Lack of CON public hearing amounted to ‘agency error,’ Appeals Court concludes

The North Carolina Court of Appeals has determined that state regulators should have held a public hearing before awarding a disputed certificate of need in 2022 for a new hospital emergency department in Buncombe County.

Yet Tuesday’s unanimous unpublished decision from the state’s second-highest court stopped short of ruling that the lack of a public hearing would force the state to drop the CON.

Instead the case will head back to a lower court for further proceedings. The decision vacates an administrative law judge’s earlier ruling in the case.

That judge had ruled in favor of Fletcher Hospital, also known as AdventHealth Hendersonville. AdventHealth challenged the 2022 CON awarded to a competitor, Mission Health, for the new emergency department. AdventHealth argued that the lack of a public hearing during the CON process should have voided the certificate.

Health care providers need a CON from state government before building new facilities, adding hospital beds, or purchasing large pieces of medical equipment.

To win its case, AdventHealth needed to show that the lack of a public hearing amounted to “agency error.” AdventHealth also needed to show evidence that it suffered “substantial prejudice” tied to that error.

“Here, AdventHealth satisfied its burden of proof in showing Agency error, but it failed to forecast particularized evidence of substantial prejudice,” wrote Judge Fred Gore. “Yet, our determination in this case should not be misconstrued. AdventHealth may ultimately satisfy its burden; it may not.”

Gore and Judges Jefferson Griffin and Michael Stading agreed to limit their ruling to the public hearing dispute. “While this Court may address summary judgment on alternative grounds de novo, we deem this case an appropriate circumstance to remand for further proceedings,” Gore wrote.

Regulators with the state Department of Health and Human Services held no CON public hearings during more than two years of the COVID-19 pandemic.

“[W]e recognize the COVID-19 pandemic presented a wide range of unique and complex challenges, but neither the Agency nor Mission directs this Court to any statute, rule, regulation, or case law that would authorize the Agency to implement its own procedures as a substitute to the public hearing provision, or any other provision mandated by statute,” Gore wrote.

“Respondents may argue that strict compliance with § 131E-185(a1)(2) would have been irresponsible under the circumstances, have undermined the Agency’s statutory duties, or that the public hearing provision in § 131E-185(a1)(2) should yield to broader public policy concerns,” Gore added. “Yet, ‘we must decline’ respondents’ ‘invitation to engage in public policy considerations here in light of the unambiguous and specific language chosen by the General Assembly in drafting and enacting …’ the CON law.”

“[W]e determine that the Agency was required to hold a public hearing under the facts in this case, and its failure to do so was error,” Gore wrote.

Yet AdventHealth must do more to end up winning its case. “[W]e agree with respondents’ position that substantial prejudice must be proven; it is not presumed to exist per se on this record,” Gore wrote. “A mere showing that the Agency’s action was erroneous ‘does not absolve the petitioner of its duty to separately establish the existence of prejudice, i.e., to show how the action caused it to suffer substantial prejudice[ ]’ to satisfy each element of its claim for relief.”

Gore, Griffin, and Stading held oral arguments in the case in February. Much of the hearing focused on whether the CON public hearing requirement is mandatory.

“It is the agency’s position that it is discretionary, not mandatory,” argued Derek Hunter, the state special deputy attorney general representing DHHS.

State health officials canceled all in-person CON public hearings during the COVID-19 pandemic, Hunter explained. That decision was consistent with state officials’ role in protecting health. “It is undisputed that the agency must — even in light of the CON process — maintain the public’s health,” Hunter argued.

“To be clear on that issue, you’re using the overall public policy approach” from other health care laws, “not citing anything from within [the CON law] that would grant that discretion, correct?” Gore asked.

“That is correct. There is nothing specific in [the CON law] that would grant that discretion,” Hunter replied.

Mission Health’s lawyer, Iain Stauffer, noted that the absence of a public hearing did not block AdventHealth from challenging the CON. “There is no prejudice to AdventHealth from the lack of a public hearing in this review,” Stauffer argued. “AdventHealth was fully aware of the Mission application. It submitted written comments in opposition to the Mission application, which were considered by the agency.”

UNC Health plays no direct role in the Mission-AdventHealth dispute. But the Appeals Court allowed UNC Health lawyer Noah Huffstetler to take part in the oral arguments.

