State of North Carolina in the Office of Administrative Hearings

STATE OF NORTH CAROLINA IN THE OFFICE OF ADMINISTRATIVE HEARINGS COUNTY OF JOHNSTON 04 DHR 0516 ______

BIO-MEDICAL APPLICATIONS OF ) NORTH CAROLINA, INC., ) ) Petitioner, ) ) v. ) ) N.C. DEPARTMENT OF HEALTH AND ) HUMAN SERVICES, DIVISION OF ) RECOMMENDED DECISION FACILITY SERVICES, ) CERTIFICATE OF NEED SECTION, ) ) Respondent, ) ) and ) ) HEALTH SYSTEMS MANAGEMENT, ) INC. (LESSOR) AND CLAYTON ) DIALYSIS CENTER, INC. (LESSEE), ) ) Respondent-Intervenor. ) ______

THIS MATTER came on for hearing before the undersigned Administrative Law Judge on October 27-29, November 1-2 and November 15-17, 2004 in Raleigh, North Carolina. The Undersigned, having heard all the evidence in the case, considered the arguments of counsel, examined all the exhibits, and reviewed the relevant law, makes the following findings of fact, by a preponderance of the evidence, enters his conclusions of law thereon, and makes the following recommended decision.

APPEARANCES

For Petitioner Bio-Medical Applications of North Carolina, Inc:

Gary S. Qualls Colleen M. Crowley Kennedy Covington Lobdell & Hickman, L.L.P. 2801 Slater Road, Suite 120 Morrisville, North Carolina 27560

For Respondent N.C. Department of Health and Human Services, Division of Facility Services, Certificate of Need Section:

June S. Ferrell Assistant Attorney General North Carolina Department of Justice Post Office Box 629 Raleigh, North Carolina 27602-0629

For Respondent-Intervenors Health Systems Management, Inc. (Lessor) (“HSM”) and Clayton Dialysis Center, Inc. (Lessee) (“CDC”) (collectively, “HSM/CDC”):

S. Todd Hemphill Bode, Call & Stroupe, L.L.P. P.O. Box 6338 Raleigh, North Carolina 27628-6338

APPLICABLE LAW

1. The procedural statutory law applicable to this contested case is the North Carolina Administrative Procedure Act (APA), N. C. Gen. Stat. §150B–1 et seq.

2. The substantive statutory law applicable to this contested case hearing is the North Carolina Certificate of Need Law, N. C. Gen. Stat. §131E–175, et seq.

3. The administrative regulations applicable to this contested case hearing are the North Carolina Certificate of Need administrative rules, 10A N.C.A.C. 14C.0100 et seq., and the Office of Administrative Hearings rules, 26 N.C.A.C. 3.0100 et seq.

ISSUES

1. Whether the Agency exceeded its authority or jurisdiction; acted erroneously; failed to use proper procedure; acted arbitrarily or capriciously; or failed to act as required by rule or law, in disapproving the CON application of BMA Johnston.

2. Whether the Agency exceeded its authority or jurisdiction; acted erroneously; failed to use proper procedure; acted arbitrarily or capriciously; or failed to act as required by rule or law, in approving the CON application of HSM/CDC.

BURDEN OF PROOF

2 Petitioner (BMA Johnston) bears the burden of showing by the preponderance of the evidence that the Agency substantially prejudiced BMA Johnston’s rights, and that the Agency also acted outside its authority, acted erroneously, acted arbitrarily and capriciously, used improper procedure, or failed to act as required by law or rule in finding BMA Johnston’s application non-conforming with G.S. §§ 131E-183(a)(3), (4), (5), (6), and (18a), and with 10A N.C.A.C. 14C.2203(b), in finding HSM/CDC’s application conforming with all applicable statutory criteria and rules, in finding HSM/CDC’s application comparatively superior to BMA Johnston’s application, in approving HSM/CDC’s application, and in disapproving BMA Johnston’s application. G.S. §150B-23(a); Britthaven, Inc. v. N.C. Dept. of Human Resources, et al., 118 N.C. App. 379, 455 S.E.2d 455, 459, disc. rev. denied, 341 N.C. 418, 461 S.E.2d 754 (1995).

WITNESSES

Witnesses for BMA Johnston–Petitioner:

Michael McKillip, Project Analyst, CON Section Craig Smith, Assistant Chief, CON Section Samuel H. Robinson, former Certificate of Need Health Planning Specialist, BMA Janice Lindsay, Regional Vice President, Fresenius Health Services

Witnesses for the Agency-Respondent:

Michael McKillip, Project Analyst, CON Section Craig Smith, Assistant Chief, CON Section

Witnesses for HSM/CDC-Respondent-Intervenor

William McDonald, Vice President of Research and Development, HSM June Johnson, Controller, HSM Marshia Coe, Regional Nurse Administrator, HSM Kimberly Walker, Admin. Assistant to Vice President of Research and Development, HSM

EXHIBITS

Exhibits submitted by all Parties and admitted are set forth in the transcript of the hearing. It is noted that the Agency File, the BMA Johnston application and the HSM/CDC application were admitted into evidence as Joint Exhibits 1-3, respectively.

BASED UPON careful consideration of the sworn testimony of the witnesses presented at the hearings, the documents and exhibits received and admitted into evidence, and the entire record in this proceeding, the Undersigned makes the following findings of fact. In making the findings of fact, the Undersigned has weighed all the evidence and has assessed the credibility of the witnesses by taking into account the appropriate factors for judging credibility, including but

3 not limited to the demeanor of the witness, any interests, bias, or prejudice the witness may have, the opportunity of the witness to see, hear, know or remember the facts or occurrences about which the witness testified, whether the testimony of the witness is reasonable, and whether the testimony is consistent with all other believable evidence in the case.

FINDINGS OF FACT

Process and Procedure

1. The July 2003 Semi-Annual Dialysis Report identified a need for 10 dialysis stations in Johnston County, and provided that applications seeking to fill that need should be filed on September 15, 2003. BMA Ex. 7, p. 15.

2. On September 15, 2003, five CON applications were filed with the N.C. Department of Health and Human Services, Division of Facility Services, Certificate of Need Section (the "Agency" or the "CON Section"), to develop the 10 stations identified in the July 2003 SDR. HSM/CDC filed an application for a new 10 station dialysis facility in Clayton, Johnston County (Project I.D. No. J-6927-03). Bio-Medical Applications of North Carolina, Inc. (“BMA”) submitted three applications to the Agency. One of BMA’s Applications sought to add five (5) dialysis stations to its existing 16-station Johnston County dialysis facility in Smithfield and to relocate the facility from Smithfield to Clayton. (“BMA-Smithfield+5”) (Project I.D. No. J- 6901-03). One of BMA’s Applications sought to add ten (10) dialysis stations to its existing 16- station Johnston County dialysis facility in Smithfield and to relocate the facility from Smithfield to Clayton. (“BMA-Smithfield+10) (Project I.D. No. J-6906-03). One of BMA’s Applications sought to add five (5) dialysis stations to its existing 25-station Johnston County dialysis facility in Smithfield. (“BMA Johnston”)(Project I.D. No. J-6903-03). Total Renal Care of North Carolina, LLC (“TRC”) also submitted an application to the Agency for a CON to construct a ten (10) station dialysis facility in Clayton.

3. The Agency determined the applications were complete for review and reviewed the applications in the review cycle which began on October 1, 2003. (Common Ex. 1, p. 6). On November 18, 2003, the Agency held a public hearing in Johnston County at which comments from representatives of the applicants and community members were heard concerning the submitted applications.

4. By letter dated February 27, 2004, CON Section project analyst Michael J. McKillip, and CON Section Assistant Chief Craig R. Smith, issued the CON Section’s decision to approve the application of CDC and to disapprove the other applications. The Agency issued its findings and conclusions on March 2, 2004. (Joint Ex. 1, Agency File, p. 236).

5. HSM/CDC’s application was the only one found conforming with all of the applicable statutory criteria and rules. The Respondent conducted a comparative analysis knowing Petitioner could not be approved because Petitioner had been found non-conforming with

4 Criteria three (3). On a comparative basis, HSM/CDC’s application was found superior to the other four applications.

6. The Agency found the BMA Application nonconforming with the statutory review criterion contained in N.C. Gen. Stat. § 131E-183(a)(3) (“Criterion 3”). (Common Ex. 1, p 236- 296). Since the Agency found the BMA Application nonconforming with Criterion 3, it also derivatively found it nonconforming with Criterion 4, 5, 6, and 18(a), and Rule 10A N.C.A.C. 14C.2203(b), for the same reasons. (Common Ex. 1, p. 236-296)

7. On March 26, 2004, Bio-Medical Applications, Inc. filed a Petition for Contested Case Hearing (04 DHR 0516) contesting the disapproval of its three applications and the approval of HSM/CDC’s application. TRC did not appeal the Agency’s decision disapproving its application.

