The Issue This case concerns four Certificate of Need ("CON") applications ("CONs 9891, 9992, 9893, and 9894") that seek to establish long-term acute care hospitals ("LTCHs") in Miami-Dade County (the "County" or "Miami-Dade County"), a part of AHCA District 11 (along with Monroe County). Promise Healthcare of Florida XI, Inc. ("Promise") in CON 9891, Select Specialty Hospital-Dade, Inc. ("Select-Dade") in CON 9892, and Kindred Hospitals East, L.L.C. ("Kindred"), in CON 9894, seek to construct and operate a 60-bed freestanding LTCH in the County. Miami Jewish Home and Hospital for the Aged, Inc. ("MJH"), in CON 9893, seeks to establish a 30-bed hospital within a hospital ("HIH") on its existing campus in the County. In its State Agency Action Report (the "SAAR"), AHCA concluded that all of the need methodologies presented by the applicants were unreliable. Accordingly, AHCA staff recommended denial of the four applications. The recommendation was adopted by the Agency when it issued the SAAR. The Agency maintained throughout the final hearing that all four applications should be denied, although of the four, if any were to be granted, it professed a preference for MJH on the basis, among other reasons, of a more reliable need methodology. Since the hearing the Agency has changed its position with regard to MJH. In its proposed recommended order, AHCA supports approval of MJH's application. MJH and Promise agree with the AHCA that there is need for the 30 LTCH beds proposed by MJH for its HIH and that MJH otherwise meets the criteria for approval of its application. MJH seeks approval of its application only. Likewise, the Agency supports approval of only MJH's application. Promise, on the other hand, contends that there is need for a 60-bed facility as well as MJH's HIH and that between Promise, Select- Dade and Kindred, based on comparative review, its application should be approved along with MJH's application. Although Promise's need methodology supports need for more LTCH beds than would be provided by approval of its application and MJH's, its support for approval is limited to its application and that of MJH. Like Promise's methodology, Select-Dade and Kindred's need methodologies project need for many more beds than would be provided by the 60 beds each of them seek. Unlike Promise, however, neither Select-Dade nor Kindred supports approval of MJH's application. Each proposes its application to be superior to the other applications; each advocates approval of its respective application alone. Given the positions of the parties reflected in their proposed recommended orders, whether there is need for at least an additional 30 LTCH beds in District 11 is not at issue. Rather, the issues are as follows. What is the extent of the need for additional LTCH beds in District 11? If the need is for at least 30 beds but less than 60 beds, does MJH meet the criteria for approval of its application? If the need is for 60 beds or more, what application or applications should be approved depends on what applications meet CON review criteria and on the number of beds needed (60 but less than 90, 90 but less than 120, 120 but less than 150, 150 but less than 180, 180 but less than 210, and 210 or more) and whether there is health- planning basis not to grant an application even if the approval would meet a bed need and all four applicants otherwise meet review criteria. Finally, based on comparative review, what is the order of approval among the applications that meet CON need criteria? Ultimately, the issue in the case is which if any of the four applications should be approved?
Findings Of Fact The Parties "[D]esignated as the state health planning agency for purposes of federal law," Section 408.034(1), Florida Statutes, AHCA is responsible for the administration of the CON program and laws in Florida. See §§ 408.031, Fla. Stat., et seq. As such, it is also designated as "the single state agency to issue, revoke, or deny certificates of need . . . in accordance with present and future federal and state statutes." § 408.034(1), Fla. Stat. Promise Healthcare of Florida XI, Inc. ("Promise") is a wholly-owned subsidiary of Promise Healthcare, Inc. The applicant for CON 9891, Promise proposes the construction of a 60-bed freestanding LTCH to be located in Miami-Dade County, Florida. Select-Dade, the applicant for CON 9892, proposes the construction of a 60-bed freestanding LTCH to be located in Miami-Dade County, Florida. It is a wholly-owned subsidiary of Select Medical Corporation ("SMC"). The largest operator of LTCHs in the country, SMC operates 96 LTCHs in 24 states. The Miami Jewish Home and Hospital for the Aged is an existing not-for-profit provider of comprehensive health and social services in Miami-Dade County. The applicant for CON 9893, MJH proposes the creation of a 30-bed hospital within a hospital (HIH) LTCH by the renovation of a former acute care hospital building on its existing campus in Miami-Dade County, Florida. Kindred is the applicant for CON 9894 and proposes the construction of a 60-bed freestanding LTCH to be located in Miami-Dade County, Florida. Kindred is a wholly-owned subsidiary of Kindred Healthcare, Inc. ("Kindred Healthcare"). Kindred Healthcare operates 85 LTCHs in the country, eight of which are in the State of Florida. One of the eight is in Miami-Dade County. Twenty-three of Kindred Healthcare's LTCHs are operated by Kindred as well as seven of the eight Florida LTCHs. Kindred has also received CON approval for another LTCH in Florida. It is to be located in Palm Beach County in LTCH District 9. The District and its LTCHs Miami-Dade and Monroe Counties comprise AHCA District The population of Monroe County is 80,000 and of Miami-Dade County, 2.4 million. As to be expected from the population's distribution in the District, the vast majority of the District's health services are located in Miami-Dade County. The greater part of the County's population is in the eastern portion of Miami-Dade County, with population densities there 3-4 times higher than in the western portion of the County. But there is little to no space remaining for development in the eastern portion of the County. Miami-Dade County has an urban development boundary that shields the Everglades from development in the western portion of the County. Still, the bulk of population growth that has occurred recently is in the west and that trend is expected to continue. While the growth rate on a percentage basis is higher in the more-recently developed western areas of the County, the great majority of the population is and will continue to be within five miles of the sea coast on the County's eastern edge. At the time of hearing, there were three LTCHs operating in the District with a total of 122 beds: Kindred- Coral Gables, Select-Miami, and Sister Emmanuel. All three are clustered within a radius of six miles of each other in or not far from downtown Miami. The three existing LTCHs in the District are utilized at high occupancy levels. Kindred's 53-bed facility receives most of its referrals from a within a 10 mile radius. It has operated for the 11-year period beginning in 1995 with an occupancy level from a low of 82.08 percent to a high of 92.86 percent. The occupancy levels for 2004 (82.08 percent) and 2005 (84.90 percent) show occupancy recently at a relatively stable level within the range of optimal functional capacity which tends to be between 80 and 85 percent when facilities are equipped with semi-private rooms. With gender and infection issues in a facility with semi-private rooms, admissions to those facilities are usually restricted above 85 percent. Select operates a 40-bed LTCH on one floor of a health care service condominium building in downtown Miami. It began operation in 2003 as part of legislatively-created special Medicaid demonstration project. Its occupancy levels for the two calendar years of 2004 and 2005 were 83.39 percent and 95.10 percent. Sister Emmanuel Hospital for Continuing Care ("Sister Emmanuel") is a 29-bed HIH located at Mercy Hospital in Miami. It became operational in 2004 with an occupancy level of 82.64 percent, and attained an occupancy level of 85.46 percent in 2005. Kindred's Broward County LTCHs Kindred operates two LTCHs in Broward County (outside of District 11); one is in Ft. Lauderdale, the other in Hollywood. From 1995 to 2003, Kindred-Hollywood's occupancy rate ranged from a low of 65.17 percent to a high of 72.73 percent, generally lower than the state-wide occupancy rate. For the same period, Kindred-Ft. Lauderdale's rate was significantly higher, between 83.69 percent and 91.65 percent. Both LTCHs have experienced occupancy rates significantly lower than the state-wide rates in 2004 and 2005. Kindred-Ft. Lauderdale's occupancy in 2004 fell substantially from earlier years to 66.41 percent and then even farther in 2005 to 57.73 percent. Kindred-Hollywood's rates for these two years were also well below the state's at 59.74 percent and 58.04 percent, respectively. Historically used by residents of District 11, the Hollywood facility served 4,292 patients from Miami-Dade County in the eleven year period from 1995 through 2005. For the same period, the Ft. Lauderdale facility served 275 Miami-Dade residents. Kindred assigns its clinical liaisons to hospitals in a territorial manner to minimize competition for referrals between its two facilities in Broward County and Kindred-Coral Gables. LTCHs A "Long-term care hospital" means a general hospital licensed under Chapter 395, which meets the requirements of 42 C.F.R. Section 412.23(e) and seeks exclusion from the acute care Medicare prospective payment system for inpatient hospital services. § 408.032(13), Fla. Stat. (2005), and Fla. Admin. Code R. 59C-1.002(28). Under federal rules, an LTCH must have an average Medicare length of stay (LOS) greater than 25 days. LTCHs typically furnish extended medical and rehabilitation care for patients who are clinically complex and have multiple acute or chronic conditions. Patients appropriate for LTCH services represent a small but discrete sub-set of all patients. They are differentiated from other hospital patients in that, by definition, they have multiple co-morbidities that require concurrent treatment. Patients appropriate for LTCH services tend to be elderly, frail, and medically complex and are usually regarded as catastrophically ill although some are young, typically victims of severe trauma. Approximately 85 percent of LTCH patients qualify for Medicare. Generally, Medicare patients admitted to LTCHs have been transferred from general acute care hospitals and receive a range of services at LTCHs, including cardiac monitoring, ventilator support and wound care. In 2004, statewide, 92 percent of LTCH patients were transferred from short-term acute care hospitals. That figure was 98 percent for District 11 during the same period of time. The single most common factor associated with the use of long-term care hospitals are patients who have pulmonary and respiratory conditions such as tracheotomies, and require the use of ventilators. There are three other general categories of LTCH patients as explained by Dr. Muldoon in his deposition: The second group is wound care where patients who are at the extreme end of complexity in wound care would come to [an] LTCH if their wounds cannot be managed by nurses in skilled nursing facilities or by home health care. The third category would be cardiovascular diseases where patients compromise[d by] injury or illness related to the circulatory system would come [to an LTCH.] And the fourth is the severe end of the rehabilitation group where, in addition to rehabilitation needs, there's a background of multiple medical conditions that also require active management. (Kindred Ex. 8 at 10-11). Effective October 1, 2002, the federal Centers for Medicare and Medicaid Services ("CMS") established a new prospective payment system for long term care hospital providers. Through this system, CMS recognizes the patient population of LTCHs as separate and distinct from the populations treated by short-term acute care hospitals and by other post acute care providers, such as Skilled Nursing Facilities ("SNFs") and Comprehensive Rehabilitation Hospitals ("CMRs"). The implementation by CMS of categories of payment designed specifically for LTCHs, the "LTC-DRG," indicates that CMS and the federal government recognize the differences between general hospitals and LTCHs when it comes to patient population, costs of care, resources consumed by the patients and health care delivery. Under the LTCH reimbursement system, each patient is assigned a Diagnosis Related Group or "DRG" with a corresponding payment rate that is weighted based upon the patient's diagnosis. The LTCH is reimbursed the predetermined payment rate for that DRG, regardless of the costs of care. These rates are higher than what CMS provides for other traditional post-acute care providers. Since the establishment of the prospective pay system for LTCHs, concerns about the high reimbursement rate for LTCHs, as well as about the appropriateness of the patients treated in LTCHs, have been raised by the Medicare Payment Advisory Committee ("MedPAC") and the Centers for Medicaid and Medicare Services. CMS administers the Medicare payment program for LTCHs, as well as the reimbursement programs for acute care hospitals, SNFs, and CMRs. MedPAC's role is to help formulate federal policy on Medicare regarding services provided to Medicare beneficiaries (patients) and the appropriate reimbursement rates to be paid to health care providers. The 2006 MedPAC report reported that LTCHs were making a good margin or profit, and recommended against an annual increase in the Medicare reimbursement rate for the upcoming fiscal year. In 2006, CMS adopted a reimbursement rate rule for LTCHs for 2007 that did not raise the base rate, and made other changes that reflect the ongoing concerns of CMS regarding LTCHs. 42 C.F.R. Part 412, May 12, 2006. In that rule, CMS found that approximately 37 percent of LTCH discharges are paid under the short-stay outliers, raising concerns that inappropriate patients may be being admitted to LTCHs. CMS made other changes to the reimbursement system which, taken as a whole, actually reduced the reimbursement that LTCHs will receive for 2007. Even with the concerns raised by MedPAC and CMS and recent changes in federal fiscal policy related to LTCHs, the distinction between general hospitals and LTCHs and the legitimate place for LTCHs in the continuum of care continues to be recognized by the federal government. One way of looking at recent developments at the federal level was articulated at hearing by Mr. Kornblat. Federal regulatory changes will reduce the reimbursement LTCHs receive when treating short-term patients (short-term outliers). "On the other end of the spectrum, there are patients who stay significantly longer than would be expected on average, long- stay outliers, and the reimbursement for those patients was also modified." Tr. 163. There have been other changes with regard to LTCH patients who require surgery the LTCHs cannot provide and patients with a primary psychiatric diagnosis or a primary rehab diagnosis. Requiring the LTCH to "foot the bill" for surgery that it cannot provide for its patients and the elimination from LTCHs of patients with a primary psychiatric or rehab diagnosis send a strong signal to the LTCH industry specifically and those who interact with it: LTCHs should admit only the medically complex and severely acutely ill patient who can be appropriately treated at an LTCH. Despite recent changes at the federal level and the clear recognition by the federal government that LTCHs have a place in the continuum of health care services, AHCA remains concerned about LTCHs in Florida. AHCA's Concerns Regarding LTCHs In deciding on whether to approve or deny new health care facilities, the Agency is responsible for the "coordinated planning of health care services in the state." § 408.033(3)(a), Fla. Stat. In carrying out this responsibility, AHCA looks to federal rules and reports to assist in making health care planning decisions for the state. Regarding LTCHs, MedPAC has reported, and CMS has noted that, nationwide, there has been a recent, rapid increase in the number of LTCHs: "It [LTCHs] represents a growth industry of the last ten years." Nationwide there has also been a huge increase in Medicare spending for LTCH care from $398 million in 1993 to $3.3 billion in 2004. AHCA has also become concerned about the recent rapid increase in LTCH applications in Florida. From 1997 through 2001 there were 8 LTCHs in the state. Starting in 2002, there was a marked increase in the number of applications for LTCHs and the number of approved LTCHs rose quickly to the current 14 in 2006. In addition, 9 new LTCHs have been approved and are expected to be licensed in the next 1-3 years. When all of the approved hospitals are licensed the number of available beds will rise from 876 to 1,351 (adding the approved 475 beds), over a 50 percent increase in LTCH beds statewide. In addition, AHCA is concerned that the occupancy level of LTCHs over the entire state appears to be falling over the last 11 years. In response to the rise in LTCH applications over the last several years, and given the decrease in occupancy of the current LTCHs, the Agency has consistently voiced concerns about lack of identification of the patients that appropriately comprise the LTCH patient population. Because of a lack of specific data from applicants with regard to the composition and acuity level of LTCH patient populations, AHCA is not convinced that there is a need for additional LTCHs in the state or in District 11. There are several reasons for this concern. First, AHCA believes, like MedPAC, that there may be an overlap between the LTCH patient populations and the population of patients served in other health care settings, such as SNFs and CMRs. Kindred's expert, Dr. Muldoon, noted that length of stay in the general acute care hospital has been shortened over the last few years because there are new more effective medical treatments, and because the "post-acute sector has emerged as the place to carry out the treatment plan that 20 years ago may been provided in its entirety in the short-term hospital." (Kindred Ex. 8 at 23). To AHCA, what patients enter what facilities in this "post-acute sector" is unclear. In the absence of the applicants better identifying the acuity of the LTCH patient population, AHCA has reached the conclusion that there may be other options available to those patients targeted by the LTCH applicants. In support of this view, AHCA presented a chart showing SNFs in District 11 that offer to treat patients who need dialysis, tracheotomy or ventilator care. These conditions are typically treated in LTCHs. In addition, AHCA believes that some long-stay patients can be appropriately served in the short-stay acute care hospitals, rather than requiring LTCH care. The length of stay in 2005 for the typical acute care hospital for most patients is five to six days. (Kindred Ex. 8, Dr. Muldoon Depo, at 23). Some hospital patients, however, are in need of acute care services on a long-term basis, that is, much longer than the average lengths of stay for most patients. Thus, patients who may need LTCH services often have lengths of stay in the acute care hospitals that exceed the typical stay. AHCA believes that these long-stay patients can be as appropriately served in the short stay acute care hospitals as in LTCHs. AHCA'S Denial of the Four Applications and Change of Position with regard to MJH On December 15, 2005, the Agency issued its SAAR after review of the applications. The SAAR recommended denial of all four applications based primarily on the Agency's determination that none had adequately demonstrated need for its proposed LTCH in District 11. In denying the four applications, AHCA relied in part on reports issued the Congress annually by MedPAC that discuss the placement of Medicare patients in appropriate post-acute settings. Appropriate use of long term care hospital services is an underlying concern that we [AHCA] have and had the federal government has as evidenced by their MedPAC reports and the CMS information in its most recent proposed rule on the subject. (Tr. 2486). The June 2004 MedPAC report states the following about LTCHs: Using qualitative and quantitative methods, we find the LTCH's role is to provide post- acute care to a small number of medically complex patients. We also find that the supply of LTCHs is a strong predictor of their use and those acute hospitals and skilled nursing facilities are the principal alternatives to LTCHs. We find that, in general, LTCH patients cost Medicare more than similar patients using alternative settings but that if LTCH care is targeted to patients of the highest severity, the cost is comparable. Given these concerns, AHCA looked to the four applicants to prove need through a needs methodology that provides sufficient information on the patient severity criteria to better define the patients that would mostly likely be appropriate candidates for LTCHs. AHCA found the need methodologies of three of the four applicants (Kindred, Promise, and Select) "incomplete" because they lacked specific information on the severity level of the patients the applicants plans to admit, and therefore they "overstate need." AHCA pointed to a former LTCH provider that did provide detailed useful information on the acuity level of its patients, and the acuity level of its patients in reference to similar patients in SNFs. Other then MJH, the applicants presented approaches to projecting need that are based, in one way or another, on long- stay patients in existing acute care hospitals. In the Agency's view these methods "significantly overstate need." The method creates a "candidate pool" for the future long-term care hospital users. But it does not include enough information on severity of illness of the patients, in AHCA's view, to give a sense of who might be expected to appropriately use the service. Further, the Agency sees no reason to believe that all long-stay patients in acute care short-stay hospitals are