STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
WUESTHOFF MEMORIAL HOSPITAL, ) INC., )
)
Petitioner, )
)
vs. ) Case No. 02-0427CON
)
AGENCY FOR HEALTH CARE )
ADMINISTRATION, )
)
Respondent. )
)
RECOMMENDED ORDER
This case was heard by David M. Maloney, Administrative Law Judge of the Division of Administrative Hearings, on June 26 and 27, 2002, in Tallahassee, Florida.
APPEARANCES
For Petitioner: David Ashburn, Esquire
Greenberg Traurig, P.A.
101 East College Avenue Post Office Drawer 1838 Tallahassee, Florida 32302
For Respondent: John F. Gilroy, III, Esquire
Agency for Health Care Administration 2727 Mahan Drive
Building Three, Suite 3431 Tallahassee, Florida 32308-5403
STATEMENT OF THE ISSUE
Whether the Agency for Health Care Administration should approve Wuesthoff Memorial Hospital's certificate of need
application to add fifty (50) general acute care beds to Wuesthoff Medical Center-Melbourne in Melbourne, Florida?
PRELIMINARY STATEMENT
On February 5, 2002, the Division of Administrative Hearings ("DOAH") received a notice from the Agency Clerk at the Agency for Health Care Administration ("AHCA"). The notice advised DOAH that AHCA had received a request for formal hearing from Wuesthoff Memorial Hospital, Inc., ("Wuesthoff") and requested that DOAH assign the matter to an administrative law judge to conduct all proceedings required by law.
Attached to the notice was a Petition for Formal Administrative proceedings submitted by Wuesthoff. The petition alleged that Wuesthoff had filed CON Application No. 9495 with AHCA seeking the addition of fifty (50) general acute care beds to Wuesthoff Medical Center-Melbourne ("Wuesthoff Melbourne") and that AHCA had preliminarily denied the application. The petition requested that appropriate relief be granted that would result in approval of the application.
The case was assigned DOAH Case No. 02-0427CON by DOAH and the undersigned was designated as the Administrative Law Judge to conduct the necessary proceedings. On February 18, 2002, the case was noticed for a two-day hearing to take place on June 26 and 27, 2002.
Final hearing took place as noticed. At the hearing, Wuesthoff presented the testimony of five witnesses:
Richard Edward Kolleda, administrator and chief operating officer of Wuesthoff Melbourne and an expert in hospital operation and administration; Brian J. Ellis, M.D., a practitioner of family medicine; Larry Jones, an expert in managed care; Gregory M. Johnston, an expert in managed care; and Mark Richardson, an expert in health care planning. Wuesthoff's six exhibits marked for identification as Wuesthoff Exhibits one through six were all admitted into evidence. The Agency presented the testimony of its Chief of the Bureau of Health Facility Regulation,
Jeffrey Gregg, an expert in health care planning.
The transcript of the final hearing was filed on July 26, 2002. Wuesthoff and AHCA timely filed proposed recommended orders. This Recommended Order follows.
FINDINGS OF FACT
Background
A Curious Shape
As the crow flies, Brevard County stretches along its coastline for some 72 miles, bordered as it is on the north by Volusia County, and on the south by the Sebastian River, the Sebastian Inlet and the Indian River County line. In contrast, bordered on the east by the Atlantic Ocean and on the west by the St. John's River and the Osceola County line, latitudes within
Brevard County average barely 20 miles. Relative to other counties in Florida, Brevard County's geographical shape, long and narrow, is unusual.
Through its curious geographical shape, the county lends itself to an easy partition into three socio-economic sub-areas: North, Central, and South. South Brevard, the area serving as the locus of Wuesthoff's hoped-for CON, has suffered in the past from a lack of competition in acute care hospital services. The Agency took steps to rectify the situation in a final order issued in Wuesthoff Memorial Hospital, Inc. v. Agency for Health
Care Administration, 23 FALR 1280, Final Order rendered November 21, 2000, when it approved Wuesthoff's CON for a 50-bed acute care hospital in South Brevard.
In the relatively short time since AHCA rendered its final order, new data shows that in the absence of Wuesthoff's presence as a provider of acute care hospital services at a location in South Brevard County, the need for competition has become more critical because of an increase in demand. It is this factor, the need for competition in acute care hospital services in South Brevard County, upon which the outcome of this administrative proceeding should turn.
Brevard County Hospitals and Health First
There are five hospitals in Brevard County. Parrish Medical Center in Titusville is in North Brevard. Wuesthoff
Rockledge and Cape Canaveral Hospital are in Central Brevard. Holmes Regional Medical Center and Palm Bay Community Hospital, operated under a single hospital license with 468 and 60 beds, respectively, are in South Brevard.
