North Carolina CON LAW UPDATE Southeastern Health Planning Symposium

2. North Carolina CON LAW UPDATESoutheastern Health Planning Symposium Gary S. Qualls March 19, 2010

3. 2009 CON CASE LAW

4. Total Renal Care of North Carolina, LLC v. N.C. Dep’t of Health and Human Services, ___ N.C. App. ___, 673 S.E.2d 137 (February 17, 2009) (Tab 1 in Handouts) Facts: • On April 17, 2006, Bio-Medical Applications of North Carolina, Inc. (“BMA”), a Fresenius affiliate, applied for a CON to establish a dialysis facility in St. Pauls, NC, by transferring 10 dialysis stations. • BMA’s application was approved. • Total Renal Care of North Carolina, LLC (“TRC”), a DaVita affiliate, filed a petition with OAH challenging BMA’s approval.

5. Total Renal Care (cont.) • The ALJ found the CON Section did not err in approving the BMA application. • The Final Agency Decision upheld the CON Section’s initial determination. • A CON was issued to BMA on April 20, 2007 • The application’s timetable proposed a March 8, 2008 project completion date.

6. Total Renal Care (cont.) • On September 19, 2007, TRC appealed to the N.C. Court of Appeals. • On December 14, 2007, TRC filed a petition for writ of supersedeas with the Court seeking to stay the certification and operation of BMA’s proposed facility until the resolution of the appeal. • The writ of supersedeas was denied by the Court on January 7, 2008. TRC filed a writ of supersedeas with the North Carolina Supreme Court which was also denied. • On August 18, 2008, BMA filed a motion with the Court of Appeals seeking to dismiss TRC’s appeal as moot.

7. Total Renal Care (cont.) BMA asserted the following: • The construction of the St. Pauls facility was complete; • CMS had already certified the facility; and • The CON Section had deemed the project and facility complete.

8. Total Renal Care (cont.) Holding: • The Court of Appeals held that TRC’s appeal was moot. • The Court reasoned that the CON Law did not authorize DHHS to withdraw a CON after the facility becomes operational. • The Court noted that the General Assembly must have recognized such a possibility in enacting the CON Law.

9. Total Renal Care (cont.) • The case at bar and the prior Mooresville case (in which the Supreme Court found an appeal of a CON decision to be moot) were similar. • The Court concluded that Mooresville was controlling and that the TRC appeal was moot. • This outcome resulted in a change in North Carolina’s CON statute. See SB 804 (discussed later).

10. Carolina Digestive Care, PLLC v. N.C. Dep’t of Health and Human Serv., __ N.C. App. __, 687 S.E.2d 318 (September 1, 2009) (Tab 2 in Handouts) * Unpublished Opinion Facts: • Blue Ridge Healthcare System and Grace Hospital (“Blue Ridge”) notified the CON Section of their intent to build a physician office building on Grace Hospital’s campus in Morganton, Burke County. • The CON Section exempted the physician office building’s development under N.C. Gen. Stat. § 131E-184. .

11. Carolina Digestive (cont.) • Carolina Digestive Care, PLLC and Gastroenterology Specialists, P.A. (“petitioners”) appealed the exemption approval. • The ALJ granted summary judgment in favor of Blue Ridge, holding that neither petitioner entity was an “affected person” with standing to challenge the exemption. • The Final Agency Decision adopted the ALJ’s recommended decision.

12. Carolina Digestive (cont.) Analysis: • The Court of Appeals affirmed, reasoning as follows: • There was no evidence that petitioners owned or operated a physician office building or planned to develop one. • As a result, petitioners did not satisfy any of the six categories of “affected persons” listed in N.C. Gen. Stat. § 131E-188.

13. Carolina Digestive (cont.) • ALJ did not abuse his discretion in denying petitioners’ motion to amend the petition to include the names of individual physicians. • The Final Agency Decision was deemed to have adopted this ALJ ruling because it did not expressly address this issue. • The Court noted the petitioners waited until a month after filing the summary judgment motion before seeking to amend.

