I. STATEMENT OF THE CASE

This matter is before the Administrative Law Court (“ALC”) for a final order and decision following a contested case hearing pursuant to S.C. Code Ann. § 44-1-60 (Supp. 2007) and S.C. Code Ann. § 1-23-600(A) (as amended by 2008 S.C. Act No. 334).^[1] Petitioner Wando Outpatient Surgery, LLC (“Wando”) challenges the decision of Respondent South Carolina Department of Health and Environmental Control (“Department” or “DHEC”) to deny Wando’s Certificate of Need (“CON”) application to establish a freestanding ambulatory surgery facility (“ASF”) with two operating rooms to be located on the Cainhoy Peninsula in the Daniel Island area in Berkley County,
South Carolina. The Department denied the application based on its finding that (1) Wando failed to
establish need for an additional ASF in the area, (2) Wando’s project would result in an unnecessary duplication of services for the area, and (3) Wando’s project would have an adverse impact on existing providers. Two of those existing providers, East Cooper Regional Medical Center (“East Cooper”) and Healthsouth Corporation (“Healthsouth”), intervened as Respondents in this matter in support of the Department’s decision to deny Wando’s CON application. On September 12, 2007, the court granted Healthsouth’s request to withdraw from this matter.

After notice to the parties, the court held a hearing on February 25-29, 2008 and March 14, 2008. All parties appeared at the hearing. Evidence was introduced and testimony presented. After carefully weighing all of the evidence and applying the applicable law, the court finds that Wando’s CON application should be denied.

II. FINDINGS OF FACT

Having observed the witnesses and exhibits presented at the hearing and closely passed upon their credibility, and taking into consideration the burden of persuasion by the parties, the court makes the following Findings of Fact by a preponderance of the evidence.

1.                  Background

On January 9, 2006, Wando filed a CON application with DHEC’s Bureau of Health Facilities and Services Development to construct a freestanding multi-specialty surgery center with two operating rooms in Berkeley County, South Carolina (“Proposed Project”). The Proposed Project would be located on the Cainhoy Peninsula in the Daniel Island area of Berkeley County, South Carolina. Wando represented that the total cost for the Proposed Project would be $7,811,222.

The application identified ten physicians, representing four physician groups, as participants in the development and operation of Wando: Peter C. Weber, M.D.; Robert C. Jordan, M.D.; Mark D. Netherton, M.D.; Timothy G. Allen, M.D.; Joel R. Cox, M.D.; James J. McCoy, M.D.; James D. Spearman, M.D.; Don O. Stovall, M.D.; Richard H. Zimlich, M.D.; and David H. Jaskwhich, M.D. Dr. Weber, an otolaryngology specialist,^[2] currently practices in Cleveland, Ohio. He previously practiced in Charleston and plans to relocate his practice to the Charleston area prior to the development of Wando. Dr. Jordan also specializes as an otolaryngologist and currently practices in the Charleston area with offices located in North Charleston. Dr. Netherton is an anesthesiologist who intended to perform pain management at Wando. However, subsequent to the Department’s initial staff decision, Dr. Netherton decided not to participate in the Proposed Project. The remaining seven physicians currently practice in the Charleston area with a practice group known as Lowcountry Orthopaedics and Sports Medicine P.A. These physicians specialize and limit their practice to orthopedics and pain management.

Lowcountry Orthopaedics and Sports Medicine P.A. (“Lowcountry Practice”) owns and operates an ASF in Dorchester County known as the Lowcountry Outpatient Surgery Center (“the Lowcountry Center”). The Lowcountry Center obtained a certificate of need and began providing outpatient services in 2004.

After reviewing the CON application and conducting a project review meeting with the applicant and affected persons, DHEC notified Wando on September 25, 2006 of its decision to deny Wando’s CON application. DHEC based its decision on the following:

1.      The application has been found to be inconsistent with Standard 4 for Ambulatory Surgical Facilities as outlined in the 2004-2005 South Carolina Health Plan in that the applicant has failed to document the need for an additional Ambulatory Surgical Facility to serve either its proposed primary or secondary service areas;

2.      Actual surgical utilization performed by several of the existing licensed Ambulatory Surgical Facilities in the applicant’s primary and secondary service area that have the capability of providing similar services to those of the applicant has declined significantly from FY 2003 to FY 2005. As a result, current utilization data does not justify the proposed additional freestanding ambulatory surgical facility to be located within the Trident Area, as it represents an unnecessary duplication of services for the citizens of these communities;

3.      The projected surgical utilization for the proposed facility as provided by the applicant is not consistent with those of its competitors at this time and would undoubtedly have a negative impact on the patient base and utilization of existing providers in both the Primary and Secondary Service Areas, without resulting in any substantial increase in accessibility of services to the population to be served; and

4.      The proposed project fails to meet one of the primary purposes of South Carolina’s Certificate of Need Program, which is to “Prevent unnecessary duplication of health care facilities and services.”

(DHEC Ex. 1-C at 841.)

2.                  Location of Proposed Site

The location of the Proposed Project is in the southern corner of Berkeley County, in the interior area of the Cainhoy Peninsula. Wando proposes to develop the project on 15.322 acres of land located on Clements Ferry Road, approximately 3 miles northeast of Interstate 526, 10.5 miles north of East Cooper, 15.2 miles southeast of Trident Medical Center, and 33.4 mile from Roper Berkeley Ambulatory Surgery Center (“Roper Berkeley”).^[3]

The location is in a region that is one of the more sparsely populated areas of Berkeley County. The Cainhoy Peninsula region contains less than 10% of the population in the county. Populous areas in Berkeley County exist to the west and northwest of the Proposed Project site. To the south and southeast across into Charleston County lies the fastest growing region in the Tri-County area. Berkeley County is expected to grow by an additional 9,700 people between 2006 to 2011, which represents a 6% increase in population at an annual growth rate of 1.3%. During the same time period the population of Charleston County is expected to grow by an additional 8,000 people and Dorchester County by 10,000 people. The Tri-County area as a whole is growing at approximately 1% per year, or 4.8% between 2006 to 2011.

The site of the Proposed Project is located in a region of Berkeley County known as Wando that consists of two zip codes: 29492 and 29450. In 2006, the population of zip code 29492 was 6,185. It is projected to increase to 9,292 by 2011. Similarly, zip code 29450 is expected to increase from 4,634 to 5,921 by 2011. The two zip codes are expected to have a total population of 15,213 by 2011, with a collective increase of 4,394. By 2015, between 70% and 75% of the population of Berkeley County will live in the western portion of the county in the communities of Goose Creek, Ladson, and Moncks Corner, compared to 5.3% of the population on the Cainhoy Peninsula.

Population density maps presented by Wando and East Cooper demonstrate that, by 2011, the proposed location for Wando will remain in a relatively sparsely populated area. Further, they indicate that Wando will be located considerably closer to more populous areas of Charleston County, particularly Mount Pleasant,^[4] than it will to the more populous areas of Berkeley County.

3.                  Applicable Service Area and Outmigration

A.                 Wando Service Area

In preparing its original projections, Wando relied on the historical patient origin data of the physicians who were identified as intending to practice at Wando. Although Wando’s utilization projections reflect patient origin from Berkeley County only, Wando noted in a first set of rebuttal comments during the Department’s project review that “Charleston and Dorchester are natural secondary service areas due to the geographic proximity to the purchased site.” (DHEC Ex. 1-C at 720.) The physicians associated with Wando have a history of serving patients from across the Tri-County area in facilities throughout that region. Wando stated in its CON application that the “10 surgeons serve patients throughout the Tri-County area with seven offices situated across the population of the ‘Lowcountry’ in Berkeley, Charleston, and Dorchester Counties.” (Id. at 11.)

A large portion of the patient base for both the Lowcountry Center and the Proposed Project is the same. The Lowcountry Center is located in the city of Summerville in Dorchester County near the Berkeley County line. The Lowcountry Center application relied on the Tri-County area, including Berkeley County, for its patient origin to establish need for its CON. Wando stated in the second set of rebuttal comments that the “[p]hysician owners in both facilities have projected that patients will originate from Berkeley County due to geographical configuration of the facilities in Dorchester and Berkeley Counties and where their patients come from day-to-day.” (DHEC Ex. 1-C at 802.) Wando also stated it would be unrealistic to assume that Wando and the Lowcountry Center would not both receive patients from all three counties.

