05-002745CON Kindred Hospitals East, Llc vs. Agency For Health Care Administration Status: Closed Recommended Order on Friday, January 20, 2006.

Summary: Petitioner`s need methodology was legally invalid and the application was flawed for demonstrating the need for a long term care hospital in Volusia County.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

KINDRED HOSPITALS EAST, LLC, )

)

Petitioner, )

)

vs. )

) Case No. 05-2745CON

AGENCY FOR HEALTH CARE )

ADMINISTRATION, )

)

Respondent, )

)

)

RECOMMENDED ORDER

This case was heard by David M. Maloney, Administrative Law

Judge of the Division of Administrative Hearings on September 13

and 14, 2005, in Tallahassee, Florida.

APPEARANCES

For Petitioner: M. Christopher Bryant, Esquire

Oertel, Fernandez, Cole & Bryant, P.A.

301 South Bronough Street, Fifth Floor

Post Office Box 1110

Tallahassee, Florida 32302-1110

For Respondent: Timothy B. Elliot, Esquire

Agency for Health Care Administration

2727 Mahan Drive, Mail Station 3

Tallahassee, Florida 32308

STATEMENT OF THE ISSUE

Kindred Hospitals East, LLC (Kindred) filed CON Application

9831 with the Agency for Health Care (AHCA or the "Agency").

The application seeks the establishment of a 60-bed Long Term

Care Hospital (an "LTCH") in Volusia County, AHCA Health Care

Planning District 4. The Agency preliminarily denied the

application. Kindred has challenged the denial.

The issue in this case is whether the application should be

approved.

PRELIMINARY STATEMENT

On July 28, 2005, the Agency filed a notice with the

Division of Administrative Hearings (DOAH). The notice advised

DOAH that AHCA had received a request for a formal hearing from

Kindred. The Agency further requested that DOAH assign the

matter to an administrative law judge to conduct all proceedings

required by law.

Attached to the notice is Kindred's petition. It requests

appropriate administrative relief including submission of a

recommended order to AHCA recommending approval of CON

Application No. 9831.

On July 29, 2005, the undersigned was designated as the

administrative law judge to conduct the proceeding and an

Initial Order was sent to the parties.

A Notice of Hearing was issued on August 11, 2005. It set

final hearing for a three-day period from August 31 through

September 2, 2005. The case was continued and ultimately

proceeded to final hearing on September 13 and 14, 2005.

As the applicant and the party with the burden of proof,

Kindred proceeded first. It presented the live testimony of two

witnesses: James John Novak, Senior Vice President of Kindred

Healthcare, Inc.'s hospital division, accepted as an expert in

the fields of health care administration and LTCH

administration; and Clarence "Bud" Wurdock, Director of Market

Planning for Kindred Healthcare, Inc., accepted as an expert in

the field of health care planning. Eight exhibits were marked

for identification as Kindred Nos. 1 through 4 and 7 through 10,

either during the final hearing or as late-filed exhibits

(Kindred Nos. 3 and 4, both transcripts of depositions were

filed on September 30, 2005.) All were admitted into evidence.

Among the eight exhibits were three depositions: the first

of Sean Muldoon, M.D., Chief Medical Officer of Kindred

Healthcare Inc.'s hospital division; the second of

Timothy Simpson, Chief Executive Officer of Kindred Hospital-

North Florida in Clay County, Florida; and, the third of

Julie Peters, Managed Care and Marketing Specialist for Kindred

Hospital-North Florida.

Dr. Muldoon was tendered as a expert in pulmonary disease,

internal medicine, preventive medicine, and critical care

medicine. During his deposition, the Agency announced that it

had no objection to Dr. Muldoon's acceptance as an expert in the

fields tendered. He is so accepted.

Likewise, Mr. Simpson was tendered during his deposition as

an expert in LTCH administration without objection from AHCA.

He is hereby accepted as an expert in the field as tendered.

The process with respect to Ms. Peters' expertise was not

as smooth. She was tendered as an expert in the fields of LTCH

management, LTCH marketing, and LTCH public relations. From the

deposition transcript, it appears that AHCA counsel did not

expect the tender with regard to "LTCH marketing and LTCH public

relations." See Kindred Ex. 3, p. 9: "MR. ELLIOT: . . . I

heard marketing and public relations. I mean, what, more

specifically, is the area that covers, as applied to this case?"

