Appeal by petitioner from final agency decision dated 9 March
2005 by the North Carolina Department of Health and Human Services,
Division of Facility Services. Heard in the Court of Appeals 21
Kennedy Covington Lobdell & Hickman, LLP, by Gary S. Qualls,
Attorney General Roy Cooper, by Assistant Attorney General
June S. Ferrell, for respondent-appellee, N.C. Department of
Health and Human Services.
Bode, Call & Stroupe, L.L.P., by S. Todd Hemphill, for
respondent-intervenor-appellees, Health Systems Management,
Inc. and Clayton Dialysis Center, Inc.
McGEE, Judge. Petitioner-appellant Bio-Medical Applications of North
Carolina, Inc. (BMA) appeals from a final decision of the North
Carolina Department of Health and Human Services, Division of
Facility Services (the agency). The final agency decision awarded
a certificate of need to respondent-intervenor-appellees Health
Systems Management, Inc. (lessor) and Clayton Dialysis Center, Inc.
(lessee) (collectively HSM) to develop a new ten-station dialysis
facility in Johnston County.
The July 2003 North Carolina Semiannual Dialysis Report
(dialysis report) established a need for ten new dialysis stations
in Johnston County. BMA filed the application at issue in this
appeal with the agency's Certificate of Need (CON) Section. In its
application, BMA proposed to add five stations to one of its
existing dialysis facilities in the Town of Smithfield. BMA also
filed two other applications which it ultimately abandoned. HSM
also filed an application with the CON section in which it proposed
to develop a new facility with ten dialysis stations in the Town of
Clayton. The CON section filed its required state agency findings
on 27 February 2004, denying BMA's application and conditionally
approving HSM's application.
BMA petitioned for a contested case hearing pursuant to N.C.
Gen. Stat. § 131E-188(a), N.C. Gen. Stat. § 150B-23(a), and 26 NCAC
3.0103(a). An administrative law judge (ALJ) allowed HSM to
intervene in the contested case on 11 May 2004. In its recommended
decision filed 17 December 2004, the ALJ recommended affirming the
denial of BMA's application and recommended reversing the CONsection's initial decision to grant a CON to HSM. The agency
issued its final agency decision on 9 March 2005. The agency
awarded a CON to HSM to develop a new ten-station dialysis facility
in Clayton. The agency also affirmed the initial agency decision
denying a CON to BMA. BMA appeals.
"On judicial review of an administrative agency's final
decision, the substantive nature of each assignment of error
dictates the standard of review." N.C. Dep't of Env't & Natural
Res. v. Carroll, 358 N.C. 649, 658, 599 S.E.2d 888, 894 (2004). We
review asserted errors of law de novo. Burke Health Investors v.
N.C. Dep't of Hum. Res., 135 N.C. App. 568, 571, 522 S.E.2d 96, 98
(1999). However, where an appellant challenges the agency decision
as unsupported by the evidence or as arbitrary and capricious, we
apply the whole record test. Id. at 571, 522 S.E.2d at 98-99.
Under the whole record test, we "examine all competent evidence in
order to determine whether the agency decision is supported by
substantial evidence." Id. at 571, 522 S.E.2d at 99. "Substantial
evidence is such relevant evidence as a reasonable mind might
accept as adequate to support a conclusion." Comr. of Insurance v.
Rating Bureau, 292 N.C. 70, 80, 231 S.E.2d 882, 888 (1977). An
agency's decisions will only be found to be arbitrary and
capricious where they are "'whimsical' because they indicate a lack
of fair and careful consideration; when they fail to indicate 'any
course of reasoning and the exercise of judgment,' or when they
impose or omit procedural requirements that result in manifest
unfairness in the circumstances though within the letter ofstatutory requirements[.]" Com'r of Insurance v. Rate Bureau, 300
N.C. 381, 420, 269 S.E.2d 547, 573 (1980) (citation omitted).
BMA first argues the agency erred by approving HSM's
application because HSM improperly amended its application during
the review process. Because BMA argues the agency decision was
made upon unlawful procedure, we apply a de novo
standard of review
to this issue. See Burke Health Investors
, 135 N.C. App. at 571,
522 S.E.2d at 99.
Pursuant to 10A NCAC 14C.0204 (June 2004), an applicant may
not amend a CON application.
