STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

HEALTH SYSTEMS AGENCY OF ) NORTHEAST FLORIDA AREA 3, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 80-2137

)

DEPARTMENT OF HEALTH AND ) REHABILITATIVE SERVICES, AND ST. ) AUGUSTINE ARTIFICIAL KIDNEY ) CENTER, INC., )

)

Respondent. )

) UNIVERSITY HOSPITAL ACADEMIC ) FUND, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 80-2138

)

DEPARTMENT OF HEALTH AND ) REHABILITATIVE SERVICES, AND ST. ) AUGUSTINE ARTIFICIAL KIDNEY ) CENTER, INC., )

)

Respondent. )

)

RECOMMENDED ORDER

A hearing was held in the above captioned cases, after due notice, at Tallahassee, Florida, on April 30 - May 1, 1981, before the undersigned Hearing Officer.

APPEARANCES

For Petitioner Fred J. Huerkamp and Ron Floyd Health Systems Health Systems Agency of Agency of Northeast Northeast Florida Area 3, Inc.

Florida Area 3, Inc.: 1045 Riverside Avenue, Suite 260

Jacksonville, Florida 32204

For Petitioner Eleanor Hunter, Esquire University Hospital 702 Lewis State Bank Building Academic Fund, Inc: Post Office Box 471

Tallahassee, Florida 32301

For Respondent E. G. Boone and

St. Augustine Richard Whitten, Esquires Kidney Center, Inc.: 1001 Avenida del Circo

Post Office Box 1596 Venice, Florida 33595

For Respondent Eric J. Haugdahl, Esquire Department of Health Assistant General Counsel and Rehabilitative Department of Health and Services: Rehabilitative Services

1317 Winewood Boulevard

Tallahassee, Florida 32301

These cases involve separate applications of University Hospital Academic Fund, Inc. and St. Augustine Artificial Kidney Center, Inc. for a certificate of need, pursuant to Chapter 381, Florida Statutes, to establish an eight-station free standing chronic hemodialysis center at St. Augustine, Florida. By letter of October 3, 1980, the Administrator of the Office of Community Medical Facilities, Department of Health and Rehabilitative Services, transmitted a certificate of need to the St. Augustine Artificial Kidney Center, Inc. for the establishment of the requested hemodialysis unit. By letter dated October 3, 1980, the Department advised the University Hospital Academic Fund, Inc. that its application had not been favorably considered for specified reasons. By another letter of the same date, the Department informed the Health Systems Agency of Northeast Florida, Area 3, Inc. that its recommendation for approval of the application of the University Hospital Academic Fund, Inc. had been rejected, and that the agency had a right to appeal the decision. Thereafter, both the University Hospital Academic Fund, Inc. and the Health Systems Agency appealed the departmental decision, and the separate cases were referred to this Division for hearing by the Department on November 10, 1980. The two cases were consolidated for hearing pursuant to Rule 28-5.106, Florida Administrative Code, by Order issued December 16, 1980. Although hearing was originally scheduled for February 12, 1981, successive motions for continuances were filed by both applicants which resulted in extension of the hearing dates to April 30 - May 1, 1981. The parties stipulated to entry of the Recommended Order herein on or before July 15, 1981.

At the commencement of the hearing, Mr. Fred J. Huerkamp, former Executive Director of the Health Systems Agency, announced his intent to represent the agency. In view of the fact that Mr. Huerkamp is not an attorney, the Hearing Officer made inquiry of his qualifications to act for the agency in a representative capacity, pursuant to the requirement stated in Model Rule 28- 5.105, Florida Administrative Code. It was thereafter determined that Mr.

Huerkamp lacked the necessary qualifications to adequately protect the rights of the agency. The hearing was recessed to provide him the opportunity to consult with the agency's out-of-state legal counsel. Mr. Huerkamp thereafter stated that he desired only to make an "opening statement" on behalf of the agency and then not participate further at the hearing. He stated that the agency did not have sufficient funds to employ legal counsel for the purpose of representation at the hearing. Accordingly, the Hearing Officer determined that the Health Systems Agency was not properly represented and that a recommendation of dismissal of Case No. 80-2137 would be submitted to the Department. However, Mr. Huerkamp was thereafter permitted to testify as a public witness.

The parties stipulated to the admission of Exhibits 1 through 4. In addition, Exhibits 5 through 8 were received in evidence.

