STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

SAWGRASS CARE CENTER, INC., )

)

Petitioner, )

)

vs. ) Case No. 99-2028

)

AGENCY FOR HEALTH CARE ) ADMINISTRATION; AMERICAN RETIREMENT ) CORPORATION; WOODLANDS EXTENDED ) CARE, INC.; NATIONAL HEALTHCARE ) CORPORATION; and FLORIDA NURSING ) CARE ASSOCIATES (GEORGIA), LLC, )

)

Respondents. )

) NATIONAL HEALTHCARE, L.P., )

)

Petitioner, )

)

vs. ) Case No. 99-2194

)

AGENCY FOR HEALTH CARE )

ADMINISTRATION, )

)

Respondent. )

) WOODLANDS EXTENDED CARE, INC., )

)

Petitioner, )

)

vs. ) Case No. 99-2195

)

AGENCY FOR HEALTH CARE )

ADMINISTRATION and NATIONAL )

HEALTHCARE CORPORATION, )

)

Respondents. )

)

NATIONAL HEALTHCARE CORPORATION, )

)

Petitioner, )

)

vs. ) Case No. 99-2757

)

AGENCY FOR HEALTH CARE )

ADMINISTRATION, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly-designated Administrative Law Judge, Eleanor M. Hunter, held a formal hearing in the above-styled case on November 4, 5, 8, 9, 10, and 12, 1999, in Tallahassee, Florida.

APPEARANCES

For Petitioner Sawgrass Care Center, Inc.:

Robert D. Newell, Jr., Esquire Newell & Terry, P.A.

817 North Gadsden Street Tallahassee, Florida 32303-6313

For Petitioner National Healthcare, L.P. and National Healthcare Corporation:

Gerald B. Sternstein, Esquire Frank P. Rainer, Esquire Sternstein, Rainer & Clarke, P.A.

314 North Calhoun Street Tallahassee, Florida 32301-7606

For Petitioner Woodlands Extended Care, Inc.:

Theodore E. Mack, Esquire Powell & Mack

803 North Calhoun Street Tallahassee, Florida 32303

For Respondent Agency for Health Care Administration: Richard Patterson, Esquire

Agency for Health Care Administration 2727 Mahan Drive

Building 3, Suite 3431

Tallahassee, Florida 32308-5403 STATEMENT OF THE ISSUE

Which of three competing applicants for a certificate of need to construct a nursing home in health planning District 4, Subdistrict 3, best meets the statutory and rule criteria for approval.

PRELIMINARY STATEMENT

Sawgrass Care Center, Inc. (Sawgrass), Woodlands Extended Care, Inc. (Woodlands), and National Healthcare Corporation (NHC) are competing applicants for a certificate of need (CON) to construct a 120-bed community nursing home in Agency for Health Care Administration (AHCA) District 4, Subdistrict 3.

AHCA published a need for 121 additional community nursing home beds for the July 2001, planning horizon, in the subdistrict encompassing southeast Duval and St. Johns Counties. After reviewing the applications, AHCA preliminarily approved the

issuance of a CON to NHC. This proceeding results from the filing of petitions to challenge that action.

At the final hearing, Sawgrass presented the testimony of Craig W. Elmore, expert in health care planning; Larry Carter, Sr., expert in construction supervision and construction costs; Darryl Weiner, expert in financial analysis including health care financial feasibility; Robert A. Bieseigel, expert in health care financial analysis and financial feasibility; and David Richard Riggs, expert in architecture with experience in nursing home design. In addition, Sawgrass presented the depositions of

John Tucker, Jackie Garrett, Donald Fike, and Philip Braeuning which were marked Sawgrass Exhibits 1-3 and 6, and received into evidence, along with Sawgrass Exhibits 4, 5, 7-9, 13 and 14.

Woodlands presented the testimony of Sidney W. Roberts, expert in nursing home administration and development; Suzanne M. Block, R.N., expert in nursing; W. Eugene Nelson, expert in health planning; Dennis O'Keefe, expert in nursing home architecture; Gerald L. Dake, expert in real estate development; Joseph D. Mitchell, expert in nursing home accounting and finance; and Morris Esformes, expert in nursing home financing.

Woodlands Exhibits 1-12 were received into evidence, including Exhibits 2 and 3, the testimony by depositions of Carol Pumphrey and Melissa Ledbetter.

NHC presented the testimony of Tim Sullivan, expert in health care, nursing home administration and operations; Duane Gallagher, expert in nursing home administration; James H. Bailey, III, expert in architecture, and nursing home design and construction; Carolyn Marsh, R.N., expert in nursing administration and long-term care; Thomas Campbell, expert in nursing home development and construction; Charles Wysocki, expert in health care financial feasibility and health care finance; and Bruce Duncan, expert in health care planning and gerontology. NHC Exhibits 1-15 were received into evidence during the hearing while NHC Exhibits 18 through 26 were received as late-filed exhibits after the hearing.

AHCA Exhibits 1 through 3 were received in evidence.

The transcript of the final hearing, consisting of eleven volumes, was filed at the Division of Administrative Hearings, on December 3, 1999. Following the granting of a motion for an extension of time, proposed recommended orders were filed on March 14, 2000.

On April 3, 2000, Sawgrass filed a Motion To Strike portions of NHC's Proposed Recommended Order (PRO). The first sentence of paragraph 8 of NHC's PRO states that "Sawgrass will not operate the facility if awarded the CON." Sawgrass responded that it will be the licensed operator although it will employ the

services of a management company. NHC countered that "operating" and "managing" are synonymous.

Sawgrass also objected to NHC's reliance on certain hearsay statements which are taken from the state agency action report (SAAR) as hearsay. According to NHC, the statements it quoted from the SAAR were corroborated by other evidence at hearing.

NHC questioned the authority for the filing of a motion to strike after proposed recommended orders have been filed.

