SC Administrative Law Court Decisions

Statement of the Case

This matter comes before me on the Petitions for Administrative Review filed by Marlboro Park Hospital and Chesterfield General Hospital (the "Hospitals"), challenging the decision of the Department of Health and Environmental Control (the "Department") to approve Doctor's Outpatient Surgical Clinic, L.L.C.'s ("DOSC") application for a Certificate of Need ("CON") to construct a freestanding ambulatory surgery center. DOSC proposes to provide general outpatient surgery in one operating room and endoscopy surgeries in a second, dedicated operating room. Because the Hospitals offer general outpatient and endoscopy surgery services to persons who reside in DOSC's proposed service area, the Hospitals are "affected persons" under S.C. Code Ann. 44-7-130 (Supp. 1999) and 24A S.C. Code Ann. Regs. 61-15, Sec. 103(1).

On May 13, 1998, DOSC filed its application for a CON to construct the proposed ambulatory surgery center. In August, 1998, the Hospitals notified the Department of their opposition to DOSC's application. On October 14, 1998, the Department conducted a project review hearing on DOSC's application. DOSC and the Hospitals appeared at the project review hearing and presented information supporting their respective positions. The Department issued its decision recommending approval of DOSC's application on December 17, 1998. The Hospitals timely requested contested case hearings on the Department's decision. Because of the similarity of issues, the cases were consolidated by Consent Order dated February 24, 1999. The contested case hearing was held January 24 through February 2, 2000.

After consideration of the evidence and arguments, I find that DOSC's proposed outpatient surgery center fails to meet the criteria for approval established by the applicable statutes and regulations, and, therefore, its application for a Certificate of Need must be denied. Any issues raised or presented in the proceeding of this matter which are not addressed specifically in this Order are deemed denied. ALJD Rule 29(C).

Standard and Burden of Proof

In a CON controversy, the petitioner bears the burden of proving its case by a preponderance of the evidence. S.C. Code Ann. § 44-7-210(E) (Supp. 1999); see also Anonymous v. State Board of Medical Examiners, 329 S.C. 371; 496 S.E.2d 17 (1998); Nat'l Health Corp. v. S.C. Dept. of Health and Environmental Control, 298 S.C. 373, 380 S.E.2d 841 (1989). A CON contested case proceeding is limited by the requirement that the only issues for decision are those which were presented to, or considered by, the Department during its review and decision-making process. S.C. Code Ann. § 44-7-210(E) (Supp. 1999). Thus, the Hospitals bear the burden of proving by a preponderance of the evidence their contentions that, considering only the information available to the Department during review, DOSC's proposed ambulatory surgery center does not meet the legal requirements for approval.

Applicable Criteria

On August 21, 1998, the Department issued its final statement of the project review criteria to be utilized in evaluating DOSC's application. The final criteria, ranked in order of importance, were:

Need - 1

Community Need Documentation - 2a, 2b, 2c, 2e

Distribution (Accessibility) - 3a, 3b, 3c, 3d, 3g, and 3h

Acceptability - 4a, 4b

Efficiency - 17

Adverse Effects on Other Facilities - 23a, 23b

Ability to Complete the Project - 14a, 14b

Financial Feasibility - 15

Record of the Applicant - 13b, 13c

The numbers beside each criterion indicate the subsections of 24A S.C. Code Ann. Regs. 61-15, Sec. 802 which the Department found applicable to DOSC's application. The Hospitals contend that DOSC's proposed ambulatory surgery center fails to meet the following criteria selected by the Department:

• Section 802 (1) - Need: The proposal shall not be approved unless it is in compliance with the State Health Plan.

• Section 802(2)(a) - Community Need Documentation: The target population should be clearly identified as to the size, location, distribution, and socioeconomic status (if applicable).

• Section 802(2)(c) - Community Need Documentation: The proposed project should provide services that meet an identified (documented) need of the target population. The assumptions and methods used to determine the level of need should be specified in the application and based on a reasonable approach as judged by the reviewing body. Any deviation from the population projection used in the State Health Plan should be explained.

• Section 802(2)(e) - Community Need Documentation: Current and/or projected utilization should be sufficient to justify the expansion or implementation of the proposed service.

• Section 802(3)(a) - Distribution (Accessibility): Duplication and modernization of services must be justified. Unnecessary duplication of services and unnecessary modernization of services will not be approved.

• Section 802(3)(b) - Distribution (Accessibility): The proposed service should be located so that it may serve medically underserved areas (or an underserved population segment) and should not unnecessarily duplicate existing services or facilities in the proposed service area.

• Section 802(3)(h) - Distribution (Accessibility): Potential negative impact of the proposed project upon the ability and/or resources of existing providers to serve medically underserved groups must be considered.

• Section 802(15) - Financial Feasibility: The applicant must have projected both the immediate and long-term financial feasibility of the proposal. Such projection should be reasonable and based upon accepted accounting procedures.

• Section 802(17) - Efficiency: The proposed project should improve efficiency by avoiding duplication of services, promoting shared services, and fostering economies of scale or size.

• Section 802(23)(a) - Adverse Effect on Other Facilities: The impact on the current and projected occupancy rates or use rates of existing facilities and services should be weighed against the increased accessibility offered by the proposed services.

Under the first criterion, "Need", DOSC's proposed ambulatory surgery center is required to be in compliance with the applicable State Health Plan. The 1997 State Health Plan, which is applicable to this matter, contains several more criteria, which the Hospitals contend DOSC has failed to meet:

• Criteria 1: The applicant must document a need for the expansion of or the addition of any ambulatory surgical facility. The existing resources must be considered and documentation presented as to why the existing resources are not adequate to meet the needs of the community.

• Criteria 3: The applicant must discuss the impact that the proposed ambulatory surgical facility or expansion will have upon the existing service providers.

• Criteria 4: The applicant must document where the potential patients for the facility will come from and where they are currently being served.

