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:
Physician Imaging Centers, Inc. vs. SCDHEC et al.

AGENCY:
South Carolina Department of Health and Environmental Control

PARTIES:
Petitioner:
Physician Imaging Centers, Inc.

Respondent:
South Carolina Department of Health and Environmental Control and Tricounty Radiology Associates, P.A. (Charleston County)
 
DOCKET NUMBER:
95-ALJ-07-0540-CC

APPEARANCES:
David B. Summer, Jr. and Faye A. Flowers, Attorneys for Petitioner

Robert A. Bernstein and Charles S. Bernstein, Attorneys for Respondent Tricounty Radiology Associates, P.A.

Cheryl H. Bullard and Jacquelyn S. Dickman, Attorneys for Respondent South Carolina Department of Health and Environmental Control
 

ORDERS:

ORDER

STATEMENT OF THE CASE

This matter comes before me upon Petition for Administrative Review filed by Physicians Imaging Centers, Inc. ("PIC") regarding the determination of the South Carolina Department of Health and Environmental Control ("DHEC" or "The Department") that the acquisition of a magnetic resonance imaging ("MRI") unit and its placement in the existing private physician offices of Tricounty Radiology Associates, P.A. ("Tricounty") is exempt from the Certificate of Need ("CON") application and review process set forth in S.C. Code Regs. 61-15 (Supp. 1995).

DHEC received a letter from Tricounty, dated July 18, 1995, requesting a determination as to whether the proposed acquisition of a MRI unit and its placement in its Charleston office was exempt from CON review. DHEC reviewed the information provided by Tricounty and notified Tricounty by letter dated July 26, 1995, that the acquisition was not reviewable under Regs. 61-15. PIC contests the July 26, 1995 DHEC exemption decision and seeks to require Tricounty to proceed with CON review under Regs. 61-15.

Several related business entities were involved in the MRI acquisition by Tricounty. The ultimate sales transaction for equipment and service was between Sitco, Inc., d/b/a Summit Credit Corporation as seller, and Tiger Management, LLC, as buyer.

Sitco, Inc, d/b/a Summit Credit Corporation, purchased the used MRI magnet and associated service warranty from Hitachi Medical Systems America, Inc. ("Hitachi"). Sitco, Inc, and Summit Credit Corporation merged in April, 1995, and are interchangeable names for the same entity. Sitco is engaged in the acquisition, reconditioning, resale, and servicing of used MRI units, and the financing of purchases of new MRI units. Hitachi is engaged in the sale of new and used MRI units in the United States. There are common, but not identical shareholders and officers between Hitachi and Sitco. A minority shareholder of Hitachi is Summit Corporation. There are common, but not identical shareholders and officers between Summit Corporation and Sitco, Inc, d/b/a Summit Credit Corporation. Some shareholders are Hitachi employees, some are Sitco, Inc. employees.

Tricounty is the professional association for three private practice physicians engaged in the practice of radiology. Tiger Management, LLC is a Limited Liability Corporation which is purchasing the MRI unit for the purpose of leasing it to Tricounty. Tiger Management, LLC is composed of all physician members of Tricounty and Mr. Chris Cochran, Tricounty's managing agent and chief administrator. The acquisition of the medical equipment is solely for the use of the offices of licensed private practitioners of medicine. For purposes of this Order, "Tricounty" refers to Tricounty Radiology Associates, P.A.. and/or Tiger Management, LLC, unless otherwise indicated.

A contested case hearing was held on October 24, 25, and 26, 1995, for consideration and determination of whether the MRI project is subject to CON review. Because PIC failed to prove that Tricounty's total project cost exceeds $600,000, CON review of the project is not required.

ISSUES

PIC's assertion that Tricounty's MRI project is subject to CON review raises the following three issues:

A. Does the operation of a MRI unit constitute operation of a "health care facility" as defined under Regs. 61-15, § 103, thereby requiring CON review regardless of the amount of the total project cost?

B. Did Tricounty's acquisition of medical equipment for the MRI project involve a "total project cost" in excess of $600,000, thereby requiring CON review pursuant to Regs. 61-15, § 104(2)(e)?

C. Is a decision to allow Tricounty to proceed with the establishment of a MRI facility without CON review arbitrary and capricious?



BRIEF ANSWER

PIC contends that the purchase and operation of a MRI system, regardless of project cost, constitutes the operation of a "health care facility" and that Tricounty cannot rely upon the exemption set forth for physicians' offices. Regs. 61-15, § 104(2)(e). A MRI facility is not necessarily a "health care facility" as defined under Regs. 61-15, and in this instance, is not one. The site of Tricounty's project is a physicians' office and the equipment in question is intended to be used for diagnosis and/or treatment of patients. Therefore, Regs. 61-15 is inapplicable unless the total project cost exceeds $600,000.

Notwithstanding a finding that a MRI unit, regardless of cost, does not constitute a "health care facility," PIC asserts CON review is required in this case because Tricounty's total project cost is in excess of $600,000. Tricounty and DHEC maintain that the total project cost is approximately $565,052.88. PIC asserts that by allocating and assessing a percentage of Tricounty's existing office square footage to the MRI project and counting capital costs allegedly disguised as service costs, the actual total project cost is well above $600,000. PIC's allocation concept is rejected, as DHEC's regulations do not utilize that methodology in determining total project cost. It appears that complete totals for some capital costs items, namely installation and product enhancement costs, are not included in the total project cost calculated by Tricounty and DHEC; however, reliable evidence is lacking to determine the amount of installation and product enhancement costs already included and the amount which must be added to produce the true total project cost. Without specific findings establishing such cost amounts, PIC fails to prove the project's total cost is in excess of the $600,000 threshold.

Finally, PIC contends that exemption of the Tricounty project would be arbitrary and capricious, given that PIC is required to complete CON review to provide similar MRI services in Charleston County.(1) No evidence was presented to substantiate that contention. Not all MRI projects are subject to CON review. Tricounty's CON exemption request was handled by DHEC no differently than any other exemption request. PIC did not seek CON exemption of its project, but rather filed an application for the grant of a CON. Dependant upon the cost of the project, different procedures and standards apply.

