Birchansky Real Estate, L.c., And Fox Eye Surgery, L.l.c. Vs. Iowa Department Of Public Health, State Health Facilities Council

IN THE SUPREME COURT OF IOWA
No. 73 / 05-2019
Filed August 10, 2007
BIRCHANSKY REAL ESTATE, L.C.,
AND FOX EYE SURGERY, L.L.C.,
Appellees,
vs.
IOWA DEPARTMENT OF PUBLIC
HEALTH, STATE HEALTH
FACILITIES COUNCIL,
Respondent,
ST. LUKE’S HOSPITAL AND
MERCY MEDICAL CENTER,
Appellants.
________________________________________________________________________
Appeal from the Iowa District Court for Polk County, Michael D.
Huppert, Judge.
Two hospitals appeal the district court’s determination a certificate
of need was not required for an ophthalmologist’s proposed outpatient
surgical facility. REVERSED.
Michael A. Dee and Rebecca A. Brommel of Brown, Winick, Graves,
Gross, Baskerville and Schoenebaum, P.L.C., Des Moines, for appellant
St. Luke’s Hospital.
Edwin N. McIntosh and Heather L. Campbell of Dorsey & Whitney,
LLP, Des Moines, for appellant Mercy Medical Center.
2
Douglas A. Fulton of Brick, Gentry, Bowers, Swartz, Stoltze &
Levis, P.C., West Des Moines, for appellees.
Maureen Keehnle, Des Moines, for amicus curiae Iowa Hospital
Association.
3
STREIT, Justice.
An ophthalmologist wants to open an outpatient surgical facility in
Cedar Rapids. Iowa law requires the sponsor of such a facility to first
obtain a certificate of need (“CON”) from the Iowa Department of Public
Health (“Department”) before the facility can be developed unless a
statutory exemption is applicable. Because we find the ophthalmologist’s
proposed facility required a CON, we reverse the decision of the district
court. Moreover, the Department’s decision to deny the
ophthalmologist’s CON application was reasonable.
I. Facts and Prior Proceedings.
This case centers on Dr. Lee Birchansky’s efforts to establish an
outpatient surgical facility 1 in Cedar Rapids. Under Iowa law, the
Department must first issue a CON before an outpatient surgical facility
can be developed. Iowa Code §§ 135.61(14)–(15), .63 (2005); see
Greenwood Manor v. Iowa Dep’t of Pub. Health, 641 N.W.2d 823, 831–32
(Iowa 2002) (providing an overview of Iowa’s CON law); Lauretta Higgins
Wolfson, State Regulation of Health Facility Planning: The Economic
Theory and Political Realities of Certificates of Need, 4 DePaul J. Health
Care L. 261 (2001) (providing historical background for the enactment of
CON laws across the country). Dr. Birchansky initially sought to obtain
a CON for a proposed facility on H Avenue in 1996. The Department 2
1An“outpatient surgical facility” is “a facility which as its primary function
provides, through an organized medical staff and on an outpatient basis to patients who
are generally ambulatory, surgical procedures not ordinarily performed in a private
physician’s office, but not requiring twenty-four hour hospitalization, and which is
neither a part of a hospital nor the private office of a health care provider . . . .” Iowa
Code § 135.61(21) (2005).
2TheState Health Facilities Council, a division of the Iowa Department of Public
Health, is charged with reviewing CON applications and deciding when a CON should
be issued. Iowa Code § 135.62(2)(d). For simplicity, we will not distinguish the actions
of the Council from the actions of the Department.
4
denied his application. Thereafter, in 1998, Dr. Birchansky, through
Birchansky Real Estate, L.C., entered into a business arrangement with
St. Luke’s Hospital whereby the latter would create a surgery center at
the H Avenue location and operate it as an off-campus department of the
hospital. St. Luke’s was not required to obtain a CON because the
facility was considered an extension of St. Luke’s hospital license. Under
the arrangement, St. Luke’s rented the H Avenue facility from
Birchansky Real Estate for five years and provided the support staff and
equipment. Dr. Birchansky was the medical director. Dr. Birchansky
and his partner, Dr. Richard Stangler, who comprised Fox Eye Laser &
Cosmetic Institute, P.C., performed the vast majority of surgeries at the
facility. Four other doctors (three podiatrists and a hand surgeon)
utilized the facility on occasion.
The initial lease agreement expired in 2003 and the parties were
unable to agree to a new contract. Nevertheless, the facility remained in
operation with St. Luke’s occupying the space on a month-to-month
basis.
