Sacred Heart Health System, Inc. v. Infirmary Health System

Citations: 155 So. 3d 969; 2010 Ala. Civ. App. LEXIS 276; 2010 WL 3722565Docket: 2090239

Court: Court of Civil Appeals of Alabama; September 24, 2010; Alabama; State Appellate Court

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The opinion issued on June 25, 2010, has been withdrawn and replaced with this updated version. Sacred Heart Health System, Inc., a not-for-profit corporation located out-of-state, operates three hospitals and other medical facilities in northwestern Florida. It owns Sacred Heart Medical Group (SHMG), comprising 143 physicians in northwestern Florida and south Baldwin County, Alabama. SHMG is not a separate legal entity, but it operates under employment contracts with Sacred Heart, which handles consolidated billing and shares a single billing number among its physicians. 

In response to increased patient demand, Sacred Heart sought to provide additional office space for three SHMG physicians in Baldwin County, starting negotiations for property to construct a medical office building (MOB) as early as 2003. Sacred Heart entered a preconstruction agreement with Colonial Pinnacle MOB, LLC, to develop and lease a 44,000-square-foot facility, which will include an ambulatory surgery center, medical-office suites, shared spaces for non-SHMG physicians, a diagnostic center, a rehabilitation center, and a laboratory. 

The MOB project is marketed as a means to enhance healthcare services in south Baldwin County. Sacred Heart's website emphasized its long-term commitment to meet growing community health needs, highlighting plans to recruit an oncologist to provide new services, including mammography and CT scans, which are currently unavailable in the area. Board meeting minutes from March 31, 2006, outline the MOB planning, indicating intentions to construct a 60,000-square-foot building with various medical services. Additionally, the construction of an ambulatory surgery center, which requires a certificate of need, has been applied for, with further discussions noted in management board minutes about property acquisition and partnerships for the surgery center project.

On August 17, 2006, SHMG management discussed a letter of intent to purchase property for a Medical Office Building (MOB) project and engaged in detailed negotiations for an ambulatory-surgery center with Pleasure Island Ambulatory Surgery Center, LLC. The records highlight references to a medical facility in Pace, Florida, which includes laboratory, imaging, outpatient surgery, rehabilitation, physical therapy, and physician offices. The Sacred Heart website announced a partnership with Johnson Development, LLC, to construct medical office parks, including a facility in Pace, emphasizing improved outpatient services for Santa Rosa County residents as part of the Sacred Heart Hospital System.

South Baldwin Regional Medical Center filed a petition with the State Health Planning and Development Agency (SHPDA), arguing that Sacred Heart's MOB development required a certificate of need (CON). Infirmary Health System intervened in support. The administrative law judge determined he lacked jurisdiction, remanding the issue to the CON Review Board (CONRB). Due to the lack of a ruling within 45 days, South Baldwin and IHS petitioned the Montgomery Circuit Court for judicial review, initially seeking a fact-finding proceeding. They later amended their petition to assert that Sacred Heart's MOB project required a CON and sought declaratory and injunctive relief under various Alabama statutes, specifically requesting the court to determine the necessity of a CON and to enjoin Sacred Heart from offering services until compliance was achieved. Both parties sought summary judgment, which was denied, and the case was set for trial based on a joint submission of evidence.

The circuit court determined that the MOB project was eligible for the physician’s office exemption under Ala.Code 1975, 22-21-260(6), classifying it not as a new health-care facility requiring a Certificate of Need (CON) under Ala.Code 1975, 22-21-263(a)(1). Consequently, Sacred Heart was not mandated to obtain a CON to provide health-care services at the MOB. Upon reviewing a post-judgment motion, the circuit court clarified that the exemption applied specifically to the three SHMG physicians relocating their practices to the MOB. It also ruled that any additional physicians or services would necessitate obtaining a CON. Sacred Heart appealed this judgment to the Alabama Supreme Court, while opponents cross-appealed; the Supreme Court transferred both cases to the current court. Oral arguments were held on April 21, 2010. The review of the circuit court's judgment is conducted de novo, meaning there is no presumption of correctness, particularly since the trial court heard the case without a jury through stipulations and written submissions. The court acknowledged that the State Health Planning and Development Agency's interpretation of CON statutes should be given significant weight. The relevant statutes define 'health care facility' broadly but specifically exclude private physician and dentist offices from this classification.

Section 22-21-260 defines 'health services' as clinically related services, including mental health and substance abuse services, typically provided by health care facilities. It distinguishes these from independent professional practices. 'Institutional health services' are defined as those provided through health care facilities or health maintenance organizations. Section 22-21-263 mandates that all new institutional health services proposed in the state are subject to review and must align with the State Health Plan. New institutional health services include construction or establishment of health care facilities or health maintenance organizations. Section 22-21-265 requires that no new institutional health service can be operated or offered without obtaining a certificate of need (CON) from the State Health Planning and Development Agency (SHPDA).