In support of its argument that HSM
improperly amended its application, BMA relies upon Presbyterian-
Orthopaedic Hosp. v. N.C. Dept. of Human Resources
, 122 N.C. App.
529, 470 S.E.2d 831 (1996), in
which the applicant applied for a
CON to develop rehabilitation beds at its hospital. Id
. at 531,
470 S.E.2d at 832. All of the logistical and financial data in its
application was based upon its use of a particular management
. at 537, 470 S.E.2d at 836. However, before its
application was approved, the applicant decided not to use the
management company listed in its application. Id
. Our Court held
that the applicant's actions constituted a material amendment to
its application. Id
In the present case, the CON application required applicants
to "[p]rovide documentation that the new or expanded facility will
comply with all staffing requirements[.]" A facility is required
to have a qualified physician-director. See
42 C.F.R. §§ 405.2102,405.2161. The CON application further asked applicants to
"[i]dentify those physicians who have expressed a willingness to
serve as Medical Director of the facility." In response to this
question, HSM provided curriculum vitae and letters of interest of
four physicians who had expressed interest in serving as the
medical director of HSM's proposed facility. However, at the CON
application hearing, in addition to the original four physicians
listed by HSM, HSM introduced Dr. Shahida Khan (Dr. Khan), who
spoke and expressed her interest in serving as the medical director
of HSM's proposed facility. Dr. Khan also provided a written
statement to the CON analyst, indicating her interest in the
position. The CON section viewed Dr. Khan's written statement as
a potential amendment to HSM's application and therefore did not
consider Dr. Khan as a possible medical director. The CON section
marked "not considered" on Dr. Khan's written statement.
Unlike in Presbyterian-Orthopaedic Hospital
, HSM did not
improperly amend its CON application in the present case. In
, the CON applicant's decision to
use a different management company affected all of the logistical
and financial data contained in its application. Presbyterian-
, 122 N.C. App. at 537, 470 S.E.2d at 836. In
the present case, the introduction of Dr. Khan as a potential
medical director had no effect on the other portions of HSM's
application. At most, Dr. Khan became the fifth candidate for the
position of medical director. More importantly, the CON section
did not consider Dr. Khan's statement in making its decision toaward the CON to HSM. Accordingly, the agency did not err in
finding that HSM did not improperly amend its CON application.
BMA next argues the agency erred in approving HSM's
application because HSM's application was nonconforming with review
criteria 3, 5, 7, 8 and with 10A NCAC 14C.2202(b)(1), 14C.2203(a)
and (c), 14C.2204(9), and 14C.2205(a).
N.C. Gen. Stat. § 131E-183(a)(3) (2005) (criterion 3)
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
The agency also adopted performance standards to be used in
conjunction with criterion 3. See Craven Regional Medical
Authority v. N.C. Dep't of Health and Hum. Ser.
, ___ N.C. App. ___,
___, ___ S.E.2d ___, ___ (2006). The relevant performance
standards applicable to criterion 3 require the following:
(a) An applicant proposing to establish a new
End Stage Renal Disease facility shall
document the need for at least 10 stations
based on utilization of 3.2 patients per
station per week as of the end of the first
operating year of the facility.
. . .
(c) An applicant shall provide all
assumptions, including the specificmethodology by which patient utilization is
10A NCAC 14C.2203 (November 2005).
BMA argues the agency erred by approving HSM's application
because HSM's application did not conform to criterion 3 in that
HSM's patient projections were unrealistic. Although BMA does not
specify the applicable standard of review, it appears that BMA is
challenging the agency's decision as unsupported by substantial
evidence and as arbitrary and capricious. See Craven Regional
, ___ N.C. App. at ___, ___ S.E.2d at ___. We
therefore apply the whole record test. "When applying the whole
record test '[w]e should not replace the agency's judgment as
between two reasonably conflicting views, even if we might have
reached a different result if the matter were before us de novo
. at ___, ___ S.E.2d at ___ (quoting Dialysis Care of N.C., LLC
v. N.C. Dep't of Health & Human Servs.