DISCUSSION

A. Definition of "Health Care Facility"

PIC contends that Tricounty must undergo CON review prior to acquisition and operation of a MRI unit, pursuant to S.C. Code Ann. § 44-7-160(1)(Supp. 1995) and Regs. 61-15, § 102(1)(a), which mandate that a CON is required before undertaking "the construction or other establishment of a new health care facility" (emphasis added). S.C. Code Ann. § 44-7-160(4)(Supp. 1995) and Regs. 61-15, § 102(1)(d) require that CON review is required before "[a] capital expenditure by or on behalf of a health care facility which is associated with the addition or substantial expansion of a health service for which specific standards or criteria are prescribed in the State Health Plan" (emphasis added). Not all purchases of MRI units render the owner a "health care facility", thus subjecting them to CON review, however. Sections 44-7-160(1) and (4), as well as Regs. 61-15, §§ 102(1)(a) and 102(1)(d) do not apply to the present situation. Because Tricounty does not constitute a "health care facility", these regulations are inapplicable.

The term "health care facility" is specifically defined in S.C. Code Ann. § 44-7-130(10)(Supp. 1995) as:

acute care hospitals, psychiatric hospitals, alcohol and substance abuse hospitals, tuberculosis hospitals, nursing homes, kidney disease treatment centers, including free standing hemodialysis centers, ambulatory surgical facilities, rehabilitation facilities, residential treatment facilities for children and adolescents, habilitation centers for mentally retarded persons or persons with related conditions, and any other facility for which Certificate of Need review is required by federal law.

The same definition of "health care facility" is set forth in the Regs. 61-15, § 103(13), with one difference: the final phrase of Regs. 61-15, § 103(13) includes within the definition "...and any other facility for which CON review is required by federal or state law" (emphasis added). Tricounty is not a "health care facility" under the regulatory scheme, and is thus not required to undergo CON review under the provisions of § 44-7-160(1) and (4), or Regs. 61-15, §§ 102(1)(a) and 102(1)(d).

Tricounty is exempt from review under any statute or regulation other than S.C. Code Ann. § 44-7-160(6)(Supp. 1995) or Regs. 61-15, § 102(1)(f). The provisions of the CON review statutes do not apply to "the offices of a licensed private practitioner whether for individual or group practice except as provided for in Section 44-7-160(7)." S.C. Code Ann. § 44-7-170(A)(2)(Supp. 1995). Regs. 61-15, § 104 (1)(e) provides that the regulations regarding CON review do not apply to "[t]he offices of a licensed private practitioner whether for individual or group practice except as provided for in Section 102.1.f." The exceptions noted in these provisions deal with the acquisition of medical equipment with a total project cost in excess of a minimum set by regulation, i.e., $600,000. The issue of whether the present project exceeds that threshold amount is a separate issue and is discussed below.

B. Total Project Cost Calculation

1. Allocation of Existing Resources

PIC argues that to establish total project cost, DHEC must consider Tricounty's existing facilities utilized as part of the physicians' group practice and allocate the proportionate value of those resources to the overall cost of the new MRI project. PIC attempted to prove that DHEC should have allocated a portion of Tricounty's existing reception areas, waiting rooms, dressing rooms, rest rooms, etc. necessary to utilize the MRI operation to the new project's total cost, and had DHEC made such an allocation calculation, the resulting total project cost would exceed the exemption cap figure.

PIC's allocation concept is not compelling. Existing facilities in the physicians' offices were not initially constructed with the present MRI project in mind. The common areas, such as waiting areas and rest rooms were in use before construction of the MRI project. Merely because those areas may also be used by future MRI patients, is no reason to consider them as part of the MRI project itself. As a matter of agency practice, DHEC does not allocate costs of pre-existing facilities and services in determining "total project cost" under the DHEC regulations when considering a project for exemption from CON review. Any allocation other than the one made for the physical real estate and improvements representing the 492 square feet upon which the MRI unit, control panel and associated equipment were installed, is not warranted.

2. Cost Shifting/Hidden Capital Costs

PIC's primary ground of attack to Tricounty being granted CON exemption, is based upon a cost shifting theory. PIC contends that Tricounty and/or a combination of related entities conspired to shift and hide various capital costs to appear as service costs so that the total project cost would appear to be under the $600,000 threshold.

Tricounty purchased the MRI equipment for $470,000. Contemporaneously with purchasing the equipment, Tricounty paid for a one year service and warranty contract required by the seller at a cost of $125,000. Tricounty also contracted for service and warranty for each of the succeeding four years, at $70,000 per year. PIC asserts that part of the $125,000 first year service fee is actually a portion of the purchase price of the MRI equipment. That conclusion rests upon the premise that all or some of the principals involved in the MRI acquisition transaction structured the deal so that, while the purchase price of the MRI unit was above $600,000, part of the capital costs were treated and referred to as warranty and/or service contract expenses.

All parties agree that, based upon the information before it at the time of the DHEC staff determination, it's exemption decision was sound. PIC claims, however, that had the exemption request been accompanied by complete and accurate information regarding the structure of the deal, and had DHEC scrutinized the transaction in its entirety, it would have calculated the total project cost of the MRI project differently, resulting in a determination that the monetary threshold is surpassed and CON review is required. At the hearing, PIC painted a picture of a "wink and nod" arrangement by the principals to allow the seller(s) to realize a profit on the sale, but avoid creating a paper trail which would indicate a $600,000+ price tag for the project. PIC maintains that DHEC, and now this Court, should look at the consideration received by the seller, regardless of how it is characterized by contract, to assess the true nature of the costs.

A laundry list of items is required from the requesting party before DHEC categorizes and calculates the total project cost, as defined by Regs. 61-15, § 103(25). DHEC requested and received extensive information from Tricounty before issuing its exemption decision. DHEC reasonably relied in good faith upon the representation that all costs necessary to accurately calculate the total project cost were included in the exemption request.

While generally complying with DHEC's information requirements, Tricounty did not submit all details and nuances of the MRI equipment and service purchase deal. Upon having many of those details uncovered at the hearing through PIC's presentation of evidence, this Court is convinced that the $600,000 total project cost threshold for CON review influenced the structuring of the MRI acquisition deal. PIC contends that the principals colluded to circumvent the intent of the CON review law. A distinction must be drawn, however, between fraudulent misrepresentation and shrewd business strategy.