Because findings of fact are based on the record, as reflected in the official transcript, not on statements in proposed recommended orders, the Motion To Strike is unnecessary and is, therefore, denied.

FINDINGS OF FACT

1. The Agency for Health Care Administration (AHCA) is the department of state government which administers the certificate of need (CON) program for health care facilities and services in Florida, pursuant to Section 408.034, Florida Statutes.

2. For the planning horizon beginning July 2001, AHCA published a numeric need for an additional 121 community nursing beds in nursing home planning District 4, Subdistrict 3, for southeast Duval and St. Johns Counties.

3. Sawgrass Care Centers, Inc. (Sawgrass), Woodlands Extended Care, Inc. (Woodlands), and National Healthcare Corporation (NHC) are competing, mutually exclusive applicants

   for a CON to construct a 120-bed nursing home in District 4, Subdistrict 3. After reviewing the applications, AHCA preliminarily approved the issuance of CON No. 9125 to NHC.

4. In the Prehearing Stipulation, filed on November 2, 1999, the parties agreed that the following criteria are either not applicable or are not in dispute: Subsections 408.035(1)(d), (e), (f), (g), (j), and (k), and Subsections 408.035(2)(a), (b), (c), and (d), Florida Statutes; Rule 59C- 1.036, Florida Administrative Code; and allocation factors 1, 3, 4, and 9 of the local health plan. During the final hearing, the parties also stipulated that all letters of intent were legally sufficient.

5. The issues requiring resolution in this proceeding, the parties agreed, are: Subsections 408.035(1)(a), (b), (c), (h), (i), (l), (m), (n), and (o); and Subsection 408.035(2)(e), Florida Statutes; allocation factors 2, 5, 6, 7, and 8 of the local health plan; and Section 408.037, Florida Statutes.

6. Sawgrass is the applicant for CON No. 9126 to construct a 120-bed nursing home in northern St. Johns County for approximately $3,967,000 in construction costs for a 56,800 square-foot building. The total project will cost approximately

   $6.4 million. Mr. S. W. Creekmore, Jr., who is the sole shareholder and president of Sawgrass, has been in the nursing home business over 30 years. Currently, Mr. Creekmore owns and

   operates between 30 and 40 nursing homes in Arkansas, California, Missouri, New York, Tennessee, Texas, and Nevada. Sawgrass is currently constructing Sawgrass Care Center of North Duval, an 84-bed addition to a 60-bed facility in Duval County.

7. If CON No. 9126 is issued to Sawgrass, it will be on condition that Sawgrass:

   1. locate the 120-bed nursing home in northern St. Johns County within zip codes 32082, 32092, 32095, and 32259, in District 4, Subdistrict 3;

      
      

   2. provide a minimum of 63.51 percent total annual patient days to Medicaid patients;

      
      

   3. establish a 20-bed Alzheimer's care unit, a 20-bed Medicare unit, hospice services and respite care;

      
      

   4. admit AIDS patients; and

      
      

   5. construct the facility according to the schematic drawings.

      
      

8. Sawgrass contends that its application should be approved primarily because of its proposed location in northern St. Johns County. An increase of beds in St. Johns County will correct what Sawgrass' expert health planner described as a maldistribution of nursing home beds within the district. Sawgrass also presented evidence questioning the financial feasibility of NHC's proposal.

9. Woodlands is the applicant for CON No. 9123 to construct a 120-bed nursing home in southeast Duval County for

   approximately $5.2 million in construction costs for 53,155 gross square feet, and $7.9 million in total project costs. Woodlands currently operates Woodlands Terrace Extended Care Center (Woodlands-Deland), a 120-bed nursing home located in Deland, Florida. Woodlands is owned by Mr. Morris Esformes, who also owns EMI Enterprises, Inc. (EMI), a nursing home management company, with its headquarters in Illinois. EMI manages almost 3,000 nursing home beds in Missouri, Illinois, and Florida, including Woodlands-Deland. EMI provides bookkeeping, payroll, purchasing, insurance and other contract negotiation services for the nursing homes it manages.

10. If its CON application is approved, Woodlands is committed to constructing the facility in southeast Duval County, to serving 63.01 percent Medicaid, 1 percent AIDS, and

    .5 percent indigent care, and to establishing units of 24 beds for subacute care and 20 beds for Alzheimer's care.

11. Woodlands contends that existing nursing home occupancy levels support its decision to build and to condition its CON on a location in southeast Duval County. Woodlands presented evidence intended to demonstrate that the design of its Alzheimer's unit, and its proposed staffing levels are superior to those of NHC. Woodlands also maintained that its estimated construction cost is more reasonable and its design preferable to that of Sawgrass. Woodlands presented evidence to

    support the accuracy of Schedule 2 of its application and of its projected financing costs.

12. NHC, the applicant for CON No. 9125, started in 1971, with fourteen nursing homes. Currently, NHC owns or manages approximately 100 facilities in nine states, 42 of those in Florida. Ten of the 42 Florida facilities are also owned by NHC. The new facility, NHC HealthCare, St. Augustine, will cost approximately $6.7 million to construct the building with 63,104 gross square feet, and $10.2 million in total project costs.

13. NHC's CON would be issued on condition that NHC (1) provide 63.05 percent of total facility patient days to Medicaid at stabilized occupancy; (2) establish, as special programs, a 16-bed subacute unit and a 30-bed Alzheimer's/Dementia unit, provide adult day care through an existing provider, and offer respite and HIV/AIDS care. In addition, NHC commits to selecting a highly accessible site within one mile of a major artery or within three blocks of a bus stop. Although NHC presented evidence that St. Johns County is the preferable location for a new nursing home, it is not willing to have a condition on the county in which it will build as a condition for the CON. NHC, through the testimony of its assistant vice president for health planning, specifically reserved the right to locate anywhere within the subdistrict so long as the

    location complies with the local health plan description of a highly accessible site.

