STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

)

) ST. AUGUSTINE GENERAL HOSPITAL, ) L.P., d/b/a ST. AUGUSTINE )

GENERAL HOSPITAL, )

)

Petitioner, )

)

vs. ) CASE NO. 90-2035

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

RECOMMENDED ORDER

Upon due notice, this cause came on for formal hearing in St. Augustine, Florida on September 17, 1990 and in Tallahassee, Florida on September 18-20, 1990 before Ella Jane P. Davis, a duly assigned Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner Kenneth F. Hoffman and Flagler Hospital, Patricia A. Renovitch Inc. (Flagler): Attorneys at Law

OERTEL, HOFFMAN, FERNANDEZ & COLE, P.A.

P. O. Box 6507

Tallahassee, Florida 32314-6507

For Petitioner Jay Adams

St. Augustine Attorney at Law General Hospital, 1519 Big Sky Way

L.P. (St. Augustine): Tallahassee, Florida 32301

For Respondent Richard Patterson Department of Health Assistant General Counsel and Rehabilitative Department of Health and Services (HRS): Rehabilitative Services

2700 Mahan Drive

Tallahassee, Florida 32308 STATEMENT OF THE ISSUE

Whether either Petitioner is entitled to a certificate of need (CON) for inpatient cardiac catheterization services in HRS Service District IV.

PRELIMINARY STATEMENT

At the commencement of formal hearing, the undersigned denied, subject to revisitation in the Recommended Order, St. Augustine General, L.P.'s Motion to Dismiss Flagler's Petition. The motion alleged that Flagler Hospital, Inc.'s Petition does not comply with Section 381.707(2)(a) F.S. (1989), going to financial impact analysis. The adequacy of each party's application remained at issue for purposes of formal hearing.

The Prehearing Stipulation was admitted as Joint Exhibit A. Dr. William Wayne O'Connell testified as a public witness and his curriculum vitae was admitted as HO Exhibit 1.

Petitioner Flagler Hospital, Inc. (Flagler) presented the oral testimony of Laurence Michael Matthews, M.D.; Manoj Prakash, M.D.; Badri Mehrotra, M.D.; David C. Chapman; Michael D. Jernigan; Rick Knapp; Lynda Kirker; James D. Conzemius; Tom Edward Thomas; Paul Pajak; and Charles Richard Lambert, Jr., M.D. and had 13 exhibits admitted in evidence. Flagler-9 was not admitted.

Petitioner St. Augustine General Hospital, L.P. (St. Augustine) presented the oral testimony of Kelly H. Adams, Daniel J. Sullivan, and Gene Nelson and had St. Augustine 1(A and B) and 2 admitted in evidence.

Respondent, Department of Health and Rehabilitative Services (HRS), presented the oral testimony of Robert Garland and Elizabeth Dudek and had 2 exhibits admitted in evidence.

Official recognition of several items was taken, as reflected in the record.

FINDINGS OF FACT

1. Petitioners Flagler and St. Augustine have each applied for a CON to establish an inpatient cardiac catheter-ization program within HRS Service District IV. Each had the opportunity of responding to HRS' "omissions letter" for the cure of certain initial flaws. However, in its preliminary review of the applications, HRS denied both applicants and this proceeding followed.

   
   

2. HRS initially denied Flagler's application, stating it had only partially complied with Sections 381.705(1)(a), (b), (i), (l), (n), and (2)(b) and (d) F.S. (1989) and Rule 10-5.011(1)(e)4.a, 4.c., and 8.b. F.A.C.

3. HRS initially denied St. Augustine's application, stating it had only partially complied with Sections 381.705(1)(a), (b), (h), (i), (l), (n), and 2(b) and (d) F.S. and Rule 10-5.011(1)(e)4.a., 4.c., and 8.b. F.A.C. and that the applicant failed to demonstrate any compliance with Sections 381.705(1)(m) and (2)(a) F.S.

   
   

4. Prior to formal hearing, the parties stipulated that there is a numerical need under Rule 10-5.011(1)(e)8. F.A.C. for one additional inpatient cardiac catheterization laboratory in HRS District IV for the applicable planning horizon for these applications. That planning horizon is January 1992.

   
   

5. The parties further stipulated that both applicants have provided quality care; that, except for existing inpatient catheterization laboratories, there are no alternatives to the proposed facilities; that health manpower and management personnel are available for operation of the proposed programs; that the salaries listed on each application are reasonable; that the costs and methods of construction proposed are reasonable; that either applicant, if approved, would meet the scope of services, hours of operation, and health personnel requirements of Rule 10-5.011(1)(e) F.A.C.; and that St. Luke's Hospital in Jacksonville provides open heart surgery and is within one-half hour ambulance travel time from either applicant. It was also stipulated at formal hearing that the equipment costs proposed by both applicants are reasonable and that the costs of construction, as proposed in the applications, are reasonable.

   
   

6. Facilities operated by Flagler Hospital, Inc. and St. Augustine General Hospital, L.P. are located in the city of St. Augustine, St. Johns County, Florida. The two facilities are less than 500 yards apart and, for all practical purposes, are directly across U.S. 1 from one another. Both facilities are 115-bed general acute care hospitals providing the same services except that Flagler provides obstetrics and St. Augustine does not. The service areas of the two hospitals consist of the five zip codes immediately surrounding the two facilities as the primary service area and St. Johns County, except the Ponte Vedra area, as the secondary service area. Flagler operates as a not-for- profit hospital. St. Augustine operates for profit.

   
   

7. The applicant for CON 6011 is "Flagler Hospital, Inc." This corporation is based out of its only and local facility described supra and is locally operated.

