STATE OF FLORIDA DIVISION OF ADMINISTRATIVE HEARINGS SELECT SPECIALTY HOSPITAL PALM ) BEACH, INC., ) ) Petitioner, ) ) vs. ) Case No. 03 2486CON ) AGENCY FOR HEALTH CARE ) ADMINISTRATION, ) ) Respondent. ) ) KINDRED HOSPITAL EAST, LLC, ) ) Petitioner, ) ) v s. ) Case No. 03 2854CON ) AGENCY FOR HEALTH CARE ) ADMINISTRATION and SELECT ) SPECIALTY HOSPITAL PALM BEACH, ) INC., ) ) Respondents. ) _______________________________ ) RECOMMENDED ORDER These co nsolidated cases were heard by David M. Maloney, Administrative Law Judge of the Division of Administrative Hearings from November 16 through November 18, 2004, in Tallahassee, Florida. APPEARANCES For Petitioner Select Specialty Hospital Palm Beach, I nc., LLC: Mark A. Emmanuele, Esquire Deborah S. Platz, Esquire Panza, Maurer, & Maynard, P.A. Bank of America Building, Third Floor 3600 North Federal High way Fort Lauderdale, Florida 33308 6225 For Petitioner Kindred Hospital East, LLC: M. Christopher Bryant, Esquire Patricia A. Renovitch, Esquire Oertel, Fernandez, Cole & B ryant, P.A. 301 South Bronough Street, Fifth Floor Tallahassee, Florida 32302 1110 For Respondent: Kenneth W. Gieseking, Esquire Agency for Health Care Administration 2727 Mahan Drive, Mail Station No. 3 Tallahassee, Florida 32308 STATEMENT OF THE ISSUE Kindred Hospitals East, LLC ("Kindred") and Select Specialty Hospital Palm Beach, Inc. ("Select Palm Beach"), filed applications f or Certificates of Need ("CONs") with the Agency for Health Care Administration ("AHCA" or the "Agency") seeking approval for the establishment of long term care hospitals ("LTCHs") in Palm Beach County, AHCA District 9. Select Palm Beach's application, CO N No. 9661, seeks approval for the establishment of a 60 bed freestanding LTCH in "east central" Palm Beach County about 20 miles south of Kindred's planned location. Kindred's application, CON No. 9662, seeks approval for the establishment of a 70 bed LT CH in the "north central" portion of the county. The ultimate issue in this case is whether either or both applications should be approved by the Agency. PRELIMINARY STATEMENT On July 9, 2003, the Agency filed with the Division of Administrative Hearin gs ("DOAH") a notice that advised that it had received a request for a formal hearing from Select Palm Beach. Attached to the notice was the petition of Select Palm Beach that contains the request. The petition relates that the co batched applications of Select Palm Beach and Kindred to establish LTCHs had been denied by the Agency. With its request for formal administrative proceedings, the petition announces its support for the denial of Kindred's application and contests the denial of Select Palm Beac h's application. The petition was assigned Case No. 03 2486CON, and Richard A. Hixson was designated as the administrative law judge to conduct the proceeding. On July 10, 2003, an I nitial O rder was issued. On August 4, 2003, DOAH received another notic e from AHCA. The notice advised that a request for a formal administrative hearing had been filed by Kindred. Attached to this second notice was a petition filed by Kindred in which Kindred had joined both the Agency and Select Palm Beach as Respondents. Kindred's petition asserts that its application should not have been denied, that its application is superior to Select Palm Beach's, and that Select Palm Beach's application should be denied. In addition to seeking administrative proceedings with the re gard to the denial of the two applications, Kindred's petition also sought leave to intervene in Case No. 03 2846CON. Kindred's petition was assigned Case No. 03 2854CON, and Judge Hixson was designated to conduct the proceedings in that case, as well. S hortly thereafter, on August 13, 2003, Kindred filed a motion to consolidate the two cases. The two cases were consolidated on August 14, 2003. The consolidated cases were set for hearing to commence in April 2004. Pursuant to a joint motion for continu ance, the cases were continued until August, 2004. On August 17, 2004, after the cases had been transferred to the undersigned, the Agency filed a motion for continuance. The motion reported that Select Palm Beach took no position on the motion and that Kindred took no position other than that the cases should be scheduled for some time in the late fall of 2004. Following a telephone conference call, the cases were re set for hearing to commence on November 4, 2004, with conclusion by November 10, 2004. During the following month, Select Palm Beach filed a motion to re set the hearing for November 16 19, 2004. The motion drew no opposition and, accordingly, was granted. The final hearing commenced on November 16, 2004, and concluded on November 18, 200 4. Proceeding first, Select Palm Beach called the following witnesses: Marsha Medlin, accepted as an expert in critical care nursing and LTCH nursing; Patricia Greenberg, accepted as an expert in health care planning, health care finance, and health care administration; and Greg Sassman, accepted as an expert in LTCH development. Select Palm Beach introduced six exhibits, marked for identification as Select Palm Beach Exhibits 1 through 6. All were admitted into evidence. Kindred presented the testimony of three witnesses: James Novak, accepted as an expert in health care administration and LTCH administration; John Grant, accepted as an expert in financial analysis; and Clarence Joseph Wurdock, accepted as an expert in health care planning. Kindred of fered fourteen exhibits into evidence, marked as Kindred Exhibits 1 through 14. All were admitted into evidence. 