Shawnee Mission Medical Center v. Kansas Dept. of Health and Environment

• Decision Date: 13 July 1984
• Docket Number: No. 56278,56278
• Citation: 685 P.2d 880,235 Kan. 983
• Parties: SHAWNEE MISSION MEDICAL CENTER, Appellee, v. KANSAS DEPARTMENT OF HEALTH AND ENVIRONMENT, and Barbara J. Sabol, Secretary, Kansas Department of Health and Environment, Appellants.
• Court: Kansas Supreme Court

Page 880

685 P.2d 880

235 Kan. 983

SHAWNEE MISSION MEDICAL CENTER, Appellee, v. KANSAS DEPARTMENT OF HEALTH AND ENVIRONMENT, and Barbara J.

Sabol, Secretary, Kansas Department of Health and

Environment, Appellants.

No. 56278.

Supreme Court of Kansas.

July 13, 1984.

Syllabus by the Court

1. The standards governing judicial review, both by a trial court and by this court on appeal, of a KDHE administrative denial of a certificate of need are discussed.

2. Substantial evidence is defined as evidence which possesses both relevance and substance, and which furnishes a substantial basis of fact from which the issues can reasonably be resolved. [Following Jibben v. Post & Brown Well Service, 199 Kan. 793, 433 P.2d 467 (1967).]

3. The record of proceedings below, involving an application for certificate of need, is examined and it is held: The district court erred in (1) finding the KDHE decision was not supported by substantial evidence and (2) granting the certificate of need to the applicant medical center.

Charles V. Hamm, Topeka, argued the cause, and Kay Y. Rute, of the Kansas Department of Health and Environment, Topeka, was on brief for appellants.

Reid F. Holbrook, of Fallon, Holbrook & Ellis, Kansas City, argued the cause and John J. Fallon and G. Mark Sappington, Kansas City, of the same firm, were with him on brief for appellee.

COOK, District Judge Assigned.

This is an appeal from the judgment of the district court granting a certificate of need to Shawnee Mission Medical Center (Medical Center) after the requested certificate had been denied by the Kansas Department of Health and Environment (KDHE) following an administrative hearing.

The Medical Center is a hospital located in Johnson County and currently has a licensed capacity of 383 acute-care beds. Included in that total is a twenty-two bed inpatient Alcoholism Recovery Unit treatment program, providing acute level alcoholism detoxification and rehabilitation services. On August 9, 1982, the Medical Center filed Certificate of Need (C.O.N.) application # 4-JO-062 with KDHE in accordance with K.S.A. 65-4801 et seq. The Medical Center sought approval to construct a "free-standing" Alcoholism Recovery Unit (A.R.U.) in which to relocate and expand the inpatient rehabilitation program by six beds, and to offer, for the first time, an outpatient treatment program. The proposal called for construction of a twenty-eight bed acute-care patient wing to be attached to the existing "Life Dynamics Center." The project would have encompassed 22,957 square feet of newly constructed and remodeled space at a total cost of $2,002,100.00, or $71,503.00 per bed. The Medical Center included in its application a request for licensure of twenty-two new acute-care beds in the existing patient tower, to replace the twenty-two rehabilitation beds which were moved to the new A.R.U. When this request was combined with the six new beds for the A.R.U., the application represented a net increase of twenty-eight beds, raising the Medical Center's licensed capacity from 383 to 411.

On September 24, 1982, a public hearing was held in Overland Park before KDHE Hearing Officer Scott Buckley. In support of the Medical Center's application ten witnesses appeared and testified, and two letters were admitted into evidence. Two other witnesses testified in opposition to the request, and three letters were admitted which opposed the certificate of need because of the request for additional beds beyond the Medical Center's current licensed capacity.

Based on this record, KDHE Secretary Joseph Harkins denied the application on November 22, 1982. Of the six review objectives and criteria adopted by the Kansas Statewide Health Coordinating Council pursuant to K.S.A. 65-4804 ("community need, quality of care, community support, financing, cost containment, and accessibility"), Harkins found the proposal failed to meet the criteria for community need and cost containment. More specifically, the Secretary stated the project was not needed to improve the availability of acute care services for alcoholism or medical/surgical patients in the applicant's designated service area, because there was already a surplus there of more than 1,500 acute-care beds and a correspondingly lower-than-recommended occupancy rate.

