended and the same were eventually filed by petitioner and respondent/applicant on March 5 and 7, 1985, respectively. A ruling on each proposed finding of fact has been made either directly or indirectly in this Recommended Order, except where such proposed findings of fact have been rejected as subordinate, cumulative, immaterial or unnecessary.

At issue herein is whether respondent/applicant's application for a certificate of need to construct and operate a freestanding ambulatory surgical center in Kissimmee, Florida should be granted.

Based upon all of the evidence, the following findings of fact are determined:

FINDINGS OF FACT

1. INTRODUCTION

   
   

   1. Respondent/applicant, Central Florida Surgical Ambulatory Center (applicant), filed an application with respondent, Department of Health and Rehabilitative Services (HRS), on February 13, 1984, seeking the issuance of a certificate of need authorizing the construction and operation of an ambulatory out-patient surgical center at 750 Oak Street, Kissimmee, Florida. According to the application, applicant intends to construct a 7,200 square foot structure 1/ at a cost of $250,000, and will occupy the top floor of a multiphasic professional building which will house other medical offices and facilities. If authorized, the facility will be immediately adjacent to a 169-bed full-service hospital owned by petitioner Humana of Florida, Inc. d/b/a Humana Hospital Kissimmee (Humana).

      
      

   2. After being reviewed by HRS, proposed agency action in the form of a state agency action report was issued on April 2, 1984 recommending that a certificate of need be issued to applicant on the theory that "(w)ith 1,679 outpatient procedures projected as possible in Osceola County ambulatory surgical centers in 1987, the proposed project, is justified. This was followed

      by a notice of such intended action in the Florida Administrative Weekly on April 13, 1984. Humana filed a petition for formal hearing on May 9, 1984 which triggered the instant proceeding. In its petition Humana basically contended that a new facility would result in "underutilization" and "unnecessary duplication" of its existing facility and "substantial financial harm."

      
      

2. APPLICANTS PROPOSAL

   
   

   1. Two physicians are the motivating force behind the filing of this application. They are Doctors John Rao and Antonio Ramirez, both from the Kissimmee area. Rao is no longer active in the practice of medicine while Ramirez currently serves as chief of surgery at Humana's facility. Both have been highly successful in the practice of medicine and investment endeavors and have a combined net worth in excess of $9 million. They are qualified to provide the technical aspects of the proposed service, but have no actual experience in running an ambulatory surgical center. The two plan to form a corporation of general partners to finance and construct a large diagnostic clinic, and to also form a limited partnership of physicians who will financially invest in and operate the ambulatory surgical center. It is anticipated that some 25 to 35 active surgeons will be solicited for membership in the limited partnership, most of whom are presently on the staff at Humana's facility. To date, however, the corporation and limited partnership have not been formed, and no funds have been formally committed by any persons towards either project.

      
      

   2. The proposed ambulatory surgical center is intended to be housed on the top floor of a four story, multi-diagnostic physician clinic to be located on a

      2.2 acre site immediately adjacent to petitioner's facility. Indeed, the two facilities would be separated only by a parking lot. Applicant points out that the close proximity to Humana's, facility is necessary to permit patients to be easily moved to the hospital if hospitalization becomes necessary. The larger diagnostic clinic has not yet been built nor has construction commenced, and its viability is apparently based upon the success or failure of the pending application.

      
      

   3. By definition, ambulatory surgical services are surgical services rendered to patients who are admitted to and discharged from the facility on the same day. According to the applicant, it will provide such surgical services under both general and local anesthesia where a stay in the hospital is not required. Specialties will include, but not be limited to, orthopedics, urology, opthalmology, gynecology, plastic/reconstructive surgery, dental surgery and otorhinolaryngology. The applicant will accept Medicare, Medicaid, other third party insurance, private pay and a "moderate" amount of charity cases. The average charge for services is projected to be less than $500 per case in 1987, which is below the average charge for comparable services in a hospital setting.

      
      

   4. The proposed surgery center would be comprised of approximately 7,200 square feet including two operating rooms, a recovery room, nurse's station, waiting area, dressing rooms, and a storage and administrative area, and will, according to the applicant, cost approximately $250,000. In addition, the center will be able to draw upon the services of the laboratory facility and radiologist who will occupy the larger diagnostic clinic, assuming that facility is constructed.

   5. Applicant and HRS predict that applicant must perform around 1,130 outpatient surgical procedures in its second year of operation (1987) in order to break-even financially. This number is based upon the assumption that all projected revenues and expenses in the application are valid. If revenues are overstated and/or expenses understated, the break-even point will obviously be higher.

