- The North Carolina Department of Health and Human Services is asking the state's highest court to reject a request to clarify the legal definition of "substantial prejudice" in a certificate-of-need dispute.
- Virginia-based Chesapeake Diagnostic Imaging Centers asked the North Carolina Supreme Court to take up the substantial prejudice issue.
- Chesapeake challenges DHHS' decision to award a CON to rival Sentara for a new magnetic resonance imaging scanner for northeastern North Carolina.
The North Carolina Department of Health and Human Services is asking the state’s highest court to reject a Virginia-based health care provider’s appeal in a certificate-of-need dispute. The appeal asks for a legal definition of the term “substantial prejudice.”
Health care providers must secure a CON from state regulators to build a new hospital, add beds to existing hospitals, open other types of health care facility, or purchase certain medical equipment.
When providers compete for a CON, the losing party often challenges DHHS’ decision in court. Judges have ruled that a successful CON challenge must show both “agency error” and “substantial prejudice.”
Virginia-based Chesapeake Diagnostic Imaging Centers argued in an August petition to the state Supreme Court that the state’s legal definition of “substantial prejudice” is unclear. Chesapeake challenges DHHS’ award of a CON to rival Sentara Advanced Imaging Solutions for a new magnetic resonance imaging scanner to serve four northeastern North Carolina counties.
“The Court of Appeals has been clear and consistent that competition-based, financial harm is insufficient to establish substantial prejudice in the context of certificate of need (‘CON’) cases,” state Special Deputy Attorney General Derek Hunter wrote Monday on behalf of DHHS. “It has also clearly stated that one’s mere status as a denied applicant in a competitive CON review does not establish substantial prejudice.”
“These are precisely the claims of harm Chesapeake asserts in the instant case,” Hunter added. “Those claims were rejected by the Administrative Law Judge and rejected unanimously by the Court of Appeals, consistent with nearly two decades of well-settled case law.”
“Despite Chesapeake’s assertions to the contrary, this case represents a very straightforward certificate of need (‘CON’) review,” Hunter added.
Sentara’s response Thursday to the Supreme Court petition emphasized Chesapeake’s “burden” to prove agency error and substantial prejudice. “The ALJ found that Chesapeake did neither and that Chesapeake’s allegations in support of its substantial prejudice claims were no different than the same allegations that the Courts of this state repeatedly have held to be insufficient.”
Chesapeake is urging North Carolina’s highest court to take up the “substantial prejudice” issue.
“The meaning of substantial prejudice in certificate of need cases has perplexed the lower court bench and the bar for some time,” according to Chesapeake’s petition. “The trial courts have repeatedly asked the Court of Appeals for guidance and clarification, but that court will only say what the substantial prejudice requirement under N.C.G.S. § 150B-23(a) does not mean, thus compounding the problem.”
“Denied applicants who want to challenge adverse Agency decisions have no idea how to prove an essential element of their case required under this State’s Administrative Procedure Act,” the court filing continued. “Only this State’s Court of last resort can bring clarity to a point of law which directly affects the accessibility and healthcare choices for all North Carolinians and the ability of denied applicant providers to seek judicial review of an Agency decision denying their right to offer and expand services in this State.”
Chesapeake challenged the CON decision on the grounds that the state allowed Sentara to maintain a monopoly on MRI services provided in Pasquotank, Perquimans, Currituck, and Camden counties.
A unanimous three-judge Appeals Court panel ruled against Chesapeake in July. An Aug. 8 court order indicated that no Appeals Court judges voted to grant Chesapeake’s request for the full 15-member court to grant a new en banc hearing.
“Petitioner’s substantial prejudice argument centers around two key factors: (1) its inability to construct its proposed imaging center in a market currently served by Sentara; and, (2) its loss of forecasted revenue from that inability,” wrote Judge John Tyson. “The harm required to establish substantial prejudice must be concrete, particularized, and actual or imminent. The argument for projected loss of revenue is legally insufficient, as it points to notions, which are both conjectural and hypothetical.”