Of the five hospitals, Parrish Medical Center and Wuesthoff are operated as independent hospitals. The other three are controlled by Health First, Inc. ("Health First" or "HF"). This control extends to the operation of the three hospitals, including contracting for managed care. Health First is, moreover, the sole shareholder of the largest HMO in Brevard County.
Wuesthoff's Physical Presence in South Brevard
In the Fall of 1996, Wuesthoff filed its first application for the establishment of a 50-bed hospital in South Brevard County. While legal proceedings were pending with regard to the application, Wuesthoff filed a second application in a different batching cycle for essentially the same 50-bed hospital in South Brevard, CON Application 8740. After administrative and appellate litigation protracted in part because of interaction between the proceedings on the applications filed in the two batching cycles, a final order was entered by AHCA on November 1, 2000, with regard to CON 8740.
The Final Order, rendered more than four years after the commencement of Wuesthoff's initial attempt to establish a 50-bed
hospital in South Brevard approved the 50-bed hospital sought by Wuesthoff.
The DOAH Recommended Order that immediately preceded the Final Order recognized the competitive benefits of a new hospital in South Brevard County in paragraphs 107 through 118 of the order:
In general, competition enhances the quality of health care services even when services being provided are of high quality. Competition also provides an incentive for hospitals, including non-profit hospitals to serve patients more efficiently.
Competition lowers the costs consumers pay for hospital services. When managed care payors are able to reduce their payments to hospitals, they are able to lower the premiums paid by the "end purchaser." (Tr. 609). If the end purchaser is an employer, the "employer then makes [its] business decision internally as to how much of that cost is passed along to the individual employee." (Id.) This effect of competition is the basis for a number of managed care contractors and employers' vigorous support of Wuesthoff's application, the success of which will create competition in South Brevard County. Wuesthoff's proposed hospital will spur competition which will benefit consumers by lowering Holmes Regional's prices.
Managed care helps contain costs and injects price sensitivity into the market. At the same time, higher levels of hospital concentration are associated with lower levels of discounting to managed care companies.
Managed care penetration has been increasing in Brevard County. In South
Brevard County, managed care penetration has increased but mainly due to increase in enrollment in HFHP, Health First's managed care plan. Managed care penetration in South Brevard County achieved by HFHP "in itself is not the issue." (HRMC No. 75, p. 32.) With only one active HMO in South Brevard County, there is no incentive to achieve better rates for the ultimate consumers especially if the main HMO is part of the same organization as the hospital as in this case. "[I]f you have several large commercial plans . . . they will be able to get better rates from Holmes Regional than if you only have one." (Id.,
p. 32-33). Commercial HMO inability to contract with HRMC was considered by the agency as the most important factor in approving Wuesthoff's application. Health maintenance organizations, other than HFHP, do not have meaningful competitive ability to compete with HFHP in South Brevard County.
In recognition of their inability to use Central Brevard County hospitals or Sebastian River Medical Center as substitutes, and to avoid losses caused by the lack of hospital competition in South Brevard County, Aetna and United, two large managed care payors in Brevard County, have embarked on an exit strategy with regard to South Brevard County.
It is difficult for managed care payors to steer south Brevard residents to central Brevard hospitals. Patients are generally unwilling to change physicians when it becomes necessary to enter a hospital. Discharge data demonstrates the lack of overlap in physician privileges between South and Central Brevard.
The Central Florida Health Care Coalition, an organization comprised of businesses and formed to address health care issues which includes the largest of Brevard County employers, supports Wuesthoff's application because of the competition it
will create and a number of consumers expressed support for the Wuesthoff application based on the need for competition in South Brevard County. In contrast, not a single employer, large or small, testified in support of opposition to the application.
Wuesthoff's new hospital would provide an alternative for managed care payors to negotiate hospital prices in South Brevard County. More favorable hospital prices in managed care contracts, in turn, would lead to managed care premiums that would be lower for managed care customers. Lower health care premiums enable larger numbers of consumers to purchase health care coverage, thereby reducing the number of persons who have no source of payments for health care services.
The ability of managed care plans to negotiate hospital prices is dependent upon ability to engage in selective contracting, the ability of a managed care plan to refuse to include a hospital in its network of providers. Selective contracting induces hospitals to offer discounted prices to assure participation in a managed care plan's network of hospitals in order to avoid losing the managed care plan's business to other competitive hospitals.
Selective contracting can only be an effective strategy if managed care contractors have meaningful choices among hospital providers. In Brevard County, only in the central area do managed care plans have more than one hospital system from which to choose meaningfully and only in Central Brevard County has there been any real competition among hospitals for managed care contracts. Holmes Regional does not face the threat of a loss of business if it refuses to contract with any one managed care plan because South Brevard residents for the most part will not seek hospital services outside South Brevard County. Without the threat of
a loss of business, Holmes Regional has little, if any, incentive to offer reduced prices to managed care plans.