appropriate candidates for long-term hospital services. Lastly, AHCA believes that LTCH applicants should develop an "acuity coefficient or an acuity factor," tr. 2627, to be considered as part of an LTCH need methodology. The need methodology employed by MJH differed substantially from the methodologies of the other three applicants. Because it is more conservative and yields a need "approximately a tenth of what the other three propose," tr. 2500, at the time of hearing AHCA was much more comfortable with MJH's need methodology. By the time AHCA filed its PRO, its comfort with MJH's need methodology had solidified and improved to the point that AHCA changed its position with regard to MJH. Describing MJH's "use rate model" as conservative, see Agency for Health Care Administration Proposed Recommended Order, at 24, AHCA proposed the following finding of fact in support of its conclusion that MJH's application be approved: "Miami Jewish Home projected a reasonably reliable bed need using approved, conservative, but detailed and supportable, need methodologies." Id. at 25. MJH MJH, is an existing not-for-profit provider of comprehensive health and social services in Miami-Dade County. As recited in the Omissions Response to CON 9893: [MJH's] mission is to be the premier multi- component, not-for-profit charitable health care system in South Florida, guided by traditional Jewish values, dedicated to effectively and efficiently serving a non- sectarian population of elderly, mentally ill, disabled, and chronically ill people with a broad range of the highest quality institutionally-based, community-based and ambulatory care services. MJH Ex. 1. Originally founded in 1945 to provide residential care for Jewish persons unable to access services elsewhere, MJH is now in its 62nd year of operation. MJH enjoys a good reputation within its community. MJH is located at Northeast Second Avenue and 2nd Street in north-central Miami in one of the most densely populated areas of the County. Known as “Little Haiti,” the surrounding community is primarily low income, and is a federally designated “medically underserved area.” A “safety net” provider of health care services, MJH's SNF is the largest provider of Medicaid skilled nursing services in the State of Florida. MJH assists its patients/residents in filing Medicaid applications, and also assists individuals in applying for Medicaid for community-based services. This same kind of assistance will also be provided to patients of the MJH LTCH. A 2004 study conducted by the Center on Aging at Florida International University identified unmet needs among elders living within the zip codes surrounding MJH. The study notes that the greatest predictors of need for home and community-based services are poverty, disability, living alone, and old age. Several of the zip codes within the MJH PSA were found to have relatively large numbers of at risk elders due to poverty and dramatic community changes. The study has assisted MJH in identifying service gaps within the community, and in focusing its efforts to serve this at-risk population. Following its most recent JCAHO accreditation survey, both MJH’s hospital and SNF received a three-year “accreditation without condition,” which is the highest certification awarded by JCAHO. MJH is a national leader in the provision of comprehensive long-term care services. MJH has been recognized on numerous occasions for its innovative long-term and post- acute care programs. The awards and recognitions include the Gold Seal Award for Excellence in Long Term Care, the "Best Nursing Home" Award from Florida Medical Business and "Decade of Excellence Award" from Florida Health Care Association. An indicator of quality of care, AHCA’s “Gold Seal” designation is especially significant. Of the 780 nursing homes in Florida, only 13, including MJH, have met the criteria to be designated as Gold Seal facilities. MJH operates Florida's only Teaching Nursing Home Program. Medical students, interns, and other health professionals rotate through the service program in the nursing home and hospital on a regular basis. Specifically, MJH serves as a student and resident training site for the University of Miami and Nova Southeastern University Medical Schools, and the Barry University, FIU, and University of Miami nursing schools. The LTCH would enhance these capabilities and give physicians in training additional opportunities. Not only will this enhance their education, but also will contribute to the high quality of care to be provided in the MJH LTCH. MJH has been the site and sponsor of many studies to enhance the delivery of social and health services to elderly and disabled persons. Most recently, MJH was awarded a grant to do research on fall prevention in the nursing home. MJH is committed to continue research on the most effective means of delivering rehabilitative and long-term care services to a growing dependent population. The development of an LTCH at MJH will enhance the opportunities for this research. MJH operates Florida’s first and only PACE Center (Program of All-inclusive Care for the Elderly) located on the main Douglas Gardens campus. The program provides comprehensive care (preventive, primary, acute and long-term) to nursing home eligible seniors with chronic care needs while enabling them to continue to reside in their own home as long as possible. MJH was recently approved by the Governor and Legislature to open a second PACE site, to be located in Hialeah. The proposed 30-bed LTCH will be located on MJH’s Douglas Gardens Campus. The Douglas Gardens Campus is the site of a broad array of health and social services that span the continuum of care. These programs include community outreach services, independent and assisted living facilities, nursing home diversion services, chronic illness services, outpatient health services, acute care hospital services, rehabilitation, post-acute services, Alzheimer’s disease services, pain management, skilled nursing and hospice. LTCH services, however, are not currently available at MJH. Fred Stock, the Chief Operating Officer of MJH is responsible for the day-to-day operation of the MJH nursing home and hospital and has 24 years experience in the administration of long-term care facilities. An example of Mr. Stock’s leadership is that when he came to MJH, its hospice program had management issues. He assessed the situation and then made a management change which has resulted in a successful turnaround of the program. There are now 462 skilled nursing beds licensed and operated by MJH at the Douglas Garden’s Campus. All of these beds are certified by Medicare. Community hospitals have come to rely on these skilled nursing beds as a placement alternative for their sickest and most difficult-to-place, post-acute patients. The discharges of post-acute patients in the SNF at Douglas Gardens more than doubled from 350 in FY 2002 to 769 in FY 2005. Dr. Tanira Ferreira is the Medical Director of the MJH ventilator unit. Dr. Ferreira is board-certified in the specialties of Internal Medicine, Pulmonary Diseases, Critical Care Medicine, and Sleep Disorders. Dr. Ferreira will be the Medical Director of the MJH LTCH. In addition to Dr. Ferreira, MJH has five other pulmonologists on its staff. MJH also employs: a full-time Medical Director (Dr. Michael Silverman); three full-time physicians whose practices are restricted to MJH hospital and SNF patients; and four full-time nurse practitioners whose practices are restricted to residents of the SNF. MJH employs two full-time psychiatrists, two full-time psychologists, and seven full-time Master’s level social workers. The MJH medical staff also includes many specialist physicians such as cardiologists, surgeons, orthopedists, nephrologists and opthamologists, and other specialists are called for a consultation as needed. A number of the MJH patients/residents are non-English speakers. However, many of the MJH employees, including all of its medical staff, are bilingual. Among the languages spoken by MJH staff are Haitian, Spanish, Russian, Yiddish, French, and Portuguese. This multi-language capability greatly enhances patient/resident communication and enhances MJH’s ability to provide supportive services. The proposed project is the development of a 30-bed LTCH in Miami-Dade County. The LTCH will be located in renovated space in an existing facility and will conform to all the physical plant and operating standards for a general hospital in Florida. The estimated project cost is $5,315,672. The first patient is expected to be admitted by July 1, 2007. The LTCH will be considered an HIH under Federal regulations 42 CFR Section 412.22(e). The LTCH will comply with these requirements including a separate governing body, separate chief medical officer, separate medical staff, and chief executive officer. The LTCH will perform the hospital functions required in the Medicare Conditions of Participation set forth at 42 CFR Section 482. In addition, fewer than 25 percent of the admissions to the LTCH will originate from the MJH acute care hospital, and less than 15 percent of the LTCH operating expenses will be through contracted services with any other MJH affiliate, including the acute care hospital. The separate LTCH governing body will be legally responsible for the conduct of the LTCH as an institution and will not be under the control of the MJH acute care hospital. Finally, less than five percent of the annual MJH LTCH admissions will be re-admissions of patients who are referred from the MJH SNF or the MJH hospital. Each referral to the LTCH will be carefully assessed using the InterQual level-of-care criteria to ensure that the most appropriate setting is chosen. MJH is also a member of the ECIN (Extended Care Information Network) system. As a member of this system, MJH is able to make referrals and place patients who may not be appropriate for its own programs. Only those patients who are medically and functionally appropriate for the LTCH will be admitted to the LTCH program. Many patients admitted to the MJH LTCH will have complex medical conditions and/or multiple-system diagnoses in one or more of the following categories: Respiratory disorders care (including mechanical ventilation or tracheostomy care) Surgical wound or skin ulcer care Cardiac Care Renal disease care Cancer care Infectious diseases care Stroke care The patient and family will be the focus of the interdisciplinary care provided by the MJH LTCH. The interdisciplinary care team will include the following disciplines: physicians, nurses, social workers, psychologists, spiritual counselors, respiratory therapists, physical therapists, speech therapists, occupational therapists, pharmacists, and dietitians. MJH uses a collaborative care model that will be replicated in the LTCH and will enhance the effectiveness of the interdisciplinary team. The direct care professionals in the LTCH will maintain an integrated medical record, so that each member of the care team will have ready access to all the information and assessments from the other disciplines. Nursing staff will provide at least nine hours of nursing care per patient per day. Seventy-five percent of the nursing staff hours will be RN and LPN hours. Therapists (respiratory, physical, speech and occupational) will provide at least three hours of care per patient day. The MJH medical staff includes a wide array of specialty consultants that will be available to LTCH patients. The specialties of pulmonology, internal medicine, geriatrics and psychiatry will be available to each patient on a daily basis. A complete listing of all of the medical specialties available to MJH patients was included with its application. The interdisciplinary team will meet at least once per week to assess the care plan for each patient. The care plan will emphasize rehabilitation and education to enable the patient to progress to a less restrictive setting. The care team will help the patient and family learn how to manage disabilities and functional impairments to facilitate community re-entry. Approval of the LTCH will allow the MJH to "round out" the continuum of care it can offer the community by placing patients with clinically complex conditions in the most appropriate care setting possible. This is particularly true of persons who would otherwise have difficulty in accessing LTCH services. MJH has committed to providing a minimum of 4.2 percent of its patient discharges to Medicaid and charity patients. However, Mr. Stock anticipates that the actual percentage will be higher. If approved, MJH has committed to licensing and operating its proposed LTCH. MJH already has a number of the key personnel that will be required to implement its LTCH, including the Medical Director and other senior staff. In addition, MJH has extensive experience gleaned from both its acute care hospital and SNF in caring for very sick patients. In short, MJH has the clinical, administrative, and financial infrastructure that will be required to successfully implement its proposed LTCH. Approval of the MJH LTCH will dramatically reduce the number of persons who are now leaving the MJH PSA to access LTCH services. The hospitals in close proximity to MJH have LTCH use rates that are very low in comparison to other hospitals that are closer to existing LTCHs. Thus, it is likely that there are patients being discharged from the hospitals close to MJH that could benefit from LTCH services, but are not getting them because of access issues or because the existing LTCHs are perceived to be too far away. A number of hospitals located close to MJH are now referring ventilator-dependent patients to MJH, and would also likely refer patients to the MJH LTCH. Because the majority of the infrastructure required is already in place, the MJH HIH can be implemented much more quickly and efficiently than can a new freestanding LTCH. For example, ancillary functions such as billing, accounting, human resources, housekeeping and administration already exist, and the LTCH can be efficiently integrated into those existing operations on campus. MJH will be able to appropriately staff its LTCH through a combination of its current employees and recruitment of new staff as necessary. In addition, MJH will be establishing an in-house pharmacy and laboratory within the next six months, which will also provide services to LTCH patients. On-site radiology services are already available to MJH patients. MJH has an excellent track record of successfully implementing new programs and services. There is no reason to believe that MJH will not succeed in implementing a high quality LTCH if its application is approved. MJH's Ventilator Unit By the time ventilator-dependent and other clinically complex patients are admitted to a nursing home they have often exhausted their 100 days of Medicare coverage, and have converted to Medicaid. Since Medicaid reimbursement is less than the cost of providing such care, most nursing homes are unwilling to admit these types of patients. Thus, it is very difficult to place ventilator patients in SNFs statewide. The problem is further exacerbated in District 11 by the lack of any hospital-based skilled nursing units. With the recent closure of two SNF-based vent units (Claridge House and Greynolds Park) there are now only three SNF-based vent units remaining in District 11. They are located at MJH, Hampton Court (10 beds), and Victoria Nursing Home. MJH instituted a ventilator program in its SNF in early 2004. Many of the patients admitted into the ventilator program fall into the SE3 RUG Code. On July 1, 2005, there were 24 patients in the SE3 RUG code in MJH. Only one other SNF in District 11 has more than four SE3 RUG patients in its census on an average day. Over 60 percent of the Medicare post-acute census at the MJH SNF falls into the RUG categories associated with extensive, special care or clinically complex services. This mix of complex cases is about three times higher than average for District 11 SNFs. Although some of the patients now admitted to the MJH SNF vent unit would qualify for admission to an LTCH, there are also a number of patients who are not admitted because MJH cannot provide the LTCH level of care required. SNF admissions are required to be initiated following a STACH admission. MJH has actively marketed its vent unit to STACHs. Similarly most LTCH admissions come from STACHs and, like MJH’s efforts, LTCHs also market themselves to STACHs. Hospitals providing tertiary services and trauma care will generate the greater number of LTCH referrals, with approximately half of all LTCH patients being transferred from an ICU. The implementation of the MJH ventilator unit required the development of protocols, infrastructure, clinical capabilities and internal resources beyond those found in most SNFs. Dr. Ferreira conducted pre-opening comprehensive staff education. These capabilities will serve as a precursor to the development of the next stage of service delivery at MJH: the LTCH. MJH’s vent unit provides care for trauma victims, and recently received a Department of Health research grant to develop a program for long-term ventilator rehab for victims of trauma. Jackson Memorial Hospital is experiencing difficulty in placing "certain" medically complex patients, who at discharge, have continuing comprehensive medical needs. MJH is the only facility in Dade County that has accepted Medicaid ventilator patients from Jackson. Mt. Sinai Medical Center also has difficulty placing medically complex patients, particularly those requiring ventilator support, wound care, dialysis and/or other acute support services. Mt. Sinai is a major referral source to MJH and supports its LTCH application. MJH has received statewide referrals, including from the Governor's Office and from AHCA, of difficult to place vent patients. Most of these referrals are Medicaid patients. Ten of the MJH vent beds are typically utilized by Medicaid patients. Although MJH would like to accommodate more such referrals, there are financial limitations on the number of Medicaid patients that MJH can accept at one time. Promise Promise owns and operates approximately 718 LTCH beds outside of Florida and employs an estimated 2,000 persons. Promise proposes to develop and LTCH facility in the western portion of the County made up of 59,970 gross square feet, 60 private beds including an 8-bed ICU, and various ancillary and support areas. The projected costs to construct its freestanding LTCH is $11,094,500, with a total project cost of $26,370,885. As a condition of its CON if its application is approved, Promise agrees to provide three percent of projected patient days to Medicaid and charity patients. Select Select-Dade proposes to locate its 60-bed, freestanding LTCH in the western portion of Miami-Dade County. The Agency denied Select-Dade's application because of its failure to prove need. Otherwise, the application meets the CON review criteria and qualifies for comparative review with the other three applicants. Select-Dade proposes to serve the entire District, but it has targeted the entire west central portion of the County that includes Hialeah, Hialeah Gardens, Doral, Sweetwater, Kendall, and portions of unincorporated Miami. This area is west of State Road 826 (the "Palmetto Expressway"), south of the County line with Broward County, north of Killian Parkway and east of the Everglades ("Select's Target Service Area"). To be located west of the Palmetto Expressway, east of the Florida Turnpike, north of Miller Drive and south of State Road 836, the site for the LTCH will be generally in the center of Select's Target Service Area. Approximately 700,000 people (about 30 percent of the County's population) reside within Select-Dade's Target Service Area. This population of the area is expected to grow almost ten percent in the next five years. The rest of the County is expected to grow about five and one-half percent. Kindred Kindred proposes to construct a 60-bed LTCH in the County. It will consist of 30 private rooms, 20 beds in 10 semi-private rooms, and 10 ICU beds. The facility would include the necessary ancillary service, including two operating rooms, a radiology suite, and a pharmacy. Kindred utilizes a screening process before admission of a patient to assure that the patient needs LTCH level care that includes the set of criteria known as InterQual. InterQual categorizes patients according to their severity of illness and the intensity of services they require. Every patient admitted to a Kindred hospital must be capable of improving and the desire to undergo those interventions aimed at improvement. Kindred does not provide hospice or custodial care. In addition, through its reimbursement process, the federal government provides strong disincentives toward LTCH admission of inappropriate patients. Furthermore, every Kindred hospital has a utilization review (UR) plan to assure that patients do not receive unnecessary, unwanted or harmful care. In addition to the UR plan, the patient's condition is frequently reviewed by nursing staff, respiratory staff and by a multi-disciplinary team. Kindred had not selected a location at the time it submitted its application. Kindred anticipates, however, that its facility if approved would be located in the western portion of the County. Stipulated Facts As stated by Kindred in its Proposed Recommended Order, the parties stipulated to the following facts (as well as a few other related to identification of the parties): Each applicant timely filed the appropriate letter of intent, and each such letter contained the information required by AHCA. Each CON application was timely filed with AHCA. Following its initial review, AHCA issued a State Agency Action Report ("SAAR") which indicated its intent to deny each of the applications. Each applicant timely filed the appropriate petition with AHCA, seeking a formal hearing pursuant to Sections 120.569 and 120.57, Fla. Stat. In the CON batch cycle that is the subject of this proceeding, Promise XI proposed to construct a 59,970 square foot building at a total project cost of $26,370,885.00, conditioned upon providing 3 percent of its patient days to Medicaid and charity patients. Select proposes to