Raleigh Radiology LLC v. NC Dep't of Health & Hum. Servs. ( 2019 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA18-785-2
Filed: 6 August 2019
Office of Administrative Hearings, No. 17 DHR 04088
RALEIGH RADIOLOGY LLC d/b/a RALEIGH RADIOLOGY CARY, Petitioner,
v.
N.C. DEPARTMENT OF HEALTH AND HUMAN SERVICES, DIVISION OF
HEALTH SERVICE REGULATION, HEALTH CARE PLANNING & CERTIFICATE
OF NEED, Respondent,
and
DUKE UNIVERSITY HEALTH SYSTEM, Respondent-Intervenor.
Appeal by Respondents and cross-appeal by Petitioner from an amended final
decision entered 16 March 2018 by Judge J. Randolph Ward in the Office of
Administrative Hearings. Heard originally in the Court of Appeals 13 March 2019.
This matter was reconsidered in the Court pursuant to an order allowing Petitioner’s
Petition for Rehearing. This opinion supersedes the opinion Raleigh Radiology v. NC
DHHS, No. 18-785, ___ N.C. App. ___, 827 S.E.2d 337 (2019), previously filed on 7
May 2019.
Brooks, Pierce, McLendon Humphrey & Leonard, L.L.P., by James C. Adams,
II, for Petitioner Raleigh Radiology LLC.
Attorney General Joshua H. Stein, by Assistant Attorney General Bethany A.
Burgon, for Respondent N.C. Department of Health and Human Services,
Division of Health Service Regulation, Health Care Planning & Certificate of
Need.
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
Poyner Spruill LLP, by Kenneth L. Burgess, William R. Shenton, and Matthew
A. Fisher, for Respondent-Intervenor Duke University Health System.
DILLON, Judge.
Petitioner Raleigh Radiology LLC (“Raleigh”) and Respondents N.C.
Department of Health and Human Services, Division of Health Care Regulation,
Healthcare Planning and Certificate of Need (the “Agency”), and Duke University
Health System (“Duke”) all appeal a final decision of the Office of Administrative
Hearings (“OAH”) regarding the award of a Certificate of Need (“CON”) for an MRI
machine in Wake County.
I. Background
In early 2016, the Agency determined a need for a fixed MRI machine in Wake
County and began fielding competitive requests. In April 2016, Duke and Raleigh
each filed an application for a CON with the Agency.
Section 131E-183 of our General Statutes sets forth the procedure the Agency
should use when reviewing applications for a CON. N.C. Gen. Stat. § 131E-183
(2016). The Agency uses a two stage process: First, the Agency reviews each
application independently to make sure that it complies with certain statutory
criteria. See Britthaven, Inc. v. N.C. Dep't of Human Res., 118 N.C. App. 379, 385,
455 S.E.2d 455, 460 (1995) (citing N.C. Gen. Stat. § 131E-183(a)). Typically, if only
one application is found to have complied with the statutory criteria, that applicant
-2-
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
is awarded the CON. But if more than one application complies, the Agency moves
to a second step, whereby the Agency conducts a comparative analysis of the
compliant applications. Britthaven, 118 N.C. App. at 385, 455 S.E.2d at 461.
In the present case, the Agency approved Duke for the CON, denying Raleigh’s
application, on two alternate grounds. First, the Agency determined that Duke’s
application alone was compliant. Alternatively, the Agency conducted a comparative
analysis, assuming both applications were compliant, and determined that Duke’s
application was superior.
In October 2016, Raleigh filed a Petition for Contested Case Hearing. After a
hearing on the matter, the administrative law judge (the “ALJ”) issued a Final
Decision, determining that both applications were compliant but that, based on its
own comparative analysis, Raleigh’s application was superior. Accordingly, the ALJ
reversed the decision of the Agency and awarded the CON to Raleigh.
Duke and the Agency timely appealed. Raleigh also timely cross-appealed.
II. Standard of Review
We review a final decision from an ALJ for whether “substantial rights of the
petitioners may have been prejudiced[.]” N.C. Gen. Stat. § 150B-51(b) (2018). We
use a de novo standard if the petitioner appeals the final decision on grounds that it
violates the constitution, exceeds statutory authority, was made upon unlawful
procedure, or was affected by another error of law. N.C. Gen. Stat. § 150B-51(b)(1)-
-3-
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
(4), (c) (2018). And we use the whole record test if the petitioner alleges that the final
decision is unsupported by the evidence or is “[a]rbitrary, capricious, or an abuse of
discretion.” N.C. Gen. Stat. § 150B-51(b)(5)(6), (c) (2018).