      
      

3. OTHER EXISTING FACILITIES

   
   

   1. There are three existing hospitals in Osceola County, none of which are freestanding ambulatory surgical centers: St. Cloud Hospital, Kissimmee Memorial Hospital, and Humana Hospital Kissimmee. St. Cloud Hospital has two operating rooms and one cysto room. Kissimmee Memorial Hospital has four operating rooms and a fifth room used for endoscopic procedures, vaginal examinations, and minor surgical procedures. Neither St. Cloud nor Kissimmee has a separate outpatient surgical operating room, and neither has filed a protest to the issuance of a certificate of need.

      
      

   2. Humana, the third existing facility in Osceola County, is a full- service, 169-bed hospital. Among other things it offers both obstetric and intensive care services. Humana also' offers sophisticated ancillary services, such as CT scanner and cardiac catherization. It currently has two operating rooms and one cysto room, which are used for both inpatient and outpatient surgeries.

      
      

   3. In November, 1983, Humana received approval from HRS for a major renovation/expansion of its facility at a cost of $4.8 million. A part of this project is the addition of two new operating rooms, an expansion of the cysto room with new equipment, and the addition of a complete system of support services for the outpatient surgery department.

      
      

   4. One of the two new operating rooms will be dedicated for only outpatient surgery in order to stay current with the growing trend and increasing emphasis on outpatient surgery. To support the outpatient operating room, there will be a separate nursing station, recovery rooms, post-recovery rooms, and business office. The new outpatient facility is expected to be operational by September, 1985.

      
      

   5. Humana projects that, a total of 4,500 surgical procedures will be performed at its facility in 1987, of which 25 percent will be done on an outpatient basis. The new outpatient operating room alone has the capability of handling 1,200-1,400 procedures per year.

      
      

4. NEED METHODOLOGIES FOR ASSESSING NEED

   
   

   1. There is presently no HRS rule which contains the methodology for determining the need for freestanding ambulatory surgical centers. On July 6, 1984, the agency proposed to adopt Rule 10-5.11(30), Florida Administrative Code, which would define such centers and their services, and prescribe the criteria against which applications are evaluated. However, as of the date of the entry of this recommended order, the rule had not yet been formally adopted because of an administrative challenge to its validity.

      
      

   2. In this proceeding, HRS presented one methodology to assess need while Humana presented three, one of which was the same as that used by HRS. The three include an informal methodology traditionally used by HRS, a variation of the informal methodology, and need based upon the criteria contained in the

      proposed rule. In prior cases involving applications of this nature, HRS has generally used an informal methodology which is based on forecasts of the number of outpatient procedures that will be performed in the service area two years in the future and the net number of such procedures that will not be performed by the service area's existing surgical facilities. Need is then assessed at the county level. In general terms, the methodology is applied by making the following calculations: (a) determining the surgical use rates (both inpatient and outpatient) per 1,000 county residents at county facilities, (b) projecting the total outpatient surgical procedures, of which 29 percent are assumed to be outpatient procedures, and (c) projecting hospital-based outpatient surgical procedures. If the number of outpatient surgical procedures available for delivery in freestanding facilities exceeds the breakeven volume forecast by a proposed unit such as applicant's, a need is accordingly indicated.

      
      

   3. Under the foregoing methodology HRS has assumed that 29 percent of all surgeries in Osceola County can be performed in an outpatient setting. This number is derived by taking the mean of (a) the actual percentage of total surgeries performed on an outpatient basis (18 percent) by hospitals participating in a 1981 survey by the American Hospital Association, and (b) the percentage of procedures that can be performed in an outpatient setting (40 percent) according to an undated, unnamed article written by a Dr. O'Donovan, who was otherwise unidentified. However, in actuality, the number of total procedures performed on an outpatient basis in Osceola County in 1984 was less than 14 percent although Humana's percentage in recent months had grown to almost 25 percent due to a promotional and educational program designed to generate additional business of this nature. Therefore, the 29 percent outpatient delivery standard used by HRS is inconsistent with and in excess of the actual 1984 demand within the county. Additionally, there was no showing by HRS that either of the two "surveys" were relevant to conditions in Florida, and whether the survey included Florida hospitals, and if so, to what degree. Moreover, one of the surveys was not current (1981), and the date of the other was not disclosed. Neither survey was introduced into evidence.