construct a 62,865 square foot building at a total project cost of $22,304,791.00, conditioned upon providing 2.8 percent of its patient days to Medicaid and charity patients. MJHHA proposes to renovate 17,683 square feet of space at a total project cost of $5,315,672.00, conditioned upon providing 4.2 percent of its patient days to Medicaid and charity patients. Kindred proposes to construct a 69,706 square foot building at a total project cost of $26,538,458.00, conditioned upon providing 2.2 percent of its patient days to Medicaid and charity patients. Long term hospitals meeting the provisions of AHCA Rule 59A-3.065(27), Fla. Admin. Code, are one of the four classes of facilities licensed as Class I hospitals by AHCA. The length of stay in an acute care hospital for most patients is three to five days. Some hospital patients, however, are in need of acute care services on a long- term basis. A long-term basis is 25 to 34 days of additional acute are service after the typical three to five day stay in a short-term hospital. Although some of those patients are "custodial" in nature and not in need of LTCH services, many of these long-term patients are better served in a LTCH than in a traditional acute care hospital. Within the continuum of care, the federal government's Medicare program recognizes LTCHs as distinct providers of services to patients with high levels of acuity. The federal government treats LTCH care as a discrete form of care, and treats the level of service provider by LTCHs as distinct, with its own Medicare payment system of DRGs and case mix reimbursement that provides Medicare payments at rates different from what the Medicare prospective payment system ("PPS") provides for other traditional post-acute care providers. The implementation by the Centers for Medicare and Medicaid Services ("CMS") of categories of payment design specifically for LTCHs, the "LTC-DRG," is a sign of the recognition by CMS and the federal government of the differences between general hospitals and LTCHs when it comes to patient population, costs of care, resources consumed by the patients and health care delivery. Joint Pre-hearing Stipulation at 4, 6-7, 9-10. Applicable Statutory and Rule Criteria The parties stipulated that the review criteria in Subsections (1) through (9) of Section 408.035, Florida Statutes (the "CON Review Criteria Statute"), apply to the applications in this proceeding. Subsection (10) of the CON Review Criteria Statute, relates to the applicant's designation as a Gold Seal Program Nursing facility. Subsection (10) is applicable only "when the applicant is requesting additional nursing home beds at that facility." None of the applicants are making such a request. MJH's designation as a Gold Seal Program is not irrelevant in this proceeding, however, since it substantiates MJH's "record of providing quality of care," a criterion in Subsection (3) of the CON Review Criteria Statute. The Agency does not have a need methodology for LTCHs. Nor has it provided any of the applicants in this proceeding with a policy upon which to determine need for the proposed LTCH beds. The applicants, therefore, are responsible for demonstrating need through a needs assessment methodology of their own. Topics that must be included in the methodology are listed Florida Administrative Code Rule 59C-1.008(2)(e)2., a. through d. Subsection (1) of the CON Review Criteria: Need Not only does AHCA not have an LTCH need methodology in rule or a policy upon which to determine need for the proposed LTCH beds, it did not offer a methodology for consideration at hearing. This is the typical approach AHCA takes in LTCH cases; demonstration of LTCH need through a needs assessment methodology is left to the parties, a responsibility placed upon them in situations of this kind by Florida Administrative Code Rule 59C-1.008(2)(e)2. MJH's Need Methodology Unlike the other three applicants, all of whom used one form or another of STACH long-stay methodologies, MJH utilized a use-rate analysis which projects LTCH utilization forward from District 11's recent history of increased utilization. A use-rate methodology is one of the most commonly used health care methodologies. The MJH use-rate methodology projected need based upon all of District 11. The methodology projected need for 42 LTCH beds in 2008, with that number growing incrementally to 55 beds by 2012. Because statewide LTCH utilization data is not reliable when looking at any particular district, MJH developed a District 11 use-rate, by age cohort, to yield a projection of LTCH beds needed. The use-rate is derived from the number of STACH admissions compared to the number of LTCH admissions, by age cohort. Projected demographic growth by age cohort was applied to determine the number of projected LTCH admissions. The historic average LTCH LOS in District 11 was applied to projected admissions and then divided by 365 to arrive at an ADC. That ADC was then adjusted for an occupancy standard of 85 percent, which is consistent with District 11. A number of states have formally adopted need methodologies that use an approach similar to MJH's in this case. Kindred has used a shortcut method of the use rate model in other states for analyzing proposed LTCHs "when there is not much data to work with." Tr. 1744. The methodology used by MJH was developed by its expert health planner, Jay Cushman. The methodology developed by Mr. Cushman was described by Kindred's health planner as "a couple of steps beyond" Kindred's occasionally-used shortcut method. Kindred's health planner described Mr. Cushman's efforts with regard to the MJH need methodology as "a very nice job." Tr. 1745. Mr. Cushman created a use-rate by examining the relationship between STACH admissions and LTCH admissions. The use-rate actually grows as it is segmented by age group, and thus the growth in the elderly population incrementally increases the utilization rate. MJH’s application demonstrated how LTCH utilization has varied greatly statewide, and how the District 11 market has a significant history of utilizing LTCH services. For planning purposes the history of District 11 is a significant factor, and the MJH methodology is premised upon that history, unlike the other methodologies. MJH demonstrated a strong correlation between STACH and LTCH utilization in District 11, where 98 percent of LTCH admissions are referred from STACHs. MJH also demonstrated that the south and western portions of Miami-Dade have overlapping service areas from the three existing LTCHs, while northeastern Miami-Dade has only one provider with a similar service area, Kindred Hollywood in neighboring District 10. This peculiarity explains why the LTCH out-migration trend is much stronger in northeastern portions of the District. The area most proximate to MJH would enjoy enhanced access to LTCH services, including both geographic and financial access, if its program is approved. In short, as AHCA, now agrees, MJH demonstrated need for its project through a thorough and conservative analysis. All parties agree that the number of LTCH beds yielded by MJH's methodology are indeed needed. Whether more are needed is the point of disagreement. For example, Mr. Balsano plugged the 2003 use rate into MJH's methodology instead of the 2004 used by MJH. Employment of the 2003 use rate in the calculation has the advantage that actual 2004 and 2005 data can serve as a basis of comparison. Mr. Balsano explained the result: "The number of filled beds in 2005 in District 11 would exceed by 33 beds what the use rate approach would project as needed in 2005." Tr. 370. The reason, as Mr. Balsano went on to explain, is that the use-rate changed dramatically between 2002, 2003, and 2004. Thus MJH's methodology, while yielding a number of beds that are surely needed in the District, may yield a number that is understated. This is precisely the opposite problem of the need assessment methodologies of the other three applicants, all of which overstated LTCH bed need in the District. The Need Methodologies of the Other Three Applicants The need methodologies presented by the other applicants vary to some degree. All three, however, are based on STACH long-stay data. Long-stay STACH analyses rely upon a number of assumptions, but fundamentally they project need forward from historic utilization of STACHs. The methodologies used by each of these three applicants identify patients in STACHs whose stays exceeded the geometric mean of length of stay plus fifteen days (the "GMLOS+15 Methodologies"), although the extent of the patients so identified varied depending on the number of DRGs from which the patients were drawn. Each of the proponent’s projects would serve only a relatively small fraction of the District 11 patients purported by the GMLOS+15 Methodologies to be in need of LTCH services. The lowest projected need of the three was produced by Promise: 393 beds in 2010. Promise's methodology is more conservative than that of Kindred and Select. Unlike the latter two, Promise reduced the number of potential projected admissions to be used in its calculation. The reduction, in the amount of 25 percent of the projection of 500 beds, was made because of several factors. Among them were anticipation that MedPAC's suggestions for ensuring that patients were appropriate for LTCH admission, which was expected to reduce the number of LTCH admissions, would be adopted. The methodologies proposed by Kindred and Select-Dade did not include the Promise methodology's reduction potentially posed by the impact of new federal regulation. Kindred's methodology projected need for 509 new LTCH beds in District 11; Select-Dade's methodology projected need for 556 beds. One way of looking at the substantial bed need produced by the GMLOS+15 Methodologies used by Promise, Select and Kindred was expressed by Kindred. As an applicant proposing a new hospital of 60 beds, when its need methodology yielded a need in the District for more than 500 beds, Kindred found the methodology to provide assurance that its project is needed. On the other hand, if the methodology was reliable then the utilization levels of the two Kindred hospitals in Broward County in relative proximity to a populated area of District 11 would have been much higher in 2004 and 2005, given the substantial out-migration to those facilities from District 11. The Kindred and Select methodologies are not reliable. Their flaws were outlined at hearing by Mr. Cushman, MJH's expert health planner who qualified as an expert with a specialization in health care methodology. Mr. Cushman attributed the flaws to Promise's methodology as well but as explained below, Promise's methodology is found to be reliable. Comparison of the projections produced by MJH's use rate methodology with the projections produced by the other three methodologies results in "a tremendous disconnect," tr. 1233, between experiences in District 11 upon which MJH's methodology is based and the GMLOS+15 Methodologies' bed need yield "that are three or four or five times as high as have actually been expressed in the existing system." Id. One reason in Mr. Cushman's view for the disconnect is that the GMLOS+15 Methodologies identify all long-stay patients in STACHs as candidates for LTCH admission when "there are many reasons that patients might stay for a long time in an acute care facility that are not related to their clinical needs." Tr. 1234. This criticism overlooks the limited number of long-stay patients in STACHs used by the Promise methodology but is generally applicable to the Select and Kindred methodologies. Mr. Cushman performed detailed analysis of the patients used by Kindred in its projection to reach conclusions applicable to all three GMLOS+15 Methodologies. Mr. Cushman's analysis, therefore, related to actual patients. They are based on payor mix, discharge status, and case mix. The analysis showed that the GMLOS+15 Methodologies are "disconnected from the fundamental facts on the ground," tr. 1240, in that the methodologies produce tremendous unmet need not reconcilable with actual utilization experience. Some of the gaps based on additional case mix testing were closed by Kindred's expert health planner. The additional Kindred test, however, did not completely close the gap between projected unmet need and actual utilization experience. Mr. Cushman summed up his basis for concluding that the GMLOS+15 Methodologies employed by Kindred, Select-Dade and Promise are unreliable: [W]e have an untested method that's disconnected from actual utilization experience on the ground. And it provides projections of need that are way in excess of what the experience would indicate and way in excess of what the applicants are willing to propose and support [for their projects.] So for those reasons, I considered [the GMLOS+15 method used by Kindred, Select-Dade and Promise] to be an unreliable method for projecting the need for LTCH beds. Tr. 1243-44. The criticism is not completely on point with regard to the Promise methodology as explained below. Furthermore, at hearing, Mr. Balsano made adjustments to the Promise GMLOS+15 Methodology ("Promise's Revised Methodology"). Although not sanctioned by the Agency, the adjustments were ones that made the Agency more comfortable with the numeric need they produced similar to the Agency's comments at hearing about MJH's methodology. For example, if the number of needed beds were reduced by 50 percent (instead of 25 percent as done in Promise's methodology) to account for the effect of federal policies and alternative providers and if an 85 percent occupancy rate were assumed instead of an 80 percent occupancy rate, the result would be reduce the LTCH bed need yielded by Promise's methodology to 200. These adjustments make Promise's Revised Methodology more conservative than Select's and Kindred's. In addition, Promise's methodology commenced with a much fewer number of STACH patients because Promise based on its inquiry into the patient population that is "using LTCHs in Florida right now." Tr. 351. Examination of AHCA's database led to Promise's identification of patients in 169 DRGs currently served in Florida LTCHs. In contrast, Select-Dade and Kindred, used 483 and 390 DRGs respectively. Substantially the same methodology was used by Promise in Promise Healthcare of Florida III, Inc. v. AHCA, Case No. 06-0568CON (DOAH April 10, 2007). The methodology, prior to the 25 percent reduction to take into account the effects of new federal regulations, was described there as: Long-stay discharges were defined using the following criteria: age of patient was 18 years or older; the discharge DRG was consistent with the discharge DRGs from a Florida LTCH; and the ALOS in the acute care hospital was at the GMLOS for the specific DRG plus 15 days or more. Applying these criteria reduced the number of DRGs used and the potential patient pool. Id. at 19 (emphasis supplied.) The methodology in this case produced a number that was then reduced by 25 percent, just as Promise did in its application in this case. The methodology was found by the ALJ to be reliable. If the methodology there were reliable then Promise's Revised Methodology (an even more conservative methodology) must be reliable as well as the numeric need for District 11 LTCH beds it yields: 200. Such a number (200) would support approval of MJH's application and two of the others and denial of the remaining application or denial of MJH's application and approval of the three other applications. Neither of these scenarios should take place. However high a number of beds that might have been projected by a reasonable methodology, no more than two of the applications should be granted when one takes into consideration the ability of the market to absorb new providers all at once. Tr. 518-520. Nonetheless, such a revised methodology would allow approval of MJH and one other of the applicants. Furthermore, there are indications of bed need greater than the need produced by MJH's methodology. Market Conditions, Population and History The large majority of patients admitted to LTCHs are elderly, Medicare beneficiaries. Typically, elderly persons seek health care services close to their homes. This is often because the elderly spouse or other family members of the patient cannot drive to visit the patient. This contributes to the compressed service areas observed in District 11. Historic patient migration patterns show that for STACH services, there is nine percent in-migration to Miami- Dade, and only five percent out-migration from Miami-Dade, a normal balance. Most recent data for LTCH service, however, shows an abnormal balance: three percent in-migration and 22 percent out-migration. The current utilization of existing LTCHs in District 11 and the high out-migration indicates that additional LTCH beds are needed. Notably, of the 400 District 11 residents who accessed LTCH care in Broward County in 2004, 114 (over 25 percent) lived in the 15 zip codes closest to MJH. MJH’s location will allow its LTCH to best impact and reduce out- migration from District 11 for LTCH services. Neither Kindred nor Promise has a location selected, and while Select-Dade has a “target area,” its actual location is unknown. None of the existing LTCHs in District 11 or in District 10 have PSAs that overlap with the area around MJH. For example, the Agency had indicated that there was no need in the case which led to approval of the Sister Emmanuel LTCH at Mercy Hospital. It was licensed in July of 2002, barely half a year after the Select-Miami facility was licensed. Both facilities were operating at or near optimal functional capacity less than two years from licensure without adverse impact to Kindred-Coral Gables. The utilization to capacity of new LTCH beds in the District indicate a repressed demand for LTCH services. The demand for new beds, however, is not limited to the eastern portion of the County. The demand exists in the western portion as well where there are no like and existing facilities. Medicare patients who remain in STACHs in excess of the mean DRG LOS become a financial burden on the facility. The positive impact on them of an LTCH with available beds is an incentive for them to refer LTCH appropriate patients for whom costs of care exceeds reimbursement. There were a total of 1,231 adult discharges from within Select-Dade's targeted service area with LOS of 24 or more days in calendar year 2004. Medical Treatment Trends in Post-Acute Service The number of LTCHs in Florida has increased substantially in recent years. The increase is due, in part to the better treatment the medically complex, catastrophically ill, LTCH appropriate patient will usually receive at an LTCH than in traditional post acute settings (SNFs, HBSNUs, CMR, and home health care). The clinical needs and acuity levels of LTCH- appropriate patients require more intense services from both nursing staff and physicians that are available in an LTCH but not typically available in the other post acute settings. LTCH patients require between eight to 12 nursing hours per day and daily physician visits. CMS reimbursement at the Medicare per diem rate would not enable a SNF to treat a person requiring eight to 12 hours of nursing care per day. CMR units and hospitals are inappropriate for long- term acute care patients who are unable to tolerate the minimum three hours of physical therapy associated with comprehensive medical rehabilitation. The primary focus of an LTCH is to provide continued acute care and treatment. Patients in a CMR are medically stable; the primary focus is on restoration of functional capabilities. Subsection (2): Availability, Quality of Care, Accessibility, Extent of Utilization of Existing Facilities There are 27 acute care hospitals dispersed throughout the County. Only three are LTCHs. The three existing LTCHs, all in the eastern portion of the County, are not as readily accessible to the population located in the western portion as would be an LTCH in the west. Approval of an application that will lead to an LTCH in the western portion of the County will enhance access to LTCH services or as Ms. Greenberg put it hearing, "if only one facility is going to be built, the western part of the county is where that needs to go." Tr. 2101. See discussion re: Subsection (5), below. In confirmation of this opinion, Dr. Gonzalez pointed out several occasions when he was not able to place a patient at one of the existing LTCHs due to family member reluctance to place their loved one in a facility that would force the family to travel a long distance for visits. LTCH appropriate patients are currently remaining in the acute care setting with Palmetto General and Hialeah Hospital among the busiest of the STACHs in the County. Both are within Select-Dade's targeted service area. From 2002 to 2005 the number of LTCH beds in the District increased from 53 to 122. During the same period, the number of patient days increased from 18,825 to 37,993. Recently established LTCH facilities in District 11 have consistently reached high occupancy levels, approaching 90 percent at the time of hearing. From 2001 to 2004, the use rate for LTCH services grew from 3.07 per 1,000 to 6.51 per 1,000. The increase in use rate for those aged 65 and over was even more significant; from 19.32 per 1,000 to 41.67 per 1,000. Kindred's Miami-Dade facility is licensed at 53 beds; of those seven are in private rooms; the facility has 23 semi- private rooms. As far back as 2001, the facility has operated at occupancy rates in excess of 85 percent; in 1998 and 1999 its occupancy rate exceeded 92 percent and 93 percent, respectively. More recently, it has operated at an ADC of 53 patients; 100 percent capacity. Several physicians and case managers provided support to Kindred's application by way of form letters, indicating patients would benefit from transfers to LTCHs and "an ever growing need for (these) services." Kindred's daily census has averaged 50 or more patients since 2004. Unlike an acute care hospital, Kindred has not experienced any seasonal fluctuations in its census, running at or above a reasonable functional capacity throughout the year. Taking various factors into consideration, including the number of