Counsel, therefore, conducted a brief voir dire that concluded

with the following question:

Q And what would be your ultimate . . .

opinion . . .on that issue, . . . marketing

and public relations?

Kindred Ex. 3, p. 10. The question was followed by a colloquy

that ended with an objection from counsel for AHCA:

MR. ELLIOT: I'm going to just state an

objection on the record to her qualification

as an expert in that area. I understand

what her qualifications are, but I'd just

like the objection on the record and just

let the administrative law judge consider

that issue and rule on it. And then, of

course, you all can go forward from here.

Id. , pgs. 10-12. The last-quoted statement is interpreted to

mean that AHCA maintained its objection to the tender of

Ms. Peters in the fields of LTCH marketing and LTCH public

relations. The objection is overruled and Ms. Peters is

accepted as an expert in the fields in which she was tendered.

The Agency presented the testimony of Karen Rivera, a

Health Services and Facilities Consultant Supervisor in AHCA's

CON Office in the Bureau of Health Facility Regulation.

Ms. Rivera is the primary person in the Agency who supervises

reviews of CON applications. She was accepted as an expert in

both health care planning and CON review.

The Agency submitted to the administrative law judge a

notebook of documents that listed in its index as "AHCA

Exhibits," sixteen exhibits, under tabs 1 through 16. The index

lists the deposition of Karen Rivera as No. 16, but the

transcript of the deposition is not contained in the notebook,

presumably because the Agency opted to present Ms. Rivera's

testimony live. Of the remaining 15 exhibits, No. 11 was not

offered. AHCA No. 8 was offered, admitted but then withdrawn.

The rest of AHCA's exhibits, Nos. 1 through 7, 9, 10 and 12

through 15 were admitted into evidence and considered for

purposes of this Recommended Order.

The parties entered into a detailed Prehearing Stipulation.

An Amended Prehearing Stipulation ("Amended Stipulation") was

subsequently presented. The Amended Stipulation corrected

clerical errors and, as had the earlier stipulation, resolved a

substantial number of issues regarding the application of

statutory and rule criteria regarding Kindred's application. In

the wake of the Amended Stipulation, the issues remaining

concern, generally, the need for Kindred's proposed facility,

the accessibility of existing LTCH facilities, and whether

competition would be promoted by Kindred's proposed facility.

The two-volume transcript of the final hearing was filed

September 26, 2005. At the conclusion of the final hearing, the

parties agreed to file proposed recommended orders by Friday,

October 21, 2005. Three unopposed motions filed by AHCA to

extend the time for the filing of proposed orders were granted.

Proposed orders were timely filed on November 21, 2005.

This Recommended Order follows.

FINDINGS OF FACT

The Parties

1. Kindred, the operator of 22 LTCHs, is a wholly-owned

subsidiary of Kindred Healthcare, Inc. Through its

subsidiaries, Kindred Healthcare, Inc., operates 75 LTCHs

nationwide, seven of which are in Florida. Of the seven Florida

facilities, Kindred operates six. If CON Application 9831 is

approved and the proposed facility becomes operational,

therefore, Kindred will become the operator of 23 LTCHs, seven

of which are in Florida.

2. The Agency is the state agency responsible for

administration of the Certificate of Need program. See

§ 408.031, Fla. Stat., et seq.

Kindred North Florida and District 4

3. Kindred currently operates a 40-bed freestanding LTCH

in Clay County ("Kindred North Florida"). Although in Clay

County, Kindred North Florida is considered by Kindred to be in

the area of Jacksonville or Duval County, a center of population

greater than Clay County's.

4. Kindred proposes to build and operate the project

subject to CON Application 9831 in Volusia County, approximately

80 miles south of Kindred North Florida. Volusia County is one

of seven counties that comprise District 4, a health service

planning district established by the Health Facility and

Services Development Act. In addition to Volusia, Clay, and

Duval Counties, the other counties that make up District 4 are

Baker, Nassau, St. Johns, and Flagler.

Stipulated Facts

5. The parties have stipulated to the following facts:

a. Kindred's CON application complies with

statutory and rule application content,

submission, filing fee and review process

requirements; and the Agency's review

complied with review process

requirements.

b. Kindred has the ability to provide a

quality LTCH program.

c. Kindred has the necessary resources,

including health personnel, management

personnel, and funds for capital and

operating expenditures, for project

accomplishment and operation.

d. Kindred's project is likely to be

financially feasible.

e. Kindred's proposed costs and methods of

construction are reasonable.

f. There are no disputes regarding

Kindred's proposed provision of services

to Medicaid patients and the medically

indigent.

g. The statutory criterion relating to

nursing home beds is not applicable.

h. Kindred complied with the letter of

intent requirements found in AHCA rules.

i. AHCA did not at the time of review, and

currently does not, calculate a fixed

need pool for LTCH beds.