The lack of incentive for Holmes Regional to reduce prices to managed care plans was demonstrated by several analyses, including one showing that from 1995 through 1998, net prices paid by all managed care contractors to Holmes Regional were on average 32% higher per year than those paid to Wuesthoff, which has competition from another hospital in Central Brevard County
Apart from pricing analyses, the lack of competition in the managed care arena for Holmes Regional was demonstrated by its ability to resist entry into any per diem managed care contracts despite efforts by some managed care contractors to negotiate such agreements with Holmes Regional. Per diem contracts are a favored from of contracting by managed care payors because they tend to enable managed care payors to predict the level of hospital payment to which they will be exposed. Such contracts are commonly found where there is competition among hospitals. In contrast, as is to be expected of a hospital in a competitive environment, most of Wuesthoff's contract with managed care payors are per diem contracts.
(23 FALR 1280 at 1301, 1302).
Despite the findings related to competition that favored approval of the application, however, the order recommended that Wuesthoff's application be denied because of concerns about financial feasibility.
The Agency did not accept the recommendation. In its final order, AHCA adopted the findings of fact and most of the
conclusions of law in the recommended order. But AHCA gave those that related to competition priority over those that related to financial feasibility. In the order's "conclusions of law" section, AHCA wrote:
[T]he Agency concludes that the need for competition in this particular case, as outlined in the ALJ's findings, is paramount to, and outweighs, the speculative concerns about the proposal's financial feasibility and costs of construction. The Agency finds this conclusion of law more reasonable, under the facts of this case, than that of the ALJ. Considering the applicable review criteria, approval of Wuesthoff's application for certificate of need is appropriate.
(Wuesthoff Ex. 5, 23 FALR 1283.)
The Agency's conclusion quoted in paragraph 8, above, was preceded in the order by discussion of the concern about financial feasibility and the need for competition:
The ALJ's concern about financial feasibility is largely based on two contingencies; first, whether the Internal Revenue Service will find that Wuesthoff violated the law with respect to its tax-exempt status and second, assuming a violation is found whether the Internal Revenue Service will revoke Wuesthoff's tax exempt status. In paragraphs
78 and 79 the ALJ noted "[i]t is by no means certain that the IRS will revoke Wuesthoff's tax exempt status . . . "[a]t bottom, predicting the action of the IRS is speculative." In contrast, the need for competition in acute care services in southern Brevard County is present and compelling. There is no necessity to reiterate the ALJ's extensive findings on this need set forth in paragraphs 106 through 118, 139, and 141 of the recommended order.
They illustrate the harmful effects of lack of competition including, but not limited to, the increased cost of healthcare services and a lack of choice of providers for consumers.
(Id.)
The final order's conclusions of law appropriately stress that the concerns about the financial feasibility of the new Wuesthoff hospital in South Brevard stemmed from the two contingencies in the hands of the Internal Revenue Service: first, would the IRS find Wuesthoff to have violated its tax- exempt status and, if so, second, whether that status would be revoked.
But the concerns expressed in the recommended order did not stop with what the IRS might do in the future. Whatever the course chosen by the IRS, the mere existence of the allegations that Wuesthoff's tax exempt status was in jeopardy was found to diminish the confidence of risk-averse underwriters to the point that it was not likely that any firm would underwrite the bonds Wuesthoff proposed as the method of financing. See Wuesthoff's Ex. 1, Vol. II, Appendix E., p. 26, paragraph 75.
Wuesthoff answered that it did not need bonds to finance the project because it had enough cash on hand with which to construct the hospital and cover losses during the first two years of operation. Nonetheless, the recommended order found that the short-term financial feasibility problems bled into the
long-term financial feasibility of the project. It was concluded in the recommended order that Wuesthoff's proof was inadequate to support a conclusion with confidence that the project was financially feasible.
The final order of AHCA, in approving CON 8740, gave greater priority to the need for competition in South Brevard County than the financial feasibility concerns discussed in the findings of fact section of the recommended order. AHCA's placement of disquiet about competition over financial fears, therefore, was not one that supplanted merely two speculative concerns with regard to short-term financial feasibility. The placement supplanted the concern that the threat of IRS action endangered financial feasibility in the short-term and supplanted, as well, the conclusion that the project had not been proven to be financially feasible in the long term.
The need for competition in South Brevard was thus accorded if not unprecedented, certainly great, weight by AHCA in its decision to grant CON Application 8740.
CON Filings in the Fall of 2001
Wuesthoff filed CON Application No. 9495 in the Fall of 2001. The application seeks the addition of 50 beds to the 50- bed hospital approved pursuant to CON 8740. At the same time, Wuesthoff filed CON Application No. 9494. This lower-numbered application sought to reduce the number of beds Wuesthoff had
pledged to de-license at Wuesthoff Rockledge as a condition of CON 9740 from 100 to 50. Granting both CON Application Nos. 9494 and 9495 would change the effect on the number of beds in the sub-district of Brevard County from a reduction to an increase.
