South Carolina              
Administrative Law Court
Edgar A. Brown building 1205 Pendleton St., Suite 224 Columbia, SC 29201 Voice: (803) 734-0550

SC Administrative Law Court Decisions

CAPTION:
Piedmont Medical Center vs. SCDHEC et al.

AGENCY:
South Carolina Department of Health and Environmental Control

PARTIES:
Petitioner:
Piedmont Medical Center

Respondent:
South Carolina Department of Health and Environmental Control and Old Pointe Diagnostic Center
 
DOCKET NUMBER:
00-ALJ-07-0210-CC

APPEARANCES:
Stuart M. Andrews, Esquire, and Travis Dayhuff, Esquire, for the Petitioner

E. Katherine Wells, Esquire, for the Respondent South Carolina Department of Health and Environmental Control

M. Elizabeth Crum, Esquire, and Sara Centioni, Esquire, for the Respondent Old Pointe Diagnostic Center
 

ORDERS:

FINAL ORDER AND DECISION

STATEMENT OF THE CASE



This matter is before the Administrative Law Judge Division (Division) pursuant to a challenge by the Petitioner, Piedmont Medical Center (Piedmont) to a Certificate of Need (CON) non-applicability determination by the Respondent, South Carolina Department of Health and Environmental Control (DHEC). DHEC issued the non-applicability determination to the Respondent, AMICO, LLC, d/b/a Old Pointe Diagnostic Center (Old Pointe or AMICO) for an MRI project in Rock Hill, South Carolina.

A hearing on the merits of this case was held on March 6-8, 2001, at the offices of the Division in Columbia, South Carolina.



FINDINGS OF FACT

Having observed the witnesses and exhibits presented at the hearing and closely passed upon their credibility, and considering the burden of persuasion by the parties, I make the following Findings of Fact by a preponderance of the evidence:



General Findings

  • The State Certification of Need and Health Facility Licensure Act, S.C. Code Ann. §§ 44-7-110, et seq. (Supp. 2001) requires that a Certificate of Need (CON) be obtained prior to the expenditure in excess of $600,000 for the acquisition of medical equipment which is to be used for diagnosis or treatment. S.C. Code Ann. § 44-7-160 (Supp. 2000) and 25A S.C. Code Ann. Regs. 61-15, Section 102.1(f) (Supp. 2000).
  • The South Carolina Department of Health and Environmental Control (DHEC or the Department) is the agency of the State of South Carolina charged, inter alia, with the administration and implementation of the CON review procedure.
  • The regulatory procedure by which a potential CON applicant can request a formal determination from DHEC as to whether the CON Act is applicable to its proposed health care project is set forth in 25A S.C. Code Ann. Regs. 61-15, Section 102.3 (Supp. 2000).
  • On February 10, 2000, AMICO, LLC, d/b/a Old Pointe Diagnostic Center (Old Pointe), requested a determination from DHEC that its MRI project in Rock Hill, South Carolina was exempt from CON review because the total project costs were under $600,000. (DHEC Exh. No. 1, pp. 1-59). AMICO, LLC is a Tennessee limited liability company authorized to do business in South Carolina. At the time of the hearing, it owned two facilities providing MRI services: the Rock Hill facility at issue in this case and another facility in Orange City, Florida, which opened in October of 1999.
  • Pursuant to requests from DHEC, Old Pointe sent additional information to DHEC on February 22, 2000, March 13, 2000, and March 16, 2000. Old Pointe's application for a non-applicability determination addressed all applicable standards and requirements as set forth in the regulations governing non-applicability determinations. (DHEC Exh. No. 1, pp. 60-89; 91-94).
  • On March 16, 2000, DHEC issued a non-applicability determination that the proposed project did not require CON review. The approval letter stated that the determination was valid for six months from the date of the letter. Further, the Department requested that, once the project was fully implemented, Old Pointe provide DHEC with (a) an audited report to show all expenditures on the approved project; (b) the contractor's signed statement of final construction costs; (c) an equipment listing and inventory for the project; (d) a program and/or service narrative describing the final project configuration; and (e) a signed statement from the applicant that the project was implemented as outlined in the exemption request. (DHEC Exh. No. 1, pp. 95-96).
  • Petitioner Piedmont Medical Center (Piedmont or Petitioner) is a for-profit hospital owned by Tenet, located in Rock Hill, South Carolina. It appealed the decision of the Department to issue the non-applicability determination, contending that the total project cost exceeded $600,000. (DHEC Exh. No. 1, 98-105; 108-112).
  • Shortly after Piedmont appealed DHEC's decision, Old Pointe informed DHEC that construction of the facility would begin on May 17, 2000. Piedmont moved for a stay. This Court denied the motion for a stay but granted a temporary restraining order upon Old Pointe for the pendency of the case, requiring a bond to be posted by Piedmont in the amount of $200,000. (DHEC Exh. No. 1, pp. 113-121).
  • Piedmont did not post the bond, and acknowledged to this Court and the parties that Old Pointe could commence construction. Old Pointe received its temporary certificate of occupancy on September 11, 2000, and began seeing patients on September 12, 2000.
  • On September 18, 2000, in response to questions from Old Pointe concerning the form and content of the audited cost report and completion report, DHEC informed Old Pointe that implementation did not require that the project be completed within six months. Further, DHEC stated that no specific form was required for a completion report. DHEC subsequently sent, as guidance, to Old Pointe's CPA firm copies of two completion reports from previous determinations. DHEC reminded Old Pointe that the audited cost report should include the total capital costs of the project in accordance with generally accepted accounting principles (GAAP). DHEC referred Old Pointe to 25A S.C. Code Ann. Regs. 61-15, Section 103.25 for explanation of the accounting procedures for leased buildings and equipment. Finally, DHEC also requested that the audited cost report document costs, to include all contracts, invoices, and assumptions for any allocations of costs (if applicable). (DHEC Exh. No. 1, pp. 133-137; Old Pointe Exh. No. 2).
  • Old Pointe's expert testified that he used the examples provided by DHEC as a format for Old Pointe's audited cost report. (Transcript, Day 2, pp. 126-127).
  • I find that the format used by Old Pointe's accountant was consistent with DHEC's requirements and consistent with other audited cost reports submitted to DHEC pursuant to 25A S.C. Code Ann. Regs. 61-15, Section 103.25.
  • The audited cost report was submitted to DHEC on January 18, 2001. It was prepared by Old Pointe's CPA firm, the Horne Group, using generally accepted auditing standards in conformity with GAAP. (DHEC Exh. No. 1, pp. 141-143). Old Pointe submitted a listing of the equipment and inventory, a final project configuration narrative and a statement of implementation on February 8, 2001. On February 9, 2001, the contractor submitted his total construction costs for the MRI project. (DHEC Exh. No. 1, pp. 141-145; 166-169).