, 137 N.C. App. 638, 646, 529
S.E.2d 257, 261 (2000)).
BMA argues that HSM's patient projections were unrealistic
because HSM failed to look at any data trends beyond the July 2003
dialysis report, which contained data from December 2002. BMA
contends that HSM should have considered the more recent 30 June
2003 data from the Southeastern Kidney Council. BMA argues this
data showed that the dialysis patient population decreased over a
six-month period in the Clayton zip code area, where HSM proposed
to add its dialysis stations, while the dialysis patient population
grew in Smithfield, where BMA proposed to add dialysis stations.
The CON applications in the present case were due on 15September 2003. Kimberly Walker, who helped prepare HSM's
application, testified that HSM knew about the 30 June 2003 data
prior to filing its application. However, this data was not
verified until after 31 October 2003, when the report was issued,
which was after the CON applications were due. Kimberly Walker
also testified that HSM chose to rely upon the same Southeastern
Kidney Council report that was used by the State Medical Facilities
Planning Section to generate the dialysis report which established
the need for ten new dialysis stations in Johnston County. This is
substantial evidence which supports the agency's final decision
that HSM complied with criterion 3.
Moreover, Kimberly Walker testified as follows:
Due to normal fluctuations in patient numbers,
a six-month fluctuation is not enough change
to indicate a definite overall change in the
patient population. Within a six-month period
the number can go up, the number can go down.
You have to look at years' worth of data in
order to determine . . . what your growth rate
We therefore find that HSM's methodology was reasonable. The
agency's determination that HSM conformed with criterion 3 was not
arbitrary or capricious.
BMA further argues that HSM's application did not comply with
criterion 3 because: (1) HSM's application did not include support
from any physicians practicing in North Carolina, (2) Johnston
Memorial Hospital refused to support HSM's application, and (3)
HSM could not rely upon referrals from its proposed medical
director. First, BMA has not cited, and we do not find, any rule
or statute requiring an applicant to submit any particular numberof letters of support with a CON application. Furthermore, Michael
McKillip (McKillip), a CON section project analyst, testified there
was no "particular quantity of letters of support that are required
in order for an application to be found conforming." Secondly,
although Johnston Memorial Hospital did not offer a letter of
support for HSM's proposed facility, Johnston Memorial Hospital
indicated that it would cooperate with HSM in the event that HSM
was awarded the CON. Finally, BMA does not cite any authority for
its contention that HSM could not rely upon its proposed medical
director for referrals. The agency did not err in finding that
HSM's CON application complied with criterion 3.
BMA argues HSM's application did not conform to criterion 5
because (1) HSM failed to demonstrate the availability of funds for
its project, and (2) HSM failed to include approximately $70,000.00
in additional costs in its application. Because BMA claims that
HSM submitted insufficient financial documentation to comply with
criterion 5, we apply the whole record test. See Burke Health
, 135 N.C. App. at 574, 522 S.E.2d at 100. N.C. Gen.
Stat. § 131E-183(a)(5) (2005) (criterion 5) provides:
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 the costs of and
charges for providing health services by the
person proposing the service.
BMA first argues that because HSM did not provide audited
financial statements showing its liabilities, HSM failed todemonstrate the availability of funds. The CON application form
requests applicants to:
Supply copies of the two most recent audited
financial reports of the applicant.
If audited statements are unavailable,
please provide unaudited statements. If there
are no statements for the subsidiary
corporation, please provide parent company's
statements, personal financial statements, or
any other financial reports which document the
financial security of the applicant.
The assistant chief of the agency's CON section testified there was
no statute or rule which required an applicant to submit audited
financial statements. However, he further testified that an
applicant must show the availability of funds. HSM submitted a
letter from C. Alex Kemp, the president and CEO of HSM, with its
application. The letter stated that C. Alex Kemp had "dedicated
unrestricted cash reserves in the amount of $3,000,000 for the
development of this project." HSM also submitted a letter from
Wachovia Bank stating that C. Alex Kemp had a trust account with
"$3 million dollars available for use." These letters are
substantial evidence that HSM had funds available to finance its
BMA also argues that HSM failed to include approximately
$70,000.00 in costs in its application. However, HSM estimated the
total cost of its proposed project to be $2,823,337.00; since HSM
had $3,000,000.00 in unrestricted funds available for the project,
it had sufficient funds to cover the $70,000.00 in additional
costs. The agency did not err by finding that HSM's application
conformed with criterion 5.
