The Issue Kindred Hospitals East, LLC (Kindred) filed CON Application 9831 with the Agency for Health Care (AHCA or the "Agency"). The application seeks the establishment of a 60-bed Long Term Care Hospital (an "LTCH") in Volusia County, AHCA Health Care Planning District 4. The Agency preliminarily denied the application. Kindred has challenged the denial. The issue in this case is whether the application should be approved.
Findings Of Fact The Parties Kindred, the operator of 22 LTCHs, is a wholly-owned subsidiary of Kindred Healthcare, Inc. Through its subsidiaries, Kindred Healthcare, Inc., operates 75 LTCHs nationwide, seven of which are in Florida. Of the seven Florida facilities, Kindred operates six. If CON Application 9831 is approved and the proposed facility becomes operational, therefore, Kindred will become the operator of 23 LTCHs, seven of which are in Florida. The Agency is the state agency responsible for administration of the Certificate of Need program. See § 408.031, Fla. Stat., et seq. Kindred North Florida and District 4 Kindred currently operates a 40-bed freestanding LTCH in Clay County ("Kindred North Florida"). Although in Clay County, Kindred North Florida is considered by Kindred to be in the area of Jacksonville or Duval County, a center of population greater than Clay County's. Kindred proposes to build and operate the project subject to CON Application 9831 in Volusia County, approximately 80 miles south of Kindred North Florida. Volusia County is one of seven counties that comprise District 4, a health service planning district established by the Health Facility and Services Development Act. In addition to Volusia, Clay, and Duval Counties, the other counties that make up District 4 are Baker, Nassau, St. Johns, and Flagler. Stipulated Facts The parties have stipulated to the following facts: Kindred's CON application complies with statutory and rule application content, submission, filing fee and review process requirements; and the Agency's review complied with review process requirements. Kindred has the ability to provide a quality LTCH program. Kindred has the necessary resources, including health personnel, management personnel, and funds for capital and operating expenditures, for project accomplishment and operation. Kindred's project is likely to be financially feasible. Kindred's proposed costs and methods of construction are reasonable. There are no disputes regarding Kindred's proposed provision of services to Medicaid patients and the medically indigent. The statutory criterion relating to nursing home beds is not applicable. Kindred complied with the letter of intent requirements found in AHCA rules. AHCA did not at the time of review, and currently does not, calculate a fixed need pool for LTCH beds. Amended Stipulation, at pp. 4-6. LTCH Services The length of stay in the typical acute care hospital (a "short-term 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 ("LTCH services"), that is, much longer than the average lengths of stay for most patients. Patients in need of LTCH services often have lengths of stay in the hospital that exceed the typical three-to-five day stay in a short-term hospital by 20 to 22 days or more. Some patients who exceed the usual short-term lengths of stay by similar lengths are not appropriate for LTCH services. Their stays are regarded more as custodial in nature. Those in need of LTCH services, whose stays are not custodial, however, are generally better served in an LTCH than in a 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 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. Some LTCH patients, however, are not elderly. These younger LTCH patients are often victims of trauma. Whatever the age of LTCH patients, they are typically medically unstable for their entire hospital stay. Because of their status as medically unstable, complex and seriously ill, they require extensive nursing care and daily physician oversight. Very often their care involves some sort of technologically advanced support such as a ventilator. Case Mix and Patient Acuity A "case mix index" for a hospital is a measure of its average resource consumption. Resource consumption can be viewed as a surrogate measure of complexity and severity of illness. The case mix index of Kindred hospitals is high compared to the entire LTCH industry and, as would be expected, is higher than the average case mix index for short-term hospitals. A way to further refine the variation of patients' acuity within a diagnostic related group (DRG) is through the APRDRG system. Not routinely used in hospitals, it is a tool of health services research. The system assigns not only a DRG but a severity of illness as well on a scale of one (minor severity) to four (extreme severity.) Applying the system to Kindred's database as well as to federal data confirms that the distribution of severe and extremely severe cases is skewed toward LTCH patients. This confirmation is consistent with empirical observation that patients in LTCHs are sicker on average than those in general hospitals. A third measure of patient acuity routinely used in Kindred hospitals is an APACHE score. It was described by Dr. Muldoon in his deposition testimony in the following way: [A]n APACHE score . . . is a combination of physiologic derangement and concurrent illnesses. While not universally applied to the LTAC [sic] population, it is a routine measurement in Kindred Hospitals. Using that indicator, we find that the average Kindred patient has an APACHE III score of about 45, whereas the average critical care patient in all of short-term acute care has a score about two-and-a-half points higher. This further supports the observation that LTACs [sic] in the Kindred portfolio treat a severely ill population only a few points, on the APACHE measure, below that of critical care units across the country. (Kindred Ex. 2, p. 15). The comparisons of acuity levels between LTCHs in general and short-term hospitals or Kindred LTCHs and short-term hospitals, while they show that the Kindred LTCH population is at a higher acuity level than patients in short-term hospitals, do not prove that Kindred LTCH patients are all appropriate for LTCH services. The Agency does not by rule define the level of acuity for admission of a patient to an LTCH. Nor has it done so by order. Information on acuity level of patients in short- term hospitals is not available through the AHCA's health statistics data base. That acuity levels are higher for Kindred's LTCHs than short-term hospitals does not necessarily mean that all patients admitted to Kindred hospitals are appropriate LTCH patients. One of the bases Kindred advances for why LTCH beds are not available in the district, despite low occupancy rates of Specialty Hospital of Jacksonville (Specialty or "Specialty Jacksonville") for the last several years (see paragraph 36, below), is that Specialty lowers utilization of its beds by restricting admission to patients of higher acuity than threshold LTCH acuity. The assertion does not prove that LTCH beds are unavailable in District 4. Rather, it begs a series of questions: does Specialty refuse patients with LTCH-appropriate acuity levels, does Kindred admit some patients whose acuity level would allow them to be served appropriately in an alternative post-acute care setting, or is the answer a combination of both? Districts Without LTCHs: Restricted Choice In those health care planning districts that do not have LTCHs, hospital patients in need of long-term acute care typically have little choice but to stay in the short-term hospital. The short-term hospital is usually dissatisfied with such an arrangement and short-term hospital staff, oriented toward stabilizing and treating the patient on a short-term basis, may lose interest in the patient after the patient exceeds the average length of stay associated with the patient's diagnosis. The patient can opt to transfer to an LTCH a long distance from home or to be treated in a setting that is less than appropriate for their level of acuity such as a skilled nursing unit of a nursing home. Neither option presents much appeal to the patient in need of LTCH services or the patient's family. Transfer to a distant LTCH is difficult and inconvenient for the patient's family. Consequently, such a transfer creates a hardship for the patient in need of family visits. Such a transfer also presents the possibility of one of two less-than-optimal results: the family loses contact with the loved one or family members have to relocate to the area of the LTCH. Re-location frequently entails significant hardship. Opting for a nursing home in the family's locality is not adequate for a patient in need of LTCH services. With the intensive nursing and daily physician oversight LTCH services entail, a skilled nursing unit in a nursing home is not an adequate setting. Its medical services, quite simply, are not of adequate intensity to the true potential LTCH patient. This difference is but one of several between LTCHs and other providers. Differences between LTCHs and Other Providers Short-term hospitals and LTCHs do not have the same purpose. The gap is widening between the two. Over the last 20 years, short-term hospitals have evolved into setting that stabilize patients, diagnose, and develop treatment plans. Most admissions to the medical ward of a short-term hospital are through the emergency room where patients are so acute and so unstable that emergency care is required. In their role as diagnostic centers, short-term hospitals provide imaging and laboratory services and then develop a treatment plan based on the diagnostic work-up performed. Short-term hospitals have moved away from the function of carrying out a treatment plan. This is borne out by lengths of stay in short-term hospitals growing shorter over the last 20 years. Lengths of stay now average three to five days. As a result, short-term hospitals 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. LTCH 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 short-term hospitals or other post-acute settings. If there is no LTCH readily available to provide a hospital-level discharge, then the short-term hospital must either keep the patient or discharge the patient to a setting that is less than appropriate for the patients needs. If the hospital keeps the patient, it is often not staffed to give the patient the amount of therapeutic rehabilitation required. The patient is not stable enough to transfer to a comprehensive medical rehabilitation facility. The patient that qualifies for an LTCH has a very different set of needs from many patients in the intensive care unit and/or medical-surgical (med-surg) beds in a short-term hospital. A very low percentage of all med-surg patients are appropriate for LTCH services. Placing these patients in an LTCH preserves the resources of short-term hospitals and encourages their financial health, which are outcomes driven by Medicare Prospective Payment System (PPS) that provides incentives to discharge patients from short-term hospitals as quickly as possible. Skilled nursing facilities (SNFs) and LTCHs are different both in intent and execution. Stable patients who require minimum medical intervention, whose primary needs are nursing and who are unlikely to become unstable, are appropriate for SNFs. Conversely, LTCHs are appropriate when daily medical intervention is required. Access to diagnostics, laboratory, radiology and pharmacy services make LTCHs better able to respond to changes in conditions and care plans than SNFs. Comprehensive medical rehabilitation hospitals (CMRs) and LTCHs are distinctly different. Geared for patients with primarily neurologic or musculoskeletal orthopedic issues, the CMR care model is based on physical rather than internal medicine that requires a minimum of three hours per day of physical therapy. Internists, therefore, are required to oversee LTCHs rather than other types of medical doctors. While rehabilitation is a concurrent component of an LTCH, patients appropriate for an LTCH bed, because of their medical conditions, cannot tolerate the three hours per day of therapy per patient conducted at a CMR. A CMR may be an appropriate facility after a stay in an LTCH when the patient has improved to the point where typical CMR therapy can be tolerated. Home health care is no substitute for LTCH care needed by patients appropriate for admission to an LTCH. By definition, LTCH patients meet criteria for inpatient hospitalization. Home health care is designed for patients who are stable and have limited medical needs that can be administered by nurses or families that visit or are in the patient's home. In sharp contrast, LTCH patients require many hours a day of nursing, respiratory, and other therapies under the direct care of a physician. On the basis of regulation alone, short-term hospitals can provide LTCH-type care. Generally, however, they do not. Because of Medicare's PPS, short-term hospitals have evolved into centers of stabilization and diagnosis, where care plans are initiated but not carried out fully. With such an orientation, short-term hospital staff often cannot sustain the focus and interest in a patient whose length of stay greatly exceeds the average length of stay for patients with the same diagnosis. Case studies bear out that when patients who are not progressing in a short-term hospital are transferred to LTCHs, where a multi-disciplinary approach replaces the diagnostic focus, the patients improve in both medical and physical well- being. In short, in the health care continuum, LTCH care constitutes a component dedicated to catastrophically ill and medically complex patients in need of acute care services that exceed by a considerable amount the average length of stay of those patients in a short-term hospital. Typically medically unstable for the entire time of stay in the short-term hospital, these patients require extensive nursing care with daily physician oversight usually accompanied by some type of technologically advanced support. Federal Government Recognition of LTCHs The federal government recognizes the distinct place occupied by LTCHs in the continuum of care based on the high level of LTCH patient acuity. The PPS of the federal government treats LTCH care as a discrete form of care. LTCH care therefore has its own system of DRGs and case mix reimbursement that provides Medicare payments at rates different from what PPS provides for other traditional post-acute care providers. Medicare and the PPS System The federal definition of a "long term care hospital" is a hospital whose average length of stay for Medicare patients is greater than 25 days. The 25-day length of stay requirement only applies to Medicare patients, not to non-Medicare, such as commercial patients; some of Kindred's LTCHs have a substantial number of commercial pay patients where the average length of stay is not 25 days. The federal government clearly identifies LTCHs as hospitals, separate from SNFs, CMR hospitals, and short-term hospitals. The very earliest LTCHs were primarily chronic care hospitals, but over the past 20 years the LTCH has evolved into a place where people are cared for who require an extended stay in a hospital, not a SNF or CMR facility, and who will benefit from extra therapeutic care, nursing, and equipment that is more orientated toward therapy than the stabilization and diagnosis of acute conditions provided by short-term hospitals. The basic concept of the Medicare PPS is the classification of patients into DRGs based on the services they need and the expenditures the hospital will make to care for the patient. The federal government analyzes these patients by group and identifies what the average cost is for each kind of patient. The classification of the patient by DRG determines the amount the Medicare program will pay the hospital for caring for that patient. As an example, if a patient comes to a short- term hospital and, based on diagnosis and intensity, is classified in DRG 13, there is a certain payment rate attached to that DRG, and that payment rate will be different from a DRG 14 or 15. The weights determine whether a hospital is paid more or less than the average for a certain type of patient. PPS was designed for Medicare patients, but payers other than Medicare including Medicaid, commercial insurance, and managed care, now also reimburse hospital providers and SNF providers as some function of the PPS. Each sector of the health care industry has a some what different payment system. DRGs were first developed for short-term hospitals, and there are hundreds of DRGs used to determine reimbursement. Not designed to measure acuity and tied to the amount of Medicare reimbursement, DRGs relate to resource utilization. The difference between reimbursement for an LTCH and a short-term hospital has to do with the average rate, which is a figure that varies somewhat from market to market based on labor costs, and the weight which is attached to each of the DRGs. The rate times the weight determines the reimbursement. When a patient is in a short-term hospital much longer than a few days past the average length of stay that the federal government has established for that DRG, financial loss for the hospital mounts. The federal government recognized that problem. It has developed a system using an "outlier" reimbursement, an add-on to the normal DRG payment for a patient who stays for an unusually long time. But, the outlier payment is calculated to recover only 80 percent of what the federal government estimates to be the hospital's true costs. In response to the PPS system, short-term hospitals have to manage their patients very closely. If a patient falls into the outlier category and is going to be hospitalized substantially longer than the average, short-term hospitals can lose a significant amount of money, so short-term hospitals are constantly searching for discharge options for their patients. Every day of utilization that a short-term hospital can save benefits the short-term hospital financially; as a result, hospitals invest significant effort into developing case management, utilization review, and clinical management departments. Effective October 1, 2002, the Centers for Medicare and Medicaid Services (CMS) implemented categories of payment designed specifically for LTCHs, the "LTC-DRG." The LTC-DRG is a sign of the recognition by CMS and the federal government of the differences between short-term hospitals and LTCHs when it comes to patient population, costs of care, resources consumed by the patients and health care delivery. Existing LTCHs in District 4 There are currently two licensed LTCHs operating in District 4: Kindred's Green Cove Springs facility ("Kindred North Florida") in Clay County and Specialty's Jacksonville facility in Duval County. Kindred North Florida is approximately 80 miles (and a 1.5 hour drive) from Daytona Beach where Kindred intends to locate its proposed Volusia County facility. Specialty Jacksonville is within 85 miles of Kindred's proposed facility. The LTCH occupancy and utilization rates for District 4 is below 70 percent. Kindred North Florida is a 40-bed LTCH. Specialty Jacksonville is a 107-bed LTCH. Specialty Jacksonville has an occupancy rate that has been consistently below 60 percent. The most recently available data shows an occupancy rate for Specialty of 56 percent. In recent years, it has been even lower. Kindred North Florida has been operating near or above optimal occupancy. Specialty has not. Beds are available within the district. CON Application Process Kindred submitted CON Application 9831 in the first CON Application Review Cycle of 2005. Kindred was the only applicant for an LTCH CON in District 4 for the batching cycle. The Agency evaluated the application and reported the evaluation in a State Agency Action Report (SAAR) issued on June 1, 2005. The SAAR recommended denial of Kindred's application. A basis for the denial of Kindred's application is summed up in the "Need" section of the SAAR: The applicant intends to focus on the provision of complex LTCH services (many requiring ventilator/pulmonary services) and contends patients remain in less appropriate settings in District 4. It maintains that Volusia County is an appropriate service area for this project due to the travel distance to a current LTCH. Although support letters state that many patients would have benefited from LTCH services, the disposition of these patients is not known and access problems to LTCH services was not shown. The applicant did not demonstrate that area residents are unable to access needed care or that care currently being provided is inappropriate. The applicant's need analysis did not solely consider high acuity patients that are LTCH appropriate that could not be more appropriately treated in lower cost long- term care facilities such as nursing homes and rehabilitation hospitals. As stated earlier, CMS announced that it plans to make changes in its reimbursement to LTCHs this fall with other updates planned for October 1, 2005. The applicant stated opposition when another LTCH proposed to establish a hospital in this area indicating that its Clay County facility would be adversely impacted and that the establishment of a third LTCH in District 4 would be a duplication of services. AHCA Ex. 1, p. 28. On June 1, 2005, AHCA adopted the SAAR's recommendation that Kindred's application be denied. Kindred timely challenged the denial of its application and its petition was referred to DOAH for formal administrative proceedings. Post-stipulation Issues The parties have resolved a number of potential issues by way of the Amended Stipulation. The remaining issues relate to need, access and competition. LTCH Need Methodology and AHCA's Concerns The Agency has not adopted a need methodology for LTCH services. Consequently, it does not publish fixed need pools for LTCHs. In response to a rise in LTCH application over the last several years, the Agency has consistently voiced concerns about 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 of LTCH patient populations, AHCA is not convinced that there is not an overlap between the LTCH patient populations and the population of patients served in other healthcare settings. In the absence of data identifying the LTCH patient population, AHCA has reached the conclusion that there are other options available to those patients targeted by the LTCH applicant, depending on such matters as physician preference. In denying Kindred's application, AHCA relied in part 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 (MedPAC Report) states 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. 9, p. 121 (emphasis supplied.) The 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. There is some gross administrative data to support the hypothesis that SNFs are a substitute for LTCHs; the data is limited, however, for drawing such a conclusion definitively. This is because of the wide variation of patient conditions that may be represented by a single DRG. Dr. Muldoon explained this in his deposition with the example of DRG-475, which groups patients who were on life support for 96 hours: [P]atients . . . under DRG-475 . . . may be discharged in conditions that vary greatly, ranging from an alert, talking patient, no longer on life support, to a patient who is not on life support making no progress. There is no[] administrative data that describes patients at the time of their discharge and therefore the MedPAC analysis was just unable, from a pure data point of view, to determine why some of those patients went to a higher versus lower level of care. Kindred Ex. 2, pgs. 24-25. While the conclusion that there is overlap is suspect, so is the conclusion that there is no significant overlap. The data is insufficient to conclude that there are only an insignificant number of LTCH patients who are not appropriate for treatment in another post-acute care setting. The data is insufficient to make one judgment or another. The SAAR also concludes, based on a letter from the MedPAC Chairman, that LTCH patients cost Medicare more on average than patients in other settings. This conclusion was also critically analyzed by Dr. Muldoon: [The comment] 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 on the DRG is that it is designed to describe the patient's need at the time of admission rather than discharge. So there is no way to tell whether someone is in good shape or poor shape at the time of discharge. So lumping them together and then observing how much they cost, depending on their site of care, is a very rough cut. Kindred Ex. 2, pgs. 27-28. In contrast, for patients at the extreme of severity and complexity there is a trend for lower cost of care for patients whose care included long-term acute care. Again, however, that the very sickest patients may be treated at a cost in an LTCH comparable to the cost in the short-term hospital does not demonstrate that there are patients who would be admitted to an LTCH at an acuity level not appropriate for an LTCH. This latter category of patients, if it exists, would be treated less expensively in a short-term hospital or a non-LTCH post-acute care setting. Need Demonstration: the Applicant's Responsibility The Agency analyzes LTCH applications on a district basis1 but it does not provide a specific formula or methodology by rule for determining need for LTCH beds as it does with some other types of beds and health care services. Consequently, AHCA does not publish a fixed need pool for LTCH beds. Nor did AHCA provide Kindred with any policy upon which to determine need for LTCH beds. Florida Administrative Code Rule 59C- 1.008(2)(e) (the "Rule"), therefore, applies to Kindred's application: . . . 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 not 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; and Market conditions. Application 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. The bulk of LTCH patients are patients over the age of 65 and on Medicare. Elderly patients in need of LTCH services do not heal as quickly as younger patients, are more difficult to wean from a ventilator, and do not improve through rehabilitation as quickly so that they can be discharged from the hospital setting. There are more than 100,000 "seniors," those 65 and over, in Volusia County. Seniors account for more than 20 percent of the county's population; the national average is between 12 and 13 percent. Volusia County was projected to have a senior population of 485,000 out of a total county population of 1.8 million as of January 1, 2005. According to AHCA population data, over the next five years Volusia's elderly population is expected to grow by another 10 percent. Volusia also accounts for a disproportionate share of all of the seniors in District 4. Its senior population is almost 40 percent of the senior population in the district. Availability, Utilization and Quality of Like Services In evaluating the availability, utilization and quality of like services under the rule, Kindred points out that there are a significant number of short-term hospitals in Volusia County and a relatively large senior population but no LTCH in the county. The LTCHs to which Volusia County residents have access are either in Orlando or the two other LTCHs in District 4: Kindred North Florida and Specialty Jacksonville. Access for Volusia County residents or patients in short-term hospitals in Volusia County was described at hearing by Clarence Joseph Wurdock, Director of Market Planning at Kindred Health Care: Both of these distances [to Orlando and the Jacksonville area] are very substantial. Orlando is more than an hour away, drive time, and then the Jacksonville hospitals [Kindred North Florida and Specialty] are 70 to 80 miles away. * * * So as far as access goes, it's not that Volusia County does not have access. The question is whether it's reasonable access for the majority of people who would benefit from the services that we offer. And given the distances involved, it would be very hard to argue that the typical potential long-term hospital patient of Volusia County really has access. Yes, we do get patients at our hospital in Green Cove Springs [Kindred North Florida], a few of them do go to Jacksonville Specialty and some of them go to Orlando, but generally, our understanding is that these patients tend to be the most acute, the patients who really need this type of care so much that they're willing -- they or their families are willing to go great distances for their care. On the other hand, the majority of long-term hospital potential patients, patient who would benefit from our services, who are still spending a fair amount of time in the short-term hospitals, those patients are at that point where they're not willing, they or their families are not willing to go that far, so consequently they're remaining in the short-term hospital. So there's an access problem. Tr. 70-71 (emphasis supplied). Of the two "Jacksonville area" LTCHs, Kindred North Florida has been operating around 90 percent occupancy; Specialty, licensed for 107 beds, according to most recently available data at 56 percent and for some time at various levels all below 60 percent. As Kindred concedes, reasonableness of access is a judgment call. See Kindred's Proposed Recommended Order, p. 20. Contrary to Kindred's present claim of "no reasonable access," Kindred North Florida indicated two years before the hearing that Volusia County patients had access in the District to LTCH services. See paragraphs 69 and 70, below. Relevant data has not changed in the two years between Kindred North Florida's statement and the final hearing in this case. A map in Kindred's CON application identifies the location of five short-term hospitals in Volusia County. The two largest (Halifax Medical Center and Florida Hospital-Ormond) are within two to five miles of Kindred's proposed location. Kindred's CON application contained letters of support from the CEOs of Halifax Community Health Systems and Florida Hospital Deland. Both hospital CEOs strongly support Kindred's application as a source of continued inpatient care for their medically complex patients. There were a number of letters of support in the application from Volusia physicians who have referred patients to Kindred North Florida in the past, and are familiar with Kindred's services and abilities. Medical Trends As to medical trends, as found earlier, LTCHs are recognized as a legitimate part of the health care continuum by the federal government. Medicare's PPS provides reimbursement for LTCHs under their own discrete set of DRGs so that reimbursement rates are different for LTCHs from short-term hospitals. LTCHs supplement acute care following the short-term hospital stay and they are complementary to SNFs and other post- acute care providers. The 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. Market Conditions Market conditions do not favor the application. The occupancy rate overall in the District indicates that beds are available. Of the two "Jacksonville area" LTCHs, Specialty has had an occupancy rate below 60 percent. According to "data over the past few years . . . [it has] been operating at that level for some period of time."2 (Tr. 73). It is reasonable to assume that Volusia County patients in need of LTCH services and their families, no matter how inconvenient or what hardship may be entailed, will seek admission to the existing LTCHs in the District or to Orange County facilities if LTCH services are truly needed and valued. Other changes in the market that have occurred in the last several years also diminish Kindred's case. Besides approval to Kindred-North Florida to add another 20 beds at its facility in Clay County, additional beds can now be added by existing LTCH facilities at will. These include both the Kindred-North Florida facility and the Specialty facility. Kindred's claim of favorable market conditions is undercut, moreover, by recent objections to two other District 4 LTCH applications on the basis that there was no need in District 4, and the implication, if not direct statement, that there is no access problems for Volusia County residents in need of LTCH services. In a letter on Kindred Healthcare letterhead, dated April 12, 2004, Mr. Wurdock wrote: On behalf of Kindred Hospital North Florida, this letter is submitted in opposition to the Certificate of Need application (action number 9752) filed by Select Specialty Hospital - Duval, Inc. to establish a long- term acute care hospital of up to 40 beds at Shands-Jacksonville Medical Center. Kindred Hospital North Florida has consistently provided high quality long-term acute care in District 4 for many years. Approval of an application for an additional long term hospital in District 4 will have a significantly adverse impact on the future of Kindred Hospital North Florida and will result in a wasteful duplication of services in District 4. In January of 2004, the Agency for Health Care Administration (AHCA) granted Kindred Hospital North Florida a Certificate of Need to add 20 beds, increasing our total offering to 80 beds and enhancing our capacity to serve the residents of District 4. Including this bed increase, the long- term acute care occupancy of District 4 is approximately 59 percent. Utilizing existing providers is the most cost- effective option for the district, thus eliminating any duplication of services and minimizing additional start-up costs. The occupancies of existing providers in the district clearly indicate there is not a need for an additional long-term acute care hospital in District 4. AHCA Ex. 4, page 1 (emphasis supplied). Less than six months earlier, Mr. Simpson in a letter dated October 31, 2003, on Kindred Hospital North Florida letterhead, objected to a Volusia County LTCH CON application: On behalf of Kindred Hospital North Florida, I submit this letter in opposition to the Certificate of Need application (action number 9706) filed by SemperCare of Volusia, Inc. to establish a long-term acute care hospital of up to 50 beds at Florida Hospital Oceanside. Kindred Hospital North Florida has been providing high-quality long-term acute care in District 4, including many patients in Volusia Count, for the past nine years. Approval of an application for an additional hospital in District 4 will have a significant adverse impact on the future of Kindred Hospital North Florida and will result in a wasteful duplication of services in District 4. In December 2002, the Agency for Health Care Administration (AHCA) granted Kindred Hospital North Florida with preliminary approval to add 20 beds, increasing our total offering to 80 beds and enhancing our capacity to serve the residents of District 4. Including this bed increase, the long- term acute care occupancy of District 4 would be approximately 59 percent (Kindred Hospital North Florida: 68 percent and Specialty Hospital Jacksonville: 52 percent - Florida Hospital Bed Service Utilization by District, July 2003). Utilizing the existing providers is the most cost effective option for the district, thus eliminating any duplication of services and minimizing additional start-up costs that are ultimately passed on to the consumer. The occupancies of existing providers in the district clearly indicate there is not a need for an additional long-term acute care hospital in District 4. Kindred Hospital North Florida has a strong working relationship with hospitals in Volusia County. In 2002, approximately 26 percent of our patients were referred from hospitals in Volusia County. AHCA Ex. 5 (emphasis supplied). The evidence, as a whole, in this proceeding supports the claims made by Kindred North Florida in the two letters. Data has not changed significantly, moreover, since the letters were written. By way of explanation of its earlier position, Kindred pointed out that at the time of the submission of the letter opposing the establishment of a Volusia County LTCH, neither it nor Kindred North Florida had conducted a detailed need analysis for Volusia County. A need analysis conducted subsequent to the statement of opposition to a Volusia County LTCH is presented in the CON application in this proceeding. It includes Kindred's need methodology. Kindred's Need Methodology The need methodology employed by Kindred is a variation of commonly used and accepted methodologies3 in the LTCH industry for determining need in a proposed service area. In this case the proposed service area is Volusia County. The methodology provides a multi-step process. It begins with the examination of AHCA discharge data for short- term hospitals. Kindred began the process in this case, therefore, with identification of short term hospital patients in Volusia County and limited this population to Florida citizens. The methodology incorporates two assumptions: one, that patients will require five days to transfer from the short term hospital after the geometric mean of the length of stay (GMLOS) for the patient's DRG and that the patient will be in the LTCH for at least 10 days. The result of the assumptions in Kindred's calculation in this case is that the potential pool of Volusia County LTCH patients "had to have exceeded their [GMLOS] by more than two weeks." Tr. 88. Application of the assumptions to AHCA's database, therefore, arrived at a population "that could reasonably be expected to be long-term hospital admissions." Tr. 88. For that population, a population that exceeded the GMLOS by more than two weeks, the Kindred summed up the number of days the population spent in the hospital in excess of the GMLOS plus five days as required by the methodology. This sum equaled potential LTCH days. This grand total of days was divided by the number of days in a year, 365, as called for by the methodology. The calculation for the twelve month period ending in March of 2004 yielded an average daily census of 40.8. The methodology further considered Volusia County patients receiving services at Kindred North Florida. When they were added into the calculation, the average daily census of potential LTCH patients from Volusia County increased to 47.2. The methodology includes the impact of future population growth at an 8.2 percent rate. This yielded an additional average daily census of 3.9 so that the potential average daily census increased to 51.1. As a final step, the methodology assumes operation of a new LTCH at an 85 percent occupancy rate. Application of this assumption yielded a bed need in Volusia County of 60 beds. The methodology assumes that 100 percent of the eligible pool of potential LTCH patients are going to be referred to an LTCH. Kindred concedes that the actual referral rate is likely to be less than 100 percent and certainly so in the beginning. Kindred's application, therefore, provides a ramp up period. Kindred believes furthermore that the less than 100 percent referral rate is offset by patients that do not come from acute care hospitals. Application of the methodology in this case is flawed. It is also not applicable legally to this CON case. The methodology is flawed in this case first because it does not account for beds available elsewhere in the District. Kindred postulated that Specialty's sub-60 percent occupancy rates are due to Specialty's decision to limit utilization of the number of beds far below the licensed capacity for beds. This assertion by Kindred is rejected as unsupported by adequate proof. See endnote 2, below. The methodology, moreover, determines need generated solely by and within Volusia County, one county in District 4, a multi-county district. Consistent with the CON Law, AHCA approaches LTCH need on a district-wide basis. Methodologies for LTCH bed need on a county basis in a multi-county district have been held by AHCA to be invalid to legally establish need for CON purposes. See Select Specialty Hospital-Marion, Inc. vs Agency for Health Care Administration, Case No. 04-0444CON (DOAH October 31, 2005, AHCA December 21, 2005). Competition Kindred concedes that "[h]aving an LTCH in Volusia County would not foster competition in the traditional sense." Kindred's Proposed Recommended Order, p. 33. The Agency did not intend to give considerations of competition much weight in this proceeding.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that the Agency for Health Care Administration deny CON application No. 9831 filed by Kindred Hospitals East, LLC. DONE AND ENTERED this 20th day of January, 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 20th day of January, 2006.