14. Carolina Digestive (cont.) • Blue Ridge also filed a motion to dismiss petitioners’ appeal based on the Total Renal Care“mootness” ruling. • The Court narrowly interpreted the Total Renal Care holding so as to only prohibit such an appeal when the project at issue has already been competed and become operational. • There was no evidence that the physician office building was already built and operational. • The Court denied Blue Ridge’s “mootness” motion, but Blue Ridge ultimately prevailed (on the grounds previously described).

15. Novant Health, Inc. and Medical Park Hospital, Inc. d/b/a Medical Park Hospital v. NCDHHS (08 DHR 0688 and 08 DHR 0689) (Recommended Decision, Dec. 8, 2008)(Tab 3 in Handouts) Applications • Davie County Emergency Health Corporation d/b/a Davie County Hospital and North Carolina Baptist Hospital (“DCH”) filed a CON application to replace and relocate Davie County Hospital within Davie County from Mocksville to the Town of Bermuda Run. • Novant filed a CON application to build a new hospital in Clemmons, Forsyth County, including 22 acute care beds and five operating rooms to be relocated from Medical Park Hospital in Winston-Salem and 28 acute care beds to be relocated from Forsyth Medical Center in Winston-Salem, resulting in a 50 bed acute care hospital.

16. Novant Health, Inc. (cont.) Applications • The applications were deemed competitive. • Both applications were denied, primarily for failing to show conformity with Criteria 3 and 3a. • Criterion 3 is the main “need” statutory review criterion. • Criterion 3a requires proof that patients will not be “left behind” when services are reduced or eliminated (arises in any relocation scenario).

17. Novant Health, Inc. (cont.) Recommended Decision • Novant argued that the Agency’s analysis of Novant’s projections were arbitrary and capricious because there is no objective standard in the CON law or rules for determining the “reasonableness” of an applicant’s methodology or projections. • The ALJ found that it was unrealistic to expect the Agency to develop an objective standard for every possible service which may require a CON.

18. Novant Health, Inc. (cont.) • Under Criterion 3a, the ALJ agreed with the Agency’s determination that Novant made inconsistent representations in two separate applications concerning the beds that were to be relocated. • Novant sought to: (a) move 28 beds from one facility; and (b) in a subsequent application, backfill by applying for 26 beds at the same location from which beds were being moved. • The ALJ also found Novant nonconforming with Criterion 3a for failing to demonstrate the types of acute care beds that would be moved. The failure to do so made it impossible to determine whether the patients at the facility losing beds would have adequate access to needed services.

19. Novant Health, Inc. (cont.) • DCH proposed to eliminate skilled nursing care provided in “swing beds.” The ALJ agreed with the Agency’s determination that DCH failed to provide any discussion of the impact on the patients currently receiving skilled nursing care at the hospital. DCH was thus found nonconforming with Criterion 3a. • The DCH application was also found nonconforming with Criterion 3a because it did not show how the needs of existing patients would continue to be served following the hospital’s relocation 13 miles away. • The ALJ and the Final Agency Decision-maker affirmed the Agency’s decision to deny both applications.

20. Cumberland County Hospital System, Inc. d/b/a Cape Fear Valley Health System, v. DHHS (08 DHR 3676 & 08 DHR 3680 ) (Recommended Decision, Sept. 16, 2009)(Tab 4 in Handouts) Facts: • Cape Fear applied to retain an existing linear accelerator at its hospital in Fayetteville, Cumberland County, that it otherwise was required to dispose of pursuant to a settlement agreement. • The Radiation Medicine Group, PLLC and The Radiation Medical Center, LLC (“RMG”) sought to acquire a linear accelerator for an outpatient facility in St. Pauls, Robeson County.

21. Cumberland County Hospital System, Inc. d/b/a Cape Fear Valley Health System, v. DHHS (08 DHR 3676 & 08 DHR 3680 ) (Recommended Decision, Sept. 16, 2009)(Tab 4 in Handouts) Facts: • The SMFP linear accelerator need determination resulted from a special needs petition Cape Fear filed for a Cyberknife (a specialized type of linac) for Service Area 18 (Cumberland, Robeson, Bladen, and Sampson Counties). • The Agency denied both applications. • This outcome underscores that an SMFP need determination does not automatically result in an approval.