1 Among Kindred's exhibits were depositions of John Caron, accepted as an expert in health care financial feasibility analysis; Dr. Sean Muldo on, accepted as an expert in pulmonary disease, internal medicine, preventive medicine, and critical care medicine; Laurence May, accepted as an expert in real estate tax and property tax; Judy Curtiss, accepted an expert in nursing and LTCH administratio n; and Rita De Armond; and, Kathleen Anson. The Agency presented the testimony of Jeffrey Gregg, Chief of AHCA's Bureau of Health Facility Regulation. Mr. Gregg was accepted as an expert in health planning and CON review. The first two exhibits offered b y the Agency, marked for identification as Agency Exhibits 1 and 2, were admitted into evidence. Agency Exhibits 3 and 4 were marked for identification. Objections to their introduction were sustained on the basis of surprise since the Agency had not lis ted them on the exhibit list provided to the other parties. The transcript of the final hearing was filed with DOAH on December 20, 2004. After requests for extensions of time in which to file proposed recommended orders, all of which were granted, propos ed orders by Select Palm Beach and Kindred were filed in a timely fashion, that is, on or before January 28, 2005. The Agency did not file a proposed order. This Recommended Order follows. FINDINGS OF FACT Long Term Care Hospitals 1. Of the four classe s of facilities licensed as hospitals by the Agency, "Class I or general hospitals," includes: 1. General acute care hospitals with an average length of stay of 25 days or less for all beds; 2. Long term care hospitals, which meet the provisions of subs ection 59A 3.065(27), F.A.C.; and, 3. Rural hospitals designated under Section 395, Part III, F.S. Fla. Admin. Code R. 59A 3.252(1)(a). This proceeding concerns CON applications for the second of Florida's Class I or general hospitals: LTCHs. 2. A cr itically ill patient may be admitted and treated in a general acute care hospital, but, if the patient cannot be stabilized or discharged to a lower level of care on the continuum of care within a relatively short time, the patient may be discharged to an LTCH. An LTCH patient is almost always "critically catastrophically ill or ha[s] been." (Tr. 23). Typically, an LTCH patient is medically unstable, requires extensive nursing care with physician oversight, and often requires extensive technological supp ort. 3. The LTCH patient usually fits into one or more of four categories. One category is patients in need of pulmonary/respiratory services. Usually ventilator dependent, these types of LTCH patients have other needs as well that requires "complex com prehensive ventilator weaning in addition to meeting ... other needs." (Tr. 26). A second category is patients in need of wound care whose wound is life threatening. Frequently compromised by inadequate nutrition, these types of LTCH patients are often diabetic. There are a number of typical factors that may account for the seriousness of the wound patient's condition. The job of the staff at the LTCH in such a case is to attend to the wound and all the other medical problems of the patient that have e xtended the time required for care of the wound. A third category is patients with some sort of neuro trauma. These patients may have had a stroke and are often elderly; if younger, they may be victims of a car accident or some other serious trauma. The y typically have multiple body systems that require medical treatment, broken bones and a closed head injury for example, that have made them "very sick and complex." (Tr. 27). The fourth category is referred to by the broad nomenclature of "medically co mplex" although it is a subset of the population of LTCH patients all of whom are medically complex. The condition of the patients in this fourth category involves two or more body systems. The patients usually present at the LTCH with "renal failure ... [and] with another medical condition ... that requires a ventilator ..." Id. 4. In short, LTCHs provide extended medical and rehabilitative care to patients with multiple, chronic, and/or clinically complex acute medical conditions that usually require care for a relatively extended period of time. To meet the definition of an LTCH a facility must have an average length of inpatient stay ("ALOS") greater than 25 days for all hospital beds. See Fla. Admin. Code R. 59A 3.065(34). 5. The staffs at gener al acute care hospitals and LTCHs have different orientations. With a staff oriented toward a patient population with a much shorter ALOS, the general acute care hospital setting may not be appropriate for a patient who qualifies for LTCH services. The s taff at a general acute care hospital frequently judges success by a patient getting well in a relatively short time. It is often difficult for general acute care hospital staff to sustain the interest and effort necessary to serve the LTCH patient well p recisely because of the staff's expectation that the patient will improve is not met in a timely fashion. As time goes by, that expectation continues to be frustrated, a discouragement to staff. 6. The LTCH is unlike other specialized health care settin gs. The complex, medical, nursing, and therapeutic requirements necessary to serve the LTCH patient may be beyond the capability of the traditional comprehensive medical rehabilitation ("CMR") hospital, nursing home, skilled nursing facility ("SNF"), or, the skilled nursing unit ("SNU"). 7. CMR units and hospitals are rarely, if ever, appropriate for the LTCH patient. Almost invariably, LTCH patients are not able to tolerate the minimum three (3) hours of therapy per day associated with CMR. The primar y focus of LTCHs, moreover, is to provide continued acute medical treatment to the patient that may not yet be stable, with the ultimate goal of getting the patient on the road to recovery. In comparison, the CMR hospital treats medically stable patients consistent with its primary focus of restoring functional capabilities, a more advanced step in the continuum of care. 8. Services provided in LTCHs are distinct from those provided in SNFs or SNUs. The latter are not oriented generally to patients who need daily physician visits or the intense nursing services or observations needed by an LTCH patient. Most nursing and clinical personnel in SNFs and SNUs are not experienced with the unique psychosocial needs of long term acute care patients and their f amilies. 