semi-private beds, the facility is operating at an efficient occupancy level. Looking ahead five years, the capacity at Kindred's facility cannot be increased in order to absorb more patients. As designed, the facility cannot operate more efficiently than it has at 85 percent occupancy. Select's facility, located in a medical arts building, houses 34 private and six semi-private beds. In 2005, Select's facility operated at an average occupancy of almost 88 percent. Unlike Kindred, Select can add at least seven more beds to its facility by converting offices. As a hospital within a hospital, Sister Emmanuel's 29-bed facility is subject to limits on the percentage of admissions it can receive from "host" Mercy Hospital; even with such restrictions, its 2005 occupancy rate was 84.6 percent. Because of gender mix and infection opportunities, among other reasons, it is difficult to utilize semi-private beds. Only three District facilities offer ventilator care: MJHHA, HMA Hampton Court, and Victoria Nursing Home. Other health care facility settings do not serve as reasonable alternatives to the LTCH services proposed here. In 2004, roughly one quarter of District 11 residents, (nearly 400 patients), requiring LTCH services traveled to District 10 facilities. In 2005 that number fell to 369, or about 22 percent. Although there is a correlation between inpatient acute care services and LTCH services, the out-migration of patients requiring LTCH services indicated above differs markedly from the out-migration numbers generated by acute care patients. The primary north-south road configurations in the county are A1A, U.S. 1 and I-95 on the east and the Palmetto Expressway on the west. The primary east-west road configurations are composed of the Palmetto Expressway extension, S.R. 112; the Airport Expressway feeding into the Miami International Airport area and downtown Miami, S.R. 836 to Florida's Turnpike, and the Don Shula Expressway in the southwest. Assuming no delays, a trip by mass transit, used by the elderly and the poor, from various areas in Miami-Dade to the nearest LTCH outside District 11 (Kindred Hollywood) runs two to four hours one way. These travel times pose a special hardship to the elderly traveling to a facility to receive care or visit loved ones. While improvements in the system are planned over the next five years, they will not measurably change the existing travel times. These factors, along with high occupancy levels in District 11 LTCHs, indicate the demand for LTCH services in the District exceeds the existing bed supply. The three existing LTCHs have recently operated at optimal functional capacity or above it. On December 31, 2005, Select Specialty Hospital-Miami was operating with 95 percent occupancy. Subsection (3): Ability of the Applicant to Provide Quality of Care and the Applicant's Record of Providing Quality of Care As discussed above, MJH has the ability to provide high quality of care to its LTCH patients and an outstanding record of providing quality of care. Select-Dade has the ability to provide quality of care to its LTCH patients and a record providing quality of care. In treating and caring for LTCH patients, Select-Dade will use an interdisciplinary team of physicians, dieticians, respiratory therapists, physical therapists, occupational therapists, speech therapists, nurses, case managers and pharmacists. Each will discipline will play an integral part in assuring the appropriate discharge of the patient in a timely manner. The Joint Commission on Accreditation of Hospital Organizations (JCAHO) has accredited all Select facilities that have been in existence long enough to qualify for JCAHO accreditation. Both Select and Promise use various tools, including Interqual Criteria, to assure patients who need LTCH services are appropriately evaluated for admission. All Promise facilities are accredited by JCAHO. Promise has developed and implemented a company-wide compliance program, as well as pre-admission screening instruments, standards of performance and a code of conduct for its employees. Its record of providing quality of care was shown at hearing with regard to data related to its ventilator program weaning rate and wound healing rates. None of the parties presented evidence or argument that any of the other applicants was unable to provide adequate quality of care. The Agency adopted its statements from the SAAR at pages 43 through 45. The SAAR noted the existence of certain confirmed complaints at the two existing LTCH providers in Florida Select and Kindred. The number of confirmed complaints is relatively few. Kindred, for example, had 12 confirmed complaints with the State Department of Health at its seven facilities during a three-year period, less than one complaint per Kindred hospital every two years. Each applicant satisfies this criterion. Subsection (4): Availability of Resources, Health and Management Personnel, Funds for Capital and Operating Expenditures, Project Accomplishment and Operation The parties stipulated that all applicants have access to health care and management personnel. Select-Dade, Kindred and MJH all have funds for capital and operating expenditures and project accomplishment and operation. In turn, each of these three contends that Promise did not demonstrate the availability of funds for its project. This issue is dealt with below under the part of this order that discusses Subsection (6) of the Statutory CON Review Criteria. Subsection (5): Access Enhancement The applicants stipulated that "each of the applicants' projects will enhance access to LTCH services for residents of the district to some degree." All four applicants get some credit under this subsection because approval of their application will enhance access by meeting need that all of the parties now agree exists. Select-Dade and Promise propose to locate their projects in the western portion of the County. Kindred did not indicate a location. Location of an LTCH in the western portion of the County will enhance geographic access. MJH's location is in an area that has reasonable geographic access to LTCH services. But approval of its application, given the unique nature of its operation, chiefly its charitable mission, will enhance access to charity and Medicaid recipients. Approval of Select-Dade's application will also enhance cultural access to the Latin population in Hialeah. A substandard public transportation system for this population makes traveling to visit hospitalized loved ones an insurmountable task in some situations. Select-Dade has achieved a competent cultural atmosphere in its LTCH opened in the County in 2003. It has in excess of 100 multi-lingual employees, many of whom communicate in Spanish. The staff effectively communicates with patients with a variety of racial, cultural and ethnic backgrounds. Every new LTCH must undergo a qualifying period to establish itself as an LTCH for Medicare reimbursement. Specifically, the average LOS for all Medicare patients must meet or exceed 25 days. During the qualifying period the LTCH is reimbursed by Medicare under the regular STACH PPS, that is paid on a DRG basis as if the patient were in an ordinary general acute care hospital with its lower reimbursement. Upon initiation of their LTCH services, Promise, Kindred and Select all intend to restrict or suppress admissions to ensure longer LOS to meet the Medicare 25 day average LOS requirement, and to “minimize the costs” of obtaining LTCH certification and reimbursement. MJH will not be artificially restricting its LTCH admissions during the initial 6 month Medicare qualification period, even though the cost of providing services during this period will likely exceed the STACH Medicare reimbursement. MJH’s opening without suppressing admissions (as in the case of Sister Emmanuel), will enhance access by patients in need of these services during the initial qualification period. Subsection (6): Immediate and Long-term Financial Feasibility a. Short-Term Financial Feasibility Short-term financial feasibility is the ability of an applicant to fund the project. None of the parties took the position that the MJH project was not financially feasible in the short term. MJH's current assets are equal to current liabilities, a short-term position found by AHCA to be weak but acceptable. The financial performance of MJH, however, has been improving in the past three years. Expansion of existing services, improved utilization of services, and the development of new programs have all contributed to a significant increase in operational revenue and total revenue during that period. MJH has a history of receiving substantial charitable gifts (ranging from $6.2 million to $13.2 million annually during the past three years) and can reasonably expect to receive financial gifts annually of between $4-5 million in the coming years. However, MJH is moving away from reliance on charitable giving, and toward increasing self-sufficiency from operations. Approval of the LTCH will play a major role in achieving that goal. In addition, MJH has total assets, including land and buildings, of approximately $150 million. The cost to implement the proposed MJH LTCH is $5,319,647. The projected cost is extremely conservative in the sense of overestimating any potential contingency costs that could be incurred. MJH has the resources available to fund the project through endowments and investments (currently $41 million) as well as from operating cash flow and cash on hand. Select-Dade has an adequate short-term position and Kindred a good short-term position. None of the parties contest the short-term financial feasibility of either Select-Dade or Kindred. In contrast, both Select-Dade and Kindred contested the short-term financial feasibility of Promise. In accord is MJH's position expressed in its proposed recommended order: "Promise did not demonstrate the availability of funds for its project." Miami Jewish Home & Hospital For the Aged, Inc.'s Proposed Recommended Order, at 37. Promise's case for short-term financial feasibility rests on the historical relationship between the principals of Promise, Sun Capital Healthcare, Inc., and Mr. William Gunlicks of Founding Partners Capital Management Company ("Founding Partners.") The relationship has led to great success financially over many years. For example, through the efforts of Mr. Gunlicks, Sun Capital has generated over $2 billion in receivable financing. Founding Partners is an investment advisor registered with the Security Exchange Commission, the Commodity Futures Trading Commission, the National Futures Association and the State of Florida. As a general partner, it manages two private investment funds: Founding Partners Stable Value Fund and Founding Partners Equity Fund. Founding Partners also manages an International Fund for non-U.S. investors. Its base is composed of approximately 130 individuals with high net worth and access to capital. Founding Partners provided Promise with a "letter of interest" dated October 12, 2005, which indicated its interest in providing the "construction, permanent, and working capital financing for the development of a 60 bed long-term acute care hospital to be located in Dade County, Florida." Promise Ex. 3, Exhibit Promise XI, Gunlicks 4, 6-27-06. The letter makes clear, however, that it is not a commitment to finance the project: "The actual terms and conditions of this loan will be determined at the time of your loan request is approved. Please recognize this letter represents our interest in this project and is not a commitment for financing." Id. Testimony at hearing demonstrated a likelihood that Promise would be able to fund the project should it's application be approved. Mr. Balsano opined that this is sufficient to meet short-term financial feasibility: "[I]t's not required at this point that firm funding be in place. . . . [W]e have an appropriate letter from Mr. Gunlicks' organization that they're interested and willing to fund the project. It kind of goes to the second issue, which is, well, what if there were some issue in that regard? Would this project be financed. And I guess I would just have to say bluntly that in doing regulatory work for the last 20-some years, that if an applicant has a certificate of need for a given service, most lending institutions view that as a validation that the project is needed and can be supported. My experience has been that I have never personally witnessed a project that was approved that could not get financing. Tr. 392. Other expert health planners with considerable experience in the CON regulatory arena conceded that they were not aware of a CON-approved hospital project in the state that could not get financing. Despite the proof of a likelihood that Promise's project would be funded if approved, however, Promise failed to demonstrate as MJH, Select-Dade and Kindred continue to maintain, that funds are, indeed, available to fund the project. In sum, Promise failed to demonstrate the short-term financial feasibility of the project. The projects of MJH, Select-Dade and Kindred are all financially feasible in the short-term. b. Long-Term Financial Feasibility Long-term financial feasibility refers to the ability of a proposed project to generate a positive net revenue or profit at the end of the second full year of operation. MJH’s projected patient volumes are both reasonable and appropriate, given its current position in the community, the services it currently provides, and the need for LTCH services in the community. MJH’s projected payor mix was largely based upon the historical experience of the three existing LTCHs in the District, with the exception of the greater commitment to charity and Medicaid patients. The higher commitment to Medicaid/charity is consistent with MJH’s historical experience and status as a safety net provider. Sister Emmanuel is a 29-bed LTCH located within Mercy Hospital. As a similarly-sized HIH, a not-for-profit provider, and an entity with the same kind of commitment to Medicaid/charity patients, Sister Emmanuel is the best proxy for comparison of the financial projections contained in the MJH application. MJH projected its gross revenues based upon Sister Emmanuel’s general charge structure, adjusted for payor mix and inflated at 4 percent per year. The staffing positions, FTEs and salaries contained on Schedule 6 of each of the applications were stipulated to represent reasonable projections. MJH’s Medicaid net revenues were calculated by determining a specific Medicaid per diem rate using the Dade County operating cost ceiling and 80 percent of the capital costs. Given that many LTCH patients exhaust their allowable days of Medicaid coverage, 70 percent of the revenue associated with MJH’s Medicaid patient days were “written off” in total. Similarly, patient days associated with charity care and bad debt reflected no net revenue. MJH's Medicare net revenues were determined using the specific diagnosis (DRG) of each projected patient. For the first six months of operation it was assumed that MJH would receive the short-stay DRG reimbursement, and in the second 6 months and second year of operation would receive the LTCH DRG payment. Net revenues for the remaining payor categories were based upon the historical contractual adjustments of MJH. MJH’s projected gross and net revenues for its proposed LTCH are conservative, reasonable and achievable. However, if MJH has in fact understated the net revenues that it will actually achieve, the impact will be an improved financial performance and improved likelihood of long-term financial feasibility. MJH’s staffing expense projections were derived from its Schedule 6 projections (which were stipulated to be reasonable) with a 28 percent benefit package added. Non- ancillary expense costs were based upon MJH’s historical costs, while ancillary expenses (lab, pharmacy, medical supplies, etc.) were based upon the Sister Emmanuel proxy. Capitalized project costs, depreciation and amortization were derived from Schedule 1 and the historical experience of MJH, as were the non- operating expenses such as G&A, plant maintenance, utilities, insurance and other non-labor expenses. MJH’s income and expense projections are reasonable and appropriate, and demonstrate the long-term financial feasibility of MJH’s proposed LTCH. John Williamson is an Audit Evaluation and Review Analyst for AHCA. He holds a B.S. in accounting and is a Florida CPA. Mr. Williamson conducted a review of the financial schedules contained in each of the four applications at issue. In conducting his review, Mr. Williamson compared the applicants’ financial projections with the “peer group” of existing Florida LTCHs. With regard to the MJH projections, Mr. Williamson noted: Projected cost per patient day (CPD) of $1,087 in year two is at the group lowest value of $1,087. Projected CPD is considered efficient when compared to the peer group with CPD falling at the lowest level. The apparent reason for costs at this level are the low overhead costs associated with operating a hospital-within- a-hospital. MJH Ex.34, depo Ex. 4, Page 3 of 5. Mr. Williamson further concluded that MJH presented an efficient LTCH project, which is likely to be more cost- effective and efficient than the other three proposals. In its application, Kindred projected a profit of $16,747 at the end of year two of operation. Schedule 8A listed interest expense "as a way of making a sound business decision." Tr. 1458. Interest expense, however, is not really applicable because Kindred funds new projects out of operation cash flows. If the interest expense is omitted, profit before taxes would roughly $1.5 million. Taking taxes into consideration, the profit at the end of year two of operation would be roughly $1 million. Promise's projections the facility will be financially feasible in the long term are contained in its Exhibit 2, Schedules 5, 6, 7 and 8A and related assumptions. The parties agreed the information contained in Promise's Schedule 5, and the supporting assumptions, were reasonable. Schedule 5 indicates Promise projects an occupancy rate in Year 2 of 76.1 percent, based on 16,660 patient days and an ADC of 45.6 patients. To reach projected occupancy rates, Promise would have to capture roughly 15-17 percent of the LTCH market in Year 2. AHCA concluded Promise's project would be financially feasible in the long term. Only Select questioned Promise's projected long term financial feasibility. The attack, evidenced by Select Exhibits 12 and 14, was composed of a numbered of arguments, considered below: The estimated Medicare revenue per patient projected by Promise was high, and among other factors, erroneously assumed Medicare would increase reimbursement by an average of 3 percent per year. In determining a project's long-term financial feasibility, AHCA looks to the facility's second full year of operation, and, assuming reasonable projections, determines if there is a net positive profit. The analysis AHCA uses to determine the reasonableness of an applicant's projections in Schedules 7A and 8A begins with a comparison of those figures against a standardized grouping developed over the years and consistently applied by the agency as a policy. In this instance, the grouping consisted of all LTCHs operating in Florida in 2004; a total of 11 facilities; eight operated by Kindred and three operated by Select. The analysis is based on Revenue Per Patient Day (RPPD). Promise estimated it would generate an average RPPD of $1,492 in Year 2, and a net profit for the same period of $2,521.327. Using the above process, AHCA concluded that Promise's projected net income per patient day appeared reasonable. At the time of hearing, other Promise facilities were receiving an average RPPD higher than $1,400; compared to the projected "somewhat over" $1,500 it would expect to receive in Year 2 of its Miami-Dade facility. Approximately half of the existing Promise facilities (including West Valley and San Antonio) received Medicare RPPDs in excess of $1,500. As opposed to total revenue per patient, revenue on a per patient day is the one figure associated with the expenses generated to treat a patient on a given day. A comparison of net RPPDs projected by Promise with those of other applicants and the state median indicate Promise's revenue projections are reasonable. While Medicare recently opted not to increase the rate of LTCH reimbursement for the 2006-07 fiscal year, it is the first year in four that the program has done so. Compared to Promise's assumption that Medicare reimbursement would increase yearly by 3 percent on average, Select assumed a rate of 2.4 percent. The ALOS projected by Promise was too long. In projecting need, Select projected an ALOS similar to Promise's projection. Compared with the statewide ALOS of 35 days, Select's is about 28 days. This is the result of a combination of managing patients and their acuity. Assuming Promise's ability to manage patients in a manner similar to Select and achieve a like ALOS, Promise would have room available to admit more patients. There is no reason to assume Promise could not attain a similar ALOS with a similar population than that served by Select; others have done so. Like other segments of the health care industry, LTCH providers will manage patient care to the reimbursement received from payors. The CMI projected by Promise was too high. The prospective payment system is based to a great extent on how patients' diagnoses and illnesses are "coded," or identified, because the information is translated into a DRG, which, in turn, translates directly into the amount of reimbursement received. Each DRG has a "weight." By obtaining the DRG weight for each patient treated in a hospital, one can obtain the average weight, which will correspond to the average cost of care for the hospital's patients. The term for this average is Case Mix Index (CMI). Each year Medicare determines the rate it will pay for treatment of patients in LTCHs, adjusted for each market in the U.S. to account for variations in labor costs. Mr. Balsano assumed the new facility would experience an average CMI of 1.55 and that Medicare would reimburse the facility based on existing rates with an annual inflation