Dr. Birchansky recognized the uncertainty of his arrangement with
St. Luke’s. He created Fox Eye Surgery, L.L.C. (“Fox Eye”). On August
24, 2004, Fox Eye submitted an application for a CON in the event the
arrangement with St. Luke’s ended. Fox Eye’s application sought to
obtain a CON for what it described as the “continued operation” of the
facility. It noted it “will negotiate to purchase” from St. Luke’s the
equipment currently in place and employ any current staff not retained
by St. Luke’s.
The Department responded by sending Fox Eye a letter stating it
had determined “the project proposed in the application does not require
5
a Certificate of Need to proceed.” (Emphasis added.) The Department
explained Fox Eye’s proposal fell within one of the exemptions to the
CON requirement. See Iowa Code § 135.63(2)(o). On November 19,
2004, the Department issued a memorandum to “All Affected and
Interested Parties” regarding the Department’s determination of non-
reviewability.
St. Luke’s disagreed with the Department’s determination. On
December 6, 2004, St. Luke’s ceased operations at the facility and
requested the removal of the H Avenue location from its hospital license.
In its letter to the Department of Inspections and Appeals, St. Luke’s
stated “[a]ll equipment and personnel at this site will be relocated to St.
Luke’s main location at 1026 A Avenue NE at the close of business on
December 6.” At a hearing before the Department, St. Luke’s admitted it
pulled out of the H Avenue facility in order “to create a break in service”
and cause the Department to reconsider its decision not to require Fox
Eye to obtain a CON.
St. Luke’s plan worked. Two days later, the Department informed
Fox Eye its CON application was reviewable. The Department reasoned
the exemption for a CON was no longer applicable because St. Luke’s
had ceased to provide services at the H Avenue facility and Fox Eye
would not be performing surgeries at this location for at least forty-five
days. On February 26, 2005, the Department denied Fox Eye’s CON
application, finding the additional surgery suites were not needed in the
Cedar Rapids area.
Fox Eye and Birchansky Real Estate filed a petition for judicial
review in the Polk County District Court. They argued (1) Fox Eye’s
application was non-reviewable under Iowa Code § 135.63(2)(o); and (2) if
6
the application was reviewable, the Department arbitrarily and
unreasonably denied Fox Eye’s CON application. St. Luke’s and Mercy
were allowed to intervene. The district court ruled the Department’s
“determination that the exemption found at Iowa Code § 135.63(2)(o) was
no longer applicable under the circumstances of this proceeding was
wholly unjustifiable.” The district court reversed the Department’s
determination and remanded the matter to the Department “for such
proceedings as may be required to complete the process started when it
was initially determined that a certificate of need was not necessary.” St
Luke’s and Mercy appeal. 3 They argue Fox Eye’s proposal required a
CON and contend the Department properly denied Fox Eye’s application.
II. Scope of Review.
We review the district court’s decision for errors at law. Iowa R.
App. P. 6.4. The Iowa Administrative Procedure Act provides specific
judicial review provisions for appeals concerning agency action. See Iowa
Code § 17A.19. The Department is a government agency.
The first question we must address is whether the Department’s
interpretation of the statute at issue, Iowa Code § 135.63(2)(o), is entitled
to deference. The answer depends on whether the interpretation of the
statute is “clearly . . . vested by a provision of law in the discretion of the
agency.” Id. § 17A.19(10)(c), (l). If the interpretation is so vested, then
the court may reverse only upon a finding the agency’s interpretation
was “irrational, illogical, or wholly unjustifiable.” Id. § 17A.19(10)(l). “If
the legislature has not clearly vested the interpretation of the statute at
issue with the agency, we are free to substitute our judgment de novo for
the agency's interpretation and determine if the interpretation is
3Neither the Iowa Department of Public Health nor the State Health Facilities
Council appealed.
7
erroneous.” Auen v. Alcoholic Beverages Div., 679 N.W.2d 586, 589–
90 (Iowa 2004) (citing Iowa Code § 17A.19(10)(c)).
In order for an interpretation to be clearly vested with an agency,
we “ ‘must have a firm conviction from reviewing the precise language of
the statute, its context, the purpose of the statute, and the practical
considerations involved, that the legislature actually intended (or would
have intended had it thought about the question) to delegate to the
agency interpretive power with the binding force of law over the
elaboration of the provision in question.’ ” Mosher v. Dep’t of Inspections
& Appeals, 671 N.W.2d 501, 509 (Iowa 2003) (quoting Arthur E. Bonfield,
Amendments to Iowa Administrative Procedure Act, Report on Selected
Provisions to Iowa State Bar Association and Iowa State Government 63
(1998)). The Department was expressly created by the legislature to,
among other things, make the final decision on all CON applications.