Amended Stipulation , at pp. 4-6.

LTCH Services

6. The length of stay in the typical acute care hospital

(a "short-term hospital") for most patients is three to five

days. Some hospital patients, however, are in need of acute

care services on a long-term basis ("LTCH services"), that is,

much longer than the average lengths of stay for most patients.

Patients in need of LTCH services often have lengths of stay in

the hospital that exceed the typical three-to-five day stay in a

short-term hospital by 20 to 22 days or more.

7. Some patients who exceed the usual short-term lengths

of stay by similar lengths are not appropriate for LTCH

services. Their stays are regarded more as custodial in nature.

Those in need of LTCH services, whose stays are not custodial,

however, are generally better served in an LTCH than in a short-

term hospital.

8. Patients appropriate for LTCH services represent a

small but discrete sub-set of all inpatients. They are

differentiated from other hospital patients in that, by

definition, they have multiple co-morbidities that require

concurrent treatment. Patients appropriate for LTCH services

tend to be elderly, frail, and medically complex and are usually

regarded as catastrophically ill.

9. Some LTCH patients, however, are not elderly. These

younger LTCH patients are often victims of trauma. Whatever the

age of LTCH patients, they are typically medically unstable for

their entire hospital stay. Because of their status as

medically unstable, complex and seriously ill, they require

extensive nursing care and daily physician oversight. Very

often their care involves some sort of technologically advanced

support such as a ventilator.

Case Mix and Patient Acuity

10. A "case mix index" for a hospital is a measure of its

average resource consumption. Resource consumption can be

viewed as a surrogate measure of complexity and severity of

illness. The case mix index of Kindred hospitals is high

compared to the entire LTCH industry and, as would be expected,

is higher than the average case mix index for short-term

hospitals.

11. A way to further refine the variation of patients'

acuity within a diagnostic related group (DRG) is through the

APRDRG system. Not routinely used in hospitals, it is a tool of

health services research. The system assigns not only a DRG but

a severity of illness as well on a scale of one (minor severity)

to four (extreme severity.) Applying the system to Kindred's

database as well as to federal data confirms that the

distribution of severe and extremely severe cases is skewed

toward LTCH patients. This confirmation is consistent with

empirical observation that patients in LTCHs are sicker on

average than those in general hospitals.

12. A third measure of patient acuity routinely used in

Kindred hospitals is an APACHE score. It was described by

Dr. Muldoon in his deposition testimony in the following way:

[A]n APACHE score . . . is a combination of

physiologic derangement and concurrent

illnesses. While not universally applied to

the LTAC [sic] population, it is a routine

measurement in Kindred Hospitals.

Using that indicator, we find that the

average Kindred patient has an APACHE III

score of about 45, whereas the average

critical care patient in all of short-term

acute care has a score about two-and-a-half

points higher. This further supports the

observation that LTACs [sic] in the Kindred

portfolio treat a severely ill population

only a few points, on the APACHE measure,

below that of critical care units across the

country.

(Kindred Ex. 2, p. 15).

13. The comparisons of acuity levels between LTCHs in

general and short-term hospitals or Kindred LTCHs and short-term

hospitals, while they show that the Kindred LTCH population is

at a higher acuity level than patients in short-term hospitals,

do not prove that Kindred LTCH patients are all appropriate for

LTCH services. The Agency does not by rule define the level of

acuity for admission of a patient to an LTCH. Nor has it done

so by order. Information on acuity level of patients in short-

term hospitals is not available through the AHCA's health

statistics data base.

14. That acuity levels are higher for Kindred's LTCHs than

short-term hospitals does not necessarily mean that all patients

admitted to Kindred hospitals are appropriate LTCH patients.

One of the bases Kindred advances for why LTCH beds are not

available in the district, despite low occupancy rates of

Specialty Hospital of Jacksonville (Specialty or "Specialty

Jacksonville") for the last several years ( see paragraph 36,

below), is that Specialty lowers utilization of its beds by

restricting admission to patients of higher acuity than

threshold LTCH acuity. The assertion does not prove that LTCH

beds are unavailable in District 4. Rather, it begs a series of

questions: does Specialty refuse patients with LTCH-appropriate

acuity levels, does Kindred admit some patients whose acuity

level would allow them to be served appropriately in an

alternative post-acute care setting, or is the answer a

combination of both?