of 3.0 percent. Mr. Balsano then reduced the estimated Medicare RPPD generated by those assumptions by 15 percent. While Select's expert criticized Promise's projected CMI adjusted reimbursement rate for Medicare patients (approximately $50,000) as to high, Select's own Exhibit 12, p. 8, indicates a projected reimbursement of $41,120.44 based on an average CMI of 1.0. However, at hearing it was verified that Select's Miami facility operated at an average CMI of 1.23. Applying a CMI of 1.23 generates an average projected Medicare reimbursement of $50,618 per patient, a number similar to that projected by Mr. Balsano. Select Ex. 14, pages 9-16, contains data on, among other things, the CMI of 161 DRGs used by Promise's expert. The data was taken from each of the existing LTCHs in Florida. In 2004, the statewide average CMI was 1.231. Also in 2004, four of 11 LTCHs in Florida experienced an average CMI of 1.4 or higher. Other Florida facilities have experienced an average CMI at or above 1.59. Indeed, other Florida facilities have experienced average CMIs and ALOS similar to that of the Select facility. While Promises operates no facility with an average CMI of 1.55, it has several with average CMIs of 1.3 or 1.4. Promise expects Medicare will take future steps to restrict the admission of patients with lower CMIs' the effect being more complex patients will access LTCHs than currently do, increasing the average CMI in LTCHs. Reducing the number of lower acuity patients admitted to LTCHs in future years will likely increase the CMI of those admitted. There is a direct correlation between CMI and ALOS. If, in fact, the CMI experienced by Promise's facility is less than 1.55, it will in turn generate a lower ALOS. Applying the reduction in reimbursement advanced by Promise's witness (15 percent) would in turn reduce the projected CMI in Promise's facility from 1.55 to 1.05. Because reimbursement coincides with acuity and ALOS, a representation that reducing one of the three does not likewise affects the others is not realistic. Whatever the CMI and ALOS for LTCHs will be in the future will be governed to a great extent by the policies established by the federal government. The federal government's reimbursement system will drive the delivery of patient services and the efficiencies the system provides, so that, in fact, the providers of care manage patients to the reimbursement provided. Whether the average CMI at Promise's facility reaches 1.55 in the future is subject to debate; however, it is reasonable that the status quo will not likely continue; thus, regardless of a facility's current CMI, more complex patients will access the facility in the future. Various sensitivity analyses generated to test the reliability of Select's criticisms in this area do not indicate any material change in the projected Medicare reimbursement. The interest rate on the loaned funds was 9 percent, rather than 7 percent. The estimated expenses did not include sufficient funds to pay the following: the necessary ad valorem taxes the required PMATF assessment the premiums to obtain premises insurance physician fees housekeeping expenses in Year 1 Using the same standardized "grouping" analysis, AHCA calculated Promise's projected costs per patient day and found them reasonable. Because the projected increase in ad valorem taxes and the PMATF assessment will not be payable until 2010, it is not necessary to borrow additional funds to meet these obligations. Select's expert concluded that, depending on a number of scenarios, the result of the appropriate calculations would produce a loss to Promise's project of between $624,636 and $902,361 of year 2. Assuming they represented sensitivity analyses which included various assumptions based on criticisms from Select. The impact of Select's suggested adjustments, reduced by overstated costs in Promise's application Schedule 8A, increased Promise's projected Year 2 net income from the initial estimate of $2,521,327 to $2,597.453. Even if the 15 percent reduction previously included in Mr. Balsano's assumptions on Medicare reimbursement were not considered, and assuming a lower CMI consistent with the existing statewide average (1.43 vs. 1.23), or that Promise's experience in District 11 will be similar to Select's, Promise's facility would still be financially feasible. Select's witness conceded that if Promise's facility experienced a lower ALOS, the demand for additional LTCH services is high enough to allow the facility to admit additional patients ("backfill"). While assuming a lower reimbursement due to lower acuity patients admitted to Promise's facility, Select's witness did not similarly assume any reduction in expenses associated with treatment of such lower acuity patients. In reality, if revenues are less than expected a facility reduces expenses to generate profits. Select's witness also conceded that Promise could reduce the management fee to reduce costs and generate a profit. The testimony of Promise's Chairman, Mr. Baronoff, established the company would take measures to reduce expenses to assure the profitability, including reducing the facility's corporate allocation. Such a reduction by itself would reduce expenses by between $1 million and $1.5 million. Reduction in corporate allocation has occurred before to maintain the profitability of a Promise facility. With regard to Select-Dade, its forecasted expenses, as detailed on Schedules 7A and 8A of its application are consistent with Select-Miami's historical experience in Miami. Evaluation of the revenues and expenses detailed in Select-Dade's Schedules 7A and 8A (and drawing comparison with SMC's 96 other hospitals, with particular attention paid to the Select-Miami facility), its profitability after year one indicates that Select-Dade's project will be financially feasible in the long term. In sum, all four applicants demonstrated long-term financial feasibility. Subsection (7): Extent to Which the Proposal Will Foster Competition that Promotes Quality and Cost-effectiveness Competition benefits the market. It stimulates providers to offer more programs and to be more innovative. It benefits quality of care generally. Competition to promote quality and cost-effectiveness is generally driven by the best combination of high quality and fair price. The introduction of a new LTCH providers to the market would press Sister Emmanuel, Kindred-Coral Gables and Select-Miami to focus on quality, responsiveness to patients and would drive innovations. Approval of any of the applications, therefore, as the Agency recognizes, see Agency for Health Care Administration Proposed Recommended Order, at 36, will foster competition that promotes quality and cost-effectiveness. Competition that promotes quality and cost- effectiveness will best be fostered by introduction to the market of a new competitor: either MJH or Promise. Between the two, Promise's application for 60 rather than 30 beds proposed by MJH, if approved, would capture a larger market share and promote more competition. On the other hand, MJH's because of its long-standing status as a well-respected community provider, particularly in the arenas of cost-effectiveness and quality of care, would be very effective in fostering competition that would promote both quality and cost-effectiveness. Kindred and Select dominate LTCH services in Florida with control over 86 percent of the licensed and approved beds: Kindred has eight existing LTCHs and one approved LTCH yet to be licensed; Select has three existing LTCHs and six approved projects in various stages of pre-licensure development. In 2005 the District 11 LTCH market shares were: Kindred-Coral Gables: 42 percent; Select-Miami: 35 percent; and Sister Emmanuel: 23 percent. Approval of Promise would only slightly diminish Select-Miami’s market share and would reduce Sister Emmanuel to a 16 percent share. A Select-Dade approval would give the two Select facilities a combined 54 percent of the market. A Kindred approval would give its two Miami-Dade facilities a combined 57 percent market share. An MJH approval would give it about 16 percent of the market, Sister Emmanuel would decline to 19 percent and Select-Miami and Kindred-Coral Gables would both have market shares above 30 percent. MJH's application is most favored under Subsection (7) of the Statutory Review Criteria. Subsection (8): Costs and Methods of Proposed Construction The parties stipulated to the reasonableness of a number of the project costs identified in Schedule 1, as well as the Schedule 9 project costs. All parties stipulated to the reasonableness of the proposed construction schedule on Schedule 10 of the application. Those additional costs items on Schedule 1 of the respective applications that were not stipulated to were adequately addressed through evidence adduced at final hearing. Given the conceptual-only level of detail required in the schematic drawings submitted as part of a CON application, and based on the evidence, it is concluded that each of the applicants presented a proposed construction design that is reasonable as to cost, method, and construction time. Each applicant demonstrated the reasonableness of its cost and method of construction. Accordingly each gets credit under Subsection (8) of the CON Statutory Review Criteria. But under the subsection, MJH's application is superior to the other three applications. The subsection includes consideration of "the costs and methods of energy provision and the availability of alternative, less costly, or more effective methods of construction." § 408.035(8), Fla. Stat. As an application proposing an HIH rather than a free-standing facility, not only can MJH coordinate its operations with other types of service settings at expected energy savings, its application involves less construction and substantially less cost that the other three applications. Subsection (9): Past and Proposed Provision of Services to Medicaid and Indigent Patients A provider's history of accepting the medically indigent, Medicaid and charity patients, influences patients and referral sources. Success with a provider encourages these patients on their own or through referrals to again seek access at that provider. As a safety net provider, MJH has a history of accepting financially challenged patients, many of whom are medically complex. Its application is superior to the others under Subsection (9) of the Statutory Review Criteria. Promise does not have a history of providing care in Florida. It has a history of providing health care services to Medicaid and the medically indigent at some of its facilities elsewhere in the country. As examples, its facility in Shreveport, Louisiana, provides approximately 7 percent of its care to Medicaid patients and a facility in California provides about 20 percent of its service to Medicaid patients. MJH committed to the highest percentage of patient days to Medicaid: 4.2 percent. Promise proposes a 3.0 percent commitment; Select-Dade and Kindred, 2.8 percent and 2.2 percent, respectively. Select-Dade's proposed condition is structured so as to allow it to include Medicaid days from a patient who later qualifies as a charity patient, thus accruing days toward the condition without expanding the number of patients served. Select-Dade's targeted service area, moreover, has fewer proportionate Medicaid beneficiaries identified (13 percent) as potential LTCH patients than identified by the methodologies used by the applicants (21 percent), indicating that Select's targeted area is generally more affluent than the rest of the County. Kindred does not have a favorable history of providing care to Medicaid and charity patients. For example, during FY 2004, Sister Emmanuel provided 6.1 percent of its services to Medicaid and charity patients. During this same period, Kindred-Coral Gables provided only 1.08 percent of its services to Medicaid and charity patients. Of all four applicants, Kindred proposes the lowest percentage of service to such patients: 2.2 percent. It has not committed to achieving the percentage upon its initiation of services. Its proposed condition and poor history of Medicaid and indigent care merit considerably less weight than the other applicants and reflects poorly on its application in a process that includes comparative review. MJH's proposed condition, although the highest in terms of percentage, is not the highest in terms of patient days because the facility it proposes will have only half as many beds as the facilities proposed by the other three applicants. Nonetheless, the proposal coupled with its past provision of health care services to Medicaid patients and the medically indigent, which is exceptional, makes MJH the superior applicant under Subsection (9) of the Statutory Review Criteria. Subsection (10) Designation as a Gold Seal Program None of the applicants are requesting additional nursing home beds. The subsection is inapplicable to this proceeding.
Recommendation Based on the foregoing Findings of Fact and Conclusion of Law it is RECOMMENDED that the Agency for Health Care Administration issue a final order that: approves Miami Jewish Home and Hospital for the Aged, Inc.'s CON Application No. 9893; approves Select Specialty Hospital-Dade, Inc.'s CON Application No. 9892; denies Promise Healthcare of Florida XI, Inc.'s CON Application No. 9891; and, denies Kindred Hospitals East LLC's CON Application No. 9894. DONE AND ENTERED this 17th day of May, 2007, in Tallahassee, Leon County, Florida. S DAVID M. MALONEY 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 17th day of May, 2007. COPIES FURNISHED: Dr. Andrew C. Agwunobi, Secretary Agency for Health Care Administration Fort Knox Building III, Suite 3116 2727 Mahan Drive Tallahassee, Florida 32308 Craig H. Smith, General Counsel Agency for Health Care Administration Fort Knox Building III, Suite 3431 2727 Mahan Drive Tallahassee, Florida 32308 Richard Shoop, Agency Clerk Agency for Health Care Administration Fort Knox Building III, Suite 3431 2727 Mahan Drive Tallahassee, Florida 32308 W. David Watkins, Esquire Karl David Acuff, Esquire Watkins & Associates, P.A. 3051 Highland Oaks Terrace, Suite D Tallahassee, Florida 32317-5828 Sandra E. Allen, Esquire Agency for Health Care Administration Fort Knox Building 3, Mail Stop 3 2727 Mahan Drive Tallahassee, Florida 32308-5403 F. Philip Blank, Esquire Robert Sechen, Esquire Blank & Meenan, P.A. 204 South Monroe Street Tallahassee, Florida 32301 Mark A. Emanuele, Esquire Panza, Maurer & Maynard, P.A. 3600 North Federal Highway, Third Floor Fort Lauderdale, Florida 33308 M. Christopher Bryant, Esquire Oertel, Fernandez, Cole & Bryant, P.A. 301 South Bronough Street, Fifth Floor Tallahassee, Florida 32302-1110
Conclusions THIS CAUSE comes before the State of Florida, Agency for Health Care Administration (“the Agency") concerning the preliminary approval of Certificate of Need (“CON”) Application No. 10199 submitted by Select Specialty Hospital-Daytona Beach, Inc., (“Select-Daytona”), to establish a 34-bed Long Term Acute Care Hospital (“LTCH”) in District 4. 1. The Agency preliminarily approved Application No. 10199 submitted by Select- Daytona to establish a 34-bed LTCH in District 4. 2. In response to the Agency’s decision, Kindred Hospitals East, LLC (“Kindred”) filed a petition for formal hearing, challenging the preliminary approval. The matter was referred to the Division of Administrative Hearings (“DOAH”) where it was assigned Case No. 14-0121CON for hearing. Select-Daytona filed a Motion to Intervene in the DOAH and the case was styled with Select-Daytona being treated as an intervenor. Filed March 17, 2014 2:04 PM Division of Administrative Hearings 3. Subsequently, Kindred filed a corrected notice of voluntary dismissal of its petition in the DOAH, which closed the case. It is therefore ORDERED: 4. The preliminary approval of CON No. 10199 is upheld and will be issued subject to the conditions noted in the State Agency Action Report. ORDERED in Tallahassee, Florida, on this IE day of far ch. Elizabeth Dudelj, Secretary Agency for Health Care Administration 2014,
Other Judicial Opinions A party who is adversely affected by this Final Order is entitled to judicial review, which shall be instituted by filing one copy of a notice of appeal with the Agency Clerk of AHCA, 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 of 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. CERTIFICATE OF SERVICE I CERTIFY that a true and correct copy of this Final Order was served on the below- —_— named persons by the method designated on this SL ‘a day of LS ere 4 , 2014. Shoop, Agency Agency for Health Care Administration 2727 Mahan Drive, Mail Stop #3 Tallahassee, Florida 32308 (850) 412-3630 Facilities Intake Unit Agency for Health Care Administration (Electronic Mail) Lorraine M. Novak, Esquire Office of the General Counsel Agency for Health Care Administration (Electronic Mail) R. Bruce McKibben Administrative Law Judge Division of Administrative Hearings www.doah.state. fl.us M. Christopher Bryant, Esquire Oertel, Fernandez, Cole cbryant@ohfe.com amooney@ohfc.com (Electronic Mail) (Electronic Mail) Michael J. Glazer, Esquire James McLemore, Supervisor Ausley and McMullen Certificate of Need Unit mglazer@ausley.com Agency for Health Care Administration (Electronic Mail) (Electronic Mail)
Conclusions THIS CAUSE comes before the State of Florida, Agency for Health Care Administration, (the "Agency") regarding certificate of need ("CON") application No. 10164 filed by Lakeland Regional Medical Center, Inc. (““LRMC”). 1. LRMC filed this CON application which sought the establishment of a 32-bed comprehensive medical rehabilitation unit within its hospital located in Polk County, Florida, Service District 6. The Agency approved LRMC’s CON application 10164. 2. At the same time, the Agency denied: (a) CON application 10162 filed by HealthSouth Rehabilitation Hospital of Polk County Filed October 21, 2013 3:41 PM Division of Administrative Hearings (“HealthSouth”), which sought the establishment of a 50-bed comprehensive medical rehabilitation unit within its hospital located in Polk County, Florida, Service District 6. (b) CON application 10163 filed by Haines City, HMA, LLC, d/b/a Heart of Florida Regional Medical Center (“Heart of Florida”), which sought the establishment of a 14-bed comprehensive medical rehabilitation unit within its hospital located in Polk County, Florida, Service District 6. (c) CON application 10165 filed by Sebring Hospital Management Associates, LLC, d/b/a Highlands Regional Medical Center (“Highlands”), which sought the establishment of a 7-bed comprehensive medical rehabilitation unit within its hospital located in Highlands County, Florida, Service District 6. 3. HealthSouth, Heart of Florida and Highlands each filed a petition for formal hearing challenging the Agency’s approval of LRMC’s CON application and the denial of their respective CON applications. LRMC filed a petition for formal hearing supporting the approval of its CON application as well as the denial of CON applications filed by HealthSouth, Heart of Florida and Highlands. 4. HealthSouth has since voluntarily dismissed its petition for formal hearing as to both the denial of its CON application and the approval of LRMC’s CON application. 5. Heart of Florida has since filed a partial notice of voluntary dismissal of its petition for formal hearing solely as to the approval of LRMC’s CON application. The challenge of the denial of its CON application remains pending before the Division of Administrative Hearings. 6. Highlands has since filed a partial notice of voluntary dismissal of its petition for formal hearing solely as to the approval of LRMC’s CON application. The challenge of the denial of its CON application remains pending before the Division of Administrative Hearings. 7. Based upon these voluntary dismissals, the Division of Administrative Hearings entered an Order Closing File and Relinquishing Jurisdiction in the above styled matter. IT IS THEREFORE ORDERED: 8. The denial of HealthSouth’s CON application 10162 is UPHELD. 9. The approval of LRMC’s CON application 10164 is UPHELD. ORDERED in Tallahassee, Florida on this_Zf day ot Crepe. .2013. Elizabeth\Qudek, Secretary Agency for'Health Care Administration
Other Judicial Opinions A party who is adversely affected by this final order is entitled to judicial review, which shall be instituted by filing the original notice of appeal with the agency clerk of AHCA, and a copy along with the filing fee 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 the rendition of the order to be reviewed. CERTIFICATE OF SERVICE 1 HEREBY CERTIFY that a true and correct copy of the foregoing Final Order has been furnished by U.S. Mail or electronic mail to the persons named below on this /& day of CA Ofer 13. Agency for Health Care Administration 2727 Mahan Drive, Mail Stop #3 Tallahassee, Florida 32308 (850) 412-3630 Janice Mills James McLemore, Supervisor Facilities Intake Unit Certificate of Need Unit Agency for Health Care Administration Agency for Health Care Administration (Electronic Mail) (Electronic Mail) R. Bruce McKibben Administrative Law Judge Division of Administrative Hearings (Electronic Mail) Lorraine M. Novak, Esquire Assistant General Counsel Agency for Health Care Administration (Electronic Mail) R. Terry Rigsby, Esquire Pennington, Moore, Wilkinson, Bell & Dunbar, P.A. 215 South Monroe Street, 2" Floor Tallahassee, Florida 32301 Jonathan L. Rue, Esquire Parker, Hudson, Rainer & Dobbs, LLP 285 Peachtree Center Avenue 1500 Marquis Two Tower Atlanta, GA 30303 Counsel for HealthSouth Co-Counsel for LRMC (U.S. Mail) (U.S. Mail) Geoffrey D. Smith, Esquire John D. Hoppe, Esquire Smith & Associates Peterson & Myers, P.A. 2834 Remington Green Circle, Suite 201 Tallahassee, FL 32308 Counsel for Heart of Florida and Highlands (U.S. Mail) 225 East Lemon Street, Suite 300 Lakeland, FL 33802-4628 + Co-Counsel for LRMC (U.S. Mail)
The Issue Whether the Agency for Health Care Administration should approve the application of Kindred Hospitals East, LLC, for a Certificate of Need to establish a 60-bed, long- term care hospital ("LTCH") to be located in Brevard County, one of four counties in AHCA District 7.