9. An LTCH is distinguished within the healthcare continuum by the high level of care the patient requires, the interdisciplinary treatment model it follows, and the duration of the patient's hospitalization. Within the continuum of care, LTCHs occupy a niche between traditional acute care hospitals that provide initial hospitalization care on a short term basis and post acute care facilities such as nursing homes, SNFs, SNUs, and comprehensive medical rehabilitation facilities. 10. Medicare h as long recognized LTCHs as a distinct level of care within the health care continuum. The federal government's prospective payment system ("PPS") now treats the LTCH level of service as distinct with its "own DRG system and ... [its] own case rate reimbu rsement." (Tr. 108). 11. Under the LTCH PPS, each patient is assigned an LTC DRG (different than the DRG under the general hospital DRG system) with a corresponding payment rate that is weighted based on the patient diagnosis and acuity. The Parties 12 . The Agency is the state agency responsible for administering the CON Program and licensing LTCHs and other hospital facilities pursuant to the authority of Health Facility and Services Development Act, Sections 408.031 408.045, Florida Statutes. 13. S elect Palm Beach is the applicant for a free standing 60 bed LTCH in "east Central Palm Beach County," Select Ex. 1, stamped page 12, near JFK Medical Center in AHCA District 9. Its application, CON No. 9661, was denied by the Agency. 14. Select Palm Bea ch is a wholly owned subsidiary of Select Medical Corporation, which provides long term acute care services at 83 LTCHs in 24 states, four of which are freestanding hospitals. The other 79 are each "hospitals in a hospital" ("HIH" or "LTCH HIH"). 15. K indred is the applicant for a 70 bed LTCH to be located in the north central portion of Palm Beach County in AHCA District 9. Its application, CON No. 9662, was denied by the Agency. 16. Kindred is a wholly owned subsidiary of Kindred Healthcare, Inc. (" Kindred Healthcare"). Kindred Healthcare operates 73 LTCHs, 59 of which are freestanding, according to the testimony of Mr. Novak. See Tr. 56 57. 17. Kindred Healthcare has been operating LTCHs since 1985 and has operated them in Florida for more than 1 5 years. At the time of the submission of Kindred's application, Kindred Healthcare's six LTCHs in Florida were Kindred North Florida, a 60 bed LTCH in Pinellas County, AHCA District 5; Kindred Central Tampa, with 102 beds, and Kindred Bay Area Tampa, wi th 73 beds, both in Hillsborough County, in AHCA District 6; Kindred Ft. Lauderdale with 64 beds and Kindred Hollywood with 124 beds, both in Broward County, ACHA District 10; and Kindred Coral Gables, with 53 beds, in Dade County, AHCA District 11. The Ap plications and AHCA's Review 18. The applications were submitted in the first application cycle of 2003. Select Palm Beach's application is CON No. 9661; Kindred's is CON No. 9662. 19. Select Palm Beach estimates its total project costs to be $12,856, 139. Select Palm Beach has not yet acquired the site for its proposed LTCH, but did include in its application a map showing three priority site locations, with its preferred site, designated "Site 1," located near JFK Medical Center. 20. At $12,937,419 , Kindred's estimate of its project cost is slightly more than Select Palm Beach's. The exact site of Kindred's proposed LTCH had not been determined at the time of hearing. Kindred's preference, however, is to locate in the West Palm Beach area in the g eneral vicinity of St. Mary's Hospital, in the northern portion of Palm Beach County along the I 95 corridor. This is approximately 15 to 20 miles north of Select's preferred location for its LTCH. 21. There is no LTCH in the five county service area th at comprises District 9: Indian River, Okeechobee, St. Lucie, Martin, and Palm Beach Counties. There are two LTCHs in adjacent District 10 (to the south). They have a total of 188 beds and an average occupancy of 80 percent. 22. The Agency views LTCH care as a district wide service primarily for Medicare patients. At the time of the filing of the applications, the population in District 9 was over 1.6 million, including about 400,000 in the age cohort 65 and over. About 70 percent of the District 9 p opulation lives in Palm Beach County. More than 70 percent of the District's general acute care hospitals are located in that county. 23. Kindred's preferred location for its LTCH is approximately 40 to 50 miles from the closest District 10 LTCH; Select Palm Beach is approximately 25 to 35 miles from the closest District 10 LTCH. The locations of Select Palm Beach's and Kindred's proposed LTCHs are complementary. The SAAR 24. Following its review of the two applications, AHCA issued its State Agency A ction Report ("SAAR"). Section G., of the report, entitled "RECOMMENDATION," states: "Deny Con #9661 and CON #9662." Agency Ex. 2, p. 43. 25. On June 11, 2003, the report was signed by Karen Rivera, Health Services and Facilities Consultant Supervisor Certificate of Need, and Mr. Gregg as the Chief of the Bureau of Health Facility Regulation. It contained a section entitled "Authorization for Agency Action" that states, "[a]uthorized representatives of the Agency for Health Care Administration adopted the recommendations contained herein and released the State Agency Action Report." Agency Ex. 2, p. 44. The adoption of the recommendations is the functional equivalent of preliminary denial of the applications. 