A “use rate” is the utilization of a service relative to the population. A use rate is calculated by dividing the total number of procedures performed for residents of a particular area for a given period by the population of that area during that period. In this case, the applicable use rate can be determined by dividing the number of outpatient surgical procedures for a designated area in a given year by the respective population for that area during that year. A use rate for outpatient surgical services can be used to indicate whether or not residents of Berkeley County have comparable access to the outpatient surgical services to residents of urban counties throughout the state.

The great majority of Berkeley County residents receive ambulatory surgery services from freestanding centers and hospitals located in Dorchester and Charleston Counties within a thirty-minute drive time. Because of the relatively close proximity for many Berkeley County residents to outpatient surgery providers located in Dorchester and Charleston Counties, the use rate for ambulatory surgery for Berkeley County residents is consistent with counties in which many more providers are located. Thus, Berkeley County residents have reasonably good access to ambulatory surgery services in the area, even though Berkeley County has fewer ASFs and hospitals than other counties with comparable populations in South Carolina.

Proximity to outpatient surgery providers is a factor that affects access. The county designation does not present a barrier to residents seeking outpatient surgery services.

B.                 Outmigration from Berkeley County

During trial, the parties presented evidence regarding two sources relating to outmigration from Berkeley County for outpatient surgery services. Wando presented evidence and testimony concerning the use of Outpatient Surgery Outmigration Reports (“Outpatient Surgery Reports”) generated by the South Carolina Budget and Control Board’s Office of Research and Statistics (“ORS”) to determine the extent of outmigration for outpatient surgery from Berkeley County. Alternatively, East Cooper presented evidence and testimony concerning the use of Joint Annual Reports (“JARs”) submitted to DHEC by freestanding providers and hospitals. The parties’ positions varied as to which data source more accurately demonstrates outmigration.

DHEC requires certain facilities, including ASFs and hospitals, to provide the Department with utilization information annually. The purpose of the data captured by providers and submitted to DHEC is specifically to measure such utilization and create the JARs. By contrast, the Outpatient Surgery Reports are based on billing data ORS collects from hospitals and freestanding centers. The providers submit the billing data on uniform billing forms the hospitals and ASFs use to submit reimbursement claims to payors. These billing forms are denominated as UB-92 or UB-04 forms.^[5] The various procedures performed on a patient are identified by a procedure code, and these codes are reported on the UB form.

Each record, classified as a “procedure” on the ORS reports, represents a single “case” or patient. An analysis of the Outpatient Surgery Reports generated by the ORS reflects that the pool of patients in the ORS data comprises more than just patients who received procedures in an operating room. The evidence presented shows that the ORS reports capture not only procedures performed in operating rooms, but also procedures performed in other settings within the reporting facilities. The ORS website contains a list and range of codes reflected in the Outpatient Surgery Reports that is identical to all of the procedure codes that can be reported on a UB billing form. Examples of outpatient procedures that are captured on a UB billing form but not performed in an operating room include: breast biopsy, dialysis, radiation therapy, and diagnostic cardiac catheterization. All of these non-operating room procedures are included in the ORS Outpatient Surgery Reports. As an example, the evidence presented shows that diagnostic cardiac catheterization procedures are typically performed in a diagnostic catheterization laboratory rather than an operating room. However, the 2005 Outpatient Surgery Report for Berkeley County for outpatient surgery includes 392 diagnostic cardiac catheterizations.

Joel Grice, the former Director of the Bureau of Health Facilities and Services Development at DHEC, illustrated another example. He testified that Charleston Memorial Hospital did not have an operating room in 2004 or 2005. However, ORS reported 194 procedures in 2004 and 396 procedures in the 2005 on the Outpatient Surgery Reports for Charleston Memorial. According to Grice, the reporting of “outpatient surgeries” for Charleston Memorial by ORS for 2004 and 2005 shows that the Outpatient Surgery Reports include in their outpatient procedure codes as “outpatient surgeries” procedures that are not actually performed in a facility’s operating rooms. The Outpatient Surgery Report cannot be reasonably interpreted to support the inference that Charleston Memorial was providing outpatient surgical services.

East Cooper’s expert, David Levitt, testified that a comparison of the JAR data and ORS data reflects that the two data sets for ambulatory surgery centers are consistent. However, the ORS data for hospitals is almost double the volume of outpatient surgeries reported on the JARs by hospitals. This variance is explained by the fact that ambulatory surgery facilities predominately provide ambulatory surgery, while hospitals provide a greater variety of services, including ambulatory surgery in addition to other outpatient invasive procedures performed in non-operating room settings. Levitt also demonstrated the reliability of the JAR data by comparing the utilization rates for South Carolina and two neighboring states, Georgia and North Carolina. The use rates for outpatient surgery for Georgia and North Carolina are nearly identical to the use rate for South Carolina derived by applying the JAR data. The use rate for South Carolina for 2006 is calculated by dividing 316,000 outpatient surgeries by a population of 4,321,429 for a use rate of 73.1. Georgia’s use rate is 70.89 (652,112 surgeries divided by 9,198,437), and North Carolina’s use rate is 72.1 (638,900 surgeries divided by 8,856,505). In contrast, the outpatient surgery use rate for South Carolina applying data from the ORS Outpatient Surgery Reports is more than double the use rate determined by using JAR data. This reflects an inconsistency with neighboring states and indicates that the ORS data is not an accurate measure of operating room utilization for the purpose of determining the need for an ASF in Berkeley County.

Doyle Williams, Wando’s expert health planner, relied on ORS Outpatient Surgery Reports as the basis for an opinion that Wando would obtain 2,000 cases in the first year. Williams’s assertion is based on an assumption that Wando would capture 5% of the Berkeley County marketplace, which he measured as 24,000 to 25,000 cases that were outmigrating from Berkeley to primarily Charleston County. However, the court finds that JARs are a more reliable source than ORS Outpatient Surgery Reports for measuring utilization of hospital operating rooms and therefore for determining the volume of outmigration of Berkeley County residents who obtain outpatient surgery services from healthcare facilities in Charleston and Dorchester Counties. Because Williams’s projections rely on the ORS Outpatient Surgery Reports, the court finds that his projections are unreasonably high and are not as reliable a means for forecasting utilization of Wando for the purpose of evaluating Wando’s CON application at issue here.

4.                  Access

There are currently thirteen existing providers of ambulatory surgery services in the Tri-County area, including seven freestanding centers and six hospitals. The existing freestanding centers consist of the Lowcountry Center, Roper Berkeley, HealthSouth, Roper St. Francis James Island Surgery Center, Roper West Ashley Surgery Center, the Surgery Center of Charleston, and Trident Surgery Center. The existing hospitals consist of East Cooper, Trident Medical Center, Summerville Medical Center, the Medical University of South Carolina (“MUSC”), Roper Hospital, and Bon Secours St. Francis. A seventh hospital has been approved for Charleston County, the Roper East facility, and is anticipated to open in or after November 2010. In addition, a CON for an eighth freestanding center, the Southeastern Spine Institute (“Southeastern Spine”), has been
approved by DHEC.^[6] Only one of these facilities, Roper Berkeley, is located in Berkeley County.

Experts for all parties generally agreed that outpatient surgery patients should not be exposed to post-procedure driving times that exceed thirty minutes. James D. Spearman, M.D., a member of the Lowcountry Practice and a Wando owner, testified that he is familiar with the thirty-minute drive time factor that DHEC takes into consideration when approving ambulatory surgery centers. Dr. Spearman stated that although a drive time of fifteen to thirty minutes is a reasonable period for a patient to be confined in a vehicle after an outpatient procedure, he believed that fifteen minutes is closer to the limit that is generally in the best interests of patients. Similarly, Williams testified that in his opinion surgical services should be relatively close to those residents who need it, and that a distance of nine miles, or a travel time of fifteen or twenty minutes, represented an optimum service area. Services located farther away than that standard become increasingly less convenient and less beneficial for patients.