Findings Of Fact The Parties Kindred Hospitals East, LLC, ("Kindred" or the "Applicant") is a subsidiary of Kindred Healthcare, Inc. ("Kindred Healthcare"). Kindred Healthcare operates 84 LTCHs nationwide, including eight in the State of Florida. Twenty-four of Kindred Healthcare's LTCHs are operated by Kindred Hospitals East, LLC, including the eight in Florida. The Agency is the state agency responsible for the administration of the Certificate of Need program in Florida. See § 408.034(1), Fla. Stat., et seq. Pre-hearing Stipulation The Joint Pre-hearing Stipulation between Kindred Hospitals East, LLC, and Agency for Health Care Administration, filed May 25, 2006, contains the following: E. STATEMENT OF FACTS WHICH AREADMITTED AND WILL REQUIRE NO PROOF The CON application filed by Kindred complies with the application content and review process requirements of Sections 408.037 and 408.039, Florida Statutes (2005), and Rule 59C- 1.008, Florida Administrative Code, and the Agency's review of the application complied with the review process requirements of the above-referenced Statutes and Rule. With respect to compliance with Section 408.035(3), Florida Statutes (2005), it is agreed that Kindred has the ability to provide a quality program based on the descriptions of the program in its CON application and based on the operational facilities of the applicant and/or of the applicant's parent facilities which are JCAHO certified. With respect to compliance with Section 408.035(4), Florida Statutes (2005), it is agreed that Kindred has the ability to provide the necessary resources, including health personnel, management personnel, and funds for capital and operating expenditures, for project accomplishment and operation. With respect to compliance with Section 408.035(6), Florida Statutes (2005)it is agreed that the project is likely to be financially feasible. The parties agree there are no disputed issues with respect to Kindred's compliance with Section 408.035(8), Florida Statutes (2005), which relates to an applicant's proposed costs and methods of proposed construction for the type of project proposed. The parties agree there are no disputed issues with respect to Kindred's compliance with Section 408.035(9), Florida Statutes (2005), which relates to an applicant's proposed provision of health care services to Medicaid patients and the medically indigent. Section 408.035(10), Florida Statutes (2005), relating to nursing home beds, is not at issue with respect to the review of Kindred's CON application. With respect to compliance with Rule 59C-1.008(1)(a)-(c), Florida Administrative Code, it is agreed that Kindred complied with the letter of intent requirements contained therein. 9. Rules 59C-1.008(1)(d), (e), (h), (i), and (j) are not at issue with respect to the review of Kindred's CON applications. With respect to compliance with Rule 59C-1.008(1)(f), Florida Administrative Code, it is agreed that Kindred complied with the applicable certificate of need application submission requirements contained therein. The need assessment methodology is governed by Rule 59C-1.008(2)(e)2.a.- d., Florida Administrative Code. With respect to Rule 59C-1.008(2), Florida Administrative Code, except as to Rule 59C-1.008(2)(e)2.a-d and (2)(e)3, Florida Administrative Code, it is agreed that this provision is not applicable to this proceeding, as the Agency did not at the time of the review cycle at issue, and currently does not, calculate a fixed need pool for LTCH beds. With respect to compliance with Rule 59C-1.008(3), Florida Administrative Code, it is agreed that Kindred submitted the required filing fees. With respect to compliance with Rule 59C-1.008(4)(a)-(e), Florida Administrative Code, it is agreed that Kindred complied with the certificate of need application requirements contained therein. Rule 59C-1.008(5), Florida Administrative Code, relating to identifiable portions of a project, is not at issue with respect to the review of Kindred's CON applications. In light of the stipulation, the issues remaining generally concern: the need for Kindred's proposed facility (including the reasonableness of Kindred's need methodology and whether its need assessment conforms to AHCA rules), the accessibility of existing LTCH facilities, and the extent to which the proposal will foster competition that fosters cost-effectiveness and quality. Long-Term Care Services The length of stay in the typical acute care hospital (a "short-term hospital" or a "STACH") for most patients is four to five days. Some hospital patients, however, are in need of acute care services on a long-term basis, that is, much longer than the average lengths of stay for most patients in an short-term hospital. Patients appropriate for LTCH services represent a small but discrete sub-set of all inpatients. They are differentiated from other hospital patients. Typically, they have multiple co-morbidities that require concurrent treatment. Patients appropriate for LTCH services tend to be elderly and frail, unless they are victims of severe trauma. All LTCH patients are generally medically complex and frequently catastrophically ill. Generally, Medicare patients admitted to LTCHs have been transferred from short-term hospitals. At the LTCH, they receive a range of services, including cardiac monitoring, ventilator support, and wound care. Existing LTCHs in District 7 At the time of the CON application there were 12 LTCHs operating in Florida with a total licensed bed capacity of 805 beds. There is one existing LTCH within District 7. Another is approved and under construction. Select Specialty Hospital-Orlando, Inc. ("Select-Orlando") contains 35 beds; it was licensed in 2003. The occupancy rate for this facility for CY 2005 was 73.57 percent. Select-Orlando's history shows few discharges to Brevard County. The majority of its discharges are to Orange, Seminole, and Osceola Counties. Most of the balance are to Volusia, Lake, and Polk Counties. A second LTCH, Select Specialty-Orange, Inc., has been approved and is under construction. It will contain 40 beds. The total licensed capacity of these two LTCHs will be 75 beds. Both of the facilities are located in Orange County and are located in or near Orlando within a few miles of each other. The acuity levels of the patients in the existing LTCH are not known. There are no LTCHs in Brevard County where Kindred proposes to build and operate a new LTCH should its application be approved. Kindred's Proposal Kindred's proposal in Brevard County, AHCA District 7, is for a freestanding 60-bed LTCH, with all private rooms, including an 8-bed intensive care unit (ICU). The proposed LTCH will follow a care model template that is similar to Kindred's other LTCHs. It will be a freestanding, licensed, certified and accredited acute-care hospital with an independent self-governed medical staff under the same model as a short-term acute hospital. The majority of patients in an LTCH typically arrive after discharge from a short-term acute care hospital, most often ending their STACH stay in an ICU. Not surprisingly, Kindred projects that its proposed LTCH will receive the bulk of its referrals from STACHs in the surrounding area. Kindred's LTCH patients will be discharged to either their homes, home health care, or to another post-acute provider on the basis of patient needs, family preference, and geography. There are several levels of care provided within an LTCH such as Kindred's proposed facility. Typically, LTCHs accept stable medical patients but with catastrophically ill patients some are bound to become medically unstable. There are eight ICU beds for the medically unstable patient. Thus, Kindred's patients who undergo changes of condition (such as becoming medically unstable) can be cared for without a transfer, unlike in skilled nursing facilities or comprehensive medical rehabilitation hospitals facilities not suited for the medically unstable patient. The goal of an LTCH is to take acute care hospital patients and provide them with a higher level of medical rehabilitation than they would receive in an STACH, and rehabilitate them so that they can be transferred home, or to a rehab hospital, or to a nursing facility. The "medical rehabilitation" of an LTCH addresses system failures and dependence on machines. This is different from the rehabilitation that takes place in an inpatient or outpatient rehab center, where patients usually have suffered an injury or trauma to a muscular or bone system, and their care is based on physical medicine rather than internal medicine. The Orlando Metropolitan Area and Brevard County In evaluating markets that may need an LTCH, Kindred looks at established metropolitan areas the boundaries of which are determined on the basis of population concentrations and commuting data. District 7 contains most of the metropolitan area associated with the city of Orlando (the "Orlando Metropolitan Area"). Like District 7, the Orlando Metropolitan Area has a presence in four counties. But the counties are different. The Orlando Metropolitan Area encompasses all or part of Orange, Osceola, Seminole, (shared with AHCA District 7) and a county that is not in District 7: Lake County. In addition to the three counties it shares with the Orlando Metropolitan Area, District 7 includes Brevard County. At hearing, Mr. Wurdock explained the following about the Orlando Metropolitan Area: When we talk about the Orlando area, we are not just talking about Orange County. Orange County, Osceola County, and Seminole County are all part of the Orlando metro area. That means they're an integrated economic unit based on commuting patterns. Lake County is also part of [the Orlando metropolitan area.] . . . [W]hen we looked at . . . Orange, Osceola and Seminole and ran an analysis . . ., we found . . . there was a need for approximately 180 more beds beyond the . . . 35 that currently existed. So even after you take out the 40 under construction, there is still a really huge need [in the Orlando metropolitan area.] Tr. 56-57. That Brevard County is not part of the Orlando Metropolitan Area is a consideration in this case. Kindred's evaluation also showed two other factors about Brevard County that distinguish it from the Orlando Metropolitan Area. First, it does not have adequate access to long-term care hospitals. Second, it's population with a significant number of seniors and a high number of discharges from STACHs makes it one of the few markets of its size that does not have at least one LTCH. As Mr. Wurdock continued at hearing: Brevard County has a population of more than a million people and it's got more than 100,000 seniors and they have six short term hospitals that produce more than 60,000 discharges a year. . . . [T]here are very few markets of that size in this country that do not have at least one long term hospital . . . Tr. 57. These two factors led Kindred to pursue the application that is the subject of this proceeding. Kindred's decision to pursue a CON for an LTCH in District 7 also stemmed from the interest of Brevard County physicians who had referred patients to Kindred facilities in Fort Lauderdale and Green Cove Springs in Duval County, a government unit consolidated with the city of Jacksonville. This interest was also supported by evidence that showed a predominate north/south referral pattern along the I-95 corridor. Patients in Brevard County STACHs appropriate for LTCH services are referred to facilities in Duval County (north) and Fort Lauderdale (south), but generally not to the lone District 7 LTCH in Orlando. The number of short-term acute hospitals in an area affects the decision of whether to locate a facility in a particular market. The presence of STACHs in a market is significant because the vast majority of an LTCH's patients are transfers from STACHs. The growing senior population (persons aged 65 and over) in Brevard County was also a factor; the elderly population is a large constituent of an LTCH's patient base. Dr. Richard Baney, who practices with Melbourne Internal Medicine Associates, the largest physician- practice group in Brevard County, holds privileges at Holmes Regional Medical Center, and is familiar with the various health care facilities of all types in Brevard County, including hospitals, inpatient rehabilitation hospitals, and nursing homes. Dr. Baney anticipates serving as either an attending or consulting physician if the Kindred facility in Brevard is approved, as do several of the other physicians in his group, including some "intensivists" such as pulmonologists, critical-care physicians, and cardiologists. Dr. Baney's physician group consists of 45 primary care physicians, including internists, family practitioners and pediatricians. The group also includes OB/GYNs, neurologists, medical sub-specialists such as cardiologists, pulmonologists, endocrinologists, hematologists, and oncologists. Among the oncologists are radiological oncologists. There are general surgeons in the group, surgery sub-specialists, including vascular surgeons, and ENT (ear, nose, and throat) physicians. Dr. Baney summed up his opinion on the need for an LTCH in Brevard County as follows: In our area we have excellent acute- care hospitals, and we have a good network located throughout the area of subacute rehab facilities, as well as nursing homes, and then home care, and then eventually a patient is home. What we don't have in this area is a long-term acute-care facility that would handle the more significantly ill patients who need more intensive medical and nursing and physical therapy support. Right now those patients that would normally benefit from this type of facility have to dwell in the hospital for . . . weeks and weeks at a time until they achieve a point of stability where they can be moved into a subacute rehab. What this does in turn is clog up the hospital beds, ICU beds in particular, and every year we have at our large acute-care hospitals here at Holmes patients who are being quartered in the . . . auditorium at the hospital, in the hallways of the emergency room, since the hospital gets just overwhelmed with patients and cannot move them out. Certainly I believe a facility in this area would have no trouble being able to fill that need of taking many of these patients who need this kind of care out of the [STACH] into a better, more efficient setting. Also, we don't have any place that's nearby that patients and their families can go for this kind of care. . . . [I]t's really not logistically feasible for patients and their families to go 80, 90 miles away or further to . . . have their care for this type of duration. Kindred No. 7, Deposition of Richard Baney, Jr., M.D., at 10-11. When asked about the difficulty presented by the distance to the LTCHs in Fort Lauderdale and Duval County, Dr. Baney answered with regard to one of his patients that administratively there a few if any problems. The problem is for the family: But the family was very hesitant to allow their father to be transported . . . 150, 180 miles away and be there for weeks or months while they were recovering. They were quite resistant to the idea of him so far away, since the family would have to travel back and forth. Eventually they overcame that and the patient did go . . . to the facility down south. * * * But it was quite a hurdle that we had to get over. Id., p. 16, 17. Aside from the logistical problems faced by the families whose loved one is a potential patient at an LTCH at great distance from home, Dr. Baney's testimony accentuates another factor faced by potential LTCH patient in Brevard County. This is a factor favoring approval of an LTCH application recently recognized by AHCA when it approved Select-Orange, a second LTCH in the Orlando Metropolitan Area dominated by two large hospital organizations. Similar to the Orlando area, Brevard County STACHs, for the most part, belong to one of two hospital organizations predominate in the area. Brevard County's Two Main Hospital Organizations There are two main hospital organizations in Brevard County: the Health First system and the Wuesthoff system. Health First includes Holmes Regional Medical Center; Palm Bay Community Hospital, which is about 90 beds; and Cape Canaveral Hospital, which is also about 90 beds, in the central part of the county. Palm Bay is a large community about 15 miles south of Melbourne. Cape Canaveral is about 20 miles from Melbourne, and Rockledge is about 15 miles from Melbourne. The Wuesthoff system consists of Wuesthoff Rockledge and Wuesthoff Melbourne. Wuesthoff Rockledge is a 267-bed acute care facility with 32 ICU beds, 8 cardiac surgery beds, and an active emergency room that sees about 1,500 visits a month. Wuesthoff Melbourne is a 115-bed facility with a 12-bed ICU and an active ER of around 800 visits a month. Wuesthoff currently refers LTCH patients- primarily long-term ventilator patients-to Kindred's facilities in Fort Lauderdale and near Jacksonville. When Wuesthoff refers a patient to Kindred, it calls Kindred's intake coordinator who journeys to Wuesthoff to review the patient's records, meet with the family, and determine if the patient can be placed. Only if a physician from the LTCH signs an admission order concurring that the patient is clinically appropriate for admission to an LTCH is the patient transferred. Often, however, because the Kindred facilities are so far away, just as Dr. Baney pointed out, the families do not want to move the patient out of Wuesthoff. This resistance continues despite increased education about the benefit of LTCHs to potential LTCH patients. LTCH Education When an LTCH comes into a market, an education process begins. It begins with the physicians, and with the case managers and social workers in the STACH. Kindred educates these professionals about what an LTCH is, what its services are, and where it fits into the continuum of care. Kindred's Admission and Patient Evaluation Processes Kindred does not admit every patient that falls within the diagnoses that might produce LTCH-appropriate patients. Patients are pre-assessed before admission using what is nationally known as Interqual criteria for hospital admissions. That set of criteria is based on severity of the patient's illness and the intensity of services required to treat the patient, and then a review committee at the LTCH makes a clinical determination whether or not the patient is appropriate for LTCH services. The sole way that a patient gets referred to a Kindred Hospital is through a physician order. Before a patient comes to a Kindred Hospital, a physician has determined that to the best of his or her judgment the patient requires continued care at the level of an acute care hospital and that the patient's course of treatment will be prolonged. A physician from a Kindred Hospital must write the admission order, concurring that it is appropriate for that patient to be in an LTCH. Prior to obtaining that physician order, potential candidates for transfer are identified through the STACH case management staff, with the assistance of the LTCH staff. The STACH medical staff, nurses, or other personnel initiate the request for Kindred to visit the patient, interview the family, talk with the STACH attending physician, and make a determination of whether transfer and care at Kindred is clinically appropriate. Kindred gathers information on a potential patient to assist in making the admission determination using individuals in the field known as "clinical liaisons," who are primarily licensed registered nurses. The clinical liaison gathers the information, but does not make the ultimate determination as to whether to admit the patient to a Kindred facility. The ultimate determination for admission is made by the physician who will be seeing the patient at the Kindred facility. In order to comply with Medicare reimbursement requirements, Kindred employs such safeguards to make sure only appropriate patients are admitted. Medicare reviews the patients treated into the hospital, and it can and does reduce payment for "short stay outliers" who do not stay at least five-sixths of the geometric mean of the length of stay (GMLOS) for the patient's diagnosis. Mathematically, however, LTCHs will always have some patients who are short stay outliers. Even if GMLOSs rise as result of the elimination of short stay patients, between 35 and 40 percent of patients will always be "short stay outliers" under CMS's current definition. They will just be hospitalized for a stay that is short relative to a longer length of stay. Kindred LTCHs utilize criteria that assure that patients, once admitted, have sufficient severity of illness and need sufficient intensity of service to continue to warrant acute care. Case managers in LTCHs apply discharge screens to patients as they near completion of their LTCH care plan to help physicians make a judgment of when they are ready to be transferred either home or to a lower level of post-acute care. Kindred's CON application included a utilization review plan, using an example from Kindred Hospital North Florida. Every hospital has a utilization review plan designed to assure that appropriate care is given to patients. It serves an oversight function for medical care, nursing care, medication administration, and any other area where resources are expended on behalf of the patient. A PPS for LTCHs Effective October 1, 2002, the federal Centers for Medicare and Medicaid Services (CMS) established a prospective payment system for LTCHs. Through this system, CMS recognizes the patient population of LTCHs as separate and distinct from the populations treated by providers of short-term acute care or other post short-term acute care providers. Under the system, each patient is assigned an LTCH DRG, indicating that the patient's diagnosis is within a certain Diagnostic Related Group. The LTCH is reimbursed the pre-determined payment rate for that DRG, regardless of the cost of care. The creation of separate DRGs for LTCH patients is the mark of the federal government's recognition of the validity of LTCH services and the distinct place occupied by LTCHs in the continuum of care based on the high level of LTCH patient acuity. Despite this recognition, concerns about the identification of patients that are appropriate for LTCH services have been voiced both at the federal level and at the state level. With the rise in LTCH applications over the last several years, AHCA has been consistent in voicing those concerns, particularly when it comes to LTCH population levels of acuity. Acuity The Agency is not convinced that there is not significant overlap between the LTCH patient population and the population of patients served appropriately in healthcare settings other than LTCHs. The Agency has reached the conclusion that there are options (other than an LTCH in Brevard County) available to patients targeted by Kindred. The options depend on such matters as physician preference and the availability of long-term care hospitals in a given geographic area. Kindred answers the concerns, in part, with evidence that relates to acuity. A "case mix index" for the hospital is a measure of its average resource consumption. Resource consumption can be viewed as a surrogate measure of complexity and severity of illness, so case mix index is often cited as a readily available measure of patient acuity. Using that indicator, the case mix index of Kindred hospitals is high compared to the entire LTCH industry, and is higher than the average case mix index for STACHs. The APR/DRG system is a way to further refine the variation of patients' acuity within a DRG. The system assigns not only a DRG, but a severity of illness on a scale of one (minor severity) to four (extreme severity). Using that tool with the Kindred data base (as well as the federal MedPAR data base) confirms that the distribution of severe and extreme severity of illness is skewed toward LTCH patients, meaning that there are more patients with higher severity of