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
The Issue Whether the certificate of need (CON) applications filed by New Port Richey Hospital, Inc., d/b/a Community Hospital of New Port Richey (Community Hospital) (CON No. 9539), and Morton Plant Hospital Association, Inc., d/b/a North Bay Hospital (North Bay) (CON No. 9538), each seeking to replace and relocate their respective general acute care hospital, satisfy, on balance, the applicable statutory and rule criteria.
Findings Of Fact The Parties AHCA AHCA is the single state agency responsible for the administration of the CON program in Florida pursuant to Chapter 408, Florida Statutes (2000). The agency separately reviewed and preliminarily approved both applications. Community Hospital Community Hospital is a 300,000 square feet, accredited hospital with 345 licensed acute care beds and 56 licensed adult psychiatric beds, located in southern New Port Richey, Florida, within Sub-District 5-1. Community Hospital is seeking to construct a replacement facility approximately five miles to the southeast within a rapidly developing suburb known as "Trinity." Community Hospital currently provides a wide array of comprehensive inpatient and outpatient services and is the only provider of obstetrical and adult psychiatric services in Sub-District 5-1. It is the largest provider of emergency services in Pasco County with approximately 35,000 visits annually. It is also the largest provider of Medicaid and indigent patient days in Sub-District 5-1. Community Hospital was originally built in 1969 and is an aging facility. Although it has been renovated over time, the hospital is in poor condition. Community Hospital's average daily census is below 50 percent. North Bay North Bay is a 122-bed facility containing 102 licensed acute care beds and 20 licensed comprehensive medical rehabilitation beds, located approximately one mile north of Community Hospital in Sub-District 5-1. It serves a large elderly population and does not provide pediatric or obstetrical care. North Bay is also an aging facility and proposes to construct a replacement facility in the Trinity area. Notably, however, North Bay has spent approximately 12 million dollars over the past three years for physical improvements and is in reasonable physical condition. Helen Ellis Helen Ellis is an accredited hospital with 150 licensed acute care beds and 18 licensed skilled nursing unit beds. It is located in northern Pinellas County, approximately eight miles south of Community Hospital and nine miles south of North Bay. Helen Ellis provides a full array of acute care services including obstetrics and cardiac catheterization. Its daily census average has fluctuated over the years but is approximately 45 percent. Mease Mease operates two acute care hospitals in Pinellas County including Mease Dunedin Hospital, located approximately 18 to 20 miles south of the applicants and Mease Countryside Hospital, located approximately 16 to 18 miles south of Community and North Bay. Each hospital operates 189 licensed beds. The Mease hospitals are located in the adjacent acute care sub-district but compete with the applicants. The Health Planning District AHCA's Health Planning District 5 consists of Pinellas and Pasco Counties. U.S. Highway 41 runs north and south through the District and splits Pasco County into Sub- District 5-1 and Sub-District 5-2. Sub-District 5-1, where Community Hospital and North Bay are located, extends from U.S. 41 west to the Gulf Coast. Sub-District 5-2 extends from U.S. 41 to the eastern edge of Pasco County. Pinellas County is the most densely populated county in Florida and steadily grows at 5.52 percent per year. On the other hand, its neighbor to the north, Pasco County, has been experiencing over 15 percent annual growth in population. The evidence demonstrates that the area known as Trinity, located four to five miles southeast of New Port Richey, is largely responsible for the growth. With its large, single- owner land tracts, Trinity has become the area's fuel for growth, while New Port Richey, the older coastal anchor which houses the applicants' facilities, remains static. In addition to the available land in Trinity, roadway development in the southwest section of Pasco County is further fueling growth. For example, the Suncoast Highway, a major highway, was recently extended north from Hillsborough County through Sub-District 5-1, west of U.S. 41. It intersects with several large east-west thoroughfares including State Road 54, providing easy highway access to the Tampa area. The General Proposals Community Hospital's Proposal Community Hospital's CON application proposes to replace its existing, 401-bed hospital with a 376-bed state- of-the-art facility and relocate it approximately five miles to the southeast in the Trinity area. Community Hospital intends to construct a large medical office adjacent to its new facility and provide all of its current services including obstetrical care. It does not intend to change its primary service area. North Bay's Proposal North Bay's CON application proposes to replace its existing hospital with a 122-bed state-of-the-art facility and also plans to relocate it approximately eight miles to the southeast in the Trinity area of southwestern Pasco County. North Bay intends to provide the same array of services it currently offers its patients and will not provide pediatric and obstetrical care in the proposed facility. The proposed relocation site is adjacent to the Trinity Outpatient Center which is owned by North Bay's parent company, Morton Plant. The Outpatient Center offers a full range of diagnostic imaging services including nuclear medicine, cardiac nuclear stress testing, bone density scanning, CAT scanning, mammography, ultrasound, as well as many others. It also offers general and specialty ambulatory surgical services including urology; ear, nose and throat; ophthalmology; gastroenterology; endoscopy; and pain management. Approximately 14 physician offices are currently located at the Trinity Outpatient Center. The Condition of Community Hospital Facility Community Hospital's core facilities were constructed between 1969 and 1971. Additions to the hospital were made in 1973, 1975, 1976, 1977, 1979, 1981, 1992, and 1999. With an area of approximately 294,000 square feet and 401 licensed beds, or 733 square feet per bed, Community Hospital's gross area-to-bed ratio is approximately half of current hospital planning standards of 1,600 square feet per bed. With the exception of the "E" wing which was completed in 1999, all of the clinical and support departments are undersized. Medical-Surgical Beds And Intensive Care Units Community Hospital's "D" wing, constructed in 1975, is made up of two general medical-surgical unit floors which are grossly undersized. Each floor operates 47 general medical-surgical beds, 24 of which are in three-bed wards and 23 in semi-private rooms. None of the patient rooms in the "D" wing have showers or tubs so the patients bathe in a single facility located at the center of the wing on each floor. Community Hospital's "A" wing, added in 1973, is situated at the west end of the second floor and is also undersized. It too has a combination of semi-private rooms and three-bed wards without showers or tubs. Community Hospital's "F" wing, added in 1979, includes a medical-surgical unit on the second and third floor, each with semi-private and private rooms. The second floor unit is centrally located between a 56-bed adult psychiatric unit and the Surgical Intensive Care Unit (SICU) which creates security and privacy issues. The third floor unit is adjacent to the Medical Intensive Care Unit (MICU) which must be accessed through the medical-surgical unit. Neither intensive care unit (ICU) possesses an isolation area. Although the three-bed wards are generally restricted to in-season use, and not always full, they pose significant privacy, security, safety, and health concerns. They fail to meet minimum space requirements and are a serious health risk. The evidence demonstrates that reconfiguring the wards would be extremely costly and impractical due to code compliance issues. The wards hinder the hospital's acute care utilization, and impair its ability to effectively compete with other hospitals. Surgical Department and Recovery Community Hospital's surgical department is separated into two locations including the main surgical suite on the second floor and the Endoscopy/Pain Management unit located on the first floor of "C" wing. Consequently, the department cannot share support staff and space such as preparation and recovery. The main surgical suite, adjacent recovery room, and central sterile processing are 25 years old. This unit's operating rooms, cystoscopy rooms, storage areas, work- stations, central sterile, and recovery rooms are undersized and antiquated. The 12-bay Recovery Room has no patient toilet and is lacking storage. The soiled utility room is deficient. In addition, the patient bays are extremely narrow and separated by curtains. There is no direct connection to the sterile corridor, and staff must break the sterile field to transport patients from surgery to recovery. Moreover, surgery outpatients must pass through a major public lobby going to and returning from surgery. The Emergency Department Community Hospital's existing emergency department was constructed in 1992 and is the largest provider of hospital emergency services in Pasco County, handling approximately 35,000 visits per year. The hospital is also designated a "Baker Act" receiving facility under Chapter 394, Florida Statutes, and utilizes two secure examination rooms for emergent psychiatric patients. At less than 8,000 total square feet, the emergency department is severely undersized to meet the needs of its patients. The emergency department is currently undergoing renovation which will connect the triage area to the main emergency department. The renovation will not enlarge the entrance, waiting area, storage, nursing station, nor add privacy to the patient care areas in the emergency department. The renovation will not increase the total size of the emergency department, but in fact, the department's total bed availability will decrease by five beds. Similar to other departments, a more meaningful renovation cannot occur within the emergency department without triggering costly building code compliance measures. In addition to its space limitations, the emergency department is awkwardly located. In 1992, the emergency department was relocated to the front of the hospital and is completely separated from the diagnostic imaging department which remained in the original 1971 building. Consequently, emergency patients are routinely transported across the hospital for imaging and CT scans. Issues Relating to Replacement of Community Hospital Although physically possible, renovating and expanding Community Hospital's existing facility is unreasonable. First, it is cost prohibitive. Any significant renovation to the 1971, 1975, 1977, and 1979 structures would require asbestos abatement prior to construction, at an estimated cost of $1,000,000. In addition, as previously noted, the hospital will be saddled with the major expense of complying with all current building code requirements in the 40-year-old facility. Merely installing showers in patient rooms would immediately trigger a host of expensive, albeit necessary, code requirements involving access, wiring, square footage, fireproofing columns and beams, as well as floor/ceiling and roof/ceiling assemblies. Concurrent with the significant demolition and construction costs, the hospital will experience the incalculable expense and loss of revenue related to closing major portions, if not all, of the hospital. Second, renovation and expansion to the existing facility is an unreasonable option due to its physical restrictions. The 12'4" height of the hospital's first floor limits its ability to accommodate HVAC ductwork large enough to meet current ventilation requirements. In addition, there is inadequate space to expand any department within the confines of the existing hospital without cannibalizing adjacent areas, and vertical expansion is not an option. Community Hospital's application includes a lengthy Facility Condition Assessment which factually details the architectural, mechanical, and electrical deficiencies of the hospital's existing physical plant. The assessment is accurate and reasonable. Community Hospital's Proposed Replacement Community Hospital proposes to construct a six- story, 320 licensed beds, acute care replacement facility. The hospital will consist of 548,995 gross square feet and include a 56-bed adult psychiatric unit connected by a hallway to the first floor of the main hospital building. The proposal also includes the construction of an adjacent medical office building to centralize the outpatient offices and staff physicians. The evidence establishes that the deficiencies inherent in Community Hospital's existing hospital will be cured by its replacement hospital. All patients will be provided large private rooms. The emergency department will double in size, and contain private examination rooms. All building code requirements will be met or exceeded. Patients and staff will have separate elevators from the public. In addition, the surgical department will have large operating rooms, and adequate storage. The MICU and SICU will be adjacent to each other on the second floor to avoid unnecessary traffic within the hospital. Surgical patients will be transported to the ICU via a private elevator dedicated to that purpose. Medical-surgical patient rooms will be efficiently located on the third through sixth floors, in "double-T" configuration. Community Hospital's Existing and Proposed Sites Community Hospital is currently located on a 23-acre site inside the southern boundary of New Port Richey. Single- family homes and offices occupy the two-lane residential streets that surround the site on all sides. The hospital buildings are situated on the northern half of the site, with the main parking lot located to the south, in front of the main entrance to the hospital. Marine Parkway cuts through the southern half of the site from the west, and enters the main parking lot. A private medical mall sits immediately to the west of the main parking lot and a one-acre storm-water retention pond sits to the west of the mall. A private medical office building occupies the south end of the main parking lot and a four-acre drainage easement is located in the southwest corner of the site. Community Hospital's administration has actively analyzed its existing site, aging facility, and adjacent areas. It has commissioned studies by civil engineers, health care consultants, and architects. The collective evidence demonstrates that, although on-site relocation is potentially an option, on balance, it is not a reasonable option. Replacing Community Hospital on its existing site is not practical for several reasons. First, the hospital will experience significant disruption and may be required to completely close down for a period of time. Second, the site's southwestern large four-acre parcel is necessary for storm-water retention and is unavailable for expansion. Third, a reliable cost differential is unknown given Community Hospital's inability to successfully negotiate with the city and owners of the adjacent medical office complexes to acquire additional parcels. Fourth, acquiring other adjacent properties is not a viable option since they consist of individually owned residential lots. In addition to the site's physical restrictions, the site is hindered by its location. The hospital is situated in a neighborhood between small streets and a local school. From the north and south, motorists utilize either U.S. 19, a congested corridor that accommodates approximately 50,000 vehicles per day, or Grand and Madison Streets, two-lane streets within a school zone. From the east and west, motorists utilize similar two-lane neighborhood streets including Marine Parkway, which often floods in heavy rains. Community Hospital's proposed site, on the other hand, is a 53-acre tract positioned five miles from its current facility, at the intersection of two major thoroughfares in southwestern Pasco County. The proposed site offers ample space for all facilities, parking, outpatient care, and future expansion. In addition, Community Hospital's proposed site provides reasonable access to all patients within its existing primary service area made up of zip codes 34652, 34653, 34668, 34655, 34690, and 34691. For example, the average drive times from the population centers of each zip code to the existing site of the hospital and the proposed site are as follows: Zip code Difference Existing site Proposed site 34652 3 minutes 14 minutes 11 minutes 34653 8 minutes 11 minutes 3 minutes 34668 15 minutes 21 minutes 6 minutes 34655 11 minutes 4 minutes -7 minutes 34690 11 minutes 13 minutes 2 minutes 34691 11 minutes 17 minutes 6 minutes While the average drive time from the population centroids of zip codes 34653, 34668, 34690, and 34691 to the proposed site slightly increases, it decreases from the Trinity area, where population growth has been most significant in southwestern Pasco County. In addition, a motorist's average drive time from Community Hospital's existing location to its proposed site is only 10 to 11 minutes, and patients utilizing public transportation will be able to access the new hospital via a bus stop located adjacent to the proposed site. The Condition of North Bay Facility North Bay Hospital is also an aging facility. Its original structure and portions of its physical plant are approximately 30 years old. Portions of its major mechanical systems will soon require replacement including its boilers, air handlers, and chillers. In addition, the hospital is undersized and awkwardly configured. Despite its shortcomings, however, North Bay is generally in good condition. The hospital has been consistently renovated and updated over time and is aesthetically pleasing. Moreover, its second and third floors were added in 1986, are in good shape, and structurally capable of vertical expansion. Medical Surgical Beds and ICU Units By-in-large, North Bay is comprised of undersized, semi-private rooms containing toilet and shower facilities. The hospital does not have any three-bed wards. North Bay's first floor houses all ancillary and support services including lab, radiology, pharmacy, surgery, pre-op, post-anesthesia recovery, central sterile processing and supply, kitchen and cafeteria, housekeeping and administration, as well as the mechanical, electrical, and facilities maintenance and engineering. The first floor also contains a 20-bed CMR unit and a 15-bed acute care unit. North Bay's second and third floors are mostly comprised of semi-private rooms and supporting nursing stations. Although the rooms and stations are not ideally sized, they are in relatively good shape. North Bay utilizes a single ICU with ten critical care beds. The ICU rooms and nursing stations are also undersized. A four-bed ICU ward and former nursery are routinely used to serve overflow patients. Surgery Department and Recovery North Bay utilizes a single pre-operative surgical room for all of its surgery patients. The room accommodates up to five patient beds, but has limited space for storage and pre-operative procedures. Its operating rooms are sufficiently sized. While carts and large equipment are routinely stored in hallways throughout the surgical suite, North Bay has converted the former obstetrics recovery room to surgical storage and has made efficient use of other available space. North Bay operates a small six-bed Post Anesthesia Care Unit. Nurses routinely prepare patient medications in the unit which is often crowded with staff and patients. The Emergency Department North Bay has recently expanded its emergency department. The evidence demonstrates that this department is sufficient and meets current and future expected patient volumes. Replacement Issues Relating to North Bay While it is clear that areas of North Bay's physical plant are aging, the facility is in relatively good condition. It is apparent that North Bay must soon replace significant equipment, including cast-iron sewer pipes, plumbing, boilers, and chillers which will cause some interruption to hospital operations. However, North Bay's four-page written assessment of the facility and its argument citing the need for total replacement is, on balance, not persuasive. North Bay's Proposed Replacement North Bay proposes to construct a new, state-of-the- art, hospital approximately eight miles southeast of its existing facility and intends to offer the identical array of services the hospital currently provides. North Bay's Existing and Proposed Sites North Bay's existing hospital is located on an eight-acre site with limited storm-water drainage capacity. Consequently, much of its parking area is covered by deep, porous, gravel instead of asphalt. North Bay's existing site is generally surrounded by residential properties. While the city has committed, in writing, it willingness to assist both applicants with on-site expansion, it is unknown whether North Bay can acquire additional adjacent property. North Bay's proposed site is located at the intersection of Trinity Oaks Boulevard and Mitchell Boulevard, south of Community Hospital's proposed site, and is quite spacious. It contains sufficient land for the facilities, parking, and future growth, and has all necessary infrastructure in place, including utility systems, storm- water structures, and roadways. Currently however, there is no public transportation service available to North Bay's proposed site. Projected Utilization by Applicants The evidence presented at hearing indicates that, statewide, replacement hospitals often increase a provider's acute care bed utilization. For example, Bartow Memorial Hospital, Heart of Florida Regional Medical Center, Lake City Medical Center, Florida Hospital Heartland Medical Center, South Lake Hospital, and Florida Hospital-Fish Memorial each experienced significant increases in utilization following the opening of their new hospital. The applicants in this case each project an increase in utilization following the construction of their new facility. Specifically, Community Hospital's application projects 82,685 total hospital patient days (64,427 acute care patient days) in year one (2006) of the operation of its proposed replacement facility, and 86,201 total hospital patient days (67,648 acute care patient days) in year two (2007). Using projected 2006 and 2007 population estimates, applying 2002 acute care hospital use rates which are below 50 percent, and keeping Community Hospital's acute care market share constant at its 2002 level, it is reasonably estimated that Community Hospital's existing hospital will experience 52,623 acute care patient days in 2006, and 53,451 acute care patient days in 2007. Consequently, Community Hospital's proposed facility must attain 11,804 additional acute care patient days in 2006, and 14,197 more acute care patient days in 2007, in order to achieve its projected acute care utilization. Although Community Hospital lost eight percent of the acute care market in its service area between 1995 and 2002, two-thirds of that loss was due to residents of Sub- District 5-1 acquiring services in another area. While Community Hospital experienced 78,444 acute care patient days in 1995, it projects only 64,427 acute care patient days in year one. Given the new facility and population factors, it is reasonable that the hospital will recapture half of its lost acute care market share and achieve its projections. With respect to its psychiatric unit, Community Hospital projects 16,615 adult psychiatric inpatient days in year one (2006) and 17,069 adult inpatient days in year two (2007) of the proposed replacement hospital. The evidence indicates that these projections are reasonable. Similarly, North Bay's acute care utilization rate has been consistently below 50 percent. Since 1999, the hospital has experienced declining utilization. In its application, North Bay states that it achieved total actual acute care patient days of 21,925 in 2000 and 19,824 in 2001 and the evidence at hearing indicates that North Bay experienced 17,693 total acute care patient days in 2002. North Bay projects 25,909 acute care patient days in the first year of operation of its proposed replacement hospital, and 27,334 acute care patient days in the second year of operation. Despite each applicant's current facility utilization rate, Community Hospital must increase its current acute care patient days by 20 percent to reach its projected utilization, and North Bay must increase its patient days by at least 50 percent. Given the population trends, service mix and existing competition, the evidence demonstrates that it is not possible for both applicants to simultaneously achieve their projections. In fact, it is strongly noted that the applicants' own projections are predicated upon only one applicant being approved and cannot be supported with the approval of two facilities. Local Health Plan Preferences In its local health plan for District 5, the Suncoast Health Council, Inc., adopted acute care preferences in October, 2000. The replacement of an existing hospital is not specifically addressed by any of the preferences. However, certain acute care preferences and specialty care preferences are applicable. The first applicable preference provides that preference "shall be given to an applicant who proposes to locate a new facility in an area that will improve access for Medicaid and indigent patients." It is clear that the majority of Medicaid and indigent patients live closer to the existing hospitals. However, Community Hospital proposes to move 5.5 miles from its current location, whereas North Bay proposes to move eight miles from its current location. While the short distances alone are less than significant, North Bay's proposed location is further removed from New Port Richey, is not located on a major highway or bus-route, and would therefore be less accessible to the medically indigent residents. Community Hospital's proposed site will be accessible using public transportation. Furthermore, Community Hospital has consistently provided excellent service to the medically indigent and its proposal would better serve that population. In 2000, Community Hospital provided 7.4 percent of its total patient days to Medicaid patients and 0.8 percent of its total patient days to charity patients. Community Hospital provided the highest percentage and greatest number of Medicaid patient days in Sub-District 5-1. By comparison, North Bay provided 5.8 percent of its total patient days to Medicaid patients and 0.9 percent of its total patient days to charity patients. In 2002, North Bay's Medicaid patients days declined to 3.56 percent. Finally, given the closeness and available bed space of the existing providers and the increasing population in the Trinity area, access will be improved by Community Hospital's relocation. The second local health plan preference provides that "[i]n cases where an applicant is a corporation with previously awarded certificates of need, preference shall be given to those which follow through in a timely manner to construct and operate the additional facilities or beds and do not use them for later negotiations with other organizations seeking to enter or expand the number of beds they own or control." Both applicants meet this preference. The third local health plan preference recognizes "Certificate of Need applications that provide AHCA with documentation that they provide, or propose to provide, the largest percentage of Medicaid and charity care patient days in relation to other hospitals in the sub-district." Community Hospital provides the largest percentage of Medicaid and charity care patient days in relation to other hospitals in Sub-District 5-1, and therefore meets this preference. The fourth local health plan preference applies to "Certificate of Need applications that demonstrate intent to serve HIV/AIDS infected persons." Both applicants accept and treat HIV/AIDS infected persons, and would continue to do so in their proposed replacement hospitals. The fifth local health plan preference recognizes "Certificate of Need applications that commit to provide a full array of acute care services including medical-surgical, intensive care, pediatric, and obstetrical services within the sub-district for which they are applying." Community Hospital qualifies since it will continue to provide its current services, including obstetrical care and psychiatric care, in its proposed replacement hospital. North Bay discontinued its pediatric and obstetrical programs in 2001, does not intend to provide them in its proposed replacement hospital, and will not provide psychiatric care. Agency Rule Preferences Florida Administrative Code Rule 59C-1.038(6) provides an applicable preference to a facility proposing "new acute care services and capital expenditures" that has "a documented history of providing services to medically indigent patients or a commitment to do so." As the largest Medicaid provider in Sub-District 5-1, Community Hospital meets this preference better than does North Bay. North Bay's history demonstrates a declining rate of service to the medically indigent. Statutory Review Criteria Section 408.035(1), Florida Statutes: The need for the health care facilities and health services being proposed in relation to the applicable district health plan District 5 includes Pasco and Pinellas County. Pasco County is rapidly developing, whereas Pinellas County is the most densely populated county in Florida. Given the population trends, service mix, and utilization rates of the existing providers, on balance, there is a need for a replacement hospital in the Trinity area. Section 408.035(2), Florida Statutes: The availability, quality of care, accessibility, and extent of utilization of existing health care facilities and health services in the service district of the applicant Community Hospital and North Bay are both located in Sub-District 5-1. Each proposes to relocate to an area of southwestern Pasco County which is experiencing explosive population growth. The other general acute care hospital located in Sub-District 5-1 is Regional Medical Center Bayonet Point, which is located further north, in the Hudson area of western Pasco County. The only other acute care hospitals in Pasco County are East Pasco Medical Center, in Zephyrhills, and Pasco Community Hospital, in Dade City. Those hospitals are located in Sub-District 5-2, east Pasco County, far from the area proposed to be served by either Community Hospital or North Bay. District 5 includes Pinellas County as well as Pasco County. Helen Ellis and Mease are existing hospital providers located in Pinellas County. Helen Ellis has 168 licensed beds, consisting of 150 acute care beds and an 18-bed skilled nursing unit, and is located 7.9 miles from Community Hospital's existing location and 10.8 miles from Community Hospital's proposed location. Access to Helen Ellis for patients originating from southwestern Pasco County requires those patients to travel congested U.S. 19 south to Tarpon Springs. As a result, the average drive time from Community Hospital's existing and proposed site to Helen Ellis is approximately 22 minutes. Helen Ellis is not a reasonable alternative to Community Hospital's proposal. The applicants' proposals are specifically designed for the current and future health care needs of southwestern Pasco County. Given its financial history, it is unknown whether Helen Ellis will be financially capable of providing the necessary care to the residents of southwestern Pasco. Mease Countryside Hospital has 189 licensed acute care beds. It is located 16.0 miles from Community Hospital's existing location and 13.8 miles from Community Hospital's proposed location. The average drive time to Mease Countryside is 32 minutes from Community Hospital's existing site and 24 minutes from its proposed site. In addition, Mease Countryside Hospital has experienced extremely high utilization over the past several years, in excess of 90 percent for calendar years 2000 and 2001. Utilization at Mease Countryside Hospital has remained over 80 percent despite the addition of 45 acute care beds in April 2002. Given the growth and demand, it is unknown whether Mease can accommodate the residents in southwest Pasco County. Mease Dunedin Hospital has 189 licensed beds, consisting of 149 acute care beds, a 30-bed skilled nursing unit, five Level 2 neonatal intensive care beds, and five Level 3 neonatal intensive care beds. Its former 15-bed adult psychiatric unit has been converted into acute care beds. It is transferring its entire obstetrics program at