STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

SURGICARE III, Sponsor of ) Surgicare Outpatient Center ) of Leesburg, )

)

Petitioner, )

)

vs. ) CASE NO. 84-0886

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

and )

) LEESBURG REGIONAL MEDICAL CENTER, ) INC., WATERMAN MEDICAL CENTER, ) INC., & LEESBURG COMMUNITY )

HOSPITAL, )

)

Intervenors. )

)

RECOMMENDED ORDER

For Surgicare: Kevin B. Getzendanner, Esquire

Patrick S. Reid, Esquire

55 Park Place, Suite 400 Atlanta, Georgia 30335

and

R. Terry Rigsby, Esquire Donald S. Hart, Jr., Esquire Suite 1618 NCNB Building

610 North Florida Avenue Tampa, Florida 33602

For Department

of Health and Douglas L. Mannheimer, Esquire Rehabilitative Post Office Drawer 11300 Services: Tallahassee, Florida 32302-3300

For Leesburg Dean Bunch, Esq.

RMC: Post Office Drawer 1170 Tallahassee, Florida 22301

For Waterman: Zebulon R. Osborne, Esquire

Post Office Drawer 2041 Eustis, Florida 32727

For Lake: Eric J. Haugdahl, Esquire

1020 East Lafayette Street, Suite 208

Tallahassee, Florida 32301

By Petition for Formal Hearing dated February 27, 1984, Leesburg Regional Medical Center (LRMC) challenges the approval of Surgicare III's application for a certificate of need (CON) to construct and operate a freestanding outpatient surgical center at Leesburg, Florida. Subsequently, Waterman Medical Center, Inc. (Waterman) and Lake Community `Hospital (Lake) were allowed to intervene as parties opposing the granting of the CON. Since Surgicare 111 is the party seeking a certificate, they were made petitioners and those opposing the granting of the CON were denoted intervenors.

In the Prehearing Stipulation the parties stipulated that the criteria contained in Section 381.494(6)(c)3, 5, 6, 7, 8, 11, and 13, Florida Statutes, have been met or they are not material to these proceedings. This leaves only the criteria contained in Section 381.494(6)(c)1, 2, 4, 9, and 12 at- issue.

At the commencement of the hearing Petitioner submitted application file containing the application, the Agency Action Report and the Department of Health and Rehabilitative Services' (HRS) disposition of the application. This established a prima facie case for Petitioner. Thereafter, LRMC called four witnesses, Lake called one witness, Petitioner called five witnesses, Respondent called one witness, and 21 exhibits were admitted into evidence. During the hearing ruling on the admissibility of Exhibit 15 was reserved. That exhibit is now admitted Into evidence.

Proposed findings submitted by he parties, to the extent incorporated herein, are adopted; otherwise, they are rejected as not supported by the evidence, immaterial, or unnecessary to the conclusions reached.

FINDINGS OF FACT

1. Surgicare III is the sponsor of Surgicare Outpatient Center of Leesburg, a proposed freestanding ambulatory surgical center to be located in Leesburg, Florida.

   
   

2. LRMC is an existing hospital located in Leesburg. It has four operating rooms where general surgery is performed and one cystoscopy room.

   
   

3. Lake is an existing hospital located in Leesburg, Florida. It has three operating rooms and one cystoscopy room. Two additional operating rooms are presently under construction, one of which is intended to be used for minor surgeries under local anesthesia.

   
   

4. Waterman is an existing hospital located in Eustis, Florida. It has four operating rooms, one urology procedures room, and one endoscopy room. Waterman has a certificate of need to add two additional operating rooms

   
   

5. As originally proposed Surgicare's application was to construct a one- story building containing 10,000 square feet and two operating rooms. The original plans have been amended to reduce the size of the building to 8,000 square feet. The total cost as projected will not exceed $1,570,064. The service area proposed to be served by this facility includes Lake County and a 30-minute driving radius, approximately 20 miles, from Leesburg.

   
   

6. Surgeries proposed at this facility are those surgeries, performed under general or local anesthesia, after which the patient will be able to be taken home and cared for, rather than remain overnight or longer in the hospital. Most such surgeries are elective as contrasted to emergency.

7. Surgicare projects a total of 1 ,269 procedures in the first year and 2, 011 in the second year of operation. Based on construction costs or the original 10,000 square foot building, with permanent financing at 12 percent and these numbers of procedures, at an average cost of $390 per procedure the first year and $413 per procedure the second year, the facility will show a slight profit in the second year. The presently proposed facility containing ,090 square feet will be less costly than the 10,000 square foot facility and, even if interest is higher than the estimated 12 percent, Petitioner will be able to pass the break-even point during the second year of operation, if necessary by increasing fees. The average charge for similar surgeries in the Lake County hospitals is $1,309, so a slight increase by Petitioner, if necessary, is acceptable.