There are common, but not identical shareholders and officers between Hitachi and Sitco. Sitco and Hitachi share several business and financial interests, but the two corporations are not synonymous. There are no common ties between Tricounty and Sitco or between Tricounty and Hitachi, except for the sale of the MRI unit at issue. The acquisition occurred in an "arm's length" transaction. While it may give one a better understanding of the complexity of the complete transaction to identify the role of each participant in the chain of the transaction, the main scrutiny must be upon the final terms of the ultimate sale between the unrelated principals, Tricounty and Sitco.

In the normal negotiating process between buyer and seller, the purchaser does not inquire into and the seller does not reveal its financial bookkeeping methods. It would impose an impossible burden upon this purchaser, or any other buyer, to charge it with knowledge of and responsibility for the acquisition costs of its supplier or suppliers; this Court declines to do so. The Court holds that, absent clear proof of collusion between purchaser and seller, the contract price entered into between the parties controls the issue of the cost of the equipment.

It is common in arm's length business sales and contractual matters, for parties to negotiate the terms of a transaction. It is not unusual in the least for the final consummated deal to be drastically different from the initial or intermediate offers and counter offers. In the present case, two separate, but necessarily linked contracts were negotiated simultaneously. The prices of the two necessary components of the overall deal were both lowered through negotiations. Hitachi first offered to sell the MRI unit to Tricounty at a cost of $525,000 (with additional options available at added costs). The offer also included a service and warranty contract for the first year at a cost of $125,000, and for the second, third, fourth, and fifth years at a total cost of $360,000. Negotiations culminated with the final terms of the transaction, encompassing the purchase of the MRI unit from Sitco at a cost of $470,000, the purchase of a service contract for the first year at a cost of $125,000, and service for the succeeding four years at a combined cost of $280,000 ($70,000 per year).

The Court's objective at this point is basic: to determine what, if any, portion of the total project cost, as defined by Regs. 61-15, § 103(25), is included in the cost of the service contract. Specifically, installation and product enhancement costs are in controversy. At trial, experts for each of the parties agreed that the costs of equipment installation and product enhancements (such as software updates and hardware modifications) should be included in the total project cost calculation. PIC has the burden not only of establishing that the service contract includes installation and/or product enhancement costs, but also of proving the amount of those costs. When added to the previously disclosed project costs, the total project cost must exceed $600,000 for PIC to win on the ultimate issue.

It appears that a portion of the installation and product enhancement costs of the MRI unit were included in the service contract. In apparent conflict, "installation" is alternately itemized as a feature of the sales contract and service contract throughout the correspondence and job cost quotes exchanged by the principals during negotiations. For example, based upon the June 16, 1995 Quotation from Summit Credit Corporation to Tricounty Leasing Partners (the document submitted to DHEC by Tricounty supporting its exemption request), the $470,000.00 purchase price of the MRP-5000 magnet and related equipment included the cost of "System Installation." (Court's Ex. #1, pp. 39-40). The evidence offered by PIC at trial indicates, however, that even after the transaction was consummated, the seller of the MRI unit considered a portion of the service contract cost of $125,000 to be for installation and software upgrades, i.e., product enhancements. (letter from James F. Kovacic to M.S. Hovsepian, dated August 31, 1995; Petitioner's Ex. # 31, p. HIT017-HIT018).

It is not clear, however, how much of the installation and product enhancement costs are included in the service contract and how much are included in the sales contract. Since Tricounty and DHEC admit that the total project cost, not including any portion of the service contract, is approximately $565,052.88, PIC has the burden of proving that the apportioned cost of installation and product enhancements contained in the service contract exceeds $34,947.12, to establish the total project cost is above the exemption cost threshold. While the cost of installation and product enhancements may have been divided between the sales contract and the service contract, the Court is unable to find by a preponderance of the evidence the exact value of that portion of the installation and product enhancements included in the service contract. Obviously, that determination is vital to resolving the issue of exemption.

PIC asserts the installation costs included in the service contract is $50,000. It bases that conclusion primarily on an undated, unsigned Sitco Job Cost Sheet (Petitioner's Ex. # 32, p. SUM031) and a May 25, 1995 letter from Hitachi to Summit (Petitioner's Ex. # 32, p. SUM005) containing the "suggested configuration" of pricing and a note that, "First year service includes installation, warranty, and upgrade of system to latest software release and compatibility." If PIC had proved that the entire cost of installation is included in the service contract, the $50,000 figure would be plausible; however, in light of the this Court's finding that the installation cost is divided between the service contract and the sales contract, there is no reliable, probative evidence to indicate the amount of installation cost attributable to the service contract.

PIC introduced no evidence of the value of the product enhancements. Upon an independent examination of the record, the Court is convinced that no evidence of the value of the product enhancements exists. Because of this Court's finding that the cost of product enhancements is divided between the service contract and the sales contract, and because the value of the product enhancements is not identifiable, there is no reliable, probative evidence to indicate the amount of product enhancement cost attributable to the service contract.

If this Court felt that further investigation or inquiry would result in discerning the specific amount of the installation and product enhancement costs apportioned to the service contract, this matter would either be remanded to DHEC for such action or reopened for additional proceedings by the Court. The Court is confident, however, that through discovery and cross examination, PIC has exhausted all means of cost identification and calculation. Reluctantly, this Court therefore finds the evidence in the record insufficient to establish the true total project cost of the Tricounty MRI project. Where there is insufficient evidence as to a material fact, the decision should be against the party with the burden of proof. Accordingly, PIC has failed to prove that the total project cost exceeds $600,000. Full CON review of the project cannot be ordered based upon probability or possibility.

3. CON Exemption Not Arbitrary and Capricious

PIC's final contention, that to exempt Tricounty's MRI project while requiring CON review of PIC's MRI project is arbitrary and capricious, is without merit. Each individual project, whether submitted for CON review or exemption, must be considered on its own merits. No evidence was presented to indicate that PIC sought CON exemption of its project, nor does PIC argue that its project should be exempt. Tricounty's exemption request is the sole issue before this Court. PIC offered no evidence that Tricounty's exemption request was handled any differently than any other exemption request.

