STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ADVENTIST HEALTH )

SYSTEM/SUNBELT, INC., ) d/b/a EAST PASCO MEDICAL CENTER, )

)

Petitioner, )

)

vs. ) CASE NO. 88-1227

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent, )

and )

)

HUMANA OF FLORIDA, d/b/a )

HUMANA HOSPITAL PA5CO, )

)

Intervenor. )

)

RECOMMENDED ORDER

Pursuant to notice, an administrative hearing was held before Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings, on December 12 through 16, 1988, and on January 6, 1989, in Tallahassee, Florida. The issue for determination in this proceeding is whether petitioner, Adventist Health System/Sunbelt, Inc., d/b/a East Pasco Medical Center, is entitled to a Certificate of Need to add 35 medical/surgical beds to its existing facility.

APPEARANCES

For Petitioner: E. G. Boone and Jeffrey A. Boone

101 Avenida del Circo Post Office Box 1596 Venice, Florida 34284

For Respondent: Stephen M. Presnell

Macfarlane, Ferguson, Allison & Kelly Post Office Box 82

Tallahassee, Florida 32302

For Intervenor: James C. Hauser

Meser, Vickers, Caparello, French & Madsen, P.A.

Post Office Box 1876 Tallahassee, Florida 32302

INTRODUCTION

In support of its application for a Certificate of Need, Adventist Health System/Sunbelt Inc., d/b/a East Pasco Medical Center, presented the testimony of

Bobby Allen Dodd, accepted as an expert in the field of hospital administration; Robert John Borrowdale, M.D., accepted as an expert in obstetrics and gynecology; Kevin Jerome Lang, accepted as an expert in hospital finance; Dr.

Bruce Vogel, accepted as an expert in health care economics; Claire Warner, accepted as an expert in nursing and nursing administration; Dr. Stanley Smith, accepted as an expert in demographics and population projections; Michael E. Demaree, accepted as an expert in agriculture; William E. McGavern; Richard Earl Morrison, accepted as an expert in health planning; Sheryl Walker; Diane Osborn, accepted as an expert in emergency nursing and nursing administration; Edward L. Meadows, accepted as an expert in architecture; and Eugene Nelson, accepted as an expert in health planning. Petitioner's Exhibits 3-5, 7, 10-16, 18 and 21 were received into evidence.

The Department of Health and Rehabilitative Services (HRS) presented the testimony of Reid Jaffe, accepted as an expert in health planning, in support of its intent to deny the Certificate of Need application. HRS's Exhibits 1 and 3 were received into evidence.

Humana of Florida, Inc., d/b/a Humana Hospital Pasco (Humana) presented the testimony of Sheryl Walker; Robert John Stanage, accepted as an expert in hospital construction cost estimation; Philanthy Sidway, accepted as an expert in hospital equipment and equipment costs; Gail Dupre, accepted as an expert in nurse recruitment; Armand Balsano, accepted as an expert in health care planning; Ward Koutnik, accepted as an expert in traffic engineering and travel time studies; and Margo P. Kelly, accepted as an expert in health care finance, including financial feasibility analyses. Humana's Exhibits 1-3, 5-10, 13, 14,

17 and 19-36 were received into evidence.

Subsequent to the hearing, the parties filed proposed findings of fact and proposed conclusions of law. To the extent that the parties' proposed factual findings are not included or incorporated in this Recommended Order, they are rejected for the reasons stated in the Appendix hereto.

FINDINGS OF FACT

Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant facts are found:

1. East Pasco Medical Center (EPMC) is a non-profit 85-bed acute care hospital facility located in the East Pasco subdistrict of HRS District V. There are only two hospitals in the subdistrict -- EPMC in Zephyrhills and Humana in Dade City, which is approximately ten miles north. Humana is a 120- bed acute care hospital facility. Both facilities offer the same services and share the same medical staff.

   
   

2. On or about September 17, 1987, EPMC submitted an application for a Certificate of Need to add 35 medical/surgical beds via a fourth floor addition to its existing facility. Its existing 85 beds are located in private rooms, and it is proposed that the additional 35 beds will also be placed in separate rooms. The application submitted to the Department of Health and Rehabilitative Services (HRS) projected a total project cost of $4,531,000. This figure was revised at the hearing to a project cost of $2,302,900.

   
   

3. With regard to acute care services, the State Health Plan seeks to assure geographic accessibility. All residents of East Pasco County currently have access to acute care hospital services within the travel times suggested by the State plan. The State Health Plan also seeks to promote the efficient

   utilization of acute care services by attaining an average annual occupancy rate of at least 80 percent.