8. On April 13, 2004, HSM filed a Motion to Intervene into BMA’s contested case, which Motion was granted on May 11, 2004.

9. Pursuant to a Stipulation filed November 15, 2004, BMA dismissed the disapproval of the BMA Smithfield +5 and the BMA Smithfield +10 applications. The only issues remaining before the ALJ are those regarding the Agency’s approval of HSM/CDC’s application and its disapproval of the BMA Johnston application.

Criteria Analysis

Criterion 3 and 10A N.C.A.C 14C .2203(a) and (c) (HSM’s Application)

1. The Agency found HSM’s Application to be conforming with the N.C. Gen. Stat. § 131E-183(a)(3) (“Criterion 3”).

2. Criterion 3 requires the following:

The applicant shall identify the population to be served by the proposed project, and shall demonstrate the need that this population has for the services proposed, and the extent to which all residents of the area, and, in particular, low income persons, racial and ethnic minorities, women, handicapped persons, the elderly, and other underserved groups are likely to have access to the services proposed.

3. HSM’s Application was also found conforming with the performance standards at 10A N.C.A.C. 14C.2203(a) and (c) which require an applicant to demonstrate the following:

5 (a) An applicant proposing to establish a new End Stage Renal Disease facility shall document the need for at least 10 stations based on the utilization of 3.2 patients per week as of the end of the first operating year of the facility.

(c) An applicant shall provide all assumption, including the specific methodology by which utilization is projected.

4. HSM’s Application projects that its new facility will have 33 patients by the end of the first operating year. (Common Ex. 3, p. 15)

5. This projection is based on HSM’s assumption that, because it will operate 19.6% of the approved dialysis stations in Johnston County, that it can obtain 19.6% of the patients within the five zip code area that it proposes to serve within Johnston County. (Common Ex. 3, p. 14-15; T. p. 1591-1592) The relevant five zip code areas are as follows: Benson, Clayton, Four Oaks, Selma, and Smithfield. (Common Ex. 3, p. 14) The five zip code area includes zip code areas that are located entirely within Johnston County and “lie partially or entirely within 15 miles of Clayton, North Carolina.” (Common Ex. 3, p. 14)

6. Kim Walker, the representative from HSM responsible for creating HSM’s need methodology, stressed the importance of looking at data trends of more than six months in creating her methodology. (T. p. 1563-1564) Ms. Walker failed to look at any data trends beyond the July 2003 SDR, which included a 10.8% change rate over five years for all of Johnston County. (T. p. 1592-1593) Ms. Walker could have reviewed the number of dialysis patients within the relevant zip code areas in the materials on the Southeastern Kidney Council (“SEKC”) website, which were available prior to the HSM Application being filed, and provided more recent patient numbers than the July 2003 SDR. (Common Ex. 1, p. 212)

7. The information contained on the SEKC website indicated that the in- center dialysis population in the Clayton zip code area was decreasing and the in-center dialysis patient population in the Smithfield zip code area was increasing. (BMA Ex. 8; T. p. 471)

8. HSM included no assumption in its application that any existing dialysis patients would transfer to its new facility. (T. p. 1608, 471) HSM was projecting to serve only “new” dialysis patients. An underlying assumption in HSM’s methodology was that “patients would dialyze or would want to dialyze closer to their home.” (T. p. 1609-1610)

6 9. The majority of the zip code areas that HSM proposes to serve are actually closer to BMA’s existing Smithfield facilities than to HSM’s proposed site. (T. p. 1616-1617; Common Ex. 3, p. 272) HSM did not consider “how close the zip code areas of Benson, Four Oaks, Smithfield, and Selma are to the Smithfield dialysis facilities as opposed to the [proposed] Clayton facility.” (T. p. 1610) BMA’s two dialysis facilities located in Smithfield would be closer to the patients living in the Smithfield area. (Common Ex. 3, p. 272)

10. A Johnston County map included in the HSM Application demonstrates that Benson and Four Oaks are located closer to Smithfield than to Clayton. (T. p. 1616-1617; Common Ex. 3, p. 272) Benson, Four Oaks, and Smithfield are all located along I-95, more convenient to Smithfield than to Clayton. (T. p. 1616-1617; Common Ex. 3, p. 272)

11. In its Application, HSM included the overall (non-patient) population within the Clayton zip code area to demonstrate the need for a dialysis facility within Clayton. (T. p. 1612; Common Ex. 3, p. 13) Ms. Walker had no idea where the majority of the population is located within the Clayton zip code area. (T. p. 1612; Common Ex. 3. p. 13)

12. HSM failed to consider that the Clayton zip code area borders Wake County and that some Clayton dialysis patients might (and probably would) find dialysis services to be more conveniently located within Wake County. (T. p. 1611-1614) HSM failed to consider that some patients might not want to treat at HSM’s proposed facility because their respective nephrologists (many if not most or all located in Wake County) might not want to obtain privileges at HSM’s dialysis facility. (T. p. 1606-1607

13. HSM has no idea how many patients, if any, that it will be able to obtain from any of the zip code areas within its service area on which HSM based its need analysis. (T. p. 1601-1604) The ability of HSM to attract the number of dialysis patients that it projects is further limited by the fact that HSM lacks a current patient base. (T. p. 1156)

14. HSM’s Application included no support from any nephrologists practicing within North Carolina. (T. p. 471) HSM’s Application failed to include the support of any North Carolina physicians, at all. HSM admitted that its “[e]fforts to solicit letters of support were met with hesitation and uncertainness.” (Common Ex. 3, p. 32) HSM’s Application only documents an attempt to contact “the Medical Director and the new vascular surgeons in Smithfield.” (T. p. 1357; Common Ex. 3, p. 32)

7 15. Johnston Memorial Hospital (“JMH”), the only hospital in Johnston County, refused to support HSM’s Application. (Common Ex. 3, p. 31, 88) In response to JMH’s failure to support the HSM Application, HSM wrote a letter to the president of JMH in which HSM indicates “without [JMH’s] full support and encouragement our goal of placing a facility and physician in Johnston County will be difficult to win.” (Common Ex. 3, p. 88)

16. William McDonald, Vice President of Research and Development for HSM, who participated in drafting the HSM Application, indicated that HSM elected to go forward with the project, in part, because of “a lot of support from the people in the Clayton area, the Chamber of Commerce, the – a lot of the local area individuals were willing to say to us and provide us documents – you know, letters of support that their community needed the services.” (T. p. 1245)

17. In actuality, there were only five letters of support contained within the HSM Application. (Common Ex. 3, p. 145; T. p. 1359) The HSM Application contained no support letters from any individual citizens of Johnston County. (T. p. 1359-1360)

18. HSM indicated that it would be able to obtain referrals from JMH because of JMH’s referral policy, but that policy was not included in the application or as an exhibit at this hearing and no representatives of HSM had seen or reviewed the alleged policy. (T. p. 1352, 1618; Common Ex. 3, p. 31).

19. The only source of potential referrals that HSM appears to have is from its “proposed” Medical Director.

20. None of the Medical Directors proposed in the HSM Application are practicing or even licensed to practice medicine in North Carolina. (Common Ex. 3, p. 173-185). Testimony revealed that no proposed Medical Director listed in the application had ever visited Johnston County, North Carolina.

21. It will take any potential HSM Medical Director time to establish a private practice and admit sufficient numbers of patients to the dialysis facility. HSM has no experience in how long that will take. The only prior experience that HSM has with anything similar to this scenario involved recruiting a new out of state Medical Director to establish a practice and operate three dialysis facilities owned by Wake Forest University in Iredell County. (T. p. 1355)

22. The situation in Iredell County is different from the potential situation in Johnston County. The new Medical Director in Iredell County was overseeing three established dialysis facilities. (T. p. 1355-1356) The Medical Director in Iredell County was also overseen by the corporate Medical Director employed by Wake Forest University. (T. p. 1354-1355)

8 23. HSM’s proposed Medical Director in Johnston County will not have any of these advantages. It is very unlikely that HSM’s Medical Director will be able to garner enough dialysis patient admissions to its proposed Clayton facility to meet HSM’s patient projections.

Criterion 5 (HSM’s Application)

24. N.C. Gen. Sta. § 131E-183(a)(5) (“Criterion 5”) states the following:

Financial and operational projections for the project shall demonstrate the availability of funds for capital and operating needs as well as the immediate and long-term financial feasibility of the proposal, based upon reasonable projections of costs and charges for providing health services by the person proposing the service.