The core issue in the appeals is whether Sacred Heart must obtain a CON before providing services in the Medical Office Building (MOB). While both parties agree the MOB does not qualify as a health-maintenance organization, they disagree on whether it meets the definition of a health-care facility under Section 22-21-260(6) or if it is exempt as a physician's office. Sacred Heart claims the MOB fits the exemption, which excludes private physicians' offices from the health-care facility definition. Opponents argue it does not qualify for the exemption, citing the project's design to include an ambulatory surgery center, rehabilitation center, laboratory, and diagnostic services, indicating a broader scope than merely serving as a primary office. Thus, the primary question is whether the MOB is a health-care facility requiring a CON or qualifies as a physician's office exempt from CON requirements.

Sacred Heart acknowledges that a Certificate of Need (CON) is necessary for any ambulatory-surgery center within the Medical Office Building (MOB) but argues it is not responsible for obtaining one since PIASC, which intended to provide the services, pursued a CON independently. Sacred Heart claims that the intended use of part of the MOB does not restrict the remaining areas’ utilization. Following PIASC's failure to secure a CON, Sacred Heart plans to repurpose the space into office areas for SHMG or non-SHMG physicians. The opposing parties argue that the MOB was not merely meant for a multi-specialty practice but was intended to introduce new health services, including an ambulatory-surgery center and oncology services, thus requiring a CON. They assert that the project must be evaluated as a whole rather than in parts, citing various administrative rulings that support a comprehensive review to determine if the project qualifies for a physician’s office exemption or necessitates a CON. The CONRB's criteria for the physician's office exemption include: exclusive provision of services by the identified physicians, operation at the primary office, billing through the physicians’ practice, and non-use of equipment for inpatient care or by a healthcare facility.

Sacred Heart contends that the Medical Office Building (MOB) project meets the criteria for classification as a physician’s office, primarily because it will house the primary offices of SHMG physicians and their diagnostic equipment, previously located in Foley. Sacred Heart asserts that only SHMG physicians will use this equipment, although evidence suggests that SHMG physicians without primary offices in the MOB will also access it. Additionally, Sacred Heart claims that non-SHMG physicians in other areas of the MOB will not have access to this diagnostic equipment. All SHMG physicians utilize the same billing number, with a dedicated division managing patient billing. Sacred Heart emphasizes that the equipment will not be used for inpatient care or by any healthcare facility.

Opponents challenge Sacred Heart's assertion, citing DR-116, which determined that the Mobile Urology Group’s (MUG) proposed facility required a Certificate of Need (CON). The CONRB's ruling indicated that MUG’s plan, involving the addition of new specialists and significant medical equipment, exceeded the definition of a physician’s office. The CONRB highlighted the extensive scope of MUG’s practice and the versatile use of the proposed VARIAN Medical System.

In DR-110, the CONRB ruled against Sacred Heart, stating the proposed multi-floor facility for advanced cardiovascular care did not qualify for the physician’s office exemption. The ruling noted that the facility's design indicated an intent for multiple physicians to use shared equipment for procedures akin to those performed in a hospital, thus necessitating a review under CON statutes to prevent healthcare duplication and waste.

The CONRB determined that the design of the large multi-floor facility indicates an intent to share its resources for treating a broader patient base than just those of the primary physicians at the facility. Evidence shows the MOB project does not meet the criteria for the physician’s office exemption, as it includes equipment for treating patients beyond those served by SHMG physicians. The project exceeds the common definition of a ‘physician’s office’ and requires review under CON regulations. 

The court concluded that the MOB project, despite including SHMG physician offices, is not merely an office expansion but encompasses additional facilities like an ambulatory surgery center and a laboratory, thereby undermining the goals of the CON statutes which aim to prevent unnecessary healthcare facility construction through mandatory reviews. Sacred Heart's development of the 44,000-square-foot MOB without securing a letter of non-reviewability or a CON was deemed premature. 

The judgment of the circuit court is reversed, and the matter is remanded for a declaration that the MOB project requires CON review. Additionally, the circuit court is to enjoin Sacred Heart from providing healthcare services in the MOB until a CON is obtained. Other issues raised by the parties are not addressed, as the decisive issue resolves the case. The court also noted that the area designated for the ambulatory surgery center is to be subleased to Pleasure Island Ambulatory Surgery Center, LLC, which had previously been denied a certificate of need.

The redacted minutes from the August 17, 2006, SHMG management board meeting are incomplete, limiting the readability of the discussion about the MOB project. Sacred Heart contends that the argument necessitating a Certificate of Need (CON) prior to the development of the MOB project, specifically due to the ambulatory-surgery center's inclusion, was not presented in the circuit court. In contrast, opponents assert that they consistently challenged the MOB project from its inception, arguing that it constituted a new health-care facility requiring a CON based on its overall purpose, design, and the new institutional health services it intended to provide. The court agrees that the opponents’ challenges encompass the argument regarding the ambulatory-surgery center's impact on the need for a CON for the entire project. Additionally, under Rule 410-1-7-02(1) of the Alabama Administrative Code, individuals may request a letter of non-reviewability from the SHPDA's executive director regarding the reviewability of a project. Such requests must be submitted in writing with complete factual information and any additional documentation deemed necessary. Sacred Heart did not pursue a letter of non-reviewability for the MOB project.