26. In Section F. of the SAAR under the heading of "Need," (Agency Ex. 2, p. 40), the Agency explained its primary bases for denial; it concluded that the applicants had not shown need for an LTCH in AHCA District 9. The discussions for the two, although not precisely identical, are quite simi lar: Select Specialty Hospital Palm Beach, Inc. (CON #9661): The applicant's two methodological approaches to demonstrate need are not supported by any specific discharge studies or other data, including DRG admission criteria from area hospitals regardin g potential need. The applicant also failed to provide any supporting documentation from area physicians or other providers regarding potential referrals. It was further not demonstrated that patients that qualify for LTCH services are not currently bein g served or that an access problem exists for residents in District 9. Kindred Hospitals East, L.L.C. (CON #9662): The various methodological approaches presented are not supported by any specific DRG admission criteria from area hospitals suggesting pot ential need. The applicant provided numerous letters of support for the project from area hospitals, physicians and case managers. However, the number of potential referrals of patients needing LTCH services was not quantified. It was further not demons trated that patients that qualify for LTCH services are not currently being served or that an access problem exists for residents in District 9. Id. At hearing, the Agency's witness professed no disagreement with the SAAR and continued to maintain the sa me bases contained in the SAAR for the denials of the two applications 27. The SAAR took no issue with either applicant's ability to provide quality care. It concluded that funding for each applicant was likely to be available and that each project appe ared to be financially feasible once operating. 28. The SAAR further stated that there were no major architectural concerns regarding Kindred's proposed facility design, but noted reservations regarding the need for further study and revision of Select P alm Beach's proposed surgery/procedure wing, as well as cost uncertainties for Select Palm Beach because of such potential revisions. By the time of final hearing, however, the parties had stipulated to the reasonableness of each applicant's proposed cost s and methods of construction. 29. The parties stipulated to the satisfaction of a number of the statutory CON criteria by the two applicants. 30. The parties agreed that the applications complied with the content and review process requirements of sec tions 408.037 and 409.039, Florida Statutes, with one exception. Select reserved the issue of the lack of a Year 2 of Schedule 6, (Staffing) in Kindred's application. The form of Schedule 6 provided by AHCA to Kindred (unlike other schedules of the appli cation) does not clearly indicate that a second year of staffing data must be provided. 31. The remainder of the criteria stipulated and the positions of the parties as articulated in testimony at hearing and in the proposed orders that were submitted le ave need as the sole issue of consequence with one exception: whether Kindred has demonstrated that its project is financially feasible in the long term. Kindred's Long Term Financial Feasibility 32. Select Palm Beach contends that Kindred's project is not financially feasible in the long term for two reasons. They relate to Kindred's application and are stated in Select Palm Beach's proposed order: (a) Kindred understated property taxes[;] (b) Kindred completely fails to include in its expenses on S chedule 8, patient medical assistance trust fund (PMATF) taxes [citation omitted]. Proposed Recommended Order of Select Palm Beach, Inc. , p. 32, Finding of Fact 97. 33. Raised after the proceeding began at DOAH by Select Palm Beach, these two issues wer e not considered by AHCA when it conducted its review of Kindred's application because the issues were not apparent from the face of the application. AHCA's Review of Kindred's Application 34. Kindred emerged from a Chapter 11 bankruptcy proceedings on A pril 20, 2001, under a plan of reorganization. With respect to the events that led to the bankruptcy proceeding and the need to review prior financial statements, AHCA made the following finding in the SAAR: Under the plan [of reorganization], the applica nt [Kindred] adopted the fresh start accounting provision of SOP 90 7. Under fresh start accounting, a new reporting entity is created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. Accordingly, th e prior period financial statements are not comparable to the current period statements and will not be considered in this analysis. Agency Ex. 2, p. 30. 35. The financial statements provided by Kindred as part of its application show that Kindred Health care, Kindred's parent, is a financially strong company. The information contained in Kindred's CON application filed in 2003 included Kindred Healthcare's financial statements from the preceding calendar year. Kindred Healthcare's Consolidated Statement of Operations for the year ended December 31, 2002, showed "Income from Operations" to be more than $33 million, and net cash provided by operating activities (cash flow) of over $248 million for the period. Its Consolidated Balance Sheet as of December 31, 2002, showed cash and cash equivalents of over $244 million and total assets of over $1.6 billion. 36. In light of the information contained in Kindred's CON application, the SAAR concluded with regard to short term financial feasibility: Based on th e audited financial statements of the applicant, cash on hand and cash flows, if they continue at the current level, would be sufficient to fund this project as proposed. Funding for all capital projects, with the support of its parent , is likely to be av ailable as needed. Agency Ex. 2, p. 30 (emphasis supplied). 