Districts Without LTCHs: Restricted Choice

15. In those health care planning districts that do not

have LTCHs, hospital patients in need of long-term acute care

typically have little choice but to stay in the short-term

hospital. The short-term hospital is usually dissatisfied with

such an arrangement and short-term hospital staff, oriented

toward stabilizing and treating the patient on a short-term

basis, may lose interest in the patient after the patient

exceeds the average length of stay associated with the patient's

diagnosis. The patient can opt to transfer to an LTCH a long

distance from home or to be treated in a setting that is less

than appropriate for their level of acuity such as a skilled

nursing unit of a nursing home. Neither option presents much

appeal to the patient in need of LTCH services or the patient's

family.

ansfer to a distant LTCH is difficult and

inconvenient for the patient's family. Consequently, such a

transfer creates a hardship for the patient in need of family

visits. Such a transfer also presents the possibility of one of

two less-than-optimal results: the family loses contact with

the loved one or family members have to relocate to the area of

the LTCH. Re-location frequently entails significant hardship.

17. Opting for a nursing home in the family's locality is

not adequate for a patient in need of LTCH services. With the

intensive nursing and daily physician oversight LTCH services

entail, a skilled nursing unit in a nursing home is not an

adequate setting. Its medical services, quite simply, are not

of adequate intensity to the true potential LTCH patient. This

difference is but one of several between LTCHs and other

providers.

Differences between LTCHs and Other Providers

18. Short-term hospitals and LTCHs do not have the same

purpose. The gap is widening between the two. Over the last 20

years, short-term hospitals have evolved into setting that

stabilize patients, diagnose, and develop treatment plans. Most

admissions to the medical ward of a short-term hospital are

through the emergency room where patients are so acute and so

unstable that emergency care is required.

19. In their role as diagnostic centers, short-term

hospitals provide imaging and laboratory services and then

develop a treatment plan based on the diagnostic work-up

performed. Short-term hospitals have moved away from the

function of carrying out a treatment plan. This is borne out by

lengths of stay in short-term hospitals growing shorter over the

last 20 years. Lengths of stay now average three to five days.

As a result, short-term hospitals have limited capability to

provide a prolonged treatment plan for patients with multiple

co-morbidities. In contrast, LTCHs do not hold themselves out

to be diagnostic or stabilization centers. LTCH have developed

expertise in caring for the small subset of patients that

require a prolonged treatment plan. A multi-disciplinary

physician-based care plan is provided in LTCHs that is not

provided in short-term hospitals or other post-acute settings.

20. If there is no LTCH readily available to provide a

hospital-level discharge, then the short-term hospital must

either keep the patient or discharge the patient to a setting

that is less than appropriate for the patients needs. If the

hospital keeps the patient, it is often not staffed to give the

patient the amount of therapeutic rehabilitation required. The

patient is not stable enough to transfer to a comprehensive

medical rehabilitation facility. The patient that qualifies for

an LTCH has a very different set of needs from many patients in

the intensive care unit and/or medical-surgical (med-surg) beds

in a short-term hospital.

21. A very low percentage of all med-surg patients are

appropriate for LTCH services. Placing these patients in an

LTCH preserves the resources of short-term hospitals and

encourages their financial health, which are outcomes driven by

Medicare Prospective Payment System (PPS) that provides

incentives to discharge patients from short-term hospitals as

quickly as possible.

22. Skilled nursing facilities (SNFs) and LTCHs are

different both in intent and execution. Stable patients who

require minimum medical intervention, whose primary needs are

nursing and who are unlikely to become unstable, are appropriate

for SNFs. Conversely, LTCHs are appropriate when daily medical

intervention is required. Access to diagnostics, laboratory,

radiology and pharmacy services make LTCHs better able to

respond to changes in conditions and care plans than SNFs.

23. Comprehensive medical rehabilitation hospitals (CMRs)

and LTCHs are distinctly different. Geared for patients with

primarily neurologic or musculoskeletal orthopedic issues, the

CMR care model is based on physical rather than internal

medicine that requires a minimum of three hours per day of

physical therapy. Internists, therefore, are required to

oversee LTCHs rather than other types of medical doctors. While

rehabilitation is a concurrent component of an LTCH, patients

appropriate for an LTCH bed, because of their medical

conditions, cannot tolerate the three hours per day of therapy

per patient conducted at a CMR. A CMR may be an appropriate

facility after a stay in an LTCH when the patient has improved

to the point where typical CMR therapy can be tolerated.

