Craven Regional Medical Authority v. N.C. Department of Health & Human Services

Citations: 625 S.E.2d 837; 176 N.C. App. 46; 2006 N.C. App. LEXIS 414Docket: COA05-284

Court: Court of Appeals of North Carolina; February 21, 2006; North Carolina; State Appellate Court

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Craven Regional Medical Center (Craven), located in New Bern, North Carolina, operates the only two magnetic resonance imaging (MRI) scanners in Service Area 23. In 2002, Craven sought an amendment to the State Medical Facilities Plan (SMFP) for an additional MRI, which was subsequently included in the 2003 SMFP. Four applicants, including Craven and Coastal Carolina Health Care, P.A. (Coastal), applied for a Certificate of Need (CON) from the North Carolina Department of Health and Human Services. The Agency found both applications met the necessary criteria but determined that Coastal's application was the superior proposal given the need for only one additional MRI. After an administrative hearing, the administrative law judge (ALJ) upheld the Agency's decision to grant the CON to Coastal. Craven's exceptions to this decision were denied, leading to an appeal by Craven.

The standard of review for appeals from administrative agency decisions is determined by the nature of the assigned errors. When a legal error is claimed, a de novo review is applied. In cases where the appeal alleges the agency's decision is arbitrary or capricious or relates to fact-intensive issues, the whole-record test is utilized. Craven argues that the Agency erred in finding Coastal's Certificate of Need (CON) application conformed to Criterion 3, citing three main reasons: the unreasonableness of Coastal's projections for achieving 2900 scans by the third year, reliance on flawed physician letters, and the Agency's improper use of post hoc rationalizations to support these projections. 

Criterion 3 requires that applicants demonstrate a clear need for the proposed services, particularly for underserved groups. The relevant regulations mandate that Coastal must show a reasonable projection of 2900 procedures in its third year based on careful documentation and data. Craven claims that Coastal’s application is nonconforming due to inflated assumptions about scans per patient, arguing that the Agency's finding of conformity lacked evidentiary support and was arbitrary. In evaluating this claim, the reviewing court applies the whole-record test to ascertain whether substantial evidence supports the Agency's decision, emphasizing that substantial evidence must be adequate for a reasonable mind to accept. The arbitrary or capricious standard is stringent, requiring a demonstration that the agency's decision lacked fair consideration or reasoning.

The whole record test mandates that an agency's judgment is not to be replaced when there are reasonably conflicting views, even if a different conclusion might have been reached de novo. Evidence supporting contrary findings does not permit a substitution of judgment. For Criterion 3 compliance, an applicant must reasonably project performing 2,900 procedures in its third operational year, and such projections inherently lack absolute certainty. Craven challenges Coastal's use of a 1.41 procedure-to-patient ratio, arguing inconsistency in reporting practices among MRI providers. However, substantial evidence supports the Agency's finding that this ratio was reasonable. The Agency conducted a thorough analysis of Coastal's projections, rejecting Craven's criticisms and noting that existing facility ratios range from 1.11 to 2.24. Despite contradictory testimony, admissible evidence supported the 1.41 ratio. Coastal's methodology was validated by actual utilization data from 2002, revealing that its projections closely matched actual scans performed, thus reinforcing the reasonableness of the ratio. Craven further argues that Coastal's application was nonconforming due to reliance on physicians' letters, which it claims are inadmissible hearsay. However, Craven did not object to these letters during the administrative hearing, having introduced them into evidence without restrictions. Consequently, it cannot later contest their consideration. Lastly, Craven asserts that the Agency improperly used 'after the fact' rationales to justify Coastal's projections.

The Agency's decision regarding Coastal's application was supported by substantial evidence, and it did not rely on 'after the fact rationales.' While Craven presented arguments suggesting Coastal's nonconformance with Criterion 3 and N.C. Gen. Stat. 131E-183 (a)(5), these claims were determined to be without merit. Specifically, Craven argued that Coastal's financial feasibility was based on overstated procedural volumes but failed as it relied on the same flawed premise that was previously dismissed. Additionally, Craven contended that Coastal's application was nonconforming due to a lease agreement with GE Capital Healthcare Financial Services, which expired before the CON review. However, the Agency found that the documentation from GE was adequate to demonstrate Coastal's financial feasibility despite the lease's expiration. The Agency clarified that an expired lease does not render an application nonconforming, as financing offers do not need to remain open indefinitely. The findings established that Coastal met Criterion 5 requirements, demonstrating both immediate and long-term financial feasibility based on reasonable cost projections. The precedent set in Burke Health Investors v. N.C. Dep't of Hum. Res. affirmed that a letter of interest from a bank suffices for Criterion 5 compliance, further supporting the Agency's findings that the lease proposal demonstrated GE's intent to lease the MRI equipment contingent on CON approval.