   
   

8. Regardless of any other terminology applied during HRS' review leading up to the formal Petition in DOAH Case No. 90-2035, and regardless of any inadvertent changes of the style of that cause thereafter, the "applicant" for CON 6012 is, in fact, "St. Augustine General Hospital, L.P.," a limited partnership. The applicant's August 23, 1989 Letter of Intent in CON 6012 is in the name of "St. Augustine General Hospital, L.P. d/b/a St. Augustine General Hospital." The Identification of Principal Parties form submitted by the applicant states that the legal name of the applicant/parent corporation is "St. Augustine General Hospital, L.P." and that the facility/project name is "St. Augustine General Hospital." As of the date of formal hearing, "St. Augustine Hospital, Inc." (no "General" in this name) was a wholly-owned subsidiary of "Healthtrust, Inc." and the only general partner in the applicant, and "Healthtrust, Inc." was the sole limited partner in the applicant.

   "Healthtrust, Inc." purchased the shares of all the other former limited partners in July 1990, only after this cause had reached the formal hearing stage. The Board of Directors of the general partner, "St. Augustine Hospital, Inc.," is located in Nashville, Tennessee, as is the Board of Directors of "Healthtrust, Inc." Health Corporation of America (HCA) owns a significant

   number of shares (approximately 30-34%) of "Healthtrust, Inc." "Healthtrust, Inc." is a nationwide hospital chain with approximately 90 hospitals, which "spun off" from HCA in 1987. Thus, "Healthtrust, Inc." is both the sole owner of the general partner and the sole limited partner in the applicant, a limited partnership.

   
   

9. The past lineage of the several St. Augustine legal entities is somewhat convoluted, but it is a significant and material consideration for purposes of this CON proceeding that "Healthtrust, Inc." collects management fees from St. Augustine General Hospital, which is the applicant's d/b/a namesake, and that "Healthtrust, Inc." seems to have been underwriting St. Augustine General Hospital in one context or another for an uncertain period of time. St. Augustine General Hospital has been losing money annually. Its net loss for fiscal year 1990 was $2 million. By a September 25, 1989 letter from Stephen C. Brandt, "Healthtrust, Inc.," otherwise known as "The Hospital Company," has committed to loan "St. Augustine General Hospital, Inc." sufficient funding to implement and provide cardiac catheterization services at "St. Augustine General Hospital." The proposed recipient of "Healthtrust Inc.'s" commitment, which is "St. Augustine General Hospital, Inc.," is not the same entity or legal "person" as the applicant, "St. Augustine General Hospital, L.P.," and the parties further agree that there is no such legal entity as "St. Augustine General Hospital, Inc." (TR-132-133) Also, it is not clear from this record what other enterprises or ventures are attributable to "St. Augustine Hospital, Inc.," the general partner in the applicant. Therefore, even if the true intent of Mr. Brandt's letter was to show that the general partner, "St. Augustine Hospital, Inc." and not the nonexistent "St. Augustine General Hospital, Inc.," would receive funding from "Healthtrust,

   Inc.," there is no guarantee that "Healthtrust Inc.'s" funding commitment to the general partner would be used as a simple conduit to St. Augustine General Hospital, L.P., the applicant.

   
   

10. With regard to quality of care, either applicant is capable of providing high quality cardiac catheterization services. However, St. Augustine's proposed physical plant is less ideal than that proposed by Flagler. St. Augustine proposes a lab with a procedure room that contains only 314.5 square feet of floor space. The industry standard is 480 square feet. The State of Florida has not adopted by rule a standard for the minimum size of a cardiac catheterization procedure room. However, the Inter-Society Commission for Heart Disease Resources has issued a report, relied upon by architects in designing cardiac care facilities, which recommends a minimum size for a procedure room of 50.4 square yards, which equals 453.6 square feet. The State Health Plan has adopted the Inter-Society Commission Report. Undersizing the lab has the potential to downgrade the quality of care in St. Augustine's proposed lab in several respects. It limits the storage space necessary and required to conduct routine procedures and crash procedures in cardiac arrest situations and interferes with maintaining the "sterile field," essential to routine catheterization procedures, but more importantly, in the event of a cardiac arrest or other emergency situation, there may not be adequate room for as many as five additional persons to enter the room, together with emergency equipment, to resuscitate and stabilize the patient. Concerns about undersizing of space are not applicable to Flagler's proposed catheterization lab. St. Augustine submitted that it could convert space adjacent to its proposed lab for its cardiac catheterization program at a cost of approximately $33,000, but expert testimony was persuasive that such a conversion could be considerably more expensive. To the extent that St. Augustine's planning would need to be revised, additional drawings would have to be prepared to show the reconfiguration of the room with the cost increase. Even assuming, arguendo,

    that St. Augustine's $33,000 figure is correct and that $33,000 is a proportionately low cost of such a change of plans in relation to St. Augustine's entire proposed project costs, it is found that such a construction conversion as proposed would constitute a change in the St. Augustine application so substantial that it would require amendment of St. Augustine's pending application and therefore such a conversion cannot be considered anew and without prior HRS review at this stage of the CON proceedings.

    
    

11. The State Health Plan contains certain preferences relevant to this comparative CON review. Both applications benefit from the State Plan's favoring of an applicant proposing to provide cardiac catheterization services in a county that does not presently have a catheterization lab if it can be demonstrated that patients are leaving the county for such services. Upon the credible evidence as a whole, including but not limited to the testimony of Messrs. Jernigan and Nelson, Ms. Dudek, and Drs. Matthews, Prakash, and Mehrotra, it is found that a minimum of 225 patients had to travel outside St. Johns County, primarily to Jacksonville, Duval County, for such services in 1988, and there is competent, substantial evidence upon which a reasonable person may infer that that number is increasing (See Finding of Fact 20). HRS' viewpoint that freestanding labs which do not require a CON in order to operate in the proposed service area now accommodate these patients or will soon take up this slack is not supported by credible, competent substantial evidence. (See Finding of Fact 19) The State Health Plan also favors disproportionate Medicaid providers. Flagler is a federally designated disproportionate share hospital and qualifies for this preference. (See, also, Findings of Fact 15 and 20). Both applicants have committed to provide services to all patients regardless of their ability to pay and therefore both applicants meet this State Health Plan preference.