25. HSM projected to incur capital costs of $1,695,600 and CDC proposed to incur capital costs of $402,115. (Common Ex. 3, p. 49) HSM also indicated that working capital in the amount of $725,622 will be necessary to start-up the project. (Common Ex. 3, p. 53)

26. The HSM application indicated that both HSM and CDC were owned 100% by C. Alex Kemp. (Common Ex. 3, p. 7)

27. The only documentation from HSM included in the application about how it proposed to fund the project was in the form of two letters. (Common Ex. 3, p. 83-84; T. p. 1320) One letter is from Wachovia Bank indicating that Mr. Kemp personally has a trust account with “$3 million dollars available for use.” (Common Ex. 3, p. 84) The letter from Wachovia makes no mention of HSM, CDC or the Johnston County project. The other letter is from Mr. Kemp to Craig Smith, Assistant Agency Chief, indicating that Mr. Kemp has “dedicated unrestricted cash reserves in the amount of $3,000,000 for the development of the project.” (Common Ex. 3, p. 83).

28. Neither HSM nor Mr. Kemp provided the required financial information to the Agency such that the Agency could properly determine their respective financial wherewithal.

29. June Johnson, Controller for HSM stated she had audited financial statements for HSM but was never asked to provide them for the application.

30. The CON application form requires applicants to do the following:

9 Supply copied of the two most recent audited financial reports of the applicant.

If audited financial statements are unavailable, please provide unaudited statements. If there are no statements from the subsidiary corporation, please provide parent company’s statements, personal financial statements, or any other financial reports which documents the financial security of the applicant.

(Common Ex. 3, p. 50)

31. Assistant Chief Craig Smith of the CON Section acknowledged that there is a specific purpose for each question in the application. (T. p. 1180- 1182) The Agency seeks financial statements because such documents contain the assets and liabilities of the applicant and thus give the complete financial status of the applicant. (T. p. 1215) Audited financial statements are preferred by the Agency because an “independent third party has examined and placed their approval on audited financial statements.” (T. p. 1215)

32. Without sufficient documentation, the Agency is unable to view the financial health of the applicant and determine whether it is able to support a project.

33. HSM failed to respond to the question seeking financial statements. (Common Ex. 3, p. 50) Since HSM failed to respond to the question in the application, Project Analyst Mike McKillip assumed that HSM did not have audited financial statements. (T. p. 318)

34. At the time the HSM Application was filed, HSM had available audited financial statements from the mid-1990s through 2003. (T. p. 1407-1408) HSM never presented such statements to the Agency.

35. The HSM Application contained no documents which showed the liabilities of HSM or Mr. Kemp. (T. p. 390)

36. In prior reviews, the Agency has found applicants to be nonconforming with Criterion 5 for failing to provide sufficient financial documentation.

10 37. BMA Ex. 37 contains Agency findings dated August 28, 2001 involving Orion Imaging, LLC (“Orion”). Orion was found nonconforming with Criterion 5. The Agency noted in those findings that, as a new entity, Orion lacked audited financials, but that Orion failed to provide “personal financial statements from Orion’s owners, documentation of equity contributions, or any financial reports to document Orion’s current financial status, therefore the financial position of Orion is not documented.” (BMA Ex. 37; T. p. 339-340) The Agency cited the lack of documentation of Orion’s financial position as a reason for its nonconformity with Criterion 5. (BMA Ex. 37; T. p. 339-340)

38. BMA Exhibit 38 contains Agency findings dated June 30, 1994, involving Gericare & Health Services (“Gericare”). The Agency noted that Gericare failed to identify any “liabilities existed which would obligate a profit.” (BMA Ex. 38; T. p. 343-344) The Agency was concerned about Gericare’s liabilities despite the fact that Gericare did not project to incur any capital costs. (BMA Ex. 38; T. p. 344) The Agency cited the lack of documentation of Gericare’s liabilities as a reason for its nonconformity with Criterion 5. (BMA Ex. 38)

39. The Agency erroneously overlooked HSM’s failure to include certain costs in its application. If the capital and operating costs are subtracted from the $3,000,000 that HSM asserts it has available to fund the project, only $176,993 remains to fund any additional costs. (T. p. 1325-1326)

40. HSM projects to operate at a loss of $333,774 during its first year of operation and is only projected to have a profit of $2,694 during its second year of operation. (Common Ex. 3, p. 54)

41. A letter from Shelco, Inc. (“Shelco), HSM’s general contractor for the project, indicates the budget for the project does not include certain items. (Common Ex. 3, p. 191) HSM’s Vice President of Research and Development, McDonald conceded that several of these items are necessary and will result in additional cost to HSM. (T. p. 1333-1334) Mr. McDonald admitted that acreage and development fees in the amount of $65,000 would be necessary. (T. p. 1333) Mr. McDonald indicated that additional costs for a title search and the marking of boundary lines would be required. (T. p. 1333-1334)

42. HSM is unsure what other additional items included in the letter might be necessary. (T. p. 1334) In its Application, HSM failed to apprise the Agency of which of these costs would and would not be necessary. (T. p. 1334)

43. At least $70,000 in additional costs will be necessary for HSM to construct its dialysis facility; however, more funds may also be required if all of the items indicated by the general contractor are required. (T. p. 480-481)

11 44. It was impossible for the Agency to determine whether HSM could cover all necessary capital costs for its project.

45. The letter from Shelco also states that the general contractor “will only disturb approx. 3 acres for this project.” (Common Ex. 3, p. 191) The HSM Application indicates that HSM is only planning to purchase 2.5 acres of property. (Common Ex. 3, p. 58) If HSM were required to purchase an additional .5 acre, it would cost HSM an additional $87,120. (T. p. 1329)

46. HSM has used Shelco on other projects in the past. (T. p. 1329) The other facilities that Shelco has built for HSM contained a similar building size and layout to the dialysis facility proposed in HSM’s Application. (T. p. 1329- 1330) HSM’s exhibits contained the progress reports of two prior dialysis facilities constructed by Shelco. (T. p. 1330-1331; HSM Ex. 37, 38) In one of those prior projects, HSM purchased 3.78 acres, in the other; HSM purchased three acres on which to construct a dialysis facility. (Common Ex. 3, p. 37, 38; T. p. 1330-1331)

47. Mr. McDonald conceded that Shelco had not previously constructed an HSM dialysis facility on less than three acres. (T. p. 1332) The evidence indicates that HSM’s project will require the purchase of at least three acres of property.

48. These additional property costs plus admitted additional construction costs leave HSM with only approximately $24,000 available for other potential costs. Assuming that just a few of the additional costs in the Shelco letter are needed, HSM will not have enough funds available for the project.

49. HSM projects to serve an unreasonably high number of commercial insurance patients. The commercial rate dialysis providers charge patients is set by the provider. The Medicare and Medicaid rates are set by the federal government. HSM proposes a commercial rate of $542.00 per treatment as opposed to the Medicare/Medicaid rate of $123.44. (Common Ex. 3, p. 54)

50. HSM projects that 15% of its dialysis patients will pay through commercial insurance. (Common Ex. 3, p. 38)

12 51. Janice Lindsay, a regional manager with Fresenius Medical Care (BMA’s parent), and a former North Carolina health planning specialist for Fresenius, whom the Undersigned recognized as an expert in the areas of CON preparation and analysis, and health planning, testified that BMA’s two existing facilities in Johnston County have a significantly smaller commercial payor mix than that proposed by HSM. (T. p. 700; Common Ex. 1, p. 265; Common Ex. 3, p. 36)

52. BMA Johnston has a commercial payor mix of 6% while BMA Smithfield has a commercial payor mix of 10.5%. (T. p. 700; Common Ex. 1, p. 265; Common Ex. 3, p. 36)

53. HSM representatives could have reviewed prior BMA Applications filed for Johnston County projects over the last several years, which are still available for inspection at the Agency’s offices, to determine a reasonable payor mix for Johnston County. (T. p. 697-698)

54. Ms. Lindsay’s testimony showed that, if HSM’s commercial projections were reduced by just 1% (which would still be higher that BMA’s experience), HSM would no longer be profitable within the second year of operation since HSM would operate at a loss of $19,787. (T. p. 705; BMA Exhibit 29)

55. If HSM’s commercial payor mix were reduced to 6%, the actual experience of the BMA Johnston facility, HSM would be operating at a loss of $199,643 in the second year of operation. (T. p. 705; BMA Exhibit 29)

56. Pursuant to the Agency’s historical interpretation of Criterion 5, an applicant must be found nonconforming with Criterion 5 if the applicant cannot reasonably project an operating profit in the second year of a project’s operation.

Criterion 7 and 8 (HSM’s Application)

57. N.C. Gen. Stat. § 131E-183(a)(7)(“Criterion 7”) requires an applicant to:

show evidence of the availability of resources, including health manpower and management personnel, for the provision of the services proposed to be provided.

58. N.C. Gen. Stat. § 131E-183(a)(8)(“Criterion 8”) requires that an applicant:

13 shall demonstrate that the provider of the proposed service will make available, or otherwise make arrangements for, the provision of the necessary ancillary and support services. The applicant shall demonstrate that the proposed services will be coordinated with the existing health care system.