BMA next argues that HSM's application was nonconforming with
criteria 7 and 8. Because BMA appears to argue that the agency's
decision was unsupported by substantial evidence, we apply the
whole record test. See Burke Health Investors
, 135 N.C. App. at
574, 522 S.E.2d at 100. With respect to criterion 7, BMA
specifically argues that HSM's application was nonconforming
because HSM failed to properly identify a medical director for its
proposed facility. BMA contends that HSM did not identify a
physician who was willing to serve as medical director. N.C. Gen.
Stat. § 131E-183(a)(7) (2005) (criterion 7) provides that "[t]he
applicant shall show evidence of the availability of resources,
including health manpower and management personnel, for the
provision of the services proposed to be provided." The CON
application requested applicants to "[i]dentify those physicians
who have expressed a willingness to serve as Medical Director of
HSM included curriculum vitae and letters of interest of the
top four candidates for the position of medical director of its
proposed facility. Each of the letters of interest contained the
following statement: "Please accept this letter as my statement of
interest for the position of Medical Director for the proposed
Clayton Dialysis Center to be located in Johnston County, North
Carolina." This was substantial evidence that HSM identified
physicians who were willing to serve as medical director of its
proposed facility. Accordingly, HSM showed "evidence of theavailability of resources, including health manpower and management
personnel" pursuant to criterion 7.
As to criterion 8, BMA argues that "HSM did not contact any
area nephrologists to see if they would agree to provide back-up
coverage[.]" N.C. Gen. Stat. § 131E-183(a)(8) (2005) (criterion 8)
provides as follows: "The 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 also demonstrate that the
proposed service will be coordinated with the existing health care
In its application, HSM stated:
Medical coverage for [the facility's] patients
will be assigned on a rotation basis by its
nephrologist who[,] as a term in his or her
contract[,] must obtain admitting privileges
and residency at the local hospital as well as
establish working relationships with other
area physicians. Physician coverage will be
provided 7 days per week, 24 hours per day.
We find this was substantial evidence that HSM "will make
available, or otherwise make arrangements for, the provision of the
necessary ancillary and support services" under criterion 8. For
the reasons stated above, the agency did not err by finding HSM's
application conforming with criteria 7 and 8.
BMA next argues that HSM's CON application was nonconforming
with 10 NCAC 14C.2202(b)(1), 14C.2204(9), and 14C.2205(a). Because
BMA appears to argue that the agency's decision was unsupported by
the evidence, we apply the whole record standard of review. SeeMt. Olive Home Health Care Agency, Inc. v. N.C. Dept. of Human
, 78 N.C. App. 224, 228-29, 336 S.E.2d 625, 627-28 (1985).
10 NCAC 14C.2202(b)(1) (November 2005) provides:
An applicant that proposes to develop a new
facility, increase the number of dialysis
stations in an existing facility, establish a
new dialysis station, or relocate existing
dialysis stations shall provide the following
information requested on the End Stage Renal
Disease (ESRD) Treatment application form:
(1) For new facilities, a letter of
intent to sign a written agreement
or 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
BMA concedes that HSM provided a signed acute care agreement
with Baptist Hospital in Winston-Salem. However, BMA argues that
HSM's application was not conforming to 10 NCAC 14C.2202(b)(1)
because HSM did not intend to send its patients to Baptist
Hospital. Rather, HSM intended to enter into an agreement with
Johnston Memorial Hospital once it was awarded the CON. The rule
requires only that the applicant have a signed written agreement
with an acute care hospital. It does not preclude the applicant
from entering into an agreement with a different hospital in the
future. There is substantial evidence supporting HSM's compliance
with 10 NCAC 14C.2202(b)(1).