    
    

12. The Local Health Plan also contains criteria relevant to these applications, among which is that plan's preference for an applicant who proposes to provide catheterization services in an area of concentrated population which is currently without an existing program. The city of St. Augustine constitutes such a designated area, and since both applicants' facilities are located there, they are each entitled to such preference. Both facilities are located in the District IV subdistrict with the highest use rate, and both are entitled to the Local Health Plan's preference for an applicant in the area of highest catheterization use. St. Augustine would be the logical place to put a catheterization lab if need were shown, and HRS' own rule reveals the need for one lab. (See also Finding of Facts 4, 14, 20)

    
    

13. The Local Health Plan also prefers the applicant who will provide the proposed services in the most cost effective manner. Hospital Cost Containment Board (HCCB) figures suggest that Flagler is superior in this regard but are not persuasive in and of themselves. Historically, the applicants have been comparably cost-effective, dependent upon the procedure or service assessed. However, for the reasons set forth infra in respect to long-term financial feasibility in general, Flagler has the edge in this preference area.

    
    

14. The Local Health Plan contains a preference for an applicant addressing a current access problem. HRS determines need for inpatient cardiac catheterization labs on a district-wide basis rather than a county-by-county basis. No cardiac catheterization subdistricts have been designed and promulgated by HRS rule. The Local Health Plan uses a subdistrict basis; subdistrict 3 contains St. Johns County without any inpatient cardiac catheterization programs and southeastern Duval County where three hospitals provide such services. Either applicant's facility meets the access standard of

    Rule 10-5.011(e)4.a. F.A.C., that is, access within one hour of automobile travel time under ordinary conditions for 90% of the district population. However, the access problem bears some further specific commentary. St. Johns County residents now regularly travel, primarily to Jacksonville, Duval County, and to a lesser extent, to Gainesville, Alachua County, to receive these services. Increased costs and duplicate procedures often accrue unnecessarily to patients who seek treatment outside the service area/county. Moreover, the need to travel probably depresses the number of catheterization procedures done on St. Johns County residents, either because of the genuine logistics of lack of continuity of care, travel costs to the patient and family, and stress on the patient and family caused by out-of-county procedures or because of the patients' perceptions that these problems exist. Health care of patients who forego catheterization for these reasons would be qualitatively improved if they could submit to the procedure in their own locale; likewise, health care and costs to all catheterization patients would be improved it they could access the procedure close by with lesser travel, stress, and peripheral costs. That an access problem exists has been thoroughly and conscientiously demonstrated by both applicants. It has also been established that the city of St. Augustine location of either applicant would enhance accessibility for the elderly, handicapped, and medically indigent who are the least likely patients to submit to travel for inpatient catheterization services. For those reasons and since the two facilities to be utilized by the applicants are in such close proximity, it can only be concluded that the award of a CON to either applicant would equally improve access to inpatient cardiac catheterization services on a geographic basis alone.

    
    

15. Both applicants will be able to meet the personnel requirements of Rule 10-5.011(e)5.b. F.A.C. The premise that a de minimis higher FTE projection by St. Augustine automatically translates into better patient care was not proven and is suspect due to the size limitations of St. Augustine's proposed lab. (See Finding of Fact 10) Flagler's argument that because Flagler assigned a higher pay rate to different members of its catheterization team and because Flagler is willing to pay higher salaries overall does not translate into an advantage upon the state of this record as a whole. Either applicant will provide services to all persons in need, regardless of ability to pay, and each applicant further proposes serving Medicare, Medicaid, indigent, private pay, and HMO/PPO. Both applicants must, by law, comply with any conditions HRS may place on their CONs. In these respects, it is concluded that each applicant equally meets those respective Local Health Plan preferences, even though Flagler has clearly shown that its past "track record" in the area of Medicare, Medicaid, and indigent care exceeds that of St. Augustine in both quantity and quality. (See Findings of Fact 11 and 20)

    
    

16. All capital projects or expenditures proposed by St. Augustine have to be approved by Healthtrust, Inc., although the hospital management can approve "substitutions" of capital items of less than $5,000 per invoice. This restriction on local management, St. Augustine's potentially imprudent freezing of its per procedure cost for two years, and its perennially low occupancy rate overall (42 out of 115 beds last year) impact unfavorably on both the short-term and long-term feasibility of its project.

    
    

17. St. Augustine raised the valid point that since, due to litigation, neither applicant can meet its projected opening date, some adjustment of each applicant's pro forma, based on inflation, is in order, however what this adjustment should be was never persuasively quantified by the witnesses. St. Augustine challenged Flagler's pro forma statement on basically three grounds: that the nine-month earlier projected starting date (now past) for Flagler's lab

    projects an artificially lower patient charge due to inflation; that Flagler's supply expense of $200 is too low; and that Flagler did not amortize remodeling costs of $147,000. Both applicants' projections in the category of patient charge per procedure are found to be reasonable, but St. Augustine also suggested that Flagler's patient charge per procedure should be increased by 3.75%, which assumes a nine-month adjustment, at a 5% annual interest rate to increase Flagler's procedure charge from $1,385 to $1,437 for year one and from

    $1,475 to $1,530 for year two. Such a result would not render Flagler's proposal unreasonable and would have the effect of increasing Flagler's profitability. However, no evidence showed Flagler intended to increase its charge. Flagler's projected supply expense per procedure is reasonable.

    Assuming Flagler depreciates renovation costs over a 20 year period, the resulting minimal increase in depreciation is not a significant concern proportionate to Flagler's "bottom line" profitability.