Mease Dunedin Hospital to Mease Countryside Hospital. Mease Dunedin Hospital is located approximately 18 to 20 miles from the applicants' existing and proposed locations with an average drive time of 35-38 minutes. With their remote location, and the exceedingly high utilization at Mease Countryside Hospital, neither of the two Mease hospitals is a viable alternative to the applicants' proposals. In addition, the construction of a replacement hospital would positively impact economic development and further attract medical professionals to Sub-District 5-1. On balance, given the proximity, utilization, service array, and accessibility of the existing providers, including the applicants, the relocation of Community Hospital will enhance access to health care to the residents. Section 408.035(3), Florida Statutes: The ability of the applicant to provide quality of care and the applicant's record of providing quality of care As stipulated, both applicants provide excellent quality of care. However, Community Hospital's proposal will better enhance its ability to provide quality care. Community is currently undersized, non-compliant with today's standards, and located on a site that does not allow for reasonable expansion. Its emergency department is inadequate for patient volume, and the configuration of the first floor leads to inefficiencies in the diagnosis and treatment of emergency patients. Again, most inpatients are placed in semi-private rooms and three-bed wards, with no showers or tubs, little privacy, and an increased risk of infection. The hospital's waiting areas for families of patients are antiquated and undersized, its nursing stations are small and cramped and the operating rooms and storage facilities are undersized. Community Hospital's deficiencies will be effectively eliminated by its proposed replacement hospital. As a result, patients will experience qualitatively better care by the staff who serve them. Conversely, North Bay is in better physical condition and not in need of replacement. It has more reasonable options to expand or relocate its facility on site. Quality of care at North Bay will not be markedly enhanced by the construction of a new hospital. Sections 408.035(4)and(5), Florida Statutes, have been stipulated as not applicable in this case. Section 408.035(6), Florida Statutes: The availability of resources, including health personnel, management personnel, and funds available for capital and operating expenditures, for project accomplishment and operation The parties stipulated that both Community Hospital and North Bay have available health personnel and management personnel for project accomplishment and operation. In addition, the evidence proves that both applicants have sufficient funds for capital and operating expenditures. Community Hospital proposes to rely on its parent company to finance the project. Keith Giger, Vice-President of Finance for HCA, Inc., Community Hospital's parent organization, provided credible deposition testimony that HCA, Inc., will finance 100 percent of the total project cost by an inter-company loan at eight percent interest. Moreover, it is noted that the amount to be financed is actually $20 million less than the $196,849,328 stated in the CON Application, since Community Hospital previously purchased the proposed site in June 2003 with existing funds and does not need to finance the land acquisition. Community Hospital has sufficient working capital for operating expenditures of the proposed replacement hospital. North Bay, on the other hand, proposes to acquire financing from BayCare Obligated Group which includes Morton Plant Hospital Association, Inc.; Mease; and several other hospital entities. Its proposal, while feasible, is less certain since member hospitals must approve the indebtedness, thereby providing Mease with the ability to derail North Bay's proposed bond financing. Section 408.035(7), Florida Statutes: The extent to which the proposed services will enhance access to health care for residents of the service district The evidence proves that either proposal will enhance geographical access to the growing population in the service district. However, with its provision of obstetrical services, Community Hospital is better suited to address the needs of the younger community. With respect to financial access, both proposed relocation sites are slightly farther away from the higher elderly and indigent population centers. Since the evidence demonstrates that it is unreasonable to relocate both facilities away from the down-town area, Community Hospital's proposal, on balance, provides better access to poor patients. First, public transportation will be available to Community Hospital's site. Second, Community Hospital has an excellent record of providing care to the poor and indigent and has accepted the agency's condition to provide ten percent of its total annual patient days to Medicaid recipients To the contrary, North Bay's site will not be accessible by public transportation. In addition, North Bay has a less impressive record of providing care to the poor and indigent. Although AHCA conditioned North Bay's approval upon it providing 9.7 percent of total annual patient days to Medicaid and charity patients, instead of the 9.7 percent of gross annual revenue proposed in its application, North Bay has consistently provided Medicaid and charity patients less than seven percent of its total annual patient days. Section 408.035(8), Florida Statutes: The immediate and long-term financial feasibility of the proposal Immediate financial feasibility refers to the availability of funds to capitalize and operate the proposal. See Memorial Healthcare Group, Ltd. d/b/a Memorial Hospital Jacksonville vs. AHCA et al., Case No. 02-0447 et seq. Community Hospital has acquired reliable financing for the project and has sufficiently demonstrated that its project is immediately financially feasible. North Bay's short-term financial proposal is less secure. As noted, North Bay intends to acquire financing from BayCare Obligated Group. As a member of the group, Mease, the parent company of two hospitals that oppose North Bay's application, must approve the plan. Long-term financial feasibility is the ability of the project to reach a break-even point within a reasonable period of time and at a reasonable achievable point in the future. Big Bend Hospice, Inc. vs. AHCA and Covenant Hospice, Inc., Case No. 02-0455. Although CON pro forma financial schedules typically show profitability within two to three years of operation, it is not a requirement. In fact, in some circumstances, such as the case of a replacement hospital, it may be unrealistic for the proposal to project profitability before the third or fourth year of operation. In this case, Community Hospital's utilization projections, gross and net revenues, and expense figures are reasonable. The evidence reliably demonstrates that its replacement hospital will be profitable by the fourth year of operation. The hospital's financial projections are further supported by credible evidence, including the fact that the hospital experienced financial improvement in 2002 despite its poor physical condition, declining utilization, and lost market share to providers outside of its district. In addition, the development and population trends in the Trinity area support the need for a replacement hospital in the area. Also, Community Hospital has benefited from increases in its Medicaid per diem and renegotiated managed care contracts. North Bay's long-term financial feasibility of its proposal is less certain. In calendar year 2001, North Bay incurred an operating loss of $306,000. In calendar year 2002, it incurred a loss of $1,160,000. In its CON application, however, North Bay projects operating income of $1,538,827 in 2007, yet omitted the ongoing expenses of interest ($1,600,000) and depreciation ($3,000,000) from its existing facility that North Bay intends to continue operating. Since North Bay's proposal does not project beyond year two, it is less certain whether it is financially feasible in the third or fourth year. In addition to the interest and depreciation issues, North Bay's utilization projections are less reasonable than Community Hospital's proposal. While possible, North Bay will have a difficult task achieving its projected 55 percent increase in acute care patient days in its second year of operation given its declining utilization, loss of obstetric/pediatric services and termination of two exclusive managed care contracts. Section 408.035(9), Florida Statutes: The extent to which the proposal will foster competition that promotes quality and cost-effectiveness Both applicants have substantial unused capacity. However, Community Hospital's existing facility is at a distinct competitive disadvantage in the market place. In fact, from 1994 to 1998, Community Hospital's overall market share in its service area declined from 40.3 percent to 35.3 percent. During that same period, Helen Ellis' overall market share in Community Hospital's service area increased from 7.2 percent to 9.2 percent. From 1995 to the 12-month period ending June 30, 2002, Community Hospital's acute care market share in its service area declined from 34.0 percent to 25.9 percent. During that same period, Helen Ellis' acute care market share in Community Hospital's service area increased from 11.7 percent to 12.0 percent. In addition, acute care average occupancy rates at Mease Dunedin Hospital increased each year from 1999 through 2002. Acute care average occupancy at Mease Countryside Hospital exceeded 90 percent in 2000 and 2001, and was approximately 85 percent for the period ending June 30, 2002. Some of the loss in Community Hospital's market share is due to an out-migration of patients from its service area to hospitals in northern Pinellas and Hillsborough Counties. Market share in Community's service area by out-of- market providers increased from 33 percent in 1995 to 40 percent in 2002. Community Hospital's outdated hospital has hampered its ability to compete for patients in its service area. Mease is increasing its efforts to attract patients and currently completing a $92 million expansion of Mease Countryside Hospital. The project includes the development of 1,134 parking spaces on 30 acres of raw land north of the Mease Countryside Hospital campus and the addition of two floors to the hospital. It also involves the relocation of 51 acute care beds, the obstetrics program and the Neonatal Intensive Care Units from Mease Dunedin Hosptial to Mease Countryside Hospital. Mease is also seeking to more than double the size of the Countryside emergency department to handle its 62,000 emergency visits. With the transfer of licensed beds from Mease Dunedin Hospital to Mease Countryside Hospital, Mease will also convert formerly semi-private patient rooms to private rooms at Mease Dunedin Hospital. The approval of Community Hospital's relocated facility will enable it to better compete with the hospitals in the area and promote quality and cost- effectiveness. North Bay, on the other hand, is not operating at a distinct disadvantage, yet is still experiencing declining utilization. North Bay is the only community-owned, not-for- profit provider in western Pasco County and is a valuable asset to the city. Section 408.035(10), Florida Statutes: The costs and methods of the proposed construction, including the costs and methods or energy provision and the availability of alternative, less costly, or more effective methods of construction The parties stipulated that the project costs in both applications are reasonable to construct the replacement hospitals. Community Hospital's proposed construction cost per square foot is $175, and slightly less than North Bay's $178 proposal. The costs and methods of proposed construction for each proposal is reasonable. Given Community Hospital's severe site and facility problems, the evidence demonstrates that there is no reasonable, less costly, or more effective methods of construction available for its proposed replacement hospital. Additional "band-aide" approaches are not financially reasonable and will not enable Community Hospital to effectively compete. The facility is currently licensed for 401 beds, operates approximately 311 beds and is still undersized. The proposed replacement hospital will meet the standards in Florida Administrative Code Rule 59A-3.081, and will meet current building codes, including the Americans with Disabilities Act and the Guidelines for Design and Construction of Hospitals and Health Care Facilities, developed by the American Institute of Architects. The opponents' argue that Community Hospital will not utilize the 320 acute care beds proposed in its CON application, and therefore, a smaller facility is a less- costly alternative. In addition, Helen Ellis' architectural expert witness provided schematic design alternatives for Community Hospital to be expanded and replaced on-site, without providing a detailed and credible cost accounting of the alternatives. Given the evidence and the law, their arguments are not persuasive. While North Bay's replacement cost figures are reasonable, given the aforementioned reasons, including the fact that the facility is in reasonably good condition and can expand vertically, on balance, it is unreasonable for North Bay to construct a replacement facility in the Trinity area. Section 408.035(11), Florida Statutes: The applicant's past and proposed provision of health care services to Medicaid patients and the medically indigent Community Hospital has consistently provided the most health care services to Medicaid patients and the medically indigent in Sub-District 5-1. Community Hospital agreed to provide at least ten percent of its patient days to Medicaid recipients. Similarly, North Bay agreed to provide 9.7 percent of its total annual patient days to Medicaid and charity patients combined. North Bay, by contrast, provided only 3.56 percent of its total patient days to Medicaid patients in 2002, and would have to significantly reverse a declining trend in its Medicaid provision to comply with the imposed condition. Community Hospital better satisfies the criterion. Section 408.035(12) has been stipulated as not applicable in this case. Adverse Impact on Existing Providers Historical figures demonstrate that hospital market shares are not static, but fluctuate with competition. No hospital is entitled to a specific or historic market share free from competition. While the applicants are located in health planning Sub-District 5-1 and Helen Ellis and the two Mease hospitals are located in health planning Sub-District 5- 2, they compete for business. None of the opponents is a disproportionate share, safety net, Medicaid provider. As a result, AHCA gives less consideration to any potential adverse financial impact upon them resulting from the approval of either application as a low priority. The opponents, however, argue that the approval of either replacement hospital would severely affect each of them. While the precise distance from the existing facilities to the relocation sites is relevant, it is clear that neither applicants' proposed site is unreasonably close to any of the existing providers. In fact, Community Hospital intends to locate its replacement facility three miles farther away from Helen Ellis and 1.5 miles farther away from Mease Dunedin Hospital. While Helen Ellis' primary service area is seemingly fluid, as noted by its chief operating officer's hearing and deposition testimony, and the Mease hospitals are located 15 to 20 miles south, they overlap parts of the applicants' primary service areas. Accordingly, each applicant concedes that the proposed increase in their patient volume would be derived from the growing population as well as existing providers. Although it is clear that the existing providers may be more affected by the approval of Community Hosptial's proposal, the exact degree to which they will be adversely impacted by either applicant is unknown. All parties agree, however, that the existing providers will experience less adverse affects by the approval of only one applicant, as opposed to two. Furthermore, Mease concedes that its hospitals will continue to aggressively compete and will remain profitable. In fact, Mease's adverse impact analysis does not show any credible reduction in loss of acute care admissions at Mease Countryside Hospital or Mease Dunedin Hospital until 2010. Even then, the reliable evidence demonstrates that the impact is negligible. Helen Ellis, on the other hand, will likely experience a greater loss of patient volume. To achieve its utilization projections, Community Hospital will aggressively compete for and increase market share in Pinellas County zip code 34689, which borders Pasco County. While that increase does not facially prove that Helen Ellis will be materially affected by Community Hospital's replacement hospital, Helen Ellis will confront targeted competition. To minimize the potential adverse affect, Helen Ellis will aggressively compete to expand its market share in the Pinellas County zip codes south of 34689, which is experiencing population growth. In addition, Helen Ellis is targeting broader service markets, and has filed an application to establish an open- heart surgery program. While Helen Ellis will experience greater competition and financial loss, there is insufficient evidence to conclude that it will experience material financial adverse impact as a result of Community Hospital's proposed relocation. In fact, Helen Ellis' impact analysis is less than reliable. In its contribution-margin analysis, Helen Ellis utilized its actual hospital financial data as filed with AHCA for the fiscal year October 1, 2001, to September 30, 2002. The analysis included total inpatient and total outpatient service revenues found in the filed financial data, including ambulatory services and ancillary services, yet it did not include the expenses incurred in generating ambulatory or ancillary services revenue. As a result, the overstated net revenue per patient day was applied to its speculative lost number of patient days which resulted in an inflated loss of net patient service revenue. Moreover, the evidence indicates that Helen Ellis' analysis incorrectly included operational revenue and excluded expenses related to its 18-bed skilled nursing unit since neither applicant intends to operate a skilled nursing unit. While including the skilled nursing unit revenues, the analysis failed to include the sub-acute inpatient days that produced those revenues, and thereby over inflated the projected total lost net patient service revenue by over one million dollars.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that: Community Hospital's CON Application No. 9539, to establish a 376-bed replacement hospital in Pasco County, Sub- District 5-1, be granted; and North Bay's CON Application No. 9538, to establish a 122-bed replacement hospital in Pasco County, Sub-District 5- 1, be denied. DONE AND ENTERED this 19th day of March, 2004, in Tallahassee, Leon County, Florida. S WILLIAM R. PFEIFFER 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 19th day of March, 2004. COPIES FURNISHED: James C. Hauser, Esquire R. Terry Rigsby, Esquire Metz, Hauser & Husband, P.A. 215 South Monroe Street, Suite 505 Post Office Box 10909 Tallahassee, Florida 32302 Stephen A. Ecenia, Esquire R. David Prescott, Esquire Richard M. Ellis, Esquire Rutledge, Ecenia, Purnell & Hoffman, P.A. 215 South Monroe Street, Suite 420 Post Office Box 551 Tallahassee, Florida 32302-0551 Richard J. Saliba, Esquire Agency for Health Care Administration Fort Knox Building III, Mail Station 3 2727 Mahan Drive Tallahassee, Florida 32308 Robert A. Weiss, Esquire Karen A. Putnal, Esquire Parker, Hudson, Rainer & Dobbs, LLP The Perkins House, Suite 200 118 North Gadsden Street Tallahassee, Florida 32301 Darrell White, Esquire William B. Wiley, Esquire McFarlain & Cassedy, P.A. 305 South Gadsden Street, Suite 600 Tallahassee, Florida 32301 Lealand McCharen, Agency Clerk Agency for Health Care Administration 2727 Mahan Drive, Mail Station 3 Tallahassee, Florida 32308 Valda Clark Christian, General Counsel Agency for Health Care Administration 2727 Mahan Drive, Mail Station 3 Tallahassee, Florida 32308 Rhonda M. Medows, M.D., Secretary Agency for Health Care Administration 2727 Mahan Drive, Mail Station 3 Tallahassee, Florida 32308
The Issue The issue in this case is whether the Agency for Health Care Administration (AHCA) should grant the application of Wuesthoff Memorial Hospital, Inc. (WUESTHOFF), for a Certificate of Need (CON) (CON 8597) to establish a new 50-bed general acute care hospital in South Brevard County, District 7.
Findings Of Fact WUESTHOFF is a 303-bed, acute care hospital in Brevard County, Florida. In addition to its hospital, WUESTHOFF has three home health locations, eight or nine walk-in clinics, a hospice, a durable medical equipment business, an ambulatory surgery center, two freestanding diagnostic centers, and outpatient labs throughout Brevard County. HRMC is a JCAHO accredited, 528-bed, regional, not-for- profit community hospital based in Melbourne, Brevard County, Florida. HRMC is comprised of two acute care campuses: a 468- bed tertiary hospital in Melbourne, and a 60-bed, general acute care hospital in Palm Bay. The Melbourne campus operates a 10-bed, Level II, neonatal, intensive care unit, and 428 general medical and pediatric beds. The Proposed Project WUESTHOFF chose to establish a satellite hospital complex in South Brevard County by applying separately for: (1) a certificate of need (CON) to decertify and de-license 100 general acute care hospital beds and undertake certain renovations and improvements at its existing Rockledge hospital facility; (2) a CON for a medical office building (MOB); (3) a non-reviewability letter for a $35 million diagnostic and treatment center (DTC), which would provide all of the ancillary services for the new satellite hospital; and (4) the CON to establish the 50-bed hospital (CON 8597) which is at issue in this case. In CON 8597, WUESTHOFF has asked AHCA to treat the $35 million DTC as the “sunk” costs of an existing facility, and to review the CON application at issue in this case incrementally— i.e., as consisting of only the inpatient tower and the additional ancillary activities that would take place at the complex, over and above those that would take place at the DTC without the inpatient tower. Viewing CON 8597 in this way, WUESTHOFF presented total project costs of only $13 million. In preparing the financial schedules for CON 8597, WUESTHOFF presented the revenues and expenses of the entire hospital operation (including the DTC), except for the additional activities (inpatient and ancillary) that would result from the addition of the inpatient tower, and the revenues and expenses of the entire hospital operation, including the additional activities (inpatient and ancillary) that would result from the addition of the inpatient tower. By presenting the financial schedules in this manner, WUESTHOFF never presented the revenues and expenses of the entirety of the new satellite hospital it is proposing to establish, and AHCA has not had the opportunity to review those revenues and expenses. WUESTHOFF planned to build the MOB, the DTC and the inpatient tower in one continual course of construction and to open the entire complex at the same time; the complex, when completed, was planned to function as a single, integrated hospital facility. AHCA granted the first three applications comprising WUESTHOFF’s project but denied CON 8597. In a subsequent batch, WUESTHOFF filed a letter of intent for a single CON application that the combined the DTC and inpatient tower projects at a total cost of approximately $50,000,000. Need In Relation To State And District Health Plans: Section 408.035(1)(a) Florida Statutes State Health Plan The first State Health Plan preference favors applicants who demonstrate that the subdistrict occupancy rate is at or exceeds 75 percent, or in the case of existing facilities, where the occupancy rate for the most recent 12 months is at or exceeds 85 percent. WUESTHOFF failed to meet this preference. For the applicable period, the subdistrict occupancy was approximately 53 percent; however, more recent data shows that occupancy is below 53 percent, which suggests a continuing decline in inpatient occupancy rates in the subdistrict. During the applicable period, the occupancy rate at WUESTHOFF’s Rockledge facility was only slightly more than 45 percent. The second State Health Plan preference favors an applicant with a history of providing a disproportionate share of the subdistrict’s acute care and Medicaid patient days, and further meets the Medicaid disproportionate share hospital criteria. WUESTHOFF failed to meet this preference, as it is not a disproportionate share provider. The third State Health Plan preference favors an applicant that provides or proposes to provide disproportionate share of Medicaid and charity care patient days in relation to other hospitals within the district or subdistrict. WUESTHOFF’s existing facility is not a disproportionate share hospital. (Although WUESTHOFF’s CON application proposes to condition award of the CON setting aside 15 percent of its discharges for Medicaid, charity, and indigent patients, its application does not provide percentages for each category.) The fourth State Health Plan preference considers the current and projected indigent inpatient case load, the proposed facility size, and the case and service mix, WUESTHOFF’s application partially complies with the preference in that it proposes to provide some indigent care. The fifth State Health Plan preference favors proposals that would not negatively affect the financial viability of an existing, disproportionate share hospital. This preference is not applicable in this case. The sixth State Health Plan preference favors applicants with a record of accepting indigent patients for emergency care. WUESTHOFF meets this preference. The seventh State Health Plan preference favors applicants for any type of hospital project if the facility is verified as a trauma center. WUESTHOFF does not meet this preference. WUESTHOFF claims that it operate the emergency room at the proposed facility with “the same level of services as WUESTHOFF’s existing emergency room.” WUESTHOFF does not currently operate a Level II trauma center at its Rockledge campus. The eighth State Health Plan preference favors applicants who can document that they provide a full range of emergency services. WUESTHOFF’s Rockledge facility offers a range of emergency services, but the emergency department at the proposed facility will necessarily offer a limited range of services, as the proposed facility will not be a tertiary care hospital, and emergency patients in need of those services will have to be transferred. The ninth State Health Plan preference favors applicants who can document that it has not been fined by HRS for any violation of the emergency services statutes. WUESTHOFF meets this preference. Local Health Plan Preferences The District 7 Local Health Plan sets forth five preferences to be used in evaluating CON applications for the transfer/relocation/delicensure of acute care beds. The health plan provides that “[p]reference shall be given to applications for transfer of existing acute care beds, delicensure/conversion of existing acute care beds and/or relocation of an entire facility if the applicant can provide substantial documentation of: The need for acute care beds or specialty beds in the service area proposed to receive the beds. Need should address specific populations, access consideration, etc. The impact of the proposed project on the parent facility including projected occupancy declines, curtailing of service effect on operating cost, use of vacated space at the main campus and charge changes. The proposed service improving access by at least 25 minutes to at least 10 percent of the population or a minimum of at least 35,000 people. This should be substantiated by analyses of patient origin to existing providers, physician referral practices and location of physician offices. Commitment to provision of care to both no-pay and low-pay medically indigent patients and Medicaid patients at a minimum of no more than 2 percent below the most recent HCB publication for the District of the charity/uncompensated care percentage of net revenues. Agreement to participate in any indigent care programs which exist in the county or counties proposed to be served. Participation should be at a rate equal to or greater than the average for the general hospitals also serving that area. As to the first preference, WUESTHOFF failed to demonstrate a need for the proposed 50-bed general acute care hospital. Even with the delicensure of 100 acute care beds as a result of WUESTHOFF’s companion application, there still is an oversupply of 215 acute care beds in the county. The evidence presented at the final hearing failed to demonstrate any geographic or other barriers to accessing acute care services that would warrant the expenditure proposed by WUESTHOFF to construct the proposed project. Indeed, WUESTHOFF’s own evidence was clear that every resident of Brevard County has access to a general acute care hospital within a maximum drive time of 30-40 minutes and, in almost all instances, to two different acute care facilities within a 30-40 minute drive time. WUESTHOFF contends that its proposed 50-bed general acute care hospital is needed for four reasons: (1) to provide a high quality alternative inpatient health care provider in south Brevard County; (2) to introduce competition into the south Brevard area; (3) to enhance access to care to Medicaid, charity, and indigent population, as well as to enhance access for the managed care segment of the population; and (4) to enable WUESTHOFF to remain competitive in the marketplace. The evidence is clear that HRMC provides high quality inpatient health care in south Brevard County. See Findings 30- 44, infra. In addition, WUESTHOFF already serves some patients, residing in south Brevard County, and so does Sebastian River Medical Center, located in the adjacent county to the south. The evidence also is clear that there already is competition for inpatient hospital services in south Brevard County. HRMC serves a much greater percentage of those patients primarily due to its location and the high quality and low costs of HRMC’s services. In view of the excess capacity of hospital beds in the county, it does not make sense to add a satellite WUESTHOFF hospital in south Brevard County that would duplicate the services of the existing providers. WUESTHOFF also attempted to show that its proposed acute care hospital was needed in order to provide services for managed care participants. However, WUESTHOFF failed to offer any competent evidence to show that participants in managed care programs are a traditionally underserved population group and did not prove that WUESTHOFF’s ability to participate in managed care networks is a valid basis for determining the need of additional acute care services in south Brevard County. To the contrary, the evidence tended to show that the expansion of managed care programs would result in a decrease in the utilization of inpatient acute care services. Furthermore, there is no barrier to WUESTHOFF’s participating in managed care programs with one or more facilities in the southern portion of Brevard County, and in fact WUESTHOFF has aligned itself with Sebastian River Medical Center in a number of managed care contracts serving residents of southern Brevard County. While WUESTHOFF is offering a larger discount to managed care payers, its charges are higher, resulting in net revenue per managed care case that is still higher than HRMC’s. The price the managed care providers pay to HRMC is actually 14 percent lower than what they pay to WUESTHOFF. Not only does HRMC provide a better “deal” to managed care payers, but HRMC’s managed care volume is also greater than WUESTHOFF’s, indicating HRMC’s willingness to negotiate and work with managed care companies. At the time WUESTHOFF submitted its CON application, the penetration of managed care in Brevard County was approximately 8.6 percent. However, more recent data from 1996 shows a significant increase in the penetration of managed care to 15 percent, without the allegedly needed new hospital. A primary thrust of WUESTHOFF’s case for the need for its proposed project was that patients in the southern portion of Brevard County cannot be admitted into HRMC’s Palm Bay facility because its physicians do not enjoy staff privileges at that facility. Each hospital establishes criterion for staff privileges. In order to be eligible for staff privileges, it is normally required that the physician reside or have his or her