III. Analysis
On appeal, Duke and the Agency argue that the ALJ erred in reversing the
Agency’s decision. Though successful in its appeal before the ALJ, Raleigh cross-
appeals certain aspects of the ALJ’s decision and with the process in general. We
address the issues raised in the appeal and cross-appeal below.
A. ALJ’s Finding that Duke’s Application Conformed
We first address Raleigh’s cross-appeal challenge to the ALJ’s finding that
Duke’s application complied with the Agency criteria. That is, though the ALJ
awarded Raleigh the CON based on a determination that Raleigh’s compliant
application was superior to Duke’s compliant application, Raleigh contends that the
ALJ should have determined that Duke’s application was not compliant to begin with.
Specifically, Raleigh contends that Duke did not conform with Criteria 3, 5, 12, and
13(c) found in Section 131E-183(a). For the following reasons, we disagree.
We review this argument under the whole record test, N.C. Gen. Stat. § 150B-
51(b)(5)(6), (c), and properly “take[] into account the administrative agency’s
expertise” in evaluating applications for a CON. Britthaven, 118 N.C. App. at 386,
455 S.E.2d at 461.
-4-
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
A review of the whole record reveals that the evidence presented by Duke in
its CON application, the Agency hearings, and the Office of Administrative Hearings
amounts to substantial evidence of Duke’s compliance with the review criteria.
In conformity with Criteria 3, Duke “identif[ied] the population to be served by
the proposed project, and . . . demonstrate[d] the need that this population has for the
services proposed, and the extent to which all residents of the area . . . are likely to
have access to the services proposed.” N.C. Gen. Stat. § 131E-183(a)(3). More
specifically, in its application, Duke illustrated the current levels of accessibility to
MRI scanners in Wake County and identified the location of its proposed MRI, the
Holly Springs/Southwest Wake County area, as one in need of increased access to
scanners, particularly due to its rapidly growing population. Duke also laid out the
current travel burdens faced by Wake County residents in the Duke Health System
who require access to an MRI scanner and how the addition of a new MRI scanner in
its proposed location could have a favorable impact on those geographic burdens.
Duke coupled those factors with the historically consistent utilization rate for MRIs
in Wake County to demonstrate the need in the area for the MRI scanner.
In conformity with Criteria 5, Duke provided financial and operational
projections that demonstrated “the availability of funds for capital and operating
needs as well as the immediate and long-term financial feasibility of the proposal[.]”
N.C. Gen. Stat. § 131E-183(a)(5). For example, Duke set forth the anticipated source
-5-
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
of financing for the project, with all the funding projected to be drawn from its
accumulated reserves. Duke also provided five-year projections for its financial
position and income statements, as well as three-year projections for the revenues to
be produced by the new MRI scanner. The Chief Financial Officer of Duke also
certified the existence and availability of funding for the project and referenced
Duke’s most recent audited financial statement to demonstrate the availability of
such funds.
Duke also conformed with Criteria 12 by delineating that the construction
“cost, design, and means” were reasonable by comparing its proposed project with
potential alternatives. N.C. Gen. Stat. § 131E-183(a)(12). Essentially, Duke
compared its proposal to potential alternatives, including maintaining the status quo,
developing the proposed MRI scanner in a different location, developing a mobile MRI
service in Holly Springs, and pursuing the current project.
Lastly, Duke conformed with Criteria 13(c) by “demonstrat[ing] the
contribution of the proposed service in meeting the health-related needs of the elderly
and of members of medically underserved groups . . . [and] show[ing] [t]hat the
elderly and the medically underserved groups identified in this subdivision will be
served by [its] proposed services and the extent to which each of these groups is
expected to utilize the proposed services[.]” N.C. Gen. Stat. § 131E-183(a)(13)(c).
Duke demonstrated that it expects almost one-third (1/3) of its patients to be
-6-
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
Medicare or Medicaid recipients and that it has the support of community programs,
which help in providing healthcare access to low-income, uninsured residents of Wake
County. In addition, Duke provided statistics regarding its interactions with female
and elderly patients, along with its policy of non-discrimination against handicapped
persons. Using this data, Duke asserted that these kinds of patients will receive the
same access to the new MRI scanner at the Holly Springs location.