Joel Grice testified that a majority of the residents of Berkeley County have access to outpatient surgery services within thirty minutes, including the residents of the Cainhoy Peninsula. Ten of the thirteen existing ambulatory surgery facilities are within a thirty-minute drive time to the location of the Proposed Project. Hanahan, Goose Creek, and Ladson are among the most populated areas of Berkeley County. Their residents have access to three existing outpatient surgery providers within a ten-minute drive. Further, two additional outpatient providers, the Lowcountry Center—owned by a majority of the Wando owners—and Summerville Medical Center are an average of eighteen minutes away from these three communities. In contrast, Wando would be an average of twenty-nine minutes from these same population centers. Roper Berkeley, the only ASF located in Berkeley County, is historically underutilized, even though it is accessible to many residents in the center of the county.

East Cooper is one of ten healthcare facilities that are located within a thirty-minute drive time for the residents of the Cainhoy Peninsula that live in the vicinity of the Proposed Project. A comparison of the East Cooper and Wando thirty-minute service areas reflects that they are largely the same. Only a very small and unpopulated geographic area in the western reaches of the Cainhoy Peninsula is beyond thirty minutes of the East Cooper facility. An overlay of the thirty-minute drive time service areas for the representative providers in the Tri-County area demonstrates that the great majority of Berkeley County residents live within thirty minutes of ten of the thirteen Tri-County area outpatient surgery providers.

Establishment of an ASF at Wando’s proposed site would improve access only to a very small population, projected to be no more than 5.3% of the total population of Berkeley County in 2015, with no appreciable effect on accessibility generally for residents of the Cainhoy Peninsula. With the exception of the Cainhoy Peninsula residents, the Proposed Project would require longer drive times and would be less convenient for the great majority of Berkeley County residents than the thirteen existing facilities in the Tri-County area. Furthermore, the Wando site is more than a thirty-minute drive time from seven of the ten population centers in Berkeley County. Moncks Corner, for example, is a fifty-two-minute drive to the Wando site. While Hanahan and Goose Creek are twenty-seven- and thirty-minute drives from the Wando site, respectively, residents of these two communities are closer to no less than seven other outpatient surgery providers than they are to the Wando site. The only recognized population center in Berkeley County where residents would have a shorter drive to Wando than to any other existing provider is the sparsely populated Cainhoy Peninsula community known as Wando. Even in that case, the new Roper East facility will be a twelve-minute drive to the town of Wando, which is as close as the Proposed Project would be.

In addition to the greater distances from the Wando site to the various Berkeley County population centers, one of the factors that would compound the inconvenience to Berkeley County residents is the fact that Clements Ferry Road, the primary artery into the Cainhoy Peninsula, is a congested, two-lane road in an industrial area. It is an eleven-minute drive to the Wando site up Clements Ferry Road from Interstate 526, which runs from Charleston County on the east through the southern tip of Berkley County to Charleston and Dorchester Counties on the west of Wando.

From 2003-2006, the average utilization of freestanding outpatient surgery centers in the Tri-County area declined from 60.8% to 50.5%, which reflects the extent to which existing ASFs in the Tri-County area are underutilized. (See East Cooper Ex. 37.) Because of the underutilization, surgeons have available numerous options to perform ambulatory surgery for patients at freestanding facilities in the Tri-County area. More specifically, Roper Berkeley and Healthsouth experienced low utilization rates during this period. The utilization of HealthSouth, in particular, dropped from 77.3% in 2003 to 47.7% in 2006. Conversely, the surgery center affiliated with the Lowcountry Practice increased utilization during the same period from its opening in 2004 until 2006, when it was at 74.4% capacity. DHEC, in its Summary Sheet during staff review, noted that in the year after the Lowcountry Center opened in 2004, utilization at HealthSouth dropped by 22.5%.

Hospital outpatient surgery capacity in the Tri-County area during this period also reflected underutilization of these facilities. The utilization of these hospital-based services was 58.1% in 2006. Both freestanding and hospital-based outpatient surgery centers have additional capacity to serve ambulatory surgery patients from the Tri-County area. DHEC noted in its decision letter that utilization of several of the existing ambulatory surgery providers significantly declined between 2003 and 2005. In addition to the existing providers in the area, new providers including the Roper East facility and Southeastern Spine, as well as additional capacity at MUSC, will provide further capacity to the Tri-County area.

Projections of outpatient surgeries in the Tri-County area in year 2010 reflect that freestanding facilities will be at less than 50% capacity (47.9%), and hospital-based outpatient surgery providers will be at 53.1%. Overall, outpatient surgery providers in 2010 are projected to be at 51% utilization and will have capacity to serve future demand.

5.                  Need

The use rate of outpatient surgery facilities for orthopedic and ENT cases is 27.4 per thousand in South Carolina. Applying the use rate to the projected population of the Cainhoy Peninsula in 2011 demonstrates that only 417 cases would be generated from the area. Only 75% of the 417 cases would utilize a freestanding center (25% are expected to occur in a hospital setting), yielding an expected 313 cases. Even if Wando were to capture a 50% share within three years of a geographic market in which its presence is currently almost non-existent, the potential number of patients Wando may serve would be approximately only 150. Levitt concluded that because the Lowcountry physicians and Dr. Jordan do not have sufficient volume to support a center based on Berkeley County patients, Wando will draw patients from the more highly populated adjacent areas in Charleston County at such a level that it will exceed patients drawn from Berkeley County. Considering the small population and undeveloped infrastructure of the Cainhoy Peninsula area, the evidence shows that the development of a freestanding outpatient surgery facility in the Wando area is premature.

Between the time DHEC staff denied Wando’s CON application and the trial, the ownership of Wando changed. Peter C. Weber, M.D. and Robert C. Jordan, M.D. were still participating. Mark D. Netherton, M.D. decided not to participate, and the Lowcountry Practice physicians remained the same except for the addition of R. Christopher Brooker, M.D. Due in part to the change of ownership, Wando developed new utilization projections that relied on different assumptions than had been presented in the original CON application. At trial, Williams testified that eight Lowcountry physicians performed a total of 1902 surgery cases in 2007 (excluding pain management procedures associated with Dr. Netherton) at all locations, including the Lowcountry Center. Williams identified 686 cases the Lowcountry surgeons performed for Berkeley County patients in 2007 and assumed that each of the cases for Berkeley County residents would be moved to the Wando center.

Of the 686 cases Wando assumed would be shifted to the Proposed Project, 447, or approximately 65%, were performed at the Lowcountry Center. The court therefore finds that Wando’s need methodology relies on the same patient base as did the Lowcountry Center and assumes the redirection of a substantial number of ambulatory surgery cases from the facility that the Lowcountry Center surgeons opened in 2004. DHEC originally denied the Wando project in part because patient origin for the project appeared to be from existing providers, including the Lowcountry Center.

The projected redirection of the 447 Berkeley County cases from the Lowcountry Center to Wando would also reduce the Lowcountry Center’s utilization to below 1500 cases per year (from 1902 to 1455). The observation in DHEC’s Summary Sheet that it appeared that a large portion of the patient base for both the Lowcountry Center and Wando would be the same is confirmed by Wando’s final projections, even though Wando’s original CON application failed to acknowledge that a single patient would be redirected from the Lowcountry Center to Wando.

With regard to the projected utilization for Dr. Jordan, Wando assumed that all of Dr. Jordan’s Berkeley County cases would also be shifted to the Proposed Project. With regard to Dr. Weber, Wando used the cases Dr. Weber performed at the Cleveland Clinic as a basis for its projections for Dr. Weber’s future productivity at the Proposed Project. Williams created several budgets for the Proposed Project: one for the original CON application, a second on January 15, 2008, and a third on January 28, 2008 which differed to reflect changes in the Proposed Project. See infra Section II.8. All of Williams’s budgets assumed an annual growth rate of 1.85% and applied that rate to the Berkeley County caseload of its various surgeon owners. His final budget yielded an annual case utilization of 1137 for 2008, 1159 for 2009, and 1180 for 2010.