   
   

4. The District V Local Health Plan emphasizes that additions to inpatient acute care beds in a subdistrict should not be considered unless a numeric bed need is shown and certain occupancy thresholds have been met. The recommended occupancy thresholds for medical/surgical beds are 80% for the subdistrict and 90% for the facility seeking to add beds.

   
   

5. Application of the bed need methodology contained in HRS's Rule 10- 5.011(1)(m), Florida Administrative Code, indicates a numeric need for 57 additional acute care medical/surgical beds in the East Pasco subdistrict for the planning horizon period of July, 1992. The rule provides that HRS will "not normally approve" additional beds unless average occupancy in the subdistrict is greater than 75 percent. However, the rule permits HRS to award additional beds when there is a calculated need, notwithstanding low occupancy in the subdistrict, if the applicant had a minimum of 75% average occupancy during the

   12 months ending 14 months prior to the Letter of Intent. Rule 10- 5.011(1)(m)7.e., Florida Administrative Code. The rule also permits HRS to award additional beds where the calculated numeric need substantially exceeds the number of existing and approved beds in the subdistrict and there is an access problem related to travel time.

   
   

6. For the relevant time period, the acute care occupancy rate for the East Pasco subdistrict was below 75% percent. Indeed, over the past few years, the average occupancy rate in that subdistrict has been 54 to 58 percent. Humana only operates at about a 55% occupancy. The East Pasco subdistrict does experience seasonal fluctuations in medical/surgical occupancy, with the season for high occupancy beginning in late October and ending in mid- to late April.

   In addition to tourists, it is expected that the revival of the citrus industry in East Pasco County will bring more migrant pickers to the area during the peak season months. The seasonal increase in occupancy directly corresponds with a large increase in seasonal population, particularly in the Zephyrhills area.

   The Zephyrhills area population is much older than the Dade City population and is also much older than the State average. The HRS acute care bed need rule includes considerations of seasonal peak demands. When considering both hospitals in the subdistrict, there has been a decline in peak seasonal occupancy rates over the past few years. While the population of the East Pasco subdistrict has grown, and is expected to increase by approximately 7,200 in 1992, there is a trend of declining utilization in the subdistrict. This decline is due to increased used of outpatient services and shorter lengths of hospital stay attributable to the current reimbursement system. The medical/surgical use rate fell from 454 patient days per 1,000 population in 1986 to 414 patient days per 1,000 population in 1988. There was a similar decline in the acute care use rate. Assuming a constant medical/surgical use rate, the projected demand for 1992 would be 2,980 additional medical/surgical patient days in the subdistrict according to population projections, and about 4,267 incremental patient days according to local health council projections.

   
   

7. EPMC's Letter of Intent to add 35 additional beds was filed in mid- July, 1987. Its acute care occupancy rate for the period of April, 1986 through March, 1987 was 75.3 percent. Occupancy at EPMC from May, 1986 to April, 1987 was 73.6%; occupancy from June, 1986 through May, 1987 was 73%; and occupancy from July, 1986 to June, 1987 was 72.2 percent.

   
   

8. EPMC does experience periods of high occupancy during the peak season months. High occupancy levels have a greater impact upon smaller hospitals due

   to their lesser degree of flexibility. On occasion, during the winter months, EPNC is required to refuse admittance to patients due to crowded conditions within its facility. Patients are sometimes transferred or referred to other facilities, including Humana, although the necessity for such transfers or referrals is occasionally due to a lack of intensive or critical care beds as opposed to a lack of medical/surgical beds. During the periods of time when EPMC had high occupancy levels, beds were available at Humana.

   
   

9. EPMC's current payor mix includes a high level of Medicare (over 60%), and it is committed, through both its Christian mission and an agreement with the County, to treat indigent and Medicaid patients. The actual amount of indigent or charity care provided by EPNC was not established. In any event, EPMC desires to increase its bed size in order to help maintain a proper payor mix at the hospital so as to ensure the financial survival of the hospital. It is felt that a greater number of beds, given the rise in population, and particularly elderly population, would allow EPNC to serve a greater number of private and/or third party insurance paying patients. While the evidence demonstrates that EPMC may operate with a less favorable payor mix than Humana, the evidence was not sufficient to demonstrate that EPMC will suffer financial ruin without additional beds. Likewise, it was not established that the patients which EPNC must turn away in the winter months are consistently paying patients. Increasing the number of beds at EPNC to 120 beds does not necessarily mean that its profitability would be improved. Volume and payor mix are the most critical factors in determining whether a hospital will be profitable.