24. Home health care is no substitute for LTCH care needed

by patients appropriate for admission to an LTCH. By

definition, LTCH patients meet criteria for inpatient

hospitalization. Home health care is designed for patients who

are stable and have limited medical needs that can be

administered by nurses or families that visit or are in the

patient's home. In sharp contrast, LTCH patients require many

hours a day of nursing, respiratory, and other therapies under

the direct care of a physician.

25. On the basis of regulation alone, short-term hospitals

can provide LTCH-type care. Generally, however, they do not.

Because of Medicare's PPS, short-term hospitals have evolved

into centers of stabilization and diagnosis, where care plans

are initiated but not carried out fully. With such an

orientation, short-term hospital staff often cannot sustain the

focus and interest in a patient whose length of stay greatly

exceeds the average length of stay for patients with the same

diagnosis. Case studies bear out that when patients who are not

progressing in a short-term hospital are transferred to LTCHs,

where a multi-disciplinary approach replaces the diagnostic

focus, the patients improve in both medical and physical well-

being.

26. In short, in the health care continuum, LTCH care

constitutes a component dedicated to catastrophically ill and

medically complex patients in need of acute care services that

exceed by a considerable amount the average length of stay of

those patients in a short-term hospital . Typically medically

unstable for the entire time of stay in the short-term hospital,

these patients require extensive nursing care with daily

physician oversight usually accompanied by some type of

technologically advanced support.

Federal Government Recognition of LTCHs

27. The federal government recognizes the distinct place

occupied by LTCHs in the continuum of care based on the high

level of LTCH patient acuity. The PPS of the federal government

treats LTCH care as a discrete form of care. LTCH care

therefore has its own system of DRGs and case mix reimbursement

that provides Medicare payments at rates different from what PPS

provides for other traditional post-acute care providers.

Medicare and the PPS System

28. The federal definition of a "long term care hospital"

is a hospital whose average length of stay for Medicare patients

is greater than 25 days. The 25-day length of stay requirement

only applies to Medicare patients, not to non-Medicare, such as

commercial patients; some of Kindred's LTCHs have a substantial

number of commercial pay patients where the average length of

stay is not 25 days. The federal government clearly identifies

LTCHs as hospitals, separate from SNFs, CMR hospitals, and

short-term hospitals. The very earliest LTCHs were primarily

chronic care hospitals, but over the past 20 years the LTCH has

evolved into a place where people are cared for who require an

extended stay in a hospital, not a SNF or CMR facility, and who

will benefit from extra therapeutic care, nursing, and equipment

that is more orientated toward therapy than the stabilization

and diagnosis of acute conditions provided by short-term

hospitals.

29. The basic concept of the Medicare PPS is the

classification of patients into DRGs based on the services they

need and the expenditures the hospital will make to care for the

patient. The federal government analyzes these patients by

group and identifies what the average cost is for each kind of

patient. The classification of the patient by DRG determines

the amount the Medicare program will pay the hospital for caring

for that patient. As an example, if a patient comes to a short-

term hospital and, based on diagnosis and intensity, is

classified in DRG 13, there is a certain payment rate attached

to that DRG, and that payment rate will be different from a DRG

14 or 15. The weights determine whether a hospital is paid more

or less than the average for a certain type of patient.

30. PPS was designed for Medicare patients, but payers

other than Medicare including Medicaid, commercial insurance,

and managed care, now also reimburse hospital providers and SNF

providers as some function of the PPS. Each sector of the

health care industry has a some what different payment system.

31. DRGs were first developed for short-term hospitals,

and there are hundreds of DRGs used to determine reimbursement.

Not designed to measure acuity and tied to the amount of

Medicare reimbursement, DRGs relate to resource utilization.

32. The difference between reimbursement for an LTCH and a

short-term hospital has to do with the average rate, which is a

figure that varies somewhat from market to market based on labor

costs, and the weight which is attached to each of the DRGs.

The rate times the weight determines the reimbursement.