Total Project Costs

  • The acquisition of medical equipment used for diagnosis or treatment is exempt from the requirement for a CON if the total project costs are less than $600,000.
  • Section 103.25 of Regulation 61-15 is used by DHEC to determine the total project costs. It defines "total project cost" as follows:

"Total project cost is the estimated total capital cost of a project including land cost, construction, fixed and moveable equipment, architect's fee, financing cost, and other capital costs properly charged under generally accepted accounting principals [sic] as a capital cost. The determination of project costs involving leased equipment or buildings will be calculated based on the total value (purchase price) of the equipment or building being leased."



  • It is not uncommon for budgets of projects which request an exemption from CON review to change from the time of the proposal to the time of the final audited cost report. (Transcript, Day 3, pg. 29).
  • DHEC does not withdraw a non-applicability determination due to changes in furniture purchases or additional purchases so long as the total project costs do not exceed $600,000 and the diagnosis or treatment projected by the exempted project can still be adequately accomplished. (Transcript, Day 3, pp. 29-30).
  • As required by DHEC, the Old Pointe audited cost report contains both the total costs and the total project costs. The total project cost (TPC) itemized in the cost report was $582,050.00. At the hearing, Old Pointe submitted the supporting documentation for these amounts. (Old Pointe Exhibit No. 3 and 13).
  • Piedmont does not dispute the costs which were included in the Old Pointe cost report, totaling $582,050.00. However, Piedmont asserts that certain of the costs in the categories included in the cost report were not accurately capitalized and were improperly excluded from the total project cost, and that other costs were improperly excluded from the cost report.
  • Piedmont's Exhibits 9 and 11 set forth which costs Piedmont contends should be capitalized and how those costs differ from those capitalized costs offered by the accountants for Old Pointe, the Horne Group.
  • These costs, alleged by Petitioner to increase Old Pointe's total project costs over the $600,000 limit, include additional closing costs, accounting fees, management services, a new roof for the MRI unit, MRI equipment costs, telephone costs, salaries, supplies, inventories, miscellaneous project costs, and travel costs. Piedmont's calculations showed capitalized costs of $677,129.41 for the Old Pointe project. (Piedmont Exh. Nos. 9 and 11).