The parties orally stipulated at the hearing that a need existed for only one eight-station hemodialysis unit at St. Augustine, Florida. They further orally stipulated that with respect to the criteria against which applications are evaluated, as set forth in Rule 10-5.11, Florida Administrative Code, only paragraphs (2) , (4) , (5) , (6) , (7) , (8) , (9) , (11) , and (12) , were in issue in this proceeding. However, not all of the parties agreed that all of the above criteria were proper issues for consideration. By the above stipulation, the parties effectively eliminated the remainder of the specified criteria contained in Rule 10-5.11.

FINDINGS OF FACT

1. Respondent St. Augustine Artificial Kidney Center, Inc. (AKC) filed an application for a certificate of need with Respondent Department of Health and Rehabilitative Services (HRS) on June 2, 1980, to construct and operate an eight-station outpatient free standing hemodialysis center at St. Augustine, Florida, for an estimated capital expenditure of $144,650. Petitioner University Hospital Academic Fund, Inc. (Academic Fund) also filed an

   application with Respondent on June 16, 1980, to construct a similar facility at St. Augustine, with a proposed project cost of $138,131.64. The Academic Fund application stated that it was in the process of incorporating a separate entity to operate the proposed facility. By letter of July 28, 1980, the Academic Fund informed HRS that it planned to form a new corporation named St. Johns Renal Services, Inc. to operate the facility and that any certificate of need which might be granted should be issued in the name of that corporation. However, no such corporation has yet been formed. (Testimony of Goldberg, Exhibits 1-2)

   
   

2. The two applications were comparatively reviewed by the Health Systems Agency of Northeast Florida, Area 3, Inc. (HSA) during July 1980. The review consisted of evaluation at various agency levels and culminated in a determination by the HSA Board of Directors on July 24, 1980, that the application of the Academic Fund should be recommended to HRS for approval. The HSA reports on the two applications were transmitted to HRS by a letter of Fred

   J. Huerkamp, Executive Director of the HSA, dated August 7, 1980. Although the HSA Board of Directors did not specifically vote to deny the application of AKC, the HSA report on the AKC application stated that inasmuch as the Board of Directors had adopted the recommendations of its Health Needs and Priorities Committee recommendations to approve the Academic Fund application, it had also adopted the implicit denial of the AKC application by the committee. The HSA report itself recommended denial of the AKC application.

   
   

3. The HSA found that there was a need for an eight-station dialysis facility in St. Augustine under its Health Systems Plan because only three such dialysis facilities are located in the applicants' proposed service areas, two of which are in Jacksonville and one in Daytona Beach, thus necessitating considerable present travel to prospective patients residing in St. Johns County and contiguous portions of adjacent counties. One of the Jacksonville facilities is an inpatient unit at University Hospital.

   
   

4. The HSA also found that the two applicants were virtually equal with respect to probable quality of service, financial resources, and costs of operation. The HSA decided that the Academic Fund application should be approved because funds received for operation of the facility could, in part, be utilized to enhance the overall patient care capabilities of University Hospital, particularly with medical staff teaching expenses. The Academic Fund is a nonprofit corporation which provides a billing service for professional fees of the physicians who are salaried employees of University Hospital and who

   participate in a University of Florida teaching program there. The organization is comprised of these physicians and operates in a manner similar to a medical group practice plan. A percentage of fund assets are donated to University Hospital to support its teaching program. The hospital is a tax-supported indigent care facility. (Testimony of Dewberry, Goldberg, Huerkamp, Exhibits 1- 3)

   
   

5. The two competing applications also were reviewed by the Florida End Stage Renal Disease Network 19, Inc., (Network 19) , a federally funded organization under the Department of Health and Human Services which performs a planning function to determine the need for new or expanded services with respect to dialysis and kidney transplants in Florida. It makes recommendations to the federal Health Care Finance Administration in such matters for determination of eligibility of a provider for participation in the Medicare and Medicaid reimbursement programs. By agreement with HRS, Network 19 also provides review and recommendations as to certificate of need applications submitted by proposed dialysis facilities. HRS considers such recommendations during its certificate of need review process as "other pertinent data" under Rule 10-5.10(5), F.A.C. On July 29, 1980, Network 19 transmitted its recommendation to HRS which stated that although it had found both applications to be essentially equal under the Network's review criteria and standards, AKC was chosen over the Academic Fund in light of the fact that it had submitted the first application and because of its expected greater cost efficiency of operation. The organization projected a need for eight dialysis stations in St. Augustine by mid-1982. The basis for the finding that AKC would be more cost efficient was that the AKC application projected a profit during the first year of operation whereas the Academic Fund application indicated a deficit for the initial year. (Testimony of Moutsatsos, Hudson, Exhibit 4)