    
    

18. HRS opposes both applications in part upon its assertion that neither applicant can attain its proposed number of procedures so as to insure long term financial feasibility. One of HRS' premises for this assertion is its contention that there are few cardiologists residing or practicing in St. Johns County. This is a truism so far as it goes, but not a controlling factor in light of significant other forces at work. Rather than cardiologists' clientele "feeding" a cardiac catheterization lab, as HRS originally supposed, the undersigned finds, upon the greater weight and credibility of all witnesses, including HRS' Ms. Dudek, that the absence of an inpatient cardiac catheterization lab in the city of St. Augustine, St. Johns County, has, in fact, depressed the availability of cardiologists in the county. Upon the testimony of Mr. Conzemius and Dr. Lambert, it is found that because there is no inpatient cardiac catheterization lab available, cardiologists currently cannot be recruited by either applicant. Establishment of such a lab by either applicant would result in more cardiologists locating in St. Augustine and St. Johns County with a concomitant improvement in patient accessibility to cardiology services.

    
    

19. HRS' assertion that neither applicant can attain its break-even use rate is not based upon any definitive or even cursory study by HRS of existing county use rates, CONs are not required for outpatient catheterization services which may be offered in freestanding facilities. The record does not establish with specificity the extent of utilization or service volume of outpatient cardiac catheterization labs, if any, in St. Johns County. There is expert cardiologist testimony that freestanding catheterization labs are not a medically acceptable alternative to inpatient programs in a hospital.

    
    

20. HRS contended that neither applicant has projected reasonable patient utilization figures guaranteeing long-term financial feasibility of their respective projects, but conceded that either proposal would be financially feasible if it attracted the projected patient numbers. The greater weight of the credible evidence supports a finding that sufficient numbers of inpatient cardiac catheterization patients can be captured by either applicant. Typically, 20% of cardiac catheterizations are done on an outpatient basis, so the 225-patient figure demonstrated for 1988 understates the potential cardiac catheterization patients in St. Johns County by 20%. Thus, approximately 55 more patients obtained catheterization out of county in 1988 than are shown by the inpatient figures, so mathematically one could project 270 such procedures on St. Johns County residents actually occurred in 1988. Application of the statewide use rate of 8.9 such procedures per 1,000 people applied to the appropriate January 1, 1992 planning horizon with the predicted population increase would yield an even higher potential patient figure of 674.

    Subdistrict 3 has historically experienced a yet higher use rate of 10.1 cardiac catheterization admissions. Either Flagler's 250 (first year) and 300 (second year) or St. Augustine's 275 (first year) and 325 (second year) is a reasonable projection which meets the HRS recommended minimum volume of 300 procedures per year in the second year. See, Rule 10-5.011(e)8.a. and e. F.A.C. Having a cardiac catheterization program would complement the obstetrical care which is exclusive to Flagler. Both applicants indicated their willingness to make their services available to a broad payor mix. St. Augustine projects utilization by class of pay for both year one and year two of operation as 2.2% Medicaid, 56.9% Medicare, 38.9% insurance, and 2.2% indigent. Flagler projects utilization by class of pay for both years as 7% Medicaid, 60% Medicare, 31% insurance, and 2% indigent. St. Augustine's projection of 2.2% of its cardiac catheterization services for Medicaid patients is reasonable but its projection of that same percentage for charity is inconsistent with St. Augustine's prior service and is unreasonable. Considering Flagler's historical Medicaid and indigent service history, its several contracts to provide care to these classes of pay, and the comparable cardiac catheterization utilization experience of similar providers, Flagler's projections in this respect are reasonable. If Flagler has erred in this portion of its assessment, increased percentages of patients covered by insurance reimbursements would only improve Flagler's "bottom line" for long- term financial feasibility.

    
    

21. Both applicants' pro forma statements are based on operation of the proposed cardiac catheterization lab only, not including ancillary services and other charges related to the entire patient episode of care. Both applicants will receive an incremental layer of profit from establishing a cardiac catheterization lab, but that amount was not quantified on this record. The greater weight of the credible expert evidence shows that St. Augustine's understatement of a number of expenses will result in its lab experiencing a net loss which it will be tempted to "pass on" through other hospital charges. St. Augustine's commitment to following Healthtrust, Inc.'s policies with regard to depreciation, amortization, and assigning useful life to equipment is not persuasive that these corporate principles are preferable to the generally accepted accounting principles used by Flagler. If St. Augustine's commitment to freezing its charge per procedure does not result in its raising fees elsewhere, this commitment may still aggravate instead of alleviate St. Augustine's financial predicament, for the entire facility currently operates at a net loss.

    
    

22. Rule 10-5.011(1)(e)6. F.A.C. as amended, August 1988, requires that CON cardiac catheterization applicants who do not provide open heart surgery services include a written protocol for the transfer of emergency patients to a hospital providing open heart surgery which is within 30 minutes' travel time by emergency vehicle under average travel conditions. No statute, rule, or credible testimony herein defined "protocol" contrary to the interpretation given that term in Florida Medical Center et al. v. HRS, 11 FALR 3904 (1989). HRS' Ms. Dudek determined that each submittal met HRS' intent in the current rule. Her rule interpretation, based on agency expertise, is entitled to great weight. Flagler filed a protocol which is specific to cardiac catheterization patients in need of open heart surgery but did not specify which open heart surgery facility would be utilized. St. Augustine submitted a current transfer agreement between St. Augustine General Hospital, L.P. and St. Luke's Hospital, Jacksonville, the closest open heart surgery provider. This agreement is not specific to cardiac catheterization patients. St. Augustine also has an agreement with doctors at St. Luke's for open heart services backup. St. Luke's is within one-half hour's emergency travel time from either applicant's facility. There was no valid reason advanced in this record to suppose that

    Flagler could not also obtain travel and backup services with St. Luke's if it were granted the CON applied-for. Therefore, it is found that both applicants have complied with the current rule.