office within certain geographic boundaries surrounding the hospital. The primary reason for such requirement is to ensure that the physician is capable of responding to patient needs within a time certain and that the physician will be able to provide coverage for his or her patients admitted into a facility. Dr. Arnold, a physician with staff privileges at WUESTHOFF who operates an office in West Melbourne, conceded that if his physician group associated with a physician living within HRMC’s geographic boundaries who was able to meet response time criteria, the physician group could admit patients into HRMC. Dr. Arnold also conceded that his physician group is not eligible for staff privileges at other Brevard hospitals, based on geographic considerations. The Availability, Quality Of Care, Efficiency, Appropriateness, Accessibility, Extent Of Utilization, And Adequacy Of Like And Existing Health Care Services In The Service District: Section 408.035(1)(b), Florida Statutes. There is no need for another hospital in South Brevard County. The county already has more than enough hospitals. Even in light of a 27-29 percent increase in population, utilization of Brevard County hospitals has dropped 10 percent in the last five years. There has been a marked shift in the Brevard County area away from inpatient services toward outpatient services. That shift is still growing. HRMC is the only hospital in Brevard County which has been nationally recognized for quality care by the National Research Corporation. According to AHCA’s hospital report card, HRMC was shown to be a consistent, low-charge provider, operating within the expected range of outcomes. According to a study done by AHCA, HRMC performs as one of the top five hospitals in Florida for reducing overall C-section births and increasing vaginal births after Cesarean (“VBAC”). This is important because vaginal births are safer for both mother and baby and save approximately $3,000 per delivery when compared with Cesarean births. HRMC has the lowest Cesarean Section rate and the highest VBAC rate in Brevard County and is one of the five lowest charging hospitals in the State for these services. Wuesthoff, on the other hand, has some of the highest costs in the county for these services. HRMC is providing efficient hospital services when compared with WUESTHOFF and other markets where competition is a factor. Of the zip codes addressed in WUESTHOFF’s travel study, there is no zip code in Brevard County that is more than 30 minutes from an existing hospital. Of the fourteen intersections tested, the addition of the proposed project would decrease travel times from only three intersections, with the greatest decrease in travel time being only nine minutes. Thus, the construction of WUESTHOFF’s proposed facility would not significantly increase access for Brevard County patients. HRMC delivers the majority of Medicaid babies in the county and is also a contract provider for Children’s Medical Services. HRMC worked with the Public Health Department to develop a better system for giving prenatal care and delivery to Medicaid and indigent mothers. HRMC offered to subsidize the salary of a doctor, and eventually two midwives, to work with the Public Health Department for this purpose. HRMC’s HOPE programs provides access to Medicaid and indigent patients. HOPE clinic and HOPE van expenses are direct expenses of HRMC. In addition to medical care, the HOPE program also provides free medication to those who cannot afford it. HRMC’s HOPE van provides services to the homeless every Tuesday, seeing as many as 40 patients each visit. Patients are provided with an examination, medications, and referrals to specialists or the hospital, if necessary. This care is provided at no charge to the patient. HRMC’s HOPE program was given the Nova award by the American Hospital Association for its ground-breaking effort in community health improvement. It is the only program in Florida which has been so recognized. The HOPE program has also received the Heartland Award from Governor Chiles for its work at improving the status of life in Florida. HRMC supports a variety of agencies to provide care to indigent AIDS patients. HRMC provides services to a nonprofit outpatient AIDS services organization, which offers reduced-rate and free lab services. HRMC, along with the Public Health Unit, funded a dental clinic for the AIDS organization. The hospitals in Brevard County do a good job in regard to taking care of the patients who are incapable of paying, with HRMC going the extra mile to provide services to the poor. There was no evidence that persons in need of quality, general acute care services are not able to access those services at any existing provider in Brevard County. There is no lack of availability or access to general acute care services based on either geographic or financial grounds. WUESTHOFF’s proposed 50- bed general acute care hospital is not needed to accomplish this. The Ability Of The Applicant To Provide Quality Of Care And The Applicant’s Record Of Providing Quality Of Care: Section 408.035(1)(c), Florida Statutes. It is clear that WUESTHOFF is capable of providing quality inpatient health care services. However, it is found that HRMC is providing higher quality services (and at a lower cost). As shown in AHCA’s hospital report card, WUESTHOFF performed in the lowest 15 percent in the State in 5 of 6 serviced lines where mortality was measured. On the other hand, HRMC was indicated to be consistently a low-charge provider, operating within expected outcomes. HRMC’s C-section rate is significantly lower than WUESTHOFF’s, and its VBAC rate much higher. The results of a low C-section rate are lower lengths of stay and less risk to both mom and baby. The Availability And Adequacy Of Other Health Care Facilities And Services In The District Which May Serve As Alternatives For The Services To Be Provided By The Applicant: Section 408.035(1)(d), Florida Statutes. WUESTHOFF already has three home health locations, 8 or walk-in clinics, a hospice, a durable medical equipment business, an ambulatory surgery center, 2 freestanding diagnostic centers, and outpatient labs in Brevard County. In addition, WUESTHOFF plans to construct a new outpatient and diagnostic center in south Brevard County. In addition, inpatient surgeries have shifted to private, for-profit outpatient centers and ambulatory surgery centers that have opened in the last five years in Brevard County. The competent, substantial evidence presented at the final hearing demonstrates that within Brevard County, there are available and adequate alternatives to the inpatient services proposed by WUESTHOFF. First, as discussed above, the existing providers of acute inpatient health care services have capacity to absorb any increase in the utilization of acute care services in the County. Second, data introduced at the final hearing demonstrate that overall utilization for the types of services WUESTHOFF proposes to offer are declining and demonstrate that residents are seeking out alternatives to inpatient hospital services. For example, from 1993-1996, inpatient surgery services in Brevard County showed a marked decline of approximately 20 percent, both in number of patients and procedures. This trend is not unique to Brevard County, but is occurring throughout the state. Health care providers are seeking alternatives to hospitalization, with procedures being performed in physician offices and ambulatory surgical centers. Likewise, there has been a decline in utilization of several other services WUESTHOFF is proposing for its 50-bed hospital. During the period 1993-1996, while the population of Brevard County was growing at a rate of approximately 2.4 percent per year, the rate of obstetric admissions as a percentage of admissions to Brevard hospitals declined. There is excess capacity for pediatric and obstetrical services in Brevard County. The average daily census in obstetrical beds has dropped from approximately 34 patients per day to approximately 29 per day. With 66 reported available obstetrical beds in Brevard County, that means that on any day only 44 percent of the available capacity is being utilized. Likewise, pediatric census has gone from approximately 32 patients per day to only about 25. With 78 reported pediatrics beds, a demand for only 25 beds means that approximately 32 percent of available capacity is utilized. Probable Economies And Improvements In Service That May Be Derived From Operation Of Joint, Cooperative, Or Shared Health Care Resources: Section 408.035(1)(e), Florida Statutes. WUESTHOFF does not propose the operation of a joint, cooperative, or shared program with any other entity. WUESTHOFF contends that its application is consistent with this criterion because it proposes the sharing of certain resources with its main facility. But the construction of a satellite facility will result in the duplication of certain services. It is actually less efficient for a hospital to operate two campuses. The Need in the Service District for Special Equipment and Services Which Are Not Reasonably and Economically Accessible in Adjoining Areas: Section 408.035(1)(f), Florida Statutes. WUESTHOFF’s CON application does not propose to provide special equipment. This criterion is not met. The Need For Research And Educational Facilities, Health Care Practitioners, And Doctors Of Osteopathy And Medicine At The Student, Internship, And Residency Training Levels: Section 408.035(1)(g), Florida Statutes. This need is already being met in the community. WUESTHOFF, HRMC, and other Brevard County hospitals are already active in community training programs through their links with Brevard Community College and the University of Central Florida. HRMC has institutional training programs with the University of Florida, all Children’s Hospital, the local vo- tech, and University of Central Florida, in addition to other community programs. The Immediate And Long-Term Financial Feasibility Of The Proposal: Section 408.035(1)(i), Florida Statutes. The immediate financial feasibility of a proposed project is satisfied by showing that the applicant has adequate financial resources to fund the capital costs of the project and the financial ability to fund short-term operating losses. WUESTHOFF has demonstrated that its proposed project is financially feasible in the short-term. Long-term financial feasibility is established by demonstrating that projected revenues can be attained in light of the projected utilization of the proposed service and average length of stay. WUESTHOFF has not demonstrated that it can achieve its projected revenues by the second year of operation and has, therefore, failed to demonstrate long-term financial feasibility. It is impossible to tell from the information contained in WUESTHOFF’s CON application 8597 what the revenues and expenses of the new hospital will be. Staffing and supply costs associated with the ancillary building, but which will be used by the hospital when constructed and which amount to millions of dollars, are not broken out in the application. The application also does not show the totality of the costs associated with the 50-bed hospital WUESTHOFF seeks to establish. For example, provision for bad debt expense does not appear in the application, nor does the indigent care tax expense. Furthermore, the application does not provide for any administrative staff for the new hospital, nor has all other necessary staff been provided for. If these positions are included under “other,” then the salary expense projected is not enough. Also, the salaries listed on Schedule 6 do not include benefits. The preopening expenses figure shown in WUESTHOFF’s application is reasonable only if the entire facility, the ancillary, outpatient, and inpatient tower would open all at the same time. It is very difficult to analyze the reasonableness of the financial projections because the revenues and expenses do not match. All the revenue from the proposed new facility appears to be included, but not all of the expenses. Schedule 8A shows that daily ancillary expenses are $470 at WUESTHOFF’s existing hospital but only $82 at the new, proposed hospital. It is implausible that the new hospital would have costs this much lower than the existing hospital. WUESTHOFF’s staffing projections do not account for a significant number of nursing and other staff necessary for the operation of the facility as a hospital. The projections only address nursing positions for the 50-bed, inpatient tower. The schedule fails to show those nurses assigned to the ancillary services areas in the outpatient diagnostic center who will be working with inpatients. For example, the scrub nurses in the emergency department who will be working on inpatients are not included in the schedule, and the nurses working in radiology who will be caring for inpatients are not shown. The schedule fails to include a director of nursing at the proposed hospital facility. Although WUESTHOFF claimed that it will assign a director of nursing when patient volumes reach 50%, it failed to include projections for that position in this second year projections, even though patient volumes are projected to reach 50% in the second year. Wuesthoff also failed to include benefits in its computation of salaries on Schedule 6, even though it expects to pay benefits at a rate of 20% of salary. Interest expenses are also significantly understated. The project is financed with 100 percent debt, which should amount to an interest expense of approximately $850,000.00 per year. However, the application shows interest in year one as $197,000.00 and for year two, $393,000.00. It is unusual that interest would be higher in year two than year one. There is no way to tell from looking at the schedules or assumptions in the application what the utilization of the new hospital will be, or how the patient days break out by payor. Therefore, reasonableness of the financial projections cannot be tested. Without additional information, one cannot determine if the average charges projected are reasonable. There are unusual projections, such as the charges during construction, year one, and year two, in the application which without explanation are not reasonable. The financial projections as to the whole facility are unreasonable. They show that WUESTHOFF, which currently makes $7 or $8 million dollars each year, will lose money once the new facility is open but that, in its second year, the new facility will make $6.9 million. Such a projection is unreasonable. By focusing only on the incremental effect of adding an inpatient tower to a presumed existing DTC, WUESTHOFF’s financial projections are not sufficient to allow a conclusion to be drawn as to the financial feasibility of the new 50-bed hospital. However, it would appear that, if those schedules had been presented, they would have shown the new satellite hospital, taken in its entirety, not to be financially feasible in the long term. The Special Needs Of Health Maintenance Organizations: Section 408.035(1)(j), Florida Statutes. The application is not made on behalf of an HMO, and this criterion is not applicable. The Needs And Circumstances Of Those Entities Which Provide A Substantial Portion Of Their Services Or Resources, Or Both, To Individuals Not Residing In The District: Section 408.035(1)(k), Florida Statutes. The CON application does not address serving a substantial number of persons or providing a substantial portion of services to individuals residing outside the district, and this criterion is not applicable. The Probable Impact Of The Proposed Project On The Costs Of Providing Health Services Proposed By The Applicant, Including The Effect On Competition: Section 408.035(1)(l), Florida Statutes. There is significant competition for managed care services in Brevard County. HRMC seeks and desires to enter into managed care contracts and is as competitive in the managed care arena as WUESTHOFF is. In fact, HRMC’s managed-care, patient volume is higher than WUESTHOFF’s. Managed care penetration in Brevard County has increased over the last five years and especially in the last two years. One particular HMO in Brevard County that is just getting started has received an acceptable managed care offer from HRMC. If they did not receive an acceptable offer from WUESTHOFF. Brevard County does not need another inpatient facility to allow the County to achieve higher levels of managed care penetration. There are no barriers in Brevard County to increasing HMO and other managed care penetration. Even though HRMC has an 82 percent market share in South Brevard County, that by itself does not indicate HRMC is charging non-competitive prices. In fact, HRMC’s charges are much lower than WUESTHOFF’s. Both the State of Florida and the FTC found that HRMC’s merger with Cape Canaveral when Health First was formed did not create an adverse, competitive effect on the marketplace. Because HRMC’s charges are so much lower than WUESTHOFF’s, the addition of the proposed hospital would not introduce price competition into the market. The majority of the proposed hospital’s patients are likely to come from South Brevard County-–an area where HRMC has an 82.5 percent market share. Thus, the bulk of the proposed hospital’s patients will come from HRMC. If the proposed hospital meets its projected utilization, HRMC stands to lose somewhere between $4 and $5 million a year. While that loss may not put HRMC into bankruptcy, it will have a significant adverse effect. The Costs And Methods Of The Proposed Construction And The Availability Of Alternative, Less Costly, Or More Effective Methods Of Construction: Section 408.035(1)(m), Florida Statutes. WUESTHOFF’s proposal to establish a 50-bed, general, acute care hospital entails the construction of a 3-story, 50-bed patient tower adjoining an outpatient diagnostic center. The outpatient diagnostic center, and not the inpatient tower, will encompass virtually all of the ancillary services necessary for WUESTHOFF to obtain a license to operate its facility as a hospital. As more fully discussed below, WUESTHOFF’s proposed 50- bed inpatient hospital will require substantial design modification and increased square footage in order to obtain licensure as a general, acute care hospital. The Applicant’s Past And Proposed Provision Of Health Care Services To Medicaid Patients And The Medically Indigent: Section 408.035(1)(n), Florida Statutes. The evidence showed that all acute care hospitals in Brevard County provide a fair level of Medicaid and indigent care in comparison to the remainder of the state. In its CON application, WUESTHOFF proposes to condition approval of its 50- bed, general, acute care hospital on providing 15 percent Medicaid and charity care, but did not provide a breakdown of each. There was no documented access problems for Medicaid or indigent patients that would warrant a new health care facility. Because indigent care is reported to the State based on a hospital’s charges, WUESTHOFF and HRMC could be doing the same amount of indigent care, but WUESTHOFF could appear to be doing more because its charges are higher. Whether Less Costly, More Efficient, Or More Appropriate Alternatives To The Proposed Inpatient Services Are Available: Section 408.035(2)(a), Florida Statutes. HRMC’s average charges are significantly lower than WUESTHOFF’s on both a per case and per patient day basis. HRMC’s costs are also lower, indicating it is more efficient. Therefore, the addition of another less-efficient, higher- charging WUESTHOFF hospital into the market would be more costly and less efficient than what it is there now. The greater weight of the evidence establishes that denial of WUESTHOFF’s proposed 50-bed, general acute care hospital is the least costly, more efficient, and appropriate alternative. The existing providers of acute care services in Brevard County are operating efficiently and have unused capacity that is available to serve Brevard residents. Data suggests that while the population of Brevard County is growing, there is no corresponding increase in utilization of general, acute care services. While Brevard enjoys a proportionately higher growth rate than the rest of the State, the growth does not translate into higher utilization of general acute care services. Further, the age 65+ population, those most likely to use hospital services, has experienced an annual growth of approximately 3.7 percent between 1990-1996, which is higher than the overall rate of growth for Brevard. While there has been a significant growth in the number of elderly and Medicaid eligible population, only approximately percent of those eligible for Medicaid in the 14 zip codes targeted as the service area of WUESTHOFF’s proposed hospital actually use hospital services. In 1993, the last year of available data, the actual county-wide use rate for Medicaid eligible residents was only 8.4 percent. This is expected to remain constant in subsequent years, as the demand for inpatient acute care services has not increased, but has in fact decreased. There is insufficient utilization of the inpatient acute care services which already exist in Brevard County, with approximately 50 percent of the available beds unoccupied. The addition of another health care facility will not improve access, improve delivery of services, or make services available to a population that is not presently being adequately and appropriately served by existing providers. In a market where inpatient volume is going down, length of stay is going down, and utilization is going down, it does not make sense to spend scarce dollars on new inpatient services. Whether The Existing Facilities Providing Similar Inpatient Services Are Being Used In An Appropriate And Efficient Manner: Section 408.035(2)(b), Florida Statutes. The greater weight of the evidence established that there is available capacity for inpatient services like those proposed by WUESTHOFF at the existing, general, acute care facilities in Brevard County. WUESTHOFF did not demonstrate that any provider is suffering from over utilization or that any patient has not been able to access general acute care services when such services were necessary. On the contrary, there was a consensus among the experts, even WUESTHOFF’s experts, that there is no problem with geographic or financial access to existing providers. Between 1993 and 1996, hospital utilization dropped from 63 percent to 52 percent. AT WUESTHOFF’s Rockledge campus, utilization fell from a high of 63 percent in 1993, to approximately 46 percent in 1996. During this same period, the population of Brevard County grew at a rate of approximately 2.4 percent per year, which was proportionately higher than for the rest of the state. At HRMC, its occupancy dropped, but not quite as dramatically. Between 1993 and 1996, HRMC’s occupancy went from 67 percent to approximately 62 percent. The satellite facility, operated by HRMC in Palm Bay and located in the same service area where WUESTHOFF proposes to construct its 50-bed general acute care hospital, has never experienced occupancy above 31 percent. That Patients Will Experience Serious Problems In Obtaining Inpatient Care Of The Type Proposed, In The Absence Of The Proposed New Service: Section 408.035(2)(d), Florida Statutes. There was no evidence to show that any population group in Brevard County is unable to access quality health care services at any of the subdistrict’s existing facilities. Further, WUESTHOFF failed to establish that its proposed facility was needed to provide general acute care services not currently provided or currently accessible to residents of south Brevard County. WUESTHOFF maintains that participants in managed care contracts may not be able to access WUESTHOFF’s general acute care services without approval of the proposed project, but there was not demonstration that those individuals would not otherwise have access to quality affordable health care in Brevard County. WUESTHOFF also failed to demonstrate that participants in managed care programs are a “traditionally underserved” population group for a determination of need under not normal circumstances. CON Application Content And Procedures: Section 408.037, Florida Statutes And Rule 59C-1.008, Florida Administrative Code. The parties stipulated as to the timeliness of the submission of WUESTHOFF’s Letter of Intent, initial CON application and response to omissions. However, the board resolution required by Section 408.037, Florida Statutes, and Rule 59C-1.008, Florida Administrative Code, is fatally defective. The applicant is required to provide certification that its governing board enacted a resolution to license and operate the proposed facility. In this case, the proposed 50- bed, inpatient tower cannot be licensed by the applicant as a hospital. In order to obtain hospital licensure, the proposed project would necessarily include the $35+ million that WUESTHOFF proposes to spend on its outpatient diagnostic center. WUESTHOFF’s CON application also fails to comply with Section 408.037(2)(c), which requires detailed financial projection including a statement of the revenues and expense for the period of construction and the first two years of operation after completion of the project. The proposed project is a “hospital.” The hospital will report all of the revenues and expenses of the inpatient and outpatients to the state in its actual report, and those same projected revenues and expenses should be in the pro forma of a certificate of need application for a new hospital project. Instead, the projected revenues and expenses in the pro formas take an “incremental” approach and focus only on the 50-bed tower and an unspecified portion of the diagnostic center. WUESTHOFF’s own financial expert admitted that one cannot determine the revenues and expenses of the new hospital from the information contained in the application. AHCA does not have sufficient information with respect to revenues and expenditures in the pro formas to determine the financial feasibility of the hospital project. The pro formas do not meet the statutory requirement contained in 408.037(2)(c), Florida Statutes, and are fatally defective. Neither AHCA nor its predecessor agency ever have approved a CON to establish a hospital without ever seeing projections of the revenues and expenses of the hospital as a whole. Additions to hospitals have been approved on a strictly incremental basis; but, in those cases, the revenues and expenses of the hospital as a whole already had been reviewed and approved. Inpatient cardiac catheterization programs also have been approved, based on a strictly incremental review of the financial impact of converting from an existing outpatient to an inpatient program. But there is a meaningful difference between the approval of a program in a hospital facility that already has been reviewed and approved as a whole and what WUESTHOFF is seeking to have done in this case. There also is a difference between treating the costs of an existing and operating facility or program as being “sunk” and treating the $35 million capital cost and additional operating costs of the proposed DTC in this case as being “sunk.” In the former, the costs have been or are being spent and truly are “sunk”; in the latter, despite WUESTHOFF’s assurances, the DTC money has not been spent, and the DTC has not been established. Indeed, the decision properly before AHCA in this case is whether those expenditures should be made for purposes of establishing a hospital. If not, the hospital should not be approved. If WUESTHOFF still wants to build and operate its proposed $35 million anyway, as it has assured AHCA that it will do, it is free to do so. Criteria Used In Evaluation Of CON Applications: Rule 59C-1.030, Florida Administrative Code. AHCA’s rules set forth additional criteria used to evaluate CON applications which focus on whether there is a need for the proposed service in the population to be served and whether the proposed project is accessible to those in need of the service. The evidence in this case showed that there was no unmet need in Brevard County for inpatient, general, acute care services and that the target population is adequately served by the existing providers of general acute care services. Furthermore, the evidenced showed that the anticipated population growth in Brevard County is not likely to generate additional numbers of inpatient admissions, based on the decline in utilization during a period when Brevard County was experiencing unprecedented annual growth at a rate of 2.4 percent overall and 3.7 percent in the 65+ population. Any attendant increase in demand for inpatient general acute care services can be easily accommodated by the existing providers in Brevard County. The rule also examines the extent to which an applicant provides services to Medicare, Medicaid, and the medically indigent patients. The evidence showed that WUESTHOFF provides a fair amount of general acute care services to Medicare, Medicaid, and charity patients, as do the other existing providers in Brevard County. Hospital Physical Plant Requirements For Licensure: Rule 59A-3, Florida Administrative Code. WUESTHOFF’s 50-bed, general, acute care hospital, as proposed, cannot meet licensure standards without significant adjustment to the design to bring it into compliance with the licensure rules. Rule 59A-3.081(4)(c), Florida Administrative Code, specifically requires that the critical care nurse’s station be situated so that nurses have visual control of each patient from common spaces. The schematics provided by WUESTHOFF indicate that there is no visual control of two patient rooms located in the northwest end of the unit. As to functionality of the space, there is no observation from the nurses station to trauma rooms located at the end of the unit and inadequate proximity to support spaces, such as soiled and clean utility and med prep, to the trauma rooms. Seriously injured patients would necessarily be transported up to surgery through what would be public corridor spaces in order to access elevators and then through additional public spaces on the second floor. Inpatient access to the CT scan room and MRI room appears to be made through a narrow, 5-foot wide corridor. Hospital licensure regulations require inpatient access through an 8-foot corridor. The only 8-foot corridors available for inpatient use, the service corridor off the housekeeping and staff facilities area to the rear of the unit and the corridor located between radiology and dietary, do not appear to be appropriate means for inpatients to access these rooms. On the third floor of the facility, WUESTHOFF proposes to locate an aerobics and exercise room, directly above the second floor patient recovery area and two of the operating rooms. With an exercise area located above such critical areas, there is the possibility that vibrations would transmit to operating room lights, ceiling mounted microscopes, and other instruments. It would be costly to sufficiently stiffen the structure to minimize vibrations. In order to bring the proposed project into compliance with hospital licensure regulations, material changes to the plans must be made, which will necessarily increase the square footage of the facility. The square footage of the facility would likely be increased by approximately 5,000 square feet, and many of the areas would have to be significantly redesigned to accommodate concerns with compliance to ADA and hospital licensure regulations.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Agency for Health Care Administration enter the final order denying WUESTHOFF’s CON 8597. RECOMMENDED this 18th day of July, 1997, in Tallahassee, Leon County, Florida. J. LAWRENCE JOHNSTON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (904) 488-9675 SUNCOM 278-9675 Fax FILING (904) 921-6847 Filed with the Clerk of the Division of Administrative Hearings this 18th day of July, 1997. COPIES FURNISHED: David C. Ashburn, Esquire Gunster, Yoakley, Valdes-Fauli and Stewart, P.A. 215 South Monroe Street, Suite 830 Tallahassee, Florida 32301 Mark Thomas, Esquire Agency for Health Care Administration Office of the General Counsel 2727 Mahan Drive Tallahassee, Florida 32308 Stephen K. Boone, Esquire Boone, Boone, Boone and Hines, P.A. Post Office Box 1596 Venice, Florida 34284 R. Terry Rigsby, Esquire Blank, Rigsby & Meenan 204 South Monroe Street Tallahassee, Florida 32301 Douglas M. Cook, Director Agency for Health Care Administration 2727 Mahan Drive Tallahassee, Florida 32308 Jerome W. Hoffman, General Counsel Agency for Health Care Administration 2727 Mahan Drive Tallahassee, Florida 32308 Sam Power, Agency Clerk Agency for Health Care Administration 2727 Mahan Drive Tallahassee, Florida 32308
The Issue Whether CON 8241, Palm Beach Regional's application to convert its 200 bed acute care hospital to a 60 bed long-term care hospital should be granted or denied?