59. The CON Application requires an applicant to “[i]dentify those physicians who have expressed a willingness to serve as Medical Director of the facility.” (Common Ex. 3, p. 32)

60. The letters from the physicians that HSM provided were from physicians who merely expressed an “interest” in the position of Medical Director for the proposed HSM facility. (Common Ex. 3, p. 173-185) None of HSM’s proposed Medical Directors indicated that they were “willing” to serve as a Medical Director of the facility.

61. All of the Medical Director applicants stated that they were “under no obligation to relinquish any offers [they] may receive . . .” (Common Ex. 3, p. 173-185)

62. None of the physicians listed in HSM’s Application as potential Medical Directors resided in North Carolina or were licensed to practice medicine in North Carolina. (Common Ex. 3, p. 173-185; T. p. 1342) The candidates also lacked experience as Medical Directors. (Common Ex. 3, p. 173-185; T. p. 1342)

63. Mr. McDonald conceded that none of the applicants might be available to serve as Medical Director if HSM receives a CON for the proposed project. (T. p. 1345-1346) HSM did not disclose to the prospective Medical Directors what HSM proposed to pay them as Medical Director or any specifics of the position. (T. p. 1341) HSM proposed to pay the Medical Director $18,000 a year. (T. p. 1345, 1347-1349) HSM did not propose to offer any kind of salary guarantee or recruitment bonus to the Medical Director. (T. p. 1345)

64. HSM acknowledged its Medical Director would be practicing as a solo practitioner since it did not project that its Medical Director would join or practice with an existing medical practice. (T. p. 1344) As a solo practitioner new to the area, the Medical Director would have zero patients upon opening his or her practice at the dialysis facility. (T. p. 1351)

65. HSM’s Medical Director would be responsible for coordinating the required 24/7 back-up for the dialysis facility. At the time the application was filed, HSM had not contacted any nephrologists in the surrounding counties to see if they would agree to provide back-up coverage. (T. p. 1350)

14 66. In a previous review addressing Criterion 7, the Agency denied an MRI application because it did not “identify a board certified radiologist to provide the proposed services who is qualified to practice medicine in North Carolina, and has the necessary training and experience in MRI procedures.” (BMA Ex. 33; T. p. 330) The applicant also included a letter indicating that the “practice intends to place a qualified candidate at the approved location in Greensboro.” (BMA Ex. 33; T. p. 332)

67. In a previous review, an applicant was found nonconforming with Criterion 7 because the “form provided by the applicant did not ask the physicians if they would be willing to serve as the facility’s medical director.” (BMA Ex. 35; T. p. 334)

68. In a previous review, an applicant was found nonconforming with Criterion 7 for failing to properly identify a medical director. (BMA Ex. 36; T. p. 338) A letter from the Medical Director of Wesley Long Hospital in Greensboro offering to assist the applicant in recruiting a Medical Director in New Hanover County was included in the application, but the Agency found that information to be insufficient because the applicant failed to “identify a person that has indicated a willingness to serve as the proposed facility’s Medical Director.” (BMA Ex. 36; T. p. 338-339)

N.C.A.C. 14C.2202(b) and .2204 (HSM’s Application)

69. 10A N.C.A.C. 14C.2202(b) (“Rule .2202(b)(1)”) states the following:

An applicant that proposed to increase the number of stations in an existing facility, or establish a new dialysis station or the relocation of an existing dialysis station must provide . . . the following: (1) A signed written agreement with an acute care hospital that specifies the relationship with the dialysis facility and describes the services that the hospital will provide to patients of the dialysis facility. . . .

70. HSM was found conforming with Rule .2202(b)(1) because it provided a signed acute care agreement between the proposed facility and North Carolina Baptist Hospital. (Common Ex. 1, p. 276; T. p. 278)

71. During the contested case hearing, Mr. McDonald conceded that, contrary to what the acute care agreement states, HSM does not intend to send patients to North Carolina Baptist Hospital in Winston-Salem. (T. p. 1336- 1338)

15 72. 10A N.C.A.C. 14C.2204 (“Rule .2204”) states that, to be approved, “the applicant must demonstrate” that certain services will be available to patients. Under Rule .2204(9), the applicants are required to demonstrate that “acute dialysis in an acute care setting” will be available to patients.

73. The Agency found HSM to be conforming with all of the items included on the list with the majority being found conforming because HSM states the required services “will be provided by North Carolina Baptist Hospital. However, the applicants state they will seek an agreement with Johnston County Memorial Hospital for the applicable services if approved.” (Common Ex. 1, p. 282-287) 74. In the Agency file when doing the .2204, Scope of Services, review, the agency listed emergency care, and acute dialysis in an acute care setting, in one area (Common Ex. 1, p. 285) and then developed a chart summarizing the proposed providers of support services further on. (Common Ex. 1, p. 293). Under emergency care for HSM-CDC on page 285, it is stated that “the applicants state emergency services will be provided by North Carolina Baptist Hospital.” It goes on to state that, “the applicants state they will seek an agreement with Johnston Memorial Hospital for these services if their application is approved.” In the summary chart on page 293 under emergency care for HSM-CDC, Johnston Memorial is recorded. Under acute dialysis in an acute care setting on page 285 for HSM-CDC it is stated that “the applicants state this service will be provided by North Carolina Baptist Hospital.” There is no mention of Johnston Memorial Hospital. Yet in the summary chart on page 293 under acute care services for HSM-CDC, Johnston Memorial is recorded not Baptist Hospital.

75. The Agency found HSM conforming with Rule .2204(9) because “the applicants state this service will be provided by North Carolina Baptist Hospital.” (Common Ex. 1, p. 285)

76. At the time the HSM Application was filed, JMH did not provide “acute dialysis in an acute care setting.” (T. p. 289)

Amendment to Application (HSM’s Application)

77. “An applicant may not amend an application. Responding to a request for additional information made by the agency after the review has commenced is not an amendment.” (10A N.C.A.C. § 14C.0204)

78. The North Carolina appellate courts have concluded that amending a CON application is improper. In Presbyterian-Orthopaedic Hospital v. Mercy Hosp. Inc., 122 N.C. App. 529, 537, 470 S.E.2d 831, 836 (1996) (BMA Exhibit 51), the Court held the following:

16 An applicant may not amend an application for a certificate of need once the application is deemed complete. N.C. Admin. Code tit. 10, r. 3R.0306 (Dec. 1994); In Re Application of Wake Kidney Clinic, 85 N.C.App. 639, 643, 355 S.E.2d 788, 790-91, disc. review denied, 320 N.C. 793, 361 S.E.2d 89 (1987).

79. The Presbyterian Court found that an improper amendment of a CON application had taken place because one applicant decided not to use the management company it proposed in its application. As a result of the improper amendment to the Stanly application, the Court decided the only proper result was to do the following:

We reverse the portion of the final agency decision that awarded Stanly a certificate of need because Stanly materially changed its application after its application was completed in violation of the North Carolina Administrative Code.

80. In responding to the question regarding who had expressed a willingness to serve as Medical Director of its proposed facility, HSM responded as follows:

Health Systems Management, Inc. has been working with physician recruiters to locate and identify individuals that are interested in providing Nephrology services and leadership in the form of Medical Director. Out of the potential candidates, the top 4 were selected and their Curriculum Vitae and letters of interest can be found at Attachment Q.

(Common Ex. 3, p. 32, emphasis in original) The letters of interest of four physicians and their respective curriculum vitae were included within HSM’s Application. (Common Ex. 3, p. 173- 185)

81. On, November 18, 2004, a public hearing was held in Johnston County concerning the review at issue in this case. Dr. Shahida Khan was introduced at the public hearing by Mr. McDonald of HSM as the following:

a nephrologist that will be willing to move to be a residence of Johnston County to be an applicant for active staff privileges at Johnston Memorial Hospital, to develop an aggressive nephrology practice in Johnston County and to serve as Medical Director for Clayton Dialysis Center.

(BMA Exhibit 11, emphasis added)

82. Dr. Khan was the only physician presented by HSM at the public hearing as a potential Medical Director for HSM’s proposed facility. (T. p. 468)

17 83. Neither Dr. Khan’s name, her curriculum vitae, nor a letter of interest from her was submitted as part of the HSM Application.