33. When a patient is in a short-term hospital much longer

than a few days past the average length of stay that the federal

government has established for that DRG, financial loss for the

hospital mounts. The federal government recognized that

problem. It has developed a system using an "outlier"

reimbursement, an add-on to the normal DRG payment for a patient

who stays for an unusually long time. But, the outlier payment

is calculated to recover only 80 percent of what the federal

government estimates to be the hospital's true costs.

34. In response to the PPS system, short-term hospitals

have to manage their patients very closely. If a patient falls

into the outlier category and is going to be hospitalized

substantially longer than the average, short-term hospitals can

lose a significant amount of money, so short-term hospitals are

constantly searching for discharge options for their patients.

Every day of utilization that a short-term hospital can save

benefits the short-term hospital financially; as a result,

hospitals invest significant effort into developing case

management, utilization review, and clinical management

departments.

35. Effective October 1, 2002, the Centers for Medicare

and Medicaid Services (CMS) implemented categories of payment

designed specifically for LTCHs, the "LTC-DRG." The LTC-DRG is

a sign of the recognition by CMS and the federal government of

the differences between short-term hospitals and LTCHs when it

comes to patient population, costs of care, resources consumed

by the patients and health care delivery.

Existing LTCHs in District 4

36. There are currently two licensed LTCHs operating in

District 4: Kindred's Green Cove Springs facility ("Kindred

North Florida") in Clay County and Specialty's Jacksonville

facility in Duval County. Kindred North Florida is

approximately 80 miles (and a 1.5 hour drive) from Daytona Beach

where Kindred intends to locate its proposed Volusia County

facility. Specialty Jacksonville is within 85 miles of

Kindred's proposed facility.

37. The LTCH occupancy and utilization rates for District

4 is below 70 percent.

38. Kindred North Florida is a 40-bed LTCH. Specialty

Jacksonville is a 107-bed LTCH.

39. Specialty Jacksonville has an occupancy rate that has

been consistently below 60 percent. The most recently available

data shows an occupancy rate for Specialty of 56 percent. In

recent years, it has been even lower.

40. Kindred North Florida has been operating near or above

optimal occupancy. Specialty has not.

41. Beds are available within the district.

CON Application Process

42. Kindred submitted CON Application 9831 in the first

CON Application Review Cycle of 2005. Kindred was the only

applicant for an LTCH CON in District 4 for the batching cycle.

43. The Agency evaluated the application and reported the

evaluation in a State Agency Action Report (SAAR) issued on

June 1, 2005. The SAAR recommended denial of Kindred's

application.

44. A basis for the denial of Kindred's application is

summed up in the "Need" section of the SAAR:

The applicant intends to focus on the

provision of complex LTCH services (many

requiring ventilator/pulmonary services) and

contends patients remain in less appropriate

settings in District 4. It maintains that

Volusia County is an appropriate service

area for this project due to the travel

distance to a current LTCH. Although

support letters state that many patients

would have benefited from LTCH services, the

disposition of these patients is not known

and access problems to LTCH services was not

shown. The applicant did not demonstrate

that area residents are unable to access

needed care or that care currently being

provided is inappropriate.

The applicant's need analysis did not solely

consider high acuity patients that are LTCH

appropriate that could not be more

appropriately treated in lower cost long-

term care facilities such as nursing homes

and rehabilitation hospitals. As stated

earlier, CMS announced that it plans to make

changes in its reimbursement to LTCHs this

fall with other updates planned for

October 1, 2005.

The applicant stated opposition when another

LTCH proposed to establish a hospital in

this area indicating that its Clay County

facility would be adversely impacted and

that the establishment of a third LTCH in

District 4 would be a duplication of

services.

AHCA Ex. 1, p. 28.

45. On June 1, 2005, AHCA adopted the SAAR's

recommendation that Kindred's application be denied.

46. Kindred timely challenged the denial of its

application and its petition was referred to DOAH for formal

administrative proceedings.

Post-stipulation Issues

47. The parties have resolved a number of potential issues

by way of the Amended Stipulation. The remaining issues relate

to need, access and competition.

LTCH Need Methodology and AHCA's Concerns

48. The Agency has not adopted a need methodology for LTCH

services. Consequently, it does not publish fixed need pools

for LTCHs.

49. In response to a rise in LTCH application over the

last several years, the Agency has consistently voiced concerns

about identification of the patients that appropriately comprise

the LTCH patient population. Because of a lack of specific data

from applicants with regard to the composition of LTCH patient

populations, AHCA is not convinced that there is not an overlap

between the LTCH patient populations and the population of

patients served in other healthcare settings. In the absence of

data identifying the LTCH patient population, AHCA has reached

the conclusion that there are other options available to those

patients targeted by the LTCH applicant, depending on such

matters as physician preference.