    
    

23. Inherent in all challenges to the applicants' respective financial projections is the completeness of each application, and evidence as to the completeness of both applications has been received.

    
    

24. Upon the testimony of HRS' health planning expert and agency representative, Elizabeth Dudek, it is found that at the time both applications were filed and at all times material to these applications, there was no consensus at HRS as to what constituted a "capital project" pursuant to Section 381.707(2)(a) F.S.; HRS had no definitional rule in place; HRS regularly looked to an applicant's audited financial statements with respect to the impact statement required under that section; and HRS did not require that there be a separate page labelled "assessment" for compliance with that section. Ms. Dudek reviewed both applications in the context of Section 381.707(2)(a) for HRS against other information already internal to HRS (exemptions, determinations for exemptions, or non-reviewables) and determined for purposes of initial review that both applicants had "captured" what HRS needed to know under Section 381.707(2)(a). This remained her opinion at formal hearing. (TR-586-589, 591- 593)

    
    

25. St. Augustine expressly stated in its omissions response that it "has no capital projects applied for, pending, approved or underway in any state" (emphasis in original). In fact, the HCCB reported that for the eight-month period ending August 31, 1989, St. Augustine had $59,000 in construction in progress. Moreover, St. Augustine failed to list a lobby and patient wings renovation project costing approximately $540,000. St. Augustine's application contained no mention of these projects and no assessment, discussion, or analysis of their impact. St. Augustine's own Comptroller, David Chapman, would have defined these as capital projects (TR-93-94), and a common understanding of the English language would suggest that his is a reasonable interpretation of the clear statutory language.

    
    

26. Flagler provided a page titled "FLAGLER HOSPITAL, INC. CURRENT CAPITAL PROJECTS" (Flagler-10), which listed the following "capital projects," as their expert witnesses defined that term under the statute.

    
    

    Maintenance and Yard Service Facility $61,000 (Review exemption pending)

    
    

    Storage Room Improvements $75,000 (Review exemption pending)

    
    

    Flagler Hospital Replacement Facility CON #2883; $21,728,558

    Cost overrun application is being developed

    
    

27. Rick Knapp, a certified public accountant and Flagler's expert in health care finance, accounting, and financial feasibility, also testified that Flagler's inclusion of the replacement hospital in the application as a "capital project" when the replacement hospital was essentially paid out before Flagler's CON application was even filed was probably not necessary under the statute but was intended for full disclosure. In fact, the evidence at formal hearing shows that Flagler's $21 million-plus replacement facility was completed, occupied, and paid for prior to Flagler's submission of the CON application to HRS in

    September 1989. The audited financial statements submitted with Flagler's application also indicated that, as of September 30, 1988, there had been construction in progress of $17 million, and an estimated $7.5 million for expected completion of construction in fiscal year 1989. Evidence admitted at formal hearing showed that the construction had been completed and the facility occupied in February 1989. Flagler began to depreciate its replacement facility upon occupancy. An overrun of approximately four million dollars was accrued and paid as of February 1989, but determining its exact amount was delayed by litigation with the architect and retainage by the general contractor. It cannot be determined from the application and omissions response that the cost overrun had been financed in full, but the two smaller capital projects were considered in the preparation and submission of Flagler's omissions response and specifically, depreciation expenses are included in the omissions response for all three of the above-identified projects. The hospital-wide pro forma contained in Flagler's omissions response shows a "healthy bottom line" for Flagler, even after consideration of the then-pending capital projects. Mr.

    Knapp represented that pages R-1, 2 of Flagler's omissions response (Flagler-11) meet the requirements of Section 381.707(2)(a) F.S., requiring a complete listing of all capital projects and an assessment of the capital projects' impact on the applicant's ability to provide the proposed cardiac catheterization lab. However, a close reading of pages R-1, 2 reveals that pages R-1, 2 do not repeat the list of capital projects just described or "showcase" Flagler's capital projects' impact on Flagler's ability to provide the services of the proposed catheterization lab, but rather, they make the detailed evaluation of the impact of the proposed cardiac catheterization lab on the cost of other services provided by Flagler, which detailed evaluation is required by Section 381.707(2)(c) F.S. Indeed, R-1 is entitled "IMPACT OF PROPOSED PROJECT ON COSTS OF OTHER SERVICES PROVIDED BY THE APPLICANT."

    Flagler's own witnesses concede that pages R1, 2 must be read in conjunction with Flagler's audited financial statements in order to arrive at the analysis of how other "health facility development projects and health facility acquisitions applied for, pending, approved or underway" will affect Flagler's ability to finance its catheterization lab. However, when compared to the pro forma on Table 3.3 of the application, it is clear that there is no impact of the listed capital projects on the proposed program. According to Mr.

    Conzemius, Flagler applied to HRS in March 1989 (six months prior to the filing of Flagler's CON application) and was turned down for an exemption on its overrun, and in the future Flagler will be applying for a CON regarding it.

    Flagler has disguised none of its activities from HRS and resolved and paid out the cost overrun prior to formal hearing so that the overrun, if it ever could have impacted on Flagler's proposed project, cannot do so now.

    
    

28. Flagler's proposed cardiac catheterization lab will be paid for by cash funds in hand; the application contained a typographical error indicating that the funds were assured, when in fact, they are in hand. There will be no debt incurred by Flagler for the construction of the project.

    
    

    CONCLUSIONS OF LAW

    
    

29. The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this cause pursuant to Section 120.57 (1), F.S,

    
    

30. Applicants for CONs bear the burden of establishing their entitlement to the certificate of need they seek. Florida Department of Transportation v.

    J.W.C. Co., Inc., 396 So. 2d 778 (Fla. 1st DCA 1981). In most instances, they must meet the criteria set forth in Section 381.705 F.S. and Rule 10-5.011(1)(e)

    F.A.C. based upon a balanced consideration of all criteria contained therein.