Findings Of Fact The Parties The applicant in this case is The Hospital Corporation of Lake Worth d/b/a Palm Beach Regional Hospital. A subsidiary of Columbia Hospital Corporation, ("Columbia,") Palm Beach Regional is a licensed general acute care hospital with 200 beds located in Palm Beach County, AHCA District 9. Palm Beach Regional's license is issued pursuant to Chapter 395, Florida Statutes, the chapter of the Florida Statutes entitled, "Hospital Licensing and Regulation." The agency is "designated as the single state agency to issue ... or deny certificates of need ... in accordance with the district plans, the statewide health plan, and present and future federal and state statutes." Section 408.034(1), F. S. Integrated is a licensed 120-bed skilled nursing facility, also known as a long-term care facility, located in Palm Beach County, AHCA District 9. Its license is issued pursuant to Chapter 400, Florida Statutes, the statute entitled "Nursing Homes and Related Health Care Facilities." Columbia Hospital Corporation The parent company of petitioner, Columbia has a stock market capitalization of between $15 and $20 billion and enjoys a profitability of over $1 billion per year. It owns approximately 340 hospitals, well over 100 ambulatory surgical centers, and an extensive number of home health agencies. As to be expected of a Fortune 500 company, Columbia generates substantial annual revenues. In 1994, for example, the annual revenues generated by Columbia exceeded $17 billion. Columbia also lays claim to being the largest hospital system in the state. It has five divisions with approximately 60 hospitals in its "Florida Group," the organizational title for its Florida operations. The net revenues of the Columbia Florida Group is approximately $4.5 billion. One of five divisions of Columbia's Florida Group, the South Florida Division is a $1.2 billion operation. The division encompasses Dade, Broward and Palm Beach Counties and consists of 15 hospitals, six surgery centers, and one dozen home health agencies. The South Florida Division, of course, includes Palm Beach Regional. Background to the Application Palm Beach Regional was purchased by Columbia shortly after Columbia had purchased JFK Hospital, a 300-bed tertiary hospital approximately three miles from Palm Beach Regional. In August of 1995, as a business decision, Columbia consolidated the operations of the two facilities. The consolidation resulted in a patient census drop at Palm Beach Regional. Shortly thereafter, with the permission of the agency, Palm Beach Regional ceased operations at its emergency room. The result of the consolidation and limitation of the services offered was that it cost only about $100,000 a month to keep Palm Beach Regional running with its small census. Even with the small census, and the relatively low monthly operational expense, the operational expense was more than $1 million per year. In June of 1996, Palm Beach Regional and the agency entered a stipulation which authorized the hospital to suspend the acute care operations in contemplation of this proceeding. Palm Beach Regional's hospital-based skilled nursing unit has since been transferred. Palm Beach Regional is now closed and empty. The reason Palm Beach Regional had been kept operating at all after the consolidation with JFK was to preserve the opportunity to convert the license as proposed in the application. The Application Certified for accuracy on September 18, 1995, under the signature of its authorized representative, Robert L. Newman, CEO of Columbia/HCA, South Florida Division, the application was submitted to the agency bearing a date of September 20, 1995. The application describes what it seeks in the section titled "Project Summary" as follows: Hospital Corporation of Lake Worth (Palm Beach Regional) proposes in this Certificate of Need Application to convert 60 acute care hospital beds to 60 long-term acute care hospital beds and to delicense 128 existing acute care beds. (At a later date the existing 12 skilled nursing beds will be located to another Columbia/HCA hospital in District IX.) Palm Beach Regional Exhibit No. 1, AHCA Form 1455A, Oct 92, AHCA 4600-0005 Aug 93. The transfer of the 12 skilled nursing beds has already occurred and therefore is not at issue in this proceeding. Nor is the delicensure of the 128 beds really at the heart of the agency's denial and Integrated's opposition. In contrast, what is contested is the conversion of the 60 acute care hospital beds to 60 long- term acute care hospital beds. Such a conversion would make Palm Beach Regional a long-term acute care hospital. Long-term Acute Care Hospitals Referring to a hospital as both "long-term" and "acute," is confusing. The two terms have divergent meanings both in terms of average length of stay and the traits of the illness suffered by the acute and the long-term patient. In the context of hospitals, "long-term" refers to a patient with an average length of stay of greater than 25 days. By comparison, the acute patient's stay is typically much less than 25 days, with the average length of stay being between 5 and 6 days. As is the patient in need of acute care, the typical long-term hospital patient is very ill. The difference in the type of illness suffered by the acute care patient as opposed to the long-term patient, however, lies in other characteristics. Unlike the acute care patient, the long-term patient is not in the urgent, emergent or desperately critical state of patients in the acute care setting. The two terms, "long-term" and "acute" have been used together with reference to the type of hospital to which Palm Beach Regional proposes to convert because of the history of the long- term care hospital’s development. Originally in Florida, long-term hospitals were licensed as acute care hospitals and were referred to, therefore, as "long-term acute," hence the combination of terms with disparate meanings. In the context of a study conducted by the Hospital Cost Containment Board, however, the agency examined the issue of whether long-term hospitals should be subject to CON review as long-term hospitals apart from other acute hospitals. As a result, long-term hospitals came to be reviewed in their own separate category under certificate of need review, subject to the same licensure requirements as a specialty acute care hospital. Because they had been licensed earlier as acute care hospitals, the term "acute" was carried over into the new category. At present, there is a recommendation to refer to long-term acute care hospitals simply as "long-term hospitals" to clear up any confusion caused by the terminology. This recommendation will be followed for the most part in the remainder of this order when reference is made to acute and long-term facilities and acute and long-term care. Long-term Care Hospital-based long-term care is a distinction established in federal Medicare regulations that describes a hospital with patients having an average length of stay of greater than 25 days. The distinction allows an exclusion from the Medicare prospective payment system so that reimbursement is received by the long-term hospital on the basis of cost. The distinction is of great import financially because of the distinction between "cost-based" Medicaid and Medicare reimbursement systems and another payment system used by Medicaid and Medicare: the prospective payment system. Before the prospective payment system was instituted, hospitals generally were well utilized, in fact, “filled to the brim.” The high utilization was due to the "cost-based" reimbursement system which contained a financial incentive for the hospital to keep patients in the hospital. Under the cost-based system, the more a hospital spent, the more reimbursement it would receive from Medicare and Medicaid. The prospective payment system was instituted to save taxpayers the high cost of the cost-based reimbursement system. Under the prospective payment system, the hospital receives a flat fee for Medicare and Medicaid patients depending on the diagnostic category, or diagnostic-related group, ("DRG,") into which falls the illness treated. The flat fee is figured on the basis of average length of stay for that diagnostic category. Under this system, unlike the cost-reimbursed system, the hospital receives the same reimbursement for Medicare and Medicaid patients who stay for less than the average length of stay assigned to the patient's DRG as for those who stay longer. With regard to a patient who stays in the hospital longer than the average length of stay for the patient's DRG, the hospital, in many cases, not only profits less the longer the patient stays but begins to lose money at some point in the stay. If the average length of stay for an appendicitis patient is four days, for example, then the hospital profits more in the case of an appendicitis patient who stays only two days because it has incurred only two days of costs instead of the expected four days of costs. In the case of another appendicitis patient, who stays longer than the average length of stay, the hospital makes less money and reaches the point eventually in some cases where the hospital actually loses money for treating the patient if the patient stays long enough. Medicare provides additional payments for both "day-outliers" and "cost-outliers," but not enough to prevent financial pressure on hospitals to discharge acute patients as soon as possible. The prospective payment system has succeeded in forcing hospitals to operate more efficiently; the average utilization of hospitals has declined dramatically. Today, about half of the hospital beds in Florida on any given day go unused. The system does not have the same effect on long-term hospitals; they are exempt from the prospective payment system. Instead, long-term care hospitals are reimbursed under a cost-based system. A long-term hospital well located geographically is particularly attractive to a large hospital system, such as Columbia. Not only will it likely be a financial success in its own right but it will assist Columbia’s sister acute care hospitals in relieving them of patients too sick to be discharged to a subacute setting yet finished with the acute episode which required the acute care hospital’s service in the first place. Development of Long-term Care Hospitals in Florida The first long-term care hospital was instituted in Florida in the 1980's. Fairly soon thereafter there were three long-term care hospitals in Florida, but then there was a lull in the attempt to establish long-term care hospitals. With the advent of the prospective payment system, however, there eventually came the closing of a number of small hospitals in Florida because of their inability to continue to operate in sound financial condition. At the same time, four or five applications for the conversion of small hospitals to long- term care hospitals were filed with the agency. In the early part of the present decade the agency conducted a study of long-term hospital care. The study took place within a larger study by the Hospital Cost Containment Board. Ultimately, it was recommended that long-term care hospitals be regulated separately from acute care hospitals and that they be subject to separate certificate of need review. The recommendation was made for a number of reasons. First, long-term hospitals were viewed by the agency as very different from acute care hospitals because of the patients' average lengths of stay. Second, long-term care hospitals were found to be expensive for the type of care given in them which was of great concern to the state since cost control is an objective of the certificate of need program. Third, long-term hospitals were found to experience high mortality rates. As the result of the study and recommendation, the agency made the creation or conversion of hospitals into long-term hospitals subject to certificate of need review. Admission Criteria In the study, the agency also found that there are no clear admission criteria for long-term hospitals. To date, neither the Health Care Finance Administration (“HCFA”), nor the Joint Commission on Accreditation of Hospital Organizations ("JCAHO,") or any of its sub-organizations have developed any criteria to define a long-term care hospital. It is not clear, therefore, exactly what type of patients are suitable for care in a long-term hospital. Sub-acute Care The parties are in agreement that sub-acute care is a level of care that is below acute care. Palm Beach Regional claims, however, that the care provided by long-term care hospitals is not subacute but rather falls into a category of care between acute and sub-acute. An understanding of this claim requires some discussion. Unlike other classes of hospitals which are exempt from the prospective payment system, like cancer, children's or psychiatric hospitals, patients in long-term care hospitals do not have a specific type of illness nor are they limited to serving a specific age group. Generally, however, they are patients who have had an acute episode, whose program of care has been identified and who need a longer term of care to recover or to be rehabilitated because of an acute illness or surgical procedure. And, although they are not limited to a specific age group, the experience of long-term care hospitals is that a major part of their patient population is elderly, virtually all of whom are covered by Medicare. In these respects, long-term care hospital patients are not much different from patients in other "subacute" settings: comprehensive rehabilitation hospitals, acute care hospital skilled nursing units, skilled nursing facilities in free-standing nursing homes, and, even, in some cases, home health care, assisted living and outpatient services for the elderly. If there is a difference between the long-term hospital patient and patients in other subacute settings, it is that the long-term hospital patient has more at-risk types of physical problems, is more likely to be medically unstable or is, in fact, medically unstable. But this difference is not strictly observed because of the financial pressure on hospitals to discharge patients from the acute setting into a subacute setting. Medically unstable patients, therefore, are found in subacute settings such as skilled nursing facilities whether hospital-based or in free- standing nursing homes. In contrast to what has become commonplace practice, Dr. Kathleen Griffin, an expert in health care planning with a specialty in long-term acute care and subacute care, testified that it would not be appropriate for a medically unstable patient to be transferred to a skilled nursing bed. In her opinion it would be best for a medically unstable patient about to be discharged from acute care to be admitted instead to a long-term care hospital. Despite the reality that there are no admission criteria for long-term care hospitals, Dr. Griffin maintains that if a hospital discharge planner believes through information gathered from the medical and nursing staffs that the patient "is highly acute and at risk, and there is a long-term care acute hospital available, then that would be the placement of choice." (Tr. 523.) If a long-term care hospital is not available, however, the alternative is to keep the at-risk, medically unstable patient in the acute care hospital rather than discharge the patient into a nursing facility. Dr. Griffin's opinion is shared by the physician practicing in long-term hospitals. Representative of such a physician is Dr. Wendell Williams, presently the Medical Director of a long-term care hospital, Specialty Hospital of Jacksonville. Dr. Williams sees a distinction between long-term acute care and subacute care. Long-term hospital care is acute care without the need for "highly technical diagnostic capabilities," and "high surgical capabilities," but still care in the "medically complex case that requires frequent physician direction [and] high skill level of caregivers." (Petitioner's Ex. No. 16, pg. 13.) In Dr. Williams view, long-term hospital care occupies a level of care between acute and subacute care. The views of Dr. Griffin and Dr. Williams find support in analyses of nursing hours per patient. In a typical nursing home, the number of hours per patient is about 4.5 hours per day, while in a long-term care hospital, the number is around 6.5 hours per patient day. At Specialty Hospital of Jacksonville, the nursing hours per patient day for non-ventilator patients is 6.75 hours, and for ventilator patients is 10 hours. In contrast, Integrated, a nursing home, provided nursing hours per patient day in its "med-surg unit" at 4.34 hours in March of 1996, 4.60 hours in April and 4.52 hours in May although at times Integrated's nursing hours per patient day have reached as high as 6 hours. The opinions of Dr. Griffin and Dr. Williams have not yet been generally accepted. Following the agency's study in the earlier part of the 1990's, the federal government, under the auspices of HCFA, launched a major study that addresses what AHCA viewed as the "whole gamut of what is marketed as subacute care," (Tr. 272). The study included long-term care hospitals, as well as those settings which the parties all agree are clearly in the category of "subacute": hospital-based skilled nursing facilities, free-standing nursing homes, comprehensive rehab hospitals and home health care. The report was issued in November of 1995. It confirmed that there was a great deal of overlap among the settings studied including between the long-term care hospital and other settings unquestionably subacute. Moreover, it confirmed that many of the services are "primarily driven by reimbursement," (Tr. 275), and not by which provides the best or most cost-effective health care for the very ill, elderly patient no longer in need of acute care. In other words, the financial pressure on hospitals to discharge patients from the acute care setting was what accounted for the tremendous growth of subacute services and the move toward more long-term care hospitals rather than what is actually best for the patient or the health care system. The study concluded that there is insufficient data to determine the cost effectiveness of subacute care as defined in the study. As for overlap in the various settings, the extent of overlap was not precisely determined. But just as long-term care hospitals provide ventilator treatment, skilled nursing units specialize in ventilator patients. Nursing home subacute units specialize in wound care, infectious disease programs and IV antibiotic therapy programs, as well, just as would Palm Beach Regional if approved. The HCFA study also confirmed that the cost of care and mortality rates at long-term care hospitals are high, $2,000 per day and 40 percent, respectively. The average cost per discharge at a long-term care facility was between $150,000 and $250,000. Despite the long-term hospital's recognition by the federal government, the presence in Florida for more than eight years, and separate CON regulation for the last several years, it remain unsettled which patients should be treated and cared for in long-term hospitals. While for some, such as Dr. Griffin and Dr. Williams, the question is one which discharge planners, after consultation with nursing and medical staff, ably make, it is not generally accepted that it is clear which patients should be cared for in long-term care hospitals. It is not generally accepted as evidenced by the wont of admission criteria for long-term hospitals. Furthermore, it is not clear whether long-term hospitals represent the best means or the most cost-effective way of treating patients ready for discharge from an acute care setting. Specialty Hospital of Jacksonville: the Model The Palm Beach Regional proposal to convert to a long- term care hospital is modeled after another Columbia long-term care hospital, Specialty Hospital of Jacksonville, the hospital of which Dr. Williams is the medical director. Opened in 1992, Specialty offers four major program areas: ventilator and other respiratory complications, infectious diseases, wound management and complex medical and rehabilitative services. The typical ventilator patient is quite ill; often with other attendant system breakdown such as cardiac or renal failure. The goal is to free the patient from ventilator dependence. If the patient is judged to be a lifetime custodial ventilator patient, the patient would not be appropriate for Specialty. A variety of infections are treated in the infectious disease program. Often the primary antibiotic treatment has failed and there may be other conditions attendant. The typical wound care patient admitted to Specialty has severe wounds that may derive from circulatory problems. Often admission is from a hospital or nursing home. The patient may be diabetic, paraplegic or quadriplegic. The patient may have experienced a surgical intervention which has not healed. Or the patient may have a distressed digestive system which inhibits the body's ability to absorb the proper nutrients to support the healing process. The typical complex medical and rehab patient includes the spinal cord injured patient and the multiple system failure patient. The patients at Specialty are under the management of an attending physician but typically four or five different specialties are involved in each patient's care. Specialty Hospital has experienced approximately five percent Medicaid and one percent charity care. A representative patient at Specialty Hospital has an average length of stay of 23 days. The representative patient in the infectious diseases program would experience an average length of 18, 20 days in the pulmonary program, 29 days in the ventilator program, 36 days in the wound program, 18 days in the physical medicine and rehabilitation program and 26 days in the medicine program. These lengths of stay resemble acute or Medicare certified skilled nursing bed lengths of stay more than the historical 90 day lengths of stay experienced in Florida at long- term care hospitals. A representative patient at Specialty Hospital will experience an average daily charge of $1,122 and an average charge per case of $25,810, the highest averages incurred by the ventilator program at $1,848 per day and $52,781 per case. From a medical standpoint, all of the patients treated at Specialty Hospital could be treated in an acute care hospital. There is one difference between Specialty's patient profile and the one expected at Palm Beach Regional. The approach proposed by the applicant will include patients with greater levels of instability. Whereas Specialty has taken the approach that patients at the intensive care level should be in a general acute care hospital, Palm Beach Regional expects to treat patients in need of services from an intensive care unit. Palm Beach Regional, therefore, has planned for an intensive care unit at the facility should its CON application be approved. Integrated's Existing Programs Sixty of Integrated 120 beds are dedicated to meet the needs of patients requiring subacute care. Although they may differ slightly in intensity of application because of slightly lower acuity levels of the patients, the programs offered in this sixty-bed skilled nursing unit encompass the four programs proposed for Palm Beach Regional's long-term care hospital: ventilator and respiratory complications; infectious disease; wound management; and complex medical and rehabilitation service program. Integrated uses its own method to measure the acuity of its patients. Within this method, two of the levels require active treatment of co-morbidities, multiple diseases which complicate the primary diagnoses. By whatever means acuity is measured, it is reasonable to expect that the average level of acuity would be somewhat higher among patients treated at a Palm Beach Regional long-term care facility. (Although without criteria to measure acuity for admission or to know for sure what patients are actually being treated at long-term hospitals, this is not certain.) Nonetheless, considering both diagnosis and treatment, Integrated's patients at Integrated's two highest levels of acuity, even if not at quite as high an acuity level on average, would be similar to the patients Palm Beach Regional might serve if its application were granted. Patients at a Palm Beach Regional's long-term care facility who would exceed the highest level of acuity of those patients at Integrated are patients appropriate for treatment in an acute care hospital. Ventilator Care at Integrated Ventilator patients are treated in skilled nursing facilities both in hospitals and in free-standing nursing homes like Integrated. Some skilled nursing units even specialize in ventilator care. There is clearly overlap between ventilator services in skilled nursing facilities and long-term care hospitals. The precise extent of the overlap is not clear. While the overlap may not be 100%, it is certainly significant. Twenty of Integrated's 60 subacute beds are capable of assisting ventilator patients. Within this 20 bed unit, Integrated provides oxygen, air, and wall suctioning just like in a hospital setting. Additionally, Integrated can provide respiratory services outside of its specific unit by using portable suction machines and oxygen concentrators. The ventilator patients treated at Integrated are similar to the ventilator patient treated in intensive care units in hospitals. Some of Integrated ventilator patients are in need of acute care. All are hemodynamically stable but some are medically unstable. Nonetheless, there are patients who would be too unstable to allow them to be suitable for admission into Integrated's respiratory unit. Patients who would need to remain in acute care in the hospital would be patients who, for example, were bleeding or having trouble with a post-surgical trach placement. The medical director at Integrated is a pulmonologist. Integrated has a 24-hour respiratory staff. The ventilator program at Integrated meets the description in the application of the proposed ventilator program at Palm Beach Regional. Comparison of the respiratory services offered at Integrated to the services proposed to be offered in Palm Beach Regional's ventilator program reveals significant overlap between the two. Integrated primarily uses a Bear 3 Ventilator. Other equipment used by Integrated includes pulse oximeters and pneumatic blood pressure cuffs to provide hemodynamic monitoring. The respiratory unit is able to obtain an assessment of the patient's arterial blood gases within two hours through an arrangement with a courier service and nearby JFK Hospital. On average the blood work results are received within an hour of the blood being drawn from the patient. An interdisciplinary team of therapists, including respiratory therapists, physical therapists, occupational therapists and speech therapists, work together on the plan of care and recovery of the ventilator patient including weaning the patient from the ventilator. Of those ventilator patients determined to be weanable, 75% are actually weaned from the machines. Ninety-two percent of the tracheotomy patients achieve decannulation. The average length of stay in the respiratory unit for Integrated's ventilator patients is 37 days, an average length of stay that meets that which defines the long-term care hospital patient, that is, in excess of 25 days. Infectious Disease Treatment at Integrated Just as long-term care hospitals, nursing homes offer infectious disease programs employing IV anti-biotic therapies. Integrated provides its patients with multiple antibiotic therapies. Among the IV anti-biotic therapies used at Integrated are cepo, fortaz and vancomycin. Integrated treats patients with pulmonary edema, pleural affusion, pulmonary embolus and pulmonary infarcts and patients with bi-lobar and multi-lobar pneumonia. Patients are treated with intravenous cortico steroids, intravenous bronchodilators, intraveous diuretics and intramuscular antimedics. Wound Care at Integrated Nursing homes offer wound management programs. There is significant overlap between patients treated for wounds at nursing homes and at long-term care hospitals. Limitations in care of the wound patient are similar as well. Just as a patient in need of surgical intervention for wound care, for example, would be discharged to an acute care hospital from a nursing home so would that patient be discharged to an acute care hospital from Specialty Hospital of Jacksonville, the model hospital for Palm Beach Regional's long-term care facility. Integrated offers wound and skin management treatment of the type described by Palm Beach Regional's proposal. Many of Integrated's patients recieve wound care upon admission. For instance, respiratory patients who have tracheotomies receive care for their wounds throughout the day. Integrated treats all levels of decubitous ulcers, including the most severe, Stage III and IV ulcers, as required by law in order to qualify for Medicare Certification. Complex Medical and Rehabilitative Care Integrated offers radiology and other imaging services on campus: mobile chest x-rays, normal x-rays, and video flouroscopy as well as an in-house staff of rehabilitation professionals: physical and registered occupational therapists and registered speech therapists. The rehabilitation programs proposed by Palm Beach Regional and those programs of other long-term care hospitals overlap significantly with those programs already offered at Integrated. The difference between the complex medical and rehabilitative care offered at Integrated and that proposed for Palm Beach Regional lies in the expected acuity of the patients. One would reasonably expect the patients to be slightly higher in acuity at Palm Beach Regional if approved than as are presently at Integrated. Nonetheless, the patients at Integrated are similar to those Palm Beach Regional would care for, in that Integrated treats patients with co-morbidities, including combinations of congestive heart failure, post-open heart surgery, arteriosclerotic heart disease and renal failure. Integrated's Services in General On an average month, Integrated offered 7.28 hours per day of nursing and respiratory, physical and occupational therapy care per day to the patients within its subacute unit. Forty percent of Integrated's subacute nursing hours are provided by registered nurses, 20% by licensed practical nurses, and the remaining 40% by certified nurse aides. A sample of Integrated's admissions noted numerous patients admitted with cardiopulmonary vent and ventilator needs. Integrated also maintains a large number of orthopedic patients in need of complex rehabilitation. Integrated treats patients with congestive heart failures, patients recovering from recent open- heart surgery, patients requiring specialized wound care, patients with post-operative cranial head injuries, and patients requiring tube feedings, IVS, ventilator and tracheostomy care. Integrated offers the equipment that is listed in the application as equipment to be purchased by Palm Beach Regional if approved. Integrated accepts patients who are medically unstable. These include patients admitted to Integrated's cardiopulmonary unit, patients with recent tracheostomies, patients on ventilators, patients with hemodialysis and peritoneal dialysis who have co- morbidities. Palm Beach Regional's application lists diagnoses of patients to be treated through long-term care which it claims are not appropriate for skilled nursing facilities. The application alludes to various types of comprehensive therapies, care and resources available for these patients. Yet, despite the application's claim that care of these patients is not appropriate for the skilled nursing facility, present at Integrated for the benefit of patients with the same diagnoses are very nearly all, if not all, of these therapies, care and resources. These include: IV antibiotic therapy, IV drips, plasma pheresis, management of severe decubitus ulcers, tracheotomy care with hourly suction, treatment with chest tubes and PCA pumps, cardiac monitoring, dialysis and an on-site pharmacy. Moreover, Integrated's roster of consulting physicians credentialed at the facility included the range of specialists listed in Palm Beach Regional's application. Integrated's roster of physician ranges from family practitioners to practitioners specializing in internal medicine, dermatology, neurology, and infectious disease control, to orthopedic specialists, physiatrists and psychiatrists, nearly the "full gamut" of specialties in medicine. Adverse Impact There will be adverse impact on Integrated if Palm Beach Regional's proposal is approved. The impact occurs as the result of a combination of significant overlap of services offered by Integrated and proposed for Palm Beach Regional and the likely loss of admissions to Integrated's subacute unit generated by patients discharged from JFK Hospital. JFK Hospital and Palm Beach Regional are each approximately 2 miles from Integrated. Approximately 85% of Integrated's subacute admissions come from JFK. A good estimate of how many patients JFK refers to Integrated's subacute unit on an annual basis is 460. It is reasonable to assume that many of these patients would be referred to Palm Beach Regional by its sister Columbia Hospital, JFK, if the application were approved. If only two-thirds of these patients were lost to Palm Beach Regional, using a conservative figure for contribution margin of $100 per patient day, the loss to Integrated would be about $1 million in contribution margin per year. Furthermore, if the application is approved, Integrated will also have to either raise salaries to keep qualified staff for ancillary staff or risk losing them because Palm Beach Regional proposes to offer ancillary staff salaries higher than those paid by Integrated. Certificate of Need Criteria The criteria to be used in evaluating the application are found in statutes, and in rules of the agency which implement these statutes. Section 408.035(1)Health Plans Neither the District 9 Treasure Coast Health Plan nor the State Health Plan contain any mention of long-term acute care beds. Both plans were written before there were any CON requirements for this type of bed. (b) Availability, Quality of Care, Efficiency,Appropriateness, Accessibility, Extent of Utilization and Adequacy of Like and Existing Services There is no agency rule regarding need determination for long-term acute care beds. Neither is long-term hospital care defined by agency rule as a referral service, one dependent upon other hospitals to refer patients. The service area for a referral hospital is larger than just one district. Patients are referred from districts 9 and 11 to the long-term care hospitals in District 10. This is certainly not surprising for patients in district 9 since there is no long- term hospital in the district and referrals are the common way for long-term hospitals to gain patients. Patients are referred from Districts 3, 5, 6 and 8 to the long-term care facility in Tampa. With the exception of the long-term care hospital in District 11 where the largest proportion of patients came from within the District 11, all of the long-term hospitals in the state, "had referrals from all over the place." (Tr. 288.) Palm Beach Regional itself proposes to serve patients from Districts 7 and 10. The reality is that long-term care hospitals are primarily referral hospitals. Nonetheless, since there is no agency rule defining long-term care hospitals as referral hospitals and since there is no agency rule defining the service area of a long-term care hospital, District 9 may be the appropriate service area for the health planning purposes of Palm Beach Regional's application. In order for the district to be the appropriate service area, however, the application must demonstrate that there is a need for a certain number of beds based on the data collected from District 9. Since there is no need methodology applicable to long- term care acute beds, Palm Beach Regional developed three different methodologies for the agency's consideration. The agency found the "components," (Tr. 910,) of the methodologies to be reasonable. Indeed, the agency never offered any other need methodology which it claimed was superior to those offered by the agency. Instead the agency criticizes the methodologies for failing to take into consideration the availability of like and existing services and alternative to the proposed services. Patients who will be served in the proposed facility are currently being served in either the short-term acute hospitals or skilled nursing facilities in nursing homes such as Integrated, both of which are less costly alternatives to this proposal. Palm Beach Regional anticipates referrals from other Columbia Hospitals in the districts; however, six of the eight Columbia Hospitals have skilled nursing units which propose to treat the same patients and conditions the applicant proposes to treat. Furthermore, at the time of hearing, five Columbia hospitals in the districts had 56 approved skilled nursing beds not then operational. Included among the 56 were the 12 skilled nursing unit beds transferred from Palm Beach Regional. Palm Beach Regional's presents arguments in favor of improved quality of care to the patient in need of care following stabilization of an acute episode. There is, however, no data to support a conclusion that outcomes are better in long-term care hospitals. As for the applicant’s ability and record to provide quality of care, there is little doubt. The testimony of Dr. Ron Luke as to the high quality of care to be provided by Palm Beach Regional was not challenged. The patients proposed to be served by the applicant are currently being served in hospitals, subacute units at nursing homes or hospitals, or in rehabilitation facilities. Some may even be in home health with high technology equipment. Transferring these patients to a long-term care facility has significant financial implications costly to the health care system. The 60 beds proposed in the application will, in all likelihood, be adequately utilized. In the case of long-term care hospitals, demand follows the supply because of the strong financial incentive to fill the beds. There is nothing to indicate, however, that acute care beds are not an alternative to long-term hospital beds. There are plenty of empty beds in acute care hospitals to be filled by patients who would be treated by the applicant. That these patients proposed to be treated by Palm Beach Regional might receive treatment, if the application is denied, in hospital-based skilled beds or, perhaps inappropriately at times, in nursing home skilled nursing units is not due to lack of alternatives. Rather, it is the product of financial pressure on the acute care hospitals to discharge patients from the acute setting. Effective utilization of at least 85 percent of cost- based services such as long-term services is an important consideration because fixed costs can be spread over more patient days, thereby decreasing the costs per patient day. The average utilization rate in Florida for long-term care beds is 66 percent. The most recent occupancy rate for Specialty Hospital is only 41 percent. The record of long-term care hospitals would indicate that the utilization projections by Palm Beach Regional are unreasonable. But, there was nothing established that indicated the three methodologies used by Dr. Luke were unreasonable in any way. Given that Palm Beach Regional will be able to draw patients from its sister Columbia acute care hospitals, all of whom will be anxious to provide patients to this long-term hospital, and given that long-term hospital care is a kind of care for which demand follows the supply, it is likely that utilization at Palm Beach Regional, if approved, will be strong. Despite the record of other long-term care hospitals, Palm Beach Regional’s utilization projections are reasonable. Need for Research and Educational Facilities There are no plans to provide research or education at this facility. Availability of Manpower, Management Personnel and Funds for Capital and Operating Expenditures The State Agency Action Report shows that the agency believes that there will be adequate levels of staffing available. The adequacy of the staffing levels was confirmed by the administrator of Specialty Hospital of Jacksonville. Palm Beach Regional will be able to adequately staff the hospital at the salary levels proposed in the application. Long-term acute care hospitals treat the very old. Since almost all of these people have Medicare coverage, economic access is not a problem for the individuals the applicant proposes to serve. The applicant has a 1% indigent commitment and a 5% projected Medicaid utilization. Geographic access is also served well by this facility. The facility is located where the population base of the elderly population is in District 9. Financial Feasibility The immediate financial feasibility of Palm Beach Regional is evident from its ability to open and operate for the first two years with a positive cash flow with a financing letter in the amount of $407,000 from Columbia. Palm Beach Regional, in its pro formas and the analysis underlying its pro formas concluded that it would be under the prospective payment system for six months before it could transer to a facility exempt from the prospective payment system. This conclusion is reasonable. Palm Beach Regional has two months to get the necessary certification changed prior to the end of its fiscal year. Palm Beach Regional will be able to institute the necessary six month evaluation, within CON constraints, when it chooses. Furthermore, Palm Beach Regional could change the end of its fiscal year so that the six-month time period could be accommodated. Finally, short-term financial feasibility was demonstrated by the pro forma which properly shows reimbursement levels for patients who were treated in the first six months, and who were discharged after the first six months. Under Medicare regulations, the hospital would be reimbursed on a cost basis for these patients. Palm Beach Regional projected an occupancy level of 85% in the first year of operation and 87% in the second year of operation. Neither Specialty Hospital of Jacksonville, the model for Palm Beach Regional, nor the other long-term care hospitals in Florida have occupancy levels that high. Comparison, however, is not valid. The long-term care hospitals that converted from acute care facilities converted their entire complement of beds which resulted in overbedding. In contrast, Palm Beach Regional seeks to convert only 60 of its 200 beds. The situation of Specialty is very different. It is a converted 105 bed facility which was in bankruptcy when it first started, limiting its ability to attract patients. Within its district, Specialty competes with Vencor of North Florida, a 60 bed facility. Not only does Palm Beach Regional not have any in-district competition, but it will benefit greatly from being a member of the Columbia system. Palm Beach Regional's application demonstrates financial feasibility, both immediate and long-term. Special Needs and Circumstances of HMOs Whether the facility provides an additional level in the continuum of care available to HMO patients is uncertain. It is not generally accepted that the level of care Palm Beach Regional argues it will provide, that is, a level between acute care and subacute care, even exists let alone whether such a level of care is necessary, cost-effective or the best means of treating patients. Needs and Circumstances of Entities Providing Substantial Portion of Services to Individuals Residing Outside the District There are no facilities in the district which provide a substantial portion of its service to individuals residing outside the district. Probable Impact on Costs of Providing Health Services Total property costs for Palm Beach Regional amount to $3.572 million per year, or approximately $250,000 per month. This includes depreciation, interest, insurance and all other property costs. Because Palm Beach Regional would enjoy cost- reimbursement from Medicare instead of being paid on the basis of the prospective payment system, Medicare would pay as much as $190 per patient day for simple property costs and not for patient care, if Palm Beach Regional's utilization projections prove true. Were Palm Beach Regional's utilization projections to turn out to be incorrect and Palm Beach Regional's occupancies were more in the range of other long-term care facilities, (50% the first year and 60% the second), the cost would be "into the $3-400 a day cost range for the cost of [the] ... property allocated per patient day, which would be picked up in their entirety or close to their entirety [by Medicare.]" (Tr. 782.) Either way, the high property costs of Palm Beach Regional would result, should the application be approved, in shifting a huge financial burden to Medicare. The result would be to "wind up costing the Federal government, the Medicare program, multiples of what it now cost[s] ... to treat those same patients in acute care hospitals." (Tr. 792). The Applicant's Past and Proposed Provision of Services to Medicaid and the Medically Indigent Palm Beach Regional projected a 5% Medicaid utilization but its commitment is to indigent care only and that being a mere 1%. The commitment to indigent care (as opposed to the projection for Medicaid care) is meager. Furthermore, Palm Beach Regional has little established pattern accepting patients in these payor classes. Given the savings to Columbia acute care hospitals which would feed patients to Palm Beach Regional, and ultimately, the profit to be enjoyed by the applicant, a commitment of 1% is lacking. That recognized, it must be said that the modesty of the commitment is consistent with the advantage Medicare's cost- reimbursement system provides long-term care hospitals. It is not to be expected that there will be many Medicaid or indigent patients utilizing long-term care hospitals. "The vast majority of the population utilizing the facility will be the elderly, virtually all of whom are covered by Medicare." (Palm Beach Regional's Proposed Recommended Order, p. 23, Tr. 339.) Still, a greater commitment, more along the lines of the commitment provided by St. Petersburg Health Care Management, Inc., with which Palm Beach Regional has drawn comparison, (See Findings of Fact, 123- 128, below,) would lend this criterion to favor the application rather than disfavor it. The Applicant's Past and Proposed Provision of Services Which Promotes a Continuum of Care There is no long-term hospital available in District 9. But whether that means Palm Beach Regional is adding a level to the continuum of care available for patients in the district is uncertain. There is no data to support the conclusion that long- term care hospitals provide a level of care between that of acute and subacute. Despite the earnestness with which Dr. Griffin and Dr. Williams hold their opinions to the contrary, their opinions are simply not yet accepted widely enough at this point to support such a conclusion. That Less Costly, More Efficient, or More Appropriate Alternatives to Such Inpatient Services are not Available Long-term care hospitals have existed for years by Act of Congress. "[W]hile there has been an active discussion of alternatives, so far they have not come up with one which has been moved into rule or legislation." (Tr. 421). Certainly keeping long-term care hospital patients covered by Medicare in acute care hospitals would be a less costly alternative. Whether caring for these patients in one facility or another is more cost-efficient, however, is unknown. At bottom, there is no determinative data on the issue of cost-efficiency. As for more appropriate alternatives, there is a group of long-term care hospital patients for whom it is less appropriate to be in a free-standing skilled nursing unit. But, the size of this group is uncertain. Certainly, from the point of view of care to the patient, it is at least equally appropriate for all long- term care patients to remain in acute care hospitals rather than be discharged to long-term care. Alternatives to New Construction As the result of renovations, the facility requires little capital to convert it to a 60 bed long-term care hospital. The capital outlay of $500,000 is an indication of how little actual construction is necessary to complete the project. Problems in Obtaining the Proposed Inpatient Care in the Absence of the Proposed New Service With the exception of inappropriately premature discharges of patients from the acute care hospital's acute care setting, there are beds available for appropriate care in the absence of approval of the application. There is an abundance of beds in acute care hospitals available to patients who might otherwise be discharged to the long-term care hospital. As for the patient for whom discharge from the acute care setting is appropriate who might be admitted to a long-term care hospital, there are available for inpatient care skilled nursing beds in one type of facility or another. Administrative Due Process Palm Beach Regional contends that it has been treated differently by the agency, without reasonable explanation, from St. Petersburg Health Care Management, Inc., a successful applicant for the conversion of a general acute care hospital to a long-term care hospital in another district. Initially approved by the agency, the "St. Petersburg" application, CON 8213, was not subjected to the scrutiny of a formal administrative hearing at the Division of Administrative Hearings. Nonetheless, in support of its claim of unfair treatment, portions of the St. Petersburg application and omissions response for Certificate of Need number 8213 were introduced into evidence by petitioner as well as the State Agency Action Report. There are similarities between the two applications. For example, both proposed conversion of underutilized facilities to long-term acute care beds, as well as reduction of the hospitals' complements of 200 acute care beds to 60 long-term care beds. But there are differences as well. The St. Petersburg commitment to indigent and Medicaid care is 500% of the commitment by Palm Beach Regional. St. Petersburg's commitment is a combined 5%: 2% to indigent and 3% to Medicaid. In contrast, Palm Beach Regional's commitment is 1%, to indigent care only. Palm Beach Regional stated in its application that "[p]atients classified as Medicaid payers are projected to equal 5.0% of total patient days in 1999, 2000, and 2001." Petitioner's Ex. No. 1, p. 79. As reasonable as this projection may be, it is just that: a projection, nothing more and a projection is a far cry from a commitment. There is another difference between the two applications. While the facilities from which Palm Beach Regional's application received letters of support were limited to Columbia's affiliated facilities, St. Petersburg received letters of support from three disproportionate share providers as well as numerous unaffiliated hospitals and nursing homes in the Pinellas and Pasco County areas. The difference is critical to an understanding of the likelihood that the facility will, in fact, meet its commitment to the historically underserved. As Ms. Elizabeth Dudek, Chief of the Certificate of Need and Budget Review Office at the Agency for Health Care Administration testified, "You have, in the case of having the support of all the disproportionate share providers ... more of an assurance that the historically underserved, the Medicaid and the indigent patients, will be served and get access to the service." (Tr. 902). Such an assurance is omitted unfortunately from Palm Regional’s application.