CON exemption is based upon the application of clear statutory and regulatory standards. Exemption of Tricounty's project is neither arbitrary nor capricious. "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 judgment, 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); see also Hatcher v. South Carolina District Council of Assemblies of God, Inc., 267 S.C. 107, 226 S.E.2d 253 (1976).

FOR THE FOREGOING REASONS, DHEC's exemption determination of Tricounty's MRI project is upheld and this action is dismissed.



FINDINGS OF FACT

By a preponderance of the evidence, I make the following findings of fact:

  1. Notice of the date, time, place, and nature of the hearing was timely given to all parties.
  2. Tricounty seeks administrative determination that CON review provisions of Regs. 61-15 are inapplicable to its MRI project. DHEC issued a staff decision that the project is exempt. PIC requested this contested case proceedings to challenge that determination.
  3. Tricounty is a professional association of licensed radiologists practicing medicine in a private group setting within the Charleston County area, operating three offices.
  4. The proposed MRI project is for Tricounty's existing physicians office located at 14-C Farmfield Road, Charleston, South Carolina.
  5. In order to take advantage of depreciation allowances, the radiologists comprising Tricounty and their office manager, Chris Cochran, formed Tiger Management, LLC, which desired to purchase the MRI and upgrade the leased premises at the Farmfield Road location, and to lease the MRI and upgraded facilities to Tricounty for a monthly fee.
  6. PIC is a corporation organized and existing pursuant to the laws of the State of South Carolina, and has applied for and received a CON (subject to a contested case hearing before this Court) to operate a MRI facility in the Charleston County area.
  7. DHEC is an agency of the State of South Carolina charged, inter alia, with the administration and implementation of the CON review procedure and exemptions therefrom for building, acquisitions and expansions by heath care related persons and facilities.
  8. Hitachi Medical Systems America, Inc. (hereinafter referred to as "Hitachi") is a corporation whose principal place of business is in Twinsburg, Ohio, and is engaged in the sale of new and used MRI units to the health care market in the United States. The majority shareholder of Hitachi Medical Systems America, Inc. is Hitachi of Japan, and the minority shareholder is Summit Corporation, Inc.
  9. Summit Corporation, a corporation whose principal place of business is now or formerly was Mundelein, Illinois, was formerly engaged in the sale of MRI units under contract with Hitachi, but presently is a corporation which functions primarily as a shareholder of Hitachi.
  10. Sitco, Inc., a corporation whose principal place of business is located in Mundelein, Illinois, is engaged in the financing of purchases of new MRI units, and also engaged in the acquisition, reconditioning and resale of previously owned MRI units and service thereof.
  11. Summit Credit Corporation, formerly a corporation engaged in the financing for purchases and leases of Hitachi MRI units, was merged into Sitco, Inc. in April, 1995.
  12. There are some common, but not identical, owners of shares in Summit Corporation, Sitco, Inc., and the former Summit Credit Corporation. Some shareholders are employees of Hitachi , and some are employees of Sitco, Inc.
  13. There is some common, but not identical, holders of corporate offices between the officers of Hitachi, Summit Corporation, Sitco, Inc. and the former Summit Credit Corporation.
  14. On July 27, 1994, Hitachi presented a formal 12 page written quotation to Tricounty for the proposed sale of a used Hitachi MRP-5000 XLS MRI, subject to availability, at the price of $525,000.00 for the base used unit, with additional prices for optional coils for the unit. The quotation was designated at the upper right hand corner with number TOMO41R-1.
  15. At the same time that the quotation for the MRI unit was proposed, Hitachi submitted a one page proposal for the sale to Tricounty of a one year "Service and Warranty" agreement for the sum of $125,000.00; this quotation was designated at the upper right hand corner with number TOMO41W.
  16. Contemporaneously with the quotation for the proposed sale of the used MRI unit and the one year Service and Warranty, Hitachi proposed the sale to Tricounty of a "Service Maintenance Agreement" for years two through five of the ownership of the MRI unit for sums exceeding $75,000 per year; this quotation was designated at the upper right hand corner with number TOMO41R-1S.
  17. Tricounty did not accept the July 27, 1994 proposals from Hitachi. From mid-1994 until the consummation of a purchase in 1995, Hitachi regularly contacted Tricounty and attempted to sell a MRI unit to Tricounty.
  18. Throughout the remainder of 1994, Tricounty continued to investigate and consider the purchase of a MRI unit for use in their radiological practice.
  19. On April 13, 1995, Hitachi presented a revised quotation for the purchase of the MRI unit, bearing quotation number TOMO41R-1. This quotation quoted a price for the used MRI unit of $470,000, and included the optional coils at no additional charge.
  20. The April 13, 1995 quotation included a quotation for a one year "Service and Warranty", bearing number TOMO41W, for the price of $125,000.00, and a quotation for a Service and Maintenance Agreement for years two through five for the price of $70,000.00 per year.
  21. The quotations for the MRI unit, the one year Warranty and Service contract, and the Service and Maintenance Agreement for years two through five were accepted by Tricounty.
  22. After the commitment by Tricounty to purchase the previously owned MRI unit from Hitachi, Summit Credit Corporation proposed and Tricounty accepted a leasing arrangement to finance the acquisition of the MRI by Tricounty; however, the parties subsequently agreed to cancel the commitment.
  23. On April 26, 1995, Hitachi and Tricounty executed quotation number TOMO41R-1 (Petitioner's Ex. 5). The April 26, 1995, quotation was substantially the same quotation given by Hitachi on July 27, 1994, with certain price revisions. The equipment purchase price was reduced from $525,000 to $470,000. The costs of separately priced items were stricken in the April 1995 quote so that the items were now included in the system price. Service and warranty for year one remained at $125,000, while the service agreement for years two through five totaled $280,000.
  24. On April 28, 1995, Summit Credit Corporation ("Summit") extended a five-year credit agreement to finance the purchase of both the equipment and service. The agreement was in the form of a "lease" with a $1 buyout at the end of the five year term.
  25. Summit was introduced to Tricounty by Hitachi sales representative Tom Gougarty as the financing entity for the purchase of the Hitachi MRP 5000 pursuant to the April 26, 1995 quote.
  26. Summit is a d/b/a of Sitco Incorporated, the entity which ultimately offered the service agreement on the MRI equipment purchased by Tricounty.
  27. Following Tricounty's acceptance of the April, 1995 Hitachi proposal, Hitachi advised Tricounty that it could not locate an available previously owned MRI unit to comply with quotation TOMO41R-1, and could not fulfill the contract.
  28. After canceling the contract with Tricounty, an employee of Hitachi contacted Michael Hovsepian, President of Sitco, Inc., and advised him of Hitachi's contract to supply the MRI unit and service to Tricounty, and asked if Sitco, Inc. had equipment available to fulfill the contract.
  29. Sitco, Inc. had previously committed to purchase a previously owned Hitachi MRI unit for $338,600.00, which was then located in a warehouse in Florida.
  30. In considering the proposal to accept the proposed deal previously worked out between Hitachi and Tricounty, Sitco, Inc. requested that Hitachi quote it prices for the upgrades and equipment necessary to upgrade the Florida MRI unit to the specifications of the deal between Hitachi and Tricounty.
  31. In a letter from the Hitachi Sales Administration Manager to an employee of Sitco, Inc. dated May 25, 1995, Hitachi quoted the cost of the additional equipment and upgrades at a combined price of $140,000.00. In the same letter, Hitachi quoted the cost of the first year service and installation for $125,000.00 and cost of subsequent years service at $75,000.00 per year, but offered to reduce the price of the acquisition of the upgrades and first year service by $50,000 if Sitco, Inc. agreed to accept an the additional four year extended service agreement.
  32. Tricounty refused to accept the proposed four additional years of the service agreement at the quoted $75,000.00 per year price, but proposed to accept the subsequent years service at the price of $70,000.00 per year.
  33. By letter dated May 31, 1995, Hitachi agreed to sell the subsequent years service to Sitco, Inc. at the price of $70,000.00 per year.
  34. Based upon the reduced pricing to be received from Hitachi for the upgrades and service, Sitco, Inc. agreed to assume the terms of the purchase agreement which had previously been reached between Hitachi and Tricounty. As a result, in May 1995 Tricounty began to deal with Summit/Sitco as the seller of the MRI equipment and not just as the financing entity.
  35. In May 1995, Tricounty contacted DHEC regarding the proposed purchase of the MRI unit, and requested a determination as to the applicability of Regs. 61-15, and whether the proposed acquisition required CON review.
  36. DHEC received the request for determination of reviewability from Tricounty, and requested, by letter from Mr. Jerry L. Paul, information including:
a. A sketch of the facility showing the proposed MRI equipment location.
b. A vendor's quote for the equipment.
c. A registered architect or engineer's estimate of the renovation cost.
d. A licensed appraiser's estimate of the value of the space that would be used for the MRI unit.
e. A completed ownership disclosure form.
f. A total project budget that shows all costs involved with the implementation of the MRI service at the Tricounty office.
  1. Tricounty provided further information to DHEC on July 18, 1995, submitting a formal request for an exemption with 58 pages of material describing Tricounty's proposed project. 38. On June 3, 1995, Sitco proposed to Tricounty that it sell the used Hitachi MRI unit for the price of $470,000.00, and also that it sell the first year service agreement at the price of $125,000.00, and the second through fifth year service agreements at the price of $75,00.00 per year.
  2. The proposed sale contract, contained on the Summit contract heading, was signed by Dr. John Hood on June 12, 1995; the price for the MRI unit and accessories, including installation, was $470,000.00.