    NME Hospitals, Inc. v. Department of Health and Rehabilitative Services, 494 So. 2d 256 (Fla. 1st DCA 1986) The weight to be given to each factor is not fixed, but varies depending on the facts of each case. North Ridge General Hospital, Inc. v. NME Hospital, 478 So. 2d 1138 (Fla. 1st DCA 1985); Collier Medical Center, Inc. v. Department of Health and Rehabilitative Services, 462 So. 2d 83 (Fla. 1st DCA 1985).

    
    

31. There is a need for one inpatient cardiac catheterization laboratory in the applicable locale. The city of St. Augustine is the best site.

    
    

32. St. Augustine's motion to dismiss (See, Preliminary Statement, supra) was specifically based on the allegation that Flagler had failed to fully disclose Flagler's capital projects in its application and that therefore the Flagler application was incomplete. The motion was initially denied as late- filed and as requiring an evidentiary hearing. It must likewise be denied here since St. Augustine has never formally intervened in DOAH Case No. 90-2034. Nonetheless, the threshold question of completeness of both applications remained an issue for formal hearing as did the superiority vel non of one applicant's financial feasibility over the other's.

    
    

33. It is clear that the applicant, St. Augustine General Hospital, L.P., has not demonstrated that it has the current short-term financial feasibility to carry out its proposal, even if some of its partners may.

    
    

34. St. Augustine's project also does not possess long-term financial feasibility.

    
    

35. Likewise, the downsizing of St. Augustine's proposed lab and the unfavorable effect such downsizing may have on the quality of care in that lab cannot be corrected now without a substantial amendment to its application, and such an amendment cannot be considered de novo in this forum.

    
    

36. As to disclosure of capital projects and the sufficiency of the parties' respective applications in this regard, the pertinent statutes are:

    
    

    381.707 Application content.-- An application for a certificate of need shall contain:

    * * *

    1. A statement of the financial resources needed by and available to the applicant to accomplish the proposed project. This state- ment shall include:

       (a) A complete listing of all capital projects, including new health facility development projects and health facility acquisitions applied for, pending, approved, or underway in any state at the time of application, regardless of whether or not that state has a certificate of need program or a capital expenditure review program pursuant to section 1122 of the Social Security Act. The department, may, by rule, require less-detailed information from major health care providers. This listing shall include the applicant's actual or proposed

       financial commitment to those projects and an assessment of their impact on the applicant's ability to provide the proposed project.

       * * *

       (c) A detailed financial projection including a statement of the projected revenue and expen- ses for the period of construction and for the first 2 years of operation after completion of the proposed project. This statement shall include a detailed evaluation of the impact of the proposed project on the cost of other ser- vices provided by the applicant.

    2. An audited financial statement of the applicant. In an application submitted by an existing health care facility, health mainten- ance organization, or hospice, financial condition documentation shall include, but need not be limited to, a balance sheet and a profit-and-loss

    statement of the 2 previous fiscal years' operation. [Emphasis supplied]

    * * *

    
    

37. At no time material to these applications had HRS promulgated a rule defining "capital project." However, it is noted that by its own expert's testimony, St. Augustine failed to make full disclosure to HRS of what it considered to be "capital projects." By this omission, St. Augustine has severely reduced the ability of Respondent HRS to make an informed decision as to the financial merits of the proposed project. See, Adventist Health Systems/Sunbelt, Inc. d/b/a Florida Hospital v. Department of Health and Rehabilitative Services and Central Florida Regional Hospital, Inc. d/b/a HCA Central Florida Regional Hospital, Inc., DOAH Case No. 90-1526 (RO November 1, 1990; FO January 4, 1991).

    
    

38. Flagler, on the other hand, disclosed all that it understood to be capital projects and possibly more. Flagler certainly met the completeness test HRS was using under the agency's prevailing policy at the time. There is nothing in the statute that mandates that the list, assessment, and evaluation be on single, separate, specifically labelled pieces of paper.

    
    

39. Flagler submitted a list of its capital projects and the amounts that were known at the time the application was filed. Included in this list was the total cost of its replacement hospital of $21,728,558 but without "showcasing" its four million dollar cost overrun. It is not clear that such an item can be legally characterized as a "capital project," particularly if, as here, it was already paid when the application was filed. Testimony revealed that the full extent of the cost overrun of the Flagler Hospital Replacement Facility was not clear at the time that the application and omissions response were filed. Therefore, a precise amount could not be accurately specified. In this case, HRS has asserted that it did not require more specific information. There is information in Flagler's audited financials that contains a summary of long-term debt, specifically including the Flagler Hospital Replacement Facility. There is also the listing of capital projects. Additionally, the financial impact of Flagler's capital projects on its proposed inpatient cardiac catheterization program may be inferred as "zero," specifically upon the audited financial statements and generally upon the application and omissions response as a whole. Testimony at hearing by Flagler's financial experts revealed that an assessment of the impact of the capital projects on Flagler's proposed inpatient cardiac

    catheterization program was done and consists of interest and depreciation. The specific amounts of that impact are fully revealed but not necessarily at pages R-1, 2 as testified-to. There is sufficient evidence included in Flagler's application and omissions response, to demonstrate substantial compliance with the capital expenditure reporting and assessment requirements of Section 381.707(2)(a) F.S.

    
    

40. Humhosco, Inc. d/b/a/ Humana Hospital v. HRS, 561 So. 2d 388 (Fla. 1st DCA 1990) does not support a conclusion that Flagler's omissions response contained insufficient information to meet the requirements of Section 381.707(2)(a) F.S. Therein, the applicant totally failed to file its audited financial statements as expressly required by Section 381.707(3) F.S. Indeed, St. Augustine's failure to provide any data on its capital projects is a closer fit to the Humhosco precedent than is Flagler's disclosure.

    
    

41. When reviewing a CON application to determine whether statutory requirements have been met, an agency should allow substantial compliance, particularly where, as here, there was no agency guidance by rule definition.