Application of GAAP

  • Generally accepted accounting principles (GAAP) guide accountants and others in determining how costs are allocated. Often the determination is based on the type of project or activity involved.
  • GAAP has differing levels of hierarchy which accountants use to interpret when costs should be capitalized or expensed. (Old Pointe Exh. No. 4). There are five levels of hierarchy when applying GAAP guidelines, with a Level I principle being the most authoritative and a Level V being the least authoritative. Financial Accounting Standards Board statements (FASB) and APB Opinions are Level I pronouncements and Statements of Position (SOP) by the American Institute of Certified Public Accountants (AICPA) are Level II. A higher level GAAP principle, if applicable to the fact situation, outranks and supersedes a lower level principle. If there is no Level I standard applicable to a situation, a Level II standard is applied to the audit.
  • Piedmont presented two experts, Gary A. Luoma (Luoma--expert in GAAP as it relates to financial accounting) and Robert J. Taylor, IV, (Taylor--expert in accounting, GAAP and the capitalization of health care projects) who contend that the total project cost of the Old Pointe Facility is in excess of $600,000.
  • Luoma testified that, in performing an engagement like preparing a Cost Report for submittal to DHEC, the most important thing is to understand the regulations governing the matter. (Transcript, Day 1, p. 39). In preparing for his testimony, Luoma only read 25A S.C. Code Regs. 61-15, §§ 102(f) and 103.25. Luoma also acknowledged that the GAAP hierarchy includes historical practices that have evolved and gained acceptance with time and experience. However, Luoma did not speak with anyone at DHEC concerning their application of the regulations, nor did he obtain any prior history of the Department's application of the regulations. (Transcript, Day 1, pp. 39-40, 95-96; Day 3, pp. 180-181).
  • Luoma based his opinion on his contention that the costs associated with the development and startup of the Old Pointe Facility should be accounted for under the standards set forth in FASB 7, "Accounting and Reporting by Development Stage Enterprises," adopted in 1990 (Piedmont Ex. 3). (Transcript, Day 1, p. 52). Luoma contended that the Old Pointe project was a "developmental stage" project as described in FASB 7. As such, he argued that the disputed costs were capital costs of the enterprise. (Transcript, Day 1, pp.52-55; Transcript, Day 3, pp. 173-175).
  • Taylor testified that he characterized the costs he felt were associated with the Old Pointe Facility as either capital or expense costs based upon his experience. (Transcript, Day 1, pp. 185-187). (1) The standard approach he uses to organize costs as either capital or expense are based upon the cost categories used in Georgia and Florida as the format under which the costs are organized for submittal for Certificates of Need in those states. (Transcript, Day 1, pp. 192-193). Taylor has not worked previously with a CON project in South Carolina.
  • FASB 7 is applicable "to any separate financial statements of a development stage subsidiary or other investee of an established operating enterprise …." Piedmont Exh. 3, p. 63, ¶ 4. FASB 7 was not intended to and did not change the application of GAAP to established operating enterprises. (Transcript, Day 3, pp. 174-176).
  • Luoma testified that while AMICO itself is not a development stage enterprise (DSE), the Old Pointe Facility is a subdivision or subsidiary or operating unit of AMICO and is a DSE. Tr. March 6, p. 53, ll. 1-16. On cross examination Luoma testified that the Old Pointe Facility is a development stage investee pursuant to paragraph 4 of FASB 7 and the calculation of total project cost is thus subject to FASB 7 guidelines. (Tr., March 6, p. 53, ll. 10 through 16; pp. 105, l. 5 through 108, l. 7). Luoma defined "investee" as "an entity in which someone else has made an investment." Tr. March 6, p. 106, ll. 3-6.
  • Footnote 4 to paragraph 4 of FASB 7 provides that "[t]he terms subsidiary and investee are defined in paragraph 3 of APB Opinion No. 18, "The Equity Method of Accounting for Investment in Common Stock." Piedmont Exh. 3, p. 63. APB Opinion No. 18 is Level 1 in the GAAP Hierarchy. "Investee" is defined as "a corporation that issued voting stock held by an investor" and "subsidiary" refers "to a corporation which is controlled, directly or indirectly, by another corporation." Old Pointe Exh. 11, pp. 2-3, paragraph 3(b)(c).
  • Arvil Stanford, AMICO's expert, testified that in his opinion, FASB 7 was not applicable to determine the total project cost in this matter because the Old Pointe Facility is not an investee as used in paragraph 4 of FASB 7 and defined in APB Opinion No. 18, paragraph 3. (Transcript, Day 2, pp. 130-132).
