ST. LUKE HOSPITALS, INC. v. COMMONWEALTH OF KENTUCKY, CABINET FOR HEALTH AND FAMILY SERVICES; AND ST. ELIZABETH MEDICAL CENTER, INC.
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RENDERED:
JUNE 3, 2005; 2:00 p.m.
TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-000692-MR
ST. LUKE HOSPITALS, INC.
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM, JUDGE
ACTION NO. 03-CI-00746
COMMONWEALTH OF KENTUCKY, CABINET FOR
HEALTH AND FAMILY SERVICES; AND ST.
ELIZABETH MEDICAL CENTER, INC.
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
BARBER, BUCKINGHAM, AND JOHNSON, JUDGES.
BUCKINGHAM, JUDGE:
St. Luke Hospitals, Inc., appeals from a
final order of the Franklin Circuit Court affirming the Cabinet
for Health and Family Services’ denial of St. Luke’s Certificate
of Need (CON) application.
St. Luke argues that the circuit
court’s decision is arbitrary and capricious because it is
incorrect as a matter of law.
Specifically, St. Luke contends
that the circuit court erred by affirming the Cabinet’s decision
even though the decision did not follow long-standing agency
interpretation of CON regulations, by not adhering to principles
of stare decisis, and by not applying the doctrine of
contemporaneous construction.
In addition, St. Luke argues that
the circuit court violated its due process rights and failed to
render an opinion capable of review and that it upheld a
decision by the Cabinet that was not supported by substantial
evidence.
Finding no error, we affirm.
FACTS
St. Luke is a nonprofit corporation that operates two
hospitals in Northern Kentucky.
St Luke Hospital East is
located in Fort Thomas, and St. Luke Hospital West is located in
Florence.
St. Luke sought to establish a freestanding,
separately licensed ambulatory surgical center (ASC) on its west
campus in Florence.
It claims that the new facility would
contain two operating rooms and that it would shut down two
existing operating rooms on the same campus.
Thus, the
applicati`on did not propose to create additional surgical
capacity at St. Luke West or in the geographical service area.
During the seven years between 1996 and 2003, the
Cabinet rendered several decisions regarding transfers of
surgical capacity on a hospital campus.
During that time, it
granted several CON applications proposing transfers of surgical
capacity from one health facility to a newly licensed facility
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on the same campus even though the State Health Plan (SHP)
criteria under 902 KAR1 17:041 were not met.
In 1999, in
response to the prevailing policy at the time, the Cabinet
promulgated a transfer exemption under 900 KAR 6:050E §7 to
grant such transfers.
The exemption provided in pertinent part:
(1) Applications proposing to relocate
surgical services from one (1) licensed
health facility to a newly established or
other health facility and either facility is
owned by the existing facility with surgical
services shall be considered consistent with
the State Health Plan if the existing
facility has not added to its complement of
operating rooms within twelve (12) months
prior to filing the application for
relocation and the following conditions are
met:
a.
The newly established surgical
services are located:
(i) On the existing facility’s
licensed premises; or
(ii) In the same county as the
existing health facility and where
there are no other licensed providers
of surgical services in the county; and
b.
The existing facility with
surgical services which relocated the room
and the newly established surgical service
shall not add operating rooms for one (1)
year following the date that the newly
established surgical services commence
operations.
1
Kentucky Administrative Regulations.
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The Cabinet promulgated the exemption to expressly sanction its
earlier decisions granting CONs to applicants that did not meet
the SHP criteria.
However, once the Cabinet decided the
proliferation of newly licensed surgical centers was growing too
quickly, it repealed the exemption, requiring all new
applications to meet the SHP criteria.
In other words, between
1999 and 2002, the Cabinet promulgated and then repealed the
exemption in response to changing policy based on the needs of
the health care community.
On August 30, 2002, the Cabinet conducted a hearing
concerning its notice of intent to amend the surgical services
criteria.
St. Luke proposed an amendment that would allow
nonsubstantive review for projects proposing transfers of
existing surgical capacity to newly licensed facilities on the
same campus.
Nonsubstantive review would eliminate the
requirement that St. Luke’s CON application satisfy the criteria
required by the SHP.