   
   

8. There is currently no rule establishing the methodology to be used in determining need for an ambulatory surgical center. Nor is there a local health system plan applicable to such need. IRS uses a pro-competitive methodology which is based upon a policy which has not been adopted as a formal rule. This methodology uses the total reported surgery cases in a given county for the most recent 12-month period, the population estimate for the period, and derives a surgical utilization rate per 1,000 population. Similarly, the reported number of outpatient procedures in that county for the same period is used to derive the outpatient surgical use rate. Applying the outpatient use rate to projected future population, HRS then determines the number of outpatient procedures expected in future years in that service area. In evaluating ambulatory surgery center CON applications, HRS utilizes a two-year planning horizon. Surgicare is expected to complete its second year of operation in 1988, so 1988 becomes the relevant year For looking at projected need. Since December, 1982, HRS has assumed that 29 percent of all surgeries could be performed in an outpatient setting. This 29 percent target is the mean between 18 percent (the actual percentage of total surgeries which are reported to have been performed on an outpatient basis by hospitals participating in a 1981 survey by the American Hospital Association) and 40 percent (that percentage which a survey of literature relating to ambulatory surgeries projected could be performed in outpatient settings) . The outpatient surgeries performed in Lake County hospitals during the most recent reported 12-month period was well below the 18 percent average nationwide. This 29 percent target is a reasonable estimate of the percentage of surgeries that can be performed on an outpatient basis. In the past two years, as is shown by the testimony presented at this hearing, hospitals in Lake County have become more receptive to facilitating outpatient surgeries on their premises. This would have the effect of increasing the 18 percent found in 1981, if a survey similar to the 1981 survey was taken today. A more recent report of the American Medical Association indicates that this low end of the range has, in fact, risen to 20.0 percent. Accordingly, a mean of

   30.4 percent of all surgeries performed on an outpatient basis is reasonable. By applying the target factor to projected total surgeries, HRS calculates the projected number of potential ambulatory surgeries for a given year in the future. Subtracting the outpatient surgeries projected to be performed in existing facilities in the future from the total potential outpatient surgeries yields a projected unmet need for outpatient surgical care.

   
   

9. Applying the 29 percent factor to the surgeries performed in Lake County for the last 12 months reporting period and projecting this figure to 1988, HRS projects a potential need for outpatient surgeries in Lake County at

   3,090. Based on the 1983 reported outpatient surgical use rate for Lake County and a target of 29 percent, 1,455 of the 3,090 surgeries would be performed in hospital settings in 1988 leaving an unmet need of 1,635 potential outpatient surgeries to be performed in Lake County.

   
   

10. The intervening hospitals all contend that they have adequate capacity in their existing operating rooms to provide for all needed outpatient surgery in Lake Count and there will be excess capacity when the four additional approved operating rooms become operational. However, none of these existing or to be added operating rooms is dedicated to outpatient use although Lake will open in the near future an operating room in which only minor surgery under local anesthesia will be performed.

    
    

11. Until very recently the Lake County hospitals were charging outpatient surgery patients the same charges imposed on inpatient surgery patients, except for the overnight room charge. As a result the average charge for outpatient surgery per procedure in Lake County is $1,309. Petitioner's initial proposed average charge per procedure is less than $400. Recently one or more of the Lake County hospitals have offered a flat charge for use of their facilities for minor surgeries. However, these new charges greatly exceed the charges proposed by petitioner.

    
    

12. Many of the surgical procedures performed in hospitals are classified as emergency and take precedence in the use of operating rooms ever elective surgical procedures which most outpatient surgeries are classified. As a result it is difficult for doctors to schedule outpatient surgeries in hospital operating rooms and have those schedules met. An exception would be, of course, if the doctor reserved and kept the operating room in which he scheduled the first operation that day.

    
    

13. The facilities now provided to patients undergoing outpatient surgery at LRMC is not well suited to outpatient surgery because outpatient surgery patients go from the operating room to the post anesthesia recovery area whether they had local or generate anesthesia. This same space is used as a postoperative recovery area for all surgical patients, some of whom have undergone serious and extensive surgery. These are not pleasant surroundings for patients following their minor surgery. LMRC outpatient surgical facilities are as good or better than those in the other Lake County hospitals.

    
    

14. Even if the existing and approved operating rooms available in Lake County hospitals are adequate, as shared outpatient-inpatient facilities, to provide for the outpatient surgeries needed in 1989, this does not preclude the need for the proposed facilities as a competitive factor in reducing hospital costs. None of the existing, and authorized, operating rooms in Lake County are dedicated for outpatient surgery, and according to federal regulations none can be so dedicated as presently organized. Medicare has recognized the cost saving aspects of ambulatory surgical facilities by paying 100 percent of the cost of surgeries performed at dedicated outpatient surgical facilities on Medicare patients while paying only 80 percent of the cost of surgeries performed at non- dedicated facilities.

    
    

15. At present there are no freestanding ambulatory surgical facilities in Lake County. Only freestanding facilities can be dedicated and thereby receive

    from Medicare 100 percent of the charge for outpatient surgery. Accordingly, this will be the only facility in Lake County capable of offering this service to the residents of Lake County. Since their rates are lower than the reimbursement Medicare would pay to Lake County hospitals for the outpatient surgery performed at these facilities, use of dedicated outpatient surgical facilities will reduce the cost of health care.