The Hospitals also contend that the Department's recommendation of approval of DOSC's proposed ambulatory surgery center is contrary to the following policy considerations set forth in the 1997 State Health Plan:

[T]here is now concern that, particularly in the case of specialty facilities, ambulatory surgery centers are being proposed as a method of increasing reimbursement for procedures currently being performed in physician's offices (through the "facility fee" built into the reimbursement mechanisms). The Department will continue to evaluate applications for ambulatory surgery centers on their individual merits. However, it is the determination of the Department that the benefits of improved accessibility will not outweigh the adverse effects caused by the duplication of existing services or equipment.

Issues

The Hospitals' contentions concerning the various criteria and standards set forth above fall into two categories, need and adverse impact, and can be summarized as follows:

• Has DOSC established a need for its proposed ambulatory surgery center consistent with standards 1 and 4 of the 1997 State Health Plan and, therefore, consistent with 24A S.C. Code Ann. Regs. 61-15, Section 802(1)?

• In a manner consistent with 24A S.C. Code Ann. Regs. 61-15, Sections 802(3)(h) and (23)(a), has DOSC demonstrated that its proposed ambulatory surgery center will not have a substantial adverse effect on the Hospitals?

Findings of Fact

Having carefully considered all testimony, exhibits, and arguments presented at the hearing of this matter, and taking into account the credibility and accuracy of the evidence, and the appropriate standard and burden of proof, I make the following Findings of Fact by a preponderance of the evidence:

The Application

1. DOSC filed its application for a Certificate of Need on May 13, 1998. In its application, DOSC seeks approval to construct a freestanding ambulatory surgery center with two operating rooms to be located in downtown Bennettsville, South Carolina. The primary need justification cited by DOSC in its application is the fifty percent (50%) outmigration rate for Marlboro County residents undergoing outpatient surgery.
2. DOSC was organized as a limited liability company by five surgeons - Dr. John Nobles, Dr. Paul Rush, Dr. Shoukath Ansari, Dr. Ralph Carter, and Dr. Philip Chaipis - and one certified registered nurse anesthetist, Mr. Steve Davis.
3. All five of the physician members of DOSC currently perform outpatient surgery at Marlboro Park Hospital. In 1997, the five physician members of DOSC accounted for almost eighty-four percent (84%) of all outpatient surgeries performed at Marlboro Park Hospital. If physicians who practice in the same group as the five physician members of DOSC are included, the percentage of all Marlboro Park Hospital's outpatient surgeries performed by DOSC-related physicians increases to almost eighty-eight percent (88%). When endoscopy outpatient surgery is considered alone, 93% of all Marlboro Park Hospital endoscopy surgeries are performed by DOSC-related physicians.
4. In its budget assumptions contained in its application, DOSC forecast that during its first three years of operation it would perform 850 surgical procedures the first year, 1000 during the second year, and 1150 during its third year of operation.
5. Although the application contains no specified list of procedures to be performed in DOSC's ambulatory surgery center, the application does propose one operating room to be used for general, gynecological, and orthopedic surgery and a second, dedicated operating room to be used exclusively for endoscopy surgery. DOSC also proposes to provide pain management services at its ambulatory surgery center utilizing the services of an anesthetist on staff.
6. On August 11, 1998, Marlboro Park Hospital notified the Department that, as an "affected person", it opposed DOSC's application for a Certificate of Need. Chesterfield General Hospital similarly notified the Department on August 24, 1998.
7. On October 14, 1998, the Department conducted a project review hearing at which representatives of DOSC and the Hospitals appeared and presented information.
8. On October 21, 1998, DOSC furnished the Department with additional information including letters from physicians estimating the number of potential referrals the physicians could make to DOSC's proposed ambulatory surgery center. The Department did not follow up with any physicians concerning the letters estimating potential referrals, although these letters were critical to the Department's determination that need for DOSC's proposed ambulatory surgical center exists.
9. Dr. Joseph K. Newsom's letter of October 19, 1998, indicates that Dr. Newsom and his partners refer approximately 45 to 50 patients per month to outlying hospitals and that "many" of these patients could be referred to DOSC's ambulatory surgery center. It is unclear, however, whether these patients were already using Marlboro Park Hospital and thus would be redirected from the hospital to the surgery center.
10. At the hearing, Dr. Newsom testified that approximately 58 patients per year could appropriately be referred to DOSC. This number, however, was based on data generated from October, 1998 through October, 1999, extending beyond the date of the project review period in this case. Therefore, much of this data would not have been available to the Department during its review of DOSC's application. Further, Dr. Newsom stated that this number represented the number of cases he had actually referred to the physicians involved with DOSC. Because these physicians perform surgery at Marlboro Park Hospital, it is possible that some of these patients were already being served by Marlboro Park Hospital.
11. In his October 16, 1998 letter, Dr. Philip N. Chaipis, one of the organizers of DOSC, indicates that he will generate 120 new cases per year for the proposed ambulatory surgery center, which cases are now being performed in his office.
12. In his October 18, 1998 letter, Dr. John R. Nobles, one of the organizers of DOSC, indicates that he will generate 40 to 50 new cases per year for the proposed ambulatory surgery center, which cases are now being performed in his office.
13. In his letter of October 16, 1998, Dr. Shoukath Ansari, an organizer of DOSC, indicates that he will perform approximately 200 endoscopies per year at the proposed surgery center, which endoscopies are now being performed in North Carolina.
14. The letters from Dr. Neal, Dr. McQueen and Dr. Nisbett contained rough estimates of potential referrals and were not based on any actual caseload histories.
15. Neither Dr. Neal nor Dr. Nisbett testified at the hearing.
16. Dr. McQueen testified at the hearing that he had not done research to document exactly how many cases he could refer to the proposed surgical center. Further, Dr. McQueen testified that the patients referenced in his letter are endoscopy patients that he currently refers to Dr. Ansari. Therefore, even if Dr. McQueen's estimate had been based on actual research of patient records, that number is merely a subset of Dr. Ansari's estimate of 200 surgeries performed in North Carolina that he could move to the proposed surgery center. For purposes of calculating referrals, DOSC incorrectly used both Dr. McQueen's and Dr. Ansari's numbers.
17. Dr. Mitchell Austin indicates in his letter of October 20, 1998, that he could refer to the surgery center approximately 10 patients per month for placement of tubes and removal of tonsils. Dr. Austin's letter further indicates potential referrals for sinus and cosmetic surgery, but does not state whether the numbers indicated are per week, per month, or per year.
18. DOSC's application contains no firm, written commitment from a plastic surgeon or an otolaryngologist ("ENT") to perform ENT or cosmetic surgery cases referred from Dr. Austin.
19. The Department generally considered the possibility that the proposed surgery center could attract surgeons whose practice specialties are not currently available in the proposed service area.
20. DOSC's application contains no firm written commitments from any specialists. In its letter of October 20, 1998, DOSC indicates that it has verbal commitments from a dentist, a urologist, a plastic surgeon and an ENT. The asserted verbal commitments from the dentist, plastic surgeon and ENT were relayed through DOSC only. Further, the October 8, 1998 letter from Timothy A. Moses, M.D., a urologist, merely states that he would "strongly consider employing" the facility if it were available. Dr. Moses does not commit to performance of any particular number of procedures.
21. Dr. Moses' letter asserts that no urologist provides services in the proposed service area on a regular basis. The evidence shows, however, that a urologist serves the area on a part-time basis and that he performed 28 surgeries in Marlboro County in 1997.
22. On December 17, 1998, the Department recommended approval of DOSC's application for a CON, finding that the proposed project was consistent with the criteria for ambulatory surgery centers contained in the 1997 State Health Plan, that DOSC had adequately documented need for the project, and that the proposed project had adequate community and physician support.