See 900 KAR 6:050, §8(5).
The Cabinet did
not accept the amendment and denied nonsubstantive review,
stating that hospitals already have the ability to transfer
services on an existing license without a CON.
See Cabinet for
Human Resources, Interim Office of Health Planning and
Certification v. Jewish Hospital Healthcare Services, Inc., 932
S.W.2d 388, 390-91 (Ky.App. 1996).
The Cabinet said the policy
behind repealing the transfer exemption precluded nonsubstantive
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review of CONs for ASCs like the one St. Luke proposed.
That
policy is to prevent proliferation of unneeded separately
licensed ASCs.
St. Luke filed its CON application on October 2, 2002,
pursuant to KRS2 216B.061(1)(a)3.
On the following day, T.J.
Samson Medical Center, an acute care hospital located in
Glasgow, Kentucky, filed a similar CON application.
On February
13, 2003, the Cabinet held a hearing on St. Luke’s application.
St. Elizabeth Medical Center contested St. Luke’s compliance
with the SHP concerning utilization of 85% of surgical capacity
in the service area, which is necessary for obtaining a CON.
St. Luke admitted that surgical utilization in its service area
was only 44.37% of capacity.
Although it was applying for a new
license, St. Luke maintained that the SHP criteria did not apply
because it was transferring existing surgical capacity and thus
was not establishing a health facility pursuant to the statute
or a “new surgical service” under the SHP.
St. Luke relied on Cabinet precedent for allowing
transfers of health services without a CON over a period of
seven years (1996-2003).
As noted above, that precedent was
continued when the Cabinet promulgated the transfer exemption in
2
Kentucky Revised Statutes.
3
KRS 216B.061(1)(a) requires that a CON be obtained before establishing a
health facility.
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1999.
However, the exemption was repealed on June 28, 2002,
four months before St. Luke’s application.
T.J. Samson’s CON application was approved on February
19, 2003.
However, the Cabinet denied St. Luke’s application on
May 19, 2003, on the grounds that it was proposing a new
surgical service and was inconsistent with three of the five SHP
criteria.
The hearing officer noted that St. Luke could
transfer the surgical services under its existing license
without having to obtain a CON.
See Jewish Hospital Healthcare
Services, Inc., 932 S.W.2d at 390-91.
The hearing officer also
concluded that the T.J. Samson case had been wrongly decided.
St. Luke appealed the Cabinet’s decision to the
Franklin Circuit Court.
The circuit court affirmed, finding
that St. Luke’s application was subject to the SHP and did not
meet the SHP’s first criterion.
The court did not review the
other criteria addressed by the Cabinet.
This appeal followed.
STANDARD OF REVIEW
“The findings of fact of an administrative agency,
which are supported by substantial evidence of probative value,
must be accepted as binding by the reviewing court.”
Kosmos
Cement Co., Inc. v. Haney, 698 S.W.2d 819, 820 (Ky. 1985).
Substantial evidence is that which “when taken alone or in light
of all the evidence has sufficient probative value to induce
conviction in the minds of reasonable men.”
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Kentucky State
Racing Comm’n v. Fuller, 481 S.W.2d 298, 308 (Ky. 1972).
“The
duty of the court is to determine whether the agency misapplied
the correct rule of law to the facts as found.”
Kosmos, 698
S.W.2d at 820.
“[T]he failure to grant administrative relief to one
carrying the burden is arbitrary if the record compels a
contrary decision in light of substantial evidence therein.”
Bourbon County Bd. of Adjustment v. Currans, 873 S.W.2d 836, 838
(Ky.App. 1994).
The burden is on the party claiming an
exemption to demonstrate its entitlement to the exemption and
that it has met all statutory requirements.
Camera Center, Inc.
v. Revenue Cabinet, 34 S.W.3d 39, 41 (Ky. 2000).
“The Cabinet is a state agency authorized by statute to
administer the CON program consistent with the [SHP].”
Cabinet
for Health Services v. Family Home Health Care, Inc., 98 S.W.3d
524, 527 (Ky.App. 2003), citing KRS 216B.010.
“In carrying out
this function, the Cabinet is required to promulgate
administrative regulations ‘to establish criteria for issuance
and denial of certificates of need.’”