14. NHC contends that approval of its CON will bring possibly the first and, among the competing applicants, the largest Alzheimer's unit to St. Johns County. NHC also challenged the financial feasibility of the Sawgrass and Woodlands proposals.

    408.035(1)(a) - need for the facility and services proposed in relation to the district plan

    
    

15. At issue in this proceeding, from the district health plan for District 4, are the following preferences or allocation factors:

    2) For urban areas, applicants who will locate in an area highly accessible in terms of public and private transportation - within one mile from a major artery or within three blocks from a bus stop.

    
    

    1. Applicants who include in their CON application specific plans detailing how they intend to address the mental health needs of their clients, including having a provider skilled in the recognition and treatment of mental health problems.

       
       

    2. Applicants who document that their project addresses an unmet need for the nursing home placement of persons with a specific debilitating illness. Applicant must document that a need exists. (In November 1992, hospital discharge planners reported having difficulty placing ventilator and tracheotomy patients).

    3. Applicants who have JCAHO accreditation and superior ratings from AHCA in existing facilities.

       
       

    4. Applicants who propose to locate in a county or defined subcounty area within a subdistrict (such as north, southwest or southeast Duval; east or west Volusia) with a licensed bed occupancy rate of at least 91 percent for the most recent six-month period (January-June or July-December) prior to the start of the current CON review cycle and no additional beds are approved.

    
    

16. Sawgrass described the area of St. Johns County in which it will locate as not urban and concluded, therefore, that allocation factor two is inapplicable to the Sawgrass application. Woodlands, which proposed locating in southeast Duval County, identified three alternative sites, all within a mile of major county, state, or interstate roads and highways, and within three blocks of public bus stops. Woodlands is not, however, committed to selecting any of those three sites. NHC's CON would include compliance with preference two as a condition for approval. If it chooses to locate in St. Johns County, NHC cannot comply with the alternative of locating within three blocks of a bus stop because there is no public transportation system in St. Johns County, but NHC can meet the preference by choosing a site in the County which is near a major artery.

17. The three applicants included, in their CON applications, letters from mental health services providers who are willing to enter into agreements to care for residents of

    the facilities. While an expert witness raised an issue regarding the dates of the supporting letters, which are 1998 and early 1999 for Sawgrass, early in 1999 for Woodlands and, by contrast, late 1997 for NHC, there is no evidence that the services proposed are not still available.

18. Overlapping to some extent with allocation factor five, for providing mental health services, is six, for meeting unmet needs of persons with specific debilitating illnesses, such as Alzheimer's/Dementia. The proposed 20-bed units dedicated to Alzheimer's/Dementia care at Sawgrass and Woodlands, and 30-bed unit at NHC comply with the that factor. Sawgrass and NHC, based on their evaluations of the subdistrict, particularly of St. Johns County, noted an absence of Alzheimer's care in a dedicated unit. There was credible evidence, however, that 40 residents have been placed in a locked 60-bed dedicated dementia unit, established at a facility called Bayview in St. Johns County, subsequent to the filing of these CON applications. There was also evidence that an estimated 50 percent of all nursing home residents suffer from some form of dementia.

19. Ratings by AHCA and the Joint Commission on Accreditation of Health Organizations (JCAHO), are not yet available for the 84-bed Sawgrass facility in Duval County, because it is still under construction. Sawgrass relied on the

    experience of its principal, Mr. Creekmore, and of Mr. Donald Fike, the president and owner of RFMS, a corporation which manages nursing homes in Florida, Nevada and Illinois. RFMS has an agreement with Mr. Creekmore to manage Sawgrass.

20. Mr. Creekmore, who resides in St. Johns County, owns facilities in Tennessee, California, New York, Nevada, Arkansas, Texas, and Missouri, none of which has had a license revoked or suspended or been in receivership within 36 months prior to the hearing. Currently, RFMS manages and Mr. Fike has a controlling interest in partnerships that own two nursing homes in Florida, 120-bed Surrey Place of Ocala (Surrey Place), which also has 36 assisted living units, and Hawthorne Care Center of Brandon (Brandon) with 90 existing beds, 30 approved beds, and 64 assisted living units which are under construction. An additional facility managed by RFMS and owned by Mr. Fike is under construction in Lakeland. RFMS' employees at its corporate headquarters in Galesburg, Illinois, provide management, budgetary, accounting, and recruiting services.

    RFMS has never managed a facility for Sawgrass or Mr. Creekmore, but its two Florida facilities, Surrey Place and Brandon, were rated superior until the state eliminated superior licenses on July 1, 1999.

21. Woodlands operates one Florida facility, Woodlands- Deland, which had been rated superior as long as it was eligible

    for that designation. Woodlands-Deland is not JCAHO-accredited. Woodlands relied on the experience of its owner, Mr. Esformes, and his management company, EMI. Mr. Esformes has been in the nursing home business for approximately 30 years. No specific information on the ratings of the facilities owned by

    Mr. Esformes or managed by EMI was provided.

    
    

22. Of the 42 Florida nursing homes operated by NHC, ten are also owned by NHC. Three of the ten were rated superior, one was not yet eligible, and one was also JCAHO-accredited at the time the CON application was submitted. By February 1999, five of the ten NHC owned and operated facilities in Florida were rated superior. Twenty-eight of the 32 NHC-operated Florida nursing homes were rated superior.