Although Wando assumed all of the Lowcountry Center’s Berkeley County patients would be redirected to the Proposed Project, the court finds that this assumption is overly optimistic based on the evidence. Only seven of the Lowcountry Center’s Berkeley County patients in 2007 were residents of the two Cainhoy zip codes (29492 and 29450) surrounding the Wando site. In addition, Dr. Spearman and Williams acknowledged during the hearing that some Berkeley County patients would continue to go to the Lowcountry Center.

The court finds that Wando’s projections are also unreasonable in that the projections assume all of Lowcountry physicians’ and Dr. Jordan’s hospital-based cases involving Berkeley County patients will be redirected to Wando. Several witnesses testified that a certain portion of the cases provided on an ambulatory basis are necessarily done in a hospital setting rather than a freestanding center. Dr. Spearman, in particular, testified that the Medicare guidelines provide that, as a condition of payment, certain procedures may not be performed in a freestanding facility and must be done in a hospital. Dr. Spearman also testified that some patients need to have their surgery performed in a hospital setting because of risk factors, such as heart problems, blood thinners, and other conditions that may complicate surgery. The age of the patient and patient preference are also factors that may result in a patient having outpatient surgery performed in a hospital. Certain insurers also require that outpatient procedures be performed in a hospital setting.

The evidence shows that 25% of the Lowcountry physicians’ cases were performed in a hospital in 2007. Dr. Jordan only performed 63.8% of his cases (51 of 80) in a non-hospital setting in 2006. Wando’s original projections in the CON application do not reflect any shift of the Lowcountry Center’s patients from hospitals to the Proposed Project. The court cannot therefore reasonably conclude that all of the Berkeley County cases of the Lowcountry physicians and Dr. Jordan would be redirected to Wando. Instead, Levitt calculated that only 549 of 742 cases generated by the physicians would be appropriate for a freestanding facility, even assuming all Berkeley County cases shifted to Wando.

Wando’s final utilization projections also do not account for the proximity of the patients to the Wando location. Although distance and proximity are not the only factors affecting utilization, they are important factors. Dr. Spearman testified that one of his goals in situating the Wando site on the Cainhoy Peninsula was to minimize travel time for patients and serve residents who live within less than a thirty-minute drive time from the Wando site. Dr. Spearman recognized that some Berkeley County residents would be farther than thirty minutes away from the site. He also acknowledged that patients in other areas of Berkeley County would choose to have their surgery performed in Summerville, rather than at the Wando site.

Wando also projected that all of Dr. Jordan’s Berkeley County cases would be transferred to the Wando center. Dr. Jordan testified in his deposition that he would be establishing a satellite office in the Wando area and was not planning to move his patients from Summerville. The record reflects that in 2006, 75 of the 80 Berkeley County patients Dr. Jordan treated resided in zip codes for Moncks Corner, Ladson, and Goose Creek. In contrast, Dr. Jordan saw only one patient that same year from the Cainhoy Peninsula area. At the hearing, Dr. Jordan testified on direct that he would shift patients to the Wando facility, but he admitted on cross-examination that in his deposition he testified that he intended to establish a “new presence” in the Cainhoy Peninsula and to respond to the demand in the area. Based on Dr. Jordan’s collective testimony, the court finds it unreasonable to project that all of his Berkeley County patients that he had been serving largely in Dorchester County would be shifted to Wando. Even without Dr. Jordan’s earlier statements, the likelihood that he would be able to redirect patients who would have to travel more than a thirty-minute drive time to a more distant site is remote.

Dr. Jordan testified that occasionally a Berkeley County patient may agree to have a procedure performed at Wando due to difficulty in getting a surgery slot at the Summerville facility or another more convenient facility where Dr. Jordan has privileges. However, these occasions would be the exception, not the rule, and do not form a basis for a finding that the Proposed Project would customarily serve residents of western Berkeley County.

Wando used the cases Dr. Weber performed at the Cleveland Clinic in Ohio as a basis for its final projections. The volume provided in the projections was based on cases performed in Cleveland, not on Berkeley County residents. Levitt testified that the Cleveland data is unreliable because no evidence was presented that Dr. Weber’s experience there formed a basis for Wando’s assumptions about the services Dr. Weber would perform when he established a practice in Charleston County. Wando failed to offer any evidence that established a correlation between the volume of cases Dr. Weber performed in a nationally renowned clinical setting in a major urban area and the private practice Dr. Weber intends to open in Mount Pleasant. Moreover, there is nothing in his Cleveland experience that was presented as a basis to project the number of cases that Dr. Weber may be able to generate for Berkeley County residents. Grice testified that he supported the Department’s analysis of the Wando CON application that excluded consideration of Dr. Weber’s experience in Cleveland. In his opinion, a physician’s practice in another state did not, in and of itself, establish a reasonable basis for projecting what the physician would actually do in South Carolina.

Wando’s calculations for Dr. Weber also do not recognize that of the 616 Cleveland cases used as a base for Dr. Weber’s projections, only 378 were performed in a healthcare facility, whether a freestanding center (90%) or a hospital-based service (10%). The remaining 238 cases were performed in an office setting, not in an operating room. Wando also failed to present any evidence relating to potential referral sources or marketing strategies to support the assumption that Dr. Weber would see the same percentage of Berkeley County patients as the Lowcountry physicians.

Levitt testified that it may be appropriate to project future volume for a physician who is not present in the proposed market by reviewing relevant historical experience. Dr. Weber worked at MUSC from 1999 until 2002. While at MUSC, Dr. Weber performed 345 outpatient cases in 2000, 420 in 2001, and 27 in 2002. Approximately 65% to 70% of Dr. Weber’s cases were from Charleston County. Only 118 cases, or approximately 15%, of his cases were from Berkeley County patients while he was at MUSC. Moreover, over 66% of the 118 Berkeley County patients were from the Moncks Corner and Goose Creek areas. At most, Dr. Weber averaged slightly less than sixty cases a year from Berkeley County, and, for the entire three-year period, Dr. Weber had five cases from the two zip codes comprising the Cainhoy Peninsula.

Levitt performed an overall analysis of the Wando projections taking into consideration the above mentioned factors. When the Lowcountry physicians’ cases are reduced by the hospital-based cases and adjusted for proximity, 176 patients, not 686, of the Lowcountry Center’s patients would be redirected to the Wando center. Adjusting Dr. Jordan’s Berkeley County cases to reduce the pool of 80 cases to include only patients within thirty minutes of Wando, 31 of the 80 patients might go to Wando. In all, the court finds it more reasonable to project that the Lowcountry Practice physicians and Dr. Jordan will redirect 207 patients instead of the 1116 cases Wando projected.

6.                  Wando’s Physicians and Shift in Patient Volume

Wando originally identified ten participating physicians in its CON application: Dr. Weber, Dr. Jordan, seven Lowcountry Practice physicians, and Dr. Netherton. During review, Wando identified eleven additional surgeons who would be providing services at Wando: Lowcountry represented to DHEC that it “plans” to add four orthopedic surgeons in two years, Dr. Jordan plans to add two ENTs, and “five (5) additional surgeons who want to practice in the Wando facility when it is completed.” (DHEC Ex. 1-C at 716 (emphasis added); Spearman Test., Hearing Day One at 104.) Wando also mentioned that its plans include additional doctors beyond the eleven.

Wando’s representations, made through its counsel, were not expressions of potential growth. They reflected precise and present intent, i.e., Lowcountry “plans” to expand its practice in the ways described. Its purpose was to persuade DHEC that Wando would not overlap its patient base with Lowcountry. Wando stated that “[w]e believe our open medical staff model accommodates additional surgeons and resulting increases in utilization.” (DHEC Ex. 1-C at 716 (emphasis added)). At no point during the review process did Wando attempt to project any utilization data for any of the six physicians that it expected would join Lowcountry and Dr. Jordan’s practice or provide any information about where the new patients would come from. Although Wando knew the five unidentified physicians wanted to practice at the proposed center when it opened, Wando did not provide any further information about them.

During discovery, Wando identified many of the additional physicians it alluded to during review. Wando identified almost fifty additional physicians it expects to provide services at the proposed center. Dr. Spearman testified that these individuals had an interest in referring patients and being actively involved with Wando and/or obtaining ownership interests once the CON was granted.