84. Dr. Khan was also the only potential Medical Director offered by HSM that was “willing” to serve as a Medical Director. The other physicians named in the HSM Application merely expressed an “interest” in becoming Medical Director. (Common Ex. 3, p. 173-85) The standard set out in the CON application requires that an applicant have a proposed Medical Director that is “willing” and not merely “interested” in serving as Medical Director. (Common Ex. 3, p. 32)

85. The Agency conceded that HSM’s actions in presenting Dr. Khan at the public hearing were improper. (T.p. 272-273) The Agency stamped Dr. Khan’s written statement as “Not Considered.” (T. p. 272; Common Ex. 1, p. 192)

86. Mr. Robinson an employee of Fresenius Medical Care, the parent Company of BMA, testified that, based on his experience, HSM was “offering some change to their application at the public hearing.” (T. p. 469-70) Mr. Robinson further opined that this constituted an amendment that should disqualify HSM’s Application from being approved in the review. (T. p. 470)

87. Craig Smith, Assist Agency Chief, testified that an amendment to an application “occurs when an applicant provides [the Agency] information that was not included in the application when originally filed.” (T. p. 1046)

88. Mr. Smith testified that when faced with an amendment to an application, the Agency does not consider the information that is deemed an amendment when making its review. (T. p. 1047) Mr. Smith did not recall ever denying an application because of an amendment. (T. p. 1047)

89. Mr. Smith testified that identifying a Medical Director is essential to a dialysis application because “a Medical Director is required by certification to operate a facility.” (T. p. 275)

90. The Court of Appeals has plainly held that a CON will not be issued to an applicant that has “materially changed its application after its application was completed.” Presbyterian, 122 N.C. App. at 537, 470 S.E.2d 831 at 836.

Agency findings regarding conforming with Review Criteria (BMA Johnson Application)

1. The Agency found the BMA Johnston application non-conforming with Statutory Review Criteria 3, 4, 5, 6, 18a and 10A N.C.A.C. 14C.2203(b). (Joint Ex. 1, Agency File, pp. 236-296).

18 The Agency’s findings of non-conformity under Criteria 4, 5, 6, and 18a were based on the findings under Criterion 3 and 10A N.C.A.C. 14C.2203(b). (McKillip, Tr. p. 267-269).

2. Samuel Robinson, BMA’s former Certificate of Need Health Planning Specialist and a former project analyst for the CON Section, who was qualified as an expert for BMA Johnston in the field of CON application preparation and analysis and health planning, agreed that if the Agency properly found BMA Johnston’s application non-conforming with Criterion 3 and the above rule, it would also be appropriate to find the application non-conforming with Criteria 4, 5, 6, and 18a. (Robinson, Tr. p. 417, 566-567). No other witness offered testimony to the contrary.

3. Again, G.S. 131E-183(a)(3) provides as follows:

The applicant shall identify the population to be served by the proposed project, and shall demonstrate the need that this population has for the services proposed, and the extent to which all residents of the area, and, in particular, low income persons, racial and ethnic minorities, women, handicapped persons, the elderly, and other underserved groups are likely to have access to the services proposed.

4. For an existing dialysis facility such as BMA Johnston, the showing required under Criterion 3 is made in part by demonstrating that each of the applicant’s dialysis stations will be utilized at a rate of 3.2 patients per stations per week as of the end of the first operating year of the additional stations. (10A N.C.A.C. 14C.2203(b).

5. The performance standard of 3.2 patients per dialysis station is considered to be 80% of each dialysis station’s capacity of four patients per station. (BMA Ex. 7, July 2003 SDR, p.1).

6. The Agency found that BMA Johnston failed to reasonably project that its facility would meet the standard required in the above rule, and found the application non-conforming. (Joint Ex. 1, Agency File, p. 281).

7. In finding the BMA Johnston application non-conforming with Criterion 3, the Agency found as follows:

According to the January 2004 SDR, Table A, there were 63 in-center patients being served at BMA of Johnston County as of June 30, 2003. In Exhibit 23 of the application, the applicant projects that BMA of Johnston County will serve 88 patients by June 30, 2005, including 71 existing patients, and 17 additional patients which the applicant identifies as “new BMA patients aside from normal growth.” Therefore, the applicant projects that the number of in-center patients it will serve will increase from 63 patients to 88, or by 40 percent (88/63 = 1.40), over the two-year period from June 30, 2003 to June 30, 2005, which is equivalent to an annual percentage increase of approximately 18 percent. However, the applicant did not explain the source of the “new BMA

19 patients aside from normal growth.” Further, the applicant did not demonstrate that it is reasonable to assume that the number of in-center patients will increase by 18 percent per year. In fact, according to the January 2004 SDR, Table B, the average annual percentage increase in the number of dialysis patient in Johnston County has been 10.8 percent over the past five years, which is well below the applicant’s projection of an 18 percent increase.

In summary, the applicant failed to adequately demonstrate the population to be served and the need this population has for the proposed dialysis services. Therefore, the application is not conforming with this criterion.

(Joint Ex. 1, Agency File, p. 242).

8. Michael McKillip, the project analyst, testified that the reason he found the BMA Johnston application non-conforming with Criterion 3 was not because the growth rate projected was higher than the facility’s historical growth rate or the rate of growth of dialysis patients in Johnston County, but because the BMA Johnston application did not explain the basis upon which it projected the higher growth rate. (McKillip, Tr. p. 873-875).

9. Mr. McKillip shared his concerns and questions about the BMA Johnston application need methodology with Craig Smith, the Assistant Chief of the CON Section who issued the Agency’s Findings along with Mr. McKillip. Mr. Smith also could not find sufficient explanation in the BMA Johnston application’s need methodology to understand its utilization projections. (Id.; Smith, Tr. p. 1051-1053).

10. The person responsible for preparing the BMA Johnston application was Samuel Robinson. Mr. Robinson is a former employee of BMA, who at the time of BMA’s application, prepared all of BMA’s applications. Mr. Robinson is also a former project analyst with the CON Section. (Tr. p. 399-400). Mr. Robinson was responsible for preparing the section of the application in which BMA Johnston attempted to demonstrate the need for the project. (Id. at p. 399).

11. Mr. Robinson did not consult with anyone at the BMA Johnston facility in developing his need projections. (Robinson, Tr. p. 532).

[CONFIDENTIAL TESTIMONY]

12. This paragraph is under seal in the attached envelope per Court Order.

[END OF CONFIDENTIAL TESTIMONY]

20 15. Mr. Robinson testified that BMA Johnston would achieve 80% capacity by the end of the first year of operation by projecting growth of dialysis patients based upon two methodologies. First, Mr. Robinson projected growth based on the historic the growth rate of 6.25%, BMA’s two Johnston County facilities, BMA Smithfield and BMA Johnston, from June 30, 2002 to June 30, 2003. Based upon that growth rate, Mr. Robinson projected the number of patients at BMA Johnston from June 30, 2003 to June 30, 2007, which he denominated Anormal facility growth,@ as follows: Date Patients 6/30/03 63 6/30/04 67 6/30/05 71 6/30/06 76 6/30/07 80

(Joint Ex. 2, BMA Johnston application, p. 359; Robinson, Tr. p. 431).

16. Mr. Robinson projected July 1, 2005 to be the date the new stations would become operational, making the end of the first two years June 30, 2006 and June 30, 2007, respectively. (Joint Ex. 2, BMA Johnston application, p. 28).

17. Mr. Robinson testified that he calculated the growth rate of all patients in Johnston County from June 30, 2002 to June 30, 2003, as being 6.67%. Using a 6.67% growth rate from 2003 to 2007, Mr. Robinson calculated a separate growth rate of the patients in the county. (Robinson, Tr. p. 433).

18. Mr. Robinson concluded that 88% of 2003 Johnston County patients were served by BMA’s facilities in Johnston, Harnett and Wake Counties. (Id. at 434; Joint Ex. 2, BMA app., p. 25, 238). Applying that same percentage, Mr. Robinson assumed that 88% of new patients would be served equally and solely by BMA Johnston and BMA Smithfield. (Robinson, Tr. p. 434-435).

19. Adding those patients to Anormal facility growth,@ Mr. Robinson stated that BMA Johnston would serve 96 ESRD patients by June 30, 2006, the end of the first year of operation following development of the stations, and 100 patients by June 30, 2007. (Id. at 435).

20. BMA’s application contains numerous conflicting and contradictory representations in support of the above explanation. According to its application, BMA Johnston based its calculation that 88% of all Johnston County patients were served by BMA facilities on a calculation that as of June 30, 2003, there were a total of 188 Johnston County in-center hemodialysis patients being served, and 166 of those patients were served by BMA facilities. (Joint Ex. 2, BMA application, p. 358). In a separate chart on the same page, the application states that as of June 30, 2003 there were only 156 total Johnston County dialysis patients. Since 21 that chart also states that 12 of those patients are home dialysis patients that means that there would be only 144 in-center hemodialysis patients from Johnston County. The January 2004 SDR also states that as of June 30, 2003, there were 144 in-center hemodialysis patients from Johnston County. (BMA Ex. 8, p. 13). The BMA Johnston application does not explain why BMA believed that its facilities served more Johnston County patients than recorded in various places.

21. The BMA Johnston application states on page 358 that there were 119 in-center hemodialysis patients at BMA Johnston and BMA Smithfield. However, on page 359 of the application, BMA Johnston states that there were 111 in-center hemodialysis patients in those two facilities. In addition, in the January 2004 SDR, BMA reported that there were 109 in-center hemodialysis patients in these two facilities. (BMA Ex. 8, p. 9). BMA’s application provides no explanation for these discrepancies.