   
   

10. There is currently a nursing shortage throughout the nation. Rural areas, such as the eastern portion of Pasco County, experience even greater difficulty in attracting nursing personnel to the area. Due to the shortage of nurses, as well as the seasonal demand, EPMC is required to use contract care nurses throughout the year. While it would prefer to employ its own nursing staff, EPMC will use contract staff due to the seasonal variations in its nursing requirements. The use of contract or registry nurses costs 50% to 60% more on a daily basis; however, lower occupancy during the off-peak months does not justify year- round employment for as large an in-house nursing staff. For its proposed 35 beds, EPMC projects nurse manpower requirements as follows: 1 nurse manager, 4.2 R.N. charge nurses, 15.1 R.N. staff and 14.1 L.P.N. staff, for a total of 34.4 full time equivalent nursing positions. The recruiting efforts of EPNC to fill these positions will include advertising, visiting nursing schools and colleges, utilizing student nurses at the hospital and use of the Adventist Health System international network. Humana currently has 15 vacancies, or 12 to 13% of its nursing staff. Humana's nursing salaries have increased 20% over the past eighteen months. As noted above, EPNC and Humana compete for the same nursing personnel. Humana's personnel director believes that if EPNC increases its nursing staff by 34 FTEs, Humana's nursing staff will be approached to fill those positions. As a consequence, Humana will experience additional nursing shortages and will be required to further increase salaries.

    
    

11. It is proposed that the project cost of adding 35 beds to EPMC will be financed with 100% debt financing through a bond issue. The financing will be part of a much larger bond issuance intended to finance several other projects within the Adventist hospital system. No evidence was adduced that such a bond issuance had been prepared or approved, and there was no evidence concerning the other projects which would be financed in conjunction with this project. In 1987, EPNC was carrying about five million dollars of negative equity. The hospital is currently greater than 100% financed.

12. As noted above, the original Certificate of Need application filed with HRS listed the total project cost to be $4,531,000. In its response to omissions, EPMC stated that the construction cost would be $175 per square foot. In the updates submitted at the hearing, EPNC proposed a project cost of

    $2,302,900, which included a construction cost of $85 per square foot. A more reasonable cost for the addition of a floor to an existing facility would be

    $125 per square foot, plus an inflation factor of 6% and architectural and engineering fees of 6 to 7%. The proposed equipment list submitted by EPNC fails to include major equipment items such as an overhead paging system, a nurse call system, examination room equipment, medication distribution equipment, bed curtains, shower curtains, patient and staff support lounge items, and IV pumps. EPNC's updated equipment cost budget fails to include tax, freight, contingency and installation costs. The projected equipment costs should be tripled to adequately and reasonably equip a 35-bed nursing unit.

    
    

13. The projected utilization and pro formas submitted by EPMC are not reasonable and were not supported by competent substantial evidence. EPMC's projected utilization for the proposed 35-bed unit is 8,950 patient days in the first year of operation and 9,580 in the second year of operation. Applying the current use rate to the population projections submitted by EPMC's expert in demographics and population projections produces only about 2,980 additional patient days in the year 1992. Given the fact that EPMC's current market share is approximately 54%, there is no reason to believe that Humana would not absorb at least some of those projected additional patient days. There are many months of the year in which additional patient days could be filled within the existing complement of 85 beds at EPNC. Depending upon the ultimate cost of the project, the break even point for financial feasibility purposes would be approximately 3,500 to 4,000 patient days. The concept behind a pro forma is to develop a financial picture of what operations will be in the first two years of operation. EPMC stated its revenues and expenses in terms of 1988 dollars and used its current revenue- to-expense ratios for projecting operations four years into the future. This is improper because gross revenues are going up, reimbursement is not increasing as rapidly and expenses, particularly salaries and insurance, are increasing. In addition, EPMC's projected 1992 salaries in several categories were less than they are currently paying for such positions.

    
    

14. EPMC currently provides good quality of care to its patients. The only future concern in this realm is the fact that in the winter months, its intensive and critical care unit beds are often full and there is no room for additional patients. Additional medical/surgical volume from the proposed 35- bed unit would lead to additional intensive and critical care bed demand.

    
    

    CONCLUSIONS OF LAW

    
    

15. An applicant for a Certificate of Need has the burden of demonstrating that it meets the statutory and regulatory criteria for approval, or that a balancing of those criteria justify approval of the application. In this proceeding, East Pasco Medical Center failed to demonstrate that the proposed addition of 35 beds to its existing facility is needed in the subdistrict; that the proposal is consistent with the Florida State Health Plan or the District V Local Health Plan; that there are no alternatives to the proposal; that there are sufficient health manpower and financial resources for project accomplishment and operation; that the project will have immediate and long-term financial feasibility; or that the project will promote competition, cost- effectiveness or quality assurance in the delivery of health care services.