   
   

6. HRS reviewed the two applications, together with the recommendations of Network 19 and the HSA, and determined that the AKC application should be approved. By a letter of October 3, 1980, the Administrator of HRS' Office of Community Medical Facilities transmitted a certificate of need to AKC, subject to any request for a hearing filed pursuant to Chapter 10-5, F.A.C. By letter of the same date, the Administrator advised the Academic Fund that its application had not been favorably considered because the proposed project did not demonstrate "favorable feasibility" when compared with the financial aspects of the AKC proposal, and that it presented a less favorable alternative method of providing services in St. Augustine. The Administrator also informed the HSA by letter of the same date that the HSA recommendation had been rejected for reasons contained in an attached "State Agency Report." Both the Academic Fund and HSA thereafter filed appeals of the HRS decision. (Exhibits 1-3)

   
   

7. The HRS medical facilities consultant, Nancy E. Hudson, who reviewed the applications and made the initial staff recommendation, favored the AKC proposal as being more financially feasible in that it planned to charge the Medicare "screen" or maximum of $138 per treatment, as opposed to the Academic Fund's plan to charge $133, plus a $5 laboratory fee. She was of the opinion that the Fund's proposed charges would be less cost effective because experience showed that laboratory fees would normally exceed $5, and thus require either an additional charge to patients or obtaining an exception to the Medicare "screen." She further found that AKC had considerable experience in the field of free standing dialysis facilities since its principals operated several other facilities in Florida, whereas the Academic Fund had not involved itself in such an enterprise apart from its members' participation in the dialysis unit at University Hospital. Although Hudson recognized that the Academic Fund's proposal stated overall lesser project costs, she testified that she could not

   adequately assess the resources of the applicant, particularly due to the fact that it had indicated its intention to form a new corporation to operate the facility. She also felt that competition in the area would be adversely affected if the Academic Fund, which was affiliated with University Hospital, was granted approval to set up the facility at St. Augustine. The Administrator of HRS' Office of Community Medical Facilities accepted the staff recommendations and approved the AKC application. He, too, was of the opinion that the AKC experience factor was important and placed reliance on the recommendations of Network 19, even though he did not view the fact that AKC had filed its application first to constitute a valid reason for preference. (Testimony of Hudson, Forehand, Exhibits 1-3)

   
   

8. AKC plans to spend $144,650 to establish its proposed facility and begin operations, whereas the Academic Fund intends to allocate $138,131.64 for its project. AKC estimates a first-year net income of $16,476, while the Academic Fund estimates a first year net loss of some $42,000. Financial statements submitted by both applicants show that they will have sufficient financial resources to meet the projected initial costs of establishment and operation of the planned facility. AKC shows a proposed cost of $35 for supplies per treatment and the Academic Fund estimates a $50 per treatment cost of supplies. The difference in expected costs is explained by the fact that AKC intends to obtain bulk negotiated discount prices from various manufacturers as its principals have done in past operations, compared to the Academic Fund's plan to seek out the "best list" prices it can obtain.

   
   

9. AKC plans to purchase necessary equipment in the amount of an estimated

   $115,350, but the Academic Fund plans to expend only $96,105. The discrepancy between these figures is, in part, based upon the fact that AKC plans to install individual television sets at each dialysis station which it considers essential for the comfort of patients. Additionally, the Academic Fund plans to purchase generally less expensive equipment for its facility than does AKC. AKC believes that for essentially the same treatment costs, it will offer a better center for patients, and that efficiency in controlling costs will maintain a high quality of care.

   
   

10. The Academic Fund is somewhat pessimistic concerning the number of patients who will use its services during the first year, thus providing a basis for the anticipated first-year loss in revenues. Approximately fifteen patients in the proposed service area reasonably can be expected to transfer to a facility in St. Augustine. However, the Academic Fund expects to gradually acquire about three to twelve patients during its first year of operation, whereas AKC estimates that it will have some twelve patients at the outset, primarily due to the accessibility of the new facility. (Testimony of Levy, Dewberry, Anderson, Cunio, Exhibits 1-4)

    
    