  • Having reviewed both FASB 7 and SOP 98-5, the testimony of the Piedmont and AMICO experts, and the definition of "investee" contained in APB Opinion No. 18, and based upon the uncontradicted evidence: (1) that the Old Pointe Facility is a wholly owned facility of AMICO doing business as Old Pointe Diagnostic Center; and (2) the Old Pointe Facility does not issue stock, I find that the Old Pointe Facility is not an investee as defined in FASB 7. I further find that, based upon the uncontradicted evidence, the Old Pointe Facility is a wholly owned facility of AMICO and is not a separate corporation. The Old Pointe Facility is not a subsidiary of AMICO.
  • Mr. Arvil Stanford (Stanford) testified on behalf of AMICO as an expert in the application of GAAP in the auditing process. Tr. March 7, p. 123, ll. 1-7. Mr. Stanford has been a CPA practicing in the private sector since 1983 and is the director of the Horne Group's audit and accounting services.
  • The Horne Group and Stanford familiarized themselves with Regs. 61-15 §§ 102.2(f), 102.3 and 103.25 by reviewing the regulations, talking with DHEC staff concerning the Department's expectations regarding the Cost Report, and finding out what other CPA firms were presenting to the Department as Cost Reports for non-applicability determinations. (Transcript, Day 2, pp. 124-128). The Department provided Stanford with examples of non-applicability Cost Reports provided to DHEC by other CPA firms. Old Pointe Exh. 2.
  • In determining whether to capitalize or expense Old Pointe's costs, including salaries and benefits, telephone and utilities, travel expenses, supplies, taxes and licenses, repairs and maintenance, legal and professional fees and other, associated with the activities necessary to open the Old Pointe facility in Rock Hill, the Horne Group relied upon SOP 98-5, "Reporting on the Costs of Start-Up Activities." (Transcript, Day 2, pp. 8, 141).
  • "Start-up costs" are broadly defined as "those one-time activities related to opening a new facility, …." Old Pointe Exh. 5, p. 100, ¶ 5. Various terms such as preopening costs, preoperating costs, organization costs and start-up costs are used in practice to refer to start-up costs, and for purposes of SOP 98-5 are all referred to as start-up costs. Old Pointe Exh. 5, p. 100, ¶ 6.
  • Start-up costs associated with activities related to the opening of the Old Pointe Facility are costs which are not specifically identifiable, have indeterminate lives or are inherent in a continuing business and related to an enterprise as a whole. Old Pointe Exh. 5, p. 102, ¶ 38.
  • Luoma and Stanford both agreed that the start-up costs identified by Horne were inherent in a continuing business and I so find.
  • Luoma testified that an asset is an embodiment of future benefits to an organization (Transcript, Day 1, p. 67) and that all costs incurred in order to put the Old Pointe Facility into use should be capital costs because they provide a future benefit and the project itself is the asset or collection of assets. (Transcript, Day 3, pp. 205-206).
  • Luoma also testified that the project itself was the identifiable asset or collection of assets for purposes of his determination that SOP 98-5 was not applicable, and that such costs as travel, lodging, meals, etc. should be capitalized because they relate to the creation of the Old Pointe Facility and not to the opening of the Facility. Luoma testified that "opening of a new facility" means the day the facility opens its doors and not the creation or development of a new facility. (Transcript, Day 3, p. 219). Thus, Luoma opined that SOP 98-5 was not applicable.
  • Based upon SOP 98-5's inclusion of the phrases "preopening costs," "preoperating costs," and "organization costs" as interchangeable with "start-up costs," I find that "start-up costs" include the cost of activities involved with developing a new facility and not just those associated with the day of opening the facility.
  • Luoma further testified that "indeterminate life" means a cost incurred for which there can be no determination as to its future benefit. (Transcript, Day 1, p. 68). I find that as associated with the start-up activities of the Old Pointe Facility, AMICO's and American Diagnostic's staff salaries, travel, meals, lodging, recruiting costs, utility costs and meal costs are costs for which there can be no determination as to its future benefit.
  • The application of SOP 98-5, that all start-up costs should be expensed rather than capitalized, applies to established operating enterprises as well as to development stage enterprises. (Transcript, Day 2, pp. 145-146; Old Pointe Exh. 5, p. 101, ¶ .33; and Piedmont Exh. 3, pp. 64, ¶ 10). An established operating enterprise is a business that has begun doing what it was created to do. (Transcript, Day 3, p. 178). Based upon the evidence in the record, I find that AMICO is an established operating enterprise.
  • Established operating enterprises incur costs with varying degrees of uncertainty about future benefits in expanding their businesses and FASB 7 was not intended to specify criteria or guidelines for when such costs should be expensed or capitalized. (Transcript, Day 3, pp. 179-180).