The original CON application included physicians who specialized in orthopedics, ENT, and pain management. The additional fifty physicians’ specialties included OB-GYN, plastic surgery, general surgery, and unspecified specialties. As a result, although Wando knew of up to fifty additional providers would be providing services at the Proposed Project, it did not provide any projections or patient origin data for them or attempt to project the expected patient volume from existing providers.

Wando also did not project the expected shift in patient volume from existing providers for either Dr. Jordan or Dr. Weber. It was clear from Dr. Jordan’s testimony that he intended to establish a new presence on the Cainhoy Peninsula in the form of a satellite office. Dr. Weber’s projections were based on his experience in Cleveland, but Wando argued Dr. Weber would be returning to South Carolina and would be treating Berkeley County patients. As with Dr. Jordan, Wando did not provide any information to demonstrate the providers currently serving those patients or which existing providers would be impacted by his re-established presence.

Accordingly, there is insufficient information available regarding the additional potential physicians to permit the court to make any determination regarding the potential impact these physicians will have on projecting Wando’s utilization.

7.                  Alternatives to the Addition of Wando

Levitt testified that there were two particularly viable alternatives that were superior to Wando’s establishment of a new $8 million facility. The first is for patients to utilize existing resources in the Tri-County area. The second is for the Lowcountry physicians to expand the existing Lowcountry facility from two to four operating rooms.

With regard to the potential expansion of the Lowcountry facility by adding an additional two operating rooms to the existing two-operating room center, Grice testified that it is a good alternative because the Lowcountry physicians already have ownership interests in an existing facility that is gaining utilization. Grice also noted that the expansion of the Lowcountry facility could be undertaken much more cost effectively than the expenditure of $8 million for the development of Wando. Instead of the $8 million project cost, he believed that an expansion of the Lowcountry facility could be accomplished for less than $2 million. This is in line with the testimony of Wando’s expert, Williams, stating that he thought a reasonable estimate for the construction costs for the expansion of the Lowcountry facility would be a little over $1 million, and he had been provided with equipment estimates for the expansion at $850,000.

Grice further testified that the expansion of the Lowcountry facility would be a better alternative to the Wando project because it would still be an accessible location for the majority of the residents, would be more convenient for the Wando physicians, and would add the same capacity for much less cost to the healthcare system. In contrast, investing the capital needed to develop a potentially unnecessary facility such as Wando would burden the healthcare system and ultimately the consumer.

8.                  Financial Feasibility

Wando presented three budgets related to the proposed ambulatory surgery center: a budget in the original CON application, a second budget on January 15, 2008, and a third and final budget on January 28, 2008. The January 15 budget reflects a reduction in number of cases from the original CON budget due to the removal of Dr. Netherton’s cases. The volume of cases is reduced further in the third budget. An analysis of the three budgets reflects that the average charges increased in each of the three budgets presented. The ENT charges were consistent throughout the budgets and are consistent with the area averages. The orthopedic charges were consistent with area averages in the original CON budget. However, the orthopedic charges increased considerably between the first and the second budget, from $4,749 to $7,102. Between the first and second budgets, Dr. Netherton’s cases and charges were removed, which partially accounts for the increase in charges. The increase in charges between the two budgets is also due to the fact that the original budget used area average charges, while the January 15 budget used the Lowcountry Center’s charges, which are not comparable to area charges because they are significantly higher than the area average. The average charges increase even further in the third budget.

The budget comparisons also demonstrate that although the volume of procedures in each budget dropped from the first to the third budget, the gross revenues were nearly identical. The assumptions relating to the gross revenue figures in the second and third budgets are due to the fact that the Lowcountry Center’s charges are significantly higher than the area average. The three budgets reflect that although the charges went up in each of the budgets, the contractual adjustments remained the same at 60.6%. Levitt testified it was unreasonable to hold the contractual adjustments at the same level because many payors pay a fixed amount regardless of what the charges are. The contractual adjustment therefore should also have increased as the charges increased.

As noted previously, projecting utilization based on Dr. Weber’s Cleveland experience is not a reasonable planning methodology given the evidence presented at trial. Subtracting Dr. Weber’s cases from the utilization in the third budget reduces the cases in year number three from 1,181 to 927 cases. The facility would then be at less that 40% capacity, and Wando would have a loss of $101,658 in the third year of operation.^[7]

The January 28 budget was based on the assumption that all of the Lowcountry Practice cases for Berkeley County residents would be redirected to Wando. Levitt prepared a version of the January 28 Wando budget reflecting the expected volume of cases reduced to exclude the percentage of cases that would be performed in a hospital setting, and not at Wando, and to exclude Dr. Weber’s Cleveland cases. The volume in year three is reduced from 1,181 in the January 28 budget to 580 cases. This reduction in volume would result in a loss of $758,800 in year three.

Levitt also adjusted the January 28 Wando budget to reflect the reductions in volume that should occur when the proximity of the Berkeley County patients is considered. In this forecast, the volumes in years one through three in the January 28 budget are reduced from 1,137 to 1,181 to 211 to 219 in the revised budget when the proximity analysis is applied. The Wando center would incur a loss of $1,442,455 in year three alone.

East Cooper’s Exhibit 55 reflects Wando’s January 28 net income pro forma with Levitt’s adjustments for proximity and area average charges. With these adjustments, the Wando center would lose $1,496,480 in the third year.

Overall, Levitt testified that the expense assumptions were consistent with the decreasing volume changes, but the revenue, gross revenue, and net and contractual adjustment percentages were not reasonable. Adjusting the final Wando budget of January 28, 2008 by different factors, including the removal of Dr. Weber’s Cleveland cases, subtracting the percentage of hospital cases that will not be performed at Wando, and adjusting the volume figures by the proximity of the patients, demonstrates that the budget was unreasonable and that realistic forecasts result in negative net income figures in the third year of operation.

III. CONCLUSIONS OF LAW

1. Jurisdiction, Review, and Burden of Proof

Jurisdiction over this case is vested with the South Carolina Administrative Law Court pursuant to S.C. Code Ann. § 1-23-600(A) (as amended by 2008 S.C. Act No. 334), S.C. Code Ann. § 44-1-60 (Supp. 2007), and 24A S.C. Code Ann. Regs. 61-15, § 403 (Supp. 2007). The weight and credibility assigned to evidence presented at the hearing of a matter is within the province of the trier of fact. See S.C. Cable Television Ass’n v. S. Bell Tel. & Tel. Co., 308 S.C. 216, 222, 417 S.E.2d 586, 589 (1992). Furthermore, a trial judge who observes a witness is in the best position to judge the witness’s demeanor and veracity and to evaluate the credibility of his testimony. See, e.g., Woodall v. Woodall, 322 S.C. 7, 10, 471 S.E.2d 154, 157 (1996); Wallace v. Milliken & Co., 300 S.C. 553, 556, 389 S.E.2d 448, 450 (Ct. App. 1990). In presiding over this contested case, the court serves as the finder of fact and makes a de novo determination regarding the matters at issue. See S.C. Code Ann. § 1-23-600(B) (Supp. 2007); Marlboro Park Hosp. v. S.C. Dep’t of Health & Envtl. Control, 358 S.C. 573, 577-79, 595 S.E.2d 851, 853-54 (Ct. App. 2004); Brown v. S.C. Dep’t of Health & Envtl. Control, 348 S.C. 507, 512, 560 S.E.2d 410, 413 (2002).

The Petitioner, as the party challenging the Department’s decision to deny the CON application in this matter, bears of the burden of proof. See Leventis v. S.C. Dep’t of Health & Envtl. Control, 340 S.C. 118, 132-33, 530 S.E.2d 643, 651 (Ct. App. 2000) (holding that the burden of proof in administrative proceedings generally rests upon the party asserting the affirmative of an issue). Therefore, Wando must demonstrate by a preponderance of the evidence that the Department’s decision to deny its CON application is contrary to the applicable regulatory criteria. S.C. Code Ann. § 1-23-600(A)(6) (as amended by 2008 S.C. Act No. 334); S.C. Code Ann. § 44-7-210(E) (2002); S.C. Code Ann. Regs. 61-15 § 403(1) (Supp. 2007); see also Anonymous v. State Bd. of Med. Exam’rs, 329 S.C. 371, 375, 496 S.E.2d 17, 19 (1998) (holding that the standard of proof in an administrative proceeding is generally the preponderance of the evidence); Nat’l Health Corp. v. S.C. Dep’t of Health & Envtl. Control, 298 S.C. 373, 380 S.E.2d 841 (Ct. App. 1989) (stating that preponderance of the evidence standard is applied in CON disputes).

