Arkansas Health Servs. Agency v. Desiderata, Inc.

Annotate this Case
ARKANSAS HEALTH SERVICES AGENCY and Arkansas
Health Services Commission; Arkansas Health
Care Association v. DESIDERATA, INC.

97-259                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
               Opinion delivered January 22, 1998


1.   Administrative law & procedure -- constitutional issues should
     first be raised at commission level -- exhaustive analysis
     best accomplished by advisory proceeding. -- Even though an
     administrative commission may not have the authority to
     declare statutes unconstitutional, such constitutional issues
     should first be raised at the administrative law judge or
     commission level because they often require an exhaustive
     analysis that is best accomplished by an adversary proceeding
     that can be done only at the hearing level; requiring
     constitutional issues to be considered by a commission can
     assure that such issues will be thoroughly developed before an
     appellate court is asked to rule on a statute's validity.

2.   Administrative law & procedure -- equal protection argument
     not raised until appeal to circuit court -- issue barred. --
     Where appellee did not raise its equal protection argument
     until its appeal to circuit court, it was barred from arguing
     that issue on appeal to the supreme court.

3.   Administrative law & procedure -- treating different nursing-
     home applicants differently does not prove denial of equal
     protection. -- Establishing that different nursing-home
     applicants are treated differently does not prove the denial
     of equal protection.  

4.   Administrative law & procedure -- review directed to agency
     and commission decisions -- administrative agencies better
     able to determine and analyze decisions affecting their
     agencies. -- Supreme court review is not directed toward the
     circuit court but toward the agency and commission decisions,
     based on the recognition that administrative agencies are
     better equipped by specialization, insight through experience,
     and more flexible procedures than courts to determine and
     analyze legal issues affecting their agencies. 

5.   Administrative law & procedure -- nursing home application --
     appellee argued occupancy-rate determinations erroneous --
     occupancy rate remained below that required. -- At the
     Commission hearing, appellee suggested that the appellant's
     need and occupancy-rate determinations were erroneous;
     however, even with appellee's suggested corrections in the
     counting of beds, the occupancy rate remained 9.46% below the
     required occupancy rate.
 
6.   Administrative law & procedure -- appellee argued occupancy-
     rate determinations erroneous -- calculation used for county
     occupancy rate -- inclusion of private-pay homes proper. --
     Where appellee argued that the 85.04% county occupancy rate
     should not have included private-pay homes because of their
     historically low occupancy rates and their ability to
     manipulate the rate, the supreme court found that the argument
     ignored testimony that Medicaid and private-pay beds are
     licensed by the same authority and have to meet the same
     standards, that private-pay beds have always been counted in
     health planning, and that counting private-pay homes would not
     prevent the county from reaching the agency's methodology
     occupancy rate of 94.5%. 

7.   Administrative law & procedure -- administrative hearings --
     telephone-survey information can constitute substantial
     evidence -- objective means to obtain data from private-pay
     facilities. -- Telephone-survey information, and other similar
     data, can constitute substantial evidence in an administrative
     hearing; while such occupancy-rate data might be obtained in
     another manner, the use of a telephone survey is the only
     objective way for the agency to obtain such data from private-
     pay facilities.

8.   Administrative law & procedure -- nursing-home application --
     occupancy-rate calculations found reliable -- appellee and
     trial court in error. -- Appellee's argument that appellant
     agency's occupancy-rate calculation of 85.04% was erroneously
     reached by using unreliable data that appellant obtained from
     a telephone survey of private-pay homes was without merit;
     this telephone data was considered reliable and therefore
     supported the agency's rate calculations. 

9.   Administrative law & procedure -- nursing-home application --
     occupancy-rate calculation -- finding that required county
     occupancy rate not shown -- supported by substantial evidence.
     -- The supreme court held that the evidence was more than
     substantial to uphold the Commission's occupancy-rate
     calculation of 85.04%, used to establish compliance with Ark.
     Code Ann.  20-8-106(b)(1), and its finding that the required
     94.5% county occupancy rate was not shown; the supreme court
     held that the record also sufficiently supported the agency's
     findings that appellee's proposed project was not economically
     feasible and did not foster cost containment as required under
     Ark. Code Ann.  20-8-106(b)(3) and (4).
10.  Administrative law & procedure -- nursing-home application --
     economically feasible consideration -- appellee's profit
     estimates unrealistically optimistic. -- In addressing the
     "economically feasible" consideration of Ark. Code Ann.  20-
     8-106(b), the agency's finding that appellee's profit
     estimates appeared unrealistically optimistic was supported by
     substantial evidence.