Rather than the reduction of the sub-district's bed inventory by
50 if CON 8740 remained the only approved application of the three, the combined action of CON Nos. 8740, 9494, and 9495 would be to increase the sub-district's bed inventory by 50.
The Agency denied both applications filed. Later it reversed it position with regard to CON Application No. 9494. It agreed to issue a CON that enabled Wuesthoff to delicense 50 beds rather than the 100 at Wuesthoff Rockledge upon the opening of Wuesthoff Melbourne.
Wuesthoff Melbourne
Construction of Wuesthoff Melbourne is currently ongoing. The new hospital is scheduled to open on December 16, 2002.
Upon opening, Wuesthoff Melbourne's physical plant will consist of two floors. The first floor will include all ancillary support services, administrative services and the Emergency Department (the "ED"). The facility's 50 inpatient beds and 10 observation beds will be on the second floor.
The adequacy and appropriateness of Wuesthoff Melbourne's physical plant is not at issue.
Construction of a third floor that can house "roughly up to 75 beds" (tr. 78), will allow for placement in the facility of the 50 licensed beds proposed for addition by CON 9495.
Stipulated Facts
The parties are in agreement with respect to a significant number of facts relative to Wuesthoff's application for CON No. 9495, as evidenced by the Pre-hearing Stipulation. Among the facts agreed upon by the parties are the following:
Wuesthoff timely filed its application, which application included all items required to be included in a CON application by the relevant portions of Chapter 408, Florida Statutes, and Rule Chapter 59C-1, Florida Administrative Code. Pre-hearing Stipulation, pp. 2,3.
Wuesthoff provides high quality health care services at Wuesthoff Rockledge and demonstrated an ability to provide high quality care at Wuesthoff Melbourne if the application for CON 9495 is approved. Id. at
p. 4.
Wuesthoff has sufficient financial resources to implement the addition of 50 beds as proposed in CON Application 9495. Id.
Wuesthoff will be able to recruit and retain staff, both health personnel and management personnel, to accomplish its proposed project and that the amounts proposed to be paid those staff are reasonable and adequate. Id.
Wuesthoff reasonably projected costs associated with implementing the project described in CON No. 9495. Id. at p. 5.
Wuesthoff's application included reasonable projections of expenses Wuesthoff would incur relative to the operation of Wuesthoff Melbourne. Id.
If Wuesthoff achieves utilization levels consistent with those projected in CON Application No. 9495, Wuesthoff reasonably projected its net revenues after expenses. Id.
Increased Population; Economic and Utilization Issues
Population Growth
From January 1999 through January 2005, according to AHCA, Brevard County's population is expected to grow at a rate of nearly 10 percent. For the same period, the State of Florida is expected to grow at a rate of 12.2 percent and District 7, a very fast-growing area, is expected to grow at a rate of almost
16 percent.
Although Brevard County is the slowest-growing county in a district that includes the rapidly growing Orlando area and is expected to grow at a rate slightly less than the state as a whole, its growth rate of 10 percent over a six-year period represents a substantial increase in population.
Economic and Utilization Issues
When Wuesthoff Melbourne opens its doors in December of this year, more than five years will have passed since the filing of CON Application 8740. During that time, the hospital industry has undergone great change. To understand the impact of the
change, it is necessary to assess not only that which has changed but that which has remained the same.
That Which is the Same
Competition still promotes cost-effectiveness and quality of health care in the delivery of health care services. The result of competition is also lower health care costs for consumers.
In a competitive environment, payors have the option of steering enrollees from one hospital to another in the interest of obtaining more favorable pricing. Pricing of hospital services is critical to the ability of the payor to offer a competitive premium to the consumer of health care because hospital costs typically take up 50-60 percent of the premium dollar. When payors are able to negotiate discounted hospital prices, those discounts can be passed on to the consumer in the form of lower health insurance premiums.
Between medical staffs in South Brevard hospitals and those in Central Brevard, there remains minimal overlap. The travel time between the most populated areas of South Brevard and Central Brevard can range from one hour to almost two. It is not reasonable to expect busy South Brevard physicians to admit patients to Central Brevard hospitals.
Significant effort by Wuesthoff involving multiple approaches to encourage South Brevard physicians to admit patients to Wuesthoff Rockledge have not been successful.
Managed care companies remain unable to steer patients in South Brevard to Central Brevard for hospital services. Indeed, recognizing that inability coupled with the inability to contract with HF for hospital services at meaningfully discounted rates, national managed care companies, including Aetna and United Healthcare, have abandoned their marketing efforts in South Brevard.