40. The proposed Service Maintenance Agreement from Sitco, Inc. was signed by Dr. Hood on June 14, 1995; the price of the first year service was $125,000.00, and the price for service for years two through five was $70,000.00 per year.

41. The Summit/Sitco quote was accepted by Tiger Management on June 12, 1995.

42. On June 14, 1995, Tricounty submitted a check in the amount of $25,000.00 to "Summit Credit Corp." for a deposit on the purchase of the used MRI unit.

43. A "Service Maintenance Agreement", which provided for maintenance and service for years one through five at a total cost of $405,000 for the equipment quoted in Exhibit 12, had also been offered to Tricounty by Sitco. Tricounty accepted the Service Maintenance Agreement on June 14, 1995.

44. By contract dated June 16, 1995, on a document bearing the name "Summit Credit Corporation," Sitco, Inc. agreed to sell the used Hitachi MRP-5000 MRI, with accessories, to Tiger Management Ltd. for the price of $470,000.00. The sale document contained the handwritten notation, "This summary quote is to fulfill Hitachi quote TOMO41R-1, equipment is as specifies by Hitachi." The sale was expressly contingent upon the DHEC grant of an exemption from CON review for the purchase and installation of the MRI unit.

45. On June 28, 1995, Mr. Hovsepian of Sitco, Inc. signed the 5 year "Service Maintenance Agreement."

46. As is reflected in Respondent's Exhibit 21, the "Service Maintenance Agreement" covered the following matters: preventative maintenance, labor, parts, travel expenses, product enhancements, guaranteed uptime, a discount schedule, and that Tricounty would receive a twenty percent discount off the list price of options. In a May 25, 1995, letter between Hitachi and Summit (Petitioner's Ex. 32, p. SUM005) Hitachi states that the first year service contract "... includes installation, warranty, and upgrade of system to latest software release and disc compatibility."

47. On July 7, 1995, Chris Cochran sent a $50,000.00 deposit to Mr. Hovsepian for the deposit on the purchase contract between the parties, requested that the original $25,000.00 deposit be returned, and declined at that time to send 25% of the purchase price until the exemption from CON review was confirmed by the DHEC.

48. On July 10, 1995, Mr. Hovsepian wrote a letter to Mr. Cochran advising, inter alia, "In order, to obtain the pricing necessary to meet your Certificate of Need needs on the unit, the five year service agreement is required by HITACHI and the $125,000, for the first year's service must be paid in advance."

49. On July 12, 1995, Tiger Management, LLC obtained a retail license from the State of South Carolina, thereby obligating itself to pay use tax, but exempting it from needing to pay sales tax upon the purchase of the MRI.

50. On July 26, 1995, Jerry Paul of DHEC wrote to the attorney for Tricounty and advised that the proposed acquisition and installation of the MRI by Tricounty did not require CON review, since the total project cost did not exceed $600,000.00.