  • Based upon the credible evidence in the record, I find that AMICO was expanding its existing business when it undertook the activities associated with starting up the Old Pointe Facility. I find that if the Old Pointe Facility project constitutes a future benefit for AMICO and is the asset for purposes of determining what is a capital cost under GAAP, then every cost incurred by AMICO should be capitalized, which is not the intent of 25A S.C. Code Ann. Regs. 61-15 § 103.25.
  • Having reviewed both FASB 7 and SOP 98-5, and having considered the testimony of the experts and the historical treatment by DHEC of these costs, I find that neither AMICO nor the Old Pointe Facility meets the definition of either a development stage subsidiary or investee as defined in paragraph 3 of APB Opinion No. 18 and adopted by FASB 7. FASB 7 is not applicable to the Old Pointe Facility. I find that SOP 98-5 is applicable and that any costs incurred with the activities associated with opening the Old Pointe Facility are start-up costs which were properly expensed in the Cost Report.


Closing Costs

  • Initially, I find that there is insufficient evidence from the testimony of one of Piedmont's expert witnesses, Robert J. Taylor, that an amount of $9,571.00 should be added to the closing costs. Mr. Taylor's assumption that this item is a capital cost derives from information in a letter from Ken McNeese (the lessor) to a bank officer. Upon cross-examination, Mr. Taylor admitted that he had no evidence of this additional cost other than the vague references in the letter. Having reviewed the letter and the HUD-1 closing costs report submitted by Old Pointe, I find the HUD-1 report to be more credible as to the closing costs incurred in the purchase of the land on which the MRI project is located. Accordingly, the amount of $9,571.00 was correctly omitted by Old Pointe as an additional capital closing cost. (Piedmont Exh. No. 11, pg. 94; Old Pointe Exh. No. 3, pp. 12-13).


Accounting Fees, Management Services, and Travel Costs

  • DHEC's expert witnesses, Ms. Cantwell and Mr. Frishman, testified that accounting fees, management services, and travel costs have never been included as a part of the total project cost for purposes of non-applicability determinations, either by DHEC or in Cost Reports submitted by outside accountants. This testimony was undisputed.
  • Old Pointe's expert, Stanford, categorized the management services and travel costs as operating expenses pursuant to the guidelines of Statement of Position 98-05 (SOP 98-5), since these were "start-up" costs of the new facility. (Old Pointe Exhibit 5; Transcript, Day 2, pp. 148-150). He testified that he would not consider the accounting fees or travel costs suggested by Piedmont for capitalization as capital costs, because they were not costs which should be capitalized according to GAAP. (Transcript, Day 2, pp. 148-150; 170-172).
  • Having reviewed both FASB 7 and SOP 98-5, and having considered the testimony of the experts and the historical treatment by DHEC of these costs, I find that the management services and travel costs, totaling $40,825.37, were "start-up" costs of Old Pointe and were properly treated as operating expenses by Old Pointe's accountants pursuant to SOP 98-5.
  • I find that the accounting fees paid by AMICO to the Horne Group, in the amount of $9,700.00, are not capital costs, based upon a review of FASB 7, SOP 98-5, the testimony of the experts, and the testimony of the DHEC witnesses. I further find that to capitalize accounting costs would unfairly penalize those projects where the TPC is over $500,000 or where an appeal is filed, since only in those situations would the applicant be faced with including the accounting fees as part of the TPC. In fact, if an applicant had a TPC close to $600,000, a competitor could cause the TPC to exceed the threshold simply by filing a request for a contested case hearing and causing the applicant to incur accounting expenses.