2. CON Program, State Health Plan, and Applicable Project Review Criteria

This matter arises under the South Carolina Certificate of Need regulatory program for health care facilities and services, which consists of the State Certification of Need and Health Facility Licensure Act, S.C. Code Ann. § 44-7-110, et seq. (Supp. 2007), the accompanying CON regulations, 24A S.C. Code Ann. Regs. 61-15 (Supp. 2007), and the 2004-2005 State Health Plan.^[8] The purpose of this regulatory scheme is to “promote cost containment, prevent unnecessary duplication of health care facilities and services, guide the establishment of health facilities and services which will best serve public needs, and ensure high quality services are provided in health facilities in this State.” S.C. Code Ann. § 44-7-120 (2002).

Pursuant to this regulatory scheme, health care facilities must apply for and receive a CON from DHEC in order to provide certain new services or undertake certain projects. S.C. Code Ann. §§ 44-7-120, -160 (2002). In making the determination whether to grant or deny a CON, DHEC evaluates the project based on the review criteria found in the CON regulation and under the policies and standards set forth in the State Health Plan. S.C. Code Ann. § 44-7-210(C) (2002). DHEC Regulation 61-15, Section 802 lists thirty-three criteria, many of which contain subsections, by which a CON application may be evaluated. Some of these criteria that are applicable to this project include:

(1) Compliance with the State Health Plan – 1^[9]

(2) Community Need Documentation – 2a, 2b, 2c, 2d, 2e

Distribution (Accessibility) – 3a, 3b, 3c, 3d, 3e, 3f, 3g

(3) Adverse Effects on Other Facilities – 23a, 23b

Distribution – 22

Acceptability – 4a, 4b, 4c

(4) Projected Revenues/Expenses – 6a, 6b, 7

Net Income/Financial Feasibility – 9, 15

(5) Alternative Methods – 19.^[10]

3. The State Health Plan

The approval of additional ASFs or the addition of operating rooms/endoscopy suites to existing ASFs is subject to review under the South Carolina CON program. (DHEC Ex. 2 at II-77.) The State Health Plan provides that ten standards must be addressed prior to the approval of additional ASFs, and DHEC listed “Compliance with the State Health Plan” as the most important criterion for evaluating Wando’s proposed project. (Id. at II-77 to II-79.) Although a project does not have to satisfy every review criterion to be approved, a project may not be approved unless it complies with the State Health Plan. See S.C. Code Ann. §44-7-210; Roper Hosp., Inc. v. S.C. Dep’t of Health & Envtl. Control, 01-ALJ-07-0378-CC, 2002 WL 31423787 at *13 (S.C. ALJD Sept. 5, 2002).

Of the ten standards that apply to the Wando project, the court finds that Wando did not establish that its Proposed Project complies with Standards One, Two, Three, Four, and Six. Standards Five, Seven, Eight, Nine, and Ten are not in controversy.

A.                 Standard One: Proposed Service Area

Standard One provides that “[t]he county in which the proposed facility is to be located is considered to be the service area for inventory purposes. The applicant may define a proposed service area that encompasses additional counties but the largest percentage of the patients to be served must originate from the county in which the facility is to be constructed.” (East Cooper Ex. 67 at II-77; DHEC Ex. 2 at II-77.)

Wando argues that the first sentence of Standard One limited its ability to present a project that relied on utilization projections based on patients residing outside of Berkeley County. The court, however, finds Wando’s argument to be contrary to the plain language of the first sentence of Standard One. See Hodges v. Rainey, 341 S.C. 79, 85, 533 S.E.2d 578, 581 (2000). Instead, the first sentence is intended to mean that the county in which the proposed facility will be located will be used when the facility is placed in the State Health Plan’s ASF inventory. (Grice Test., Day Four at 139-43.) The inventory of ASFs, by county, is located in the State Health Plan immediately after the CON standards for ASFs. (East Cooper Ex. 67 at II-77 to II-85; DHEC Ex. 2 at II-77 to II-85.) Applying the first sentence to this matter, Wando proposes its facility will be located in Berkeley County, and thus its service area “for inventory purposes” would be Berkeley County.

Wando, in fact, in its CON application lists Berkeley County as its primary service area and refers to Charleston and Dorchester Counties as its natural secondary service areas. Furthermore, the proposed owners have a history of serving patients from across the Tri-County area. This proposed service area is consistent with the second sentence of Standard One, which clearly allows an applicant to “define a proposed service area that encompasses additional counties . . . .” (East Cooper Ex. 67 at II-77; DHEC Ex. 2 at II-77.) The court finds it is unreasonable in this case and contrary to the evidence presented to assume that the Wando facility’s service area would be limited to Berkeley County.

Wando plans to place the Proposed Project in the Cainhoy Peninsula of the southern tip of Berkeley County. However, the majority of Berkeley County residents do not live in this area and will not in the foreseeable future. (See Wando Ex. 24) (reflecting 78.9% of Berkeley County residents in 2015 will reside in Moncks Corner and Goose Creek-Hanahan areas, while 5.3% of county residents are projected to live in Wando or Cainhoy Peninsula).

An analysis of the Wando projections and the participating physicians’ patient origin also reflects that the Wando owners will not generate enough patients from Berkeley County to support the proposed center. When Wando’s final utilization projections are adjusted to remove the hospital-based cases that cannot be performed in a new freestanding center to (1) reflect the fact that numerous other facilities, including the Lowcountry Center, are far more convenient for most of the Berkeley County residents and (2) exclude the projections based solely on Dr. Weber’s experience in Cleveland, Wando has failed to prove there is a reasonable basis to project more than 207 Berkeley County patients would be redirected by the Lowcountry physicians and Dr. Jordan to Wando. This patient volume would be insufficient to support a surgery center based predominantly upon Berkeley County patients as required by Standard One of the State Health Plan.

The court is persuaded by East Cooper’s evidence that the Wando owners under these circumstances would attract surgeons with practices and patients in the Mount Pleasant area. Mount Pleasant has the most highly populated and fastest growing zip codes in the Tri-County area and is closer in proximity to the Proposed Project than are the communities where the majority of Berkeley County residents live. For these reasons, the court finds that Wando has not proven by a preponderance of the evidence that the largest group of patients served by the Proposed Project would be drawn from Berkeley County instead of the more highly populated, fast growing, and closer Mount Pleasant area.

B.                 Standards Two and Three: Identification of Affiliated Physicians and Projected Shift in Utilization

i.                    Identification of Affiliated Physicians, Where They Perform Surgery, and Anticipated Practice Changes

Standard Two of the State Health Plan provides:

The applicant must identify the physicians who are affiliated or have an ownership interest in the proposed facility by medical specialty. These physicians must identify where they currently perform their surgeries and whether they anticipate making any changes in staff privileges or coverage should the application be approved.

(East Cooper Ex. 67 at II-78; DHEC Ex. 2 at II-78.) Although Wando originally identified seven Lowcountry surgeons, Dr. Jordan, Dr. Weber, and Dr. Netherton as participating physicians, Wando failed to identify numerous other physicians who were affiliated with its project. During project review, Wando revealed plans to add eleven surgeons. The evidence conflicts as to whether Wando knew the identities of the four surgeons it intended to recruit in the next two years or whether Dr. Jordan knew the identities of the two ENTs he intended to recruit. However, it is unrefuted that Wando knew the identities of the five additional surgeons “who want to practice in the Wando facility when it is completed,” but declined to provide it. Further into Project Review, Wando stated that its “plans call for additional MDs” and its witnesses discussed up to fifty additional providers who would be providing services, although whether particular physicians in this group would practice at Wando is unclear.