51. On July 30, 1995, Tiger Management LLC and Tricounty entered into an Equipment Service Agreement for the lease of the equipment and improvements from Tiger Management, LLC to Tricounty.

52. On August 4, 1995, PIC filed the present petition for review of the determination by DHEC that the acquisition of the MRI unit by Tricounty was exempt from CON review.

53. On August 15, 1995, Sitco, Inc. entered into a purchase order with Hitachi wherein Sitco, Inc. agreed to purchase all of the equipment and software upgrades, as well installation and service for the first year, at the price of $215,000.00.

54. On August 21, 1995, the MRI unit was shipped from Florida to the offices of Tricounty.

55. On August 31, 1995, Hitachi agreed to sell the first year service, installation and upgrade to Sitco, Inc. for $125,000 and the equipment upgrades at $140,000.00; Sitco agreed to purchase the Service contract for years 2-5; and Hitachi agreed to sell "the entire package" for $215,000.00. (Petitioner's Ex. 31, p. HITO17).

56. On October 12, 1995, Hitachi installed the MRI unit at the location of Tricounty , and issued a "Certificate of Acceptance/Warranty Start Date" to Tiger Management, LLC.

57. Following the termination of the financing arrangement with Summit Credit Corporation, Tiger Management, LLC obtained a loan in the amount of $692,000.00 at 9.75 percent from Southtrust Bank of Charleston for the financing of the acquisition of the MRI, the service agreements, the buildout to the premises upon which the MRI unit would be housed, and operating capital. The loan commitment was issued on June 28, 1995, and the loan was closed on July 6, 1995. The loan to Tiger Management, LLC was guaranteed by Tricounty, Tricounty Leasing Partners(2), and the individual shareholders of Tiger Management, LLC.

58. In its request for exemption, Tricounty included a summary of budgeted costs reflecting a MRI equipment purchase price of $470,000 and a total project cost of $551,094 (Court's Ex. #1, pp. 48- 47). The summary includes "installation" in the cost of the MRI equipment.

59. On or before July 20, 1994, Tricounty commissioned a market research study to determine the feasibility of the addition of a MRI unit to their practice of medicine. Tricounty paid Selby and Associates the sum of $1,470.00 for the conduct of the survey.

60. On June 15, 1995, Tricounty contracted with Spears Construction for the renovation of office space for the installation and operation of the MRI unit at a construction cost of $19,709.00.

61. On June 26, 1995, CWA Architecture billed Tricounty the sum of $1,800.00 for services rendered in designing the improvements to the premises for the reception of the MRI unit.

62. On June 28, 1995, Appraisal Consultants, Inc., a certified real estate appraisal firm, submitted an appraised value of $25,173.00 for the physical real estate and improvements representing the 492 square feet upon which the MRI unit, control panel and associated equipment would be installed and utilized at Tricounty.

63. On July 5, 1995, Tricounty issued a check for $300.00 to Appraisal Associates, Inc. in payment for the appraisal.

64. On August 4, 1995, Tricounty contracted with Lindgren RF Enclosures, Inc. for the installation of shielding necessary for the operation of the MRI unit within the offices of Tricounty at a cost of $31,387.00.

65. In September, 1995, Tiger Management, LLC commissioned an artist to paint scenery in the room housing the MRI unit at a cost of $1,900.00.

66. Tricounty incurred attorneys fees in the sum of $1,500 for preparation of the submission of materials to the Department for consideration of the exemption under the CON statutes and regulations.

67. Tricounty incurred interest expenses from the date of the loan until the asset was placed in service. The loan for $692,000 closed on July 6, 1995, and the certificate of installation was completed on October 12, 1995(3). The loan has been drawn upon on several occasions, and there presently remains a balance of $125,000 which has not been drawn from the account. The amount of the outstanding loan at the time the MRI unit was placed into service was thus $567,000.00. Therefore, the interest cost which should be capitalized is $11,813.88(4).

68. Tricounty did not include any sales tax on the equipment in its total project cost.

69. Tricounty claims and admits the following itemized and totalled costs as the "total project cost" associated with its MRI unit acquisition:

1. $ 1,470.00 for the marketing survey regarding the purchase and placement of the MRI unit;
2. 470,000.00 for the cost of the unit;
3. 31,387.00 for the cost of installation of the shielding;
4. 19,709.00 for the building renovations for installation of the unit;
5. 1,800.00 for the engineering costs;
6. 1,500.00 for the attorneys fees expended in preparing to submit the project for a Department determination of the applicability of the exemption;
7. 300.00 appraisal fees for the appraisal of the real estate;
8. 1,900.00 for the painting of the mural
9. 25,173.00 for the value of the land developed in conjunction with the acquisition of the MRI unit; and
10. 11,813.88 for the interest cost which should be capitalized.
$ 565,052.88

70. The "total project cost" of a project includes all costs required to put the acquired equipment into service.

71. The installation of an MRI unit is an element of "putting the equipment into service." Installation is considered part of the capital cost of a piece of equipment, properly charged under generally accepted accounting (GAAP) principles as a capital cost.

72. Some portion of the $125,000 paid for first year's service was paid for capital costs in the form of installation and product enhancements, which should be included in determining Tricounty's total project costs.

73. Sitco's job cost work sheet (Petitioner's Ex. 32, p. SUM031) indicates a total installation cost estimate of $50,000 for the Tricounty MRI unit; however, the record lacks reliable, probative evidence to establish the correct and accurate apportionment of installation costs between the service contract and the sales contract.

74. PIC's and Tricounty's accounting experts agree that the value of product enhancements from the Service Agreement would necessarily have to be calculated, and then added to the cost of the equipment in question in order to determine the total capital cost of the equipment.

75. No evidence of the value of the product enhancements was introduced.

76. The record lacks reliable, probative evidence to establish the correct and accurate apportionment of product enhancement costs between the service contract and the sales contract.

77. The total project cost of Tricounty's MRI acquisition is at least $ 565,052.88. Depending upon the portion of capital costs that were included in the service contract (installation and product enhancements), total project cost could exceed $ 600,000; however, Tricounty's total project cost cannot be accurately calculated. Failing to prove how much of the $50,000 installation cost is attributable to the service contract, the cost of the product enhancements, and the proper apportionment of the value of the product enhancements, PIC did not carry its burden in proving the total project cost surpasses the CON review threshold amount.