Recommendation ACCORDINGLY, it is recommended that the application of Palm Beach Regional to establish a long-term acute care hospital by delicensing 128 beds and converting 60 acute care beds to 60 long- term acute care beds be denied.DONE AND ORDERED this 24th day of March, 1997, in Tallahassee, Florida. DAVID MALONEY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (904) 488-9675 SUNCOM 278-9675 Fax Filing (904) 921-6847 COPIES FURNISHED: Eric Tilton, Esquire Filed with the Clerk of the Division of Administrative Hearings this 24th day of March, 1997. Gustafson, Tilton & Henning, P.A. 204 South Monroe Street, Suite 200 Tallahassee, Florida 32301 Lesley Mendelson, Senior Attorney Agency for Health Care Administration 2727 Mahan Drive, Suite 3431 Fort Knox, Building III Tallahassee, Florida 32308-5403 Thomas F. Panza, Esquire Seann M. Frazier, Esquire Panza, Maurer, Maynard & Neel, P.A. 3600 North Federal Highway Fort Lauderdale, Florida 33308 Sam Power, Agency Clerk Agency for Health Care Administration 2727 Mahan Drive, Suite 3431 Fort Knox, Building III Tallahassee, Florida 32308-5403 Jerome W. Hoffman, General Counsel Agency for Health Care Administration 2727 Mahan Drive, Suite 3431 Fort Knox, Building III Tallahassee, Florida 32308-5403
Findings Of Fact Introduction Petitioner, Leesburg Regional Medical Center ("Leesburg"), is a 132-bed acute care private, not-for-profit hospital located at 600 East Dixie Highway, Leesburg, Florida. It offers a full range of general medical services. The hospital sits on land owned by the City of Leesburg. It is operated by the Leesburg hospital Association, an organization made up of individuals who reside within the Northwest Taxing District. By application dated August 13, 1982 petitioner sought a certificate of need (CON) from respondent, Department of Health and Rehabilitative Services (HRS), to construct the following described project: This project includes the addition of 36 medical/surgical beds and 7 SICU beds in existing space and the leasing of a CT scanner (replacement). The addition of the medical/surgical beds is a cost effective way to add needed capacity to the hospital. Twenty-four (24) beds on the third floor will be established in space vacated by surgery and ancillary departments moving into newly constructed space in the current renovation project. A significant portion of this area used to be an obstetric unit in the past; and therefore, is already set up for patient care. The 7 bed SICU unit will be set up on the second floor, also in space vacated as a result of the renovation project. Twelve additional beds will be available on the third and fourth floors as a result of changing single rooms into double rooms. No renovation will be necessary to convert these rooms into double rooms. It is also proposed to replace the current TechniCare head scanner with GE8800 body scanner. Based on the high demand for head and body scans and the excessive amount of maintenance problems and downtime associated with the current scanner, Leesburg Regional needs a reliable, state-of-the-art CT scanner. The cost of the project was broken down as follows: The total project cost is $1,535,000. The construction/renovation portion of the project (24 medical/surgical and 7 SICU beds) is $533,000. Equipment costs will be approximately $200,000. Architectural fees and project development costs total $52,000. The CT scanner will be leased at a monthly cost of $16,222 per month for 5 years. The purchase price of the scanner is $750,000 and that amount is included in the total project cost. The receipt of the application was acknowledged by HRS by letter dated August 27, 1982. That letter requested Leesburg to submit additional information no later than October 10, 1982 in order to cure certain omissions. Such additional information was submitted by Leesburg on October 5, 1982. On November 29, 1982, the administrator for HRS's office of health planning and development issued proposed agency action in the form of a letter advising Leesburg its request to replace a head CT scanner (whole body) at a cost of $750,000 had been approved, but that the remainder of the application had been denied. The basis for the denial was as follows: There are currently 493 medical/surgical beds in the Lake/Sumter sub-district of HSA II. Based upon the HSP for HSA II, there was an actual utilization ratio of existing beds equivalent to 2.98/1,000 population. When this utilization ratio is applied to the 1987 projected population of 156,140 for Lake/Sumter counties, there is a need for 465 medical/surgical beds by 1987. Thus, there is an excess of 28 medical/surgical beds in the Lake/Sumter sub-district currently. This action prompted the instant proceeding. At the same time Leesburg's application was being partially denied, an application for a CON by intervenor-respondent, Lake Community Hospital (Lake), was being approved. That proposal involved an outlay of 4.1 million dollars and was generally described in the application as follows: The proposed project includes the renovations and upgrading of patient care areas. This will include improving the hospital's occupancy and staffing efficiencies by reducing Med-Surg Unit-A to 34 beds and eliminating all 3-bed wards. Also reducing Med-Surg Units B and C to 34 beds each and eliminating all 3-bed wards. This will necessitate the construction of a third floor on the A wing to house the present beds in private and semi-private rooms for a total of 34 beds. There is also an immediate need to develop back-to-back six bed ICU and a six-bed CCU for shared support services. This is being done to fulfill JCAH requirements and upgrade patient care by disease entity, patient and M.D. requests. Another need that is presented for consideration is the upgrading of Administrative areas to include a conference room and more Administrative and Business office space. However, the merits of HRS's decision on Lake's application are not at issue in this proceeding. In addition to Lake, there are two other hospitals located in Lake County which provide acute and general hospital service. They are South Lake Memorial Hospital, a 68-bed tax district facility in Clermont, Florida, and Waterman Memorial Hospital, which operates a 154-bed private, not-for-profit facility in Eustis, Florida. There are no hospitals in Sumter County, which lies adjacent to Lake County, and which also shares a subdistrict with that county. The facilities of Lake and Leesburg are less than two miles apart while the Waterman facility is approximately 12 to 14 miles away. South Lake Memorial is around 25 miles from petitioner's facility. Therefore, all three are no more than a 30 minute drive from Leesburg's facility. At the present time, there are 515 acute care beds licensed for Lake County. Of these, 493 are medical/surgical beds and 22 are obstetrical beds. None are designated as pediatric beds. The Proposed Rules Rules 10-16.001 through 10-16.012, Florida Administrative Code, were first noticed by HRS in the Florida Administrative Weekly on August 12, 1983. Notices of changes in these rules were published on September 23, 1983. Thereafter, they were filed with the Department of State on September 26, 1983 and became effective on October 16, 1983. Under new Rule 10-16.004 (1)(a), Florida Administrative Code, subdistrict 7 of district 3 consists of Lake and Sumter Counties. The rule also identifies a total acute care bed need for subdistrict 7 of 523 beds. When the final hearing was held, and evidence heard in this matter, the rules were merely recommendations of the various local health councils forwarded to HRS on June 27, 1983 for its consideration. They had not been adopted or even proposed for adoption at that point in time. Petitioner's Case In health care planning it is appropriate to use five year planning horizons with an overall occupancy rate of 80 percent. In this regard, Leesburg has sought to ascertain the projected acute care bed need in Lake County for the year 1988. Through various witnesses, it has projected this need using three different methodologies. The first methodology used by Leesburg may be characterized as the subdistrict need theory methodology. It employs the "guidelines for hospital care" adopted by the District III Local Health Council on June 27, 1983 and forwarded to HRS for promulgation as formal rules. Such suggestions were ultimately adopted by HRS as a part of Chapter 10-16 effective October 16, 1983. Under this approach, the overall acute care bed need for the entire sixteen county District III was found to be 44 additional beds in the year 1988 while the need within Subdistrict VII (Lake and Sumter Counties) was eight additional beds. 2/ The second approach utilized by Leesburg is the peak occupancy theory methodology. It is based upon the seasonal fluctuation in a hospital's occupancy rates, and used Leesburg's peak season bed need during the months of February and March to project future need. Instead of using the state suggested occupancy rate standard of 80 percent, the sponsoring witness used an 85 percent occupancy rate which produced distorted results. Under this approach, Leesburg calculated a need of 43 additional beds in 1988 in Subdistrict VII. However, this approach is inconsistent with the state-adopted methodology in Rule 10- 5.11(23), Florida Administrative Code, and used assumptions not contained in the rule. It also ignores the fact that HRS's rule already gives appropriate consideration to peak demand in determining bed need. The final methodology employed by Leesburg was characterized by Leesburg as the "alternative need methodology based on state need methodology" and was predicated upon the HRS adopted bed need approach in Rule 10-5.11(23) with certain variations. First, Leesburg made non-rule assumptions as to the inflow and outflow of patients. Secondly, it substituted the population by age group for Lake and Sumter Counties for the District population. With these variations, the methodology produced an acute care bed need of 103 additional beds within Lake and Sumter Counties. However, this calculation is inconsistent with the applicable HRS rule, makes assumptions not authorized under the rule, and is accordingly not recognized by HRS as a proper methodology. Leesburg experienced occupancy rates of 91 percent, 80 percent and 73 percent for the months of January, February and March, 1981, respectively. These rates changed to 86 percent, 95 percent and 98 percent during the same period in 1982, and in 1983 they increased to 101.6 percent, 100.1 percent and 95.1 percent. Leesburg's health service area is primarily Lake and Sumter Counties. This is established by the fact that 94.4 percent and 93.9 percent of its admissions in 1980 and 1981, respectively, were from Lake and Sumter Counties. Although South Lake Memorial and Waterman Memorial are acute care facilities, they do not compete with Leesburg for patients. The staff doctors of the three are not the same, and there is very little crossover, if any, of patients between Leesburg and the other two facilities. However, Lake and Leesburg serve the same patient base, and in 1982 more than 70 percent of their patients came from Lake County. The two compete with one another, and have comparable facilities. Leesburg has an established, well-publicized program for providing medical care to indigents. In this regard, it is a recipient of federal funds for such care, and, unlike Lake, accounts for such care by separate entry on its books. The evidence establishes that Leesburg has the ability to finance the proposed renovation. HRS's Case HRS's testimony was predicated on the assumption that Rule 10-16.004 was not in effect and had no application to this proceeding. Using the bed need methodology enunciated in Rule 10-5.11(23), its expert concluded the overall bed need for the entire District III to be 26 additional beds by the year 1988. This calculation was based upon and is consistent with the formula in the rule. Because there was no existing rule at the time of the final hearing concerning subdistrict need, the witness had no way to determine the bed need, if any, within Subdistrict VII alone. Lake's Case Lake is a 162-bed private for profit acute care facility owned by U.S. Health Corporation. It is located at 700 North Palmetto, Leesburg, Florida. Lake was recently granted a CON which authorized a 4.1 million dollar renovation project. After the renovation is completed all existing three-bed wards will be eliminated. These will be replaced with private and semi-private rooms with no change in overall bed capacity. This will improve the facility's patient utilization rate. The expansion program is currently underway. Like Leesburg, the expert from Lake utilized a methodology different from that adopted for use by HRS. Under this approach, the expert determined total admissions projected for the population, applied an average length of stay to that figure, and arrived at a projected patient day total for each hospital. That figure was then divided by bed complement and 365 days to arrive at a 1988 occupancy percentage. For Subdistrict VII, the 1988 occupancy percentage was 78.2, which, according to the expert, indicated a zero acute care bed need for that year. Lake also presented the testimony of the HRS administrator of the office of community affairs, an expert in health care planning. He corroborated the testimony of HRS's expert witness and concluded that only 26 additional acute care beds would be needed district-wide by the year 1988. This result was arrived at after using the state-adopted formula for determining bed need. During 1981, Lake's actual total dollar write-off for bad debt was around $700,000. This amount includes an undisclosed amount for charity or uncompensated care for indigent patients. Unlike Leesburg, Lake receives no federal funds for charity cases. Therefore, it has no specific accounting entry on its books for charity or indigent care. Although Leesburg rendered $276,484 in charity/uncompensated care during 1981, it is impossible to determine which facility rendered the most services for indigents due to the manner in which Lake maintains its books and records. In any event, there is no evidence that indigents in the Subdistrict have been denied access to hospital care at Lake or any other facility within the county. Lake opines that it will loose 2.6 million dollars in net revenues in the event the application is granted. If true, this in turn would cause an increase in patient charges and a falling behind in technological advances. For the year 1981, the average percent occupancy based on licensed beds for Leesburg, Lake, South Lake Memorial and Waterman Memorial was as follows: 71.5 percent, 58.7 percent, 63.8 percent and 65.7 percent. The highest utilization occurred in January (81 percent) while the low was in August (58 percent). In 1982, the utilization rate during the peak months for all four facilities was 78 percent. This figure dropped to 66.5 percent for the entire year. Therefore, there is ample excess capacity within the County even during the peak demand months.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Leesburg Regional Medical Center for a certificate of need to add 43 acute care beds, and renovate certain areas of its facility to accommodate this addition, be DENIED. DONE and ENTERED this 15th day of December, 1983, in Tallahassee, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 15th day of December, 1983.
The Issue Select Specialty Hospital-Marion, Inc.'s CON Application 9710, filed with the Agency for Health Care Administration, seeks establishment of a 44-bed Long Term Care Hospital (an "LTCH") in Polk County, AHCA Health Care Planning District 6. The Agency preliminarily denied the application. Select-Marion has challenged the denial and Kindred-Bay Area seeks intervention in the proceeding. The issues in this case are two: whether Kindred-Bay Area has proven it has standing to intervene in the proceeding and whether the application should be approved.
Findings Of Fact The Parties Select-Marion, the applicant, is a wholly-owned subsidiary of Select Medical Corporation. Select Medical Corporation provides long-term acute care services at 99 LTCHs in 26 states through various subsidiaries. In addition, Select Medical Corporation operates 741 outpatient clinics and has more than 400 "contract therapy locations for freestanding rehabilitation hospitals[.]" (Tr. 65.) Select has approximately 21,000 employees. The Agency is the state agency responsible for the administration of the Certificate of Need program in Florida. See § 408.034(1), Fla. Stat. Kindred-Bay Area operates a 73-bed freestanding, long- term care hospital in Tampa, Hillsborough County, Florida, in AHCA District 6, the health services planning district in which Select-Marion hopes to construct and operate the applied-for project. Kindred-Bay Area is owned and operated by Kindred Hospitals, East, LLC, which also owns and operates a number of other long-term hospitals in Florida and other states. LTCH Services The length of stay in an acute care hospital (a "short- term hospital" or a "general 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 30 days of additional acute care service after the typical three to five day stay in a short-term hospital. Although some of these patients are "custodial" in nature (see paragraph 19, below) and not in need of LTCH services, many of these long-term patients are better served in an LTCH than in a traditional acute care hospital. In the health care continuum, LTCH care constitutes a component dedicated to catastrophically ill and medically complex patients in need of acute care services that exceed by a considerable amount the average length of stay for those patients in a general hospital. Typically medically unstable for the entire time of stay in the general hospital, these patients require extensive nursing care with daily physician oversight usually accompanied by some type of technologically advanced support. Quite commonly, the technological support includes a ventilator. Most often elderly, LTCH patients may be younger if victims of severe trauma. Whatever the age of the patients, for a variety of reasons, once they exceed the short-term length of stay in a general hospital intensive care unit ("ICU"), they rarely receive the health care treatment that is most appropriate for them in health care settings other than an LTCH. LTCH patients are not able to tolerate, for example, the three hours per day of therapy associated with comprehensive medical rehabilitation and so are not appropriate for Comprehensive Medical Rehabilitation ("CMR") units or hospitals. As compared to LTCH patients, moreover, CMR patients usually require significantly less nursing care. They receive on average 4 to 4.5 hours of nursing care per patient day, as compared to the average eight hours of nursing care per patient day required by LTCH patients. The services in an LTCH are distinct from those provided in a skilled nursing facility ("SNF") or a skilled nursing unit ("SNU") in that more nursing hours are dedicated to the patient and physician oversight is provided with more regularity, that is, on a daily basis. Patients in SNFs or SNUs are not likely to receive daily physician visits and observation or, in terms of hours, the intensity in nursing services required by the patient appropriate for LTCH care. The level of care provided in an LTCH is analogous to that provided in an ICU progressive care unit in a short-term acute care hospital. But staff orientation at an ICU in a short-term care hospital is different from LTCH staff orientation. The ICU staff is focused on stabilizing the patient and moving the patient to the next level of care within the continuum of care. With such a focus, it is difficult for the ICU in a general hospital to sustain the level of care for the long-term as required by a patient in need of long-term intensive care. Furthermore, when a patient has "fallen off . . . [the] clinical pathway" (tr. 19) and does not leave the ICU within the short time projected for the standard short-term acute care patient, the patient is viewed as a failure by the ICU staff. Staff perspective that there is little hope for the patient's recovery dampens the motivation necessary to provide consistently the service the patient requires over the long-term if the patient is to recover. Federal Government Recognition of LTCHs The federal government recognizes the distinct place based on the high level of patient acuity occupied by LTCHs in the continuum of care. The Prospective Payment System ("PPS") of the federal government treats LTCH care as a discrete form of care. LTCH care therefore has its own system of diagnostic related groups ("DRGs") and case mix reimbursement that provides Medicare payments at rates different from what PPS provides for other traditional post-acute care providers. Effective October 1, 2002, the Centers for Medicare and Medicaid Services ("CMS") implemented categories of payment designed specifically for LTCHs, the "LTC-DRG." The LTC-DRG is a decisive 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. CON Application Process Select-Marion submitted CON Application 9710 in the second CON Application Review Cycle of 2003. The application was reviewed in comparison with CON Application 9709, submitted by SemperCare Hospital of Lakeland, Inc., through which SemperCare-Lakeland sought a 30-bed "hospital in a hospital" at Lakeland Regional Medical Center in Polk County. The Agency evaluated the applications in a State Agency Action Report ("SAAR"). The SAAR recommended denial of both applications. A basis for the denial of Select-Marion's application is summed up as follows: The applicant contends that Polk County LTCH appropriate patients are remaining in acute care hospitals within the county as no appropriate or available alternatives exist with an acceptable distance. The applicant did not demonstrate that Polk County residents are being denied access to existing appropriate post-acute care services including LTCH services. There are two licensed LTCHs with an average occupancy in calendar year 2002 below 75 percent located in adjacent Hillsborough County. Travel distances to existing LTCHs, skilled nursing facilities, comprehensive medical rehabilitation facilities, or any appropriate provider of post-acute care were not demonstrated to be unreasonable. AHCA Ex. 2, p. 34. The SAAR also recommended denial of SemperCare-Lakeland's application. On December 10, 2003, authorized representatives of AHCA adopted the recommendation contained in the SAAR and released it. See id., p. 37. Both Select-Marion and SemperCare-Lakeland timely challenged the denials of their respective applications. The petitions of the two were referred to DOAH and consolidated for purposes of hearing. SemperCare-Lakeland subsequently withdrew its challenge. An order was entered closing the DOAH file on the Sempercare challenge, see DOAH Case No. 04-0460CON, leaving this case to proceed on its own. Issues Aside from the standing issue with regard to Kindred- Bay Area, the issue in this case is approval of Select-Marion's application. This primary issue breaks into related sub-issues reflected in the provision of the SAAR, quoted above. Has Select-Marion demonstrated that there is need for an LTCH in Polk County despite the existence of other LTCHs in the district and given their less-than-optimal occupancy rates? If so, would an LTCH in Polk County enhance access to LTCH service for District 6 residents and specifically for those who reside or are hospitalized in Polk County? Put another way, is there a legally cognizable barrier to access for Polk County patients to LTCH beds available elsewhere in the district that would justify approval of the application? LTCH Need Methodology and AHCA's Concerns The Agency has not adopted a need methodology for LTCH services. Consequently, it does not publish fixed need pools for LTCHs. In response to a rise in LTCH applications over the last several years, the Agency has consistently voiced concerns about 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 of LTCH patient population, the Agency is not convinced that there is not an overlap between the LTCH patient population and the population of patients served in other healthcare settings. In the absence of data identifying the LTCH patient population, AHCA has reached the conclusion "that there are other options available to those patients [the population targeted by the LTCH applicant], depending on . . . things such as physician preference." (Tr. 175.) Another expression of the Agency's view is that LTCH applicants have taken an "overly-broad" (id.) approach to determining the LTCH patient population with an emphasis on long lengths of stay in general hospitals. The Agency accepts that the candidate population for placement in a long-term care hospital includes at least some of those patients with extended lengths of stay in an acute care setting. But "in the absence of better data that evaluated severity of illness, as well," AHCA fears that the approval of an LTCH application "has a tendency to allow less severely ill people to drift into these otherwise very expensive facilities [that is, LTCHs]." (Tr. 175-176.) A better approach in AHCA's view would be to focus on severity of illness because some long stay patients in general hospitals whose stays are more custodial in nature are not appropriate candidates for LTCH services. These long stay "custodial" patients are neither catastrophically ill nor medically complex. For them, rather than the more specialized and highly technological-based services accompanied by intensive nursing care required by the LTCH patient, fewer services of less complexity suffice. When there is an oversupply of LTCH beds, moreover, they tend to attract less severely ill patients than those who are appropriate for LTCH services. The Agency draws support for its concerns from a report to the Congress in June 2004 by MedPAC.1 MedPAC's concern about LTCHs stems from the cost associated with LTCH services: a cost that is higher than other skilled nursing facilities or inpatient rehabilitation facilities. Just as the Agency has concluded, MedPAC expects LTCHs with an oversupply of LTCH beds to attract patients who are not severely ill enough to be appropriate for LTCH care. In a setting whose costs are higher than is appropriate for them, more Medicare dollars are expended on these patients than is necessary. The Agency's concerns about LTCH applications in general are compounded in this case by declining occupancies in LTCHs in District 6. "For the calendar year 2002, they were at 74.47%, and for calendar year 2004 they're at 66.65%, according to our [AHCA] records." (Tr. 178.) Existing LTCHs in District 6 There are currently two licensed LTCHs operating in District 6: Kindred Hospital-Central Tampa, and the Intervenor in this case, Kindred-Bay Area. Kindred-Bay Area is approximately 50 to 60 miles, and within an hour's drive of the Winter Haven Area where Select-Marion intends to locate its proposed LTCH; Kindred Hospital-Central Tampa is 5 to 7 miles closer to Winter Haven than is Kindred-Bay Area. Kindred-Central Tampa is a 102-bed LTCH. It is JCAHO accredited. The recent trend in its average occupancy is a declining one. In 2002, the average occupancy rate was 79.4%. In 2003, it fell to 70.6%. In 2004, it fell, yet again, although the decline was less dramatic, to 69.6%. On the average day, Kindred-Central Tampa had 30 to 32 beds available to accommodate additional patients. Kindred-Bay Area is a 73-bed LTCH in Hillsborough County. Also JCAHO accredited, it is licensed as an acute care hospital and is designated as an LTCH by the Medicare program. It offers a variety of long-term care services: respiratory/ventilator services, IV services, neurological services, wound care, dialysis and others. Kindred has a 4-bed ICU, an 8-bed "step down" unit, and 61 med-surg beds. Need Demonstration: the Applicant's Responsibility It is the applicant's responsibility to demonstrate under Florida Administrative Code Rule 59C-1.008(2)(e)2., that there is a need for the services for which approval is sought. The Agency analyzes LTCH applications on a district basis. The approach offered by Select-Marion, however, was a different one from the Agency’s. The approach is outlined in Select-Marion’s application. Extensive testimony about the approach, moreover, was offered at hearing through Select-Marion's expert health planner, Patricia Greenberg. Select-Marion’s Application and Proposal Submitted in the second application cycle for 2003, Select-Marion’s application was assigned CON 9710. Select-Marion estimates its total project costs to be approximately $11,244,000. It has not yet acquired the site for its proposed LTCH but anticipates that the facility will be located near or in Winter Haven in the central eastern region of Polk County. Select-Marion, however, has not conditioned its application on the location of the facility in the Winter Haven area. It has only offered to condition the application on the location of the facility in Polk County. If located in the Winter Haven area, the proposed LTCH will be within 20 miles of the existing acute care providers in the county, a location sufficiently close to the major referral sources for the facility. Uncontested Statutory and Rule Criteria By stipulation of the parties it has been agreed that Select-Marion's application meets most of the statutory and rule criteria applicable to CONs or that those criteria are not applicable. The primary exception to the parties' agreement is need. As testified at hearing by the Agency's sole witness, the applicant's alleged failure to demonstrate need is the sole reason the application was denied. (See Tr. 169.) Ms. Greenberg's Testimony Patricia Greenberg is the President of National Health Care Associates, "a health care consulting firm that specializes in health care planning, health care finance and health care operations." (Tr. 100.) She has extensive experience as a consultant on health care projects "including Certificate of Need work." (Tr. 101.) Since the Agency does not have an LTCH need methodology in rule nor an Agency policy on LTCH need methodology in place, Select-Marion is responsible for demonstrating need through a needs assessment methodology which must include, at a minimum, consideration of the following topics: Population, demographics and dynamics; Availability, utilization and quality of like services in the district, sub-district or both; Medical treatment trends; and, Market conditions. See the testimony of Ms. Greenberg at tr. 115 and Florida Administrative Code Rule 59C-1.008(2)(e). Select-Marion addressed each of these topics in its application. On the basis of the each of the above-quoted topics and using several numeric need methodologies that follow general health planning principles, generally accepted by AHCA in other contested LTCH CON cases, as testified by Ms. Greenberg, there is a need for at least 44 LTCH beds in Polk County. Ms. Greenberg's analysis does not overlook the beds that are available elsewhere in the district, that is, in Hillsborough County where Kindred-Central Tampa and Kindred-Bay Area are located. But in her words, "[t]he facilities in the neighboring county [Hillsborough] are not accessible to this [the Polk County] population." (Tr. 135.) Ms. Greenberg elaborated on this point later in her testimony when discussing the extent of impact to Kindred-Bay Area that might occur should the application be granted, "Kindred-Bay Area may have beds, but they're not accessible to that population, or they would be using them." (Tr. 150.) The gist of the testimony with regard to accessibility was reiterated by Ms. Greenberg when asked directly whether the Kindred facilities in Tampa are "reasonable alternatives to the patients in Polk County": No, they are not reasonable alternatives at all. [The two Kindred facilities] have beds that are available. The physicians that support the need for the project, in the depositions I have reviewed[2], say they're not an alternative, they're not sending patients to them, they only get a few patients going [to the Kindred facilities] because of the family hardship, continuity of care, . . . . They're not an alternative at all for that patient population. (Tr. 162, 163.) In contrast to the approach of Select-Marion to need on a "Polk County" basis, as explained by Ms. Greenberg in her testimony, AHCA, however, does not approach LTCH need on a sub- district basis. The Agency approaches LTCH need on a district basis. Polk County is but one county in the multi-county health planning district in which it is located: District 6. District 6 At the time of filing of the application, the population in District 6 was over 1,955,700. The population included 323,869 in the age cohort of 65 and over, the age cohort eligible for Medicare services, and the cohort that contains patients primarily served by LTCHs. The population of Polk County at the time of the filing of the application was 507,839, including 94,950 in the age cohort, 65 and over. Approximately one-third of the District’s Medicare eligible population lives in Polk County. Polk County is one of five counties that comprise AHCA Health Care Planning District 6. (The other four are Hillsborough, Manatee, Hardee, and Highlands Counties.) The two LTCHs that presently exist in the District are Kindred-Central Tampa and Kindred-Bay Area. Evidence was presented as to Kindred-Bay Area's Patient Recruitment and Admissions Practices, the sources of its admissions, market conditions and impacts to Kindred-Bay Area's census and the adverse impact to Kindred-Bay Area. Kindred-Bay Area’s Patient Recruitment and Admissions Practices Kindred-Bay Area has “clinical liaisons” who serve to educate health care providers as to the availability of Kindred’s services to build relationships with potential referral sources, and to gather information for the evaluation of potential LTCH patients from other health care facilities. The majority of Kindred’s referrals and admissions come from short-term acute care hospitals, primarily intensive care units within such hospitals but also the med-surg units. The clinical liaison’s job includes conducting “in- service training” to educate hospital staff as well as physicians and other health care professionals of the services and treatments Kindred offers, and the types of patients for whom Kindred may be an appropriate placement option. Kindred- Bay Area’s clinical liaison for Polk County, Mindy Wright, has been performing in-service training in Winter Haven for ten years, typically once a year but more frequently if turnover demands. She attempts a visit to the Winter Haven area at least every two weeks and frequently for periods of every week. The clinical liaison also gathers information concerning potential referrals to Kindred from acute care hospitals in