22. Cape Fear Valley Health System (cont.) Cape Fear’s Application • Cape Fear was found nonconforming with Criterion 3 for failing to show the need for the linear accelerator it was seeking to retain. This led to other related nonconformities. • Cape Fear was also independently found nonconforming with Criterion 20 (the “quality of care” criterion) due to an immediate jeopardy citation in a licensure and certification survey during the CON review. • Cape Fear had separately appealed the survey decision to a federal ALJ.

23. Cape Fear Valley Health System (cont.) Cape Fear’s Application • Criterion 20 provides that: “An applicant already involved in the provision of health services shall provide evidence that quality care has been provided in the past.” • This case raised interesting questions of: (a) whether isolated survey events should cause an applicant to be unapprovable, notwithstanding a long history of quality care; and (b) whether licensure or certification adverse events which occur during the review should be considered under Criterion 20.

24. Cape Fear Valley Health System (cont.) Cape Fear’s Application • The ALJ made findings of fact that Cape Fear failed to conform with Criterion 20 despite the questions raised on the prior slide.

25. Cape Fear Valley Health System (cont.) RMG’s Application • RMG was found nonconforming with Criterion 3 for failing to show need for the linac it was seeking to acquire. This led to other nonconformities. • RMG was found nonconforming with Criterion 5 (financial feasibility) because RMG’s financial projections failed to show a positive net income in Project Year 3.

26. Cape Fear Valley Health System (cont.) Recommended Decision • Affirmed the Agency’s decision to deny both applications despite the need determination. • Case settled before the Final Agency Decision was due.

27. Parkway Urology, P.A. d/b/a Cary Urology, P.A. v. NCDHHS (North Carolina Court of Appeals, No. COA09-1490) (The “Area 20 Linac” Case) (Tab 5 in Handouts) Background • The Governor added a special need determination to the 2007 SMFP for a linear accelerator in Linear Accelerator Service Area 20 (Wake, Harnett, and Franklin Counties). • Eligible applicants were limited to “existing providers of radiation oncology services in Service Area 20.” • The Governor made this need determination even though the SMFP need methodology did not generate a need, and instead, showed excess linear accelerator (“linac”) capacity in Service Area 20.

28. Parkway Urology, P.A. (cont.) Background • Raleigh Hematology Oncology Associates, PC d/b/a Cancer Centers of North America, AOR Management Company of Virginia, LLC (“CCNC”) were approved by the Agency to acquire the linac. • Competing applicants, Wake Radiology Oncology Services, PLLC (“WROS”) and Parkway Urology, P.A., d/b/a Cary Urology, P.A. (“Cary Urology”), were denied.

29. Parkway Urology, P.A. (cont.) Background • WROS, Cary Urology, and Rex Hospital, Inc. (“Rex”) each filed contested case petitions. • Rex was – and is – an existing provider of radiation oncology services in Service Area 20, and is situated across the street from CCNC, where the new linac was approved to be located.

30. Parkway Urology, P.A. (cont.) Recommended Decision • WROS and Cary Urology contended that their respective applications should have been approved instead of CCNC. • Rex contended that none of the applications should be approved, because there is no need under Criterion 3, and an additional linac in Area 20 would constitute unnecessary duplication under Criterion 6. • Rex argued that CCNC’s application did not project the impact of its proposed second linac on Rex’s four underutilized linacs located less than three-tenths (3/10) of a mile from CCNC’s existing facility.

31. Parkway Urology, P.A. (cont.) Recommended Decision • The ALJ affirmed the Agency’s decision approving CCNC. • In the contested case hearing, the Agency acknowledged that the Agency found CCNC’s application automatically conforming with Criterion 6 (unnecessary duplication criterion) because: • There was a need in the SMFP under Criterion 1 (SMFP need limitation criterion); and • CCNC was found conforming with Criterion 3 (main need criterion).