50. In denying Kindred's application, AHCA relied in part

on reports issued to Congress annually by the Medicare Payment

Advisory Committee (MedPAC), that discuss the placement of

Medicare patients in appropriate post-acute settings. The

June 2004 MedPAC report (MedPAC Report) states the following

about LTCHs:

Using qualitative and quantitative methods,

we find that LTCHs' role is to provide post-

acute care to a small number of medically

complex patients. We also find that the

supply of LTCHs is a strong predictor of

their use and that acute hospitals and

skilled nursing facilities are the principal

alternatives to LTCHs. We find that, in

general, LTCH patients cost Medicare more

than similar patients using alternative

settings but that if LTCH care is targeted

to patients of the highest severity, the

cost is comparable.

AHCA Ex. 9, p. 121 (emphasis supplied.) The MedPAC Report,

therefore, concludes that LTCHs should "be defined by facility

and patient criteria that ensure that patients admitted to these

facilities are medically complex and have a good chance of

improvement." Id.

51. There is some gross administrative data to support the

hypothesis that SNFs are a substitute for LTCHs; the data is

limited, however, for drawing such a conclusion definitively.

This is because of the wide variation of patient conditions that

may be represented by a single DRG. Dr. Muldoon explained this

in his deposition with the example of DRG-475, which groups

patients who were on life support for 96 hours:

[P]atients . . . under DRG-475 . . . may be

discharged in conditions that vary greatly,

ranging from an alert, talking patient, no

longer on life support, to a patient who is

not on life support making no progress.

There is no[] administrative data that

describes patients at the time of their

discharge and therefore the MedPAC analysis

was just unable, from a pure data point of

view, to determine why some of those

patients went to a higher versus lower level

of care.

Kindred Ex. 2, pgs. 24-25. While the conclusion that there is

overlap is suspect, so is the conclusion that there is no

significant overlap. The data is insufficient to conclude that

there are only an insignificant number of LTCH patients who are

not appropriate for treatment in another post-acute care

setting. The data is insufficient to make one judgment or

another.

52. The SAAR also concludes, based on a letter from the

MedPAC Chairman, that LTCH patients cost Medicare more on

average than patients in other settings. This conclusion was

also critically analyzed by Dr. Muldoon:

[The comment] is based on an analysis that

is unable to differentiate patients within a

DRG based on their severity at the time of

discharge. The limitation on the DRG is

that it is designed to describe the

patient's need at the time of admission

rather than discharge. So there is no way

to tell whether someone is in good shape or

poor shape at the time of discharge.

So lumping them together and then observing

how much they cost, depending on their site

of care, is a very rough cut.

Kindred Ex. 2, pgs. 27-28. In contrast, for patients at the

extreme of severity and complexity there is a trend for lower

cost of care for patients whose care included long-term acute

care. Again, however, that the very sickest patients may be

treated at a cost in an LTCH comparable to the cost in the

short-term hospital does not demonstrate that there are patients

who would be admitted to an LTCH at an acuity level not

appropriate for an LTCH. This latter category of patients, if

it exists, would be treated less expensively in a short-term

hospital or a non-LTCH post-acute care setting.

Need Demonstration: the Applicant's Responsibility

53. The Agency analyzes LTCH applications on a district

basis 1 but it does not provide a specific formula or methodology

by rule for determining need for LTCH beds as it does with some

other types of beds and health care services. Consequently,

AHCA does not publish a fixed need pool for LTCH beds. Nor did

AHCA provide Kindred with any policy upon which to determine

need for LTCH beds. Florida Administrative Code Rule 59C-

1.008(2)(e) (the "Rule"), therefore, applies to Kindred's

application:

. . . If an agency need methodology does

not exist for the proposed project:

1. The Agency will provide to the

applicant, if one exists, any policy upon

which to determine need for the proposed

beds or service. The applicant is not

precluded from using other methodologies to

compare and contrast with the agency policy.

2. If not agency policy exist, the

applicant will be responsible for

demonstrating need through a needs

assessment methodology which must include,

at a minimum, consideration of the following

topics, except when they are inconsistent

with the applicable statutory and rule

criteria:

a. Population demographics and

dynamics;

b. Availability, utilization and

quality of like services in the district,

subdistrict or both;

c. Medical treatment trends; and

d. Market conditions.