the Winter Haven area. The clinical liaison transmits this information to the hospital and the information is evaluated by a team consisting of the hospital’s CEO, CFO, internal case manager, and a nurse or physician to make a decision on admission. There is an incentive for LTCHs to admit patients who meet medical criteria for admission. Reimbursement from Medicaid and Medicare programs may be denied if a patient has not met appropriate admission criteria. Reimbursement, moreover, may be reduced if the patient initially met appropriate criteria but then turns out to have a relatively short length of stay in the LTCH. Some patients are denied admission to Kindred-Bay Area for clinical reasons. For example, the patient may not meet Interqual criteria for admission. Failure to meet clinical admission criteria can occur if the patient has been kept in the short-term acute care hospital too long, possibly even for several months, when the patient should have been referred to Kindred much sooner. The majority of patients referred to Kindred-Bay Area are admitted. Patients are also denied admission to Kindred for financial reasons. On principle, Select does not decry such a practice, acknowledging that it also seeks to assure that some revenue stream is available to assist in providing the expensive care that comprises LTCH services. Sources of Admissions to Kindred-Bay Area Kindred-Bay Area draws the majority of its patients (60 to 75%) from Hillsborough and Polk Counties and specifically from the cities of Tampa and Lakeland and the Brandon and Winter Haven areas. It has also drawn patients from the Orlando/Orange County area, other areas of Polk County, and from as far south as the Naples Area. In 2003, Kindred-Bay Area underwent renovations. The renovations limited the number of patients it could admit. In 2004, Mindy Wright, the clinical liaison responsible for the Orange County and Polk County areas, was on maternity leave for four months. Her absence significantly reduced Kindred’s presence in Polk County health care facilities. The hospital did not replace Ms. Wright. Although other clinical liaisons provided some coverage in her area, it was not as effective as Ms. Wright had been. The result was not unexpected; when clinical liaisons are not in regular contact with short-term acute care hospitals and other providers, referrals and admissions to the LTCH from such facilities usually drop significantly. In addition to renovations and Ms. Wright's absence, there were several other factors that had an impact on admissions to Kindred-Bay Area in the last few years. First, several hurricanes in 2004 had an impact on Central Florida. They seriously disrupted the delivery of health care services, particularly in Polk County. The disruption resulted in a drop in referrals and admissions to Kindred-Bay Area from Polk County. Second, turnover in staffs at hospitals to which Ms. Wright was assigned, including Winter Haven, had an impact on referrals. If the social worker at the hospital does not know about Kindred and its capabilities, the social worker may not identify patients meeting Kindred’s criteria for admission. The conditions that led to declining admissions to Kindred-Bay Area from Polk County were temporary. So far in 2005, the downward trend in admissions between 2002 and 2004 has been reversed. Admissions through the first four months of 2005 at Kindred-Bay Area have been 20% higher for the same period in 2004, higher than the same period in 2003 and nearly at the same level for the period in 2002. Admissions from Orange County, on the other hand, have dropped and are not likely to rebound. Orange County admissions went from 50 in 2002 to 28 in 2003 and only 10 in 2004. An LTCH operated by SemperCare, subsequently acquired by Select Medical Corporation, opened in Orange County in June 2003 (at a location about an hour’s drive from Winter Haven). The drop in Orange County admissions is likely to be exacerbated by the opening of another CON-approved Select facility in Orange County, a 40-bed, freestanding facility. LTCH Market Conditions and Impact on Census Kindred-Bay Area's census has declined in recent years, from an average daily census of 52 patients (72% occupancy) in 2002 to 48 patients (66%) in 2003 to 46 patients (63%) in 2004. On the average day in 2004, Kindred-Bay Area had beds available to accommodate another 27 patients. At the time of final hearing, Kindred-Bay Area's occupancy level was at 60% or about 44 beds. Optimal occupancy for Kindred-Bay Area would be 69 to 70 patients or about 95% occupancy. The existence of a decline in occupancy rates for District 6 LTCHs is supported by AHCA data which shows a decline from about 74.5% in 2002 to 66.7% in 2004. It is also reasonable to assume that some patients from eastern Polk County will follow historic trends and flow to the existing LTCH and approved LTCH in Orange County. The combination of declining occupancy in District 6 LTCHs and possible outmigration of eastern Polk County residents to Orange County for LTCH services diminish Select-Marion's claim that an LTCH is needed in Polk County. Other changes in the LTCH market are also likely to impact Kindred-Bay Area in terms of referrals and admissions from other areas. Select has won a recommendation for approval for an LTCH in Lee County in a formal administrative proceeding. At the time of filing of proposed recommended orders in this proceeding the recommended order in the Lee County proceeding was pending. Kindred-Bay Area maintains a clinical liaison in Lee County to seek referrals in much the same manner as conducted by Ms. Wright. If a Select facility opens in Ft. Myers, it will have an impact on the referrals that Kindred-Bay Area receives from Ft. Myers and surrounding areas. In addition, HealthSouth has received CON approval for an LTCH in Sarasota expected to open in August 2005. Kindred- Bay Area does not directly market to the Sarasota area. Another Kindred Hospital, Kindred-St. Petersburg markets in that area. It is reasonable to assume that the areas south of Sarasota toward Ft. Myers will begin to refer patients to the closer HealthSouth-Sarasota facility rather than continuing referrals to Kindred-Bay Area. Further, as HealthSouth-Sarasota seeks to establish its present in the market, it will likely engage in some marketing in the Tampa Bay area, in areas currently served by Kindred-Bay Area. Kindred-Bay Area's sister hospital, Kindred-Central Tampa, no longer a party to this proceeding, does not contend that the opening of a Select facility would result in the loss of patients to Kindred-Central Tampa. Kindred-Central Tampa, however, is available to accept referrals from Polk County health care providers, either directly or at the request of Kindred-Bay Area. Kindred-Bay Area, like Kindred-Central Tampa, has an open medical staff and any physician can apply for admitting or consulting privileges and would be granted them if they met qualifications. Further, declining occupancy levels at Kindred-Central Tampa, a 102-bed facility, demonstrates that there is available capacity at Kindred-Central Tampa to absorb patients from Polk County, just as there is capacity at Kindred- Bay Area to absorb additional patients from Polk County who are in need of LTCH services. Adverse Impact on Kindred For the periods of calendar years 2002 and 2003 and the first half of 2004, the gross revenue impact on Kindred-Bay Area attributable to the number of patients from Polk County that Kindred-Bay Area would have lost to Select-Marion's proposed facility ranged from $1.75 million to $4.7 million. In terms of net revenue and after-tax margin, however, the losses would be substantially smaller. For the 32 patients from Polk County admitted to Kindred-Bay Area in 2004, the total after-tax margin impact would be only $240,000. Furthermore, Kindred-Bay Area is not likely to lose all of its Polk County patients if the proposed project is located in the Winter Haven area since Lakeland area patients, located closer to Tampa than Winter Haven, might still choose LTCH services at Kindred-Bay Area over the proposed Select facility. As found earlier in this order, however, Select-Marion has not conditioned its CON on locating the proposed facility in Winter Haven. A Winter Haven facility, moreover, with a primary service area with a 20-mile radius would capture Lakeland in its primary service area. On balance, the impact of the proposed facility located in Polk County on Kindred is not substantial enough to confer standing on Kindred-Bay Area. The SAAR Following its review of Select's application, AHCA issued its State Agency Action Report (the "SAAR") recommending that CON 9710 be denied. Following the signature of officials at the Agency indicating approval of the recommendation, the SAAR became the preliminary action of the Agency subject to challenge under Chapter 120, Florida Statutes. At trial, the Agency, through its witness, Jeffrey Gregg, Chief of the Agency's Bureau of Health Facility Regulation, testified that the only reason the application was denied is the Select-Marion's failure in AHCA's view to demonstrate need for the facility. Select-Marion's expert health care planner testified that there is need in Polk County for the facility. The need is based on need methodologies that are both reasonable and appropriate from a health planning perspective and that are consistent with methodologies approved by final orders of the Agency. As discussed, above, however, there is a critical difference in the application of the need methodologies in this case from other cases. In this case the need methodologies developed by Select-Marion applied only to Polk County and not to the district as a whole. The Agency determines need on a district-wide basis. Select-Marion maintains that there are barriers to Polk County patients' access to existing LTCH facilities. The barriers are described as geographical based on physician referral patterns and family participation in rehabilitation. Patient and Physician Preference and Practice Select-Marion largely bases its case for need on allegations of the preferences of patients, family members and their physicians. As to family members, it is not to be doubted that family members wish to avoid the burdens of travel. To the extent, however, that family members value specialized care, they are more likely to have the patient travel the distance necessary to receive it. Indeed, some Polk County families of LTCH patients are willing to travel the distance necessary to visit family members who are patients outside Polk County. With regard to referring physicians, the majority of referring physicians choose not to serve as the attending physician for their patients once referred to an LTCH, even when the LTCH is located in the same city as the referring physician. Typically, a referring physician relies upon another doctor or a practice group to attend to his or her patient in the LTCH setting.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that the Agency for Health Care Administration deny CON 9710 filed by Select Specialty-Marion, Inc. DONE AND ENTERED this 31st day of October, 2005, 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 31st day of October, 2005.
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 Whether the application of Wuesthoff Memorial Hospital, Inc. (CON 8740) for a 50-bed general acute care hospital in South Brevard County should be granted?
Findings Of Fact The Parties Wuesthoff The applicant for CON 8740 is Wuesthoff Memorial Hospital, Inc., a Florida not-for-profit corporation. Wuesthoff operates a general acute care hospital (the "Hospital" or the "Rockledge campus") in Rockledge, Florida. According to the division of the county into three areas (north, central, and south) ascribed to by Wuesthoff, Rockledge is in Central Brevard County. Wuesthoff's parent corporation is a not-for-profit corporation, Wuesthoff Health Systems, Inc. (the "Wuesthoff System"). The Wuesthoff System operates health care providers across the health care spectrum. Among the entities controlled by the Wuesthoff System is Wuesthoff Health Services, Inc., which operates a home health agency, a hospice, a durable medical equipment service and a 114-bed skilled nursing facility. The Wuesthoff Foundation, responsible for fundraising activities for all components of the Wuesthoff System and Care Span, a medical services organization which owns and operates physician practices, are also under the umbrella of the Wuesthoff System. The health care system operated by the Wuesthoff System serves residents in and around Brevard County and, to a limited extent, beyond. Examples of its service throughout Brevard County are the hospice, the durable medical equipment-company, and a reference laboratory. The hospice, for example, is licensed and serves all of Brevard County. The reference laboratory, located in Viera, provides services throughout Broward County and to other counties in Florida. The Wuesthoff System also owns a mobile health unit that travels throughout the county to provide health care services. The Wuesthoff System owns two outpatient clinics or "broad based diagnostic clinics" (Tr. 98) in Brevard County. One is on Merritt Island; the other is located in Sun Tree. Home health services are provided from a base of three different offices in the county. Similar to some of the other services offered by Wuesthoff, its home health services are provided throughout the county. Although it draws patients from throughout the county, most of Wuesthoff's hospital admissions come from Central Brevard County where the Hospital is located. If one defines "Central Brevard County" to include Port St. John and Sun Tree Viera, the sites of the northernmost and southernmost physician practices owned or operated by Care Span, then all of the practices in the Wuesthoff System are within Central Brevard County. Ownership of these practices does not restrict the physicians in them from referring patients for treatment outside the Wuesthoff System. But consolidation of the various services offered by the practices (diagnostic and radiology services, for example) enables Wuesthoff to strengthen its presence in Central Brevard County. The result is "additional volume" (Tr. 164) for the Hospital. The Hospital contains 268 acute care beds, 30 psychiatric beds, and five hospice beds, for a total of 303 beds. (It also contains 10 Level II Neonatal Intensive Care Unit beds.) If the project subject to CON review in this proceeding is ultimately approved, 100 of these beds will be de-licensed, leaving a 203-bed facility. HRMC Holmes Regional Medical Center ("HRMC") is a 528-bed regional, not-for-profit hospital, headquartered in Melbourne, Florida, operating on two acute care campuses under a single hospital license. One campus is the site of a 428-bed tertiary care facility in Melbourne; the other is a 60-bed general acute care community hospital in Palm Bay. Both facilities are in the southern portion of Brevard County. In addition to the 428 general medical and pediatric beds operated at the Melbourne facility, HRMC operates there a 10-bed Level II neonatal intensive care unit. HRMC is accredited by the Joint Commission for Accreditation on Health Care Organizations ("JCAHO"). It operates the only hospice program in the county accredited with commendation by the JCAHO; the only comprehensive community cancer program that has been accredited by the American College of Surgeons; the only American Sleep Disorders Association accredited sleep lab; the only American College of Radiology accredited respiratory therapist department; the only certified pulmonary function lab; and, the only life flight helicopter in Brevard County for hospital transports. As a regional medical center, HRMC provides open heart surgery, tertiary, orthopedic and neurosurgical referrals through a seven-county area, and provides trauma support for the central and south central Atlantic Coast in the State of Florida. It is the only designated trauma center in Brevard County. HRMC was founded 60 years ago by the community and has been a not-for-profit, community-based hospital ever since. The mission of HRMC is to improve, regardless of ability to pay, the health status of every member of the community through collaborative and cooperative agreements with other organizations and agencies it its service area. To represent the community's interests, HRMC's Board is composed of community leaders, educators, and employers. HRMC plays an active role in the community. The program denominated HOPE (Health Outreach Production and Education) is a collaborative effort by the Brevard County Public Health Unit, the American Cancer Society, the School Board, the County Commission and HRMC to solve community health problems. There are currently nine HOPE sites, and three HOPE centers. Among the purposes of the HOPE sites and centers is meeting the unique needs of children with developmental disabilities. Cape Canaveral Hospital, Health First and HFHP Cape Canaveral Hospital, Inc. ("CCH") is the licenseholder for a 150-bed hospital approximately five miles east of Wuesthoff in Cocoa Beach, Florida. Like Wuesthoff, Cocoa Beach is located in Central Brevard County. In August of 1995, HRMC entered into an agreement with CCH to create Health First, Inc. The presidents/chief operating officers of HRMC and CCH are employees of Health First. Similar to the Wuesthoff System, Health First controls the operations of its hospital facilities (HRMC and CCH) and owns and operates physician practices, health clinics, a home health agency, a hospice, and a skilled nursing facility. Health First is the sole shareholder of a Florida not- for-profit corporation known as Health First Health Plans, Inc. ("HFHP"). HFHP is the largest managed care organization in Brevard County operating both a traditional health maintenance organization ("HMO") and a Medicare HMO. Other Nearby Hospitals Parrish Medical Center, operated by a statutorily created tax district, is located in Titusville. If the county is considered to contain three distinct areas (north, central, and south) as proposed by Wuesthoff, Parrish is the only hospital in North Brevard County. Sebastian River Medical Center is located in Indian River County, south of Brevard County. Located in a relatively rural area, it is a small hospital. It provides no tertiary services. It draws some patients from South Brevard County. These patients would otherwise in all probability seek hospital services from a Brevard County hospital. Second Attempt by Wuesthoff Wuesthoff's CON application seeks to establish a new 50-bed general acute care hospital in South Brevard County. This is not the first time Wuesthoff has attempted to obtain such a CON. It applied earlier in CON 8597 for a 50-bed hospital in South Brevard County. In the first attempt, the Agency preliminarily denied the application. Wuesthoff petitioned for a formal administrative hearing. Following receipt of a Recommended Order entered in DOAH Case No. 97-0389 that CON 8597 be denied, Wuesthoff withdrew its application and dismissed its petition for a formal administrative hearing. The Agency entered a "final order" closing its file and dismissing Wuesthoff's petition in light of the application's withdrawal. (Legal proceedings which followed issuance of the order are briefly described in the Preliminary Statement of this Recommended Order.) No New Beds in the Subdistrict Proposed by the Application By the application subject to this proceeding, Wuesthoff does not propose the addition of new beds to Brevard County (the acute care subdistrict at issue, designated by the Agency as Subdistrict 7-1.) In fact, because of Wuesthoff's commitment to delicense 100 beds as a condition of the approval of its application, the granting of the application will result in a net loss of 50 hospital beds in the subdistrict. "[F]ixed need pool[s] only appl[y] to the addition of new beds to a subdistrict." (Tr. 3468). That the fixed need pool resulted in a published need of zero for general acute care hospital beds for the batching cycle in which Wuesthoff's application was filed, therefore, has "no bearing" (Id.) on the issues in this proceeding. For the same reason (that granting Wuesthoff's application will not result in the addition of new general acute care beds in the district) the applicant is not required to prove the existence of "not normal circumstances" to overcome any presumption created by the calculation of the fixed need pool as zero. The Proposed Project The site of the proposed hospital, 43 acres purchased by Wuesthoff for approximately $2.5 million, is on Wickham Road in the city of Melbourne. Twenty of the 43 acres will be devoted to a medical complex of which the 50-bed hospital will be a part. The complex will be "one building that has three very definite components." (Tr. 83). The three components are "an ambulatory and diagnostic center" (Id.), a medical office building, and the 50-bed hospital. The diagnostic center is CON- exempt and the medical office building has been issued a certificate-of-need. Although committed to construct the diagnostic facility and the medical office building at least since March of 1997, at the time of hearing, no construction permits for the property had been obtained nor had any activity on the two components been commenced. Nonetheless, Wuesthoff remains committed toward construction of the diagnostic center and the office building regardless of the outcome in this proceeding. Although the proposed hospital will not provide tertiary services, it will provide all services typically provided in a community hospital. These include obstetrics, pediatrics, and emergency services in a 24-hour emergency department. The services to be offered will not be unique in the subdistrict; all are presently available in the community. In other words, the services to be offered will duplicate services presently offered by existing providers. The estimated cost of the 50-bed hospital proposed in CON 8740 is $38,512,961, a cost that, in the case of a not-for- profit hospital, will ultimately be born by the public "one way or another." (Tr. 2402.) Wuesthoff's application included projections of revenues and expenses attributable to the proposal for the proposed construction period and the first two years of operation. It also included, as required, audited financial statements for two years and a listing of all Wuesthoff's capital projects planned, pending or underway at the time of the filing of the application. A Purpose of CON Law One of the purposes of CON review of an application for a new hospital is "to limit unnecessary, costly duplication of services that are available at other hospitals . . . at least where those services are being provided at reasonable costs." (Tr. 2401-02). Preliminary Agency Action Initially, AHCA Staff intended to recommend denial of Wuesthoff's application. After a meeting with the Director of AHCA, the decision was made to approve the application. The most important factor weighing in favor or approval was one related to competition and costs of hospital services to the ultimate consumer of the services, "[n]amely that . . . large HMO providers have no access to [HRMC] . . . or have been unable to get contractual relationships with [HRMC]." HRMC No. 75, p. 20. The meeting with the Director clarified the Agency's priorities. On July 11, 1997, AHCA issued its State Agency Action Report ("SAAR") containing its determination that the application should be approved. This proceeding was initiated on August 15, 1997, when HRMC filed its Petition for Formal Administrative Hearing on August 15, 1997, in order to challenge the Agency's decision. Need in Relation to the District Health Plan: Section 408.035(1)(a), F.S. The portion of the District 7 Local Health Plan governing the transfer of existing beds includes five parts. Preference is given to applicants that provide documentation of compliance with the five parts. The first part addresses need in the service area proposed to receive the beds. In addressing specific populations, access is one of the considerations. There was no published need for beds to be provided if the application is granted. "[A]t the time the application was filed the Agency's formula showed in excess of 342 beds. [At the time of hearing], the current formula shows an excess of 333 acute care beds for Brevard County." (Tr. 3385). There are no barriers (such as geographic barriers) typically associated with access to acute care services in the subdistrict. Every resident of Brevard County has access to a general acute care hospital within a drive time of 30 minutes usually and 40 minutes at the most. In South Brevard County, Holmes Regional at its two campuses provides high quality inpatient care and excellent medical services. Wuesthoff's hospital in Central Brevard County and Sebastian Medical Center in the adjacent county to the south also serve some of the residents of South Brevard County. Wuesthoff does not receive preference under the first part of the district plan applicable to this proceeding. The second part of the local health plan applicable to this proceeding governs impact to the parent facility including projected occupancy declines, curtailing of service effect on operating cost, use of vacated space at the main campus and charge changes. "[T]here would be minimal utilization decline at the Rockledge facility tied to some redirection of patients from Rockledge to south Brevard." (Tr. 1222). The space that will be vacated will be reused. Wuesthoff receives preference under this part of the district plan. The third part calls for documentation of improvement of access by at least 25 minutes to at least 10% of the population or a minimum of at least 35,000 people. While Wuesthoff's proposal will provide a competitive alternative to substantially more than 10% of the population of South Brevard County, a number in excess of 35,000 people, access to acute care hospital services is presently satisfactory in South Brevard County. Wuesthoff does not receive any preference under this part of the plan. The fourth part relates to the commitment of the applicant to the provision of charity care and care to the medically indigent. Wuesthoff meets this preference based on its commitment that 15% of the discharges from the proposed facility will be Medicaid and charity care. The fifth part addresses the applicant's participation in indigent care programs in the county. Wuesthoff participates in a significant number of community benefit and outreach programs that meet the concerns of this part: There is the We Care Program, . . . a distributed medical access point . . . [and]. . . the United Order of True Sisters, . . .a service group which Wuesthoff supports. Wuesthoff works with a CMS program to provide baby and young children support services. Wuesthoff was involved with the development of the Children's Advocacy Center . . . a community-based program. It's a participant in the Health Start Coalition. And Wuesthoff has also sponsored its own mobile health program with a specific focus and purpose to provide care to [the indigent]. (Tr. 1225). Wuesthoff clearly meets this preference. On balance, despite the lack of an access problem for residents of the subdistrict, Wuesthoff meets the need criteria identified in the applicable portion of the district plan. The Availability, Quality of Care, Efficiency, Appropriateness, Accessibility, Extent of Utilization, and Adequacy of Like and Existing Health Care Services in the Service District: Section 408.035(1)(b),F.S. There is an excess of capacity in acute care beds in Brevard County. Despite an increase in population from 1993 to 1997 of about 2% per year overall and about 3.5% per year in the populace over 65 years of age, the use rate of hospital services declined. In 1993, the use rate was 600 acute care patient days per thousand population. In 1997, the rate was 484 acute care patients per thousand. The occupancy rates for Brevard County hospitals, despite the population increase, is also trending downward. In 1990, overall occupancy of hospital beds in Brevard County was 63%. In 1997, it was approximately 53%. This is due to a number of factors. Managed care penetration has increased; managed care exerts influence to hold down admissions and inpatient days; and there has also been a shift from inpatient surgical procedures to outpatient surgical procedures. The SunTree/Viera area, mid-way between Wuesthoff and Holmes Regional, is the most rapidly growing area of its size in Brevard County. As opposed to areas south of the SunTree/Viera area, where the overwhelming majority of patients use Holmes Regional for hospital services, the SunTree/Viera area is subject to active competition between Wuesthoff and HRMC for patients. Holmes Regional has been shown to be a consistent low charge provider operating within the expected range of outcomes. Furthermore, HRMC has performed as one of the top five hospitals in Florida in reducing overall Cesarean-Section births and increasing vaginal births after Cesarean ("VBAC"). This is important because "unnecessary Cesarean Section presents a real risk for both the mom and the baby . . . [and] the cost to the State for Cesarean Sections performed when vaginal birth would be a desirable alternative added about $3,000 per delivery to the State funded [deliveries]." (HRMC No. 77, p. 1091). Holmes Regional has had the lowest Cesarean Section rate in the county and the highest VBAC rate in the County. The construction of the proposed facility would not significantly increase access to hospital services for Brevard County patients. Holmes Regional delivers the majority of Medicaid babies in the county and is also a contract provider for Children's Medical Services. Ten years ago or so, in recognition of a substantial portion of the population in Brevard County without health insurance, Holmes Regional collaborated with the school board, the public health unit, civic organizations and others to create two school-based community health clinics. "[T]argeted at young families and children" (HRMC No. 77, p. 1063), the clinics provide pro bono health care services. The collaboration was the genesis of the HOPE program. The HOPE program's agenda was expanded to include a mobile clinic to reach those in need of pro bono services who were without transportation to the school-based clinics. The agenda was again enlarged to provide integrated services for children with developmental and cognitive disabilities and delays. Holmes Regional provides direct funding of approximately $1.5 million per year through operational costs of the HOPE program. Holmes Regional not only provides funding to HOPE but it subsidizes salaries of nurses, midwives, and obstetricians directly employed by the Public Health Unit, whose duties include the provision of medical care to the indigent. Dr. Manuel Garcia, Medical Director of the Public Health Unit in Brevard County for over 20 years until his retirement in 1998 offered the following in his testimony in the hearing before Administrative Law Judge Johnston (admitted into evidence in this proceeding as HRMC No. 65) about Holmes Regional's support of the Public Health Unit: "Holmes has always been willing to go the extra mile to help the Health Department with other programs and activities." HRMC No. 65, p. 1211. With regard to the question of which hospital "in Brevard County sets the pace in providing indigent care" (Id.) Dr. Garcia answered: ll the hospitals do a pretty good job . . . [t]here is no doubt that Holmes has been more aggressive in terms of getting into the community to kind of use all the resources available and putting together different organizations and agencies in order to provide more services to the poor in the community. They have been going the extra mile . . . (HRMC Ex. No. 65, pgs. 1211, 1212.) Holmes Regional's efforts in support of the Public Health Unit have continued following Dr. Garcia's tenure. At the same time, "it is true" (Tr. 274) that Wuesthoff, Cape Canaveral, and Parrish Medical Center all "go the extra mile in providing services to the patients that come through the health department." (Id.) Holmes Regional works with the Brevard County Public Health Unit, whose duties include provision of medical care to the poor and indigent patients in the county to develop a better system for giving prenatal care to Medicaid and indigent mothers. In 1998, HRMC provided $10 million of free charity for indigent patients not admitted through HOPE. General community donations and contributions totaled $542,000 and in-kind contributions totaled $714,000. The HOPE program, funded entirely by Holmes Regional, paid $1.1 million in clinical services for staff, pharmacy, services, and supplies to operate its clinics. In addition to these direct dollars, HRMC contributed 2.1 million in uncompensated services to the HOPE program in 1998. The HOPE program has been honored for ground-breaking work in community health improvement and for improving life in Florida through the American Hospital Association's Nova Award and the Heartland Award from the Governor of Florida. Holmes Regional supports a variety of agencies to provide care to AIDS patients. One such clinic is the Comprehensive Health Clinic. In existence since 1991, it currently treats 400 AIDS patients. Its services are mostly paid for through federal programs. Without the assistance of HRMC, the clinic would not be able to provide the quality of services it offers these AIDS patients. Holmes Regional is involved with several children's health programs, including a Healthy Families Program providing in-kind screening assessment. Health Kids Plan subscribers are provided access to managed care insurance products by Health First Health Plans, the managed care company affiliated with Holmes Regional through its parent, Health First, Inc. The company loses "hundreds of thousands of dollars" (Tr. 2108) on the Health Kids segment of its business. There was no evidence presented that persons in need of quality, general acute care services are not able to obtain those services at existing providers in Brevard County. There is no lack of availability or access to general acute care services on either geographic or financial grounds. The ability of the applicant to provide quality of care and the Applicant's Record of Providing Quality of Care: Section 408.035(1)(c), F.S. Wuesthoff is capable of providing quality inpatient health care services and has done so in the past. The Availability and Adequacy of Other Health Care Facilities in the District which may serve as Alternatives to the Health Care Facilities and Health Services to be Provided by the Applicant: Section 408.035(1)(d), F.S. There are available alternatives to the inpatient services proposed by Wuesthoff. The existing providers of acute care services have excess capacity to absorb any increase in the utilization of acute care services