Petty Cash Deposits, Supplies, and Inventory

  • Stanford testified that he would not consider the petty cash deposits, supplies or inventory costs suggested by Petitioner for capitalization as capital costs, because they were not costs which should be capitalized according to GAAP. (Transcript, Day 2, pp. 148-150; 170-172).
  • DHEC's witnesses testified that petty cash deposits, supplies and inventories are never included as capital costs for projects seeking non-applicability determinations. Those items are considered by DHEC to be operating costs of the project, not capital costs, due to the small sums involved and the fact that these items are usually consumed within a year of operation. (Transcript, Day 3, pp. 40-44; pp. 112-114; 120-122). This testimony was undisputed. I also find undisputed DHEC's testimony that in all the years of reviewing cost reports by Mr. Frishman and Ms. Cantwell, no CPA has included petty cash deposits, supplies, or inventory costs as capital costs to be included in the total project cost for purposes of non-applicability determinations.
  • Based upon a review of the applicable accounting principles and the testimony of the experts and the DHEC witnesses, I find that the costs for deposits, general supplies, inventories and miscellaneous project costs totaling $ 8,966.50 are not capital costs and were properly treated as operating expenses.


Costs Associated with MRI Equipment

  • Piedmont's experts testified that any costs associated with the MRI equipment which was transported from Illinois to Florida for use in a facility in Florida must be capitalized. These costs included transportation costs from Illinois to Florida and maintenance of the MRI equipment in Florida and South Carolina. (Transcript, Day 1, pp. Pp. 81-82; 170-179).
  • The transportable MRI unit identified in Old Pointe's application for a non-applicability determination (MRI Unit) was located in Calumet, Illinois, and was originally purchased from Medical Manufacturing by AMICO for use in its Orange City, Florida facility. (Transcript, Day 2, pp. 21-24), because the Orange City facility was having shielding problems with its existing unit. (Transcript, Day 2, pp. 10-12). The MRI Unit was a complete operating system, except for the cowling rail, when it was purchased and was complete when it arrived in Orange City to be ramped up. (Transcript, Day 2, pp. 25-26; 57).
  • DHEC's witnesses testified that it is not uncommon for health care facilities in South Carolina to purchase used MRIs in other states and to bring them into South Carolina. Historically, DHEC has capitalized only transportation costs from the most recent point of ownership to South Carolina. Repair costs which are necessary to operate the machinery and which increase the life of the equipment are capitalized; routine maintenance is not capitalized. (Transcript, Day 3, pp. 61-62; 88-90; 109-111; 120-122; 126-129).
  • Old Pointe's witness, William George, is a radiologic technologist and is employed as a service engineer and applications specialist for the MRI division of American Diagnostics, Inc. His duties include the repair and maintenance of MRI units; the training of other radiologic technologists; and the setting of protocols for MRI machines so they can produce images. (Transcript, Day 2, pp. 44-46).
  • After the MRI Unit was delivered to the Orange City facility, George cleaned and "ramped up" the unit, following the procedures in the preventive maintenance manual furnished by the manufacturer, General Electric. (Transcript, Day 2, pp. 58-61). The MRI Unit was filled with cryogens according to the preventive maintenance manual. MRI units must be routinely filled with cryogens to keep the unit cool so that it holds its electricity and thus its magnet field. (Transcript, Day 2, pp. 61, 67). During the course of the work performed on the MRI Unit in Orange City, no hardware, coils, or software were added to the unit. As a result of this work, the MRI Unit had no additional capacity and was the same unit following the work as it had been when it arrived in Florida. (Transcript, Day 2, p. 68).
  • When the MRI Unit was moved to Rock Hill, George again "ramped up" the unit according to the manufacturer's preventive maintenance manual. (Transcript, Day 2, pp. 68-70).
  • George's testimony concerning the routine nature of the work performed on the MRI Unit in Orange City and in Rock Hill was not contradicted by other technical testimony.
  • I find that, based on the historical application by DHEC and GAAP, only the transportation costs of $4,605 from Florida to South Carolina should be capitalized. Based on the uncontradicted technical testimony of George, I find that maintenance costs in both Florida and South Carolina, estimated by Piedmont to be $28,727.49, were costs of routine maintenance properly accounted as operating expenses and were not capital costs of the Old Pointe project.


Construction Costs

  • Piedmont also alleged that the construction costs were undercapitalized by $4,200.27 and did not include repairs to a leaking roof which occurred during the construction of the building in September. (Transcript, Day 1, pg. 165, 199).
  • However, Ralph Norman, the contractor for Old Pointe, sent to DHEC, as part of the completion report requirement, a signed statement, dated February 9, 2001, of total construction costs. This included, among other items, the costs of MRI roof repair. (DHEC Exh. No. 1, pg. 169).
  • I find that the total construction costs were $231,840, as specified in Mr. Norman's statement, and in the Horne Group report.