78. As a matter of agency practice, DHEC does not allocate costs of pre-existing facilities and services in determining "total project cost" under the Department regulations when considering a project for exemption from CON review.

79. No allocation of existing Tricounty facilities, other than the one made for the physical real estate and improvements representing the 492 square feet upon which the MRI unit, control panel and associated equipment were installed, is required.

80. The long standing practice of the Department does not require all purchases of MRI units to undergo CON review. Many MRI units in operation in South Carolina did not undergo the CON review process.

81. DHEC treated Tricounty's exemption request in the same manner as it treats all other CON exemption requests.

CONCLUSIONS OF LAW

Based upon the foregoing Findings of Fact, applicable law, the analysis and discussion herein, I conclude, as a matter of law, the following:

  1. This matter is a contested case proceeding, governed by the Administrative Procedures Act. S.C. Const. art. 1, § 22; see League of Women Voters of Georgetown County v. Litchfield by the Sea, 305 S.C. 424, 409 S.E.2d 378 (1991); see also the September 13, 1995 Order of this Court denying Tricounty's Motion to Dismiss in the present case.
  2. The Administrative Law Judge Division has jurisdiction over this matter and is authorized to hear this contested case pursuant to S.C. Const. art. 1, § 22; Chapter 23 of Title 1 of the 1976 Code, as amended; and S.C. Code § 44-7-210(E) (Supp. 1995).
  3. S.C. Code Ann. §§ 44-7-110, et seq. (Supp. 1995), the State Certification of Need and Health Facility Licensure Act, grants DHEC the authority to administer the State's CON program.
  4. The CON program is administered under the guidelines of S.C. Code Regs. 61-15 (Supp. 1995).
  5. Tricounty seeks determination of the applicability of CON application and review requirements pursuant to Regs. 61-15, § 105.
  6. Upon the issue of whether Tricounty is exempt from the CON review process, PIC bears the burden of proving by a preponderance of the evidence that Tricounty is not exempt. National Health Corporation v. South Carolina Department of Health and Environmental Control, 298 S.C. 373, 380 S.E.2d 841 (Ct.App. 1989).
  7. The preponderance of the evidence means evidence which is of greater weight, or is more convincing, than that offered in opposition to it. Black's Law Dictionary 1182 (5th ed. 1979).
  8. Evidence of a allegation must be sufficient and probative of the matter to be proven. SeeColeman v. Palmetto State Life Ins. Co., 241 S.C. 384, 128 S.E.2d 699 (1962). The test for the sufficiency of a proffer of evidence to warrant a finding is as follows:
A...finding must be based on the evidence and...on the facts proved.... [A]lthough difficulty of proof does not prevent the assertion of a legal right, the...finding cannot rest on surmise nor can it rest on mere speculation. Likewise, ...a...finding cannot rest on conjecture...guesswork...or rest on supposition, assumption, imagination, suspicion, arbitrary action, whim, caprice, illogical and unsound reasoning, innuendo, percentage, likelihood, mere theory, or conclusions that are in conflict with undisputed fact...The evidence on which the...finding is based must be competent, legal evidence received in the course of the trial, credible, and of probative force, and must support every material fact. The decision should be against the party having the burden of proof where there is no evidence, or the evidence as to a material issue is insufficient...The evidence must be sufficient to warrant a reasonable belief in the existence of those facts which the...finding establishes; the...finding must be grounded on a reasonable certainty as to probabilities arising from a fair consideration of the evidence, and cannot be predicated upon a mere probability or on mere possibilities (emphasis added).


32A C.J.S. Evidence § 1042 (1964).

9. CON review is required for most health care facility projects. S.C. Code Ann. §§ 44-7-110, et seq. (Supp. 1995); S.C. Code Regs. 61-15 (Supp. 1995).

10. Regs. 61-15, § 104.2.e provides an exemption from CON review for the following:

The offices of a licensed, private practitioner whether for individual or group practice except as provided for in §102.1.f. (emphasis added).

11. Regs. 61-15, § 102.1.f mandates CON review for:

The acquisition of medical equipment which is to be used for diagnosis or treatment if the total project cost is in excess of $600,000 (emphasis added).

12. "Total project cost" is defined in Regs. 61-15, § 103(25) as follows:

Total project cost is the estimated total capital cost of a project including land cost, construction, fixed and movable equipment, architect's fees, financing costs, and other capital costs properly charged under generally accepted accounting principles 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.

13. "Health care facility" is defined at § 44-7-130 (10) as follows:

Health care facility means acute care hospitals, psychiatric hospitals, alcohol and substance abuse hospitals, tuberculosis hospitals, nursing homes, kidney disease treatment centers, including free-standing hemodialysis centers, ambulatory surgical facilities, rehabilitation facilities, residential treatment facilities for children and adolescents, rehabilitation centers for mentally retarded persons or persons with related conditions, and any other facility for which CON review is required by federal law.

The definition of "health care facility" contained in Regs. 61-15, § 103(13) is identical except that it also includes any facility for which CON review is required by state law, in addition to the federal law requirement.

14. "The General Assembly has the power to prescribe legal definitions by statute, and such definitions are binding upon courts and should prevail." Purvis v. State Farm Mutual Automobile Insurance Co., 304 S.C. 283, 403 S.E.2d 662 (Ct.App. 1991); see also Brown v. Martin, 203 S.C. 84, 88, 26 S.E.2d 317 (1943). Because the statute prescribes the definition of a health care facility, this court should not expand the definition to include the Respondent within the reach of the statute.

15. The provisions of the CON review statutes do not apply to "the offices of a licensed private practitioner whether for individual or group practice except as provided for in Section 44-7-160(7)." S.C. Code Ann. § 44-7-170(A)(2).

16. S.C. Code Regs. 61-15, § 104 (1)(e) provides that the regulations regarding CON review do not apply to "[t]he offices of a licensed private practitioner whether for individual or group practice except as provided for in Section 102.1.f."

17. The operation of an MRI unit in a private physicians' offices does not constitute operation of a "health care facility" as defined under Regs. 61-15, § 103, and therefore is not subject to CON review unless the "total project cost" exceeds $600,000.