The Hospitals

1. Marlboro Park Hospital is an acute care hospital located in Bennettsville, South Carolina, which provides, inter alia, outpatient surgery services to persons in the surrounding communities, including residents of Marlboro County. Marlboro Park Hospital has two operating rooms in which it provides general outpatient surgery services and one, dedicated operating room in which it provides endoscopy services.
2. Marlboro Park Hospital is located just outside of the town of Bennettsville, within a few miles of the location of DOSC's proposed ambulatory surgery center, which would be located in downtown Bennetsville.
3. Chesterfield General Hospital is an acute care hospital located in Cheraw, South Carolina in Chesterfield County, which provides, inter alia, outpatient surgery services to persons in the surrounding communities, including persons residing in Marlboro County. Chesterfield General Hospital has two operating rooms in which it provides general outpatient surgery services and one, dedicated operating room in which it provides endoscopy services.
4. Chesterfield General Hospital is located within sixteen (16) miles of the location of DOSC's proposed ambulatory surgery center.
5. During the review period, out of 250 total days of operation, Marlboro Park Hospital had 183 days with four or fewer surgeries performed and 143 days with four or fewer endoscopy surgeries performed.
6. Marlboro Park Hospital's total surgical utilization during the review period was forty percent (40%) of capacity. Chesterfield General Hospital's total surgical utilization during the review period was fifty percent (50%) of capacity.
7. For planning purposes, the Department does not generally consider there to be a need for additional services or facilities until existing facilities reach at least eighty percent (80%) of their total capacity.
8. Few delays in scheduling or performing outpatient surgery exist at Marlboro Park Hospital. To the extent that delays occur, they are generally caused by the surgeon's schedule or by emergency procedures which divert operating room staff.
9. No or few bottlenecks occur in pre-operative and post-operative outpatient areas of Marlboro Park Hospital.

Surgery and Population Statistics

1. The population statistics reported in the 1997 State Health Plan indicate an occurrence of 58 outpatient surgeries per 1000 persons in South Carolina.
2. The population of Marlboro County as set forth in the 1997 State Health Plan is 33,210 for 1995 with a projected population of 31,700 for the Year 2001. As recorded in the 1997 Plan, both the general population and the population over the age of 65 for Marlboro County are declining.
3. The number of outpatient surgeries performed on Marlboro County residents at Marlboro Park Hospital in 1997 was 1,180.
4. In 1997, 2,367 Marlboro County residents underwent outpatient surgery. Approximately 1,187, or fifty percent (50%), of these residents left Marlboro County for such services. Therefore, in 1997, Marlboro County's total outmigration pool was 1,187.
5. According to statistics provided by the Budget and Control Board, in 1996, approximately 874 outpatient surgeries were performed on Marlboro County residents in South Carolina but outside Marlboro County. In its application, DOSC presented evidence that in 1997 approximately 577 outpatient surgeries were performed on Marlboro County residents in North Carolina. The Department attempted to add these numbers together to yield an outmigration pool of 1451 cases. I find this figure unreliable because of the difference in years and, therefore, reject it.
6. At the hearing, the Department claimed that 1997 data pertaining to outpatient surgeries at Marlboro Park Hospital and outmigration from Marlboro County was not available for release to the public, and therefore, the Department did not consider that data. I find that the Department needed only to request Marlboro Park Hospital's consent to make use of this data.⁽¹⁾ Therefore, the data was, for all practical purposes, available to the Department during project review.
7. A certain percentage of patient outmigration is a natural occurrence in health care. Causes of such "natural outmigration" are unavailability of specialty services in the patient's area, physician referral patterns, patient choice, and closer geographic access. In some cases, outmigration to regional facilities is actually desirable from a health care planning perspective; to maintain an acceptable level of skill, providers require a sufficient number, or critical mass, of patients. For example, outmigration is common for tertiary specialty care services such as cardiac or neurological procedures.
8. Marlboro County is a rural county.
9. A high percentage of outmigration is typical in rural counties. One of the reasons for this is the difficulty in attracting health care providers practicing in certain specialties because of the lack of critical mass of patients.
10. Although the overall outpatient outmigration rate for Marlboro County was 50% in 1997, the percentage of outmigrating patients for each specific type of procedure varied widely. For example, outmigration of Marlboro County residents for cardiac outpatient procedures was approximately ninety-six percent (96%), while outmigration of Marlboro County residents for gastrointestinal outpatient surgeries was fourteen percent (14%).
11. Construction of DOSC's proposed ambulatory surgery center is not likely to reverse natural outmigration of patients from Marlboro County. For example, because DOSC will not provide cardiac surgery procedures, it is expected that none of the 96% of Marlboro residents outmigrating for those services can be recaptured by DOSC.
12. The total percentage of natural, non-reversible outmigration is expected to be at least 25% of total outpatient surgeries, leaving, at the most, only a 25% rate of reversible outmigration.
13. Assuming that DOSC captures 25% of reversible outmigration, the remainder of cases needed to meet DOSC's projections will have to come either from an increase in the total number of outpatient procedures performed on Marlboro County residents, or from cases redirected from physicians' offices, or cases redirected from the Hospital, or a combination of these sources.
14. Based on statistics set forth in the 1997 State Health Plan, the total population in Marlboro County is declining. Therefore, it is not expected that DOSC can generate any of its projected cases from new cases caused by increases in population.