11.  Administrative law & procedure -- nursing-home application --
     appellee's proposed facility failed to promote cost
     containment or improve efficiency or productivity. -- The
     agency's finding that appellee's proposed facility failed to
     promote cost containment or improve efficiency or productivity
     was found by the supreme court to have merit where appellee
     offered no evidence showing cost containment would result from
     its proposed project, there was testimony that appellee's land
     site was in an unincorporated area located three miles from
     the closest incorporated area, and municipal services such as
     for water, sanitation, fire protection, and ambulance needs
     were not readily available.

12.  Administrative law & procedure -- nursing-home licensure --
     appellant's methodology not arbitrary -- valid reasons exist
     for giving preference to established nursing homes. --
     Appellee's charge that appellant agency's methodology was
     arbitrary and appellee's charge that the agency's methodology
     arbitrarily favored established nursing homes by ranking
     nursing-home applicants was without merit; both the agency and
     Commission stated and gave valid reasons for providing a
     preference to established nursing homes, particularly those
     that offer excellent service.

13.  Administrative law & procedure -- agency's decision must be
     affirmed if supported by substantial evidence. -- The supreme
     court must affirm an agency's decision if there is substantial
     evidence to support it, and in reviewing the record, the
     evidence is given its strongest probative force in favor of
     the agency's ruling.

14.  Administrative law & procedure -- substantial evidence
     supported Commission's decision -- trial court reversed and
     remanded. -- Where the supreme court was unable to say the
     evidence presented was not substantial or failed to support
     the Commission's decision, the court found that the trial
     court wrongly discounted and at times altogether dismissed the
     consideration of proper evidence presented to the Commission
     and erred in substituting its own judgment for that of the
     agency and Commission; the trial court's decision was reversed
     and remanded.
  

     Appeal from Pulaski Circuit Court; Morris W. Thompson, Judge;
reversed and remanded.
     Winston Bryant, Att'y Gen., by:  Vicki M. Pickering, Asst.
Att'y Gen., and Glen Hooks, Asst. Att'y Gen., for appellants.
     Friday, Eldredge & Clark, by:  Bill S. Clark, for appellee.
     Meeks & Jernigan, P.A., by:  George O. Jernigan, Jr., for
intervenor-appellant.