37. The SAAR recognized that Kindred projected a "year two operating loss for the hospital of $287,215." Agency Ex. 2, p. 34. Nonetheless, the SAAR concludes on the issue of financial feasibi lity, "[w]ith continued operational support from the parent company, this project [Kindred's] is considered financially feasible." Id. 38. The Agency did not have the information, however, at the time it reviewed Kindred's application that Kindred under stated property taxes and omitted the Public Medicaid Trust Fund and Medical Assistance Trust Fund ("PMATF") "provider tax" of 1.5 percent that would be imposed on Kindred's anticipated revenues of $11,635,919 as contended by Select Palm Beach. 39. Consi stent with Select Palm Beach's general contentions about property taxes and PMATF taxes, "Kindred acknowledges that it likely understated taxes to be incurred in the operation of its facility." Kindred's Proposed Recommended Order , paragraph 50, p. 19. 4 0. The parties agree, moreover, that the omitted PMATF tax is reasonably projected to be $175,000. They do not agree, however, as to the impact of the PMATF tax on year two operating loss. The difference between the two (approximately $43,000) is attrib utable to a corporate income tax benefit deduction claimed by Kindred so that the combination of the application's projected loss, the omitted PMATF tax, and the deduction yields a year two operating loss of approximately $419,000. Without taking into con sideration the income tax benefit, Select Palm Beach contends that adding in the PMATF tax produces a loss of $462,000. 41. Kindred and Select Palm Beach also disagree over the projection of property taxes by approximately $50,000. Kindred projects that the property taxes in year two of operation will be approximately $225,000 instead of the $49,400 listed in the application. Select Palm Beach projects that they will be $50,000 higher at approximately $275,000. 42. Whether Kindred's or Select Palm Bea ch's figures are right, Kindred makes two points. First, if year two revenues and expenses, adjusted for underestimated and omitted taxes, are examined on a quarterly basis, the fourth quarter of year two has a better bottom line than the earlier quarters . Not only will the fourth quarter bottom line be better, but, using Kindred's figures, the fourth quarter of year two of operations is profitable. 43. Second, and most importantly given the Agency's willingness to credit Kindred with financial support from its parent, Kindred's application included in its application an interest figure of $1.2 million for year one of operation and $1.03 million for year two. Kindred claims in its proposed recommended order that "[i]n reality ... this project will incur no interest expense as Kindred intends to fund the project out of cash on hand, or operating capital, and would not have to borrow money to construct the project." Id. , at paragraph 54, p. 20. Through the testimony of John Grant, Director of Planning an d Development for Kindred's parent, Kindred Healthcare, Kindred indicated at hearing that its parent might, indeed, fund the project: A ... Kindred [Healthcare] would likely fund this project out of operating capital. Like I said, in the first nine month s of this year Kindred had operating cash flow of approximately $180 million. So it's not as if we would have to actually borrow money to complete a project like this. Q And what was the interest expense that you had budgeted in Year Two for this facili ty? A $1,032,000. Q ... so is it your statement then that this facility would not owe any interest back to the parent company? A That's correct. Tr. 221 222 (emphasis supplied). 44. If the "financing interest" expense is excluded from Kindred's st atement of projected expenses in Schedule 8 of the CON application, using Kindred's revised projections, the project shows a profit of approximately $612,000 2 for the second year of operation. If Select Palm Beach's figures and bottom line loss excludes t he "finances interest" expense, the elimination of the expense yields of profit for year two of operations in excess of $500,000. 45. If the support of Kindred's parent is considered as the Agency has signaled its willingness to do and provided that the project is, in fact, funded by Kindred Healthcare rather than financed through some other means that would cause Kindred to incur interest expense, Kindred's project is financially feasible in the long term. 46. With the exception of the issue regarding Kindred's long term financial feasibility, as stated above, taken together, the stipulation and agreements of the parties, the Agency's preliminary review contained in the SAAR, and the evidence at hearing, all distill the issues in this case to one overar ching issue left to be resolved by this Recommended Order: need for long term care hospital beds in District 9. Need for the Proposals 47. From AHCA's perspective prior to the hearing, the only issue in dispute with respect to the two applications is ne ed. This point was made clear by Mr. Gregg's testimony at hearing in answer to a question posed by counsel for Select Palm Beach: Q. ... Assuming there was sufficient need for 130 beds in the district is there any reason why both applicants shouldn't be approved in this case, assuming that need? A. No. (Tr. 398). Both applicants contend that the application each submitted is superior to the other. Neither, however, at this point in the proceeding, has any objection to approval of the other applicatio n provided its own application is approved. 