Redirection From Physicians' Offices

1. In its application, DOSC projects that approximately 160 cases will be generated as a result of redirection of cases currently performed in physicians' offices.
2. DOSC plans to charge its patients a facility fee.
3. DOSC plans to lease most of the equipment necessary for surgical procedures and other patient care. DOSC plans to pass the leasing costs of some of its equipment on to its patients.
4. DOSC plans to pass through to its patients the cost of certain supplies.
5. DOSC plans to obtain disposable reusable surgical instruments on a per use basis and bill these items to its patients.
6. Redirecting outpatient surgery cases from the physicians' offices to the ambulatory surgery center will add additional costs to the health care system, such as facility fees and the pass-through of DOSC's costs for certain equipment, disposable surgical instruments and supplies.

Adverse Impact on Hospitals

1. Because of the limitations on other sources, it is expected that the majority of DOSC's projected caseload, not including recaptured outmigration, will come from cases redirected from the Hospitals.
2. The number of outpatient surgery cases currently being done at Marlboro Park Hospital but reasonably expected to be redirected to DOSC's surgery center is between 290 and 527, assuming an outmigration reversal rate of between 20% and 30%, respectively. The average number of redirected cases is therefore expected to be 408. This number does not take into account the 160 cases proposed to be redirected from physicians' offices to the ambulatory surgical center, given the questionable appropriateness of this practice.
3. Assuming Marlboro Park Hospital's loss of 408 outpatient surgery cases to DOSC, the expected financial impact of DOSC's surgery center on the hospital is a reduction in its pre-tax profit by approximately $476,000. This would be a 32% reduction in Marlboro Park Hospital's pre-tax profit, based on its 1997 pre-tax profit of $1.5 million.
4. Approximately one-third of the caseload that Chesterfield General Hospital receives from Marlboro County residents living near the county border would be redirected to the proposed ambulatory surgical center. Therefore, the number of outpatient surgery cases currently being done at Chesterfield General Hospital but reasonably expected to be redirected to DOSC's surgery center is approximately 103 to 155.
5. Assuming Chesterfield General Hospital's loss of 103 outpatient surgery cases to DOSC, the surgery center's expected financial impact on the hospital is a reduction in its pre-tax profit by approximately $162,000. This would be a 10% reduction in Chesterfield General Hospital's pre-tax profit, based on its 1997 pre-tax profit of $1.6 million.
6. A reasonable profit is necessary for the Hospitals to allow for capital investments such as new equipment.
7. Even under the most favorable economic climate, a 32% reduction in pre-tax profit for Marlboro Park Hospital is an unacceptable adverse impact.⁽²⁾
8. Expected changes to reimbursement under the 1997 Balanced Budget Act and South Carolina's disproportionate share program, as those changes were understood during project review, make both Hospitals, as well as all South Carolina health care providers, more vulnerable. Given this increased vulnerability, the adverse impact caused by DOSC's ambulatory surgical center, as proposed, would be more likely to result in the Hospitals' reduction or elimination of services to the community. While the evidence shows that there are alternative resources to fund indigent care in Marlboro County, these resources would not necessarily protect the community as a whole from the reduction or elimination of certain services such as 24 hour emergency care, obstetrical care, psychiatric care and a skilled nursing unit.

Discussion and Conclusions of Law

Need

As noted above, DOSC's application identifies the 50% outmigration rate for Marlboro County residents undergoing outpatient surgery as the need justification for its new outpatient surgery center in Marlboro County. The Hospitals argue that outmigration does not equal "need" and that, although outmigrating patients might be one future source of business for DOSC's proposed center, DOSC would be able to capture only an insubstantial portion of the outmigration pool. The Hospitals argue that no need exists for the proposed ambulatory surgical center.

DOSC and the Department calculate the perceived need for the facility in two ways. First, they rely on the raw statistics which indicate that 50% of Marlboro County residents seeking outpatient surgeries do not utilize Marlboro Park Hospital. A proper analysis, however, to determine need for the proposed facility should consider the types of procedures for which patients are outmigrating and whether DOSC intends to provide those services at its facility.

Both DOSC and the Department concede that only a certain percentage of outmigration is reversible. Further, the Department concedes that quality of care at the Hospitals is not an issue; yet, it contends that DOSC will capture most of the outmigrating patients because these patients refuse to have surgery at the Hospitals. The Hospitals presented evidence that the major causes of outmigration are unavailability of specialty services in the patient's area, physician referral patterns, patient choice, and closer geographic access. At the hearing, DOSC conceded that at least half of all 1187 outmigrating cases, or 25% of all Marlboro County residents who had outpatient surgery in 1997, could not be reversed due to these factors. The Department conceded that at least a third of all outmigrating cases, or 17% of all Marlboro County residents who had outpatient surgery in 1997, could not be reversed due to these factors.

The second way in which DOSC and the Department calculated the perceived need for the proposed facility is by relying on the physician letters submitted by DOSC near the end of the review process. In these letters, various physicians, including those associated with DOSC, represent to the Department that a certain number of patients who allegedly do not seek care at Marlboro Park Hospital can be referred to the proposed facility. Although the Department relied heavily on these letters in determining need, it did not follow up with any of the physicians to seek clarification or verification of the number of potential referrals.