23. From January through June 1998, the average occupancy was 90.84 percent in the subdistrict, 91.3 percent for southeast Duval County, and 89.36 percent for northern St. Johns County. Woodlands is committed to establishing its facility in southeast Duval County, Sawgrass is committed to the northern four zip codes in St. Johns County, and NHC is not committed to either but, in general, supported the need for a nursing home in St. Johns County. Subsequent data on occupancy shows consistency with past levels. In the second six months of 1998, the occupancy levels in nursing homes in St. Johns County was 88 percent, and in southeast Duval, 93 percent. From January

    through June 1999, St. Johns was 89 percent and southeast Duval was 92.8 percent occupied. Suggesting that occupancy percentages are not the sole indicators of the availability of beds, a health planning expert for Sawgrass noted that significantly more empty beds are available in southeast Duval County as compared to St. Johns County due to the larger total number of beds in the Duval area.

24. Three CONs were issued in 1998 and 1999 to Vantage Health Care Corporation, which was identified as a Beverly Corporation, the first one for 60 beds in St. Johns County, a second one to add 56 beds to the first CON with Duval/St. Johns as the county on the face of the CON, and the third to add four skilled nursing beds to the first two CONs, or a total of 120 beds all together. Although, counties are indicated on each CON, none is specifically conditioned on a particular location within the subdistrict. AHCA lists the Vantage beds in its inventory for St. Johns County, which is supported by the testimony of the Executive Director of the Health Planning Council of Northeast Florida and by the most restrictive location on the face of the first 60-bed CON.

25. Although of questionable value due to the arbitrariness of using zip codes for health planning purposes and due to the relatively minor, 2 percent difference in occupancy rates, preference eight favors a proposal to locate in

    southeast Duval County. More important in determining the preference for a southeast Duval location is the prior approval of 120 beds for St. Johns County, even though Vantage could build its facility in southern St. Johns County.

    408.035(1)(b) - availability, quality of care, efficiency, appropriateness, accessibility, extent of

    utilization, and adequacy of existing facilities and services in the district

    
    

26. In addition to the comparison of occupancy levels in St. Johns and Duval Counties, other factors affecting the availability and utilization of nursing beds have been considered. The total population 65 and over in Duval county was 79,986 as compared to 17,294 for St. Johns County in 1995. Population growth, however, has been and is projected to be greater in St. Johns than in Duval County. From 1998 to 2003, the population 65 years and older is expected to increase from 36,988 to 39,790, or 7.5 percent, in southeast Duval County, and from 8,506 to 9,922, or 17 percent, in the northern four zip codes in St. Johns County. Despite the fact that St. Johns is relatively sparsely populated currently, the data supports a conclusion that the trend from 1990 to 1995, when the over 65 population increased by 12 percent in Duval County and by 26.3 percent in St. Johns County, is continuing.

27. The lower occupancy in St. Johns County was attributed, in part, to two facilities with occupancy rates

    consistently in the 87 to 88 range which occupy over 30 year-old concrete block buildings with survey problems. Although, in 1998, all of the facilities in St. Johns County were rated superior. Another explanation was the fact that one 57-bed facility, in northern St. Johns County, reserves five beds for residents of its retirement community. A second nursing home, near Ponte Vedra Beach in St. Johns County, is also a sheltered facility, which is limited to residents of the retirement community. Migration patterns, in a study done around 1996, showed significantly more St. Johns County residents placed in Duval County facilities than Duval County residents in St. Johns County facilities.

28. Bed-to-population ratios in St. Johns and southeast Duval Counties are also factors which may indicate the relative availability and accessibility of nursing home services. The health planning experts for Sawgrass and NHC determined that a maldistribution of beds is indicated by the bed-to-population ratio, showing that St. Johns County is underserved as compared to the rest of the district. NHC's health planner testified that, for every one thousand people over the age of 65, there are 32 beds in St. Johns County as compared to 42 beds in Duval County. Sawgrass' health planner noted that 72 percent of the beds but only 66 percent of the district population is located in southeast Duval County, while four percent of the beds and

    15 percent of the population are in northern St. Johns County.

    
    

    The discrepancy in bed-to-population ratio is more significant, according to the experts for Sawgrass and NHC, than the two percent difference in occupancy levels between the two areas of the subdistricts. Bed-to-population ratio analyses, however, assume uniform need which is not necessarily valid due to demographic variances in the population. The bed-to-population analysis also assumed that what was, at the time, 116 approved beds for Vantage would be constructed in southern St. Johns County. Considering the Vantage CONs together, the more reasonable conclusion is that Vantage could build the new nursing home anywhere in the County.

29. Woodlands' proposed location was criticized by the health planner for NHC as contributing to a clustering of facilities in Duval County. As a part of that cluster, Woodlands might not greatly enhance accessibility although it does meet the local health plan preferences related to accessibility and occupancy. In addition, NHC argued, that the area is growing in young families not older people due in part to its proximity to Mayport Naval Station, and as indicated by the construction of three new elementary schools in the last six years.

30. Accessibility and availability to specialty programs was another consideration evaluated by the health care planners.

    There is a need for more complex subacute care in nursing homes. The evidence indicated that Alzheimer's care in a dedicated unit was available in St. Johns County at the time of hearing although it had not been at the time the applications were filed. See also Finding of Fact 18.

    408.035(1)(c) - history of providing and ability to provide quality of care

    
    

31. As a legal entity, the applicant Sawgrass has no history of providing nursing home care in Florida. Sawgrass, however, through the experiences of Mr. Creekmore and Mr. Fike, has established that the owner and operator have histories of providing high quality of care. Based on the descriptions of operational styles and the policies of RFMS, Mr. Fike's management company, Sawgrass demonstrated the ability to provide a high quality of care if its CON application is approved. See Findings of Fact 20.

32. Woodlands, as to a legal entity operating in Florida, has a limited but excellent history, with a superior rating at Woodlands-Deland beginning in 1997. Woodlands asserted, but without specific information on their other facilities, that its principal, Mr. Esformes, and his management company, EMI, have the ability to provide a high quality of care if CON 9123 is approved. See Findings of Fact 21.