In accordance with our previous holdings in CON cases, this Court “cannot
substitute our own judgment for that of the Agency if substantial evidence exists.”
Total Renal Care of N.C., LLC v. N.C. Dep't of Health & Human Servs., 171 N.C. App.
734, 739, 615 S.E.2d 81, 84 (2005). Indeed, Duke met this threshold by putting forth
the aforementioned evidence; and the Agency is entitled to deference, as Duke put
forth substantial evidence of its conformity with these criteria. Thus, we affirm the
ALJ’s finding of fact number 24 that Duke’s application was compliant.
B. Comparative Analysis Review
Duke and the Agency argue that the ALJ erred in conducting its own
comparative analysis review of the two CON applications. That is, they argue that
the ALJ should have given deference to the Agency’ determination that Duke’s
application was superior. We review this question of law de novo. Cumberland Cty.
Hosp. Sys. v. N.C. Dep’t of Health & Human Servs., 242 N.C. App. 524, 527, 776
S.E.2d 329, 332 (2015).
-7-
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
Our Court has held that where the Agency compares two or more applications
which otherwise comply with the statutory criteria, “[t]here is no statute or rule
which requires the Agency to utilize certain comparative factors.” Craven Reg’l Med.
Auth. v. N.C. Dep’t of Health & Human Servs., 176 N.C. App. 46, 58, 625 S.E.2d 837,
845 (2006) (emphasis added). But, rather, the Agency has discretion to determine
factors by which it will compare competing applications. Id.
However, the ALJ on appeal of an Agency decision does not have this same
discretion to conduct a comparative analysis. That is, where an unsuccessful
applicant appeals an Agency decision in a CON case, the ALJ does not engage in a de
novo review of the Agency decision, but simply reviews for correctness of the Agency
decision, pursuant to N.C. Gen. Stat. § 150B-23(a). E. Carolina Internal Med., P.A.
v. N.C. Dep’t of Health & Human Servs., 211 N.C. App. 397, 405, 710 S.E.2d 245, 252
(2011). Indeed, “there is a presumption that ‘an administrative agency has properly
performed its official duties.’ ” Id. at 411, 710 S.E.2d at 255 (quoting In re Cmty.
Ass’n, 300 N.C. 267, 280, 266 S.E.2d 645, 654 (1980)).
In the present case, the Agency reviewed Duke’s application and Raleigh’s
application for the CON independently. Britthaven, 118 N.C. App. at 385, 455 S.E.2d
at 460 (citing N.C. Gen. Stat. § 131E-183(a)). This review revealed that Duke’s
application conformed with all criteria and that Raleigh failed to conform with respect
to certain criteria. At that point, assuming that Raleigh’s application indeed failed
-8-
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
to conform to certain criteria, it would have been appropriate for the Agency to
proceed with issuing the CON to Duke. Nevertheless, the Agency, as stated in its
seventy-four (74) pages of findings, additionally “conducted a comparative analysis of
[Duke’s and Raleigh’s applications] to decide which [one] should be approved,”
assuming that Raleigh’s application did satisfy all of the criteria. See id. at 385, 455
S.E.2d at 461.
The Agency, in its discretion, used seven comparative factors in reviewing the
CON applications: (1) geographic distribution, (2) demonstration of need, (3) access
by underserved groups, (4) ownership of fixed MRI scanners in Wake County, (5)
projected average gross revenue per procedure, (6) projected average net revenue per
procedure, and (7) projected average operating expense per procedure. This
comparative analysis led the Agency to approve and award the CON to Duke.
However, on appeal to the OAH, the ALJ deviated from the above factors by
considering two additional factors: (1) the types of scanners proposed by each
applicant, and (2) the timeline of each proposed project. Admittedly, there was
evidence that Raleigh’s proposed MRI machine was superior to the machine which
Duke would use. It is this deviation and the reliance on additional comparative
factors by the ALJ which we must conclude was error.
Indeed, adding two additional comparative factors is not affording deference to
the Agency, but rather constitutes an impermissible de novo review of this part of the
-9-
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
Agency’s decision. Such a substitute of judgment by the ALJ is not allowed.