Miscellaneous Costs and Addendum to Cost Report

  • I find that the Horne Group's treatment of the loan closing costs, other financing costs, furniture and fixtures, telephone and other equipment were correctly categorized and that no capital costs were omitted based on the information available to the Horne Group at the time it completed the report.
  • Further, I find that the Department's determination that the audited cost report prepared by the Horne Group properly categorized capital costs for the total project cost is consistent with its historic interpretation of total project costs as defined by Section 103.25 of Regs. 61-15.
  • However, at the hearing, Old Pointe submitted Exhibit 13 as an addendum to the capital costs for the Old Pointe project for additional furniture purchases made between October 2000 and January 2001. This increased the total project cost to $586,030.24.
  • The Department did not object to the inclusion of these amounts in the total project cost.
  • I find that $586,030.24 accurately reflects the total project cost of the Old Pointe project as defined by S.C. Code Ann. Regs. 61-15, Section 103.25.


CONCLUSIONS OF LAW

Based upon the foregoing Findings of Fact, I conclude, as a matter of law, the following:

  • The Administrative Law Judge Division has jurisdiction over this matter and is authorized to hear it pursuant to S.C. Const. Art. I, §22; Chapter 23 of Title 1 of the 1976 Code, as amended, S.C. Code Ann. § 1-23-600(B)(Supp. 2001); S.C. Code Ann. §§ 1-23-310, 320 (Supp. 2001); S.C. Code Ann. § 44-7-210(D)(2) (Supp. 2001); 25A S.C. Code Ann. Regs. 61-15 § 403 (Supp. 2001), and S.C. Code Ann. Regs. 61-72 § 201 (Supp. 2001).
  • The burden of proof in a contested case hearing is a preponderance of the evidence, with the burden being on the Petitioner. Therefore, Piedmont has the burden of proof to establish by a preponderance of the evidence that DHEC erred in approving Old Pointe's request for a non-applicability determination. S.C. Code Ann. §§ 44-7-110 through 44-7-340 (Supp. 2001); S.C. Code Ann. Regs. 61-15, § 403(1) (Supp. 2001); National Health Corp. v. S.C. Dep't. Of Health and Environmental Control, 298 S.C. 373, 380 S.E.2d 841 (1989).
  • Evidence of allegations must be sufficient and probative of the matter to be proven. See Coleman v. Palmetto State Life Ins. Co., 241 S.C. 384, 128 S.E.2d 699 (1962).
  • DHEC is the agency of the State of South Carolina, charged, inter alia, with the administration and implementation of the State Certification of Need and Health Facility Licensure Act, S.C. Code Ann. §§ 44-7-110, et seq. (Supp. 2001). It is therefore the State agency responsible for determining if an application for an MRI project such as the Old Pointe Facility requires CON review.
  • Pursuant to 25A S.C. Code Ann. Regs. 61-15, CON review is not applicable to a medical equipment project when the total project cost is less than $600,000. Therefore, for the determination of nonapplicability of the CON review process to be invalid, Piedmont must prove by a preponderance of the evidence that Old Pointe's total project cost was in excess of $600,000.
  • 24A S.C. Code Ann. Regs. 61-15, Section 103.25 defines "total project cost" as follows:

Total project cost is the estimated total capital cost of a project including land cost, construction, fixed and moveable equipment, architect's fee, financing cost, and other capital costs properly charged under generally accepted accounting principals [sic] as a capital cost. The determination of project costs involving leased equipment or buildings will be calculated based on the total value (purchase price) of the equipment or building being leased.