     Tom Glaze, Justice.
     In 1994, Desiderata filed an application with the Arkansas
Health Services Agency, requesting a permit of approval for a new
70-bed nursing home to be constructed near Maumelle.  Desiderata's
application provided that the proposed home is intended to serve
developmentally disabled and mentally retarded elderly persons, as
well as those diagnosed with Alzheimers and HIV.  Its application
also proposed to serve members of what is referred to as the normal
segment of the elderly community needing long-term care.
     The Agency denied Desiderata's application, stating that the
application failed to meet all of the required criteria under Ark.
Code Ann.  20-8-106(b) (Repl. 1991).  Desiderata appealed the
Agency decision to the Arkansas Health Services Commission, and
after a public hearing on November 28, 1994, the Commission voted
to affirm the Agency.  Upon petitioning for judicial review, the
trial court reversed the Commission's decision, and in doing so,
held the methodology employed by the Agency and Commission was
arbitrary and capricious and violated the Equal Protection Clause. 
The trial court further ruled the Commission's decision was not
supported by substantial evidence.  We hold the trial court erred.
     We first mention our inability to reach, at least directly,
the trial court's Equal Protection Clause ruling, because that
constitutional issue was never raised before the Commission.  In
this respect, we cite the settled law in Hamilton v. Jeffrey Stone
Co., 6 Ark. App. 333, 641 S.W.2d 723 (1982), where the court of
appeals adopted the rule that, even though the Workers'
Compensation Commission may not have the authority to declare
statutes unconstitutional, such constitutional issues should first
be raised at the Administrative Law Judge or Commission level
because such issues often require an exhaustive analysis that is
best accomplished by an adversary proceeding, which can be done
only at the hearing level.  The Hamilton court concluded that
requiring constitutional issues to be considered by the Commission
can assure such issues will be thoroughly developed before an
appellate court is asked to rule on a statute's validity.  The
rule in Hamilton has been consistently followed by the court of
appeals, see Green v. Smith & Scott Logging, 54 Ark. App. 53, 54,
922 S.W.2d 746 (1996), and we believe the rule is a sound one and
applicable here.
     Desiderata did not raise its Equal Protection Clause argument
until its appeal to circuit court; thus, under the Hamilton rule,
it is barred from arguing that issue now.  However, even if
Desiderata had raised equal protection as an argument at the
administrative level, this court has held that establishing that
different applicants are treated differently does not prove the
denial of equal protection.  Second Baptist Church v. Little Rock
Historic Dist. Comm'n, 293 Ark. 155, 732 S.W.2d 483 (1987).  And
while Desiderata argues the Health Services Agency and Health
Services Commission have failed to give a sufficient reason or
rationale for treating established nursing homes more favorably
than new ones, we disagree.  However, for present-case analysis and
decision making, the fundamental issues actually before us to be
decided are (1) whether the Commission's methodology and actions
were arbitrary and capricious, and (2) whether its decision is
supported by substantial evidence.  See Arkansas Dep't of Human
Servs. v. Kistler, 320 Ark. 501, 898 S.W.2d 32 (1995).  In this
respect, our review is not directed toward the circuit court but
toward the Agency and Commission decisions, recognizing that
administrative agencies are better equipped by specialization,
insight through experience, and more flexible procedures than
courts to determine and analyze legal issues affecting their
agencies.  Id. 
     In the initial review of Desiderata's application, the Agency
considered the four factors set out in  20-8-106(b), which read as
follows:
          (1)  Whether the proposed project is needed or
     projected as necessary to meet the needs of the locale or
     area in terms of the health care required for the
     population or geographic region;
          (2)  Whether the proposed project can be adequately
     staffed and operated when completed;
          (3)  Whether the proposed project is economically
     feasible; and
          (4)  Whether the project will foster cost
     containment through improved efficiency and productivity.
     As related to factor (1), the Agency determined that its
population-based methodology requires a "need" for additional beds
and an "occupancy rate" for Pulaski County of at least 94.5% for
the previous calendar year.  The Agency found that Desiderata had
not demonstrated a "need" in the county or shown that the occupancy
rate was satisfied.  Specifically, it found an excess of fifty-one
beds over the county's need, and the county's occupancy rate fell
short of the required 94.5% rate.  Other concerns of the Agency
listed under the "need" factor were that, for the calendar year
used under its methodology policy, 389 beds were empty on any given
day in the county, and that 222 approved but still unlicensed beds
existed in the county.
     At the Commission hearing, Desiderata did not suggest that the
Agency's methodology policy be changed, but it did contend the