That Which has Changed
At the time Wuesthoff filed CON Application No. 8740 in 1997, the environment in which acute care hospital services were delivered was very different from what it is today. It was reasonable then to expect that a 50-bed hospital in South Brevard County would have sufficient capacity to provide a competitive alternative to the South Brevard HF facilities.
Five years later, the population of Brevard County, and particularly South Brevard and the Wuesthoff Melbourne service area with a growth rate of 2 percent per year, is significantly larger.
On an industry level, hospital inpatient use rates and lengths of stay are increasing. Many hospital are seeking to add inpatient beds in the face of increased demand.
In the Wuesthoff Melbourne service area, AHCA's data shows that non-tertiary inpatient admissions increased by more than 6,000, from approximately 19,000 in 1996 to more than 25,000 in 2001. That increase alone translates to a need for between 85 and 91 additional beds in Brevard County.
The increase in demand has led to bed shortages in Brevard County. Among the consequences of the shortages has been that hospitals have been forced to divert emergency transport vehicles to other hospitals.
Due to the unavailability of hospital beds, delays in Brevard hospital EDs are becoming extreme. Brian Ellis, M.D., a family practitioner with the Osler Group, testified about such delays giving a recent example:
During the fall and late fall, during the winter months and spring months, the delays have been fairly considerable. A number of days, in fact, from a patient being admitted through the emergency department until they get a room.
One of my patients, for example, a patient in congestive heart failure presented to my office, we sent him down -- all the work was already done, so this patient, all this patient needed was admission.
We sent him down to the hospital, he spent four days in the emergency department.
(Tr. 140-141). With regard to delays in the scheduling of routine or elective surgical procedures at Health First due to the unavailability of beds, Dr. Ellis testified, "Right now it
takes several months to get on schedule for simple surgical procedures, elective surgical procedures. Patients wait two months for a colonoscopy; six weeks or so, sometimes longer, for routine [hernia repair]." (Tr. 141).
The delays in moving ED patients to an inpatient bed have been so severe and persistent that HRMC has instituted a system akin to a traffic light to notify physicians when beds are unavailable. A red light apprises physicians that no beds are available. During winter months, the light is almost always red. The time period during which the light has been red "on almost a daily basis" (Wuesthoff Ex. 4, p. 9) has expanded to extend from November through April.
The change in bed availability in South Brevard County has rendered Wuesthoff Melbourne's 50-bed hospital too small to accomplish the primary purpose for which it was conceived and approved by AHCA - to inject competition for acute care hospital services into South Brevard County. The insufficiency of the present size of Wuesthoff Melbourne has been magnified by information that became available after Wuesthoff filed CON Application No. 9495. This information also demonstrates that the utilization forecasts in the application are significantly understated.
Projected Utilization
At the time Wuesthoff filed its application for CON 9495, the most current hospital utilization data available from AHCA was for the 12 months ending March 2000. Additional data has become available that further supports projected utilization and that can be of use in determining the available patient pool.
Determining Available Pool
Wuesthoff's first step in projecting admissions for the proposed beds was to define Wuesthoff Melbourne's service area by zip code. In doing so, Wuesthoff used the same service area that it has used in its earlier applications.
Next, Wuesthoff identified the pool of admissions available for service by Wuesthoff Melbourne. To do so, it was necessary to identify the existing volume of hospital admissions currently generated by the population in the Wuesthoff Melbourne service area. Admissions for tertiary services were excluded from the pool of potential Wuesthoff Melbourne patients.
Wuesthoff then examined population statistics that reveal a growth rate of approximately 2 percent in the service area.
Population data were used to derive hospital inpatient utilization rates for the service area. The use rates, on an age cohort specific basis, were applied to the population forecasts, resulting in projected non-tertiary discharges within the service
area for the first year of operation ("Project Year One") of the additional 50 beds. The methodology yielded non-tertiary discharges for Project Year One of 21,695.
After the application was filed, hospital utilization data through the full calendar year of 2001 was made available by AHCA.
The CY 2001 data revealed that the number of discharges generated within the service area was 25,672, a number substantially higher than Wuesthoff's projection for Project Year One. The pool of patients in the service area was already in 2001 almost 4000 greater than the pool of such patients Wuesthoff projected for Project Year One.
Substitution of the actual 2001 pool data into Wuesthoff's utilization projection methodology would not cure the understatement in Wuesthoff's utilization projection. There are two reasons for this. First, as stated earlier, population within the Wuesthoff Melbourne service area is increasing at approximately 2 percent per year. Second, use rates are continuing to increase.
Ignoring the expected use rate increases and simply factoring in the population growth rate of 2 percent would result in a pool of admissions for Project Years One and Two of 27,400 and 27,900 respectively.