in the county. Utilization of the services Wuesthoff proposes, moreover, have been in decline in relation to the earlier part of the decade of the nineties. From 1993 to 1997, inpatient surgery procedures conducted in Brevard County declined approximately 18.8%, a trend consistent with the statewide trend. In 1998, "the number of inpatient procedures pretty much level[ed] off." (Tr. 3410). In contrast, the number of outpatient procedures in the county rose in 1997 from the number conducted in 1993. For each year in the same time period, the number of outpatient surgical procedures conducted in the county far exceeded the number of inpatient ones. In 1997, for example, there were more than twice as many outpatient procedures as inpatient. The move toward outpatient procedures is the result of health care providers seeking alternatives to hospitalization. Among the alternatives in the case of surgical procedures are the provision of those procedures on an outpatient basis performed in physician offices and ambulatory surgical centers. There has been a decline in Brevard County in utilization of other services Wuesthoff proposes for its 50-bed hospital. During the period of 1993-1997, while the population of Brevard County was growing at a rate in excess of 2% per year, obstetric admissions as a percentage of admissions to Brevard hospitals declined. Pediatric admissions did likewise. Not surprisingly, therefore, there is excess capacity for pediatric and obstetrical beds in Brevard County. With 66 reported available beds in Brevard County, the average daily census is about 34 beds. The average daily census for the 86 pediatric beds in the county is about 32 to 35. At the time of hearing, available data for 1998 showed a continued decline in pediatric bed demand and "[b]ased on the annualized data . . . a very slight increase" (Tr. 3402) in obstetric bed demand. The excess capacity demonstrated for the period from 1993 through 1997 remains. Although alternatives are available, they are not adequate for one reason. That reason is a competitive problem which exists in South Brevard County, discussed in Findings of Fact Nos. 91-107, below. Probable Economies and Improvements in Service that May be Derived from Operation of Joint, Cooperative, or Shared Health Care Resources: Section 408.035(1)(e), F.S. Wuesthoff does not propose its new hospital operate a joint, cooperative, or shared program with any entity except its Rockledge facility. It proposes the sharing of resources with its main facility in Rockledge. "The services that are being proposed for the South Brevard hospital [the proposed hospital] are a subset of what's there now." (Tr. 1257). The proposed services, therefore, are a duplication of existing services. There are some economies of scale and benefits enjoyed by a second campus of a hospital by virtue of the first hospital's existence, but generally, it is less efficient for a hospital to operate two campuses. The Need in the Service District for Special Equipment and Services which are not Reasonably and Economically Accessible in Adjoining Areas: Section 408.035(1)(f), F.S. Wuesthoff does not intend to provide equipment that is not available within the county or in adjacent districts. The Need for Research and Educational Facilities, Health Care Practitioners, and Doctors of Osteopathy and Medicine at the Student, Internship and Residency Training Levels: Section 408.035(1)(g), F.S. This need is met in Brevard County. The Brevard County hospitals are active in community training programs in conjunction with Brevard County Community Hospital and the University of Florida. Holmes Regional has institutional training programs with the University of Florida, All Children's Hospital, the local vo-tech, and the University of Central Florida, in addition to other community programs. Immediate and Long-term Financial Feasibility of the Proposal: Section 408.035(1)(i), F.S. a. Immediate Financial Feasibility. Immediate financial feasibility is determined by whether the applicant has adequate financial resources to fund the capital costs of the project and the financial ability to fund short-term operation losses. The project costs projected in Schedule 1 of Wuesthoff's application, taking into account inflation and other factors arising from delays associated with this proceeding, are reasonable and appropriate. Wuesthoff proposes to finance the project with $10.5 million in existing funds and $28 million in debt financing. At the time of hearing, Wuesthoff had $51 million in cash assets on its balance sheet available to cover the $10.5 million proposed to come from existing funds. The $28 million in debt financing was proposed in the application to be provided by "proceeds from a fixed rate bond issue." (Wuesthoff No. 1, Vol. I of II, Schedule 3 Assumptions.) "The interest rate for the debt is expected to be approximately 6.5%." (Id.) As part of its case for immediate financial feasibility, Wuesthoff presented a letter from The Robinson- Humphrey Company, Inc., dated April 6, 1999. In support of the opinion that Wuesthoff would qualify for tax exempt financing, the company wrote: Based on our long relationship and thorough understanding of Wuesthoff and its strategic direction, we believe that the rating agencies, bond insurers and capital markets will react positively to the Hospital's project. In addition, based on the Hospital's ability to secure a competitive insurance bid on its Series 1996 Bonds, the Hospital will be able to secure a new competitive bond insurance policy as well as credit ratings in the "A" category from the rating agencies in conjunction with the financing to help fund a portion of the proposed facility. Based on today's market conditions, the average interest rates available on a 30-year tax-exempt bond issue would be in the range of 5.25% to 5.50% based on an "A" rating category issue and "AAA/Aaa" rated issue with bond insurance, respectively. Although it is difficult to anticipate the interest rate environment throughout 1999, we would expect rates to be in the 5.50% to 5.75% range , using recent interest history as a benchmark. (Wuesthoff No. 3, pgs. 1 and 2). After testimony with regard to the letter by Wuesthoff's witness Rebecca M. Colker, qualified as an expert in health care finance, the following colloquy between Ms. Colker and Wuesthoff's counsel took place at hearing: Now, based on your assessment of the marketplace and your investigation of the marketplace, do you have an opinion as to whether Wuesthoff has the ability to finance the project that it proposed in [its] application . . .? A. Yes, sir, I feel [Wuesthoff] has the ability to finance the project. (Tr. 179). During the hearing, but after Ms. Colker's testimony, allegations surfaced publicly that Wuesthoff had violated the law with respect to its tax-exempt status as a "501(c)(3) organization" under the Internal Revenue Code by engaging in political activity and obtaining private benefit. Proof of the violations exposes Wuesthoff to revocation of its tax-exempt status. At the time of hearing, the IRS had not determined the truth of the allegations. If the IRS determines that the violations occurred, there are penalty options available to the Service short of revocation of Wuesthoff's tax exempt status. These options are referred to as intermediate sanctions. In addition, the IRS may enter a closing agreement with the offender in which an intermediate sanction is accepted in lieu of revocation. Wuesthoff, moreover, can take certain steps in mitigation of any ultimate penalty imposed by the IRS. Wuesthoff presented evidence that "upon a resolution of the allegations of wrongdoing which falls short of revocation of Wuesthoff's tax exempt status, there will be no cloud upon Wuesthoff's ability to obtain the tax exempt debt financing it has proposed." Joint Proposed Recommended Order of Wuesthoff Memorial, Inc., and the Agency for Health Care Administration, p. 39. Such a resolution, if it is the one chosen by the IRS, can reasonably be expected to occur within a single year. In the meantime, whatever the outcome of the IRS' dealing with the allegations, their very existence jeopardizes Wuesthoff's ability to obtain tax exempt debt financing. Given what he had heard and read about the allegations, Mr. Todd Holder, an investment banker who provides "basically the same services that Robinson-Humphrey would provide to a hospital client" (Tr. 3337) testified: At this time, my firm would not underwrite these bonds [proposed by Wuesthoff] and I wouldn't imagine at this time any firm would underwrite these bonds . . . (Tr. 3339). If Wuesthoff's tax exempt status were revoked, its bonds would be in jeopardy of being called to cover loss to existing bond holders. Such action would affect its bond rating. A BBB rating would involve approximately a 3% rise in interest rates. If its rating were to fall below investment grade, the interest rate could rise 5% or more. Based on a $28 million issue, the amount Wuesthoff proposes for financing the new facility, each percentage point rise in interest rate equates to an annual debt service cost of $250,000. Furthermore, a loss of its tax exempt status would make it more difficult to obtain bond insurance. It is by no means certain that the IRS will revoke Wuesthoff's tax exempt status as explained above. When a charitable organization continues to fulfill its charitable obligations, "the IRS has, in practice, not revoked [its] tax- exempt status but tried to exact some other type of penalty." (Tr. 3600). Furthermore, when an offending organization has removed from authority the individuals responsible for the violations, the IRS considers such action to mitigate the penalty it imposes. At bottom, predicting the action of the IRS is speculative. If the IRS does revoke Wuesthoff's tax exempt status, Wuesthoff has enough cash assets on hand to build the proposed facility without resort to financing. If it comes to that, however, Wuesthoff's decision to carry the costs of construction and getting the facility off the ground in the first few years of operation without debt financing has implications for the project's long-term financial feasibility. b. Long-term financial feasibility. Historically, AHCA has defined long-term financial feasibility as at least breaking even, if not making a profit, by the end of the second year of operation. Among other matters Wuesthoff must prove in order to satisfy the test employed by AHCA historically, it must demonstrate that "projected revenues can be attained in light of the projected utilization of the proposed service and average length of stay." OR-1, p. 18. The processes used by Wuesthoff's expert to conclude that the project is financially feasible were conservative. But the processes contained flaws. Wuesthoff, for example, projects that it will have a volume of 8,327 patient days at its South Brevard campus in year one of operation and 11,224 patient days in year two. For the same time periods, it projects volumes of 50,000 patient days at its Rockledge facility for both year one and year two of operation, the same volume it projects at its Rockledge facility for the 12-month period during which the new facility will be built. The projections are not reasonable. Building the new hospital will not increase the demand for hospital services in Brevard County. Rather, patients will be reallocated. The proposed facility will receive patients who otherwise would be hospitalized at Holmes Regional or the Wuesthoff Rockledge campus. It is not reasonable, therefore, for Wuesthoff to project that its patient days at the Rockledge facility will remain the same in years one and two of operation of the new facility as during the year's period of construction. The Agency concurred with Holmes Regional's expert that Wuesthoff's utilization projections were overstated but did not see the overstatement as a problem because "while the applicant may not fully attain what is projected within the application . . . [it] will attain a level which will be successful, especially for a provider that is financially stable at this point in time and has the resources to carry out this project." (Tr. 3474). There are other flaws. Wuesthoff assumed that for the Rockledge facility pro forma all payors' reimbursement increased 4% a year for years one and two of operation resulting in a net revenue increase in excess of 9% for the two-year period. Managed care companies are typically not allowing a 4% per year increase to providers. Medicare reimbursement (the largest single payor source) was not likely to increase 4% per year prior to the Balanced Budget Act of 1997 (see finding of fact no. 86, below). Medicare is the largest payor source currently at Wuesthoff, accounting for in excess of 50% of operating revenues. It is also the largest payor source projected for the proposed project. In the wake of the Balanced Budget Act of 1997, Medicare margins have declined and are expected to continue to decline. Wuesthoff's Medicare revenue in year one of operation were overstated by 4.3% and in year two by 5.7%. Wuesthoff's expert did not assess the impact of the Balanced Budget Act on the Wuesthoff projections at the time they were made since they were made before the effective date of the Act. But he had not assessed the impact of the Act on the pro forma prepared for the new facility as of March 1999, after effects of the Act's impact were observable. Presumably, no such impact analysis was undertaken because Wuesthoff is a hospital that takes action to contain costs, a method for reducing the negative impact of the Act on a hospital's revenue. Other assumptions that underlie projections by Wuesthoff in the application are also not reasonable. Wuesthoff assumed that Medicare HMO would generate higher charges than traditional Medicare, but have a length of stay almost half the time such that the net reimbursement per case would be identical. On a per day basis, Weusthoff assumed that the Medicare and Medicaid HMO patient will generate a greater per diem reimbursement than a traditional Medicare and Medicaid patient, respectively. This is not a reasonable assumption. The assumption that commercial insurance remains a significant payor at the South Brevard campus is critical to the financial viability of the project. If the pro forma had shown a more reasonable managed care percentage and less commercial insurance in the payor mix, net revenue would decrease by approximately $280,000 in year two. The projected costs of operation at the South Brevard campus are unrealistically low because the projected salary expenses have been understated. The nursing staff will comprise almost one-third of the total hospital FTEs for years one and two at the South Brevard campus. There currently exists a nursing shortage such that hospitals in Brevard County are having to pay a several thousand dollar signing bonus when hiring nursing staff. Projected nursing salaries for the first and second year of operation were only minimally higher above what Wuesthoff was paying its nursing staff three years earlier. The Needs and Circumstances of those Entities which Provide a Substantial Portion of their Services or Resources or Both, to Individuals not Residing in the District: Section 409.035(1)(k), F.S. Wuesthoff's application does not address providing a substantial portion of its services or resources to individuals not residing in the District. The Probable Impact of the Proposed Project on the Costs of Providing Health Services Proposed by the Applicants, Including the Effect on Competition: Section 408.035(1)(l), F.S. Brevard County's Unusual Shape Brevard County is relatively narrow from East to West and extremely long from North to South, stretching 72 miles from its northern border to its southern one. Because of its unusual geographic shape, the county is easily divisible into three areas, north, central and south. North Brevard County's population was approximately 68,000 in 1998. Central Brevard County's population was approximately 168,000 and South Brevard County's was approximately 234,700. Since 1970, the share of total county growth has consistently been lowest in North Brevard County, peaking at 13% in 1990, with a projected share of total county growth in 2003 at 10.4%. Next in order, Central Brevard County's share of growth since 1970 has been on the rise but has remained substantially lower than South Brevard County's. Its share of growth in 2003 is expected to be about 38.8%. The County's "growth has been predominantly in [S]outh Brevard." (Tr. 375). In 1971, its share of total county growth was 71.1%. Although "the share of growth in [S]outh Brevard has declined over time . . . it is still about 50%." (Id.) In 2003, South Brevard County's share of total growth is projected to be 51.2%. Consistent with its higher share in total county growth, more than half of Brevard County housing starts have within recent years occurred in South Brevard County and more than half of Brevard County employers and employees are located in South Brevard County. South Brevard, for some time, has been the most populated of the county's three areas. It will continue to be the most heavily populated area for a considerable time in the future. North Brevard has one hospital: Parrish Medical Center. Central Brevard has two hospitals: Wuesthoff and Cape Canaveral Hospital. The two are operated by different hospital systems; Wuesthoff by the Wuesthoff Health System and Cape Canaveral by Health First. South Brevard has two hospital facilities: Holmes Regional Medical Center and Palm Bay Community Hospital. Unlike the situation in Central Brevard the two South Brevard facilities operate under a single hospital license and are part of one system: Health First. Markets, Monopolies, and the Exercise of Monopoly Power A great deal of evidence was introduced by both Wuesthoff and Holmes about whether or not South Brevard County, by itself, constitutes a market for purposes of economic analysis and, if so, whether Health First through its operation of the two South Brevard hospitals has a monopoly on hospital services within the market. Further evidence was introduced about whether Health First, in fact, exercises monopoly power. Wuesthoff posits that South Brevard County, in and of itself, is an economic market for purposes of economic analysis. While there was evidence that indicated that South Brevard County is a market for purposes of economic analysis, none of the experts who testified could ever recall a proceeding in which they had been involved in which an area smaller than a county had ever been found to constitute a market. Wuesthoff's approach, moreover, is problematic in a Certificate of Need proceeding (as distinguished from other types of proceedings that typically employ economic analysis, such as anti-trust proceedings.) Brevard County is one part of AHCA District VII, a district established by the Legislature for health planning purposes. The district is divided into subdistricts. Subdistrict 1 is composed of Brevard County, nothing more and nothing less. But the subdistricts are not further divided for health planning purposes. There is no question (nor any argument from Wuesthoff otherwise) that Health First does not have a monopoly on hospital services over the entire subdistrict, let alone the district. Assuming for the sake of argument that South Brevard County is a market for purposes of this proceeding and that Health First has a monopoly over hospital services in that market, Health First has not exercised its monopoly power as would typically be expected on the basis of net price. First of all, while one might expect that an entity with monopoly power would exercise it, that expectation cannot be assumed in the case of not-for-profit hospitals, such as Holmes Regional. The not-for-profit hospital "can't act like a profit- maximizing organization because of the way it is structured." (Tr. 2958). More importantly, "the economic hallmark of the exercise of monopoly power is a price above the competitive level, one that permits the earning of an above-competitive profit rate." (Tr. 2946). Holmes Regional's average net prices are 90.8% of what would be expected. In contrast, Wuesthoff's are 115.1% of what would be expected. Neither of these is "extraordinarily far from what you would expect." (Tr. 2971). In the final analysis, pricing data with regard to both list prices and net prices, no matter the payor source, does not indicate "the systematic exercise of monopoly power by Holmes . . ." (Tr. 2973), in "[S]outh Brevard County." (Tr. 2975). It is clear, however, that residents of South Brevard do not have convenient access to Brevard County hospitals other than the two Health First hospitals in South Brevard, Holmes Regional and Palm Bay Medical Center. The other Brevard County hospitals are either too far away in distance or require too much travel time to reach by automobile for most of the residents of South Brevard. Consistent with this convenience factor, 82% of the South Brevard County residents discharged from hospitals in the first six months of 1998 were discharged from Holmes Regional and Palm Bay Community. Of the remaining South Brevard County residents discharged from hospitals, the highest percentage (6%) of patients were discharged from Sebastian River Medical Center. Sebastian River, while close to some South Brevard County residents, does not provide a high enough level of services in many cases to be a reasonable substitute for Holmes Regional. Even if it is convenient to use hospital services that are close by, a patient will chose a more inconvenient hospital if the nearby hospital does not provide services of reasonable quality at reasonable prices. The two Health First hospitals provide services of reasonable quality at reasonable prices. Nonetheless, the establishment of Wuesthoff's proposed hospital would substantially increase the accessibility of South Brevard County residents to a non-Health First facility. The presence of Wuesthoff's proposed hospital in South Brevard County would offer residents of South Brevard more of a meaningful choice. In essence, granting Wuesthoff's application would produce a more competitive environment for the hospital services to be offered by Wuesthoff in South Brevard County, whether South Brevard County constitutes a market or not. Wuesthoff presents a greater question for resolution in this proceeding than whether granting the application would simply provide more competition. Even though Holmes Regional's net pricing in general does not indicate that it is exercising monopoly power in South Brevard County, is there, nonetheless, a need for a more competitive environment for hospital services in South Brevard County? The answer to that question is "yes" when one considers competition from the perspective of managed care payors. Need for Competition for Hospital Services in South Brevard County. In general, competition enhances the quality of health care services even when services being provided are of high quality. Competition also provides an incentive for hospitals, including non-profit hospitals to serve patients more efficiently. Competition lowers the costs consumers pay for hospital services. When managed care payors are able to reduce their payments to hospitals, they are able to lower the premiums paid by the "end purchaser." (Tr. 609). If the end purchaser is an employer, the "employer then makes [its] business decision internally as to how much of that cost is passed along to the individual employee." (Id.) This effect of competition is the basis for a number of managed care contractors and employers' vigorous support of Wuesthoff's application, the success of which will create competition in South Brevard County. Wuesthoff's proposed hospital will spur competition which will benefit consumers by lowering Holmes Regional's prices. Managed care helps contain costs and injects price sensitivity into the market. At the same time, higher levels of hospital concentration are associated with lower levels of discounting to managed care companies. Managed care penetration has been increasing in Brevard County. In South Brevard County, managed care penetration has increased but mainly due to increase in enrollment in HFHP, Health First's managed care plan. Managed care penetration in South Brevard County achieved by HFHP "in itself is not the issue." (HRMC No. 75, p. 32.) With only one active HMO in South Brevard County, there is no incentive to achieve better rates for the ultimate consumers especially if the main HMO is part of the same organization as the hospital as in this case. "[I]f you have several large commercial plans . . . they will be able to get better rates from Holmes Regional than if you only have one." (Id., p. 32-33). Commercial HMO inability to contract with HRMC was considered by the agency as the most important factor in approving Wuesthoff's application. Health maintenance organizations, other than HFHP, do not have meaningful competitive ability to compete with HFHP in South Brevard County. In recognition of their inability to use Central Brevard County hospitals or Sebastian River Medical Center as substitutes, and to avoid losses caused by the lack of hospital competition in South Brevard County, Aetna and United, two large managed care payors in Brevard County, have embarked on an exit strategy with regard to South Brevard County. It is difficult for managed care payors to steer south Brevard residents to central Brevard hospitals. Patients are generally unwilling to change physicians when it becomes necessary to enter a hospital. Discharge data demonstrates the lack of overlap in physician privileges between South and Central Brevard. The Central Florida Health Care Coalition, an organization comprised of businesses and formed to address health care issues which includes the largest of Brevard County employers, supports Wuesthoff's application because of the competition it will create and a number of consumers expressed support for the Wuesthoff application based on the need for competition in South Brevard County. In contrast, not a single employer, large or small, testified in support of opposition to the application. Wuesthoff's new hospital would provide an alternative for managed care payors to negotiate hospital prices in South Brevard County. More favorable hospital prices in managed care contracts, in turn, would lead to managed care premiums that would be lower for managed care customers. Lower health care premiums enable larger numbers of consumers to purchase health care coverage, thereby reducing the number of persons who have no source of payments for health care services. The ability of managed care plans to negotiate hospital prices is dependent upon ability to engage in selective contracting, the ability of a managed care plan to refuse to include a hospital in its network of providers. Selective contracting induces hospitals to offer discounted prices to assure participation in a managed care plan's network of hospitals in order to avoid losing the managed care plan's business to other competitive hospitals. Selective contracting can only be an effective strategy if managed care contractors have meaningful choices among hospital providers. In Brevard County, only in the central area do managed care plans have more than one hospital system from which to choose meaningfully and only in Central Brevard County has there been any real competition among hospitals for managed care contracts. Holmes Regional does not face the threat of a loss of business if it refuses to contract with any one managed care plan because South Brevard residents for the most part will not seek hospital services outside South Brevard County. Without the threat of a loss of business, Holmes Regional has little, if any, incentive to offer reduced prices to managed care plans. The lack of incentive for Holmes Regional to reduce prices to managed care plans was demonstrated by several analyses, including one showing that from 1995 through 1998, net prices paid by all managed care contractors to Holmes Regional were on average 32% higher per year than those paid to Wuesthoff, which has competition from another hospital in Central Brevard County Apart from pricing analyses, the lack of competition in the managed care arena for Holmes Regional was demonstrated by its ability to resist entry into any per diem managed care contracts despite efforts by some managed care contractors to negotiate such agreements with Holmes Regional. Per diem contracts are a favored from of contracting by managed care payors because they tend to enable managed care payors to predict the level of hospital payment to which they will be exposed. Such contracts are commonly found where there is competition among hospitals. In contrast, as is to be expected of a hospital in a competitive environment, most of Wuesthoff's contract with managed care payors are per diem contracts. The Applicant's Past and Proposed Provision of Health Care Services to Medicaid Patients and the Medically Indigent: Section 408.035(1)(n), F.S. Wuesthoff has "a history of providing care to the medically indigent population." (Tr. 1244). Its commitment to continue to provide such care at the proposed facility has been discussed. Whether Less Costly, More Efficient, or More Appropriate Alternatives to the Proposed Inpatient Services are Available: Section 408.035(2)(a), F.S. The greater weight of the evidence establishes that denial of the application is less costly and more efficient. The new facility will cost $38 million to build. At the same time, existing providers are operating efficiently and have unused capacity. In fact, there is insufficient utilization of the inpatient acute care services in existence in Brevard County. The subdistrict occupancy rate is "about 54% . . .[with] at least [hundreds of] beds that are unoccupied at any point in time with the county." (Tr. 3385). Whether the alternative of denying the application is more appropriate in light of the cost of the project and efficiency considerations turns on the weight to be given Wuesthoff's case for the need for competition in the managed care arena in South Brevard County. Whether the Existing Facilities Providing Similar Inpatient Services are being Used in an Appropriate and Efficient Manner: Section 408.035(2)(b), F.S. Existing facilities are being used in an efficient manner. Whether the status quo is appropriate, again, turns on the weight to be given Wuesthoff's case for the need for competition. That Patients Will Experience Serious Problems in Obtaining Inpatient Care of the Type Proposed in the Absence of the Proposed New Service: Section 408.035(2)(d), F.S. There was no evidence that patients will experience serious problems in obtaining inpatient care of the type proposed by Wuesthoff for its South Brevard County if the application is not granted. Rule Criteria Rule 59C-1.030, Florida Administrative Code, sets forth "health care access criteria . . . [i]n addition to criteria set forth in Section 408.035, Florida Statutes . . .". Among the criteria are [t]he contribution of the proposed service in meeting the health needs of members of such medically underserved groups, particularly those needs identified in the . . . State Health Plan as deserving of priority." The first State Health Plan preference favors an applicant that provides a disproportionate share of Medicaid and charity care patient days in relation to other hospitals within the subdistrict. Wuesthoff has provided its fair share of Medicaid and charity care patient days in the past and proposes to continue to do so at the new facility if approved. But Wuesthoff is not a disproportionate share provider. As to the second preference which considers the current and projected indigent inpatient case load, the proposed facility size, and the case and service mix, Wuesthoff's application partially complies with preference in that it proposes to provide indigent care. But, Medicaid and indigent members of the population were not shown to have been denied access to hospital services in Brevard County. Approval of the facility, moreover, will not improve access or increase the number of beds since approval will result in a net loss of 50 beds in the county. The fourth preference favors an applicant with a record of accepting indigent patients for emergency care. Wuesthoff meets the preference. The fifth preference favors applicants for a type of hospital project if the facility is verified as a trauma center. Holmes Regional will remain the only verified trauma center in the subdistrict, even if the application is approved. The sixth preference favors applicants who document that they provide a full range of emergency services. The new facility will provide emergency services but not a full range unless the emergency services provided by Wuesthoff at its Rockledge campus are considered. Because the 50-bed hospital will not provide tertiary services nor high-level trauma services, "[t]he complicated or trauma cases will . . . go to Holmes Regional Medical Center" (Tr. 3384), the hospital campus closest to the new facility. The seventh preference favors applicants not fined by AHCA for any violation of emergency service statutes. Wuesthoff meets this preference. The eighth preference favors applicants who demonstrate that the subdistrict occupancy rate is at least 75%, or in the case of exiting facilities, where the occupancy rate for the most recent 12 months is at least 85%. Wuesthoff did not show that it meets this preference. The ninth preference of the State Health Plan favors an applicant with a history of providing a disproportionate share of the subdistrict's acute care and Medicaid patient days and is a Medicaid disproportionate share provider. Wuesthoff does not meet this preference.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is recommended that the Agency for Health Care Administration enter a final order denying Wuesthoff Memorial Hospital, Inc.'s application for CON 8740. DONE AND ENTERED this 12th day of July, 2000, in Tallahassee, Leon County, Florida. 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 12th day of July, 2000. COPIES FURNISHED: Richard A. Patterson, Esquire Agency for Health Care Administration Fort Knox Building Three, Suite 3431 2727 Mahan Drive Tallahassee, Florida 32308-5403 Terry Rigsby, Esquire Blank, Rigsby & Meenan, P.A. 204 South Monroe Street Tallahassee, Florida 32301 Stephen K. Boone, Esquire Boone, Boone, Boone & Hines, P.A. Post Office Box 1596 Venice, Florida 34284-1596 David C. Ashburn, Esquire Smith & Ashburn, P.A. 1330 Thomasville Road Tallahassee, Florida 32303 Sam Power, Agency Clerk Agency for Health Care Administration Fort Knox Building Three, Suite 3431 2727 Mahan Drive Tallahassee, Florida 32308-5403 Julie Gallagher, General Counsel Agency for Health Care Administration Fort Knox Building Three, Suite 3431 2727 Mahan Drive Tallahassee, Florida 32308-5403