    
    

42. Flagler has substantially complied with the statutes cited supra so as to have passed the threshold question of completeness of the CON application and has established its short- and long-term financial feasibility upon the merits.

    
    

43. St. Augustine's disclosure, and therefore its application, was incomplete and inaccurate and Flagler's is the better and more complete application.

    
    

44. Flagler has successfully met all of the review criteria remaining at issue in this formal proceeding.

RECOMMENDATION

Upon the foregoing Findings of Fact and Conclusions of Law, it is recommended that HRS enter a final order granting CON 6011 to Flagler Hospital, Inc. and denying CON 6012 to St. Augustine General Hospital, L.P.

RECOMMENDED this 29th day of January, 1991, at Tallahassee, Florida.

ELLA JANE P. DAVIS, 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 29th day of January, 1991.

APPENDIX TO RECOMMENDED ORDER, CASE NOS. 90-2034 and 90-2035

The following constitute specific rulings pursuant to Section 120.59(2)

F.S. upon the parties' respective proposed findings of fact (PFOF):

Petitioner Flagler's PFOF (1-77):

Accepted: 7, 10, 15, 16, 22, 23, 30, 34, 58

Rejected as irrelevant, unnecessary and nondeterminative: 4, 5 Rejected as subordinate or unnecessary: 66, 67, 68, 69, 70

Accepted except where subordinate, unnecessary, or cumulative to the facts as found; not necessarily adopted: 1-3, 11, 12, 13, 14, 17, 18, 19, 20, 21, 24,

25, 26, 27, 31, 33, 38, 39, 40, 41, 42, 53, 54, 55, 56, 59, 61, 62, 65

Rejected as mere legal argument: 6

Subjects covered but proposals rejected in form proposed because they are mere legal argument or recital of unweighted, unreconciled testimony and/or exhibits: 71, 72, 73

Covered as modified to reflect actual stipulations and credible record evidence as a whole, eliminating subordinate matters and mere legal argument: 8, 9, 28, 29, 32, 35, 36, 37, 43-52, 57, 60, 63, 74-77

The weight and credibility of all the evidence has been weighed within the RO and applies to all rulings.

Petitioner St. Augustine's PFOF 6-(69)-73:

[NOTE: St. Augustine numbered its preliminary matters 1-5 and its PFOF begin with #6; it also proposed two #69's]

Accepted, except where subordinate, unnecessary, or cumulative to the facts as found: 6-15, 17-24, 26, 27, 28, 33, 35, 37, 38, 40, 41, 47

Accepted as modified to more closely conform to the material facts of record or to eliminate subordinate or unnecessary proposed facts or facts which were not proven: 31, 34, 48, 49, 52, 53, 54, 55, 58, 66, 67, 68, 69#2, 72

Accepted, except where subordinate, unnecessary or mere legal argument: 39, 43 Rejected as subordinate, immaterial or mere legal argument: 16, 25, 29, 32, 36

Subjects covered but proposals rejected in the form proposed because they are mere legal argument or recital of unweighted, unreconciled testimony and/or exhibits: 30, 42, 44, 45, 46, 50, 51, 60, 70

Rejected as not proven for the reasons set out in the RO: 56

Accepted in part, the remainder is rejected in part as mere legal argument, recital of unweighted, unreconciled testimony and exhibits, and/or not proven: 57

PFOF 59: First paragraph cumulative. All paragraphs beginning with a dash on the same page under 59: Subordinate and unnecessary to the facts as found or mere recital of unweighted or unreconciled testimony and/or exhibits and legal argument. Dash 1 on next page: Rejected as contrary to the credible record

evidence as a whole. Remaining dashes beginning on that page: subordinate and not determinative and/or mere recitation of unweighted or unreconciled testimony and exhibits. Credibility determination made.

Accepted but cumulative that historically Flagler has served more Medicaid patients than St. Augustine and is a disproportionate Medicaid provider. The remainder is rejected as mere legal argument or recital of unweighted or unreconciled testimony and/or exhibits: 61

Rejected that the same payor mix may be expected. The evidence supports Flagler's projected 7% Medicaid rate. The remainder is mere legal argument, subordinate and cumulative to the facts as found, and/or contrary to the weight of the credible record as a whole: 62-65

Accepted as modified to eliminate mere legal argument and to more closely conform to the material facts of record: 69#1

In all its parts, is rejected as mere legal argument and not determinative of any material fact: 71

PFOF 73: The subject matter is covered within the RO. Recital of deposition testimony in a belated attempt to impeach a witness who has testified has been rejected as not a proposed finding of material fact. The remainder is mere recitation of unweighted or unreconciled testimony/exhibits.

The weight and credibility of all the evidence has been weighed within the RO and applies to all rulings.

Respondent's PFOF (1-13):

Accepted, except as subordinate or unnecessary: 1, 2, 3, 4, 7, 11, 13

Rejected in part as mere legal argument or unweighted or unreconciled testimony or exhibits (not proven upon the credible record evidence as a whole); otherwise accepted: 5, 6, 8, 9, 10, 12

The weight and credibility of all the evidence has been weighed within the RO and applies to all rulings.

COPIES FURNISHED:

Kenneth F. Hoffman Patricia A. Renovitch Attorneys at Law

Oertel, Hoffman, Fernandez & Cole, P.A.

Post Office Box 6507 Tallahassee, Florida 32314-6507

Jay Adams, Esquire Attorney at Law 1519 Big Sky Way

Tallahassee, Florida 32301

Richard Patterson Assistant General Counsel Department of Health and

Rehabilitative Services 2727 Mahan Drive

Fort Knox Executive Center Tallahassee, Florida 32308

Sam Power, Clerk Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32399-0700

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS:

All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should consult with the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

=================================================================

AGENCY FINAL ORDER

=================================================================

STATE OF FLORIDA

DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES

)

)

FINAL ORDER

This cause came on before me for the purpose of issuing a final agency order. The Hearing Officer assigned by the Division of Administrative Hearings (DOAH) in the above-styled case submitted a Recommended Order to the Department of Health and Rehabilitative Services (HRS). A copy of that Recommended Order is attached hereto.