Wando attempted to establish sufficient need for the Proposed Project through the additional surgeons or physicians. However, without sufficient information concerning these additional physicians, its utilization data is insufficient.

Standard Two further requires that an applicant for an ASF must “identify where [the affiliated physicians or owners] currently perform their surgeries and whether they anticipate making any changes in staff privileges or coverage should the application be approved.” (East Cooper Ex. 67 at II-78; DHEC Ex. 2 at II-78.) At no point did Wando provide any information about where the five surgeons who expressed a desire to become affiliated with it soon after Wando would be licensed were performing their surgeries or if they anticipated making any changes in staff privileges or coverage. While the court appreciates the desire of these physicians to remain anonymous due to concerns of reprisal, Wando cannot prove by a preponderance of the evidence the requirements of Standard Two without the information called for by the State Health Plan.

ii.                  The Interrelation Between Standards Two and Three

Standard Two is interrelated with Standard Three. Standard Two requires an applicant to identify the physicians and their current practice locations, and Standard Three requires an applicant to document the details regarding the physicians’ patients—where the patients will come from, where they are currently being served, and any expected shift in patient services from existing providers.^[11] (East Cooper Ex. 67 at II-78; DHEC Ex. 2 at II-78.) Thus, when Wando failed to identify other affiliated physicians during and after the DHEC review process, Wando also did not comply with Standard Three, because Wando did not document where the physicians’ patients would come from or any expected shift in patient volume. (Levitt Test., Hearing Day Five at 9-10 and 103.)

The State Health Plan standards for freestanding surgery centers are predicated on the Department’s need to know the identities of the physicians affiliated with the centers, details regarding the physicians’ practices, the number of potential patients that would be shifted to the new center, and where they will come from. When assessing whether an ASF applicant has proposed a viable project, the analysis based on the standards in the State Health Plan should focus first on whether affiliated physicians identified by the applicant control a sufficient volume of patients to justify the approval of the center. The same information is also essential to the assessment the court must undertake of the potential impact on existing providers that would be caused by the shift of patients from their facilities to the Proposed Project. Therefore, if Wando is relying upon the utilization data of a particular physician or group of physicians to support its Proposed Project, then they must be disclosed. Without that information, the court cannot make a determination of the project’s impact.

Standard Seven of the ASF standards requires that new facilities have open medical staffs and not restrict the range of surgical specialties offered. (East Cooper Ex. 67 at II-78; DHEC Ex. 2 at II-78.) However, this requirement does not obviate the requirement of Standards Two and Three that the physicians and their specialties be identified, along with expected shifts in patient volume from existing providers. The burden is on the applicant to comply with Standards Two and Three. It would not be reasonable to conclude that this obligation would exist in perpetuity, but it is reasonable to require an applicant prior to the approval of the CON to provide information within its knowledge to the Department, as well as to the court, concerning the identity of physicians who are reasonably likely to become affiliated with a proposed project during the three-year CON planning projection period. The three-year projection period ties directly to Standard Four, which mandates that an applicant document the need for an ASF, including documentation of the projected number of surgeries performed by medical specialty. DHEC further requires an applicant to quantify the extent to which a proposed project would address the need for services through the three-year future utilization projections, which include volumes, revenues, and expenses.

C.                 Standard Four: Need and Existing Resources

Standard Four requires that an applicant that proposes to establish an ASF document the need for the facility. The application of Standard Four essentially involves a two-part analysis: (1)
whether the applicant documented need, including whether existing resources are adequate to meet the need; and, (2) whether the proposed project meets the projected need, if it exists.^[12]

As a general rule, a need for an additional ambulatory surgery facility is not considered to exist unless outpatient surgery providers are operating at 80% of capacity. Marlboro Park Hosp. v. S.C. Dep’t of Health & Envtl. Control, et al., 98-ALJ-07-0734-CC, 2000 WL 1274366 at *16 (S.C. ALJD July 27, 2000) (“[T]he appropriate utilization threshold is that need generally does not exist until existing facilities reach approximately eighty percent of their total capacity.”) (ultimately affirmed by Marlboro Park Hosp. v. S.C. Dep’t of Health & Envtl. Control, 358 S.C. 573, 595 S.E.2d 851 (Ct. App. 2004)). The record reflects that there are currently thirteen existing providers of outpatient surgery services in the Tri-County area, seven freestanding centers, and six hospitals. The thirteen facilities have the capacity to serve additional patients and are operating at well below 80% capacity. Specifically, the utilization of the freestanding centers dropped from 60.8% to 50.5% from 2003-2006, and hospital outpatient surgery capacity during 2006 was at 58.1%. Thus, both hospital-based and freestanding outpatient surgery centers have considerable capacity to serve ambulatory surgery patients from Berkeley County.

In addition, an analysis of the projected outpatient surgeries in the Tri-County area in 2010 reflects that freestanding providers will be operating at only 47.9% capacity, and hospital-based providers will be at 53.1% capacity. Projected utilization in 2010 for all Tri-County providers of outpatient surgeries will be at 51% overall, with capacity to serve projected future demand. The existing ambulatory surgery centers in the Tri-County area not only have the capacity to serve additional patients, but they are also accessible to the great majority of the residents of Berkeley County.

Expert witnesses for all parties were generally in agreement that the standard drive time for an outpatient surgery patient after a procedure should be no greater than thirty minutes. In fact, Dr. Spearman testified that from a clinical standpoint he believed that although “15 to 30 minutes is reasonable,” the drive time should be “closer to 15.” (Dr. Spearman Test., Hearing Day One at 135.)

Grice testified that a majority of Berkeley County residents have access to outpatient surgery within thirty minutes. During the review period, DHEC also noted that the populous areas within Berkeley County are served by multiple hospital-based and freestanding ambulatory surgery facilities. The drive time analysis presented by East Cooper confirmed the Department’s observations, because it demonstrated that a majority of the residents of Berkeley County have access to ambulatory surgery providers within a thirty-minute drive time.

The court finds that Wando has not met its burden of demonstrating by a preponderance of the evidence the need for an additional ASF in Berkeley County. Furthermore, even if need did exist for an additional ambulatory surgery center in Berkeley County, Wando has not proven by a preponderance of the evidence that the Proposed Project would meet the need.

Wando has proposed to establish an ASF in a remote area of the southern corner of Berkeley County. The site is located on Clements Ferry Road, along a congested two-lane road in an industrial area. It is an eleven-minute drive along Clements Ferry Road from the site to Interstate 536, which cuts across the Cainhoy Peninsula to connect Charleston County on the east and Charleston and Dorchester Counties on the west. For this reason, there is limited access into the Cainhoy Peninsula area, and, as Wando represented during the staff review, truck traffic and industrial congestion would make travel difficult into and away from the site. The Proposed Project is therefore not situated to serve the great majority of residents of Berkeley County who do not reside on the Cainhoy Peninsula.

In addition to problems with physical access to the site, the proposed location is also in one of the least populated regions in Berkeley County. Only 5.3% of Berkeley County’s population is projected to live in the Cainhoy Peninsula in 2015. The population is concentrated instead in the western region of Berkeley County, where 70% to 75% of the population resides.

When compared to existing and approved providers in the Tri-County area, Wando’s project is the least accessible of the options available to the great majority of Berkeley County residents. Ten of the thirteen existing Tri-County area providers already are located within a thirty-minute drive time of the proposed Wando center’s location. With the exception of a small number of Cainhoy Peninsula residents, the proposed site would require longer drive times and would be less convenient for nearly all other Berkeley County residents.

Standard Four requires that an applicant provide the most current utilization available, including the projected number of surgeries to be performed by medical specialty. (East Cooper Ex. 67 at II-78; DHEC Ex. 2 at II-78.) An analysis of Wando’s projections reflects that Wando has been unable to demonstrate a reasonable basis for its utilization projections. As discussed in the Findings of Fact, Wando’s projections unreasonably assume that (1) it would shift all the Berkeley County patients seen at the Lowcountry Center to Wando; (2) it would acquire all of Dr. Jordan’s Berkeley County cases; and (3) it could rely on Dr. Weber’s Cleveland Clinic experience to quantify its projections that Dr. Weber would perform at Wando. See supra Section II.5. Further, Wando’s projections rely on ORS Outpatient Surgery Reports in its projections rather than JAR data, which is a more reliable means for measuring the utilization of outpatient surgical activity. See supra Section II.3.B. For all of the foregoing reasons, Wando has not met its burden of documenting need for its proposed facility.

