Health Law Daily Wrap Up, CERTIFICATE OF NEED—Wash. App.: Sudden death tie breaker unnecessary, applicant loses in regulation, (Dec 29, 2015)

By Harold Bishop, J.D.

An administrative decision by a Washington state health law judge (HLJ) to award a certificate of need (CN) application to expand an existing kidney dialysis facility was upheld by the state court of appeals. The court of appeals concluded that the HLJ properly reversed a decision of the Washington State Department of Health (Department) to grant the CN to second applicant because the Department improperly invoked a tie breaker analysis when the second applicant’s financial feasibility plan was inferior and would likely result in higher service costs in the area (DaVita Healthcare Partners v. Washington State Department of Health, December 28, 2015, Appelwick, J.).

Both DaVita Healthcare Partners (DaVita) and Northwest Kidney Centers (NKC) submitted CN applications to the Washington State Department of Health (Department) for five kidney dialysis stations in south King County, Washington. DaVita sought to build a new facility to accommodate the stations whereas NKC sought to expand an existing facility.

CN program decision. Because both applicants proposed to serve residents in the same planning area, the Department’s CN program reviewed the competing applications concurrently. The evaluation by the CN program came down to a tie breaker analysis. Because DaVita received more tie breaker points than NKC, the program awarded DaVita the CN for its new proposed five station facility. It denied NKC's application.

Administrative hearing. NKC requested an adjudicative proceeding arguing that instead of evaluating which of the CN applications represented the superior alternative in terms of cost, efficiency, and effectiveness, the program improperly jumped directly to a tie breaker analysis. After an administrative hearing before a HLJ, the HLJ reversed the program's decision and awarded the CN to NKC. The HLJ found that the program properly determined that both NKC and DaVita met the determination of need requirement and the structure and process of care requirement, but that financial feasibility was where the differences between the two applications became the most distinct. The HLJ found that because DaVita's expenses were 19 times that of NKC's, it would have to increase its billing to non-Medicare patients who have insurance or other funding in order to account for its higher expenses and in order to reach its projected revenues. The HLJ concluded that this would have an unreasonable impact on the costs of health services in the area.

Superior court. DaVita petitioned for review to the state superior court. The superior court affirmed the HLJ's decision. It concluded that the HLJ correctly interpreted and applied the CN statutes and regulations and that substantial evidence supports the HLJ's findings. It reasoned that tie breakers are to be reached only in the event that the two applicants first satisfy all of the applicable review criteria and that DeVita failed to meet the financial feasibility criteria. DaVita appealed to the state court of appeals.

Court of appeals analysis. The appellate court found that: (1) the plain language of the Department’s regulation is clear that tie breakers are applied only if both applications first satisfy all other review criteria; (2) the HLJ did not err to the extent he directly compared the two applications under the relevant review criteria and determined reasonability comparatively; (3) DaVita failed to show that the HLJ's consideration of commercial reimbursement rates and capital costs in determining an unreasonable impact on the cost of health services was invalid; and (4) substantial evidence demonstrated that significantly higher rates for dialysis services will be charged to private pay patients and their insurers under DaVita's proposal.

The appellate court concluded that the HLJ's finding of a probable unreasonable impact on costs or service charges under DeVita’s application was not clearly erroneous.

The case is No. 73630-2-1.

Attorneys: James Michael Beaulaurier (Law Office of James M. Beaulaurier) and Brian William Grimm (Perkins Coie LLP) for Davita Healthcare Partners, Inc. Gail S. Yu, Attorney General's Office, for Washington State Department of Health.

Companies: Davita Healthcare Partners, Inc.; Washington State Department of Health

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