Regulators did not need to approve a CON that would have allowed Chesapeake to add another MRI machine in Elizabeth City, the Appeals Court ruled.
“DHHS deciding a CON application between two applicants in a manner, which fails to increase competition in one city, is not an unauthorized, erroneous, arbitrary or capricious action, was not made from improper procedure, or is inapposite to rule or law,” Tyson wrote. “For Petitioner to meet its burden, it must show an erroneous or improper action by the Agency during evaluation of the applications, which in turn resulted in substantial prejudice. DHHS has no statutory obligation to favor one CON applicant over another, simply because granting one would allow a new provider to enter the same city in the service market.”
“Petitioner’s argument for unconstitutionality of the ALJ’s decision hinges on the allegation DHHS’ granting Respondent’s CON application prevents it from entering the market and restricts its ‘ability to do business’ within the service area,” Tyson added. “The ALJ was under no obligation to consider the effects of Petitioner’s denial on its ability to compete with Respondent within Elizabeth City specifically or in the greater prescribed 4-county area. While DHHS’ CON authority does not permit decisions to perpetuate or develop a monopoly, its authority allows CON applications where monopolies might exist as a byproduct of the determined medical need.”
Judges Donna Stroud and Allegra Collins joined Tyson’s opinion. The three judges heard oral arguments in the case on June 12.
“If a new provider seeking to come into an area and needing a certificate of need is disapproved, and that disapproval is based on agency error, and that is not substantial prejudice, then in the CON context nothing is. Who could bring a case?” asked Noah Huffstetler, one of Chesapeake’s lawyers.
“It essentially eviscerates the law,” Huffstetler added.
Sentara argued during the state’s CON process that its new machine would increase competition for MRI services in the targeted four-county area of northeastern North Carolina.
“That’s pretty rich,” Huffstetler said, pointing to Sentara’s success in convincing state regulators five years in a row to remove a new MRI scanner from state plans for the four-county region.
When Chesapeake successfully advocated to keep the new MRI machine in the state’s 2022 health facilities plan, “Sentara flipped 180 degrees and said, ‘Not only is it needed, but we need it here.’”
“There is no possible way that approving the Sentara application — the monopolist who had the only service within that service area to supply MRI procedures — approving their application and denying the application of a would-be competitor, there’s no way that conforms” with CON competition standards, Huffstetler argued. That’s true “particularly given the undisputed facts of how Sentara over and over had attempted to prevent the need from being recognized.”
Sentara countered in the Appeals Court argument that Chesapeake has no legal basis to overturn a valid decision from DHHS.
“Look at the agency’s decision overall — it was a close one,” argued lawyer Alexander Gormley. “Both applications were found conforming, and then they applied a number of comparative factors. Sentara won, 3-2. What tipped it is they won on geographic accessibility.”
“They proposed to put their MRI in Currituck County, where none exists, whereas Chesapeake proposed to put theirs right on top of the existing MRI” in Elizabeth City, Gormley added. “So I think the agency exercised a lot of wisdom and common sense and found this is the better application. It’s going to spread the MRI’s throughout the area.”
Chesapeake asks the court to “make a new rule as to what substantial prejudice is,” Gormley argued.
Sentara disputed Chesapeake’s arguments about competition. “The right to compete is the right to file for and apply for a CON,” Gormley said. “It’s not the right to be in that market. At bottom, the allegation that being denied means they can’t put the MRI in that area is no different than the underlying allegations of the many denied applicants in the many ‘substantial prejudice’ cases when this court has said, ‘You’re just making a competition claim, and, I’m sorry, that’s not what substantial prejudice is.’”
Hunter also urged the Appeals Court to reject Chesapeake’s arguments. “Chesapeake invites the court to disavow decades of its own precedent.”
“The CON law is not designed to level the playing field between health care providers,” Hunter added. “Its purpose is to ensure that all North Carolinians, and particularly those in rural areas, are able to access necessary, cost-effective health care.”