16. The proposal to add 35 additional acute care beds to a subdistrict experiencing low occupancy levels is inconsistent with both the State Health Plan and the District V Local Health Plan. The applicant urges that since these State and Local Plans have occupancy thresholds higher than the State's rule on the subject, they should not be considered. This argument might have validity were current occupancy levels in the subdistrict between 75% and 80%. However, where current occupancy levels do not even meet the lower threshold contained in HRS's acute care bed need

    rule, such an argument is without merit.

    
    

17. The fact that occupancy levels in the subdistrict do not reach 75% does not result in an automatic finding of zero bed need for the subdistrict. Rule 10-5.011(1)(m), Florida Administrative Code, clearly permits HRS to exercise its discretion when an applicant itself is experiencing occupancy levels in excess of 75%, regardless of subdistrict occupancy levels, and when there are geographic accessibility problems. The evidence supports a conclusion, and EPNC agrees, that there are no geographic accessibility problems for residents of the eastern portion of Pasco County. EPNC did present evidence that for the 12-month period between April, 1986 and May, 1987, it experienced an average occupancy rate of 75.3 percent. Even assuming that that 12-month period is the correct period from which institution-specific occupancy levels are to be ascertained, exceeding the minimum by three-tenths of one percent does not compel HRS to exercise its discretion in favor of the application. Given the very low occupancy levels in the subdistrict, trends of declining utilization, no problems with geographic accessibility, and considering other

    12-month periods where occupancy levels did not reach 75%, it would be an improper exercise of discretion to conclude that there is a need for additional beds in the subdistrict or at the applicant's existing facility.

    
    

18. Even if it were established that peak season demands at EPMC tax its ability to provide adequate services, there are available alternatives to the proposed 35-bed addition at EPMC. Humana, located approximately 10 miles away, offers the same medical staff, the same scope of services, and it has ample unused capacity. The existing bed inventory in the subdistrict is sufficient to accommodate the number of additional medical/surgical patient days expected in mid-1992. The approval of 35 additional beds at EPMC would further decrease occupancy levels in the East Pasco subdistrict.

    
    

19. In light of the extreme nursing shortage, EPMC will have difficulty securing the personnel necessary to staff the

    35-bed proposed addition. If it were able to do so, it would be to the detriment of Humana's ability to maintain and fund its nursing needs. Also, EPNC failed to demonstrate that it has the necessary financial resources for project accomplishment or operation. Given the negative equity position of the facility, the failure to demonstrate secure financing for the project takes upon greater meaning. In addition, EPMC failed to prove the financial feasibility of the project, either on a short-term or long-term basis. The accuracy and reliability of the projected costs of the project with respect to construction and equipment were not established. The pro formas were not prepared in a reasonable or sufficient manner, and the projected utilization of the 35-bed addition was not supported by competent, substantial evidence. EPNC's claim that it will face financial ruin without additional beds is simply not supported by the record of this proceeding.

    
    

20. The applicant's ability to provide quality of care would not be enhanced by the proposed project. Such quality is presently being provided by EPMC, and an increase in medical/surgical beds could create problems due to the

    limited number of available intensive care or critical care beds, as well as the availability of additional nursing personnel. While Humana does receive some overflow of patients as a result of EPMC's current size, EPMC currently has a greater market share in the subdistrict and it was not shown how competition or cost- effectiveness would be enhanced were additional beds to be added as proposed.

    
    

21. In summary, there being no demonstrated need for additional acute care medical/surgical beds in the subdistrict, no showing of a "not normal" circumstance, and the petitioner having failed to demonstrate that the proposal otherwise meets the statutory and rule criteria for approval, EPMC has failed to sustain its burden of proof in this proceeding.

    
    

22. As a final matter, it is concluded that Humana, as an existing provider of the same services in the same subdistrict, has standing to intervene in this proceeding. The record demonstrates that Humana and EPNC actively compete in the same marketplace, they offer the same services and they utilize the same medical staff. It is likely that, were the project approved, Humana would lose overflow patients during the busier winter months. It was also established that, were the project approved, Humana would be substantially and adversely affected in its ability to maintain and recruit necessary staff and that greater increases in salaries for nursing personnel could be expected. The fact that Humana was also an applicant for additional beds in the same batching cycle, and chose not to contest the denial of its own application, does not negate its standing to participate as a party in this proceeding. Accordingly, EPMC's Motion to Dismiss Humana for failure to prove standing is DENIED.

