STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
MEDIVISION OF MIAMI, INC., )
)
Petitioner, )
)
vs. ) CASE NO. 84-2306
)
DEPARTMENT OF HEALTH AND )
REHABILITATIVE SERVICES, )
)
Respondent. )
) MEDIVISION OF NORTHERN DADE ) COUNTY, INC., )
)
Petitioner, )
)
vs. ) CASE NO. 84-2313
)
DEPARTMENT OF HEALTH AND )
REHABILITATIVE SERVICES, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to Notice this cause was heard by Linda M. Rigot the assigned Hearing Officer of the Division of Administrative Hearings, on February 3, 1986, in Tallahassee, Florida.
Petitioners MediVision of Miami, Inc., and Medivision of Northern Dade County Inc., were represented by Robert A. Weiss, Esquire, Tallahassee, Florida, and Respondent Department of Health and Rehabilitative Services was represented by Richard A. Patterson, Esquire, Tallahassee, Florida.
Respondent denied the applications of Petitioners for certificates of need to construct ophthalmic outpatient surgery centers in Dade County, Florida, and Petitioners timely requested a formal hearing. Accordingly, the issue for determination is whether either or both applications for certificates of need should be approved.
Petitioners presented the testimony of Peter M. Jones; Lovell Jones, who was accepted as an expert in health care finance; and Mark Druash, who was accepted as an expert in health planning. Additionally, Petitioners' Exhibits numbered 1-4 were admitted in evidence. Respondent presented the testimony of Reid Jaffe, who was accepted as an expert in health planning, and Respondent's Exhibits numbered 1-2 were admitted in evidence.
By stipulation of the parties at hearing, the only criteria at issue relate to the need for the proposed facilities, and the financial feasibility of the proposed facilities, solely as feasibility relates to need. Further, the
Department of Health and Rehabilitative Services does not contest the reasonableness of Petitioners' expense and revenue projections; however, based on its position regarding need, it contends that Petitioners will not experience sufficient utilization at their facilities to generate the revenue figures projected.
Although both parties requested and were given leave to file proposed findings of fact in the form of proposed recommended orders, only Petitioners did so. Each of Petitioners' proposed findings of fact has been adopted in this Recommended Order.
FINDINGS OF FACT
The applicants, MediVision of Miami, Inc., and MediVision of Northern Dade County, Inc., are wholly owned subsidiaries of MediVision Inc., which maintains its corporate offices in Boston, Massachusetts. MediVision, Inc., was incorporated in January, 1984, to promote the development of outpatient eye surgery, in part through the development and operation of outpatient eye surgery centers. MediVision of Miami, Inc., and MediVision of Northern Dade County, Inc., will each be responsible for the development and operation of the projects proposed in their respective applications.
MediVision, Inc., was organized by several individuals in response to a study conducted by Bain and Company, a strategic consulting firms as part of a consulting engagement in which those persons were involved. The study disclosed several demographic and health care delivery trends which prompted MediVision management to pursue the development of outpatient eye surgery centers. Those trends are:
an overall movement of all types of surgery from an impatient to an outpatient setting;
the increase in the nation's elderly population, and the fact that the likelihood of a person developing cataracts increases dramatically with age;
the technological improvements in the provision of cataract surgery;
the growth in the number of cataract surgeries performed nationally; and,
a change in the manner in which Medicare reimburses a facility for outpatient surgery performed upon Medicare recipients. Medicare, since 1982, has reimbursed licensed freestanding ambulatory surgical facilities at a flat rate for the provision of such surgery, with no cost to the patient. For the same surgical procedures performed in a hospital outpatient setting, Medicare will reimburse the facility its costs of providing the surgery; the patient is responsible to pay the Medicare
deductible and 20 percent co-insurance.
Various subsidiaries of MediVision Inc., presently operate eight outpatient eye surgery centers nationwide; two are located in Florida. Other MediVision subsidiaries are developing three additional centers in Florida, pursuant to certificates of need issued by the Department of Health and Rehabilitative Services.
Both parties employed the same quantitative need methodology. The methodology employs the following steps:
acquire data regarding number of impatient and outpatient surgical procedures performed by existing providers;
using this data, calculate current overall surgical use rate and outpatient surgical use rate for county;
using the projected population for the year in question and the current use rate, calculate projected number
of surgeries;
multiply total projected surgeries by
40 percent to establish total outpatient surgery pool for year in question;
subtract from result of step 4, all outpatient surgical procedures
projected to be performed in hospitals and operating freestanding ambulatory surgery centers;
subtract financial break-evens of all certificate of need approved
freestanding outpatient surgery centers from this pool; and,
after subtractions the number of surgical procedures remaining are compared to the break-evens of certificate of need applicant at issue. If the pool is larger than break-evens the condition is satisfied. If the pool is smaller than break-evens the condition is not satisfied.