48. Consistent with its position that both applications may be approved, Select Palm Beach presented testimony through its health care planner Patricia Greenberg 3 that there was need in District 9 for both appl icants' projects. Her testimony, moreover, rehabilitated the single Kindred methodology of three that yielded numeric need less than the 130 beds proposed by both applications: Q ... you do believe that there is a need for both in the district. A I bel ieve there's a need for two facilities in the district. Q It could support two facilities? A Oh, absolutely. Q And the disagreement primarily relates to the conservative approach of Kindred in terms of not factoring in out migration and the narrowing the DRG categories? A Correct. ... Kindred actually had three models. Two of them support both facilities, but it's the GMLOS model that I typically rely on, and it didn't on the surface support both facilities. That's why I reconciled the two, and I believe that's the difference, is just the 50 DRGs and not including the out migration. That would boost their need above the 130, and two facilities would give people alternatives, it would foster competition, and it would really improve access in that market. Tr. 150 51. 49. Need for the applications, therefore, is the paramount issue in this case. Since both applicants are qualified to operate an LTCH in Florida, if need is proven for the 130 beds, then with the exception of Kindred's long term fina ncial feasibility, all parties agree that there is no further issue: both applications should be granted. No Agency Numeric Need Methodology 50. The Agency has not established a numeric need methodology for LTCH services. Consequently, it does not publ ish a fixed need pool for LTCHs. 51. Nor does the Agency have "any policy upon which to determine need for the proposed beds or service." See Fla. Admin. Code R. 59C 1.008(2)(e)1. 52. Florida Administrative Code Rule 59C 1.008(2), which governs "Fixed Need Pools" (the "Fixed Need Pools Rule") states that if "no agency policy exist" with regard to a needs assessment methodology: [T]he applicant will be responsible for demonstrating need through a needs assessment methodology which must include, at a mini mum, consideration of the following topics, except where they are inconsistent with the applicable statutory or rule criteria: a. Population demographics and dynamics; b. Availability, utilization and quality of like services in the district, subdistrict or both; c. Medical treatment trends; and d. Market conditions. Fla. Admin. Code R. 59C 1.008(2)(e)2. The Fixed Need Pools Rule goes on to elaborate in subparagraph (e)3 that "[t]he existence of unmet need will not be based solely on the absence of a health service, health care facility, or beds in the district, subdistrict, region or proposed service area." Population, Demographics and Dynamics 53. The first of the four topics to be addressed when an applicant is responsible for demonstrating need t hrough a needs assessment methodology is "population, demographics and dynamics." 54. The Agency has not defined service areas for LTCHs. Nonetheless, from a health planning perspective, it views LTCH services as being provided district wide primarily fo r Medicare patients. 55. Consistent with the Agency's view, Select Palm Beach identified the entire district, that is, all of AHCA District 9, as its service area. It identified Palm Beach County, one of the five counties in AHCA District 9, as its prima ry service area. 56. In identifying the service area for Select Palm Beach, Ms. Greenberg drew data from various sources: population estimates for Palm Beach County and surrounding areas; the number of acute care hospital beds in the area; the number of LTCH beds in the area; the types of patients treated at acute care hospitals; and the lengths of stay of the patients treated at those hospitals. 57. AHCA District 9 has more elderly than any other district in the State, and Palm Beach County has more tha n any other county except for Dade. Palm Beach County residents comprise 71% of the District 9 population. It is reasonably projected that the elderly population (the "65 and over" age cohort) in Palm Beach County is projected to grow at the rate of 8 pe rcent by 2008. 58. The "65 and over" age cohort is significant because the members of that cohort are most likely to utilize hospital services, including LTCH services. Its members are most likely to suffer complications from illness and surgical proced ures and more likely to have co morbidity conditions that require long term acute care. Persons over 65 years of age comprise approximately 80 percent of the patient population of LTCH facilities. 59. Both Select Palm Beach and Kindred project that appr oximately 80 percent of their admissions will come from Medicare patients. 60. Since 90 percent of admissions to an LTCH come from acute care facilities, most of the patient days expected at Select Palm Beach's proposed LTCH will originate from residents in its primary service area, Palm Beach County. 61. When looking at the migration pattern for patients at acute care facilities within Palm Beach County, the majority (90 percent) come from Palm Beach County residents. Thus, Select Palm Beach's project ed primary service area is reasonable. 62. Just as Select Palm Beach, Kindred proposes to serve the entire District. Kindred proposes that its facility be based in Palm Beach County because of the percentage of the district's population in the county as well as because more than 70% of the district's general acute care hospitals are in the county. Its selection of the District as its service area, consistent with the Agency's view, is reasonable. 63. Currently there are no LTCHs in District 9. Availab ility, Utilization and Quality of Like Services 64. The second topic is "availability, utilization and quality of like services." 65. There are no "like" services available to District residents in the District. Select Palm Beach and Kindred, therefo re, contend that they meet the criteria of the second topic. 66. There are like services in other AHCA Districts. For example, AHCA District 10 has at total of 188 beds at two Kindred facilities in Fort Lauderdale and Hollywood. The Agency, however, di d not present evidence of their quality, that they were available or to what extent they are utilized by the residents of AHCA District 9. Medical Treatment Trends 67. The third topic is medical treatment trends. 