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

Citations: 155 So. 3d 989; 2013 WL 135851Docket: 2090239, and 2120658

Court: Court of Civil Appeals of Alabama; January 10, 2013; Alabama; State Appellate Court

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The Alabama Supreme Court has reversed a prior judgment in Case No. 2090239 and remanded the case to the trial court for 90 days to conduct further proceedings. The trial court is instructed to apply the physician's office exemption test as outlined in the Supreme Court's opinion to the leased space of Sacred Heart Medical Group (SHMG) within a medical-building project. Sacred Heart Health System, Inc., an out-of-state not-for-profit corporation, operates medical facilities in Florida and Alabama and owns SHMG, which consists of 143 physicians. SHMG is not a separate legal entity, but its physicians have employment contracts with it, share billing practices, and are recognized as a medical group by insurers. Sacred Heart has been seeking to expand office space for its physicians in Baldwin County, having initiated plans for a medical-office building (MOB) that would include various healthcare facilities. South Baldwin Regional Medical Center filed a petition with the State Health Planning and Development Agency (SHPDA) to declare that Sacred Heart’s MOB plans required a certificate of need (CON), with Infirmary Health System intervening to support this petition.

The administrative law judge (ALJ) assigned to the case ruled that he lacked jurisdiction and remanded the petition to the Certificate of Need Review Board (CONRB). Due to inaction from both the CONRB and the ALJ within 45 days, which constituted a denial of the petition under Ala.Code 1975, 41-22-11(b), South Baldwin and IHS (the opponents) filed a petition for judicial review in the Montgomery Circuit Court, as allowed by Ala.Code 1975, 41-22-20. Initially, the opponents sought an order for a fact-finding proceeding regarding the petition for a declaratory ruling. They later amended their request, seeking a declaration that Sacred Heart's medical office building (MOB) project required a Certificate of Need (CON) to provide health-care services.

In their final amended petition, the opponents requested both declaratory and injunctive relief under various Alabama laws, including the Alabama Administrative Procedure Act and the Declaratory Judgment Act. They specifically sought a ruling that Sacred Heart needed a CON to operate services in the MOB and that the court should prevent Sacred Heart from doing so until a CON was obtained. 

Both Sacred Heart and the opponents filed motions for summary judgment, which were denied by the circuit court, leading to a trial held on submitted evidence rather than a bench trial. The circuit court ruled that the MOB project fell under the "physician's office exemption" in Ala.Code 1975, 22-21-260(6), thus not requiring a CON. After a post-judgment motion, the circuit court clarified that the exemption applied only to three specific physicians relocating their offices to the MOB, but any additional physicians or services would necessitate a CON.

Sacred Heart appealed the decision, and the opponents cross-appealed. The Alabama Supreme Court transferred the case to a lower court, where oral arguments were held on April 21, 2010. Following the arguments, the court reversed the trial court's judgment, concluding that the entire MOB project did not qualify for the physician’s office exemption due to the use of diagnostic equipment by physicians whose primary offices were not located in the MOB, thereby necessitating CON review.

The court examined whether the physician’s office exemption (POE) from the Certificate of Need (CON) process applied to a medical-building project leased by Sacred Heart Health System for its Baldwin County physicians. The CONRB’s established criteria for the POE, derived from a prior administrative ruling regarding The Institute for Advanced Cardiovascular Care, outlined four essential conditions: (1) services and equipment must be exclusively for the identified physicians' patients; (2) services and equipment must be utilized at the physicians' primary office; (3) all related patient billings must be through the physicians' practice; and (4) the equipment must not be used for inpatient care or by a healthcare facility. The supreme court referred to these criteria as the 'Heart-Lung test.' Upon reviewing the case, the court modified this test to reflect legislative intent and the purpose of the POE, adopting a new version that allows services to be provided at any office of the physicians and removes the restriction regarding billings on behalf of third parties. The modified criteria maintain the original framework while clarifying the application of the POE.

An administrative agency's interpretation of a statute is not entitled to deference if it contradicts legislative intent. Statutory provisions will take precedence over conflicting state agency regulations. The supreme court remanded the case back to the trial court with instructions to apply a modified POE application test to the SHMG leased space in the medical-building project. Following this directive, the trial court allowed limited discovery and conducted a hearing, resulting in an order on April 10, 2013, detailing its findings. 