Agency's need and occupancy-rate determinations were erroneous. 
Although Desiderata argues at length that the Agency Director,
Orson Berry, had failed to account for some 94 beds in his
calculation of bed needs, it concedes that it must also satisfy the
methodology county occupancy rate of 94.5%.  As a consequence, even
with Desiderata's suggested corrections in the counting of beds,
the Agency occupancy rate remained at 85.04%, or 9.46% below the
required occupancy rate.  Thus, the crux of Desiderata's argument
turns on its contentions that the Agency and Commission erred in
calculating the 85.04% rate figure for Pulaski County.
     In its brief, Desiderata points out that the 85.04% Pulaski
County occupancy rate was calculated by including private-pay
nursing homes and homes with Medicaid and Medicare residents.  It
argues that private-pay homes should not be included because of
their historically low occupancy rates and their ability to
manipulate the rate.  The trial court agreed with Desiderata's
argument, relying in part upon the testimony of Larry Taylor, a
health planning consultant, who, among other things, said that if
a private-pay nursing home wanted to change its method of
marketing, that home could change its occupancy rate.  However, in
relying on this portion of Taylor's testimony, the trial court and
Desiderata ignored other pertinent parts.  For example, Taylor
related that Medicaid and private-pay beds are licensed by the same
authority and have to meet the same standards.  He stated private-
pay beds have always been counted in health planning in this state
and others, and if you fail to do so, the state will immediately
have "too many beds because anybody that wants to do private pay
can just come in and start building nursing homes."  Taylor
disagreed, too, with Desiderata's speculation that, by counting
private-pay homes, Pulaski County could never reach the Agency's
methodology occupancy rate of 94.5%.  Also significant, while
Desiderata introduced evidence reflecting private-pay facilities in
Pulaski County that have low occupancy rates, the same proof shows
that five of those homes' rates had increased substantially over a
three- or four-year period, and one of them reported an occupancy
rate as high as 93.53%.
     Desiderata further questions the accuracy of the Agency's
occupancy-rate calculations, urging that the 85.04% figure was
erroneously reached by using unreliable data that the Agency
obtained from a telephone survey of the private-pay homes.  In
other words, while the Agency obtains occupancy-rate information
for Medicaid-certified nursing homes from the Department of Human
Services Office of Long-Term Care, it acquires such occupancy data
from private-pay facilities by telephone survey.  This telephone
data, Desiderata contends, is unreliable and therefore fails to
support the Agency's rate calculations.  Desiderata and the trial
court are wrong.
     In Arkansas Health Planning & Development Agency v. Hot Spring
County Memorial Hospital, 291 Ark. 186, 723 S.W.2d 363 (1987), this
court held that telephone survey information, and other like data,
can constitute substantial evidence in an administrative hearing. 
And while such occupancy-rate data might be obtained in another
manner, Taylor testified that the use of a telephone survey is the
only objective way for the Agency to obtain such data from private-
pay facilities.  Other than Desiderata's attorney's opening
statement before the Commission, Desiderata presented no evidence
that questioned the accuracy of the Agency's data. 
     From the foregoing, we conclude substantial evidence was more
than ample to uphold the Commission's occupancy-rate calculation of
85.04% and its finding that the required 94.5% county occupancy
rate was not shown.  And while Desiderata does not appear to
challenge the Agency's findings that Desiderata's proposed project
was not economically feasible and did not foster cost containment
as required under  20-8-106(b)(3) and (4), we believe the record
sufficiently supports those findings as well.
     In addressing the "economically feasible" consideration, the
Agency found Desiderata's profit estimates appeared unrealistically
optimistic for several reasons.  For instance, Trudy James, the
Executive Director of the Regional AIDS Interfaith Network, RAIN-
Arkansas, testified that it has been difficult to find nursing
homes that would accept AIDS patients due to the fear of mixing
AIDS patients with other patients.  However, Dr. Carl Johnson, a
member of the Commission and a physician who has worked with just
such a mix, stated that a problem does exist when mixing or
interacting AIDS patients with demented ones because of potential
health and legal concerns if there ever was an interaction between
the two.  The Agency questioned whether a facility could attract
private-pay patients who are financially able to pay more than
Medicaid patients.  Taylor further pointed out that Desiderata had
not identified special staff personnel that would focus on the
combined groups to be served, and that, in serving special groups,
Desiderata had not shown a sufficient population in any of those
groups to justify the existence or financial feasibility of a 70-
bed nursing home.  And finally, the Agency found that, because
there presently existed 222 approved but unlicensed beds that have
not, as yet, entered the market place, the Agency doubts the