A lender is not expected to commit to lease terms indefinitely before an applicant receives a Certificate of Need (CON). Craven cites Johnston Health Care Ctr. v. N.C. Dep't. of Hum. Res. to argue that a bank's commitment letter was insufficient since it expired before the project began. However, the lease in this case pertains to cost projections, not financing availability, making Craven's reliance on Johnston irrelevant. Craven's arguments regarding compliance with specific statutory criteria (N.C. Gen. Stat. 131E-183 (a)(4), (6), and (18a)) are largely abandoned due to a lack of supporting authority for Criteria 4 and 6. Regarding Criterion 18(a), which examines the impact of proposed services on competition, Craven claims that Coastal's anticipated physician referrals would harm competition. Craven, currently holding a monopoly with two MRI scanners, argues that controlling all three would enhance competition, an illogical stance that is rejected. Coastal demonstrated the cost-effectiveness of its project and its beneficial effect on competition, supported by evidence indicating it would have the lowest net revenue per procedure. Craven's assertion that Coastal's application was flawed due to self-referrals under N.C. Gen. Stat. 90-406 is acknowledged as a viable issue but is ultimately dismissed. Coastal Carolina Health Care plans to refer its patients to its Imaging Center under independent supervision, thus complying with statutory requirements against self-referrals.

To issue a Certificate of Need (CON), the Agency must evaluate applications against the criteria in N.C. Gen. Stat. 131E-183, as established in Britthaven, Inc. v. N.C. Dep't of Human Res. The Department asserts that it is not responsible for verifying compliance with other statutes during the CON review, emphasizing that enforcement of unlawful self-referrals falls to other state agencies per N.C. Gen. Stat. 90-407. Courts defer to an agency's reasonable interpretation of the statutes it administers, and here, the Agency's interpretation aligns with the law, confirming that it did not err in determining that Coastal's application did not breach self-referral laws.

Craven's argument that the Agency's preference for Coastal lacked a reasonable basis is rejected. In competitive reviews, the Agency can compare applications of conforming applicants without specific statutory requirements for comparative factors. The Agency considered geographic distribution, location, access by underserved groups, operating costs, revenues per procedure, and access to an open MRI scanner. Evidence supported that an additional MRI scanner would benefit the service area and that Coastal would serve a higher percentage of Medicare patients. Coastal proposed an open MRI scanner, deemed more effective, while Craven proposed a closed scanner and had a higher net revenue per procedure. Given substantial evidence supporting the Agency's decision, deference is warranted, and it is inappropriate for the court to substitute its judgment.

Regarding Craven's claim that Coastal improperly amended its CON application by substituting a mobile closed MRI, the argument is also rejected, as this occurred post-decision and involved seeking a material compliance determination from the CON Section.

Coastal notified the CON section of its intent to temporarily lease a closed mobile MRI scanner during the construction of a proposed fixed, open MRI scanner. The court's review is restricted to the final agency decision, which granted Coastal's request for a material compliance determination post-issuance of the CON. Craven's appeal is based on events occurring after the final decision, for which it did not file a notice of appeal as required by Rule 3(d) of the Rules of Appellate Procedure. This failure to provide proper notice is a jurisdictional issue, preventing the court from reviewing the matter. 

In Craven's final argument, it asserts that the Agency's findings regarding compliance with Criterion 5 were misleading and lacked certain facts. The court disagrees, stating that it is not required to find every fact presented and only needs to establish those pertinent to resolving the dispute. The Agency concluded that Craven conformed to Criterion 5, which was deemed sufficient. Coastal's cross-assignment of error regarding this finding is rendered unnecessary due to the court's affirmation of the Agency's approval of Coastal's CON application, which was supported by evidence and met statutory criteria. The decision is affirmed with judges WYNN and JOHN concurring.