At the hearing, these physicians' estimates were explored thoroughly, and many of these estimates were shown to have little or no reliability in determining the likely number of cases that DOSC could attract to the proposed surgery center. Therefore, I find these letters are not sufficient to justify need as required by Regulation 61-15 and the State Health Plan. See Mississippi State Department of Health, et al. v. Natchez Community Hospital, 743 So.2d 973 (Miss. 1999) (Unsupported statements by physicians concerning estimates of projected procedures to be performed were insufficient to support grant of CON for ambulatory surgery center). Further, two of these letters indicate that approximately 160 cases would be redirected from physicians' offices to the proposed surgery center. As concluded earlier, the practice of redirecting cases from physicians' offices to the ambulatory surgery center adds additional costs to the health care system. It is for this reason that the 1997 State Health Plan expresses serious concern about such redirection. I conclude that DOSC's reliance on cases redirected from physician's offices to justify need is not in compliance with the State Health Plan.

The project review criterion entitled "Need" requires that an application be in compliance with the State Health Plan in order to qualify for approval. 24A S.C. Code Ann. Regs. 61-15, Section 802(1). The 1997 State Health Plan, at page II-79, criterion 1 provides, "The applicant must document a need for the expansion of or the addition of any ambulatory surgical facility. The existing resources must be considered and documentation presented as to why the existing resources are not adequate to meet the needs of the community." Criterion 4 of the Plan states, "The applicant must document where the potential patients for the facility will come from and where they are currently being served." I find that the Hospitals have demonstrated by a preponderance of the evidence that DOSC's presentation of the physician referral letters does not meet the requirements of these two criteria of the 1997 State Health Plan.

DOSC also attempted to show need for the proposed ambulatory surgical center by referencing physician turnover in Marlboro County. DOSC's expert testified that the proposed ambulatory surgical center could serve as an anchor to bring into the community additional physicians. The Department also considered the possibility of attracting new specialty physicians to the area as a factor in determining need for the proposed ambulatory surgical center. Unfortunately, the evidence did not support the reasoning of DOSC and the Department. First, while there was evidence of a physician turnover problem in Marlboro County, there was also evidence that a significant factor in physician turnover is the nature of the rural setting in the county versus the lifestyle available in larger metropolitan areas.

Admittedly, there was credible evidence of physicians' frustrations with the issues of (1) the history of Marlboro Park Hospital's equipment purchasing practices; (2) poor layout of the surgical and recovery areas at the hospital; and (3) occasional diverting of operating room staff for emergency C-sections. These issues, however, are correctable management and administrative issues that do not justify construction of a new facility. Indeed, the evidence of adverse financial impact that the proposed ambulatory surgical center would have on Marlboro Park Hospital would exacerbate rather than solve these problems, due to the reduction in funds available for capital investment. Further, the evidence shows that Marlboro Park Hospital has had several different owners over the past few decades, and that its current owner is more committed to necessary upgrading of equipment than its predecessors.

Moreover, the possibility that the proposed ambulatory surgical center would attract new specialty physicians to the area is just that, a possibility. There is insufficient evidence in the record to show enough of a probability that the establishment of an ambulatory surgical center in a rural county, with a significant percentage of irreversible outmigration, will in fact attract new specialties. While DOSC relayed some verbal commitments from certain physicians, there were no firm, written commitments from any physicians practicing in specialties not already offered by Marlboro Park Hospital.

DOSC's expert testified that physicians are reluctant to commit to the proposed ambulatory surgical center unless they know it is going to be a reality. This tribunal, however, cannot make a determination of need on the basis of new services to be offered unless there is adequate evidence that the offering of such new services is going to be a reality. While it is evident that the physician population in Marlboro County is less than ideal, unless there is adequate evidence that the proposed ambulatory surgical center will be the answer to this problem, this tribunal cannot find that there is a need for the center.

This tribunal is very cognizant that the burden of proof lies with the Hospitals in this case. The Hospitals, however, thoroughly explored the issue of need at the hearing by focusing the testimony on the actual procedures that will be provided by the ambulatory surgical center and comparing them to those procedures already offered by the Hospitals. No probative evidence was submitted to counter the testimony elicited by the Hospitals showing that no new procedures will be offered by the ambulatory surgical center. Although the CON application indicates that DOSC proposes to provide pain management utilizing the services of an anesthetist on staff, there was inadequate evidence in the record concerning how this service would be implemented and what qualifications are necessary to provide such a service.

Finally, the project review criterion entitled "Community Need Documentation" requires that current and/or projected utilization should be sufficient to justify the expansion or implementation of the proposed service. 24A S.C. Code Ann. Regs. 61-15, Sec. 802(2)(e). At the hearing, the parties stipulated that Marlboro Park Hospital's current surgical utilization is 40% of total capacity, while Chesterfield General Hospital's is operating at 50% of total capacity. The Department concedes that, for planning purposes the Department does not generally consider there to be a need for additional services or facilities until existing facilities reach at least eighty percent (80%) of their total capacity. Given that only a limited number of outmigrating cases can be recaptured by either DOSC or the Hospitals, the current or projected utilization of existing facilities does not justify establishment of a new ambulatory surgery center, offering for the most part identical services to the Hospital's outpatient departments. I find that the Hospitals have proved by a preponderance of evidence that DOSC's proposed ambulatory surgery center does meet the need criterion of Section 802(2)(e).

Adverse Impact

The Hospitals contend that, because the reversible outmigration pool is limited, DOSC must redirect cases from the Hospitals in order to meet its projected caseload. In that regard, it is important to note that DOSC-related physicians account for nearly 88% of all outpatient surgeries currently performed at Marlboro Park Hospital.

DOSC and the Department claim no, or only a minimal, adverse impact will result because DOSC's target population consists of patients who do not currently use the Hospitals. DOSC and the Department argue that DOSC's patients will come from the outmigration pool and from cases which have previously been performed in physicians' offices.