22. The BMA Johnston application’s assumption that 88% of new patients from Johnston County would be served only at BMA Johnston and BMA Smithfield is contrary to BMA’s experience. In fact BMA Johnston and BMA Smithfield were not serving 88% of all Johnston County residents BMA Johnston’s application provided no explanation as to why those patients would choose to change their care from other facilities to BMA Johnston or BMA Smithfield. (Robinson, Tr. p. 544). By adding new patients currently served by other BMA facilities to its proposed market share, BMA Johnston was actually increasing its market share of Johnston County patients, without any explanation as to why that would occur. (Robinson, Tr. p. 543).

23. Although the Agency has the authority to approve an application with conditions, G.S. 131E-188(a), the Agency cannot condition an applicant to provide additional evidence that the Agency needs to evaluate in order to determine conformity with need under Criterion 3. In other words, the Agency will not condition an applicant to provide more information to demonstrate need at some later date, as the applicant is either able to demonstrate need or not. (McKillip, Tr. p. 163).

24. The Agency can, in some circumstances, conditionally approve an applicant to provide a lesser amount of services than proposed in the application, if the applicant demonstrated a need for the lesser amount but not the full amount proposed. (Smith, Tr. p. 261). In this review, BMA Johnston did not demonstrate a need for the number of stations proposed, which were five stations or for some lesser amount. The part of BMA’s need methodology which was clearly explained was its assumption that its facility reasonably could expect to continue to grow at its historical rate of 6.25% per year. (Joint Ex. 2, BMA app., p. 359).

25. 10A N.C.A.C. 14C.2203(b) requires an applicant proposing to expand an existing facility to demonstrate that each of the applicant’s dialysis stations will be utilized at a rate of 3.2 patients per station per week, or 80% occupancy, as of the end of the first operating year of the additional stations. In order to justify a need for five additional dialysis stations, for a total of 30 stations, BMA Johnston was required to demonstrate that 30 stations would be utilized at a rate of 3.2 patients per station per week, which would be a total of 96 patients. This was the number

22 of patients BMA Johnston projected to serve at the end of the first year of operation. (Joint Ex. 2, BMA app., p. 27).

26. Based on past annual growth of its existing facility, BMA Johnston projected to serve 76 patients by June 30, 2006, the end of its first year of operation. (Joint Ex. 2, BMA app., p. 359). Multiplying BMA’s existing 25 dialysis stations times the rate of 3.2 patients per station per week results in a total of 80 patients per week, more than BMA Johnston projects at the end of the first year, based on facility growth. This portion of BMA Johnston’s need methodology does not justify the need for additional dialysis stations.

27. Because BMA Johnston’s application failed to demonstrate a need for the proposed stations under Criterion 3 and failed to demonstrate conformity with 10A N.C.A.C. 14C.2203(b), the application was properly found to be also non-conforming with Criteria 4 (proposing an effective alternative); Criterion 5 (demonstrating the financial feasibility of the proposal); Criterion 6 (no unnecessary duplication of existing services), and Criterion 18a (positive impact on the cost effectiveness of the proposed services). (Joint Ex. 1, Agency File, pp. 251, 253, 256, and 27.

Comparative Analysis

91. In a competitive review, following an analysis of each application under the applicable criteria and rules, the Agency conducts a comparison of the applications, to determine which applicant is the most effective and/or least costly alternative. (Joint Ex. 1, Agency File, p. 289; Smith, Tr. p. 1058-1059). The Agency conducted a comparative analysis of the competing applications, in which the applicants were compared on the following factors: (1) SMFP Principles regarding Availability of Dialysis Care; (2) Geographic Distribution; (3) Continuity of Care; (4) Access to Alternative Providers; (5) Access by Underserved Groups; (6) Access to Support Services; (7) Patient Charges; and (8) Direct Care Staff Salaries. (Common Ex. 1, p. 289-294)

92. There is no statute or rule which requires the Agency to identify certain comparative factors. The CON law states that the Agency must provide notice of all "findings and conclusions upon which it based its decision." (G.S. § 131E-186(b). Those “findings and conclusions” which are not specifically addressed in the statutory criteria and rules give the Agency the opportunity to explain why it finds one applicant preferable to another on a comparative basis. Britthaven, Inc. v. North Carolina Dept. of Human Resources, Div. of Facility Services, 118 N.C.App. 379, 455 S.E.2d 455, 461 (1995). In general, the Agency selects the comparative factors in each review which it believes are the most appropriate, based on the facts or circumstances in that particular review. (Smith, Tr. p. 1062).

23 93. The Agency found HSM/CDC the most effective alternative for the following reasons: a. Demonstrates the need that the population to be served has the proposed dialysis services. b. Demonstrates that the financial feasibility of the proposal is based on reasonable projections of costs and charges. c. Proposes to locate the dialysis facility in Clayton, which is in northwestern Johnston County. d. Proposes to offer home dialysis training in-center at its proposed Clayton facility. e. Proposes to offer most of the support services through Johnston County providers. f. Proposes to provide a medical director whose primary practice location is Johnston County. g. The applicant proposes to provide a percentage of its services to Medicare and Medicaid recipients which are comparable with existing providers of dialysis services. (Joint Ex. 1, Agency File, p. 294)

94. The Agency found the BMA Johnston application a less effective alternative for the following reasons: a. Failed to demonstrate the need that the population to be served has the proposed dialysis services. b. Failed to demonstrate that the financial feasibility of the proposal is based on reasonable projections of costs and charges. c. Proposes to provide home dialysis training at a facility which is approximately 32 miles from the existing facility in Smithfield. d. Proposes to provide a medical director whose primary practice location is Wake County. (Joint Ex. 1, Agency File, p. 295)

95. Basic Principle 12 of the 2003 SMFP provides as follows: “The Council encourages applicants for dialysis stations to provide or arrange for home training and backup for patients suitable for home dialysis in the ESRD dialysis facility or in a facility that is a reasonable distance from the patient’s residence.” Joint Ex. 1, Agency File, p. 289.

96. The Agency found HSM’s Application to be the most effective alternative under the SMFP Principles because HSM proposed to provide home dialysis at its proposed facility in Clayton. (Common Ex. 1, p. 290) While HSM proposed, in theory, to provide home dialysis services, it did not actually propose to serve any home dialysis patients in the first two years of operation, the only operating years for which projections were included. (Common Ex. 3, p. 24)

97. BMA’s Application stated that BMA would provide home training at its existing Wake Dialysis Home Training Clinic in Raleigh (Common Ex. 1, p. 289; Common Ex. 2. p. 32) BMA does not propose to serve any home dialysis patients in the first two operating years either. (Common Ex. 2, p. 32)

24 98. Marshia Coe, HSM’s Regional Nurse Administrator, testified that in her experience, when HSM is opening a new facility, it usually does not have a lot of home patients, because it takes some time to convince patients that home dialysis is a better modality for them than in-center hemodialysis. (Coe, Tr. p. 1451-1452).

99. The Agency concluded that each of the applicants demonstrated the services would be available a sufficient number of hours and days per week to provide flexibility for scheduling of services. Accordingly, this factor had no bearing on the Agency’s determination of which applicant was the most effective alternative in the review. (Joint Ex. 1, Agency File, p. 290).

100. The Agency concluded that Johnston County was a rural area, but not a remote area. Accordingly, the SMPF Principle of Services in rural, remote areas was not applicable to the review. (Joint Ex. 1, Agency File, p. 290).

101. The Agency found those applications, including HSM’s Application that proposed to construct a dialysis facility in Clayton to be a more effective alternative under the Geographic Distribution factor because the other two dialysis facilities in Johnston County are located in Smithfield. (Common Ex. 1, p. 290)

102. Clayton is the most populated town in Johnston County, and the largest municipal area in Johnston County without a dialysis facility. Joint Ex. 3, HSM app., p. 15; Walker, Tr. 1581-1582.

103. The number of in-center patients within the Clayton zip code area had declined as demonstrated in the June 30, 2003 data available to the Agency during the course of the review. (Common Ex. 1, p. 212; T. p. 1153) Some portions of Benson and Four Oaks zip codes are just as close to Clayton as they are to the existing dialysis facilities located in either Dunn or Smithfield. The growth in the other zip code areas in Johnston County was closer to BMA’s facility than to HSM’s proposed site.