32. Parkway Urology, P.A. (cont.) Recommended Decision • ALJ affirmed the Agency despite no consideration of Rex’s four linear accelerators; the necessary or unnecessary duplication of any existing linear accelerator; downward linear accelerator volume trend; or the decrease in Wake County residents receiving linear accelerator treatments. • The ALJ found that Rex was not substantially prejudiced by the Agency’s decision despite being located across the street from CCNC and presenting evidence that it was already underutilized and would further lose volume as a result of the addition of another linear accelerator at CCNC.

33. Parkway Urology, P.A. (cont.) Final Agency Decision • Modified, but affirmed, the ALJ’s Recommended Decision. Court of Appeals • Currently pending at the Court of Appeals. • CCNC is prohibited from proceeding with its project pursuant to Petitions for Writ of Supersedeas filed by the appellants as well as Session Law 2009-373 (Senate Bill 804). • Briefing is now occurring.

34. UPDATE ON CASES REPORTED ON LAST YEAR

35. Hope-A Women’s Cancer Center, P.A., (“Hope Case”) (North Carolina Court of Appeals #08-1548) Facts: • Hope filed a Declaratory Ruling Request to enter into a purported “Services Agreement” with an unnamed out-of-state provider to provide, without a CON, new diagnostic radiation oncology services in Asheville, on the following regulated items of equipment: a linear accelerator; a dual use PET/CT scanner; and an MRI scanner. • Hope’s Request argued that medical equipment owned by an out-of-state entity, but used by an in-state entity pursuant to a “Services Agreement,” is not subject to CON review. Hope’s Request did not include a copy of its purported “Services Agreement”

36. Hope Case (North Carolina Court of Appeals #08-1548) • In denying Hope’s Declaratory Ruling Request, the department determined that: • Hope (or the unnamed, out-of-state provider) is offering or developing the described services in North Carolina; • Hope’s proposal constitutes a “new institutional health service” requiring a CON because it proposes offering and development of equipment that requires a CON regardless of cost; and • Hope failed to satisfy its burden that its proposal did not exceed the $2,000,000 and $750,000 capital cost thresholds implicating the requirement of a CON.

37. Hope Case (North Carolina Court of Appeals #08-1548) Superior Court Opinion • On June 26, 2008, Wake County Superior Court Judge Robert Hobgood entered an Order affirming the Department’s denial of Hope’s Declaratory Ruling Request. Court of Appeals • The case is currently pending at the NC Court of Appeals. • Briefing has concluded. • Oral argument occurred on August 18, 2009.

38. Hope and Raleigh Orthopaedic Clinic, P.A. v. Easley, et al, Hope/ROC Case”) (North Carolina Court of Appeals #09-844) Facts: • Hope and Raleigh Orthopaedic Clinic, P.A. (“ROC”) sued certain State officials responsible for the health planning process in NC, seeking declaratory and injunctive relief. • First, Plaintiffs allege that the NC planning process constitutes an impermissible delegation of legislative authority without adequate guiding standards and procedural safeguards to ensure that the State Health Coordinating Council’s decisions are not arbitrary, unreasoned or affected by self-interest o fits members, citing Article I, Section 6 and Article II, Section I of the NC Constitution.

39. Hope/ROC Case (North Carolina Court of Appeals #09-844) • Second, Plaintiffs allege that the NC planning process violates their procedural due process rights under Article I, Section 19 of the NC Constitution on the theory that the State Medical Facilities Plan (‘SMFP”) need determinations deprive Plaintiffs of a reasonable opportunity to demonstrate need for certain services. • Third, Plaintiffs allege that the NC planning process violates their substantive due process rights under the same constitutional provision on the theory that the SMFP need determinations create an unreasonable burden on Plaintiffs’ opportunity to carry out an otherwise lawful business.

40. Hope/ROC Case (North Carolina Court of Appeals #09-844) Superior Court Decision (See Tab 6 in Handouts) • A special Wake County Superior Court Judge (Howard Manning, Jr.) was designated to hear the case. • Numerous existing providers moved to intervene to support the State Defendants’ position. • Judge Manning allowed the proposed intervenors to fully participate in the case prior to formally ruling on a motion to intervene. • On March 26, 2009, Judge Manning denied Plaintiffs’ Motion for Judgment on the Pleadings and granted Defendants’ Motion on the Pleadings • Judge Manning appeared to deny, as moot, the motions to intervene in his March 26 Order.