    
    

16. The filing of the application in this case induced the Lake County hospitals to speed up the review of their outpatient surgical procedures to provide better and less costly service. Without competition in outpatient surgical procedures, the hospitals have no incentive to institute cost-cutting measures apart from the measures they may have to adopt as a result of the newly implemented diagnostic related groupings (DRG) by the federal government. However, the DRGs are primarily aimed at reducing length of hospital stays and eliminating unnecessary diagnostic procedures, rather than directly reducing surgical costs.

    
    

    CONCLUSIONS OF LAW

    
    

17. The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, these proceedings.

    
    

18. The statutory criteria which the parties stipulated to be relevant to these proceedings, as contained in Section 381.494(6)(c), Florida Statutes, are:

    
    

    1. The new or the health care facilities and services and hospices being proposed in relation to the applicable district plan and state health plan adopted pursuant

       to Title XV of the Public Health Service Act, except in emergency circumstances which pose a threat to the public health.

    2. The availability, quality of care, efficiency, appropriateness, accessibility, extent of utilization, and adequacy of

       like and existing health care services and hospices in the service district of the applicant.

       4. The availability and accuracy of other health care facilities and services and hospices in the service district

       of the applicant, such as outpatient care and ambulatory or home care services, which may serve as alternatives for the health care facilities and services to

       be provided by the applicant.

       9. The immediate and long-term financial feasibility of the proposal.

       12. 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.

       
       

19. There is no district health plan or HRS rule specifying the methodology to be used in determining need for a freestanding ambulatory surgical facility. Accordingly, the services proposed by petitioner cannot be compared Lo a district or state health plan.

    
    

20. Lake County's low utilization rate of existing hospital operating rooms for outpatient surgeries is indicative that, until very recently, little recognition was given to the fact that charges for use of facilities for outpatient surgery should be less than that for more serious surgical procedures. Many minor surgical procedures can be, and are, performed in the physician's office where hourly charges for operating and recovery rooms are not assessed. In some of these procedures, the physician might feel more comfortable with hospital facilities available if needed; however, at what cost to the patient is such comfort obtained? The evidence is clear that Lake County hospitals did little to facilitate the use of their facilities for outpatient surgery, prior to the filing of the application here under consideration. As a result the use of hospital operating rooms in Lake County hospitals for outpatient surgery have been well below the national average. Without extensive use of the existing facilities for outpatient surgery, these hospitals in the past two years obtained certificates of need to add four operating rooms to their total.

    
    

21. There are no other freestanding ambulatory surgical facilities in Lake County. While the hospitals contend that their operating rooms, both in use and approved, in Lake County can provide all of the outpatient surgery needed, the service they offer certainly is not comparable to that proposed by Petitioner in cost, convenience to both physician and patient, or in the accommodations provided to the patient.

    
    

22. The proposed facility is feasible both immediately and long term. Petitioner is financially capable of suffering the projected loss during the first year of operation.

    
    

23. The proposed facility will have a significant impact on the cost of providing outpatient surgical procedures. The charges performed by Petitioner are one-third the charges now imposed by the Intervenors for outpatient surgical procedures. Just the filing of this application increased the activity of the Intervenors to provide better outpatient surgical facilities. Having a dedicated facility will reduce the costs paid by Medicare and the Medicare patient for outpatient surgery. The advent of two dedicated ambulatory surgical operating rooms charging much less than the charges currently imposed by existing hospitals will undoubtedly reduce the outpatient surgical procedures performed at the existing hospitals and the overall hospital costs should be reduced. This is one instance in which competition between health care providers will reduce the cost of health care.

    
    

24. From the foregoing it is concluded that the application of Surgicare III meets all of the criteria of Section 381.494(6)(c) Florida Statutes. It is

RECOMMENDED that a Final Order be issued approving the application of Surgicare III to establish and operate a freestanding ambulatory surgical facility in Leesburg, Florida.

ENTERED this 21st day of September, 1984, at Tallahassee, Florida

K. N. AYERS Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 21st day of September, 1984.

COPIES FURNISHED:

Kevin P. Getzendanner, Esquire Patrick S. Reid, Esquire

55 Park Place, Suite 400 Atlanta, Georgia 30335

R. Terry Rigsby, Esquire Donald S. Hart, Jr., Esquire Suite 1610 NCNB Building

610 North Florida Avenue Tampa, Florida 33602

Douglas L. Mannheimer, Esquire CULPEPPER, TURNER & MANNHEIMER

Post Office Drawer 11300 Tallahassee, Florida 32302-3300

Dean Punch, Esquire Post Office Drawer 1170

Tallahassee, Florida 32301

Zebulon R. Osborne, Esquire Post Office Box 2041 Eustis, Florida 32727

Eric J. Haugdahl, Esquire 1020 East Lafayette Street Suite 200

Tallahassee, Florida 32301

David H. Pingree, Secretary Department of Health and

Rehabilitative Services 1321 Winewood Boulevard

Tallahassee, Florida 32301

Docket for Case No: 84-000886

Orders for Case No: 84-000886