The result of the increasing lengths of stay and use rates is that Wuesthoff must capture only 25 percent of the non- tertiary discharges to achieve the volume forecasts found in CON Application No. 9495. To add precision to its methodology, Wuesthoff segmented its analysis into a review of ED patients, managed care patients and other patients (those not directed by emergency status or managed care contract).
ED Projections
Emergency Department patients typically comprise a large percentage of a hospital's admissions. Patients who find it necessary to access a hospital through an ED usually choose the closest hospital. In fact, Brevard County emergency medical services protocols generally dictate that patients requiring ambulance service should be taken to the nearest hospital.
Wuesthoff forecasted by zip code the percentage of ED admissions that would be captured by Wuesthoff. It carried out the process separately with respect to "walk-in" admissions and ED admission whose arrival is by ambulance.
The highest "percentage capture" forecast for Wuesthoff Melbourne in any zip code was approximately 60 percent, substantially below the percentages frequently achieved by other hospitals.
Application of the methodology resulted in a projected pool of non-tertiary ED patients available, combining walk-ins
and ambulance arrivals, of 11,609. Use of the CY 2001 data results in a much larger pool -- 13,785.
Application of the market capture rates in Wuesthoff's application to the larger pool of available ED admissions yields a projection of 837 more admissions than projected in the application.
Managed Care Projections
Wuesthoff reasonably projected 1,123 and 1,217 managed care admissions for Wuesthoff Melbourne in Project Years One and Two, respectively.
The methodology used by Wuesthoff to project managed care admissions was extremely conservative. It focused on only three managed care payors with which Wuesthoff has contracts: Aetna, Prudential and United. It was based on the reasonable assumption that those payors would achieve enrollment levels achieved in the past. The forecasts are understated to the extent Wuesthoff is able to contract with managed care providers other than the three with which it already has contracts.
Since the filing of the application, several events have occurred that demonstrate Wuesthoff's managed care utilization projections to be significantly understated. Wuesthoff has secured a contract with Blue Cross - Blue Shield for its new Network Blue product. It has also signed a managed
care contract with CIGNA, a managed care payor with a coverage in Brevard County in excess of 40,000.
Wuesthoff's methodologies with respect to both ED and managed care admissions are reasonable.
Other Patients
The final component of Wuesthoff's utilization projections consists of patients other than those directed by managed care contracts or driven by emergency condition. The forecast for these patients involved an application of zip code based market capture projections to the pool of patients in the service area not accounted for in the ED and managed care analysis.
The methodology yielded the forecast that Wuesthoff Melbourne would serve 823 and 1,089 other patients in Project Years One and Two, respectively.
As with its ED and managed care patient projections, the forecast of other admissions is substantially understated in light of CY 2001 utilization data. If the more recent data is used, the pool of available admissions is much greater. The same methodology yields a forecast of 988 other admissions for Wuesthoff Melbourne for Project Year One, an increase of 165 admissions.
Use of the data available after the filing of Wuesthoff's application results in an increase of at least 1,002
admissions during Project Year One. The total is comprised of 837 ED admissions and 165 admissions other than by way of the ED or managed care contract. This figure remains understated because it does not account for the increase in managed care admissions, the original figure for which is understated.
The reasonableness of Wuesthoff's utilization projections derived from data available both at the time of and after the filing of the application is bolstered by the support of the physician and payor communities. Not yet open, Wuesthoff has received more than 150 applications for medical staff privileges. One of the groups of physicians that has applied for privileges at Wuesthoff Melbourne is responsible for approximately 7,000 admissions annually to HRMC and PBCH. Typically, this single group has between 75 and 100 patients in those facilities on any given day.
Wuesthoff's utilization projections (rendered especially conservative by new data and the acquisition of additional managed care contracts since the filing of the application) are clearly reasonable. Given the fact that the projections in the application support the need for additional beds, more recent information emphasizes that the proposed additional 50 beds are warranted and necessary to meet the community's needs.
The AHCA Approach
The Agency suggests that it would be more appropriate to delay the proposed addition of the 50 beds to be able to see more clearly the need for them. The Agency suggests, moreover, that in the interim Wuesthoff can take advantage of the procedure found in Section 408.036, Florida Statutes, that permits the addition of 10 beds if a hospital experiences 80 percent occupancy during a prior 12-month period.
The Agency's approach is not persuasive for a number of reasons. For a small hospital, adding 10 beds at a time poses inefficiency problems. (See the testimony of Mr. Kolleda at tr. 79). Nor does the approach adequately take into account the benefits of competition stressed as so important by AHCA in the past with regard to South Brevard County. Finally, the approach does not cure other negative impacts of delay in adding beds.
Negative Impact of Delay in Adding Beds
The negative impact of delay in adding beds to Wuesthoff Melbourne takes many forms.
It creates an access problem for patients. Diversions of emergency medical transport vehicles will continue to occur and patients will continue to suffer ED delays and delays in surgical procedures that are caused by the unavailability of inpatient beds in Brevard County.