11. The applicants have made satisfactory arrangements for ancillary services, including acute backup, kidney transplant, and home training services with qualified medical facilities. Both plan to use University Hospital at Jacksonville as a backup hospital and Shands Teaching Hospital at Gainesville for any necessary transplant services. The Academic Fund intends to use University Hospital for home training services and AKC will utilize Dialysis Clinics, Inc. of Jacksonville. Both applicants plan to have a nephrologist available at the facility and other personnel staffing proposed is sufficient for proper operation. AKC plans to utilize a smaller staff than the Academic Fund, thus reducing expenses. (Testimony of Levy, Dewberry, Anderson, Cunio, Exhibits 1-3)

12. Both of the applicants reasonably can be expected to offer a satisfactory quality of care in the operation of a dialysis facility. Academic Fund will draw upon its staff of experienced physicians who operate the 24- station unit at University Hospital. Their association with the Hospital assures ready access to that "backup" facility in the event of acute need. Both applicants plan to use the two local St. Augustine hospitals for routine hospitalization requirements. AKC's principals, Doctors Cunio and Anderson, have had extensive experience in the ownership of free standing dialysis facilities. Dr. Cunio is the Director of the Mercy Hospital Dialysis Unit in Miami and has had a close affiliation with the South Florida Artificial Kidney Center and Dade Dialysis Center in Miami. Dr. Anderson is the Medical Director of the South Florida AKC and its satellite unit in Fort Myers. He has been affiliated in the management and direction of the Dade Dialysis Center, Hialeah Dialysis Center and Indian River Artificial Kidney Center in Stuart. He is also the operator and owner of Suncoast Artificial Kidney Center in Naples. The South Florida Artificial Kidney Center was commended by the Mayor of Metropolitan Dade County, Florida, in 1977, in a proclamation that November 7th of that year would be "South Florida Artificial Kidney Center Day," in recognition of its ten years of success in the treatment of patients. Although the University Hospital dialysis unit received an unfavorable report as the result of a state Medicare survey in 1980, the deficiencies were primarily housekeeping in nature and did not directly reflect unfavorably upon the quality of medical services provided to patients. (Testimony of Dewberry, Cunio, Anderson, Exhibits 1-2, 5-0)

    
    

    CONCLUSIONS OF LAW

    
    

13. These consolidated cases involve competing applications for certificates of need for the establishment of a free standing hemodialysis center in St. Augustine, Florida, submitted pursuant to Section 381.494, Florida Statutes. That statutory provision prescribes the method of applying for such certificates and for processing and review of the applications by a local health systems agency and the Department of Health and Rehabilitative Services. Subsection 381.494(6)(c) prescribes criteria for review by the Health Systems Agency which is also to be considered by the Department under subsection 381.494(7)(c), together with criteria established by the Department in its administrative rules, and the recommendation of the Health Systems Agency. Respondent HRS has further delineated criteria against which applications are to be evaluated in its Rule 10-5.10(5) and 10-5.11, Florida Administrative Code.

    
    

14. The parties have stipulated that a need exists for an eight-station free standing dialysis facility at St. Augustine, Florida. Accordingly, the only question to be determined is which of the competing applicants should receive the certificate of need. In this connection, the Second District Court of Appeal stated in Bio-Medical Applications v. Department of Health and Rehabilitative Services, et al., 370 So.2d 19 (2nd DCA 1979) as follows:

    
    

    In such a case fairness requires that the agency conduct a comparative hearing at which the competing applications are con- sidered simultaneously. Only in that way can each party be given a fair opportunity to persuade the agency that its proposal would serve the public interest better than that of its competitor.

15. Although the parties stipulated that certain of the criteria contained in the agency's Rule 10-5.11 remained in consideration as possible issues, it is determined that only the following of those criteria are applicable for the particular project in question where, as here, a need for the facility has been acknowledged. The are as follows:

    
    

    10-5.11 Criteria against which applications are evaluated.--

    (5) The immediate and long-term financial feasibility of the proposal.

    1. The availability of resources (including health manpower, management personnel, and funds for capital and operating needs) for the provision of the proposed services . . .

    2. The relationship of the proposed health services to ancillary or support services.

    
    

    Additionally, it is considered that the following criterion set forth in Section 381.494(6)(c)11, F.S., should be applied:

    
    

    11. The probable impact of the proposed project on the cost of providing health services proposed by the applicant, upon consideration of factors including, but not limited to, the effects of competition on the supply of health services being proposed and the improvements or innovations in the financing and delivery of health services

    which foster competition and service to promote quality assurance and cost effectiveness.