In its application, DOSC made no analysis of the likely adverse financial impact on the Hospitals but instead relied on its assumption that no cases from the Hospitals would be redirected to its surgery center. At the hearing, DOSC presented the testimony of an expert accountant who sought to discredit the Hospitals' analysis regarding adverse impact. Upon cross-examination, however, DOSC's accountant indicated that, in forming his conclusions, he relied almost exclusively upon other members of his firm who were better qualified to express opinions on hospital reimbursement matters. When pressed further on cross-examination, DOSC's accountant acknowledged that he was unfamiliar with significant reimbursement issues regarding his own client and the pro formas submitted to the Department during the review process.

In contrast, the Hospitals presented a detailed analysis of the potential adverse impact of DOSC's proposed facility on both Marlboro Park Hospital and Chesterfield General Hospital. The Hospitals' analysis assumes an outmigration recapture rate of approximately 25%.

The Hospitals' analysis also considered expected changes to reimbursement under the 1997 Balanced Budget Act and South Carolina's disproportionate share program, as those changes were known or understood during the review period. I find consideration of this information to be appropriate given the requirement of 24A S.C. Code Ann. Regs. 61-15, Sec.802(3)(h) that the "[p]otential negative impact of the proposed project upon the ability and/or resources of existing providers to serve medically underserved groups must be considered." Finally, the Hospitals' analysis takes into account that a certain level of benefit will flow to the Hospitals because of the referral of patients for ancillary services and because of the reduction of expenses attributable to redirected cases.

To summarize the Hospitals' analysis, the expected financial impact of DOSC's surgery center on Marlboro Park Hospital is a reduction in pre-tax profit by approximately $476,000, while the expected financial impact on Chesterfield General Hospital is a reduction of the hospital's pre-tax profit by approximately $162,000. As indicated by witnesses for both sides, it is important for hospitals to make a reasonable profit in order to invest in equipment and other capital improvements because the inability to do so will likely result in the reduction or elimination of important services, such as emergency surgeries or obstetrical services.

Given my previous finding that a substantial number of cases currently being performed at the Hospitals will be redirected to DOSC, I find the analysis of adverse financial impact proffered by the Hospitals' experts to be the most reasonable indicator of adverse financial impact. Therefore, I conclude that the Hospitals have proved by a preponderance of the evidence that DOSC's proposed ambulatory surgery center does not meet the requirements of the 1997 State Health Plan or of 24A S.C. Code Ann. Regs. 61-15, Sec. 802(3)(a), (3)(b), (3)(h), (17), and(23)(a).

Finally, under S.C. Code Ann. § 44-7-180(B)(4) (Supp. 1999), the Department is required to include in the State Health Plan a finding for each type of service as to whether the benefits of improved accessibility to such type of service may outweigh the adverse effects caused by duplication of any existing service. The purpose of the finding is to make sure accessibility in and of itself is not a reason to duplicate services in a community. See Open MRI of Charlotte v. South Carolina Department of Health and Environmental Control, et al., Docket No. 97-ALJ-07-0706-CC (1999) (referencing testimony of the Department's expert in State health planning). The 1997 State Health Plan sets forth the determination of the Department that for ambulatory surgery centers the benefits of improved accessibility will not outweigh the adverse effects caused by the duplication of existing services.

DOSC's own application shows that its target population is currently receiving outpatient surgery, in some cases, at facilities closer to them. The population of Marlboro County is declining and the rate of outpatient surgery is static. Therefore, DOSC does not propose to meet some future demand for services. In short, there is no independent need to justify the addition of DOSC's facility to the Marlboro County service areas. The only justification is that Marlboro County residents who outmigrate would have greater accessibility to services in Marlboro County. As required by the 1997 State Health Plan, I conclude that this increased accessibility does not outweigh the adverse effects caused by duplication of services already offered by the Hospitals.

Based on the foregoing Findings of Fact and the testimony put forth in this case, I make the following Conclusions of Law:

Jurisdiction/Procedure

• The South Carolina Administrative Law Judge Division has jurisdiction over Certificate of Need contested case proceedings pursuant to S.C. Code Ann. § 44-7-210 and § 1-23-600(B) (Supp. 1999).
• Because the Hospitals offer general outpatient and endoscopy surgery services to persons who reside in DOSC's proposed service area, they are "affected persons" under S.C. Code Ann. § 44-7-130 (Supp. 1999) and 24A S.C. Code Ann. Regs. 61-15, Sec. 103(1) (Supp. 1999) with standing to request a contested case hearing to review the Department's decision to approve DOSC's application for an ambulatory surgery center.
• The Hospitals timely filed a request for a contested case hearing regarding the Department's approval of DOSC's CON application. S.C. Code Ann. § 44-7-210(D)(Supp. 1999) and 24A S.C. Code Ann. Regs. 61-15, Sec. 403(1) (Supp. 1999).
• The Department's initial staff decision on a CON application is merely a proposed decision; it becomes a final agency decision unless a request for reconsideration or a contested case hearing on the proposed staff decision is timely filed by the applicant or an affected person. S.C. Code Ann. § 44-7-210(D) & (E) (Supp. 1999).
• The contested case hearing is conducted as a contested case under the Administrative Procedures Act. S.C. Code Ann. § 44-7-210(E) (Supp. 1999). The issues considered at the contested case hearing on a CON application are limited to those presented or considered during the staff review and decision process. Id. This limitation on the issues, however, does not preclude the use of any information pertinent to the issues considered by the Department staff, as long as that information was available to the Department staff during project review. See 24A S.C. Code Ann. Regs. 61-15, Section 308(1) (Supp. 1999) ("On the basis of staff review of the record established by the Department, including but not limited to, the application, comments from affected persons and other persons concerning the application, data, studies, literature and other information available to the Department, the staff of the Department shall make a proposed decision to grant or deny the Certificate of Need") (emphasis added).
• As a state-wide administrative tribunal authorized to hear evidence and adjudicate contested case hearings, the Administrative Law Judge Division is the fact finder in this matter for purposes of administrative and judicial review. See Lindsey v. S.C. Tax Comm'n, 302 S.C. 504, 397 S.E.2d 95 (1990).
• The Department cites Milliken v. S.C. Department of Labor, 275 S.C. 264, 269 S.E.2d 763 (1980) for the proposition that the parties are prohibited from submitting new or additional facts for consideration at the hearing which were not part of the administrative record at the time of the initial staff decision. In Milliken, the Court found the Department of Labor's use of post-citation discovery to be illegal, because the applicable statutory scheme contemplated that fact-finding would have been completed before the issuance of a citation. Milliken, 269 S.E.2d at 764. In this CON case, however, the applicable statutory scheme contemplates a contested case hearing under the Administrative Procedures Act to complete the fact-finding process. Therefore, as long as no new issues are considered in this contested case proceeding, any data pertinent to the issues considered by staff that was available to the Department during project review may be considered by this tribunal.