Id., citing KRS
216B.040(2)(a)2.
The specific provision at issue in this case, KRS
216B.061(1)(a), provides that a licensed health provider such as
St. Luke must obtain a CON before establishing a health
facility.
St. Luke seeks a newly licensed ASC.
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Thus, under the
statute, it must obtain a CON.
consistent with the SHP.
Further, its CON must be
See KRS 216B.040(2)(a).
St. Luke admits that its proposal was inconsistent with
the SHP criterion that requires a utilization rate of 85% of
capacity in the service area before a new CON will be approved.
However, it argues that it is exempt from complying with SHP
criteria due to a long-standing Cabinet interpretation of the
regulations.
St. Luke maintains that for approximately seven
years the Cabinet had not treated a hospital’s application to
transfer existing operating rooms to another location on its
campus as a new surgical service.
KRS 13A.130(1)
St. Luke’s first contention is that the hearing
officer’s decision violates KRS 13A.130, which states in
pertinent part:
(1) An administrative body shall not by
internal policy, memorandum, or other form
of action:
(a) Modify a statute or administrative
regulation;
(b) Expand upon or limit a statute or
administrative regulation[.]
St. Luke contends that the hearing officer changed the
administrative regulation by departing from precedent.
This
argument disregards the fact that the Cabinet repealed the
transfer exemption in June 2002.
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Further, by claiming that its
reliance on earlier decisions by the Cabinet prevents the
Cabinet from correctly applying the law, St. Luke asserts that
the hearing officer could not correct a prior erroneous
interpretation of the regulation.
otherwise.
This court has held
“[A] public officer’s failure ‘to correctly
administer the law does not prevent a more diligent and
efficient’ officer’s proper administration of the law, as ‘[a]n
erroneous interpretation of the law will not be perpetuated.’”
Natural Resources and Environmental Protection Cabinet v.
Kentucky Harlan Coal Co., Inc., 870 S.W.2d 421, 427 (Ky.App.
1993), quoting Delta Air Lines, Inc. v. Revenue Cabinet, 689
S.W.2d 14, 20 (Ky. 1985).
St. Luke cites Hagan v. Farris, 807 S.W.2d 488 (Ky.
1991), for the rule that an agency is required to apply a longstanding interpretation, even if such interpretation is
incorrect.
St. Luke argues that the Cabinet’s treatment of CON
applications proposing to move health services on the same
hospital campus during the seven years from 1996-2003 is similar
to the agency interpretation in the Hagan case.
However,
important distinctions exist that show Hagan does not support
St. Luke’s argument.
The Hagan decision held that, even though improper, a
“decades old, consistent interpretation” of a liquor license
regulation would be applied prospectively.
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Id. at 490.
However, the rule in Hagan applies only in cases where there is
strong, reasonable detrimental reliance on the incorrect,
decades-old interpretation of a regulation.
Without such
reliance, “[a]n erroneous interpretation or application of the
law is reviewable by the court which is not bound by an
erroneous administrative interpretation no matter how long
standing such an interpretation.”
Camera Center, Inc., 34
S.W.3d at 41.
The first difference between the Hagan case and this
case focuses on the language “decades old.”
In Hagan, the court
implied that the incorrect interpretation was perhaps twenty
years old.
In this case, St. Luke can argue at best that the
interpretation is seven years old.
The second distinction, which focuses on the
description “consistent,” throws doubt on St. Luke’s claim that
the interpretation is seven years old.
Neither the regulation
nor its interpretation was consistent during the seven years
between 1996 and 2003 because of the transfer exemption.
The
transfer exemption was enacted in 1999 and repealed in 2002.
a result, the Cabinet operated under a different regulatory
As
framework during three of the seven years (1999-2002).
Such a
change in controlling law did not occur in Hagan.
The final difference involves strong detrimental
reliance.
Here, unlike in Hagan, St. Luke knew that the
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transfer exemption had been repealed, but it nevertheless raised
a reliance argument based on earlier Cabinet decisions.
Such
reliance is neither compelling nor reasonable given the change
in the regulation.