104. Mr. Robinson testified that the most effective alternative would have been to “add stations to [the BMA Johnston facility], which is located in the area where the vast majority of the dialysis patients reside.” (T. p. 506)

105. The Agency found the BMA Application to be a more effective alternative with regard to Continuity of Care comparative factor because a “majority of the in-center dialysis patients have existing relationships with the physicians who will provide nephrology services at the BMA facilities in Johnston County.” (T. p. 291)

25 106. The Agency found the BMA Application to be the most effective alternative under the Access by Underserved Groups comparative factor because it projected the “highest percentage of services to be provided to Medicaid and Medicare recipients.” (Common Ex. 1, p. 292)

107. The Agency found the HSM Application to be a more effective alternative than the BMA Application under Access to Alternative Providers solely because the “CON Section determined that the development of a dialysis provider other than BMA will offer residents of Johnston County an alternative choice of providers for dialysis services.” (Common Ex. 1, p. 291)

108. The only issue the Agency considered when evaluating the applicants on this factor was whether or not an applicant operated a dialysis facility in Johnston County at the time of the review. (T. p. 228; 1191-1192)

109. The procedure for the comparative review must be “consistent with the CON statute and its stated purpose.” Britthaven, Inc. v. North Carolina Department of Human Services, 118 N.C. App. 379, 455 S.E.2d 455 (1995). None of the CON statute’s foundational findings in N.C. Gen. Stat. § 131E-175, speak to the importance of enhanced competition or consumer choice.

110. The CON statute speaks favorably about competition in the very specific context of other associated factors. In the review criteria found at N.C. Gen. Stat. § 131E-183(a)(18a), an applicant is required to demonstrate the:

expected effects of the proposed service area on competition, including how any enhanced competition will have a positive impact upon the cost effectiveness, quality, and access to the services provided.

111. The Agency did not attempt to compare the applicants on whether competition would improve cost effectiveness, quality, and access to the services provided. (T. p. 505-506)

112. Applicants for dialysis facilities are required to identify the proposed providers of support services, including diagnostic and evaluation services, x- ray services, laboratory services, blood bank services and emergency services. Joint Ex. 1, Agency File, pp. 292-293

113. The Agency found the HSM Application to be the most effective alternative under the factor of Access to Support Services because it asserted that HSM Application “proposes to offer all of these support services through a Johnston County provider.” (Common Ex. 1, p. 293)

26 114. There was no evidence before the Agency that warranted the assumption that JMH would provide all relevant services, or any relevant services, to HSM. HSM’s application conceded that JMH refused to support HSM’s proposal for a new facility. (Common Ex. 3, p. 88)

115. The only agreement for the provision of support services included in the HSM Application was with North Carolina Baptist Hospital in Winston-Salem, North Carolina.

116. BMA’s Application documented that BMA was currently receiving the majority of its services from JMH with a few other services being provided by WakeMed in contiguous Wake County. (Common Ex. 1, p. 293)

117. The Agency did not make a conclusion under the Patient Charges factor because it asserted that proposed patient charges for BMA are “based on unreasonable utilization projections.” (Common Ex. 1, p. 293)

118. The Agency noted that BMA Johnston proposed private and commercial charges of $539.21 per treatment. (Common Ex. 1, p. 293) HSM proposed charges of $542.00. (Common Ex. 1, p. 293) As between BMA and HSM, BMA proposed lower charges. Mr. McKillip stated that if he were to compare the proposed patient charges, he would conclude that the proposals were essentially comparable and neither application would be comparatively superior to the other. (Joint Ex. 1, Agency file, p. 293; McKillip, Tr. p. 244-245).

119. Utilization projections in no way dictate patient charges. (T. p. 517) Mr. Robinson testified, utilization projections and patient charges “have no relationship to each other” and patient charges “are what they are.” (T. p. 517- 518)

120. The Agency found the BMA Application to project higher Direct Care Staff Salaries than the HSM Application. The Agency thus conceded that the BMA Application would be a more effective alternative than the HSM Application under this comparative factor. (Common Ex. 1, p. 294)

121. HSM/CDC proposed to fill the need for all 10 stations identified as being needed in Johnston County by the July 2003 SDR. BMA Johnston proposed to develop 5 dialysis stations. Joint Ex. 1, Agency file, p. 237-238. Had there been two otherwise equally qualified applications, the Agency has in the past considered the applicant proposing to fill the need in the State Medical Facilities Plan as the more effective alternative. In that instance, this factor could be used in the comparative review as a “tiebreaker.” (Smith, Tr. p. 258- 259).

27 122. Logic, reason and consistency indicate that there were other comparative factors that the Agency should have considered in this review.

123. The Certificate of Need Section has used capital cost as a comparative factor in the past but did not do so in this case.

124. “ Site Control” has been used by the Agency as a comparative review factor in other reviews. (BMA Ex. 35; T. p. 336-337)

125. In a 2000 review involving a nursing home, an applicant was found comparatively superior because it “controls the proposed primary site for an option on the site.” (BMA Ex. 35; T. p. 336) BMA would have been comparatively superior to HSM because BMA controls its site, already operating a facility on it.

126. In a 1999 Duplin County dialysis review, the Agency used Medical Directors” as a comparative factor. (BMA Ex. 50; T. p. 366) If that factor had been used in this case, BMA would have been found comparatively superior because it actually had a Medical Director who was already serving in the BMA Johnston facility.

127. There are no written standard operating procedures or factors for use by analysts. For Agency precedent, Mr. McKillip consulted the Agency Findings from the 2003 Greene County dialysis review when drafting the Findings in this review. (T. p. 251)

128. The comparative factors used in that review were the SMFP Principles, Continuity of Care, Patient Charges, and Direct Care Staff Salaries. (T. p. 1160) All of those comparative factors were included in this review. (T. p. 1160-1162)

129. Mr. Smith conceded that if only the comparative factors used in the Greene County review were used in this review, BMA would have been found comparatively superior to HSM on three of those four factors. (T. p. 1162) The factors under which BMA would have been found comparatively superior would be the following: Continuity of Care, Patient Charges, and Direct Care Staff Salaries. (T. p. 1162)

130. Why the Agency did not use the same comparative factors in this review as in the Greene County review is unclear.

131. The Agency does not appear to have a clear cut way of determining comparative factors in a review other than looking at prior reviews. (T. p. 251)

28 132. Mr. Smith acknowledged that four different analysts could have conducted this review and arrived at four different sets of comparative factors. (T. p. 1163-1164)

BASED UPON the foregoing findings of fact and upon the preponderance or greater weight of the evidence in the whole record, the Undersigned makes the following

CONCLUSIONS OF LAW

1. The Office of Administrative Hearings has jurisdiction over the parties and the subject matter of this action. The parties received proper notice of the hearing in the matter. To the extent that the findings of facts contain conclusions of law, or that the conclusions of law are findings of fact, they should be so considered without regard to the given labels.

2. In concluding that BMA Johnston’s application was non-conforming with G.S. §§ 131E- 183(a)(3), (4), (5), (6), and (18a), and with 10A N.C.A.C. 14C.2203(b), the Agency did not exceed its authority or jurisdiction; act erroneously; fail to use proper procedure; act arbitrarily or capriciously; and/or fail to act as required by rule or law.

3. Respondent correctly found that Petitioner, BMA Johnston, did not explain the source of the “new BMA patients aside from normal growth.” Further, Petitioner did not demonstrate that it is reasonable to assume that the number of in-center patients will increase by 18 percent per year. According to the January 2004 SDR, Table B, the average annual percentage increase in the number of dialysis patient in Johnston County had been 10.8 percent over the past five years, which was well below the applicant’s projection of an 18 percent increase.

4. The Respondent has the authority to approve an application with conditions, however, the Respondent cannot condition an applicant to provide additional evidence that the Agency needs to evaluate in order to determine conformity with need under Criterion 3.

5. The Respondent can, in some circumstances, conditionally approve an applicant to provide a lesser amount of services than proposed in the application, if the applicant demonstrated a need for the lesser amount but not the full amount proposed. In this review, BMA Johnston did not demonstrate a need for the number of stations proposed, which were five stations or for some lesser amount.

6. Because BMA Johnston’s application failed to demonstrate a need for the proposed stations under Criterion 3 and failed to demonstrate conformity with 10A N.C.A.C. 14C.2203(b) and in accord with established procedures, the Petitioner’s application was properly found to be also non-conforming with Criteria 4; Criterion 5; Criterion 6, and Criterion 18a.

29 7. In concluding that HSM/CDC’s application was conforming with all plans, standards and criteria, the Respondent exceeded its authority; acted erroneously; failed to use proper procedure; acted arbitrarily or capriciously; and/or failed to act as required by rule or law.

8. In concluding that HSM/CDC’s application was the most effective alternative in the comparative review of the applicants, the Agency did exceed its authority; act erroneously; fail to use proper procedure; act arbitrarily or capriciously; and/or fail to act as required by rule or law.

9. HSM improperly amended its Application pursuant to 10A N.C.A.C. § 14C.0204, which states that an “applicant may not amend an application.” HSM’s action in introducing a physician at the public hearing who was not mentioned in the HSM Application and, who was the only physician willing to serve (not just interested) as a Medical Director for its facility and, after the HSM Application was deemed to be complete, was a material change to the HSM Application.