The quantitative methodology provides a reasonable approach to the evaluation of need for ambulatory surgical facilities. The basic methodology has been employed by the Department since 1982; in December, 1985, the Department began to employ a "40 percent outpatient factor" in implementing the policy. Accordingly, looking toward the planning horizon of 1988, the methodology projects that 40 percent of all surgeries in Dade County will be performed on an outpatient basis.
The 40 percent outpatient factor is reasonable for use in these proceedings. The prevailing literature suggests that 40 percent of all surgeries can be expected to be performed on an outpatient basis. Within Florida, many counties are already performing in excess of 30 percent of all surgeries on an outpatient basis. Trends in health care delivery and reimbursements including the growth in pre-paid health care organizations, such
as health maintenance organizations; professional review organizations, which monitor the appropriateness of hospital admissions; and Medicare reimbursement incentives will contribute to an increase in the percentage of surgeries performed in an outpatient setting.
While employing the same quantitative need methodology, the parties' health planning experts arrived at different conclusions as to whether the methodology projects need for the facilities at issue in these proceedings. The differences in outcome are attributable to two issues: (1) the calculation of a base-year use rate; and (2) the calculation of "break-evens" for previously approved, but non-operational, ambulatory surgical facilities.
Each expert relied upon the same basic data source in calculating a base-year surgical use rate, employing data collected by HRS and reported in the most current State Agency Action Report prepared by the Department relative to Dade County. Such Action Report (CON Action No. 4095) lacked complete data regarding the total number of surgeries performed in Dade County during the
base-year (1984-5), in that six of the thirty-three acute care hospitals in Dade County failed to report.
Because it is necessary to have complete data in order to establish an accurate base-year surgical use rate, Mark Druash who was engaged to undertake a need analysis by the applicants, referred to earlier State Agency Action Reports to acquire surgical procedure data for the six hospitals which had failed to report. Such documents are reliable data sources upon which to base a need analysis.
In calculating a county's surgical use rate, health planners take into consideration the total population within the county. Accordingly, the total number of surgeries provided within the county must also be considered. In that six Dade County hospitals failed to report data and HRS' health planner did not acquire data relative to those facilities, the surgeries performed at those hospitals were not included in his calculation of a surgical use rate.
If the total population of a county is considered in calculating a surgical use rate, but something less than the total number of surgeries is considered, the calculation results in an artificially deflated use rate. As the base-year use rate drives all of the remaining calculations in the quantitative methodology, an error in the calculation of the use rate will be carried through the entire methodology. The ultimate effect of a deflated use rate is to project a smaller number of surgical procedures, as compared to a use rate calculated upon complete data. HRS calculated a base-year surgical use rate for Dade County of 78.2 surgeries/1000 population. MediVision calculated a base-year surgical use rate of 92.8/1000 population. The variance in the use rates is attributable solely to the fact that Druash acquired and employed in his calculations surgical procedure data from all Dade County hospitals previously relied upon by HRS; while HRS relied upon incomplete data. In that Druash's calculations are based on a complete data based the surgical use rate of 92.8/1000 population is found to be more accurate and reliable than the rate of 78.2/1000 population calculated by HRS from incomplete data.
The parties differ in their calculation of "break- evens for previously approved, but not yet operational, ambulatory surgical facilities. The break-even calculation is an integral part of the quantitative need methodology. The purpose of subtracting from the available outpatient surgical
pool the "break-evens" of approved, but not yet operational ambulatory surgical facilities is to assure that there exists need for the project proposed adequate to allow both such project and previously approved facilities to operate in a financially viable manner.
The "break-even" approach is also intended to promote competition; rather than assuming that all of the procedures projected by a facility will be performed in such facility; the approach allocates to the facility only that number of procedures it needs to generate sufficient revenues to cover its expenses. Druash who participated in the development of the quantitative methodology during his tenure with HRS, testified that the "break-even" approach was selected because it would promote competition among providers by approving enough applicants so that they would be "hungry" for the residual surgeries projected by the methodology.
The purpose of calculating a financial break-even is to ascertain at what point a project's cash flow will equal its expenditures. The generally accepted method for calculating a financial break-even requires that fixed costs be separated from variable costs. The concept of variable costs is the basis for the computation of a break-even. Fixed costs are those which remain constant regardless of the volume of business conducted by an entity; variable costs are those that change directly with volume.