illnesses in LTCHs than in STACHs. As is to be expected, and one would hope if LTCHs are appropriately serving their niche in the continuum of care, this is consistent with the empirical observation that patients in LTCHs, are more sick than those in STACHs. A third measure of patient acuity routinely used in Kindred hospitals is an APACHE score, which is a combination of physiologic derangement and concurrent illnesses. The average Kindred patient has an APACHE score of about 45, whereas the average critical care patient in all STACHs has a score about two-and-a-half points higher. Thus, Kindred's LTCHs treat a severely ill population only a few points, on the APACHE measure, below that of critical care units in STACHs across the country. The Agency does not, by rule or order, define the level of acuity at which LTCH patients should be for admission. Information on acuity level of patients in STACHs is not available through the State's health statistics data base, nor is any information that would allow an LTCH applicant to undertake an acuity analysis of potential patients. AHCA acknowledges that it has no reason to believe that Kindred admits lower-acuity patients with the least need for resources among those in LTCH- appropriate DRGs. Family Hardship In those markets that do not have LTCHs, STACH patients typically have no choice of treatment but to stay in the STACHs, unless they are willing to travel long distances. As Dr. Baney pointed out in his deposition testimony, many patients who could benefit from an LTCH are not inclined to travel long distances. One reason is that the patients' families are not able to commute that distance. If the patient is going to be in an LTCH for weeks or months, it creates a hardship on the family to have their loved one that far away. The family either loses contact with their loved one or they actually have to relocate to where the loved one is and abandon their home temporarily. The need for family presence and involvement is more than just an emotional matter of patient and family preference. Families are involved in the treatment of a patient in a long-term care hospital, not only through their presence in the hospital but also because they will participate in patient care after the patient leaves the LTCH. Families have to learn how to get the patients out of bed, feed them, and possibly suction them. The families would be taught how to care for their family members once they leave the LTCH, by nursing and therapy staff, teaching them exercises for the patient, how to regulate the oxygen, and giving medications. Differences between LTCHs and Other Providers LTCHs and STACHs do not have the same purpose, and the gap is widening between the two. Over the last 20 years, STACHs have evolved into settings that are very good at stabilizing patients, diagnosing their conditions, and developing treatment plans. Most admissions to the medical ward of an STACH come in through the emergency room where patients are so acute, so unstable, that emergency care is required to stabilize the patient. In their role as diagnostic centers, STACHs provide imaging and laboratory services, and then develop a treatment plan based on the diagnostic work-up performed. STACHs have moved away from the function of carrying out a treatment plan. This is borne out by shrinking STACH lengths of stay over the last 20 years, which now average four to six days. As a result, STACHs have limited capability to provide a prolonged treatment plan for patients with multiple co-morbidities. In contrast, LTCHs do not hold themselves out to be diagnostic or stabilization centers. They have developed expertise in caring for the small subset of patients that require a prolonged treatment plan. A multi-disciplinary physician- based care plan is provided in LTCHs that is not provided in STACHs or other post-acute settings. LTCH patients meet hospital level criteria, and if there is no LTCH readily accessible to provide a hospital-level discharge option for these patients, then the STACH has no option but to keep them, and manage their treatment and costs as best they can. LTCHs take care of those patients who need to be in a hospital, but for whom reimbursement is not adequate for STACHs to treat. The reimbursement system is driving this to a great extent, because of the incentives it gives to discharge patients as quickly as possible. Not every STACH patient needs LTCH care; as a rule of thumb, about one percent of all non-obstetric patients are potentially LTCH-appropriate. Ms. Woods, Vice President for Wuesthoff Health System which operates STACHs in Brevard County, testified in deposition that Wuesthoff's ICUs in Wuesthoff hospitals often retain patients who could be placed in an LTCH. As the Wuesthoff ICUs remain full, the ability to move patients through the hospital, from the emergency department through the ICU, is significantly impacted. While long-term care hospitals take a team approach to getting patients weaned from ventilators or getting them to a rehab involvement, an acute care hospital ICU deals more with acute crisis situations, such as an acute MI (myocardial infarction) or an acute blood clot to the lungs, or someone who has acute sepsis or infection. The roles that LTCHs play have a significant impact on acute care hospitals such as Wuesthoff. If an acute care hospital has to maintain a patient for 30 to 60 days on a ventilator in order to get them weaned or to meet their needs, that poses the potential to interfere with the acute care hospital from meeting the needs of the community, such as patients who are coming in the emergency room with acute conditions. Most of the stays in Wuesthoff's ICU beds, for example, are five to seven days; they are trauma patients, surgery patients that need support and critical care, and patients coming in with major infections. When ICU beds are unavailable, these patients are being held in the emergency departments; it stops the patient flow if the beds in a community hospital are taken up from a long-term ventilator patient. SNFs and LTCHs are different both in intent and execution. SNFs are appropriate for patients whose primary needs are nursing, who are stable and unlikely to change, and who do not require very much medical intervention. Conversely, LTCHs, being licensed and accredited as acute care hospitals, are appropriate when daily medical intervention is required. LTCHs are able to respond to changes in conditions and changes in care plans much better than SNFs because LTCHs have access to diagnostics, laboratory, radiology, and pharmacy services. Further, there are no skilled nursing facilities in Brevard County that operate beds for ventilator dependent patients, nor are there hospital-based skilled nursing units ("HBSNUs"). Using Kindred's own nursing data base, which consists of 250 SNFs across the country, and Kindred's LTCH data base, consisting of 75 LTCHs, Kindred has discovered that that overlap in patient condition is very small. Where there is overlap, it tends to be at the ends of care in LTCHs and the beginning of care in SNFs. This progression makes sense, since SNFs are a common discharge destination for LTCH patients. LTCHs and rehab hospitals are also distinctly different. Rehab hospitals are geared for people with primarily neurologic or musculoskeletal orthopedic issues, and are driven with a care model based on physical medicine rather than internal medicine; LTCH care requires the oversight of an internist rather than a physical medicine doctor. While rehab is a concurrent component of LTCH care, the patient in an LTCH cannot tolerate the three hours per day of therapy required for admission to rehab hospitals due to their medical conditions. In fact, a common continuum of care is for an LTCH patient to receive treatment and improve to the point where they can tolerate three hours of rehab and so be transferred to a rehab hospital. There is one acute rehab center in Brevard County, and it does not take ventilator-dependent patients. There are no hospital based skilled nursing units in Brevard County. There are no skilled nursing facilities in Brevard County that can accommodate ventilator-independent patients. Often ventilator-dependent patients also have IV antibiotics and tube feedings, and these are complicated conditions that a nursing home will not treat. LTCH care cannot be provided through home health care, because, by definition, LTCH patients meet criteria for inpatient hospitalization. Home health care is designed for patients who are very stable and have such a limited medical need that it can be administrated by a visiting nurse or by families. This is in sharp contrast to an LTCH patient where many hours a day of nursing, respiratory, and other therapies are required under the direct care of a physician. On the basis of regulation alone, STACHs could provide LTCH care. They generally do not do so because they have evolved into centers of stabilization, diagnosis, and initiating a treatment plan. Case studies bear out that when patients who made very little progress in STACHs are transferred to LTCHs, where the multidisciplinary approach takes over from the diagnostic focus, the patients improve in both medical and physical well-being. Those patients that would normally benefit from an LTCH have to dwell in the hospital for weeks until they achieve a point of stability where they can be moved in to a subacute facility; instead of continuing to move efficiently down the continuum they remain in the "upper end of the stream." This, in turn, may overwhelm the short-term acute care hospital, particularly in its ICU, resulting in patients being quartered in the auditorium at the hospital and in the hallways of the emergency room. The LTCHs available along the east coast of Florida in Fort Lauderdale or Jacksonville are at a distance from Brevard County that is an obstacle to referral of a Brevard County patient. Having a long-term care hospital in Brevard County would enhance the continuum of services available to Brevard County residents. On the other end of the referral process from Dr. Baney is Rita DeArmond, the clinical liaison for Kindred Hospital Fort Lauderdale. Her duties include, "patient evaluations on potential admissions to [Kindred Fort Lauderdale], which also involves meeting with families and educating the families, . . . case managers, . . . physicians and other people in the community about our hospital and long-term acute care hospitals in general." Kindred No. 8, at 5. She serves "Palm Beach County, the area around Lake Okeechobee [Okeechobee and Hendry Counties], Martin County, . . ., St. Lucie County, Indian River County and Brevard County." Id. at 11. In Ms. DeArmond's experience in dealing with potential long-term care hospital patients and their families not in the immediate vicinity of an LTCH, the willingness of those patients to travel great distances is the biggest hurdle for the patients admission to an LTCH. Most of the patients and their spouses are elderly, and they do not tend to travel long distances, or on the interstate. Being faced with traveling hundreds of miles round-trip to visit a loved one is very distressing to most of them. Not only would potential Brevard County LTCH patients be more likely to avail themselves of LTCH services if there were an LTCH in Brevard County but so would patients in other counties. For example, according to Ms. DeArmond, Lawnwood Regional Medical Center in Fort Pierce, a St. Lucie County STACH, and Sebastian River Medical Center, an STACH in Indian River County, would definitely send potential LTCH patients to an LTCH in Brevard County rather than the current closest LTCH, Kindred Fort Lauderdale. Having an LTCH would be a positive impact for other Brevard County STACHs as well. For example, Wuesthoff would not experience the backup in its emergency department and in its ICU beds, especially in the winter time where there is a high census due to more cases of pneumonia in the winter. If a patient who might be clinically appropriate for an LTCH remains in the ICU in an acute care hospital such as Wuesthoff, that patient does not receive the same care that he or she would receive at an LTCH. Acute care hospitals do not provide the medical rehabilitation work that LTCH's do, such as a plan of care just for the rehab of ventilator patients. An acute care hospital can deal with the pneumonia, and can wean the patient, but does not have the same plans or care or the same focus that an LTCH does with those types of patients. If the patient does not go to an LTCH, they will stay in the acute care hospital using the hospital resources. Wuesthoff has had patients there up to 65 days. The hospitals and physicians visited by Kindred- Fort Lauderdale clinical liaison Ms. DeArmond on a regular basis are located in Brevard County in District 7, as well as Indian River and St. Lucie counties. The hospitals within Brevard County that she contacts include Holmes Regional and Wuesthoff Melbourne Hospital; within Indian River County, Indian River Memorial Hospital in Vero Beach and Sebastian River Medical Center, and within St. Lucie County, St. Lucie Medical Center in Port St. Lucie and Lawnwood Hospital in Fort Pierce. In gathering letters of support that were submitted with Kindred's CON application for a long-term care hospital in Brevard County, Ms. DeArmond met with case managers and physicians and informed them of Kindred's intention to apply for a CON to build a hospital in Brevard County. The physicians and case managers who provided letters of support had previously referred patients to Kindred Hospital in Fort Lauderdale, so they were familiar with the services that Kindred can offer in an LTCH. It is reasonable to assume that such physicians and case managers would refer patients to a Kindred LTCH in Brevard County, if approved. MedPAC Concerns In denying Kindred's application, AHCA relied on reports issued to Congress annually by the Medicare Payment Advisory Committee (MedPAC) that discuss the placement of Medicare patients in appropriate post-acute settings. The June 2004 MedPAC report state the following about LTCHs: Using qualitative and quantitative methods, we find that LTCHs' role is to provide post-acute care to a small number of medically complex patients. We also find that the supply of LTCHs is a strong predictor of their use and that acute hospitals and skilled nursing facilities are the principal alternatives to LTCHs. We find that, in general, LTCH patients cost Medicare more than similar patients using alternative settings but that if LTCH care is targeted to patients of the highest severity, the cost is comparable. AHCA Ex. 7, at 121. The June 2004 MedPAC report, therefore, concludes that LTCHs should "be defined by facility and patient criteria that ensure that patients admitted to these facilities are medically complex and have a good chance of improvement." Id. Despite the above language in the June 2004 MedPAC report, discussion in the SAAR of portions of the MedPAC report shows that AHCA may have misread some of the subtleties of the MedPAC findings. The MedPAC report makes statements that LTCHs and SNFs substitute for one another. While there is some gross administrative data to support that hypothesis, that conclusion cannot yet be drawn due to limitations in data and the wide variation of patient conditions that may be represented by a single administrative grouping such as a DRG. An example of patients in different settings who would appear to be similar are those under DRG-475, which means they were on ventilator life support for at least 96 hours. Such patients may be discharged in conditions that vary greatly. These conditions range from an "alert, talking patient, no longer on life support," to a patient who is "not on life support but is making no progress." There is no administrative data that describes patients at the time of their discharge. MedPAC analysis, therefore, lacks the data to determine why some of those patients went to a higher versus a lower level of care. The SAAR also concludes, based on a letter from the MedPAC Chairman, that LTCH patients cost more on average than patients in other settings. This conclusion is based on an analysis that is unable to differentiate patients within a DRG based on their severity at the time of discharge. The limitation in the DRG is that it is designed to describe the patient's need at the time of admission rather than discharge, so the DRG classification alone does not identify whether the patient was healthy or ill at the time of discharge. Furthermore, MedPAC found that patients who tended to be more severe based on DRG assignment tended to be cared for at similar cost between LTCHs and other settings. In fact, for the tracheostomy patient, which is the extreme of severity and complexity, there was evidence of lower cost of care for patients whose case included an LTCH stay. MedPAC Chairman Glenn Hackbaith, in his March 20, 2006 letter, agreed that CMS's proposed change to the short stay outlier policy was "too severe"; that it affects a "substantial percentage of LTCH patients"; and that it would continue to affect a large percentage of admissions "regardless of the admission policies of LTCHs." MedPAC's March 2006 Report to Congress notes that the total Medicare payments to LTCHs nationwide -- $3.3 billion in 2004 -- represented less than one percent of all Medicare spending. Need Analysis in the Absence of an AHCA Need Methodology The Agency does not have a rule that sets out a formula for determining the need for LTCH beds. Accordingly, AHCA does not publish a fixed need pool for LTCH beds. As the parties agree, this case is governed, therefore, by Florida Administrative Code Rule 59C- 1.008(2)(e)2.a-d (the "Needs Assessment Rule"). Application of the Needs Assessment Rule makes Kindred responsible for demonstrating need through a needs assessment methodology that covers specific criteria listed by the rule as detailed below, following the sections of this Order devoted to Kindred's Need Methodology and AHCA's criticisms of it. Kindred's Need Methodology Kindred bases its need methodology (the "Kindred Methodology") in this case on long-stay patients in short- term hospitals. A description of the Kindred Methodology, supported and proved by the testimony of Mr. Wurdock at hearing, appears in Kindred's CON application under a section entitled "Bed Need Analysis," see Exhibit K-1, at 14. It begins with the statement: "Long-term care hospital bed need can be estimated directly based on the acute care discharges and days occurring in the market." Id. There follows a chart that lists the six Brevard County STACHs and shows the number of patient discharges in the six months ending March 2004 and the patient days for the same period. These total 68,710 and 309,704, respectively. To identify the number of patient days appropriate for LTCH care, the Kindred Methodology takes into account patient diagnosis at discharge, patient age and length of stay. Some types of patients (burn patients, obstetric and pediatric patients or behavioral patients) are not appropriate for LTCH admission. Likewise, patients with short-term rehabilitation diagnoses typically are not appropriate for LTCH care. The first step in the Kindred Methodology, therefore, is to identify and omit those diagnoses which represent patients not appropriate for long-term care admission. Those include all DRGs in the Major Diagnostic Categories (MDC) of 13-Female Reproductive System; 14-Pregnancy, Childbirth and Puerperium; 15- Newborns and Other Neonates; 19-Mental Diseases and Disorders; 20-Alcohol and Substance Abuse; 22-Burns; and 23-Factors Influencing Health Status. Two additional groups of DRGs are omitted by the Kindred Methodology: DRGs specific to patients less than 18 years of age and DRGs for organ transplant patients who are usually required to remain in the STACH for specialized care. The end result of the first step in the Kindred Methodology is a list of 387 short-term acute care DRGs ("LTCH Referral DRGs") that represent patients who potentially could be eligible for LTCH admission. The Kindred Methodology's second step is to identify discharges that are assigned to one of the LTCH Referral DRGs and are aged 18 or older and whose length of stay exceeds a threshold number of days. This threshold is described in the application as follows: The length of stay threshold is defined in terms of the national geometric mean length of stay (GeoMean). That statistic is calculated annually by the federal Centers for Medicare and Medicaid Services (CMS) for each DRG. The number of long-term hospital patients and patient days is affected by the timing of the referrals. Referrals usually occur after the patient's length of stay has become longer than average. It is commonly accepted that many patients who stay in the acute care hospital beyond the geometric mean length of stay would be best cared for in a specialized, long- term environment. Therefore, in this analysis it is assumed that referral to Kindred Hospital Brevard will occur five days after a patient has passed their DRG-specific geometric mean length of stay. This allows time for patient assessment and transfer arrangements. Another important factor affecting the potential number of long-term hospital patients and patient days is the length of time a patient stays in the LTCH. In order to qualify for Medicare certification, long-term care hospitals must maintain a minimum average length of stay of twenty-five days or greater among their Medicare patients. Admission criteria, therefore, are used to minimize the number of Medicare patients requiring just a few days of care. To reflect this in the analysis, patients are considered to be LTCH appropriate only if they would have a long-term hospital length of stay of ten days or more. Exhibit K-1, at 16. Discharged patients, therefore are considered appropriate for LTCH care by the Kindred Methodology if they are discharged from a Brevard County STACH, are at least 18 years of age, are assigned to one of the 387 Referral DRGs, and have a hospital length of stay that exceeds the geometric mean by at least 15 days, the sum of a referral period of five days and an LTCH minimum length of stay of ten days. The third step in the Kindred Methodology is to sum the potential LTCH days produced by the appropriate patients. For these patients, potential LTCH days include all days after the "'transfer day' (i.e., all days that exceed the GeoMean + five days)." Id. For the 12-month period ending March 2004, this calculation yielded approximately 18,400 hospital days in the six Brevard County hospitals, for an average daily census (ADC) of 50.4. The fourth step in the Kindred Methodology is to identify the number of patient days that are leaving Brevard County for LTCH care, due to the absence of an LTCH in the county. During the 12-month period ending in March 2004, 41 Brevard County residents were discharged from Kindred Hospital North Florida in Green Cove Springs and Kindred Hospital Fort Lauderdale. Those patients received 2,229 days of LTCH care, equaling an average daily census of 6.1. Adding that to the 50.4 ADC un-served patients in Brevard County, yields a potential LTCH ADC of 56.5. The fifth step is to account for population growth. This is especially important when there is rapid growth in senior population as there is in Brevard County. According to AHCA projections, the population 65 and over will increase 9.2 percent during the next five years, while the total population will increase 10.8 percent. It is appropriate to increase LTCH ADC at least by 9.2 percent during this time period, since the proposed project will not open until 2007 at the earliest, and will not achieve full utilization until at least 2011. This step produces an LTCH ADC of 61.7. The sixth and final step is to calculate LTCH "bed need" by assuming 85 percent occupancy. Dividing the LTCH ADC of 61.7 by 0.85 yields a bed need of 72 LTCH beds. The Kindred Methodology