33. NHC has a more inconsistent but improving history, based on licensure, of providing quality of care in its Florida facilities. It is the only applicant with JCAHO accreditation but in only one of its ten Florida nursing homes. NHC has significantly more experience operating nursing homes than either of the other two applicants. See Findings of Fact 22.

34. To determine quality of care, an additional factor urged for consideration is staffing, which overlaps with the following critera:

    408.035(1)(h) - availability of resources, including health personnel, management personnel

    
    

35. On Schedule 6, the table in the CON application which shows staffing patterns, NHC showed a total of 11.2 full-time equivalent (FTE) registered nurses (RNs). On Schedule 8, which listed the projected income and expenses for the proposal, NHC allocated RN salaries for 7.0 FTEs. NHC's 7.0 FTEs for RNs providing direct patient care is comparable to 5.6 for Sawgrass, and 8.4 for Woodlands. The comparison is valid because NHC included administrative as well as direct care positions in the total of 11.2 FTEs for RNs, including unit directors or managers and an assistant director of nursing. An NHC witness conceded that the RNs in these positions do not, as a routine responsibility, provide direct care. NHC also included a central supply clerk and nursing secretary in the FTEs for

    nurses aides or CNAs. NHC's regional administrator for Florida, Tennessee and Kentucky testified that staff in these positions also do not, as a routine, provide direct care to patients. NHC included one FTE for a medical director on Schedule 6, but indicated, at hearing, that the position is not full time.

36. When the administrative positions are excluded, NHC's total direct hours of care per patient day (ppd) is approximately 3.18 hours, not 3.29 as described in the CON, as compared to 3.39 for Woodlands, and 3.29 for Sawgrass. When broken down based on the type of nurse providing the care, NHC's

    3.18 total hours combines 2.38 hours by certified nurse assistants (CNAs) and 0.8 by licensed nurses (RNs and LPNs). Woodland's total of 3.39, combines 2.32 hours by CNAs and 1.07 hours by licensed nurses.

37. For the Alzheimer's unit, NHC, in the CON application, erroneously described its proposal as providing 5.0 hours of care per resident day, but that was corrected at hearing by NHC's expert in health care financial feasibility and reduced to

    2.58 hours. Woodlands provided at its current facility and proposed to provide at a new one approximately 3.9 hours ppd in the Alzheimer's unit.

38. The staffing levels proposed by Sawgrass, NHC, and Woodlands all exceed the minimum state requirements of .06 ppd for licensed staff and 1.7 ppd for CNA, or 2.3 hours ppd total.

39. Direct care staff at NHC perform some functions which would be performed by different personnel in the other two proposals. These duties include evening housekeeping, setting up and cleaning dining tables in the Alzheimer's unit, and answering evening telephone calls. Another indication of the demands on staff time is reflected in NHC's proposal to employ 7 FTEs in housekeeping for a 63,000 square foot building, as contrasted to Woodlands' use of 8 FTEs in its housekeeping department for 53,000 square feet.

40. The staff at Woodlands will provide more direct resident care by higher level staff and reasonably, therefore, presumptively a higher quality of care than Sawgrass or NHC.

41. NHC asserted that it can attract and retain quality staff by paying higher salaries. Using NHC's salary levels, NHC's expert determined that Sawgrass and Woodlands underestimated salary expenses by $573,000 and $522,000 respectively. NHC's total for projected salaries is $2,864,000, as compared to $2,386,653 for Woodlands and $2,318,119 for Sawgrass, although NHC will have seven fewer FTEs than Woodlands and six more than Sawgrass.

42. NHC's comparison used 1998 average salaries, inflated forward, from Palm Gardens of Jacksonville (Palm Gardens), a facility managed by NHC for the owner, Florida Convalescent Centers (FCC). The average salary, for example for nurses,

    including administrators, such as the assistant director of nursing and Alzheimer's director, was applied to each nurse's position proposed by Woodlands and Sawgrass. NHC's methodology, particularly without any comparison of patient mix and acuity at Palm Gardens to that projected by the applicants, and the use of five percent annual inflation as compared to an actual annual inflation rate of three percent, when two statistical outliers are excluded, renders the analysis unreliable. The testimony of NHC's witness that the opening of new centers forces salaries to go up also indicates that the salary comparison includes some factor over and above actual inflation.

    408.035(1)(h) - funds for capital and operating expenses, for project accomplishment and operation; 408.037(1)(a)1. - listing of all capital projects; and 408.035(1)(i) - immediate and long term financial feasibility

    
    

43. The ability of Sawgrass to fund and finance the project was, in part, established by the deposition testimony of Jackie Garrett, Vice President, for Commercial Lending, First National Bank, Fort Smith, Arkansas, who is accepted as an expert in banking and finance as well as a fact witness. Having been involved for 30 years in financing projects for the Sawgrass owner, Mr. Creekmore, Ms. Garrett, in her letter of December 28, 1998, and in her testimony expressed the interest of the Bank in financing the Sawgrass project. Ms. Garrett also confirmed the possibility of financing up to 100 percent of the

    cost at better than an 8 percent fixed rate, as well as providing working capital as long as the loan is guaranteed by Mr. Creekmore.

44. Ms. Garrett's letter to Mr. Creekmore offering to work out any contingencies with him and the inclusion of his personal financial statement in the application, lead to a reasonable conclusion that he can and will guarantee the financing for Sawgrass. Although a specific letter of commitment or the testimony of Mr. Creekmore could have provided a clearer commitment on his part, the documents in the application are sufficient to establish the short-term financial feasibility of Sawgrass.

45. The accuracy of Schedule 2 of the Sawgrass CON application was questioned because it does not include an assisted living facility (ALF) for Duval County, which was proposed for construction on the campus with the nursing home. A financial expert for Sawgrass testified that the ALF is no longer planned, although AHCA was led to believe, in the prior

    nursing home CON, that an ALF would be built in conjunction with the nursing home.