E. Carolina Internal Med., 211 N.C. App. at 405, 710 S.E.2d at 252.
Evidence was provided that the factors utilized by the Agency have been used
in two previous MRI CON decisions and that the additional factors used by the ALJ
have not been a part of the Agency’s policies and procedures for many years. We note
that information pertaining to Raleigh’s allegedly superior MRI machine was not
included in Raleigh’s application, though it was otherwise presented at the Agency
public hearing, but without an expert testifying as to the machine’s medical efficacy.
Even so, the Agency has the discretion to pick which factors it evaluates in conducting
its own comparative analysis. Craven Reg’l Med. Auth., 176 N.C. App. at 58, 625
S.E.2d at 845. Further, regarding the timeline factor used by the ALJ, there was
testimony that the Agency puts little, if any, weight to this factor as the factor
disadvantages new providers. The ALJ did not determine that the Agency acted
arbitrarily and capriciously, but rather simply substituted his own judgment in
weighing the factors. We cannot say, though, that the Agency abused its discretion
to rely on the factors that it did. Therefore, we conclude that the ALJ exceeded its
authority conducting a de novo comparative analysis of the competing applications.
Separately, Raleigh argues that the Agency erred by concluding that its
application was not conforming. But even assuming that the Agency incorrectly made
a determination that Raleigh’s application did not conform to certain statutory
- 10 -
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
criteria, such error was harmless: the Agency proceeded with a comparative analysis
of both applications as if Raleigh’s application did comply and, in its discretion,
determined that Duke’s application was superior.
Therefore, we reverse the Final Decision and reinstate the decision of the
Agency.1
C. Motion in Limine – Spoliation of Evidence
In its cross-appeal, Raleigh argues that the ALJ erred in denying its motion in
limine to apply adverse inference based on Duke’s alleged spoliation of certain
evidence. We disagree.
“[W]hen the evidence indicates that a party is aware of circumstances that are
likely to give rise to future litigation and yet destroys potentially relevant records
without particularized inquiry, a factfinder may reasonably infer that the party
probably did so because the records would harm its case.” McLain v. Taco Bell Corp.,
137 N.C. App. 179, 187-88, 527 S.E.2d 712, 718, disc. rev. denied, 352 N.C. 357, 544
S.E.2d 563 (2000). This inference is a permissible adverse inference. Id. “To qualify
for [an] adverse inference, the party requesting it must ordinarily show that the
spoliator was on notice of the claim or potential claim at the time of the destruction.”
1 We note that additional arguments were made on appeal. For instance, Duke and the Agency
contend that Raleigh did not establish substantial prejudice and that the Final Decision was
incomplete and untimely by thirty-seven (37) minutes. However, in light of the ALJ’s comparative
analysis error and our subsequent reversal of the Final Decision, we need not address these
arguments.
- 11 -
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
McLain, 137 N.C. App. at 187, 527 S.E.2d at 718 (internal citations omitted).
However, “[i]f there is a fair, frank and satisfactory explanation” for the absence of
the documents, an adverse inference will not be applied. Yarborough v. Hughes, 139
N.C. 199, 211, 51 S.E. 904, 908 (1905).
In the present case, Duke contracted with a third-party consultant,
(“Keystone”), to perform and draft its CON application. Keystone’s practice is to
discard all useless documentation and application references so as to keep only
relevant, accurate applications and data. This practice is consistent with most
consultants in this field, it is not disputed, and amounts to “a fair, frank and
satisfactory explanation[.]” Id.
Moreover, as Duke and the Agency correctly point out, these documents would
not be the subject of review or an appeal. Rather, the ALJ’s review of the Agency’s
decision is limited to its seventy-four pages of findings and conclusions. We conclude
that the ALJ did not err in not applying an adverse inference based on the absence of
certain documents.
IV. Conclusion
The ALJ erred in not deferring to the comparative analysis performed by the
Agency and conducting its own comparative analysis. However, the ALJ did not err
in finding and concluding that Duke conformed with the applicable review criteria
nor in not applying an adverse inference against Duke regarding certain information.
- 12 -
RALEIGH RADIOLOGY V. NCDHHS
Opinion of the Court
Thus, we reverse the Final Decision and reinstate and affirm the decision of the
Agency awarding the CON to Duke.2
REVERSED.
Judges BRYANT and ARROWOOD concur.
2 We acknowledge Raleigh’s motion for leave to file a supplemental brief regarding the ALJ’s
authority to remand a contested case to the Agency. We deny this motion as our resolution has
rendered such an issue moot.
- 13 -