Iowa Code § 135.62(2)(d). The Department is also statutorily mandated
with the responsibility for adopting all rules “necessary to enable [the
Department] to implement this division,” including procedures and
criteria for reviewing CON applications. Id. § 135.72(1); see also id.
§ 135.62(2)(d)(5). We have found similar statutory language sufficient to
conclude the matter under consideration was vested in the discretion of
the agency. ABC Disposal Sys., Inc. v. Dep’t of Natural Res., 681 N.W.2d
596, 602 (Iowa 2004); Auen, 679 N.W.2d at 590; City of Marion v. Dep’t of
Revenue & Fin., 643 N.W.2d 205, 207 (Iowa 2002). Thus, the district
court correctly concluded the interpretation of the statutory exemption
for a CON, Iowa Code § 135.63(2)(o), was clearly vested in the discretion
of the Department. Consequently, we may only reverse the Department’s
8
interpretation if we find it to be “irrational, illogical, or wholly
unjustifiable.” Iowa Code § 17A.19(10)(l).
Although we give weight to the Department’s interpretation, the
meaning of any statute is always a matter of law to be determined by the
court. City of Marion, 643 N.W.2d at 206. The goal in interpreting a
statute “is to determine the legislature’s intent when it enacted the
statute.” ABC Disposal Sys., 681 N.W.2d at 603 (citing State v. Tague,
676 N.W.2d 197, 201 (Iowa 2004)). “If the statute’s language is clear and
unambiguous, we apply a plain and rational meaning consistent with the
subject matter of the statute.” Id. (citing City of Waukee v. City Dev. Bd.,
590 N.W.2d 712, 717 (Iowa 1999)).
III. Merits.
A. Whether Fox Eye’s Proposal Required a CON.
The crux of this case concerns the Department’s interpretation of
Iowa Code § 135.63(2)(o). This section provides a CON is not required in
the event of a
change in ownership, licensure, organizational structure, or
designation of the type of institutional health facility [as long
as] the health services offered by the successor institutional
health facility are unchanged.
When Fox Eye applied for a CON in 2004, the Department initially
determined a CON was not required under section 135.63(2)(o).
However, after St. Luke’s pulled out of the facility, the Department
notified Fox Eye a CON was necessary. The Department reasoned:
In construing section 135.63(2)“o” in the past, the
Department has approved this exemption only in those
circumstances in which the change in the designation of type
of institutional health facility (from hospital to outpatient
surgical facility) was a seamless change in which the
cessation of hospital outpatient surgical services occurred
simultaneously with the offering of the surgical services by the
9
outpatient surgical facility. In this situation, . . . the hospital
has removed this location from its license and is no longer
offering these services in this setting. In addition, the
providers of these outpatient surgical services are not
currently, and will not in the immediate future, be in a
position to offer these services at this location [due to the
need to purchase equipment and hire support staff]. Hence
there will clearly be a significant gap in time during which no
outpatient surgical services will be offered by Fox Eye . . . at
this location. For this reason, the Department has
determined that the exemption previously cited is no longer
applicable.
(Emphasis added.)
The district court found the Department’s interpretation of section
135.63(2)(o) “wholly unjustifiable” because “the [temporal] gap in services
relied upon by the agency is not a factor to be considered under the
exemption at issue and the defined terms found therein.” We agree.
Although the statute may contemplate a seamless transition or change in
ownership, it does not expressly state or imply any temporal aspect to
the change in ownership. The Department may not, under the guise of
interpretation, add lack of “a significant gap in time” between services to
the requirements for the exemption. 4
Nevertheless, we find Fox Eye’s proposal required a CON for a
different reason: there was no “change in ownership, licensure,
organizational structure, or designation of the type of institutional health
facility.” Iowa Code § 135.63(2)(o). Instead, St. Luke’s simply moved its
4We note our ruling is largely confined to this case because during the pendency
of this appeal the legislature amended section 135.63(2)(o) by adding the following
language:
This exclusion is applicable only if the institutional health facility
consents to the change in ownership, licensure, organizational structure,
or designation of the type of institutional health facility and ceases
offering the health services simultaneously with the initiation of the
offering of health services by the successor institutional health facility.