The Sacred Heart medical park was established through a joint agreement between Sacred Heart Health System Inc. and Colonial Pinnacle MOB, LLC, with Colonial Pinnacle as the owner and Sacred Heart as the primary tenant, holding seven leases for most of the space. Sacred Heart Health System, which operates hospitals and healthcare facilities in Florida and employs around 143 physicians, operates the Sacred Heart Medical Group (SHMG) as a non-legal entity under its umbrella. The medical park was designed to provide facilities for Sacred Heart’s physicians in Baldwin County, including an outpatient surgery center, diagnostic center, laboratory, and rehabilitation center, none of which are currently offered by its Baldwin County physicians.

The court determined that the medical park's leaseholds do not meet the POE application test, as the seven leases vary in size and rental rates, indicating they are treated as separate facilities rather than a singular physician's office. Specifically, the diagnostic and ambulatory surgery centers are not designated as physician practices, and the Same Day Walk In clinic will operate as an outpatient clinic under Alabama law. Consequently, the court concluded that at least three facilities within the medical park do not qualify as physicians' offices, and applying the POE to them would violate the CON law.

The Court determines that the Physician Office Exemption (POE) does not apply to the leaseholds of the ambulatory surgery center, diagnostic facility, and Same Day Walk In, necessitating a Certificate of Need (CON) for these facilities. It finds that services provided will not be exclusively used by the identified physician owners or their patients, as patient billing will not be managed through the physicians’ practices, and the equipment will serve a health care facility. The Alabama Supreme Court's interpretation of the POE application test reinforces that it should not bypass relevant statutory provisions in Ala. Code 1975. Specifically, applying the POE to the entire medical park would contravene the statutory language concerning health services and operating expenses, as Sacred Heart's annual operating costs exceed the $800,000 threshold established in 22-21-263(a)(2). Consequently, the Court mandates that Sacred Heart Health System obtain a CON from the State Health Planning and Development Agency. 

In the context of consolidated appeals, Sacred Heart argues that the trial court overstepped its remand instructions by determining that the entire medical office building (MOB) must comply with CON requirements, asserting that only the space leased for its SHMG physicians should be considered. This claim relies on a specific reference from the Alabama Supreme Court, which clarified that the examination should focus on the leased space utilized by the physicians' practice, not the entire building.

Sacred Heart argues that the trial court failed to adhere to the supreme court's remand instructions by considering all areas of the Medical Office Building (MOB), including those designated for an outpatient surgery center, rather than only the portions leased to SHMG physicians when applying the POE application test. Sacred Heart believes the supreme court's language limited the trial court's analysis to specific leaseholds relevant to SHMG physicians. In contrast, IHS asserts that the trial court complied with the remand by evaluating each leasehold individually and determined that certain leases (primary-care, medical oncology, co-op timeshare, and community room) satisfied the POE application test. IHS clarifies that the trial court did not require a Certificate of Need (CON) for the MOB itself but only for specific leaseholds. South Baldwin argues that the supreme court did not restrict the trial court's consideration of the MOB, claiming the MOB should be viewed in its entirety. South Baldwin interprets "SHMG leased space" broadly, arguing it differentiates between space retained by the developer and that leased by Sacred Heart, rather than limiting the space for POE application test considerations. However, the supreme court's language indicates that the relevant consideration was the space leased for SHMG physicians' use, specifically for family practice, walk-in care, and diagnostic services, excluding the outpatient surgery and rehabilitation center from the POE test analysis.

The supreme court's opinion establishes that the areas designated for the outpatient surgery center and the rehabilitation center in the Medical Office Building (MOB) should not be included in the POE application test, as these plans were either abandoned or not realized due to the failure to obtain a Certificate of Need (CON). These spaces were not intended for use by the SHMG physicians, who are applying the POE to the MOB. The trial court's error in considering these areas was noted, but it did not warrant a reversal of the trial court's order because the POE application test was correctly applied to the spaces intended for SHMG physicians.

The trial court concluded that the SHMG leased space did not satisfy the four-part POE application test, which required determining if the services and equipment in that space would be used exclusively by SHMG physicians. The evidence presented did not support the trial court’s conclusion. South Baldwin and IHS argued that the MOB's design was similar to a Sacred Heart facility in Pace, Florida. However, testimony from Peter Heekathorn clarified that, while the services might be similar, the laboratory and diagnostic center in the MOB would be exclusively for SHMG physicians, and non-SHMG physicians would not be allowed to send patients there. This exclusivity was reaffirmed in Heekathorn's affidavit from October 10, 2008.

Tammy Nall, the administrative director for Sacred Heart, affirmed in her October 13, 2008, affidavit that the laboratory and diagnostic center in the MOB would exclusively serve SHMG physicians. This assertion is corroborated by Sacred Heart's responses to interrogatories, which confirm that all personnel in the SHMG leased space are SHMG employees. Aside from vague references at a board meeting comparing the MOB to a facility in Pace, Florida, and certain advertisements, evidence indicates that the equipment and space in the MOB will solely be utilized by SHMG physicians for patient diagnosis and treatment.