      
      

   4. The HRS methodology also assumes that the 1984 hospital use rate for outpatient surgeries will remain constant through 1987. It does so even though historical data for the years 1982 through 1984 reflects a dramatic increase (300 percent) in the outpatient use rates at the three county hospitals over that period of time. Moreover, it fails to consider the fact that Human's outpatient use rate will increase because of the addition of a new dedicated operating room in September, 1985. Without such a correction, the number of projected available outpatient surgeries under this methodology will be overstated.

      
      

   5. Aside from the foregoing infirmities, HRS did not apply its informal methodology on a consistent basis. Specifically it followed the strictures of the formula in determining the number of surgical procedures and outpatient procedures in 1987 for St. Cloud Hospital and Kissimmee Memorial Hospital, but abandoned these principles in making the same calculation for Humana. 2/ By doing so, HRS considerably overstated the number of available outpatient procedures in 1987. Instead of 1,233 as HRS forecasts a more reasonable number is in the range of 700, which is far below the number needed for applicant to break-even. Had the informal methodology been properly applied, no need would be shown for the proposed facility.

      
      

   6. Humana also assessed need using the proposed HRS rule. Under this methodology, total surgical procedures are projected based upon the county's historical relationship between surgeries and hospital discharges. Outpatient

      procedures are projected as 30 percent of the total surgery projection. The formula then purports to calculate the need for outpatient surgery operating rooms by determining the county's capacity for delivery of outpatient services. To do this, two elements must be ascertained: existing and approved dedicated outpatient operating rooms in hospitals and freestanding facilities, and the full-time equivalent outpatient surgical capacity in the county's hospitals.

      One full-time equivalent operating room is then allotted for every 1,200 outpatient surgeries performed in non-dedicated hospital operating rooms. Finally, the net need is calculated by subtracting the county's existing inventory from the projected need. Following this prescribed formula produces only a net need for 0.37 outpatient operating rooms in 1987 in Osceola County, or far less than needed to make the proposed project financially feasible.

      
      

5. CONSTRUCTION AND EQUIPMENT COSTS

   
   

   1. Applicant projects estimated construction costs of $250,000, or approximately $45 to $50 per square foot so doing, applicant failed to account for a physicians lounge, administrative offices and laboratory services. Moreover, this range of costs was not, supported by credible expert testimony. On the other hand expert testimony offered by Humana contradicted this figure and portrayed more realistic costs to be in the range of $90 to $95 per square foot, and such testimony is hereby accepted. Accordingly, the breakeven point is far higher than that projected by HRS, and renders the proposal financially unfeasible under its present scheme.

      
      

   2. Applicant proposes to either lease or purchase its equipment. Its major principal (Dr. Rao) acknowledged, however, that he is not aware of the minimum equipment requirements for an ambulatory surgical center. Expert Testimony offered by Humana, and which is hereby accepted as being more persuasive, established that applicant's list of equipment and related costs is dramatically understated. Had a more realistic equipment list been used, it would have resulted in a substantially higher break-even point.

      
      

6. EFFECT ON EXISTING FACILITIES

1. The evidence supports a finding that the proposed facility, which would be immediately adjacent to that of Humana, would have an adverse impact upon Humana's facility. This is particularly true since most of the potential staff of physicians are active surgeons on the medical staff of Humana, and Humana has just been authorized by HRS to construct a dedicated outpatient facility, which would be in direct competition with applicant.

   
   

   CONCLUSIONS OF LAW

   
   

2. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties thereto pursuant to Subsection 120.57(1), Florida Statutes.

   
   

3. In this proceeding, respondent/applicant has the burden of proving entitlement to the requested certificate of need. Fla. Dept. of Transportation

   v. J.W.C. Co., 396 So.2d 778 (Fla. 1st DCA 1981). As such, it must show by a preponderance of evidence that the certificate should be issued.

   
   

4. The legal criteria applicable to this case are found in Subsection 381.494(6)(c), Florida Statutes. However, the parties agree that only criteria 1, 2, 3, 4, 5, 8, 9, 12 and 13 contained therein apply. They provide as follows:

   1. The need for the health care facili- ties and services and hospices being proposed in relation to the applicable district plan and state health plan adopted pursuant to Title XV of the Public Health Service Act, except in emergency circumstances which pose a threat to the public health.

   2. The availability, quality of care, efficiency, appropriateness, accessibility, extent of utilization, and adequacy of like and existing health care services and hospic- es in the service district of the applicant.