From a health planning perspective, the competitive benefits which AHCA intended to flow from Wuesthoff Melbourne will at best be delayed and at worst be defeated.
The basis for AHCA's issuance of CON 8740, the establishment of an alternative hospital provider in South Brevard County to promote competition that enables physicians and managed care payors to negotiate more favorable contracts, will be delayed. The ability of physicians and managed care payors to negotiate more favorable arrangements with hospitals is dependent on the ability to steer patients or enrollees to another hospital. The Agency could not have been more clear on this point when it issued its final order that approved CON 8740. The order adopted the following language written in paragraph 116 of the Findings of Fact in the Recommended Order: "Without the threat of a loss of business, Holmes Regional has little, if any, incentive to offer reduced prices to managed care plans." Wuesthoff Ex. 1, Vol. 2, Appendix E, p. 39.
If Wuesthoff Melbourne lacks available beds, managed care payors cannot threaten HRMC with a loss of business. For managed care payors, bed unavailability at Wuesthoff Melbourne will reduce the situation to the same status that preceded the issuance of CON 8740: either pay whatever rates are demanded by HRMC to provide access to a South Brevard hospital or offer a product that is not marketable because of the inability of the
consumers to gain access at an inpatient facility in South Brevard County. This was explained by Mr. Kolleda at hearing when he was asked the following:
Let's say the managed care payer has a contract with Wuesthoff's system. So they have a contract -- the patients can go either to Wuesthoff Melbourne or Wuesthoff Rockledge. Let's say that the Wuesthoff Melbourne facility is full, and that for some reason there is some bed availability in Wuesthoff Rockledge.
What is the impact on the marketability of that managed care payer's product if with some routine, regular frequency they are taking those patients out of Wuesthoff Melbourne and sending them ... up to Wuesthoff Rockledge.
(Tr. 178). Mr. Kolleda answered:
Sooner or later you are going to get the disgruntled employer because of the complaints from their employees and families, dependents, that the product that they have been sold is not a viable product that will maintain health care inpatient in an inpatient facility in their part of county.
And again, you are going to have the same situation as you would have if you didn't have the hospital at all.
(Id.) Another more succinct discussion on the topic took place in the testimony of Larry Jones on re-direct examination:
Q Mr. Gilroy also talked with you about the leverage that is in place for physicians and payers to negotiate with Health First as a result of the existence of the Wuesthoff Melbourne facility, correct?
A Correct.
Q Is that leverage in any way dependent on there actually being beds available to service patients at that Melbourne facility?
A Certainly. (Tr. 207).
The inability by Wuesthoff Melbourne to accommodate inpatient admissions because of bed unavailability poses the threat of other negative consequences.
Physician dissatisfaction with being unable to admit a patient to Wuesthoff Melbourne may cause that physician to discontinue efforts to admit patients to the facility.
Bed availability at Wuesthoff Melbourne is necessary to provide access for emergency patients who are enrollees of managed care payors with whom Wuesthoff contracts. If Wuesthoff is unable to provide that access and the patient instead accesses the ED of a hospital with whom the payor does not have a contract, the payor will be forced to pay the non-contracted hospital's higher rates for the hospital services provided.
Those higher rates necessarily translate into higher health care premiums.
The negative consequences of bed unavailability at Wuesthoff Melbourne are not limited to circumstances involving ED patients. Managed care payors who contract with Wuesthoff to provide access to a South Brevard hospital will lose credibility
and ultimately enrollees if unable to provide access due to inadequate bed capacity at Wuesthoff Melbourne.
Delays in allowing Wuesthoff Melbourne the additional
50 beds sought by this application increase the likelihood that HRMC may avail itself of the statutory process for bed expansion when 80 percent occupancy is attained for the required time. Expansion of HRMC would foster competitive imbalance in South Brevard County.
Approval of Wuesthoff's application will promote cost savings by Wuesthoff when permitted to proceed. Wuesthoff can avoid (a) the costs associated with a new contractor coming on site, including remobilization costs expected to be between
$350,000 and $500,000; and (b) incremental construction and material costs resulting from inflation expected in the building industry.
In contrast to the evidence of the negative consequences that will flow from denial of the application, there was no evidence that approval would lead to any negative
consequences.
CONCLUSIONS OF LAW
The Division of Administrative Hearing has jurisdiction over the parties and the subject matter of this proceeding. Sections 120.569, 120.57(1), and 408.039(5), Florida Statutes.
Wuesthoff has the burden of demonstrating that its application for an additional 50 beds at Wuesthoff Melbourne should be approved. Boca Raton Artificial Kidney Center, Inc. v. Department of Health and Rehabilitative Services, 475 So. 2d 260 (Fla. 1st DCA 1985); Humana, Inc. v. Department of Health and Rehabilitative Services, 469 So. 2d 889 (Fla. 1st DCA 1985).