46. Comparing the historical payer mix and occupancy rates from similar facilities in the service area to staffing, salaries, and other fixed and variable expenses, the financial

    expert for Sawgrass demonstrated that the project is also financially feasible in the long term.

47. To develop Woodlands-Deland, the general partner,

    
    

    Mr. Esformes, obtained financing primarily from AmSouth Bank in Orlando. The AmSouth loan was guaranteed by Mr. Esformes, who proposes similarly to finance the new Woodlands facility. In a letter dated December 30, 1998, and in her deposition testimony of October 26, 1999, an AmSouth assistant vice president indicates the availability of a loan to cover 75 to 85 percent of the total project cost. On behalf of EMI Enterprises, Inc., Mr. Esformes committed to funding the equity and working capital required from funds which are on deposit.

48. AmSouth's lending limit for a borrower with

    
    

    Mr. Esformes' assigned risk rating is $15 million. NHC argued that Woodlands is not financially feasible in the short term because Mr. Esformes cannot borrow $8 million given his outstanding debt of $12,669,382. That position erroneously ignores the testimony of the bank officer when she stated that such projects, with liquidation of the property as a secondary source of repayment, can be treated separately, not grouped together and not aggregated to come to the $15 million total. She specifically considered Woodlands-Deland, saying, "And his other loan with the Deland property would be isolated for the

    same reason." See Deposition of Melissa Ann Ledbetter,

    
    

    October 26, 1999, page 11.

    
    

49. In addition to the letter from AmSouth Bank, Woodlands presented a letter from and the testimony of Mr. Esformes on his commitment to the project. The evidence showed that Mr. Esformes has sufficient funds available to honor that commitment. Woodlands' proposal is, therefore, financially feasible in the short term.

50. Woodland's long-term financial position was criticized based on Woodlands-Deland's not having achieved the utilization projected as quickly as projected. Utilization goals were adversely affected by the opening or expansion of other nursing homes at approximately the same time in the Deland area, an undesirable consequence which the District 4 health plan seeks to avoid. At the time of the hearing, Woodlands had a 1999

    year-to-date profit of $106,000. Considering projected revenues and expenses, based on actual reimbursement rates at Woodlands- Deland, which are extremely high for Medicare, Woodlands' proposal is expected to be profitable in the long term.

51. An expert for Sawgrass questioned NHC's short-term financial feasibility based on the sufficiency, commitment dates and changing investment policies of its funding sources. Schedule 2 of the NHC application lists total capital projects exceeding $436.6 million with approximately $397 million in

    "funds assured but not in hand and funds currently being sought." The application also includes letters of commitment establishing lines of credit from related companies National Health Investors, Inc. (NHI) for $260 million, and National Health Realty, Inc. (NHR) for $200 million. The letters are expressly valid through December 31, 1999, although what Sawgrass' expert estimated as the 12-month construction period for this project would begin approximately May 1, 2000, to end when operations commence on May 1, 2001. In addition, an examination of documents filed with the Securities and Exchange Commission (SEC) by NHI and NHR, according to the expert for Sawgrass, shows declining available funds and changing company objectives.

52. As real estate investment trust (REIT) companies, NHI and NHR identify their typical financing arrangements mortgages and lease-back agreements, but do not specifically mention the extending of lines of credit. The SEC documents also indicate that NHI had approximately $136.9 million, available to fund health care real estate projects as of December 1998, not $260 million as committed for the line of credit to NHC. By

    June 1999, the SEC disclosures report a decrease to approximately $15.3 million available to fund health care real estate projects, of which approximately $12 million was available for the next 12 months. NHR's disclosures also

    indicate that the company will maintain its existing portfolio, not expand further.

53. NHC's net income after taxes decreased from $23.7 million in 1997, to $8.2 million in 1998, adversely affected by declining Medicare reimbursements and increased taxes. The decline in profit from $37 million in 1997 to the projected $14 million for 1999 resulted largely from the expiration, on December 31, 1997, of special tax benefits for corporations. SEC disclosures indicate possible additional declines due to lawsuits over management contracts and a former employee, "whistle-blower" action, neither of which had been finalized at the time of the hearing.

54. NHC's plan to reduce its taxes included the transfer of assets to NHI and NHR. NHC has also off-set losses by providing some therapies in-house and by group purchasing of pharmacy entical and medical supplies. In response to the loss of management agreements with FCC, NHC has successfully secured other management contracts and has eliminated certain regional positions. Reserves of approximately $31 million have been set aside for potential liability resulting from pending litigation, with FCC and in the former employee's qui tam action related to Medicare costs.

55. Despite the efforts of NHC to adjust to changes in its financial position, the termination dates in the NHR and NHI

    letters of credit are troubling. The position of NHC, as investment advisor to NHI and NHR, and the ability of their Boards of Directors to change investment policies, without stockholder approval, suggests the likelihood of their funding the NHC project, if approved.

56. Stronger support for a determination that at least NHR continues to be a source of funds for NHC comes from the deposition testimony of NHR's Senior Vice President, who signed the NHR line of credit letter. He noted that any projects submitted by NHC in the past have been approved by NHR and thinks it unquestionable that NHC would obtain financing for this project. That testimony rises to the level of the letters of interest by lending institutions submitted on behalf of the other applicants and establishes the short-term financial feasibility of the NHC proposal.

57. NHC projected a net operating profit of $57,000 in year two which, with depreciation of about $350,000, results in a cash flow in excess of $400,000. NHC's proposal is financially feasible in the long term.

    408.035(1)(l) - impact on costs; and 408.035(1)(m) - costs and methods of construction

    
    

58. The estimated construction cost for Sawgrass is $70 a square foot for a 56,800 square foot building. By comparison NHC's estimated construction cost is $106 a square foot for the

    nursing home and a separate storage/maintenance building, totaling 63,104 square feet. Woodlands' 53,000 square foot facility will cost an estimated $98 a square foot.