D.                Standard Six: Documentation of the Potential Impact of the Proposed ASF

Standard Six provides that “[t]he applicant must document the potential impact that the proposed new ASF or expansion will have upon the existing service providers and referral patterns.” (East Cooper Ex. 67 at II-78; DHEC Ex. 2 at II-78.) To comply with Standard Six, an applicant must provide documentation regarding the potential impact its proposed project will have on existing providers. Because of the evidence presented on the underutilization of the existing nearby facilities and the high probability that Wando will draw patients from Mount Pleasant, which it did not include in its projections, Wando did not prove by a preponderance of the evidence that there would not be an adverse impact on the existing providers.

4. Proposed Wando Project’s Non-Compliance with Project Review Criteria

South Carolina Regulation 61-15 contains a list of criteria for project review that are potentially applicable to a proposed CON project. In this matter, DHEC specifically listed a number of criteria regarded as most important in evaluating Wando’s CON application. (See DHEC Ex. 1-C at 581.) Further, the parties offered testimony concerning an additional criterion. For the following reasons, in addition to the applicable State Health Plan standards, the court finds that the Proposed Project did not comply with the project review criteria identified by DHEC as applicable to the Wando application.

A.                 Community Need Documentation – 2a, 2b, 2c, 2d, 2e

For the same reasons discussed related to Standard Four, Wando did not meet its burden of documenting community need. See supra Section III.3.A. Wando failed to identify a need of a specific target population or that its project would meet that need.

B.                 Distribution (Accessibility) – 3a, 3b, 3c, 3d, 3e, 3f, 3g

The project review criteria for distribution (accessibility) involves in part the principle that an application will not be approved where the effect of doing so would be the unnecessary duplication of services. 24A S.C. Code Ann. Regs. 61-15, § 802, criteria 3a and 3b (Supp. 2007). As discussed previously, the existing ambulatory surgery centers in the Tri-County area have capacity to serve additional patients and are accessible to a great majority of Berkeley County residents. See supra Section III.3.C. For this reason, the Proposed Project represents an unnecessary duplication of existing services.

C.                 Adverse Affects on Other Facilities – 23a, 23b

Criterion 23a involves weighing the impact on current and projected occupancy rates or use rates of existing facilities against increased accessibility offered by the proposed services. 24A S.C. Code Ann. Regs. 61-15, § 802, criterion 23a (Supp. 2007). In the Tri-County area, the existing providers were well below 80% capacity at 58.1% in 2006 and are projected to be at a 51% utilization level in 2010. See supra Section III.3.C. The addition of Wando, another outpatient surgery provider, would necessarily impact and lower the utilization rates even further and is unwarranted because Wando offers little increased accessibility.

D.                Distribution – 22

Criterion 22, Distribution, pertains to an identification of the existing distribution of the health services and the effect of the proposed project upon the distribution. 24A S.C. Code Ann. Regs. 61-15, § 802, criterion 22 (Supp. 2007). The Tri-County area is currently served by thirteen existing outpatient surgery providers that are accessible to a great majority of Berkeley County residents. The Proposed Project would have little positive effect on the current distribution of ambulatory surgery services because it would be located in a sparsely populated area of Berkeley County, is not situated so as to increase accessibility of services to most of the county, and is less accessible than most of the existing providers to the population centers of the county.

E. Projected Revenues/Expenses – 6a, 6b, 7 and Net Income/Financial Feasibility – 9, 15

Criterion 6a states that the proposed charges should be comparable to those charges established by other facilities for similar services within the service area or state. 24A S.C. Code Ann. Regs. 61-15, § 802, criterion 6a (Supp. 2007). Criterion 9 provides that a CON project should show an improvement in net revenue position over time, and Criterion 15 requires that the applicant must project both the immediate and long-term financial feasibility of the proposal and that the projections must be reasonable. 24A S.C. Code Ann. Regs. 61-15, § 802, criteria 9 & 15 (Supp. 2007).

Wando has not proven by a preponderance of the evidence that the Proposed Project is financially feasible. As explained above, its assumptions on which the budgets were based are not supported by the evidence. See supra Section II.8. As a starting point, the orthopedic charges in the final Wando budget are not comparable with area averages. The charges were based on the Lowcountry Practice’s charges, which are high compared to the area averages. Moreover, the contractual adjustments used by Wando remained unchanged even though the charges significantly increased in each budget. This was an unreasonable assumption because many payors pay a fixed amount regardless of what is charged (the contractual adjustment should increase as charges increase). Adjusting Wando’s final budget by several key factors also demonstrates that its pro forma budget was unreasonable. Subtracting the cases projected for Dr. Weber based on his Cleveland experience results in a facility operating at less than 40% capacity with a loss of $101,658 in the third year of operation. In addition to the Weber adjustments, reducing the projected volume of cases to exclude the percentage that would be performed in a hospital setting, rather than at Wando, produces a net loss of $758,800 in year three. By reducing the number of patients from all Berkeley County residents to only the number of residents who live in areas in closer proximity to the Proposed Project site, Wando’s final budget shows a loss of $1,442,455 in the third year. Finally, adjusting patient volumes for proximity and reducing the charges to more accurately reflect area averages shows the Wando center with a loss of $1,496,480 in the third year. Each of these examples of negative revenue forecasts demonstrates that Wando’s assumptions overstate the financial feasibility of the Proposed Project and that, furthermore, it would not be financially feasible if Berkeley County patients are the predominant patient group, as required by Standard One.

F. Alternative Methods - 19

While not specifically raised by the Department during review, one of the criteria for project review provides:

a. The applicant should have considered any available or more effective alternatives which exist to the proposed service such as the use of less costly alternatives, outpatient services, shared services, or extended hours of service.

b. For new construction projects, modernization of existing facilities should be considered as an alternative, and the rejection of this alternative by the applicant should be justified.

S.C. Code Ann. Regs. 61-15, § 802.19 (Supp. 2007). Evidence was presented at trial that the Proposed Project does not satisfy this criterion. Two cost effective alternatives to the Proposed Project were presented during the course of the hearing that provide choices consistent with the underlying purpose of the CON program. First, given the low utilization of existing providers of outpatient surgery services, both currently and as projected in the future, patients in the Tri-County area could increase their use of existing resources in the area. The second alternative would be for the Lowcountry Center to expand its current facility from two operating rooms to four operating rooms.

Eight of the ten proposed Wando owners are members of the Lowcountry Practice, and six of the eight Lowcountry Practice members have an ownership interest in Lowcountry. The evidence reflects that the Lowcountry Center, which was only opened in 2004, could be expanded for less than $2 million compared with an $8 million investment in the Proposed Project. In addition to being a less costly alternative, expanding the existing Lowcountry Center is a superior alternative because it would still be accessible for a majority of residents. Accordingly, these alternatives better promote the purposes and objectives of the CON Act. See S.C. Code Ann. § 44-7-110, et seq. (Supp. 2007).

5. Conclusion

Viewing all of the facts in the record as a whole, the court finds that Wando did not meet its burden as the petitioner to prove by a preponderance of the evidence that its CON application to construct and establish a freestanding ambulatory surgery facility was in compliance with the applicable CON statutes and regulations and the standards set forth in the 2004-2005 State Health Plan, or that DHEC erred in denying Wando’s CON application for its Proposed Project.

IV. ORDER

For all the foregoing reasons, it is

ORDERED that the decision of the South Carolina Department of Health and Environmental Control to deny the Certificate of Need applied for by Wando Outpatient Surgery Center, LLC to establish an ambulatory surgery center in Berkeley County is upheld.

IT IS SO ORDERED.

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PAIGE J. GOSSETT

Administrative Law Judge

October 15, 2008

Columbia, South Carolina