In evaluating a CON application, a balanced consideration of the applicable statutory and rule criteria must be made. Balsam v. Department of Health and Rehabilitative Services, 486 So. 2d 1341 (Fla. 1st DCA 1986). "The appropriate weight to be given to each criterion contained in the statute regarding CON applications is not fixed, but rather must vary on a case-by-case basis, depending on the facts in each case." Collier v. Department of Health and Rehabilitative Services, 462 So. 2d 83 (Fla. 1st DCA 1985). Whether there exists a positive fixed need pool (and in this case there is not) is but one factor to be assessed in determining whether a CON application should be approved. See FMC Hospital, Ltd. v. AHCA, 20 FALR 40401, 4054 (AHCA, July 1, 1998)(citing Sarasota County Public Hospital Board v. Department of Health and Rehabilitative Services, 11 FALR 6248, 6281 (DHRS, November 17, 1989)(Fixed need pool "is just one of the criteria which must be weighed and considered, and is no more important than any other criteria.")
Approval of Wuesthoff's application is supported by the following factors:
Hospital beds in South Brevard are not as accessible as is reasonable consistent with principles of health planning as evidenced by diversions of emergency medical transport vehicles, delays in admission of ED patients to hospital beds, and delays in the scheduling of surgical procedures. Approval of Wuesthoff's application will address the need for enhanced access to hospital beds.
Wuesthoff has a record of providing quality care and is currently capable of doing so.
There is no adequate alternative to the proposed bed addition due to the immediacy of the described access problems and the need for an available competitive hospital alternative in South Brevard.
The proposed project is financially feasible in both the long and short term.
Wuesthoff's proposed costs and methods of construction, as described in its application, are reasonable.
Finally, due to circumstances which have changed since the Wuesthoff Melbourne facility was approved, approval of the requested bed addition is necessary to more fully address the competitive problem in the managed care arena in South Brevard.
Both the Florida Legislature and AHCA have in recent years clarified their intention that competition considerations be accorded a particularly important role in the consideration of CON applications.
In 2000, when the Florida Legislature comprehensively amended statutes pertaining to CON applications, it directed AHCA to include in its assessment of CON applications, "The extent to which the proposal will foster competition that promotes quality and cost effectiveness." Section 6, Chapter 2000-256, Laws of Florida.
The pronouncements in AHCA's Final Order awarding CON 8740 concerning the paramount importance of competition relate directly to this case. AHCA has in other final orders, moreover, reiterated that competition concerns, due to their inter- relationship with quality, efficiency and access issues, are extremely important. See, e.g., HCA Health Services of Florida v. AHCA, 24 FALR 1519, 1558, 1559 (AHCA, January 24, 2002).
Approval of Wuesthoff's application is necessary and appropriate based upon a balanced consideration of the applicable statutory and rule review criteria.
Wuesthoff has carried its burden of showing that its application for CON No. 9495 should be approved.
Based on the foregoing, it is recommended that the Agency for Health Care Administration approve CON Application No. 9495 filed by Wuesthoff Hospital, Inc., to add 50 general acute care beds to its hospital facility currently under construction in South Brevard County, Wuesthoff Medical Center-Melbourne.
DONE AND ENTERED this 12th day of September, 2002, in Tallahassee, Leon County, Florida.
DAVID M. MALONEY
Administrative Law Judge
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-3060
(850) 488-9675 SUNCOM 278-9675
Fax Filing (850) 921-6847 www.doah.state.fl.us
Filed with the Clerk of the Division of Administrative Hearings this 12th day of September, 2002.
COPIES FURNISHED:
David Ashburn, Esquire Greenberg Traurig, P.A.
101 East College Avenue Post Office Drawer 1838 Tallahassee, Florida 32302
John F. Gilroy, III, Esquire
Agency for Health Care Administration 2727 Mahan Drive
Building Three, Suite 3431 Tallahassee, Florida 32308-5403
Lealand McCharen, Agency Clerk Agency for Health Care Administration 2727 Mahan Drive
Building Three, Suite 3431 Tallahassee, Florida 32308-5403
Valda Clark Christian, General Counsel Agency for Health Care Administration 2727 Mahan Drive
Building Three, Suite 3431 Tallahassee, Florida 32308-5403
NOTICE OF RIGHT TO SUBMIT EXCEPTIONS
All parties have the right to submit written exceptions within 15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the Final Order in this case.
| Issue Date | Document | Summary |
|---|---|---|
| Nov. 12, 2002 | Agency Final Order | |
| Sep. 12, 2002 | Recommended Order | AHCA`s emphasis on competition compels award of Certificate of Need for 50 additional beds for Wuesthoff Medical Center in South Broward County. |