In the operation of an ambulatory surgical facility, virtually all expenses related to medical supplies are variable. If no patients are treated, no medical supplies are needed, and no expenses are incurred. If 100 patients are treated, 100 units of medical supplies are needed, with resultant expense. Certain expenses involved in the operation of an ambulatory surgical center are totally fixed, such as debt service and property taxes. All other expenses are variable to some degree e.g. salaries, utilities, and maintenance.
Depreciation and amortization of property and equipment are not considered as expenses in a break-even analysis, as those items do not represent cash expenditures. As mere accounting recognitions of prior investment, depreciation and amortization should not be included in a calculation of a cash flow break-even.
HRS' methodology for calculating financial break-evens for ambulatory surgical procedures treats all expenses as fixed, and includes amortization and depreciation among those expenses. By HRS' admissions the Department, "in lieu of attempting to determine what is fixed and what is variable . . . will use a somewhat more crude method". Where a financial break-even is calculated treating all costs as fixed, the resulting break-even number is artificially inflated. By the Department's reckoning, the effect of treating all expenses as fixed is to "add a cushion" to its approvals of prior applications. HRS' expert acknowledged, however, that differentiating between fixed and variable costs in performing a financial break-even analysis is the "preferred methods no question".
Lovell Jones, a certified public accountant and expert in health care finance, performed revised break-even analyses for previously approved, but not yet operational, ambulatory surgical facilities. Jones first acquired expense and revenue data from the certificate of need applications submitted by previously approved applicants. Then, treating only medical supplies as variable expenses, and excluding amortization and depreciation from the list of fixed expenses, he calculated the actual financial break-even of each approved, but not yet operational, facility. Jones' analysis finds the collective break-
even of all previously approved, but not yet operational, facilities to be 17,996 procedures, whereas the Department's "crude" analysis results in a collective break-even of 25,736. Jones' method of calculating break-even, which was agreed to be technically correct by both parties, is more accurate and reliable than the method employed by the Department.
Using the agreed-upon quantitative methodology, the surgical use rate calculated by Druash, and the break-even numbers calculated by Jones, there is projected to exist in 1988 a pool of 5006 outpatient surgical procedures that could be provided by the applicants in these proceedings. Subtracting the break-even numbers of the two proposed facilities, there will exist a residual pool of greater than 3600 procedures. Accordingly, there exists a quantitative need for the two proposed facilities. Furthers the residual pool of greater
than 3600 procedures represents an adequate "cushion" to satisfy the concerns of HRS that previously approved facilities be given the opportunity to operate in a financially viable manner.
The proposed facilities will improve access to services for both Medicare and indigent patients. Medicare patients receiving surgery at the facilities will be treated free of cost, with the Medicare program having full responsibility for payment. All other patients will be treated at the facilities regardless of ability to pay.
The proposed facilities will promote competition in that management intends the charges to commercial patients to be less than the prevailing charges in the community. Where an ambulatory surgical facility enters a market, hospital charges for similar services tend to decrease.
The proposed facilities will promote cost containment, as it is more costly to render care in a hospital outpatient department than in a freestanding ambulatory surgical facility. Hospital outpatient departments, which are reimbursed by Medicare for their costs of providing services, do not have the same incentive to reduce costs as do freestanding ambulatory surgery facilities, which are reimbursed at a predetermined flat rate for the provision of services. Accordingly, Medicare has encouraged the use of freestanding ambulatory surgical facilities by incurring all responsibility for payments at no cost to Medicare recipients.
The Department's sole concern regarding the financial feasibility of the proposed facilities arises out of its position that there exists no need for the facilities. Accordingly, the Department questions whether the facilities will enjoy utilization sufficient to generate the revenues necessary to their viable operation. In that need for the facilities has been found to exist, it follows that the facilities will be able to generate adequate numbers of surgeries to achieve break-even in their second years of operation.
Several other factors indicate that the facilities will experience utilization sufficient to achieve break-even in their second years of operation:
The marketing and community education activities proposed by the applicants
will encourage utilization. In its existing surgical facility in Orlando, MediVision, Inc., has undertaken similar activities, which have resulted in substantial surgical referrals to the facility;
There exists a residual pool of approximately 5,000,000 untreated cataracts nationally;
Medicare reimbursement policies which allow Medicare recipients to receive treatment at licensed freestanding ambulatory surgical centers at no cost
to the recipient will encourage utilization of the proposed facilities;
The applicants' pricing structure, for both Medicare and commercial patients,
will encourage utilization of the proposed facilities; and
Two local ophthalmology group practices have expressed strong interest in
performing surgery at the proposed facilities. Each group presently performs in excess of 1000 surgeries annually, which volume is greater than the break-even volume necessary to be achieved at each facility.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties hereto and the subject matter of these proceedings. Section 120.57(1), Florida Statutes.