8. The burden of proof in a contested case hearing on a CON application must be upon the moving party. S.C. Code Ann. § 44-7-210(E) (Supp. 1999); see also 2 Am. Jur. 2d Administrative Law § 360 (1994); Alex Sanders, et al., South Carolina Trial Handbook § 9:3 Party With Burden, Civil Cases (1999) (In civil cases, generally, the burden of proof rests upon the party who asserts the affirmative of an issue.). The Hospitals are the moving parties in this case; therefore, the Hospitals must prove by a preponderance of the evidence that DOSC's proposed ambulatory surgery center does not meet the criteria necessary for approval under the applicable statutes, regulations and the 1997 State Health Plan. See Anonymous v. State Bd. of Medical Examiners, 329 S.C. 371, 496 S.E.2d 17 (1998) (standard of proof in an administrative proceeding is the preponderance of the evidence); Nat'l Health Corp. v. S.C. Dept. of Health and Environmental Control, 298 S.C. 373, 380 S.E.2d 841 (1989) (preponderance of evidence standard used in CON dispute).⁽³⁾

9. The weight and credibility assigned to evidence presented at the hearing of a matter is within the province of the trier of fact. See S.C. Cable Television Ass'n v. Southern Bell Telephone and Telegraph Co., 308 S.C. 216, 417 S.E.2d 586 (1992). Furthermore, a trial judge who observes a witness is in the better position to judge the witness's demeanor and veracity and to evaluate his testimony. See McAlister v. Patterson, 278 S.C. 481, 299 S.E.2d 322 (1982); Peay v. Peay, 260 S.C. 108, 194 S.E.2d 392 (1973); Mann v. Walker, 285 S.C. 194, 328 S.E.2d 659 (Ct. App. 1985); Marshall v. Marshall, 282 S.C. 534, 320 S.E.2d 44 (Ct. App. 1984).

Expert Testimony

10. According to Rule 702, SCRE, "[i]f scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of opinion or otherwise." An expert is granted wide latitude in determining the basis of his or her opinion. Where an expert's testimony is based upon facts sufficient to form an opinion, the trier of fact must weigh its probative value. Small v. Pioneer Machinery, Inc., 329 S.C. 448, 494 S.E.2d 835 (Ct. App. 1997).

11. "[E]xpert testimony is essential in cases which involve a subject of special technical science, skill, or occupation of which the members of the jury or the trial court are not presumed to be specially informed." 32A C.J.S. Evidence § 729 (1955). For example, the Supreme Court of South Carolina has addressed medical malpractice cases and stated that "the plaintiff must use expert testimony . . . unless the subject matter lies within the ambit of common knowledge and experience, so that no special learning is needed to evaluate the conduct of the defendant." Pederson v. Gould, 288 S.C. 141, 341 S.E.2d 633 (1986).

12. In general, "expert opinion evidence is to be considered or weighed by the triers of the facts like any other testimony or evidence; the triers of facts cannot, and are not required to, arbitrarily or lightly disregard, or capriciously reject, the testimony of skilled witnesses, and make an unsupported finding contrary to the opinion." 32A C.J.S. Evidence § 727 (1955). The trier of fact, however, may give an expert's testimony the weight he determines it deserves. Florence County Dep't of Social Services v. Ward, 310 S.C. 69, 425 S.E.2d 61 (Ct. App. 1992). Further, the trier of fact may accept the testimony of one expert over another. S.C. Cable Tel. Ass'n. v. Southern Bell, 308 S.C. 216, 417 S.E.2d 586 (1992). In the present case, this tribunal finds the testimony of Petitioner's experts exceedingly persuasive.

Criteria For Review

13. The "State Certification of Need and Health Facility Licensure Act," S.C. Code Ann. §§ 44-7-110, et seq. (Supp. 1999) mandates that the Department establish a certificate of need program of which the purposes are to promote cost containment, prevent unnecessary duplication of health care facilities and services, guide the establishment of health care facilities and services which will best serve public needs, and ensure that high quality services are provided in health care facilities in this State.

14. The criteria applicable to DOSC's CON application in this case are found in 23A S.C. Code Ann. Regs. 61-15, Section 802, subsections (1) Need; (2)(a),(b),(c), and (e) Community Need Documentation; (3)(a), (b), (c), (d), (g), and (h) Distribution (Accessibility); (4)(a) and (b) Acceptability; (17) Efficiency; 23(a) and (b) Adverse Effects on Other Facilities; (14)(a) and (b) Ability to Complete the Project; (15) Financial Feasibility; and (13)(b) and (c) Record of the Applicant.

15. The State Health Plan outlines the need for medical facilities and services in the State and is a criterion for reviewing projects under the CON program. 24A S.C. Code Ann. Regs. 61-15, Sec. 802(1) (Supp. 1999).

16. The Department may not issue a CON unless an application complies with the applicable State Health Plan, project review criteria, and other regulations. S.C. Code Ann. § 44-7-210(C) (Supp. 1999).

17. Although a project does not have to satisfy every applicable project review criterion in order to be approved, no project may be approved unless it is consistent with the State Health Plan. 24A S.C. Code Ann. Regs. 61-15, Sec. 801(3) (Supp. 1999).

18. The 1997 State Health Plan was in effect when DOSC's CON application was filed and is, therefore, applicable to this matter.

19. Proposing an ambulatory surgery center as a method of increasing reimbursement for procedures currently being performed in physicians' offices is contrary to the 1997 State Health Plan.

