The North Carolina Supreme Court has upheld a lower court ruling against the Department of Health and Human Services and Duke Health in a Wake County certificate-of-need dispute.
The court clarified that an applicant who loses a CON to a competitor has suffered “substantial prejudice,” one of the factors necessary for a successful court challenge.
DHHS and Duke had appealed a state Appeals Court decision that granted Pinnacle Health Services of North Carolina a CON for a new magnetic resonance imaging scanner. State health regulators had chosen Duke over Pinnacle for the CON in 2021.
Health care providers must secure a CON from the state before opening new medical facilities or purchasing high-dollar medical equipment.
“In North Carolina, health care providers cannot simply develop, acquire, or expand health care facilities or services based on market demand,” wrote Justice Phil Berger Jr. for the court’s majority. “Instead, providers must obtain a Certificate of Need (CON) from the North Carolina Department of Health and Human Services (the Agency) before they can acquire or offer a ‘new institutional health service.’”
“The CON law is essentially a form of market control premised on the idea that government restrictions on the unnecessary duplication of health service facilities can rein in increasing health care costs,” Berger added. “Each year, the Agency, using its administrative judgment, prepares a State Medical Facilities Plan (SMFP) to determine the need for additional health care services and facilities, and it awards CONs accordingly. In other words, instead of allowing market preferences to determine the allocation of resources, the CON law leaves these decisions to bureaucratic assessments.”
Pinnacle and Duke filed competing applications in 2021 to secure a CON for a new MRI to serve Wake County. State regulators chose Duke, but an administrative law judge reversed that decision.
The Appeals Court split, 2-1, in affirming the ALJ’s ruling.
Berger criticized DHHS and Duke for ignoring 2011 amendments to the state’s Administrative Procedure Act.
“Prior to the 2011 amendment, an ALJ would issue a ‘recommended’ decision that the agency was free to adopt or reject, in whole or in part,” he wrote. “Now, however, in contested case hearings under Article 3, it is the ALJ’s decision that is final and binding on parties.”
“Here, in blatant disregard of the 2011 amendment, the Court of Appeals’ explanation of this legislative change, and this Court’s precedent, … appellants persist in arguing that the Agency’s decision is the focus of our review,” Berger added. “Appellants’ argument is not merely wrong, it proceeds as though the amendments to § 150B-34 do not exist at all. Indeed, in its briefing to this Court, Duke cited at least eight cases for this very proposition, all of which were decided prior to the 2011 amendment. The Court of Appeals majority correctly made the ALJ’s final decision, not the Agency’s decision, the focus of its review. Appellants’ contentions of error on this point are wholly without merit and border on frivolous.”
Berger also addressed arguments that the administrative law judge should have relied on the agency’s expertise when making a decision.
“[T]he statute commands ‘due regard,’ not blind deference,” he wrote. “Deference to the agency’s factual determinations is improper, therefore, when the evidence shows that no such specialized knowledge or expertise was utilized, or that an agency bureaucrat’s subjective conclusions inexplicably depart from general agency practices and procedures. To mandate deference to such arbitrary determinations would invite unimaginable bureaucratic mischief and render an ALJ’s review effectively meaningless.”
The court’s majority tackled the issue of “substantial prejudice” in CON disputes.
The dissenting judge at the Appeals Court had written that Pinnacle “failed to show substantial prejudice because ‘[h]arm from normal competition does not amount to substantial prejudice,’” Berger noted.
“We disagree. Where two eligible applicants compete for a CON, the denied applicant is inherently prejudiced because ‘but-for’ the denial, the CON would be theirs,” he wrote. “Pinnacle is a denied applicant. Pinnacle was statutorily eligible to receive the CON and did not do so only because Duke was approved instead.”
“In other words, Pinnacle is prejudiced by the denial of its own application, not merely the approval of a competitor’s,” Berger explained.
“The CON Act was enacted with laudable goals: to control healthcare costs, to facilitate access to health service facilities, and to prioritize the healthcare needs of rural North Carolinians,” he concluded. “But laudable intent can be easily manipulated by bureaucrats left unchecked. Judicial review serves as the necessary backstop, providing relief for parties wronged by bureaucratic overreach.”
All seven Supreme Court justices agreed that Pinnacle should get the CON. The entire court agreed on the “substantial prejudice” issue.
Yet Justice Anita Earls, a Democrat, wrote separately to explain that she would have ruled for Pinnacle for different reasons than the five Republican justices who supported Berger’s opinion.
“Duke and the Agency effectively asked this Court to conclude that the ALJ’s decision must have been error, since the Agency’s decision was ‘correct’ and the ALJ reversed it,” Earls wrote. “They argued in a conclusory manner that the ALJ substituted its judgment for that of the Agency. But Duke and the Agency failed to explain why individual findings or conclusions were made without the ‘due regard’ to the agency’s expertise.”
The state Supreme Court heard oral arguments in the case in September 2024. In August, the court asked the parties to address whether DHHS had legal authority to appeal an ALJ’s ruling in a CON dispute.
All parties agreed that state regulators could file an appeal.
“Although one could argue that it is unclear how the Agency, as a purportedly impartial administrative body, is ‘prejudiced’ by a final decision awarding a CON to one qualified applicant over another, appellants failed to present any argument on this issue,” Berger wrote in a footnote.
That issue did not affect the decision upholding the CON for Pinnacle.
The post Top NC court rules against DHHS, Duke in Wake County CON dispute appeared first on Carolina Journal.