10 NCAC 14C.2204(9) (June 2004) directs that an applicant
demonstrate the availability of "acute dialysis in an acute care
setting[.]" As stated above, HSM had a contract with BaptistHospital, which could provide acute dialysis care. HSM's contract,
included in its application, is substantial evidence that HSM's
application conformed to 10 NCAC 14C.2204(9).
10A NCAC 14C.2205(a) (June 2004) provides that "[t]o be
approved, the state agency must determine that the proponent can
meet all staffing requirements[.]" BMA argues that because HSM did
not properly identify a medical director for its proposed facility,
HSM failed to conform to this rule. However, as we determined
previously, HSM's application conformed to the applicable staffing
requirements. Therefore, this argument is without merit.
BMA argues the agency erred in finding BMA's CON application
nonconforming with criterion 3. BMA also argues the agency erred
in finding BMA's application derivatively nonconforming with other
applicable review criteria. The agency found that BMA did not
explain the source of "new BMA patients aside from normal growth."
The agency also stated that BMA "did not demonstrate that it was
reasonable to assume that the number of in-center patients [would]
increase by 18 percent per year." "[A]n application must be found
consistent with the statutory criteria before a Certificate of Need
may be issued." Bio-Medical Applications of N.C., Inc. v. N.C.
Dep't of Hum. Res.
, 136 N.C. App. 103, 109, 523 S.E.2d 677, 681
McKillip, the CON section project analyst, testified that
BMA's application did not explain the source of its proposed
numbers of new patients aside from normal growth. McKillip furthertestified that BMA did not explain the basis for its projection of
a growth rate of 18 percent, when the growth rate for Johnston
County was 10.8 percent. Craig Smith, the assistant chief of the
CON section, also testified that BMA did not explain the basis for
its proposed growth rate. This testimony was substantial evidence
supporting the agency's denial of BMA's CON application for
noncompliance with criterion 3. The agency did not err in finding
BMA's application nonconforming with criterion 3.
The agency also found BMA nonconforming with review criteria
4, 5, 6, and 18a, based upon BMA's nonconformity with criterion 3.
Samuel Robinson, who prepared BMA's CON application, and who was
accepted as an expert in CON application preparation and analysis,
testified that a CON application which was nonconforming with
criterion 3 would also be nonconforming with criteria 4, 5, 6, and
18a. No other witness contradicted this testimony. There was
substantial evidence supporting the agency's final decision and we
overrule this assignment of error.
BMA next argues the agency erroneously found HSM's application
comparatively superior to BMA's application. BMA also argues the
agency erred by failing to reject several of the ALJ's findings of
fact dealing with the comparative analysis. However, because we
affirm the final agency decision finding that BMA was nonconforming
to criterion 3, and derivatively nonconforming with several other
review criteria, we do not address BMA's arguments regarding the
comparative review. See, e.g., Bio-Medical Applications of N.C.,Inc.
, 136 N.C. App. at 109, 523 S.E.2d at 681 (holding that "an
application must be found consistent with the statutory criteria
before a Certificate of Need may be issued"); see also, Retirement
Villages, Inc. v. N.C. Dept. of Human Resources
, 124 N.C. App. 495,
502, 477 S.E.2d 697, 701 (1996) (declining to address the
appellant's remaining arguments upon a finding that the appellant
was nonconforming under the applicable review criteria).
BMA argues the agency erroneously rejected the majority of the
ALJ's findings of fact by stating the findings were "not supported
by the substantial evidence of the record, [were] erroneous, and
[were] contrary to the preponderance of the evidence in the
contested case." However, upon a review of the final agency
decision, we find that the agency stated a specific reason why it
rejected each of the ALJ's findings of fact. See Total Renal Care
of N.C., LLC v. N.C. Dep't of Health and Human Servs.
, ___ N.C.
App. ___, ___, 615 S.E.2d 81, 84 (2005). Moreover, the agency's
findings of fact were supported by substantial evidence. This
argument is without merit.
BMA failed to set forth arguments pertaining to its remaining
assignments of error and we therefore deem those assignments of
error abandoned pursuant to N.C.R. App. P. 28(b)(6).
Judges CALABRIA and GEER concur.
Report per Rule 30(e).
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