Furthermore, as the circuit court and the
Cabinet emphasized, St. Luke has the ability to expand its
surgical service on its existing license without obtaining a
CON.
See Jewish Hospital Healthcare Services, Inc., 932 S.W.2d
at 390-91.
Thus, St. Luke is not being deprived of the ability
to complete its project.
Its reliance on Hagan is misplaced in
all respects.
St. Luke’s reliance on KRS 13A.130 is misplaced as
well.
The hearing officer did not attempt to modify, expand, or
limit a statute or regulation.
Rather, after being presented
with the fact that St. Luke’s application did not meet the first
SHP criteria, she properly applied the law and denied the
application.
The hearing officer acted within her authority by
departing from the T.J. Samson decision after determining that
it was incorrectly decided.
STARE DECISIS
St. Luke’s second argument is that the circuit court
erred by not reversing the Cabinet’s decision on stare decisis
grounds.
“It is axiomatic that an administrative agency either
must conform with its own precedents or explain its departure
from them.”
In re: Appeal of Hughes & Coleman, 60 S.W.3d 540,
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543 (Ky. 2001).
“An agency changing its course must supply a
reasoned analysis indicating that prior policies and standards
are being deliberately changed, not casually ignored, and if an
agency glosses over or swerves from prior precedents without
discussion, it may cross the line from the tolerably terse to
the intolerably mute.”
Id.
“Consequently, while the agency may
reexamine its prior decisions and depart from its precedents, it
must explicitly and rationally justify such a change of
position.”
Id.
Here, St. Luke continues to ignore the promulgation of
the transfer exemption in 1999 and its repeal in 2002.
St. Luke
maintains that the Cabinet’s interpretation has been consistent
for seven years and that the hearing officer in its case
unilaterally and arbitrarily departed from that precedent.
disagree.
We
The repeal of the transfer exemption changed the
administrative rule for obtaining a newly licensed ASC.
During
the time the exemption was in effect, a CON could be granted for
such services without complying with the SHP.
After its repeal,
a CON application must comply with the SHP.
As the circuit court held, the hearing officer in this
case followed the plain language of the regulation.
The Cabinet
explicitly and rationally justified its change of position by
finding that the T.J. Samson decision was incorrectly decided
and by noting the repeal of the transfer exemption.
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Therefore,
the doctrine of stare decisis does not require reversal of the
circuit court’s decision because the examples cited as precedent
were decided under previous, different versions of the CON
regulations amended over time as the Cabinet molded its CON
policy.
DOCTRINE OF CONTEMPORANEOUS CONSTRUCTION
Finally, St. Luke argues that the circuit court erred
by not holding that the Cabinet was bound by its previous
applications of the CON regulations under the doctrine of
contemporaneous construction.
“The doctrine of contemporaneous
construction means that where an administrative agency has the
responsibility of interpreting a statute that is in some manner
ambiguous, the agency is restricted to any long-standing
construction of the provisions of the statute it has made
previously.”
1994).
GTE v. Revenue Cabinet, 889 S.W.2d 788, 792 (Ky.
“Practical construction of an ambiguous law by
administrative officers continued without interruption for a
very long period is entitled to controlling weight.”
Id.,
quoting Grantz v. Grauman, 302 S.W.2d 364, 367 (Ky. 1957).
St. Luke discusses the situation in Revenue Cabinet v.
Humana, Inc., 998 S.W.2d 494 (Ky.App. 1998), in support of its
argument for the application of the doctrine of contemporaneous
construction.
Both the GTE and Humana cases involved
interpretation of Kentucky tax law.
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In GTE, the Kentucky
Supreme Court held that a corporation and its unitary
subsidiaries had the right to file a tax return on a combined,
unitary basis in reliance on a consistent, 16-year
interpretation of Kentucky tax law.
Id. at 792.
Similarly, in
Humana, the Court of Appeals held that a change in the Revenue
Cabinet’s consistent, 18-year interpretation of a sales and use
tax exemption for nonprofit hospitals violated the doctrine of
contemporaneous construction and KRS Chapter 13A.
Id. at 495.
In both the GTE and Humana cases, the interpretation
had been consistent for almost two decades, unlike the present
case.