2006 Iowa Acts ch. 1184, § 78.
10
surgery center back to the hospital’s main campus. It maintained the
ownership, licensure, organizational structure, and designation of the
type of facility. The only thing that changed was the facility’s location.
The exemption with its use of the term “successor” contemplates a
transfer of operations between parties. See id. § 135.63(2)(o); Black’s
Law Dictionary 1473 (8th ed. 2004) (defining successor as “[a]
corporation that, through amalgamation, consolidation, or other
assumption of interests, is vested with the rights and duties of an earlier
corporation”). Nothing was transferred here. As St. Luke’s employee and
landlord, Dr. Birchansky did not gain the right to operate a similar
surgery center at the H Avenue location without obtaining a CON. See
Catonville Nursing Home, Inc. v. Loveman, 709 A.2d 749 (Md. Ct. App.
1998).
The Department’s confusion on whether a CON was required may
have stemmed from the application itself. Fox Eye’s application implied
the facility was going to be transferred from St. Luke’s to Fox Eye. The
application indicated Fox Eye planned to purchase St. Luke’s equipment
and planned to hire any of the support staff St. Luke’s did not retain.
Neither proposal occurred. After St. Luke’s informed the Department it
had no intention of transferring its H Avenue operations to Fox Eye, the
Department ruled a CON was required based on the temporal gap in
services. It never specifically addressed whether it believed Fox Eye’s
proposal still constituted a “change in ownership, licensure,
organizational structure, or designation of the type of institutional health
facility.” We find it does not. Thus, a CON was required.
11
B. Whether the Department’s Decision to Deny Fox Eye’s
CON Application was Unreasonable.
Alternatively, Fox Eye argues the Department’s decision to deny
Fox Eye’s CON application was unreasonable. On review, we will reverse
the Department’s decision to deny a CON only if the decision was
“unreasonable, arbitrary, capricious, or an abuse of discretion.” Iowa
Code § 17A.19(10)(n); Greenwood Manor, 641 N.W.2d at 831.
Iowa Code section 135.64(1) provides a list of eighteen factors the
Department shall consider when reviewing a CON application.
Additionally, the Department shall grant a CON for a new or changed
institutional health service only if it finds:
a. Less costly, more efficient, or more appropriate
alternatives to the proposed institutional health service are
not available and the development of such alternatives is not
practicable;
b. Any existing facilities providing institutional health
services similar to those proposed are being used in an
appropriate and efficient manner;
c. In the case of new construction, alternatives including
but not limited to modernization or sharing arrangements
have been considered and have been implemented to the
maximum extent practicable;
d. Patients will experience serious problems in obtaining
care of the type which will be furnished by the proposed new
institutional health service or changed institutional health
service, in the absence of that proposed new service.
Iowa Code § 135.64(2). The Department found none of these four criteria
existed in the Cedar Rapids area. It concluded two local hospitals and
an existing surgery center (Surgery Center of Cedar Rapids) had
sufficient operating room capacity to accommodate the procedures that
had been performed at the H Avenue location for the past six years.
Specifically, it found patients would not be affected by a denial of Fox
Eye’s CON application because the Surgery Center of Cedar Rapids
12
provided a similar atmosphere to Fox Eye’s proposed facility at similar
costs.
Fox Eye does not dispute these findings. Instead, Fox Eye argues
the Department should not have based its decision in part on the
existence of the Surgery Center of Cedar Rapids because that facility
came into existence after St. Luke’s opened its surgery center on H
Avenue. Even more offputting to Fox Eye is the fact the Surgery Center
of Cedar Rapids was a joint venture between St. Luke’s and
approximately eighty medical practitioners. It did not require a CON.
Fox Eye argues St. Luke’s should not be able to block competitors by
“artificially munipulat[ing] the market.” While we understand Fox Eye’s
frustration, there is nothing unlawful about St. Luke’s participating in
the Surgery Center of Cedar Rapids. Based on the aforementioned
criteria, the Department acted reasonably when it denied Fox Eye’s CON
application.
IV. Conclusion.
We agree with the district court the exemption for a CON does not
require a successor entity to offer services concurrently with its
predecessor. Nevertheless, we find the exemption was not applicable to
Fox Eye’s proposal because there was no “change in ownership” of the
facility. Rather, St. Luke’s simply moved its surgery center back to the
hospital’s main campus. Consequently, Iowa law required Fox Eye to
obtain a CON for its proposed outpatient surgical facility and the
Department did not act unreasonably in denying Fox Eye’s application.
REVERSED.
All justices concur except Ternus, C.J., who takes no part.