10. HSM’s Application failed to comply with N.C. Gen. Stat. § 131E-183(a)(3) (“Criterion 3”) which requires an applicant to “identify the population to be served by the proposed project and [the applicant] shall demonstrate the need that this population has for the services proposed. HSM’s Application failed to comply with Criterion 3 because HSM failed to demonstrate that its patient projections were reasonable and that it could obtain 33 patients by the end of its first operating year from the five zip code area from which it projected its patients would originate.

11. HSM’s Application failed to comply with N.C.Gen. Stat. § 131E-183(a)(5) (“Criterion 5”) which requires an applicant to demonstrate the “immediate and long term financial feasibility of the proposal, based upon reasonable projections of the costs of the charges for providing health services by the person providing the services.”

12. HSM’s Application failed to comply with Criterion 5 because it failed to demonstrate the availability of funds for its projects since neither HSM nor Mr. Kemp, the individual responsible for funding the project, provided the required financial information to the Agency such that it could determine their respective financial wherewithal. Further, HSM’s Application failed to comply with Criterion 5 because it failed to provide the Agency with enough information for the Agency to determine whether HSM has accounted for all of the necessary capital costs for its project and whether HSM had sufficient funds to cover all necessary capital costs. Moreover, HSM’s Application failed to comply with Criterion 5 because HSM would have been operating at a loss in its second year of operation if it had used a reasonable commercial payor mix.

13. HSM’s Application failed to comply with N.C. Gen. Stat. § 131E-183(a)(7) (“Criterion 7”) which requires an applicant to “show evidence of the availability of resources, including health manpower and management personnel, for the provision of the services proposed to be provided.” HSM’s Application failed to comply with Criterion 7 because it failed to identify a

30 physician who expressed a willingness to serve as a Medical Director for the proposed HSM facility.

14. HSM’s Application failed to comply with N.C. Gen. Stat. § 131E-183(a)(8) (“Criterion 8”) which requires that an applicant “shall demonstrate that the provider of the proposed services will make available, or otherwise make arrangements for, the provision of the necessary ancillary and support services. The applicant shall demonstrate that the proposed service will be coordinated with the existing health care system.” HSM’s Application failed to comply with Criterion 8 because it failed to identify a physician who expressed a willingness to serve as a Medical Director for the proposed HSM facility.

15. HSM’s Application failed to comply with N.C. Gen. Stat. § 131E-183(a)(13)(c) (“Criterion 13(c)”) which requires that an applicant shall demonstrate that the “elderly and the medically underserved groups . . .will be served by the applicant’s proposed services and the extent to which each of these groups is expected to utilize the proposed services . . .” HSM’s Application failed to comply with Criterion 13(c) because it proposed an unreasonably high commercial insurance payor mix and an unreasonably low payor mix for Medicare and Medicaid patients.

16. HSM’s Application failed to comply with 10A N.C.A.C. 14C.2202(b)(1) (“Rule .2202(b) (1)”) which requires an applicant to provide a “signed written agreement with an acute care hospital that specifies the relationship with the dialysis facility and describes the service that the hospital will provide to patients of the dialysis facility . . .” HSM’s Application failed to comply with Rule .2202(b)(1) because, although HSM included in its application a signed acute care agreement with North Carolina Baptist Hospital, HSM’s Mr. McDonald testified that HSM did not intend to send patients to North Carolina Baptist Hospital. Further, it is evident in the application itself the unreasonableness of Johnston County patients being served in Forsyth County, the location of Baptist Hospital.

17. HSM’s Application failed to comply with 10A N.C.A.C. 14C.2204 (“Rule .2204”) which states that an “applicant must demonstrate” that certain services will be available. HSM’s Application failed to comply with Rule .2204 because the only documentation included in the HSM Application concerning the provision of these services indicated that North Carolina Baptist Hospital would provide the necessary services, and Mr. McDonald testified that HSM did not intend to transfer patients to North Carolina Baptist Hospital. There was no evidence in the application to demonstrate that JMH would or could provide any of the required services to HSM’s patients and it is evident in the application itself the unreasonableness of Johnston County patients being served in Forsyth County, the location of Baptist Hospital..

18. HSM’s Application failed to comply with 10A N.C.A.C. 14C.2202(b)(7) (“Rule .2202(b) (7)”) which requires an applicant to state “all assumptions, including the specific methodology for which patient origin is projected . . .” HSM’s Application failed to comply with Rule . 2207(b)(7) because if failed to conform with Criterion 3.

31 19. HSM’s Application failed to comply with Criterion 10A N.C.A.C. 14C.2205(a) (“Rule . 2205(a)”) which requires an applicant to satisfy certain staffing requirements. HSM’s Application failed to comply with Rule .2205(a) for the same reasons that it failed to comply with Criterion 7 and 8.

20. HSM’s Application should have been found nonconforming, standing alone, with the review criteria cited in these Conclusions of Law. The Agency exceeded its authority and jurisdiction pursuant to N.C. Gen. Stat. § 150B-23(a)(1) in approving HSM’s Application because the Agency misapplied relevant review criteria, and reached erroneous conclusions regarding HSM’s assertions concerning patient projections, payor mix, its ability to fund the project, the documentation of capital costs, having a medical director, and providing patient services through JMH with no prevailing supporting evidence.

21. The Agency acted erroneously pursuant to N.C. Gen. Stat. § 150B-23(a)(2), in approving HSM’s Application because the Agency misapplied relevant review criteria, ignored its own prior findings, and failed to require HSM to demonstrate the necessary support for its assertions.

22. The Agency failed to act as required by law or rule pursuant to N.C. Gen. Stat. §150B- 23(a)(5), in approving HSM’s Application because the Agency misapplied relevant review criteria, ignored its own prior interpretations, and failed to require HSM to demonstrate sufficient support for its assertions.

23. The Agency acted arbitrarily and capriciously pursuant to N.C. Gen. Stat. § 150B-23(a) (4), in approving HSM’s Application because the Agency applied statutory and regulatory criteria inconsistently and ignored Agency precedent by giving different treatment to different parties in similar circumstances.

24. Respondent erred in finding HSM’s Application comparatively superior to BMA’s Application. As set forth in the findings of fact which shall be incorporated by reference in these conclusions of law, BMA’s Application should have been found comparatively superior in those areas already set forth above. Further, had the Agency applied the comparative factors which the Agency used in the most recent comparative dialysis review preceding this review, BMA’s Application would have been found to be comparatively superior.

25. The Petitioner has the burden of proof by a greater weight or preponderance of the evidence regarding those issues set forth in this hearing. Black’s Law Dictionary cites that “preponderance means something more than weight; it denotes a superiority of weight, or outweighing.” The finder of fact cannot properly act upon the weight of evidence, in favor of the one having the onus, unless it overbear, in some degree, the weight upon the other side.

26. As set out above, the testimony at this hearing and the exhibits presented lead the Undersigned to find that Petitioner’s evidence does not overbear, in some degree, the weight upon the other side regarding Respondent’s disapproval of the CON application of BMA

32 Johnston; and as such, the finder of fact cannot properly act upon the weight of evidence, in favor of the Petitioner as the one having the onus regarding BMA’s application.

27. Petitioner’s evidence does, however, prevail over Respondent and Respondent- Intervenor’s evidence regarding the issue of Respondent exceeding its authority; acting erroneously; failing to use proper procedure; acting arbitrarily or capriciously; and/or failing to act as required by rule or law, in approving the CON application of HSM/CDC.

BASED UPON the foregoing Findings of Fact and Conclusions of Law, the Undersigned makes the following:

RECOMMENDED DECISION

Based upon the foregoing findings of fact and conclusions of law, it is hereby recommended that the decision of the Certificate of Need Section disapproving Bio-Medical Applications of North Carolina, Inc.’s (BMA Johnston) application be affirmed. Further, the Undersigned recommends reversing the initial Agency decision to grant a certificate of need to Respondent-Intervenor, Health Systems Management, (HSM) and Clayton Dialysis Center, Inc. (CDC) and recommends denying HSM’s application (Project I.D. No. J-6927-03) to develop a ten (10) station dialysis facility in Clayton, Johnston County.

It is hereby ordered that the Agency serve a copy of the Final Decision on the Office of Administrative Hearings, 6714 Mail Service Center, Raleigh, NC 27699-6714, in accordance with G.S. 150B-36(b).

NOTICE

Before the Agency makes the Final Decision, it is required by G.S. 150B-36(a) to give each party an opportunity to file exceptions to this Recommended Decision, and to present written arguments to those in the Agency who will make the final decision. The Agency is required by G.S. 150B-36(b) to serve a copy of the Final Decision on all parties and to furnish a copy to the parties’ attorneys of record. The agency that will make the Final Decision in this case is the North Carolina Department of Health and Human Services.

IT IS SO ORDERED.

This the 17th day of December, 2004.

33 ______Augustus B. Elkins II Administrative Law Judge