Split Appeals Court rules against state regulators, Duke in CON dispute

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  • The state Court of Appeals split, 2-1, in ruling against state regulators and Duke Health in a dispute over a certificate of need.
  • The decision allows Pinnacle Health Services to add a magnetic resonance imaging scanner in Wake Forest.
  • Judge Julee Flood wrote that a change in state law in 2011 required the court to give deference to an administrative law judge's ruling favoring Pinnacle over Duke and the state.

The state Court of Appeals has ruled 2-1 against state health care regulators and Duke Health in a fight over a certificate of need in Wake County. The decision allows a medical imaging company to add an MRI scanner in Wake Forest.

The company, Pinnacle Health Services, had challenged the state’s 2021 decision to award a CON to Duke. Pinnacle and Duke were competing for state approval of a single new magnetic resonance imaging scanner for either Raleigh or Wake Forest.

Administrative Law Judge Melissa Owens Lassiter reversed the state’s decision in July 2022. Lassiter determined that Pinnacle should have won the CON from the state Department of Health and Human Services.

“ALJ Lassiter concluded the Agency’s decision was based on material errors in the geographic accessibility analysis that led to the erroneous decision that Duke’s application would be more effective,” wrote Judge Julee Flood for the Appeals Court majority. “ALJ Lassiter further concluded the Agency erroneously failed to follow principles used to determine historical utilization, which would have revealed Pinnacle’s as the more effective application. Finally, ALJ Lassiter concluded Pinnacle met its burden of demonstrating the Agency’s decision substantially prejudiced its rights.”

Flood wrote that a change in state law in 2011 influenced the decision in the Pinnacle case.

“Duke implores this Court to review this case by giving deference to the Agency’s decision, and not to the Final Decision of the ALJ,” she wrote. “To support this argument, Duke cites several of this Court’s precedents that did, in fact, analyze agency decisions by giving deference to the agency’s expertise and experience in the particular field.”

“While this review would have been correct in the cases preceding the 2011 legislative session, it is not a correct application of current law,” Flood added. “What Duke failed to note, either fortuitously or conveniently, is that our legislature amended the Administrative Procedure Act (the ‘APA’) in 2011, ‘conferring upon [ALJs] the authority to render final decisions in challenges to agency actions, a power that had previously been held by the agencies themselves.’”

“Before the legislature amended the APA, an ALJ would issue a recommended decision to the respective agency, which the agency was then free to adopt in full or in part, or reject in full,” Flood explained. “Since the 2011 amendment, however, the ALJ decision is no longer a recommendation but rather is the final decision binding on parties. In reviewing an agency decision, the ALJ ‘shall decide the case based upon the preponderance of the evidence, giving due regard to the demonstrated knowledge and expertise of the agency with respect to facts and inferences within the specialized knowledge of the agency.’”

“Most of Duke’s brief is dedicated to showing why the Agency decision was correct, while failing to specifically show this Court where the ALJ’s Final Decision was incorrect,” the majority opinion explained.

Flood also critiqued the state’s arguments. “The Agency argues this Court’s role is to review whether Pinnacle met its burden of showing substantial prejudice,” she wrote. “The question before this Court, however, is ‘whether the whole record contains relevant evidence that a reasonable mind might accept as adequate to support the [ALJ’s] decision’ that Pinnacle showed it suffered substantial prejudice from the Agency’s granting of the CON to Duke.”

“Our review is not conducted with an eye towards whether Pinnacle met its burden of proof to the ALJ; instead, our review is focused on whether the ALJ’s Final Decision concluding Pinnacle did meet its burden is supported by substantial evidence,” Flood explained.

Judge Jeff Carpenter joined Flood’s opinion. Judge John Tyson dissented.

Tyson emphasized that the CON process originates with state health regulators, not an administrative law judge in the state Office of Administrative Hearings.

“The ALJ is not writing on a clean slate and is statutorily constrained and mandated to “giv[e] due regard to the demonstrated knowledge and expertise of the agency with respect to facts and inferences within the specialized knowledge of the agency,’” he wrote. “While the OAH and the ALJ, since the 2011 amendments to the statute, can issue a Final instead of a Recommended Decision, those amendments and the standards and constraints in the NCAPA do not allow an ALJ to merely disagree with and substitute its judgment for that of ‘the specialized knowledge of the agency.’”

“Here, both applicants, Pinnacle and Duke, submitted conforming applications,” Tyson added. “NC DHHS could approve only one application, as only one CON was authorized. There was necessarily going to be a winner and a loser, as in all competitive environments and contests. The Agency conducted an extensive and competitive review of the applications within its expertise to determine which was more effective for the purposes of awarding the CON.”

State regulators chose Duke, and Lassiter “was not free to substitute her personal preferences for the record, expertise, and knowledge of the agency merely to reach a contrary result,” Tyson wrote.

He specifically targeted Lassiter’s finding that the state’s decision would cost Pinnacle $400,000 in annual savings and $97,000 in additional net income. “While both may be true, as between two admittedly qualified applicants and only one CON available, those findings will be equally true no matter which party is not awarded the CON,” Tyson wrote. “It is not up to the ALJ under the statute to make that determination, but only to review ‘whether the whole record contains relevant evidence that a reasonable mind might accept as adequate to support the Agency’s conclusion[.]’”