59. Sawgrass' construction costs were considered unreasonably low by some expert. The construction costs were developed by an expert in construction supervision and costs, who works for Medical Holdings Limited, another company which is owned by the Sawgrass President, Mr. Creekmore. The architects for the project work for another related wholly owned subsidiary of Medical Holdings Limited, Healthcare Builders, Incorporated (Healthcare Builders). Healthcare Builders is also owned by and only builds facilities for Mr. Creekmore. The estimated cost,

    $70 per square foot, is based on the use of local materials and subcontractors and excludes any profit, which alone would add from 8 to 10 percent to the cost. All of the salaries for the supervisors of the project, the general construction superintendent, the regular superintendent, and bookkeeper are paid by Healthcare Builders and excluded from constructions costs. Only one Sawgrass project, over the past 15 years, has required an application for a cost overrun. On this basis, Sawgrass established the reasonableness of the costs for its company.

60. NHC's building is the largest and most expensive, with

    
    

    71 resident rooms and 9-foot wide corridors, as compared to 66

    rooms and 8-foot wide corridors for Woodlands and Sawgrass. NHC has 22 private rooms, but Woodlands and Sawgrass have 12 private rooms in each of their designs. NHC's private rooms range in size from 196.8 to 277 net square feet, as compared to 220 net square feet for Sawgrass, and 194 net square feet for Woodlands. Semiprivate rooms range in size from 196 to 246.7 net square feet for NHC, 198 to 218 for Woodlands, and 220 for Sawgrass.

    All three exceed the state minimums of 100 square feet for private rooms, and 160 square feet for semiprivate rooms.

61. The schematics for NHC and Woodlands demonstrate more concern for safe outside spaces, with two separate enclosed courtyards, one designated for wandering which is typical of Alzheimer's residents. Woodlands' design also provides for two separate entrances, one for the main facility and one for the subacute unit. The subacute entrance is particularly desirable because the busier pattern of visitors is more akin to that in a hospital setting.

62. NHC has 57 rooms with showers in the bathrooms, as compared to 53 for Woodlands and 18 for Sawgrass. The experts debated the benefits of privacy and the enhanced dignity and the reality that safety necessitates, for many, assistance in bathing. On the one extreme, NHC has unnecessarily included showers on the Alzheimer's unit for residents who are least likely to use them safely and most likely to need assistance,

    but Sawgrass has so few that the use of central bathing facilities will be necessary for most of its residents and will not enhance their privacy and dignity. Woodlands' design for the purposes intended, is the most reasonable, and its type of construction is the highest rated of the three. Despite the differences in size and construction costs, all three applicants propose relatively similar charges in a very narrow range of lows for Sawgrass and highs for NHC, from $105 to $115 a day for semiprivate rooms to $120 to $130 for private rooms.

    Reimbursement rates, primarily from Medicare, differ based on differences in acuity levels.

    408.035 (1)(n) - past and proposed Medicaid and indigent care

    
    

63. Sawgrass has received one CON in Florida with a Medicaid commitment of 87.4 percent of total resident days. Other CON applications prepared for Mr. Creekmore have offered to meet or exceed the prevailing community Medicaid occupancy levels. Woodlands committed to providing a minimum of 63.01 percent Medicaid and 0.5 percent indigent resident days. Woodlands has reached 63 percent but not its committed level of

    66 percent Medicaid in its Deland facility, although it expected to do so when final data at full occupancy becomes available for 1999.

64. NHC's proposal includes the provision of 63.05 percent of total resident days to Medicare. AHCA has determined that NHC is not in compliance with its Medicaid commitment in two of its facilities, located in Daytona and on Merritt Island, but due to its extensive operations in Florida, NHC provides substantial Medicaid care.

    408.035(1)(o) - continuum of care in multilevel system

    
    

65. All three of the applicants plan to offer Alzheimer's hospice, respite and subacute care.

66. Sawgrass included a 60-unit ALF on its schematic design and on its Schedule 2 for a cost of $4 million. The ALF will be connected to the nursing home by a covered entrance. Sawgrass also planned but is not constructing an ALF with its Duval County project. See Finding of Fact 45.

67. Woodlands stated its intention to build an ALF on the same campus with the proposed nursing home in a misleading narrative on page 114 of the application, but did not include it as part of the project in either the schematics or on Schedule 2 of the CON application. At the hearing, Woodlands' witness conceded that an ALF would not be built, if at all, for several years until the nursing home proves to be financially viable and then, by a separate corporation.

68. In addition to the services provided by the other applicants, NHC plans to offer adult day care through existing providers.

69. Only Sawgrass meets the criterion for proposing a multilevel system of care, based on the assumption that it will build the ALF as planned.

    408.035(2)(e) - consisting with plans of other state agencies responsible for providing

    or financing long term care

    
    

70. All three proposals are consistent with the policies of other responsible state agencies, including the Department of Elder Affairs.

    Summary Comparison of Applications

    
    

71. This case is difficult, in part, because there is not a great difference among the applicants based on any one of the criteria. In terms of location, southeast Duval has a slight advantage due to its larger population, occupancy levels, and the approved CON for St. Johns County.

72. Woodlands promises to provide a higher quality of care than NHC and Sawgrass based on proposed staffing, but has only operated one other Florida facility, albeit a superior one. Woodlands provided less detailed information on its owner's and manager's operations of out-of-state facilities.

73. All three applicants have what appear to be at this relatively early stage of the process, reliable funding sources and plans to operate profitably.

74. Woodlands' construction cost and design are the most reasonable for the purposes intended, although no appreciable differences in patient room charges were demonstrated.

75. Based on past history and current proposals, all of the applicants will provide adequate and appropriate levels of Medicaid care. Only Woodlands will also provide a small percentage of indigent care.