68. Caring for patients with chronic an d long term care needs is becoming increasingly more important as the population ages and as medical technology continues to emerge that prolongs life expectancies. 69. Through treatment provided the medically complex and critically ill with state of the art mechanical ventilators, metabolic analyzers, and breathing monitors, LTCHs meet needs beyond the capability of the typical general acute care hospitals. In this way, LTCHs fill a niche in the continuum of care that addresses the needs of a small but growing patient population. eatment for these patients in an LTCH, who otherwise would be cared for without adequate reimbursement to the general acute care hospital or moved to an alternative setting with staff and services inadequate to meet thei r needs, is a medical trend. Market Conditions 71. The fourth topic to be addressed by the applicant is market conditions. 72. The federal government's development of a distinctive prospective payment system for LTCHs (LTC DRG), has created a market co ndition favorable to LTCHs. 73. General acute care hospitals face substantial losses for the medically complex patient who uses far greater resources than expected on the basis of individual diagnoses. 74. Medicare covers between 80 and 85 percent of L TCH patients. The remaining patients are covered by private insurance, managed care and Medicaid. LTCH programs allow for shorter lengths of stay in a general acute care facility, reduces re admissions and provide more discharges to home. These benefits are increasingly recognized. Numeric Need Analysis 75. Kindred presented a set of needs assessment methodologies that yielded numeric need for the beds applied for by Kindred. Select Palm Beach did the same. Unlike Kindred, however, all of the needs assessment methodologies presented by Select Palm Beach demonstrated numeric need in excess of the 130 beds proposed by both applications. Select Palm Beach's methodologies, overall, are superior to Kindred's. 76. Select Palm Beach used two sets of need s assessment methodologies and sensitivity testing of one of the sets that confirmed the methodology's reasonableness. The two sets or needs assessment methodologies are: (1) a use rate methodology and (2) length of stay methodologies. 77. The use rate methodology yielded projected bed need for Palm Beach County alone in excess of the 130 beds proposed by the two applicants. For the year "7/05 6/06" the bed need is projected to be 256; for the year "7/06 6/07" the bed need is projected to be 261; a nd, for the year "7/07 6/08" the bed need is projected to be 266. See Select Ex. 1, Bates Stamp p. 000036 and the testimony of Ms. Greenberg at tr. 114. If the use rate analysis had been re computed to include two districts whose data was excluded from the analysis, the bed need yielded for Palm Beach County alone was 175 beds, a numeric need still in excess of the 130 beds proposed by both applicants. 78. The use rate methodology is reasonable. 4 79. The length of stay methodologies are also reasona ble. These two methodologies also yielded numeric need for beds in excess of the 130 beds proposed. The two methodologies yielded need for 167 beds and 250 beds. Agency Denial 80. The Agency's general concerns about LTCHs are not without basis. For ma ny years, there were almost no LTCH CON applications filed with the Agency. A change occurred in 2002. The change in the LTCH environment in the last few years put AHCA in the position of having "to adapt to a rapidly changing situation in terms of [Agen cy] understanding of what has been going on in recent years with long term care hospitals." (Tr. 358.) "... [I]n the last couple of years long term care hospital applications have become [AHCA's] most common type of application." (Tr. 359.) 81. At the time of the upsurge in applications, there was "virtually nothing ... in the academic literature about long term care hospitals ... that could [provide] ... an understanding of what was going on ... [nor was there anything] in the peer reviewed literature that addressed long term care hospitals" id ., and the health care planning issues that affected them. 82. Two MedPAC reports came out, one in 2003 and another in 2004. The 2003 report conveyed the information that the federal government was unable to i dentify patients appropriate for LTCH services, services that are overwhelmingly Medicare funded, because of overlap of LTCH services with other types of services. The 2004 report gave an account of the federal government decision to change its payment po licy for a type of long term care hospitals that are known as " hospitals within hospitals " (tr. 368) so that "hospitals within hospitals as of this past summer [2004] can now only treat 25 percent of their patients from the host hospital." Id. 83. Both reports roused concerns for AHCA. First, if appropriate LTCH patients cannot be identified and other types of services overlap appropriately with LTCH services, AHCA cannot produce a valid needs assessment methodology. The second produces another concern . In the words of Mr. Gregg, The problem ... with oversupply of long term care hospital beds is that it creates an incentive for providers to seek patient who are less appropriate for the service. What we know now is that only the sickest patient ... wit h the most severe conditions are truly appropriate for long term care hospital placement. * * * ... [T]he MedPAC report most recently shows us that the greatest indicator of utilization of long term care hospital services is the mere availability of thos e services. Tr. 368 369. 84. The MedPAC reports, themselves, although marked for identification, were not admitted into evidence. Objections to their admission (in particular, Kindred's) were sustained because they had not been listed by AHCA on the st ipulation required by the Pre hearing Order of Instructions. CONCLUSIONS OF LAW, 85. The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of these proceedings. §§ 120.569, 120.57(1) and 408.039(5), Fla. St at. (2004). 