RULING ON EXCEPTIONS FILED BY THE DEPARTMENT

In paragraph 11 of the findings of fact the Hearing Officer found that the record does not support a conclusion that the need for cardiac catheterization services in St. John's County is or will be met by outpatient laboratories.

Counsel does not except to the finding, but does object to the characterization of the rejected conclusion as the "HRS viewpoint". The characterization is unnecessary and is stricken.

In paragraph 4 of the conclusions of law the Hearing Officer denied St.

Augustine General Hospital's (St. Augustine) Motion to Dismiss Flagler's petition because Flagler did not intervene in the St. Augustine proceeding. In this consolidated proceeding the applications were comparatively reviewed. In such a proceeding each applicant may challenge the sufficiency of competing applications without formal intervention.

Counsel excepts to the Hearing Officer's comment that Flagler Hospital's substantial compliance with statutory application requirements is sufficient. Counsel cites Humhosco vs. Department of Health and Rehabilitative Services, 561 So2d 388 (Fla. 1st DCA 1990) (applicant submitted a board resolution of a related corporation and financial statements of only a division of the applicant); Manor Care vs. Department of Health and Rehabilitative Services, 558 So2d 26 (Fla. 1st DCA 1989) (application did not include detailed statement of financial feasibility, assessment of need, and analysis of impact on costs); HCA Health Services vs. Department of Health and Rehabilitative Services, 12 FALR

234 (applicant's board resolution stated that the proposed facility would be licensed and operated by an unnamed subsidiary corporation); Brookwood- Jackson Company vs. Department of Health and Rehabilitative Services, 12 FALR 1474 (applicant sought a CON to add beds to a facility which was licensed and operated by an unrelated corporation); and Central Florida Regional Hospital vs. Department of Health and Rehabilitative Services, Case Number 90- 1526 (HRS 12/28/90) (applicant's list of capital projects omitted projects involving expenditures of 12 million dollars). In each of the cited cases there was noncompliance with statutory requirements. In the present case, the Hearing Officer criticized the format of the Flagler application, but concluded that the application was complete. Because the application was complete, the Hearing Officer's comment regarding substantial compliance is rejected as unnecessary.

RULING ON EXCEPTIONS FILED BY ST. AUGUSTINE GENERAL HOSPITAL (ST. AUGUSTINE)

St. Augustine excepts in whole on in part to findings of fact 9, 13, 15, 16, 20, 21, and 22. The challenged findings are supported by competent, substantial evidence; therefore, the exceptions are denied.

St. Augustine excepts to the Hearing Officer's rejection of its proposed finding that Flagler's application should be rejected as incomplete. I concur with the Hearing Officer's conclusion that Flagler's application included the necessary data and information.

St. Augustine's exceptions to conclusions of law 5 through 16 are denied.

FINDINGS OF FACT

The department hereby adopts and incorporates by reference the findings of fact set forth in the Recommended Order except as modified by the rulings on the exceptions.

CONCLUSIONS OF LAW

The department hereby adopts and incorporates by reference the conclusions of law set forth in the Recommended Order except as modified by the rulings on the exceptions.

Based upon the foregoing, it is

ADJUDGED, that the application of Flagler Hospital, Inc. for CON 6011 be GRANTED and that the application of St. Augustine General Hospital, L. P. for CON 6012 be DENIED.

DONE and ORDERED this 26th day of February, 1991, in Tallahassee, Florida.

Robert B. Williams Acting Secretary Department of Health and

Rehabilitative Services

by Acting Deputy Secretary for Program

COPIES FURNISHED:

Jay Adams, Esquire Attorney at Law 1519 Big Sky Way

Tallahassee, FL 32301

Kenneth F. Hoffman, Esquire Patricia A. Reovitch, Esquire OERTEL, HOFFMAN, FERNANDEZ, &

COLE, P.A.

P. O. Box 6507 Tallahassee, FL 32314-6507

Richard Patterson, Esquire Assistant General Counsel Department of Health and

Rehabilitative Services 2727 Mahan Drive

Fort Knox Executive Center Tallahassee, FL 32308

Ella Jane P. Davis Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, FL 32399-1550

FALR

Post Office Box 385 Gainesville, FL 32602

Wayne McDaniel (PDRFM) Susan Lincicome (PDRHD) Legal (PDDR)

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that a copy of the foregoing was sent to the above-named people by U.S. Mail this 1st day of March, 1991.

R. S. Power, Agency Clerk Assistant General Counsel Department of Health and

Rehabilitative Services 1323 Winewood Boulevard Building One, Room 407

Tallahassee, Florida 32399-0700 904/488-2381

A PARTY WHO IS ADVERSELY AFFECTED BY THIS ORDER IS ENTITLED TO JUDICIAL REVIEW WHICH SHALL BE INSTITUTED BY FILING ONE COPY OF A NOTICE OF APPEAL WITH THE AGENCY CLERK OF HRS, AND A SECOND COPY, ALONG WITH FILING FEE AS PRESCRIBED BY LAW, WITH THE DISTRICT COURT OF APPEAL IN THE APPELLATE DISTRICT WHERE THE AGENCY MAINTAINS ITS HEADQUARTERS OR WHERE A PARTY RESIDES. REVIEW PROCEEDINGS SHALL BE CONDUCTED IN ACCORDANCE WITH THE FLORIDA APPELLATE RULES. THE NOTICE OF APPEAL MUST BE FILED WITHIN 30 DAYS OF RENDITION OF THE ORDER TO BE REVIEWED.

Docket for Case No: 90-002034

Orders for Case No: 90-002034