   3. The ability of the applicant to provide quality of care.

   4. The availability and adequacy of

      other health care facilities and services and hospices in the service district of the applicant, such as outpatient care and ambu- latory or home care services, which may serve as alternatives for the health care facili- ties and services to be provided by the applicant.

   5. Probable economies and improvements

      in service that may be derived from operation of joint, cooperative, or shared health care resources.

      * * *

      1. The availability of resources, including health manpower, management person- nel, and funds for capital and operating expenditures, for project accomplishment and operation; the effects the project will have on clinical needs of health professional training programs in the service district; the extent to which the services will be accessible to schools for, health professions in the service district for training purposes if such services are available in a limited number of facilities; the availability of alternative uses of such resources for the provision of other health services; and the extent to which the proposed services will be accessible to all residents of the service

      2. The immediate and long-term finan- cial feasibility of the proposal.

      * * *

      1. The probable impact of the proposed project on the costs of providing health services proposed by the applicant, upon consideration of factors including, but not limited to, the effects of competition on the supply of health services being proposed and the improvements or innovations in the fi- nancing and delivery of health services which foster competition and service to promote quality assurance and cost-effectiveness.

      2. The costs and methods of the pro- posed construction, including the costs and methods of energy provision and the availa- bility of alternative, less costly, or more effective methods of construction.

      
      

      To warrant approval of the application, the applicant must show by a preponderence of evidence that the foregoing statutory criteria have been met. If it fails to do so, the application must be denied.

      
      

5. The criteria in Subsection 381.494)(6)(c)1. and 2., Florida Statutes, pertain to "need" and require that an applicant demonstrate a need for the proposed project. In assessing need, HRS normally relies upon a methodology prescribed by rule. In this case, no such rule has been adopted, and reliance upon an informal methodology is necessary.

   
   

6. Three methodologies were presented at final hearing to assess the need for the proposed project. The evidence reflects that none show a need for a new ambulatory surgical center in Osceola County, Florida in 1987. This conclusion is based on the more persuasive evidence which clearly shows that existing and approved hospital capacity is sufficient to meet 1987 projected demand.

   
   

7. Subsection 381.494(6)(c)9., Florida Statutes, requires HRS to consider "the immediate and long-term financial feasibility of the proposal." The evidence reveals that applicant has failed to establish that its proposed project has immediate and long-term financial feasibility. This conclusion is founded upon the lack of any credible testimony to support the pro formas or the breakeven point for the project, and uncontroverted testimony offered by petitioner which demonstrates various infirmities in applicant's calculations and projections.

   
   

8. Petitioner has also failed to meet the requirements of Subsection 381.494(6)(c)13., Florida Statutes, which requires HRS to consider "the costs and methods of construction." In this regard, it is noted that no credible expert testimony was presented by HRS or the applicant to support the reliability of the equipment and construction costs used in the application. Having failed to do so, it is concluded that she same are not reasonable, realistic or sufficient, and the criterion has not been satisfied.

   
   

9. Based on the record herein, it is concluded that applicant has satisfied Subsections 381.494(6)(c)3., 4., 5., 8. and 12., Florida Statutes.

   
   

10. The appropriate weight to be given to each individual criterion in Subsection 381.494(6)(c) is not fixed, but varies from case to case, depending upon the facts of each case. Collier Medical Center v. DHRS, 462 So.2d 83 (Fla. 1st DCA 1985). Even so, the applicant has failed to meet a number of critical requirements enumerated therein, and having done so, the application must be denied.

    
    

11. Respondent/applicant's exhibit 6 is hereby received in evidence.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Central Florida Surgical Ambulatory

Center be DENIED.

DONE and ORDERED this 27th day of March, 1985, in Tallahassee, Florida.

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 27th day of March, 1985.

ENDNOTES

1/ The application and state agency action report refer to a 5,000 square foot area. However, applicant's representative testified at final hearing that an additional 2,200 square feet would be added to the center to allow for future expansion.

2/ This variation of the informal methodology has been referred to as the second methodology offered by the parties.

COPIES FURNISHED:

John H. French, Jr., Esquire James C. Hauser, Esquire Post Office Box 1876 Tallahassee, Florida 32302

Douglas L. Mannheimer, Esquire Post Office Drawer 11300 Tallahassee, Florida 32302-3300

Robert B. Worman, Esquire Post Office Box 1764 Orlando, Florida 32802

Docket for Case No: 84-001939

Orders for Case No: 84-001939