18. Tricounty is not a "health care facility" as defined in S.C. Code Ann. § 44-7-130(10) or S.C. Code Regs. 61-15, § 103(13).

19. In deciding whether a project is exempt or subject to CON review, common practice and common sense must be applied in calculating expenditures and determining the total project cost. See Regs. 61-15, § 102(2).

20. DHEC regulations do not require that portions of the pre-existing overhead and facilities of Tricounty be allocated toward and included in the total project cost. S.C. Code Ann. § 44-7-160(6) and S.C. Code Regs. 61-15, § 102(1)(f) require CON review when the capital cost of "the acquisition of" medical equipment exceeds the threshold amount. The pre-existing facilities of Tricounty are clearly not costs associated with the acquisition of the medical equipment in this instance; they are not an additional costs of any kind, as they were incurred prior to and independent of the acquisition of the MRI.

21. The acquisition of land is not subject to CON review, however the cost of the land must be included in total project cost at the time the land is proposed to be developed. S.C. Code Ann. §44-7-170(A)(4). It is therefore appropriate to include the cost of that portion of real estate developed for construction of the MRI project in the determination of the cost of the project.

22. "Cost" is defined as "[e]xpense; price. The sum or equivalent expended, paid or charged for something." Black's Law Dictionary 312 (5th ed. 1979). "Price" is defined as "[s]omething which one ordinarily accepts in exchange for something else. The consideration given for the purchase of a thing. Amount for which a prospective seller indicates as the sum for which he is willing to sell; market value." Id. at 1070. "Market value" is defined as the price property would command in the market." Id. at 876. "Market price" is defined as "[t]he price at which a seller is ready and willing to sell and a buyer ready and willing to buy in the ordinary course of trade." Id. at 875.

23. A "capital cost" is a cost which benefits the purchaser for a period of longer than one calendar year. "Capital Cost" is defined in Black's Law Dictionary as "Costs for improvements to property; such 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 the cost of an item or service which is exhausted within a twelve month period.

24. There exists a valid, binding contract between Tricounty and Sitco for the sale of the MRI unit at the price of $470,000.00, regardless of the amount of costs it had in the unit; the appropriate cost of the equipment to Tricounty was, therefore, $470,000.00.

25. The internal pricing and accounting procedures between Hitachi and Sitco, Inc. do not affect the cost to Tricounty or Tiger Management, LLC for their purchase of the MRI unit and service agreement.

26. Though Tricounty entered into a service maintenance agreement for five years at the time of the purchase of the MRI, the cost of service maintenance is properly treated as an expense, not a capital cost. True service agreements are properly treated under generally accepted accounting principals as an expense in the year in which they are paid, and not as a capital cost.

27. S.C. Code Ann. § 12-36-90 (Supp. 1995) imposes a five percent tax upon gross proceeds of retail sales. "Retail Sales" are defined as "all sales of tangible personal property except those defined as wholesale sales." S.C. Code Ann. § 12-36-110 (Supp. 1995). A "wholesale sale" means a "sale of... tangible personal property to licensed retail merchants...." As Tiger Management, LLC has obtained a license to act as a wholesaler, the sale from Sitco to Tiger Management, LLC is thus a wholesale sale under South Carolina law. Since the transaction is a wholesale sale, sales tax is not imposed upon the transaction between Sitco and Tiger Management, LLC. Since no sales tax is imposed, no additional capital cost is incurred in the transaction by Tiger Management, LLC or Tricounty.

28. The service and maintenance agreement is clearly a divisible contract, as it calls for payments and service in yearly increments.

A severable contract is one in its nature and purpose susceptible of division and apportionment, having two or more parts, in respect to matters and things contemplated and embraced by it, not necessarily dependent on each other, nor is it intended by the parties that they shall be. The entirety or severability of a contract depends primarily upon the intent of the parties, rather than upon the divisibility of the subject, although the latter aids in determining the intention.

Columbia Architectural Group, Inc. v. Barker, 274 S.C. 639, 266 S.E.2d 428 (1980); Packard & Field v. Byrd, 73 S.C. 1, 51 S.E. 678 (1905).

29. The estimated total capital costs properly charged under GAAP, and other costs included in "total project cost" of Tricounty's MRI project does not exceed the $600,000 threshold amount necessary to require CON review.

30. "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 judgment, 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).

31. DHEC's exemption determination was based upon clear standards and sound reasoning.

32. The decision to allow Tricounty to proceed with the establishment of an MRI unit without CON review is not arbitrary and capricious.

33. Any other issues raised in the proceedings of this case but not addressed in this Order are deemed denied. ALJD Rule 29(B).



ORDER

IT IS HEREBY ORDERED that the DHEC determination that the Tricounty MRI project is exempt from CON review under S.C. Code Regs. § 61-15 is upheld. Accordingly, this case is dismissed.



______________________________

STEPHEN P. BATES

ADMINISTRATIVE LAW JUDGE

January 17, 1996

Columbia, South Carolina



____________________

Fn. 1. PIC applied for and was granted a CON by the Department in June of 1995 to establish a free-standing MRI facility in Charleston County. The Department's decision on the PIC application is the subject of a contested case currently pending before this Court. Administrative action on PIC's project has been stayed pending the conclusion of the present contested case hearing and decision by this Court.

Fn. 2. Tricounty Leasing Partners is the corporation which leases the premises upon which Tricounty Radiology Associates, P.A. practice medicine, and in turn subleases the space to Tricounty Radiology Associates, P.A. Tricounty Leasing Partners is owned by the three physicians who practice with Tricounty Radiology Associates, P.A.

Fn. 3. The Court notes that the installation was delayed due to a stay imposed by this Court on September 13, 1995. This stay was lifted by an Order filed on October 3, 1995. Because the stay was imposed due to means outside the control of Tricounty, it would be inappropriate to calculate the interest which accumulated during the twenty days of the stay in determining the capital cost of the project.

Fn. 4.

[($567,000.00 x 9.75%) ÷ 365 days] x 78 days =
[$55,282.50 ÷ 365] x 78 =
$151.46/day x 78 days =
$11,813.88

Brown Bldg.

 

 

 

 

 

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