Section 120.57(1) proceedings, such as this, are de novo proceedings intended to formulate final agency action, not to review prior action or action taken preliminarily. McDonald v. Dep't of Banking and Finance, 346 So.2d 569 (Fla. 1st DCA 1977). The applicant has the burden of proving entitlement to a license. Florida Dep't of Transportation v. J.W.C. Co., Inc., 396 So.2d 778 (Fla. 1st DCA 1981). A certificate of need is a license within the meaning of Section 120.52(1), Florida Statutes.
Need for a proposed facility must be based on a balanced consideration of all statutory and rule criteria. Department of Health and Rehabilitative Services v. Johnson and Johnson Home Health Cared Inc., 447 So.2d 361 (Fla. 1st DCA 1984). A balanced consideration of the various criteria in this case clearly compels the conclusion that the proposed facilities should be approved.
The only issue in dispute relates to the need for the proposed facilities. While HRS contests the financial feasibility of the proposals, the Department's position regarding feasibility is that because of insufficient needs the facilities will not experience adequate utilization to achieve break- even in their second years of operation. Accordingly, if need is found to exist, financial feasibility is no longer at issue.
Petitioners have met their burden of proving that need exists for the proposed facilities. See Section 10-5.11(3)(a), Florida Administrative Code. Both parties employed the same quantitative need methodology, which was found to be reasonable and appropriate for use in these proceedings. The parties differ in their application of the methodology in only two areas: calculation of a base-year surgical use rate; and (2) calculation of financial break-evens of previously approved, but not yet operational, ambulatory surgical facilities.
In that the Department's witness calculated a surgical use rate employing incomplete data, the use rate employed by the Department was artificially deflated, resulting in an under- estimation of need for the proposed facilities. Petitioners witness employed complete data in the calculation of a base-year use rate; accordingly, such use rate is found to be more accurate and reliable than that calculated by the Department.
By its own admission, the Department's method of calculating financial break-even of previously approved, but not yet operational, freestanding ambulatory surgical facilities is "crude". Lovell Jones, an expert in health care finance, pronounced the method "technically incorrect"; HRS' expert Jaffe opined that Jones' method of calculating financial break-evens is "the preferred methods no question". In light of such testimony, it is clear that Jones' conclusions are more reliable than those calculated by the Department and must be employed in the quantitative need methodology.
The Department noted that the use of its method of calculating break- even resulted in a "cushion" for those previously approved facilities, so as to assure their financial viability. In light of the residual pool of surgeries available following approval of the Petitioners' projects, however, the Department's witness was satisfied that the Department "might have no objection on that ground".
Petitioners have established that the proposed facilities will improve access to services for both elderly Medicare and indigent patients. See Section 381.494(6)(c)12. Florida Statutes (1985); Section 10-5.11(3)(a), Florida Administrative Code.
The proposed facilities will have a positive effect on competition and upon the costs of providing the health services proposed by the applicants. See Section 381.494(6)(c)12. Florida Statutes (1985).
In that there exists need for the proposed facilities, each will be financially feasible immediately and in the long-term. Section 381.494(6)(c)9., Florida Statutes (1985).
Based upon the foregoing Findings of Fact and Conclusions of Lawn it is RECOMMENDED that a Final Order be entered approving the applications of
Petitioners to establish and operate freestanding ophthalmic ambulatory surgical centers in Dade County, Florida.
DONE and RECOMMENDED this 6th day of June, 1986, at Tallahassee, Florida.
LINDA M. RIGOT, 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 6th day of June, 1986.
COPIES FURNISHED:
William Page, Jr., Secretary Department of Health and
Rehabilitative Services 1323 Winewood Boulevard
Tallahassee, Florida 32301
Robert A. Weiss, Esquire
The Perkins House, Suite 101
118 North Gadsden Street Tallahassee, Florida 32301
Richard A. Patterson, Esquire Department of Health and
Rehabilitative Services 1323 Winewood Boulevard
Tallahassee, Florida 32301
=================================================================
AGENCY FINAL ORDER
=================================================================
STATE OF FLORIDA
DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES
MEDIVISION OF MIAMI, INC.,
Petitioner, CASE NO. 84-2306 CON NO. 3190
vs.
DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES,
Respondent.
/ MEDIVISION OF NORTHERN DADE COUNTY, INC.,
CASE | NO. | 84-2313 |
CON | NO. | 3187 |
Petitioner,
vs.
DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES,
Respondent.
/
FINAL ORDER
This cause came on before me for the purpose of issuing a final agency order. The Hearing Officer assigned by the Division of Administrative Hearings (DOAH) in the above-styled case submitted a Recommended Order to the Department of Health and Rehabilitative Services (HRS) . A copy of that Recommended Order is attached hereto.
CONCLUSIONS OF FACT
The Department hereby adopts and incorporates by reference the findings of fact set forth in the Recommended Order except for the conclusion that depreciation and amortization should be disregarded in the financial break-even calculation. This conclusion is either a conclusion of law of policy, not a finding of fact.
Depreciation is more than a "mere accounting recognition of prior investment" as found by the hearing officer, it in fact is a recognition and subtraction each year of part of the cost of a capital asset from revenues that is required in order to accurately determine the financial status of a business. To fail to deduct depreciation would,, at best, overstate net income and at worst, disguise a loss. For example, if a business purchases a truck it expects to use over a five year period, the business will pro rate the cost over the
five year period and subtract from income the pro rated figure each year. This pro rated amount is depreciation. A business that fails to deduct depreciation may enjoy a positive cash flow while on the path to bankruptcy. It should be noted that the cost of a capital asset is not deducted in full in the year the cost is incurred because by definition a capital asset is expected to have a useful life of more than one year, and through depreciation the cost is recovered over the useful life of the asset.
A break-even analysis is the study of the relationship between cost, volume, and profits which is often used in business to analyze the effect that volume (for example, sales volume) has on costs and ultimately profits. The only costs affected by volume are variable costs. Variable costs and fixed costs are customarily separated to measure the change in variable costs with volume. This-does not; however, eliminate the need to include fixed costs in the break-even analysis, including depreciation. The break-even point as an accounting concept is the point of activity (i.e.. sales volume) where total revenues and total expenses are equal, that is, the point of zero profit and zero loss.
The purpose of the break-even calculation in reviewing a CON application for an ambulatory surgical facility is to determine if there is sufficient need for the proposal to support a reasonable expectation of financial viability for both the proposed project and the previously approved facilities. Thus, for the reasons discussed above depreciation must be included in the financial break- even calculation. Findings of fact number 15, 16, 17, and 18 are rejected for the above discussed reasons.
CONCLUSIONS OF LAW
The Department hereby adopts and incorporates by reference the conclusions of law set forth in the Recommended Order except for the conclusion that depreciation and amortization should be disregarded in the financial break-even calculation. There is sufficient need to justify approval of the CONs sought by the petitioner.
Based upon the foregoing, it is
ADJUDGED, that CONs #3187 and 3190 opthalmic ambulatory surgical centers in Dade County are hereby approved.
DONE and ORDERED this 1st day of October, 1986, in Tallahassee, Florida.
WILLIAM J. PAGE
Secretary
Copies furnished to:
Robert A. Weiss, Esquire Richard A. Patterson, Esquire The Perkins House, STE 101 Assistant General Counsel
118 North Gadsden Street Department of Health and Tallahassee, Florida 32301 Rehabilitative Services
1323 Winewood Blvd.
Linda M. Rigot Building One, Room 407
Hearing Officer (DOAH) Tallahassee, Florida 32399-0700
Nell Mitchem (PDCFM) Reid Jaffe (PDCFR)
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that a copy of the foregoing was sent to the above-named people by U.S. Mail this 3rd day of October, 1986.
R. S. Power, Agency Clerk Assistant General Counsel Department of Health and Rehabilitative Services 1323 Winewood Boulevard Building One, Room 407
Tallahassee, Florida 32399-0700 904/488-2381
NOTICE OF RIGHT TO JUDICIAL REVIEW
A party who is adversely affected by this Final Order is entitled to judicial review which shall be instituted by filing one copy of a Notice of Appeal with the agency clerk of HRS, and a second copy, along with filing fee as prescribed by law, with the District Court of Appeal in the appellate district where the agency maintains its headquarters or where a party resides. Review proceedings shall be conducted in accordance with the Florida Appellate Rules. The Notice of Appeal must be filed within 30 days of rendition of the order to be reviewed.
| Issue Date | Proceedings |
|---|---|
| Jun. 06, 1986 | Recommended Order (hearing held , 2013). CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Oct. 01, 1986 | Agency Final Order | |
| Jun. 06, 1986 | Recommended Order | Certificate Of Need for freestanding opthalmic ambulatory surgical centers approved where applicants proved need using complete data and department used incomplete. |