86. Each Petitioner has the burden to prove by a preponderance of the evidence that its CON application should be approved. See Boca Raton Artificial Kidney Center, Inc. v. Dept. of Health & Rehabilitative Services , 475 So. 2d 260 (Fla. 1st DCA 1985); § 120.57(1)(j), Fla. Stat. 87. In light of the parties' stipulation, the position of the Agency and the positions of Select Palm Beach and Kindred in their proposed recommended orders, there are only two issues that need to be addressed. The first is Kindred's long term financial feasibility. The second is need for the 130 LTCH beds proposed by the two applications. Kindred's Long Term Financial Feasibility 88. Kindred's project is financially feasible in the long term provided that the pro ject is financed by its parent, Kindred Healthcare. The possibility of such a finance arrangement was suggested at hearing; the commitment of the parent to such a financing arrangement was expressed by Kindred in its proposed recommended order. The Agenc y indicated in the SAAR that Kindred Healthcare's financial support would be credited toward a finding that Kindred's project is financially feasible. 89. Hence, if Kindred has otherwise proved that its application should be approved, the approval should be conditioned on financing of the project by its parent, Kindred Healthcare. Need 90. The evidence establishes that there is a need for at least 130 LTCH beds in AHCA District 9. 91. The preponderance of the evidence in the proceeding is that the Age ncy's concerns do not defeat the applications. 92. The Agency recognizes that there is a type of patient that LTCHs serve the sickest patients with the most severe conditions. 93. The evidence establishes that LTCHs are appropriate for the medically c omplex and critically ill patient who requires an extended length of stay. While these patients might receive healthcare in other settings such as the general acute care hospital or a SNU in a nursing home so as to create the appearance of an overlap in s ervices, the evidence establishes that the most appropriate healthcare setting for such a patient is an LTCH. 94. Valid need assessment methodologies establish that there is a need in AHCA District 9 for more than 130 LTCH beds. See , however, endnote 4. Both applications therefore should be granted; Kindred's, however, should be conditioned on financing of the project by its parent, Kindred Healthcare. RECOMMENDATION Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be issued by the Agency for Health Care Administration that: 1. approves Select Palm Beach's application, CON 9661; and 2. approves Kindred's application CON 9662 with the condition that financing of the project be provided by Kindred Health care. DONE AND ENTERED this 18th day of April, 2005, in Tallahassee, Leon County, Florida. S DAVID M. MALONEY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallah assee, 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 18th day of April, 2005. ENDNOTES 1/ Select's objections to some of Kindred 's exhibits were treated as motions to strike with the instruction that if the objections were maintained after hearing a memorandum of law should be filed. The objection to Kindred's exhibits led Kindred to object in kind to some of Select's exhibits. T hese objections, too, were treated as motions to strike to be supported by a memorandum of law. No memoranda were filed. The objections, therefore, are deemed waived. 2/ The difference between the $1,032,000 in financing interest that Kindred projected in its application it would incur in year two of operations if the project were financed and the $419,000 loss it projected it would sustain that year in its application. If Kindred Healthcare provides the funds for the project and chooses to impose no f inancing interest on its subsidiary, Kindred, as was indicated at hearing by Mr. Grant, then the projection of Kindred's bottom line would improve by $1,032,000, from a $419,000 loss to a gain of approximately $613,000. 3/ Ms. Greenberg, who has several decades of experience in health care planning, was also accepted as an expert in health care finance and health care administration. She has participated in the preparation of "[a]t least a hundred" (tr. 93) CON applications, has been involved in more tha n 20 LTCH applications and has provided litigation support for at least 50 CON applications. She has been frequently accepted as an expert in CON proceedings in Florida at DOAH as well as in other jurisdictions. 4/ This finding is based on the evidence of record in this proceeding. See the criticism of use rate methodologies for LTCHs in Florida in Select Specialty Hospital Sarasota, Inc. v. Agency for Health Care Administration , Case No. 03 2484CON, at 15, (DOAH March 15, 2004; AHCA May 20, 2004). CO PIES FURNISHED : Richard Shoop, Agency Clerk Agency for Health Care Administration 2727 Mahan Drive, Mail Station 3 Tallahassee, Florida 32308 Valda Clark Christian, General Counsel Agency for Health Care Administration Fort Knox Building, Suite 3431 272 7 Mahan Drive Tallahassee, Florida 32308 Alan Levine, Secretary Agency for Health Care Administration Fort Knox Building, Suite 3116 2727 Mahan Drive Tallahassee, Florida 32308 M. Christopher Bryant, Esquire Oertel, Fernandez, Cole & Bryant, P.A. 301 S outh Bronough Street, Fifth Floor Post Office Box 1110 Tallahassee, Florida 32303 1110 Mark A. Emmanuele, Esquire Panza, Maurer, & Maynard, P.A. Bank of America Building, Third Floor 3600 North Federal Highway Fort Lauderdale, Florida 33308 6225 Kenne th W. Gieseking, Esquire Agency for Health Care Administration 2727 Mahan Drive, Mail Station No. 3 Tallahassee, Florida 32308 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.

Docket for Case No: 03-002486CON

Orders for Case No: 03-002486CON