76. Sawgrass, by offering to construct an ALF in conjunction with nursing home and by designating a funding source to do so, offers the greatest continuum of care in a multilevel setting.

77. On balance, the application submitted by Woodlands is

    
    

    superior.

    
    

    CONCLUSIONS OF LAW

    
    

78. The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of these proceedings. Sections 120.569, 120.57(1), and 408.039(5), Florida Statutes.

79. The Agency for Health Care Administration (AHCA) is the designated state agency to issue, revoke or deny

    certificates of need (CONs) for health care facilities and health care services. Section 408.034, Florida Statutes.

80. The applicants carry the burden of proving that their applications meet the statutory and rule criteria for approval of the CONs that they seek. Boca Raton Artificial Kidney v.

    Department of Health and Rehabilitative Services, 475 So. 2d 260 (Fla. 1st DCA 1985). The award of a CON must be based upon balanced consideration of the criteria applicable by law, including the preferences expressed in the state and local health plans. Department of Health and Rehabilitative Services v. Johnson Home Health Care, Inc., 447 So. 2d 361 (Fla. 1st DCA 1984); Balsam v. Department of Health and Rehabilitative

    Services, 486 So. 2d 1341 (Fla. 1st DCA 1988).

    
    

81. AHCA published a need for 121 additional nursing home beds in state health planning District 4, Subdistrict 3 for southeast Duval and St. Johns Counties. 24 Florida Administrative Weekly 42, October 16, 1998.

82. On February 25, 1999, AHCA issued its State Agency Action Report (SAAR) preliminarily approving the application filed by National Healthcare Corporation (NHC) for CON No. 9125, and preliminarily denying, among others, the applications for CON No. 9123 filed by Woodlands Extended Care, Inc. (Woodlands) and for CON No. 9126 filed by Sawgrass Care Center, Inc. (Sawgrass).

83. Sawgrass complies with district health plan allocation factors 5 and 6, but 2 is inapplicable. Sawgrass complies with factor 7 through the experience of other entities and does not comply with allocation factor 8. Woodlands complies with allocation factors 2, 5, and 8, and, to a lesser extent with ten fewer Alzheimer's beds than NHC, with 6, and with 7, in part, because of more limited experience and based on the records of other entities. NHC complies with allocation factors 2, 5, 6, to a lesser extent with 7, and does not comply with allocation factor 8. Woodlands followed in order, by NHC and Sawgrass best meets the criteria in Subsection 408.035(1)(a), (c), and (h), as related to staffing.

84. Construction of a nursing home in northern St. Johns County will enhance access to complex subacute care and to Alzheimer's care in a distinct unit. St. Johns County also has fewer total beds and a lower bed-to-population ratio as compared to Duval County. Although St. Johns County is growing in population, the population of Duval, including the population aged 65 and over is still significantly larger. Although Duval County is favored under the local preference, neither location is clearly better than the other based on the general criteria regarding accessibility, availability, utilization, and adequacy, in Subsection 408.035(1)(b), Florida Statutes.

85. All three applicants submitted accurate lists of planned capital projects, in Schedule 2 of their applications. The evidence showed that the funding sources for the proposal were sufficient and still available. The projects are financially feasible in the short and long term, and meet the requirements of Subsections 408.037(l)(a)1., 408.035(10(h), related to funding, and 408.035(1)(i), Florida Statutes.

86. None of the proposals will have an adverse impact on the cost of providing health care. Subsection 408.035(1)(l), Florida Statutes.

87. Woodlands' construction cost, design, and type comply best with the criteria in Subsection 408.035(1)(m), Florida Statutes.

88. Sawgrass proposed the highest level of Medicaid care, but Woodlands' and NHC's proposals were appropriate. NHC had a greater track record for providing substantially more total Medicaid care with relatively few facilities not in compliance. All meet the criteria in Subsection 408.035(1)(n), Florida Statutes.

89. Only Sawgrass' proposal is consistent with Subsection 408.035(1)(o), Florida Statutes.

90. The projects are not distinguishable based on Subsection 408.035(2)(e), Florida Statutes.

91. On balance, Woodlands best meets applicable criteria for approval, and best met its burden for proving that it met that criteria.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is

RECOMMENDED that a final order of the Agency for Health Care Administration issue CON No. 9123 to Woodlands Extended Care, Inc. to construct a 120-bed nursing home in southeast Duval County on the conditions set forth in the application and in Findings of Fact 10 of this Recommended Order; and deny CON No. 9125 to National Healthcare Corporation, and CON No. 9126 to Sawgrass Care Center, Inc.

DONE AND ENTERED this 14th day of August, 2000, in Tallahassee, Leon County, Florida.

ELEANOR M. HUNTER

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 14th day of August, 2000.

COPIES FURNISHED:

Sam Power, Agency Clerk

Agency for Health Care Administration 2727 Mahan Drive

Building 3, Suite 3431

Tallahassee, Florida 32308-5403

Julie Gallagher, General Counsel Agency for Health Care Administration 2727 Mahan Drive

Building 3, Suite 3431

Tallahassee, Florida 32308-5403

Richard Patterson, Esquire

Agency for Health Care Administration 2727 Mahan Drive

Building 3, Suite 3431

Tallahassee, Florida 32308-5403

Robert D. Newell, Jr., Esquire Newell & Terry, P.A.

817 North Gadsden Street Tallahassee, Florida 32303-6313

Gerald B. Sternstein, Esquire Frank P. Rainer, Esquire Sternstein, Rainer & Clarke, P.A.

314 North Calhoun Street Tallahassee, Florida 32301-7606

Theodore E. Mack, Esquire Powell & Mack

803 North Calhoun Street Tallahassee, Florida 32303

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the Final Order in this case.

Docket for Case No: 99-002195CON

Orders for Case No: 99-002195CON