The trial court was required to evaluate whether services and equipment would be used at "any office" of the physicians, a modification influenced by the supreme court to prevent limiting service provision to a primary office. Evidence suggests that the MOB would serve as the primary office for the relocating SHMG physicians. Diagnostic equipment previously located in individual offices and a shared facility in Foley will be transferred to the MOB, raising the question of whether centralizing this equipment meets the requirement for use at any office.

The trial court also ruled that the laboratory and diagnostic center did not satisfy the third factor of the POE application test, which mandates that billing must be conducted through or on behalf of the physicians' practice. Heckathorn testified that all billing for SHMG physicians is handled by SHMG, and funds from these billings are considered SHMG receipts. Regarding the walk-in clinic, Heckathorn clarified that it would not function as a freestanding emergency department, would not operate continuously, and would not offer trauma care or advanced technology. Nall further indicated that the clinic would provide same-day appointments rather than urgent care, despite some interchangeability in terminology during planning discussions.

Barton testified that Dr. Cynthia Harbaugh and other SHMG physicians would continue to provide same-day, walk-in care at the MOB in Orange Beach, with a designated area for walk-in patients to separate them from those seeking routine care. Nall's affidavit indicated that while the walk-in clinic, laboratory, and family-practice areas are physically distinct, they would operate in a coordinated manner for SHMG patients. The evidence supports that all patient billing from these services would be handled by SHMG's billing department, and that Dr. Harbaugh's practice model would remain unchanged, treating non-trauma patients without appointments.

The trial court's assessment of whether the SHMG leased space met the fourth factor of the POE application test found that the equipment would only be used by SHMG physicians for patient care, with non-SHMG physicians barred from using the laboratory and diagnostic center. Consequently, the leased space, comprising the family-practice area, walk-in clinic, and diagnostic center, satisfies the POE application test requirements. 

The trial court's consideration of build-out costs as indicative of separate facilities was deemed irrelevant to the POE test, which does not include this factor. Additionally, the trial court's assertion that applying the POE to the entire medical park would conflict with specific statutory provisions was based on a supreme court statement cautioning against circumventing the relevant statutory language.

The trial court incorrectly interpreted the supreme court's opinion by adding a fifth factor to the POE application test, which should only consider the four objective factors specified by the supreme court. The POE application test offers an exemption from Certificate of Need (CON) review for physicians' offices and is not intended to bypass the requirements outlined in specific statutes regarding new institutional health services. The trial court was instructed to apply only the POE application test to the relevant facts, specifically focusing on the SHMG leased space in the Medical Office Building (MOB) rather than evaluating the entire facility. The trial court's consideration of the total costs of all leaseholds in the MOB, which exceeded the statutory limit for annual operating costs, was deemed erroneous. The supreme court's reference to the medical-building project was limited to the portion leased by the specific physicians seeking the exemption. Consequently, it was determined that the SHMG leased space qualifies under the POE application test and does not constitute a healthcare facility. Therefore, the trial court's application of the relevant cost statute to the overall leasehold costs was rejected, as the evidence supported that the SHMG leased space meets the four-factor test established in Ex parte Sacred Heart.

The evidence establishes that the SHMG leased space, which includes the family-practice area, walk-in clinic, and laboratory and diagnostic center within the MOB, satisfies the POE application test. The trial court's consideration of the entire MOB in relation to the POE test improperly introduced an additional factor, leading to the rejection of the requirement for Sacred Heart to obtain a CON for the MOB based on the leased space's qualification for the POE. Additionally, the trial court's ruling that Sacred Heart must secure a CON before operating in the MOB due to the total leasehold costs exceeding the threshold for new annual operating costs is also rejected. The supreme court affirmed that only the portions of the MOB leased for SHMG physicians should be evaluated in applying the POE test, as SHMG is the entity seeking the POE benefits. The trial court's judgment is reversed and remanded for a new judgment in accordance with this opinion. The current arrangement indicates that the laboratory and diagnostic center, initially planned to be separate, are now combined in one part of the MOB. The opinion clarifies that the definition of "outpatient clinic" under 22-21-260(8) is not provided, and discusses Sacred Heart's prior plans to sublease space for an outpatient surgery center, which were denied. Furthermore, it emphasizes that despite SHMG being essentially owned by Sacred Heart, this ownership does not affect the exemption of physicians' offices from the definition of healthcare facilities under 22-21-260(6).