RECOMMENDATION

Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that the application of East Pasco Medical Center for a Certificate of Need to add 35 acute care beds to its existing facility be DENIED.

Respectfully submitted and entered this 30 day of March, 1989, in Tallahassee, Florida.

DIANE D. TREMOR

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 30th day of March, 1989.

APPENDIX TO RECOMMENDED ORDER CASE NO. (Case No. 88-1227)

The proposed findings of fact submitted by the parties have been carefully considered and are accepted, incorporated and/or summarized in this Recommended Order, with the following exceptions:

Petitioner:

1. Third sentence rejected as not established by competent, substantial evidence.

2. Accepted, but not included as irrelevant to the ultimate resolution of the issues.

1. Rejected. The Personnel Director of Humana presented testimony in this proceeding.

2. Accepted as an accurate restatement of testimony, but rejected as an erroneous conclusion of law.

16. Second sentence rejected as an erroneous conclusion of law. A18. Rejected as contrary to the evidence.

20. First sentence rejected as an erroneous conclusion of law.

1. First sentence rejected as an erroneous conclusion of law.

2. Rejected as not supported by competent substantial evidence.

27 and 30. Accepted as an accurate restatement of testimony, but rejected as an erroneous conclusion of law.

1. Rejected as immaterial to the issue of need in the year 1992.

2. First sentence rejected as not established by competent substantial evidence.

3. First and third sentences rejected as not established by competent substantial evidence.

37 and 38. Rejected as not established by competent substantial evidence.

44. Last sentence rejected as unsupported by competent substantial evidence.

1. Accepted only if the factors of volume and payor mix are also considered.

2. Partially rejected as speculative and not supported by competent substantial evidence.

3. All but first two sentences rejected as unsupported by competent substantial evidence and an erroneous conclusion of law.

4. Rejected as unsupported by competent substantial evidence and an erroneous conclusion of law.

5. Last sentence rejected as unsupported by the evidence.

1. Rejected as unsupported by competent substantial evidence.

2. Second sentence rejected as contrary to the greater weight of the evidence.

58. Rejected as irrelevant and immaterial.

60. Rejected as not established by competent substantial evidence.

62 - 67. The actual figures regarding total costs, projected utilization and those figures utilized in the pro formas were not established by competent substantial evidence and, therefore, the findings regarding the financial feasibility of the project are rejected.

71. Rejected as not supported by competent substantial evidence.

74. Rejected as not supported by competent substantial evidence.

77. Rejected as an improper factual finding and contrary to the evidence.

78 and 79. Rejected as contrary to the greater weight of the evidence.

1. First sentence rejected as unsupported by competent substantial evidence.

2. Last sentence rejected as unsupported by the evidence.

3. Rejected as contrary to the evidence.

Respondent:

2 and 6. Partially accepted with the additional considerations of the applicant's occupancy levels and geographic accessibility.

9. Rejected as contrary to the evidence.

19(a) Interpretation of rule not sufficiently explicated at hearing.

56 - 58. Actual figures are not established by competent evidence due to the failure to establish with reliability the total costs of the project.

Intervenor:

1. Second sentence accepted with the additional considerations of the applicant's occupancy levels and geographic accessibility.

2. Third sentence rejected. Interpretation of rule not sufficiently explicated at hearing.

1. First sentence rejected, but this does not preclude a consideration of such a period.

2. Third sentence rejected as not established by the greater weight of the evidence.

31. Second sentence rejected as speculative.

40 and 41. Accepted as factually correct, but not included due to the showing of unused capacity within the East Pasco subdistrict.

55 and 56. Actual figures are not established by competent evidence due to the failure to establish with reliability the total costs of the project.

63 and 72. Same as above with regard to second sentence.

92. Rejected as an overbroad statement or conclusion.

97. Second sentence rejected as overbroad and not supported by the evidence.

COPIES FURNISHED:

E.G. Boone and Jeffrey Boone 1001 Avenida del Circo

Post Office Box 1596 Venice, Florida 34284

Stephen M. Presnell Macfarlane, Ferguson, Allison

& Kelly

Post Office Box 82 Tallahassee, Florida 323a2

James C. Hauser

Messer, Vickers, Caparello, French & Madsen, P.A.

Post Office Box 1876 Tallahassee, Florida 32302

Gregory L. Coler, Secretary Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32399-0700

Sam Power, Clerk Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32399-0700

John Miller, Esquire General Counsel Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32399-0700

Docket for Case No: 88-001227

Orders for Case No: 88-001227