The Cabinet in this case addressed several cases
involving transfers of services during the seven years between
1996 and 2003.
The application of the SHP to transfers of
surgical capacity to newly licensed ASCs changed during those
years as the Cabinet shaped its policy.
Several transfers were
granted without satisfying the SHP criteria.
Then, in 1999, the
Cabinet passed the transfer exemption to expressly sanction such
transfers and to clarify its policy.
Once the Cabinet found
that proliferation of new licenses was growing too fast, it
repealed the exemption, requiring all applications for new
licenses to meet the SHP criteria.
John Gray, director of the Office of Certificate of
Need testified that policy changes required the promulgation of
the exemption in 1999 and its repeal in 2002.
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He testified that
the Cabinet’s denial of St. Luke’s amendment proposal at the
August 30, 2002 hearing illustrated the Cabinet’s new policy.
This put St. Luke on notice of the new policy before it filed
its CON application and before the T.J. Samson decision.
Therefore, St. Luke’s detrimental reliance argument based on an
allegedly consistent, long-standing interpretation of the CON
regulations is unpersuasive.
St. Luke’s argument for reversal
under the contemporaneous construction doctrine is without
merit.
DUE PROCESS
St. Luke also claims that the Cabinet relied on
evidence outside the record in finding the CON application did
not satisfy other SHP criteria.
St. Luke argues that the
Cabinet violated due process and that the circuit court
committed reversible error by not addressing the alleged due
process violation.
The circuit court stated, “The Court affirms
the final order, finding that the Petitioner’s proposal is
subject to the SHP.
Because the Court upholds the order on that
ground, the Court does not review the Cabinet’s conclusions that
the Petitioner failed to meet the other CON review criteria.”
As the circuit court held, since St. Luke’s CON application is
subject to the SHP review criteria and did not satisfy the first
criterion, any alleged due process violation arising from the
Cabinet’s order addressing the remaining criteria is moot.
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SUBSTANTIAL EVIDENCE
“The findings of fact of an administrative agency,
which are supported by substantial evidence of probative value,
must be accepted as binding by the reviewing court.”
S.W.2d at 820.
Haney, 698
Substantial evidence is that which when taken
alone or in light of all the evidence has sufficient probative
value to induce conviction in the minds of reasonable men.
Fuller, 481 S.W.2d at 308.
In this case, the hearing officer rendered an 18-page
final order with findings of fact and conclusions of law.
In
her report, the hearing officer relied on St. Luke’s evidence,
St. Elizabeth’s evidence, and a staff report by the Cabinet.
St. Luke conceded that its application was inconsistent with the
first criterion under the SHP.
The fact that the hearing
officer evaluated the application under the other four criteria
is irrelevant on appeal because inconsistency with one criterion
requires the Cabinet to reject the application.
The Cabinet
staff’s report combined with the evidence presented by St. Luke
and St. Elizabeth was comprehensive, and absent clear error by
the hearing officer, the Cabinet’s decision is binding.
Therefore, the circuit court did not commit reversible error by
upholding the Cabinet’s decision, which was supported by
substantial evidence.
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CONCLUSION
We affirm the order of the Franklin Circuit Court
affirming the Cabinet’s denial of St. Luke’s CON application.
ALL CONCUR.
BRIEFS AND ORAL ARGUMENT FOR
APPELLANT:
Lisa English Hinkle
Holly J. Turner
Lexington, Kentucky
BRIEF FOR APPELLEE,
COMMONWEALTH OF KENTUCKY,
CABINET FOR HEALTH AND FAMILY
SERVICES:
Anne Dooling Clarke
Frankfort, Kentucky
ORAL ARGUMENT FOR APPELLEE,
CABINET FOR HEALTH AND FAMILY
SERVICES:
Ann Truitt Hunsaker
Frankfort, Kentucky
BRIEF FOR APPELLEE, ST.
ELIZABETH MEDICAL CENTER,
INC.:
Richard G. Meyer
Mathew R. Klein, Jr.
Crestview Hills, Kentucky
ORAL ARGUMENT FOR ST.
ELIZABETH MEDICAL CENTER,
INC.:
Richard G. Meyer
Crestview Hills, Kentucky
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