Need

20. "Need" is examined by considering resources already in the community along with a demonstration of why those resources cannot meet the demand being asserted. Edisto Surgery Center v. South Carolina Department of Health and Environmental Control, et al., Docket No. 97-ALJ-07-0434-CC (1998).

21. The project review criterion entitled "Need" requires that an application be in compliance with the State Health Plan in order to qualify for approval. 24A S.C. Code Regs. 61-15, Section 802(1) (Supp. 1999).

22. The 1997 State Health Plan, at page II-79, criterion 1 provides, "The applicant must document a need for the expansion of or the addition of any ambulatory surgical facility. The existing resources must be considered and documentation presented as to why the existing resources are not adequate to meet the needs of the community." Criterion 4 of the Plan states, "The applicant must document where the potential patients for the facility will come from and where they are currently being served." I find that the Hospitals have demonstrated by a preponderance of the evidence that DOSC's presentation of the physician referral letters does not meet the requirements of these two criteria of the 1997 State Health Plan or of Section 802(1) of Regulation 61-15. See Mississippi State Department of Health, et al. v. Natchez Community Hospital, 743 So.2d 973 (Miss. 1999).

23. For planning purposes, the appropriate utilization threshold is that need generally does not exist until existing facilities reach approximately eighty percent (80%) of their total capacity.

24. DOSC's proposed surgery center does not meet the requirements of 24A S.C. Code Ann. Regs. 61-15, Sec. 802(2)(e) because current and/or projected surgical utilization is not sufficient to justify the implementation of its proposed services.

25. Under the 1997 State Health Plan, the Department should evaluate whether an ambulatory surgery center is being proposed as a method of increasing reimbursement for procedures currently being performed in physicians' offices through the "facility fee" built into the reimbursement mechanisms. The redirection of surgical procedures which can suitably be performed in physicians' offices to an ambulatory surgery facility violates this policy.

Adverse Impact

26. "Adverse impact" can generally be construed to mean a material decrease in the present or future use or occupancy rates of existing providers for like procedures. See 24A S.C. Code Ann. Regs. 61-15, Section 802(23)(a) (Supp. 1999).

27. DOSC's proposed ambulatory surgery center will have a substantial adverse financial impact on Marlboro Park Hospital.

28. Given the increased vulnerability of the Hospitals due to expected changes to reimbursement under the 1997 Balanced Budget Act and South Carolina's disproportionate share program, DOSC's proposed ambulatory surgery center will have a substantial adverse financial impact on Chesterfield General Hospital.

29. The 1997 State Health Plan establishes a policy for ambulatory surgery centers, which the Department must follow, that the benefits of improved accessibility will not outweigh the adverse effects caused by the duplication of existing services.

30. Any increased accessibility that may be provided by DOSC's proposed surgery center does not outweigh the adverse effects caused by duplication of services already offered by the Hospitals.

31. DOSC's proposed ambulatory surgery center does not meet the requirements of the 1997 State Health Plan or of 24A S.C. Code Ann. Regs. 61-15, Sec. 802(3)(a), (3)(b), (3)(h), (17), and(23)(a) (Supp. 1999).

CONCLUSION

A careful study of the applicable statutes, regulations and the 1997 State Health Plan, and a thorough review of all of the evidence presented in this case, leads me to the inescapable conclusion that the CON must be denied. In reaching a decision in this matter, I am constrained by the record of evidence as developed by the opposing parties and by the applicable law as it is written. S.C. Code Ann. § 1-23-320(I) (Supp. 1999). This decision was rendered impartially, as a judge "ought to live, an eagle's flight beyond the reach of fear or favor, praise or blame, profit or loss." WILLIAM S. McFEELEY, FREDERICK DOUGLASS 318 (1991); Rule 501, S.C. App. Ct. R, Canon 3.

The final decision of an Administrative Law Judge in cases involving an agency that is governed by a board or commission authorized to exercise the sovereignty of the state is initially appealed back to the board or commission of the agency from which the case arose. S.C. Code Ann. § 1-23-610(A) (Supp. 1998). Hence, a party wishing to file an appeal must do so with the agency from which the case originated. On appeal, the scope of review is limited as follows.

[t]he scope of review of final ALJ decisions is essentially identical to the scope of review established in section 1-23-380. This scope of review applies to the circuit court or the applicable board or commission. Under S.C. Code Ann. § 1-23-610(D), the reviewing tribunal may affirm the decision or remand the case for further proceedings, or it may reverse or modify the decision if the substantive rights of the petitioner have been prejudiced because the finding, conclusion, or decision is:

a. in violation of constitutional or statutory provisions;

b. in excess of the statutory authority of the agency;

c. made upon unlawful procedure;

d. affected by other error of law;

e. clearly erroneous in view of the reliable, probative and substantial evidence

on the whole record; or

f. arbitrary or capricious or characterized by abuse of discretion or clearly

unwarranted exercise of discretion.

JEAN H. TOAL, SHAHIN VAFAI & ROBERT A. MUCKENFUSS, APPELLATE PRACTICE IN SOUTH CAROLINA 56-57 (1999), citing S.C. Code Ann. § 1-23-610(D) (Supp. 1998) (emphasis added).

Order

DOSC's application for a Certificate of Need is denied.

AND IT IS SO ORDERED.

________________________________________

John D. Geathers

Administrative Law Judge

Columbia, South Carolina

July 27, 2000

1. Marlboro Park Hospital is the only hospital in Marlboro County.

2. Even assuming that the 160 cases redirected from physicians' offices would reduce the number of cases redirected from Marlboro Park Hospital, the resulting impact would be a reduction in Marlboro Park Hospital's pre-tax profit by $289,416, or 19%. This impact would also be unacceptable.

3. The preponderance of the evidence is "[t]he greater weight of the evidence" or "superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other." BLACK'S LAW DICTIONARY 1201 (7th ed. 1999). "The preponderance of the evidence means such evidence as, when considered and compared with that opposed to it, has more convincing force and produces in the mind the belief that what is sought to be proved is more likely true than not true." Sanders, supra, § 9:5 Quantum of Evidence in Civil Cases (1999) (citing Frazier v. Frazier, 228 S.C. 149, 89 S.E.2d 225 (1955)).