"The Secretary finds that the local health plan [the 1982-1986 Health Systems Plan by Mid-America Health Systems Agency] has established a desired level of utilization for alcoholism treatment beds, and that these beds in the service area are operating at a level below that recommended. The Secretary further finds that the service area has an excess of all types of acute care beds ...."

Finally, regarding the issue of cost containment, the Secretary concluded the proposed project would unnecessarily increase the cost of patient care and health care services in general because of the estimated increase in debt service and depreciation per patient day and due to the absence of a demonstrated need for the additional beds.

On December 6, 1982, counsel for the Medical Center met with Secretary Harkins in Topeka. They spoke of the "over-bedding" condition in Wyandotte and Johnson Counties, and Harkins alluded to that as being at least one of the reasons he denied their application. Upon further probing by counsel, Harkins responded that he would consider deletion of the proposed new beds in a request for reconsideration a "significant change in the application." Such a change, he said, would clearly remove one of the major reasons for his earlier denial, and would have a very good chance of receiving reconsideration, although he made no promises or guarantees about the ultimate result.

That very day Medical Center Senior Vice President Terry White wrote Secretary Harkins requesting reconsideration of his decision pursuant to K.A.R. 28-42-9(b)(2). In pertinent part, White said:

"It appears that the major rationale behind the denial of our proposal is the fact that it would result in the development of twenty-eight (28) additional acute-care beds. The fact remains, however, that our alcoholism recovery unit cannot continue operating in a cost-efficient manner in its present location regardless of whether or not acute-care beds are added.

"We are therefore requesting a reconsideration of your decision, based on a reduction in size of the free-standing alcoholism recovery unit to 22 beds and no net increase in the licensed acute-care capacity of SMMC. The area on the fifth floor of the patient tower currently occupied by the alcoholism recovery unit would be converted to other acute-care use as originally planned. However, twenty-two acute-care patient rooms would be converted from semiprivate to private occupancy, thus resulting in the maintenance of the medical center's current licensed bed capacity...."

Secretary Harkins ordered a reconsideration hearing pursuant to K.S.A.1983 Supp. 65-4808 and K.A.R. 28-42-9, finding White's request demonstrated "the existence of significant and relevant information not previously considered." In his order for reconsideration, however, Harkins limited the reconsideration hearing to the following issues:

"1. Revision of the application from a free-standing alcohol recovery unit and the addition of 28 acute care beds to a request for a free-standing alcoholism recovery unit with no increase in the number of beds.

2. A comparison of operating costs for the existing in-hospital alcoholism recovery unit with costs projected for the proposed free-standing unit.

3. The need to convert 22 semi-private rooms to private rooms."

The reconsideration hearing was held January 6, 1983, in the KDHE Topeka offices with Hearing Officer Scott Buckley again presiding. No witnesses, testimony or evidence were received in opposition to the request; in fact some who previously opposed licensure of the additional beds now wrote supporting the revised proposal for the "free-standing" A.R.U.

Approximately one month later Hearing Officer Buckley filed his report, recommending denial of the application. He first concluded the proposed relocation would not enable the Medical Center to reduce the operating expenses of the A.R.U., projecting instead that those expenses would increase:

"... although the applicant projects the Alcoholism Recovery Unit to operate profitably by 1986, the excess revenue over expenses results mainly from increased patient charges, rather than the improved cost-effectiveness of the Alcoholism Recovery Unit."

Although recognizing there could be some advantages flowing from integrated inpatient and outpatient programs, Buckley concluded there was no reason to believe an outpatient program could not operate independently especially since both programs were to be staffed separately anyway. Finally, he found the availability of acute-care beds in other Johnson County hospitals precluded any need for "additional [private] beds" in Shawnee Mission Medical Center.

The new Secretary of the KDHE, Barbara J. Sabol, adopted Buckley's findings and concluded the modified proposal did not meet the objectives of the community need or cost containment. She denied the C.O.N. application on February 15, 1983. Due to an error in calculations an amended order was entered on March 14, 1983.

The following day the Medical Center appealed her decision to the District Court of Johnson County, pursuant to K.S.A. 1983 Supp. 65-4816. After pretrial conference on June 10, 1983, Judge Janette Howard allowed the Medical Center to conduct limited discovery. Former KDHE Secretary Joseph Harkins was deposed on June 30 and the deposition was made part of the record on September 8 over the agency's objection.

Oral argument was heard on September 26, 1983, and Judge Howard filed her decision on October 25 reversing the KDHE and granting the certificate of need to the Medical Center. The court found the KDHE decision not supported by the evidence, and arbitrary and...