financial feasibility of a new nursing home.
     The final consideration was the Agency's finding that
Desiderata's proposed facility failed to promote cost containment
or improve efficiency or productivity.  Desiderata offered no
evidence showing cost containment would result from its proposed
project.  Taylor, however, testified Desiderata's land site was in
an unincorporated area located three miles from Maumelle, and
municipal services such as for water, sanitation, fire protection,
and ambulance needs are not readily available.  The Agency also
opined that a county with low occupancy and 222 beds yet to enter
the market place could not improve the efficiency or productivity
of existing services.
     In conclusion, we address Desiderata's charge that the
Agency's methodology is arbitrary because an "established" nursing
home that has an occupancy rate of 96% for the year can obtain up
to 10% of their licensed capacity or an additional ten beds
(whichever is greater) even though the county occupancy rate of
94.5% or a need is not shown.  In short, Desiderata submits if no
county need can be shown under the Agency's population-and-
utilization-based methodology, then all applicant requests for new
beds should be denied.  As a part of the same argument, Desiderata
also claims the Agency's methodology arbitrarily favors established
nursing homes by ranking nursing home applicants as follows:
          1.   Applicants whose facility had a 96% occupancy
     rate or greater for the previous calendar year.  These
     applicants would be eligible for 10% increase in their
     licensed capacity or 10 beds whichever is greater.
          2.   Applicants who propose to replace older
     facilities.  These applicants would be eligible for a 20%
     increase in their licensed capacity.
          3.   Applicants who have a facility proposing to
     expand to 70 beds would be eligible to expand to 70 beds. 
     Applicant facilities with less than 70 beds and more than
     60 licensed beds would be eligible for a 10 bed increase.
          Applicants qualifying under [1] who also propose to
     add more than 10% or 10 beds will have a preference (for
     up to 35 beds) over applicants proposing a new facility.
     The Agency and Commission counter Desiderata's arguments,
stating that there are valid reasons for providing a preference to
established nursing homes.  They offer, once again, Taylor's
testimony to support their position.  Taylor explained that there
are counties in the state where there are only two nursing homes. 
He said that you may have one operator who provides excellent
services and maintains a 96% occupancy, but the second one may
offer very poor quality care, and have only a 60% occupancy rate. 
As a consequence, the county occupancy rate could never meet the
established 94.5%.  The Agency decided that, if a facility
maintained a 96% occupancy rate for a year, it would enable that
facility to expand in order to allow patients a choice of a better
facility.  Taylor added that the Agency had not acted arbitrarily
in utilizing the 96% rule, since he knew of only one nursing home
in Pualski County whose application had been approved under the
rule.  
     The Agency and Commission further justify the preference
extended to existing facilities because the methodology fosters
cost containment and aids in the control of spiralling health-care
costs.  They cite the case of Statewide Health Coordinating Council
v. General Hospitals of Humana, Inc., 280 Ark. 443, 660 S.W.2d 906
(1983), a case involving prior law governing certificates of need
to hospitals, where the court discussed the economic reasons for
regulating the health industry.  There the court noted that the
policy of restricting hospital construction stems from the belief
that competition among hospitals, unlike competition in the market
place, does not reduce the cost of in-patient hospital services to
the consuming public.  Id.  Based on this reasoning, the Agency and
Commission maintain that the State's permit of approval requirement
for the construction or expansion of nursing home facilities is
based on the State's interest in controlling health-care costs and
that the overbuilding of facilities can be responsible for high
costs of medical services.
     Although the trial court in its order expressly stated that it
considered much of Taylor's testimony improper and the "need"
evidence suspect and unreliable, we are unable to say the evidence
set out and discussed hereinabove was not substantial or failed to
support the Commission's decision.  We are reminded that the rule
is well settled that this court must affirm an agency's decision if
there is substantial evidence to support it, and in reviewing the
record, the evidence is given its strongest probative force in
favor of the agency's ruling.  Files v. Arkansas State Highway &
Transp. Dep't, 325 Ark. 291, 925 S.W.2d 404 (1996); Arkansas Dept.
of Human Servs. v. Kistler, supra.  Here, the trial court, we
believe, wrongly discounted, and at times altogether dismissed the
consideration of, proper evidence presented to the Commission, and
erred in substituting its own judgment for that of the Agency and
Commission.  See Arkansas Contractors Licensing Bd. v. Butler
Constr. Co., 295 Ark. 223, 748 S.W.2d 129 (1988).  Consequently, we
reverse and remand the trial court's decision.