41. Hope/ROC Case (North Carolina Court of Appeals #09-844) The North Carolina Court of Appeals • The case is currently pending before the North Carolina Court of Appeals. • The proposed intervenors were permitted to file briefs as amici curiae over the objections of Plaintiffs. • Briefing has concluded. • Oral Argument occurred on January 11, 2010.

42. LEGISLATIVE UPDATE

43. Fairness in CON, Session Law 2009-145 (HB 436) (Tab 7 in Handouts) • Exempts from CON review expenditures over $2 million for certain “same site” nursing home, adult care home, or ICF/MR: • Renovations; • Replacements; or • Expansions.

44. Fairness in CON, Session Law 2009-145 (HB 436) Project must be limited to one or more of the following purposes: • Conversion of semi-private resident rooms to private rooms. • Providing innovative, homelike residential dining space, such as cafes, kitchenettes, or private dining areas to accommodate residents and their families or visitors. • Renovating, replacing, or expanding residential living or common areas to improve resident quality of life.

45. Defining the Term “Hospital” - Session Law 2009-487 (HB 1297) (Tab 8 in Handouts) • Rewrites N.C. Gen. Stat. § 131-76(3) to limit what the term “Hospital” includes, and does not include. • The term does not include – • any outpatient department, including a portion of a hospital operated as an outpatient department, on or off the hospital’s main campus, that is operated under the hospital’s control or ownership and is classified as Business Occupancy. • However, if the Business Occupancy outpatient location is to be operated within 30 feet of any hospital facility, or any portion thereof, which is classified as Health Care Occupancy or Ambulatory Health Care Occupancy under the Life Safety Code of the National Fire Protection Association, the hospital shall provide plans and specifications to the Department for review and approval as required for hospital construction or renovations in a manner described by the Department.

46. Session Law 2009-487 (cont.) • Revises N.C. Gen. Stat. § 131E-80(a), which concerns hospital inspections by the Department. • After the hospital’s initial licensing, any location included or added to the hospital’s accreditation shall be part of the hospital’s license; however, all locations may be subject to inspections “which the Department seems necessary to validate compliance with the requirements set forth in this part.”

47. CON Appeals, Session Law 2009-373 (SB 804) (Tab 9 in Handouts) • Enacted in response to Total Renal Care (see earlier slides) • Prevents the CON Section from issuing a CON until the applicable contested case and any appeals are adjudicated and resolved (amending N.C. Gen. Stat. § 131E-187). • Increases potential CON appellate bond cap from $50,000 to $300,000 (amending N.C. Gen. Stat. § 131E-188(b1)). • The default bond amount is still $50,000. • But amendment gives Court of Appeals discretion to increase bond amount up to $300,000, upon a request by the approved CON applicant.

48. CON Appeals, Session Law 2009-373 (SB 804) (Tab 9 in Handouts) (cont.) • Senate Bill 804 also places a temporary moratorium on the development of free-standing emergency departments unless they are in the same county as, and operated under the same license as, licensed and operational acute care beds

49. Expedited Reviews – Session Law 2007-473 (HB 1685) (Tab 10 in Handouts) • Allows an expedited review for holders of a CON for a nursing home or adult care facility where the applicant proposes to: • Move beds from one licensed facility to another; • Within the same county; and • Not increase the county’s bed complement. • This 2007 bill is still law, but was never codified into the General Statutes. It is included in this presentation to remind everyone it is out there.

50. New NC CON Rules Adopted in 2009 - Feb. 2010 Intensive Care Services • The Agency published proposed rules to amend the information required for an applicant proposing new or expanded intensive care services. See Tab 13 in Handouts, February 15, 2010 NC Register, p. 1363 (amending rules at 10A NCAC 14C.1202(b)). • Eliminated the requirement that an applicant demonstrate the number of patients from the proposed service area projected to require intensive care services by each patient’s county of residence.