“It … strains credulity to believe that the General Assembly — in the midst of a worldwide pandemic, an unprecedented healthcare emergency — would have wanted a needed healthcare facility, an emergency room, not to be built because of an inconsequential failure by the agency,” Huffstetler argued.

On the other side of the argument, attorney Frank Kirschbaum made AdventHealth’s argument that Mission Health and DHHS cannot get around clear requirements in state law.

“They are essentially saying that the agency is free not to follow the rule of law as long as they take away some of your rights, but not all,” Kirschbaum argued.

“Assume it is error not to have a public hearing. What’s the substantial prejudice?” Griffin asked.

“The error is the failure to have that hearing,” Kirschbaum responded. “The taking away of the right that is granted to all of the public and to AdventHealth is substantial prejudice.”

In March 2023, Administrative Law Judge David Sutton reversed the state’s CON decision. Sutton cited the lack of a public hearing during the CON process.

A state law — NC Gen. Stat. § 131E-185(a1)(2) — calls on DHHS to “ensure that a public hearing is conducted at a place within the appropriate service area” in a CON case if an affected party requests a hearing or if the CON involves a project of at least $5 million. Mission’s new emergency department is estimated to cost more than $14.7 million.

Mission filed a brief in October 2023 explaining how Sutton’s ruling could impact other CON cases.

“It is undisputed that during the period from February of 2020 through September of 2022, the Agency did not hold public hearings with respect to any CON applications because of the COVID pandemic and out of concern for public safety,” Mission’s lawyers wrote. “During that time period, the Agency conducted eighty-six (86) CON application reviews which, pursuant to the provisions of N.C. Gen. Stat. § 131E-185(a)(2), would have required a public hearing because they were competitive reviews or involved projects costing more than five million dollars ($5,000,000.00).”

“Those eighty-six (86) reviews involved a total of one hundred and fifty-two (152) applicants and proposed projects,” the Mission brief continued. “The vast majority of those reviews resulted in at least one CON application being approved, including Mission’s. The projects involved ranged from new hospitals to the acquisition of major medical equipment such as fixed cath labs, MRIs, PET Scanners, linear accelerators, new diagnostic centers, new facilities such as hospices and home health agencies, new hospitals, and a wide range of other services and facilities.”

Affected providers included “not only Mission, but Pardee Hospital; UNC Hospitals (with multiple projects approved including a new hospital in Durham County and new diagnostic centers); Duke University Health System; Novant Health; Cone Health; Wake Forest Baptist Hospital; Atrium Health; and others.”

Mission reminded the court of public health conditions in April 2020, when state law called for a public hearing on the Candler emergency department CON. “North Carolina and the entire United States were under an ongoing federal and state declared public health emergency due to the COVID pandemic,” according to the brief. “While conditions related to COVID were generally improving at that time, the pandemic was far from over.”

The challenge to state regulators’ decision argued that the “failure to hold a public hearing regarding the Mission Application during the COVID pandemic was Agency error which substantially prejudiced” AdventHealth, according to Mission’s brief.

Sutton’s ruling “was based entirely on his conclusion that the Agency’s failure to hold a public hearing in connection with its review of the Mission … Application was a violation of N.C. Gen. Stat. § 131E-185(a)(2) that substantially prejudiced” AdventHealth’s rights.

UNC Health explained in a friend-of-the-court brief how the “theory” advanced by Sutton’s decision could affect its own projects. “This same theory has been advanced against UNC in a contested case hearing in which Duke University Health System, Inc. challenged the Agency’s approval of UNC’s application to expand its already-approved … new community hospital in Durham County, which is also pending appeal in this Court.”

“UNC offers the perspective of another frequent participant in the CON process that would have its growth hampered based on an alleged error that it had no part in causing,” the motion added.

UNC Health urged the Appeals Court to rule that “the public hearing provision should not preclude the issuance of a CON; in fact, whether it is directory … or mandatory, the result here should be issuance of the requested CON. The public hearing provision is merely directory because it does not provide for any consequence in the event it is not followed.”

UNC Health argued Sutton’s decision “runs roughshod” over a “well-established” burden AdventHealth faced to show that the CON decision involved both agency error and substantial prejudice.