does not account for the five percent or more of referrals that come from sources other than LTCHs such as nursing homes. Nor does it take into account the admissions from Indian River County currently served by Kindred Hospital Fort Lauderdale, some of which are sure to come to the proposed project if approved. AHCA Criticism The methodology is criticized by AHCA on the bases, among others, that it does not account for beds available elsewhere in District 7, and that it determines need solely within Brevard County, a departure from the statutory mandate which requires Agency review of CON applications with regard to "availability, quality of care, accessibility, and extent of utilization of existing health care facilities in the service district of the applicant." § 408.035(2), Fla. Stat. (emphasis supplied). The Agency's argument with regard to the un- utilized beds at the one existing LTCH in District 7, Select-Orlando, is undermined by recent action of the agency in approving a second Select facility in Orange County, a 40-bed freestanding facility: Select Specialty Hospital-Orange, Inc. ("Select-Orange"). The Agency approved the 40-bed Select-Orange facility, not open at the time of hearing, by way of a Settlement Agreement (the "Select-Orange Settlement Agreement") with the applicant. The two parties to the agreement, AHCA and Select-Orange, jointly stated in that document: [T]he Agency, in recognizing that there are two distinct health systems in the Orlando area, believes that this LTCH is needed for the Orlando Regional Healthcare System due to that unique situation . . . Kindred Ex. 4, at 2. The two distinct health systems in the Orlando area are Orlando Regional Healthcare System, Inc., which has a number of STACHs in the Orlando area including Orlando Regional Medical Center (ORMC), a tertiary medical facility with more than 500 beds, and the Adventist Health System, Inc. (Adventist), a hospital organization with a nationwide presence that as of 2002 operated seven acute care campus systems under a single license held by Adventist d/b/a Florida Hospital in the Orlando Metropolitan Area. See Orlando Regional Healthcare System, Inc. vs. AHCA, Case No. 02-0449 (DOAH November 18, 2002), pp. 8-10. The Select-Orange Settlement Agreement was entered in the midst of administrative litigation over AHCA's preliminary agency action with regard to a CON application. The meaning and impact of AHCA's statement quoted above from the Select-Orange Settlement Agreement were not fully elaborated upon at hearing by any direct evidence. Kindred established through the testimony of Mr. Wurdock and through cross-examination of Ms. Rivera that although Select-Orange was originally approved as a "hospital-in- hospital" or "HIH," that Select-Orange obtained a modification of its CON to become a freestanding facility. Had the facility remained an HIH, federal regulations would have limited the percentage of Medicare referrals that could come from its host hospital, ORMC. As a freestanding facility, Select-Orange has no such limitations. It can fill its beds with referrals from ORMC. Whatever the impact of the freestanding nature of Select-Orange, the Agency's recognition of the unique situation in the Orlando area created by two distinct health systems, such that there is support for a new LTCH when the existing LTCH has available beds, gives rise in this case to an inference in Kindred's favor. If two distinct hospital systems in the Orlando area can support the addition of 40 LTCH beds, then it is highly likely that Brevard County can support a 60-bed LTCH. The county is not a part of the Orlando Metropolitan Area. LTCH referral patterns are north-south along the I-95 corridor (not to Select-Orlando). There are geographic and roadway access issues from Brevard County to the Orlando area demonstrated by commuting patterns that exclude Brevard County from the Orlando Metropolitan Area. And most significantly, the methodology reasonably established need for more than 60 beds in Brevard County. The Needs Assessment Rule The need for any health care service or program regulated by CON Law for which AHCA has not provided a specific need methodology by rule is governed by Florida Administrative Code Rule 59C-1.008(2)(e)(the "Need Assessment Rule"), which states in part: . . . If an agency need methodology does not exist for the proposed project: . . . If an agency need methodology does not exist for the proposed project: The Agency will provide to the applicant, if one exists, any policy upon which to determine need for the proposed beds or service. The applicant is not precluded from using other methodologies to compare and contrast with the agency policy. If no agency policy exist, the applicant will be responsible for demonstrating need through a needs assessment methodology which must include, at a minimum, consideration of the following topics, except when they are inconsistent with the applicable statutory and rule criteria: Population demographics and dynamics; Availability, utilization and quality of like services in the district, subdistrict or both; Medical treatment trends; Market conditions; and Competition. The Agency does not publish a fixed need pool for LTCH beds because it does not have a specific need formula or methodology for LTCH beds. The Agency, furthermore, has not provided Kindred with any policy upon which to determine need in this case. Accordingly, Kindred used its own methodology for determining need in Brevard County and elsewhere in the district (the Orlando Metropolitan Area). Finally, since no agency policy exists with regard to an LTCH need methodology, Kindred is required to prove the existence of need for its proposed project on the basis of the five categories of criteria (referred to in the rule as "topics") listed in sub-paragraphs "a. through e.," of paragraph 2., in subsection (2)(e) of the Rule. Population Demographics and Dynamics In assessing an area's population and demographics for the purpose of evaluating LTCH need, special attention is paid to the elderly population because the majority of LTCH patients are Medicare patients. The elderly are also more likely to produce LTCH patients because they are more likely to be medically complex and catastrophically ill with co-morbidities and dependent on medical equipment like ventilators. Brevard County, while home to only an approximate one-quarter of District 7's population, accounts for more than a third of its seniors. While Brevard County's elderly population is experiencing average or slightly below average growth in relation to the rest of the state, there is no question that Brevard County's elderly population is on the increase and reasonably projected to increase in the future. Availability, Utilization, and Quality of Like Services in the District "[B]y definition, putting a long term hospital in Brevard County will increase accessibility [make LTCH services more available] because . . . the people in Brevard County will no longer have to go all the way to Orlando, or Jacksonville, or Ft. Lauderdale for [LTCH] care." Tr. 48. Mr. Wurdock elaborated on the point of district availability at hearing: We did look at the entire district. . . . [T]here [are] only four counties in the district, three of which orbit around the Orlando and then there is the Palm Bay/Melbourne metropolitan area, which is Brevard. And when we looked at the district as a whole, what we discovered was that there is a need really for two new long term hospitals in the district. There is clearly a need for another one in Orlando [beyond the existing Select- Orlando and the approved not yet operating Select-Orange] and there is also a need for one in Brevard County. . . . [You] could build . . . two new long term care hospitals, both of them in Orlando, but that doesn't . . . make . . . sense when you've got a very large concentration of seniors significantly removed from the Orlando area with six short term hospitals in . . . [Brevard C]ounty comprising essentially its own market. So logically, you . . . put one long term hospital in Brevard and then another long term hospital in Orlando. Tr. 48-49. The presence of six STACHs in Brevard County and the large senior population is significant. The closest LTCH is Select-Orlando more than an hour's drive away. The distance to Select-Orlando and Select-Orange's future site from the municipality in which Kindred proposes to site its proposed LTCH, Melbourne, is more than 60 miles, in a direction not favored by Brevard County residents oriented to driving north or south along the I-95 corridor, but not to the west into the Orlando Metropolitan Area. Furthermore, and most significantly, family members rarely fully understand and accept that their catastrophically ill elderly loved one should be shipped 60 miles away when the patient is in a hospital with a good reputation. Their resistance to a referral at such a distance is unlikely to increase utilization at the Orlando area LTCHs no matter how convinced are their physicians and other clinical practitioners that such a move is required for better care. Medical Treatment Trends LTCHs are recognized as a legitimate part of the health care continuum by the federal government and CON approvals of LTCHs in Florida have been on the upswing throughout this decade. At the federal level, in recognition of their treatment of a small but important subset of patients, Medicare has adopted LTCH DRGs, that is, DRGs specific to LTCHs, for reimbursement under Medicare's PPS. At the state level, the Agency recognizes that "[t]he trend is for LTCHs to be increasingly used to meet the needs of patients in other settings who for a variety of reasons are better served in LTCHs." Respondent Agency for Health Care Administration's Proposed Recommended Order, at 15. This recognition is made by AHCA despite MedPAC's concerns, many of which were tempered and adequately addressed by Kindred in this proceeding. Market Conditions At first blush, market conditions might not seem to favor Kindred's application. The occupancy rate in the District indicates that there are available beds. In AHCA's view, the occupancy rate at the one existing LTCH in District 7, the 35-bed Select-Orlando facility, an H-I-H in a converted nursing home at Florida Hospital Orlando, is not optimal. Select-Orlando opened in 2003, only a few years ago, and it is operating at a high occupancy rate that is approaching optimal. Kindred, moreover, did not confine its need case to its Brevard County methodology. It also presented evidence of need in the Orlando Metropolitan Area consisting, in part, of the three other counties in District 7. Competition While the Agency asserts that it did not give competition much weight in this application, AHCA has not taken the position that Kindred's proposed facility would not foster competition. Having an LTCH in Brevard County would foster competition in the traditional sense in that the only LTCHs in the District, one existing and one approved, are those of Select Medical Corporation, Kindred's chief competitor. A Reasonable Methodology for Brevard County In short, Kindred's methodology is reasonable for determining need in Brevard County and it appropriately includes the topics required by the Needs Assessment Rule. The Agency's argument that there is no need for LTCH beds in Brevard County when there are LTCH beds available elsewhere in the district is defeated by its approval of the Select-Orange facility. Whether Kindred's methodology in this case carries the day for Kindred, given the Agency's approach on a district-wide basis to the need for LTCHs, is addressed in the section of this Order devoted to conclusions of law.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law, it is recommended that the Agency for Health Care Administration issue CON No. 9835 to Kindred Hospitals East, LLC, for a 60-bed, long-term acute care hospital in AHCA Health Planning Service District 7, to be located in Brevard County. DONE AND ENTERED this 29th day of November, 2006, in Tallahassee, Leon County, Florida. S DAVID M. MALONEY 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 29th day of November, 2006. COPIES FURNISHED: Alan Levine, Secretary Agency for Health Care Administration Fort Knox Building III, Mail Stop 3 2727 Mahan Drive, Suite 3116 Tallahassee, Florida 32308 Christa Calamas, General Counsel Agency for Health Care Administration Fort Knox Building III, Mail Stop 3 2727 Mahan Drive, Suite 3116 Tallahassee, Florida 32308 Richard Shoop, Agency Clerk Agency for Health Care Administration Fort Knox Building III, Mail Stop 3 2727 Mahan Drive Tallahassee, Florida 32308 M. Christopher Bryant, Esquire Oertel, Fernandez, Cole & Bryant, P.A. 301 South Bronough Street Tallahassee, Florida 32302 Sandra E. Allen, Esquire Agency for Health Care Administration Fort Knox Building III, Mail Stop 3 2727 Mahan Drive Tallahassee, Florida 32308
The Issue The issue for resolution is whether proposed amendments to Rule 10- 5.042(14)(a) and (f), F.A.C. constitute an invalid exercise of delegated legislative authority, as asserted by petitioner.
Findings Of Fact In 1987, the department began to develop a rule to govern certificates of need ("CON") for Level II and Level III neonatal intensive care services in hospitals (hereinafter referred to as "NICU"). That process ultimately led to the department's publication of Proposed Rule 10-5.011(1)(v), F.A.C. (now renumbered as Rule 10-5.042, F.A.C.) on November 3, 1989. (Joint Prehearing Stip., p.4). All pertinent provisions of the NICU Rule were upheld in a final order issued by DOAH in June, 1990, and affirmed by the District Court of Appeal, First District, in St. Mary's Hospital, Inc. v. Department of Health and Rehabilitative Services, 12 FALR 2727 (DOAH, June 12, 1990, aff'd, Baptist Hospital v. Department of Health and Rehabilitative Services, 578 So.2d 1004 (Fla. 1st DCA 1991). (Joint Prehearing Stip. p. 4). The NICU Rule became effective on August 6, 1990. (Joint Prehearing stip., p. 4). Paragraph 14 of the NICU Rule addresses the entitlement of hospitals to implement, or to continue to operate Level II or Level III NICU services. Paragraph 15 prescribes the process for creating an inventory of those hospitals authorized under the NICU Rule to provide Level II or Level III NICU services. Paragraph 15 provides that the department publish a preliminary inventory of those hospitals it has determined meet the entitlement criteria contained in Paragraph 14. It provides further that hospitals be allowed to contest the preliminary inventory. (Rule 10-5.042, F.A.C.). The department published a revised preliminary inventory on September 21, 990, in the Florida Administrative Weekly, authorizing Winter Haven to operate an 11 bed Level II NICU Unit. (Joint Prehearing Stip., p.4). Winter Haven was included in the inventory based on its documentation that the agency had approved construction plans for creation of NICU beds in an expansion project. On August 6, 1991, Hearing Officer Veronica Donnelly issued a recommended order in Lakeland Regional Medical Center, Inc. v. Department of Health and Rehabilitative Services, DOAH Case Nos. 90-7682 and 90-7683, regarding Lakeland's challenge to Winter Haven's inclusion in the preliminary inventory. Among other things, the Hearing Officer recommended that the department enter a final order excluding Winter Haven from the inventory of facilities authorized to provide Level II NICU services. (Joint Prehearing Stip., p.4). The Hearing Officer's recommended order concluded Winter Haven had not demonstrated that it complied with the grandfathering provisions of subparagraph 14 of the NICU Rule. It further concluded that DHRS lacked the authority to adopt a policy which conflicted with the plain meaning of the NICU Rule. On September 23, 1991, the department issued its final order. (Joint Prehearing Stip. p.5). DHRS' final order concurred with the Hearing Officer's recommendation that Winter Haven was not entitled to be included in the inventory of Level II NICU beds pursuant to the criteria contained in the NICU Rule. Nonetheless, the final order held that the department was estopped from excluding Winter Haven from the inventory on the theory of equitable estoppel, and, therefore, ordered that the final inventory include 11 Level II NICU beds at Winter Haven. The final order found that Winter Haven relied on representations by the department over a five-year period to establish its Level II NICU unit, hire employees and commence operation. (Lakeland composite exhibit #2). On October 14, 1991, Lakeland filed a notice of appeal appealing the portion of the final order requiring that the final inventory include 11 Level II NICU beds at Winter Haven. (Joint Prehearing Stip., p. 5). As a result of the Hearing Officer's recommended order, the department initiated the current rulemaking proceedings which culminated on December 27, 1991, when DHRS published the first version of the proposed amendments to Rule 10-5.042(14)(a) and (f) in Volume 17, No. 52, Florida Administrative Weekly. On March 13, 1992, however, the department withdrew those proposed rule amendments. (Joint Prehearing Stip., p. 5). On March 13, 1992, DHRS published a second version of the proposed amendments to Rule 10-5.042(14)(a) and (f) in Volume 18, No. 11, Florida Administrative Weekly, which were substantially identical to the first version. On May 29, 1992, the department withdrew the second version of the proposed rule amendments. (Joint Prehearing Stip., p. 5). On May 29, 1992, DHRS published a third version of the proposed amendments to Rule 10-5.042(14)(a) and (f) in Volume 18, No. 22, Florida Administrative Weekly, which were substantially identical to the first and second versions of the proposed amendments, and which are the subject of Lakeland's challenge in this proceeding. (Joint Prehearing Stip., pp. 5-6). At the time the department proposed the rule amendments that are at issue in this proceeding, there were only three providers of which the department was aware, i.e., Alachua General Hospital, Winter Park Hospital, and Winter Haven, who had construction plans deemed approved by the department allegedly authorizing neonatal intensive care beds prior to October 1, 1987. (Joint Prehearing Stip., p. 6). Alachua General Hospital and Winter Park Hospital were included in the preliminary inventory of Level II NICU beds. Their inclusion in the inventory was either not challenged, or was challenged and subsequently dismissed. Alachua General Hospital and Winter Park Hospital were also included in the final inventory of Level II NICU beds. Their entitlement to be included in the final inventory is final and is not subject to further appeal. The department is not currently aware of any other providers, who have construction documents approved by the department prior to October 1, 1987, as a basis for being included in the inventory under the proposed amendments. (Joint Prehearing Stip., p. 6). Elfie Stamm is responsible for rule development, special studies, and the development of fixed need pools at the department. Ms. Stamm was responsible for the development of the NICU Rule and the proposed amendments. She also was responsible for evaluating the information submitted to the department by providers seeking to be included in the inventory of the NICU beds under the NICU Rule. 19 . The proposed amendments merely authorize one additional basis for "grandfathering in" neonatal intensive care services at hospitals. (Ex. 1; Proposed Amendments, Florida Administrative Weekly, Volume 18, No. 22, May 29, 1992, pp. 3061-3062). The amendment is intended to allow the agency, under specified conditions, to acknowledge a type of prior departmental authorization for neonatal intensive care services which is not specified in the current rule. The proposed amendments represent the agency's current policy adopted in October of 1990, or within about two months of the effective date of the NICU rule. Knowledge about the problem first came to light within two months of the August 1990 effective date of the new NICU rule when Alachua General Hospital sought grandfathering under the new rules because of its approved construction documents. The agency believed that the construction plans that it had approved for Alachua General came under its rule. The department considered it consistent with the grandfathering provision for hospitals which had indicated on their licensure application that they provide the services. Also soon coming forward for grandfathering because of approved construction documents were Baptist Hospital in Pensacola, Winter Park Hospital in Orlando, and Winter Haven Hospital in Winter Haven, Florida. Alachua General and Winter Park were considered grandfathered. Because Baptist had not produced sufficient evidence that it had approved construction documents, it was denied. If Baptist can prove it had approved construction documents it might later be grandfathered. When the department promulgated the existing rule, had it been aware of the issue involving documents approved for NICU construction, it would have specifically written into the rule the provision it is now promulgating. The already existing grandfathering provision includes facilities and providers which had not received anything from the agency in the way of approval, including those which had not received a CON, and had no recorded NICU services on their license application. The current rule includes hospitals which had no contact with the department, no approvals, no construction plans, and no licensure application. If grandfathering a provider which established the service without any approvals of any kind is appropriate, and is now part of the rule, the department considers it should approve a hospital which affirmatively obtained approval construction documents for this service. Such facilities have proceeded in good faith, approved by the same agency that issues certificates of need, so the department believes that they should be authorized to provide the service. The department's Office of Plans and Construction had by 1987 specific construction standards for Level II and Level III NICU beds and still does. The Office of Plans and Construction in the past approved specific levels of care for NICU. In 1987 there were published standards for plans and construction that covered Level II and III neonatal care beds. The department, in its preparation of this amendment, did not analyze all factors listed under Section 381.704(3), F.S., because that statute refers to the development of need methodologies and the subject amendments are not a need methodology. They are used to establish an inventory of existing beds which inventory is a factor in the need methodology. NICU services are tertiary health care services, services which are intensive and complex, and generally present a certain degree of risk in the delivery of the service. As a result, tertiary health care services are regionalized. NICU services, therefore, are not necessarily available in every hospital which provides obstetrical services to its patients. There was no competent evidence that the proposed rule amendments will cause disruption in services. Those grandfathered in under this policy are already on inventories and in operation, including Winter Haven. Ms. Stamm testified she could not conclude from existing evidence that disruption would occur, and to the contrary, increased competition might be a result, along with the potential for improvement in service. Based on department experience, it is not likely that any hospitals remain with approved construction plans from prior to October, 1987, which would be able to come forward now to seek approval, although as found above, it remains possible. Any grandfathered facility (under the proposed amendments) must meet all licensure requirements for NICU beds, and must meet all requirements of the NICU rule within one year (Rule 10-5.042(14)(i), F.A.C.;). Medical quality is protected under licensure rules.