  • A capital cost is a cost which benefits the purchaser for a period longer than one calendar year. "Capital cost" is commonly defined as a cost for improvement to property, such as are depreciable over the useful life of the improvements. An expense, i.e., an item other than a capital cost, is generally considered to be a cost of an item of service which is exhausted within a twelve month period. Image Trust Florence v. South Carolina Department of Health and Environmental Control and Florence Medical Imaging, Docket No. 95-ALJ-07-0539-CC, Order dated April 19, 1996, citing from Robert N. Anthony and James S. Reese, Accounting Text and Cases (6th ed. 1979); Ralph Estes, Dictionary of Accounting (1981); J.K. Lasser's Standard Handbook for Accountants (1962).
  • An agency's interpretation of the regulations and statutes which it is charged with administering is entitled to a most respectful consideration and should not be overruled absent compelling reasons. Vulcan Materials Company v. Greenville County Board of Zoning Appeals, 342 S.C. 480, 536 S.E.2d 892 (Ct. App. 2000); Dalton v. S.C. Tax Comm'n., 295 S.C. 174, 367 S.E.2d 459 (Ct. App. 1988); Image Trust Florence v. South Carolina Department of Health and Environmental Control and Florence Medical Imaging, supra. Piedmont has not even alleged that DHEC abused its discretion in its interpretation of its own regulations regarding non-applicability determinations.
  • A trier of fact is not compelled to accept an expert's testimony, but may give it the weight and credibility he or she determines it deserves. Florence County Dep't. of Social Serv. v. Ward, 310 S.C. 69, 425 S.E.2d 61 (1992).
  • I find and conclude that the testimony of Mr. Stanford, Old Pointe's expert, as consistent with the interpretation of FASB No. 7, SOP 98-5 and the historical interpretations of DHEC, was more credible than the testimony of Piedmont's experts. Further, I find and conclude that the testimony of Ms. Cantwell and Mr. Frishman was more credible than that of Piedmont's experts in that both Ms. Cantwell and Mr. Frishman have many years of experience in reviewing applications for CONs and applications for exemptions from CON review, and it was uncontradicted that DHEC's review of Old Pointe's application for exemption was consistent with its review of other applications for exemption.
  • As to the testimony on routine maintenance and repair, this court holds that the testimony of Bedell and George, Old Pointe's witnesses was uncontradicted by any other technical testimony, and therefore, more credible than the testimony on this issue by Piedmont's expert accountants.
  • Old Pointe's testimony regarding the application of GAAP and its determination of capital costs was in accord with DHEC's historic interpretation and application of 25A S.C. Code Ann. Regs. 61-15 §§ 102.2(f), 102.3 and 103.25, as well as the previous interpretations of GAAP by other CPAs who have submitted Cost Reports to DHEC in conjunction with requests for non-applicability determinations.
  • Pursuant to S.C. Code Ann. § 1-23-330(4) (1986), in the evaluation of the Old Pointe application, and in the presentation of testimony and evidence at the hearing, DHEC used its experience, technical competence, and specialized knowledge.
  • The estimated total capital cost properly charged under generally accepted accounting principles, and other costs included in the total project costs of Old Pointe's MRI project, did not exceed the $600,000 threshold amount necessary to require CON review.
  • A decision is arbitrary if it is without a rational basis, is based alone on one's will and not upon any course of reasoning and exercise of judgement, is made at pleasure, without adequate determining principles, or is governed by no fixed rules or standards. Deese v. South Carolina State Board of Dentistry, 286 S.C. 182, 332 S.E.2d 539 (Ct. App. 1985); Physician Imaging Centers, Inc. v. South Carolina Department of Health and Environmental Control and Tricounty Radiology Associates, PA, Docket No. 95-ALJ-07-0540-CC, Order dated January 17, 1996.
  • DHEC's determination that CON review did not apply to Old Pointe's project was based upon clear standards, sound reasoning, and was consistent with its historical interpretation of such projects. Furthermore, DHEC met all statutory and regulatory requirements in its review of the Old Pointe application and in its decision that the Old Pointe application did not require CON review.
  • Piedmont failed to prove by a preponderance of the evidence that DHEC's review of the Old Pointe application was not in accordance with the CON Act and Regulation 61-15 and that the total project cost of the Old Pointe Facility was in excess of $600,000.
  • I conclude that $586,030.24 is the total project cost of the Old Pointe project as defined by S.C. Code Ann. Regs. 61-15, Section 103.25.


ORDER

Based upon the foregoing Findings of Fact and Conclusions of Law, it is hereby

ORDERED that DHEC's non-applicability determination, NA-00-19, that the Old Pointe MRI project in Rock Hill, South Carolina did not require CON review is affirmed.

AND IT IS SO ORDERED.



________________________________

CAROLYN C. MATTHEWS

Administrative Law Judge



January 31, 2002

Columbia, South Carolina

1.

0 Taylor also testified that he relied upon "Statement on Concepts" number 6, a Level 5 in the GAAP hierarchy. (Transcript, Day 1, p. 186).


Brown Bldg.

 

 

 

 

 

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