    
    

16. In comparing the two proposals, recognition is accorded to the expertise of the HSA, Network 19, and HRS, in arriving at their various recommendations. All three agencies found the two applicants to be relatively equal in most respects, thus posing a dilemma in determining which is the best proposal. AKC points to various comments made during the course of the several HSA hearings as indicative of the fact that its recommendation was biased in favor of the locally situated Academic Fund. Further, both AKC and HRS maintained that because the HSA did not actually vote on the AKC application, but merely approved that of the Academic Fund, it must be considered to have approved the AKC application. This contention is based on the requirement of subsection 381.494(6)(e) which provides that if the Health Systems Agency fails to make a recommendation within a sixty-day period, it shall be deemed that the proposal was recommended for approval by the agency. Both contentions are considered to be without merit. The two applicants participated in all of the various hearing procedures before the HSA. The HSA's recommendation that approval should be given to the Academic Fund application, although based on reasons which could be considered parochial in nature, and which, in effect, treated the Academic Fund as a mere extension of University Hospital, cannot be said to have been totally unjustifiable. The report of the HSA to HRS pointed out correctly that by approving the Academic Fund proposal, the HSA's governing body had implicitly denied the other, and the formal recommendation transmitted to HRS by the agency clearly recommended denial of the AKC application.

    
    

17. Confusion was obviously engendered at the various reviews by the misconception that the Academic Fund is interchangeable with University Hospital, and by its intent to form another corporation to operate the proposed

    facility. This led HRS to wonder who, indeed, was the applicant. There is no question, of course, that the Academic Fund, albeit a separate corporation, is closely identified with the University Hospital operation. Nevertheless, it has a separate legal identity and the application is based upon its own financial resources. Inasmuch as no separate corporation has ever been established, the application must be considered in the light of its present contents.

    
    

18. In assessing the relative capability of the two applicants to successfully operate a free standing hemodialysis facility, the evidence clearly shows that AKC is undoubtedly the superior potential provider of such services. The "track" record of its principals in similar enterprises in the state is impressive and leads to the conclusion that it is far better organized and experienced in the field. Its cost effective methods as established at the hearing indicate its familiarity with such enterprises, as opposed to the total lack of experience of the Academic Fund in the ownership and operation of such a facility. Indeed, there was no showing that the Academic Fund has ever engaged in a separate business enterprise of any nature, but serves primarily as a bookkeeping entity for University Hospital. This comparison leads to the inevitable conclusion that its venture into an unknown field could present serious questions as to long-term financial feasibility. It is true that the availability of nephrologists from the nearby hospital-based dialysis unit would be beneficial to some degree. However, this factor is insufficient to overcome the experience factor of AKC, plus legislative intent to spur competition in the health services area. In sum, it is concluded that the AKC proposal would "serve the public interest better than that of its competitor" and it, therefore, should be approved.

    
    

19. In view of the previously referenced failure of the HSA to provide a qualified representative to pursue its appeal at the hearing, its petition should be dismissed.

RECOMMENDATION

1. Case No. 80-2137: That the petition of the Health Systems Agency of Northeast Florida, Area 3, Inc. be DISMISSED.

   
   

2. Case No. 80-2138: That the application of St. Augustine Artificial Kidney Center, Inc. for a certificate of need to establish an eight-station free standing dialysis center in St. Augustine, Florida be APPROVED, and that the competing application of the University Hospital Academic Fund, Inc. for a similar facility be DENIED.

DONE and ENTERED this 14th day of July, 1981, in Tallahassee, Florida.

THOMAS C. OLDHAM

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 14th day of July, 1981.

COPIES FURNISHED:

Honorable Alvin J. Taylor, Secretary

Department of HRS

1317 Winewood Boulevard

Tallahassee, Florida 32301

Eric J. Haugdahl, Esquire Assistant General Counsel Department of HRS

1317 Winewood Boulevard

Tallahassee, Florida 32301

Eleanor Hunter, Esquire 702 Lewis State Bank Bldg. Post Office Box 471

Tallahassee, Florida 32301

E. G. Boone and

Richard Whitton, Esquires 1001 Avenida del Circo Post Office Box 1596 Venice, Florida 33595

Health Systems Agency of Northeast Florida, Area 3, Inc.

1045 Riverside Avenue, Suite 260

Jacksonville, Florida 32204

Docket for Case No: 80-002137

Orders for Case No: 80-002137