Application of the Rule

a. Population Demographics and Dynamics

54. In assessing an area's population and demographics for

the purpose of evaluating LTCH need, special attention is paid

to the elderly population. The bulk of LTCH patients are

patients over the age of 65 and on Medicare. Elderly patients

in need of LTCH services do not heal as quickly as younger

patients, are more difficult to wean from a ventilator, and do

not improve through rehabilitation as quickly so that they can

be discharged from the hospital setting.

55. There are more than 100,000 "seniors," those 65 and

over, in Volusia County. Seniors account for more than 20

percent of the county's population; the national average is

between 12 and 13 percent.

56. Volusia County was projected to have a senior

population of 485,000 out of a total county population of 1.8

million as of January 1, 2005. According to AHCA population

data, over the next five years Volusia's elderly population is

expected to grow by another 10 percent.

57. Volusia also accounts for a disproportionate share of

all of the seniors in District 4. Its senior population is

almost 40 percent of the senior population in the district.

b. Availability, Utilization and Quality of Like Services

58. In evaluating the availability, utilization and

quality of like services under the rule, Kindred points out that

there are a significant number of short-term hospitals in

Volusia County and a relatively large senior population but no

LTCH in the county.

59. The LTCHs to which Volusia County residents have

access are either in Orlando or the two other LTCHs in District

4: Kindred North Florida and Specialty Jacksonville. Access

for Volusia County residents or patients in short-term hospitals

in Volusia County was described at hearing by Clarence Joseph

Wurdock, Director of Market Planning at Kindred Health Care:

Both of these distances [to Orlando and the

Jacksonville area] are very substantial.

Orlando is more than an hour away, drive

time, and then the Jacksonville hospitals

[Kindred North Florida and Specialty] are 70

to 80 miles away.

* * *

So as far as access goes, it's not that

Volusia County does not have access. The

question is whether it's reasonable access

for the majority of people who would benefit

from the services that we offer. And given

the distances involved, it would be very

hard to argue that the typical potential

long-term hospital patient of Volusia County

really has access. Yes, we do get patients

at our hospital in Green Cove Springs

[Kindred North Florida], a few of them do go

to Jacksonville Specialty and some of them

go to Orlando, but generally, our

understanding is that these patients tend to

be the most acute, the patients who really

need this type of care so much that they're

willing -- they or their families are

willing to go great distances for their

care.

On the other hand, the majority of long-term

hospital potential patients, patient who

would benefit from our services, who are

still spending a fair amount of time in the

short-term hospitals, those patients are at

that point where they're not willing, they

or their families are not willing to go that

far, so consequently they're remaining in

the short-term hospital. So there's an

access problem.

Tr. 70-71 (emphasis supplied).

60. Of the two "Jacksonville area" LTCHs, Kindred North

Florida has been operating around 90 percent occupancy;

Specialty, licensed for 107 beds, according to most recently

available data at 56 percent and for some time at various levels

all below 60 percent.

61. As Kindred concedes, reasonableness of access is a

judgment call. See Kindred's Proposed Recommended Order , p. 20.

Contrary to Kindred's present claim of "no reasonable access,"

Kindred North Florida indicated two years before the hearing

that Volusia County patients had access in the District to LTCH

services. See paragraphs 69 and 70, below. Relevant data has

not changed in the two years between Kindred North Florida's

statement and the final hearing in this case.

62. A map in Kindred's CON application identifies the

location of five short-term hospitals in Volusia County. The

two largest (Halifax Medical Center and Florida Hospital-Ormond)

are within two to five miles of Kindred's proposed location .

Kindred's CON application contained letters of support from the

CEOs of Halifax Community Health Systems and Florida Hospital

Deland. Both hospital CEOs strongly support Kindred's

application as a source of continued inpatient care for their

medically complex patients. There were a number of letters of

support in the application from Volusia physicians who have

referred patients to Kindred North Florida in the past, and are

familiar with Kindred's services and abilities.

c. Medical Trends

63. As to medical trends, as found earlier, LTCHs are

recognized as a legitimate part of the health care continuum by

the federal government. Medicare's PPS provides reimbursement

for LTCHs under their own discrete set of DRGs so that

reimbursement rates are different for LTCHs from short-term

hospitals. LTCHs supplement acute care following the short-term

hospital stay and they are complementary to SNFs and other post-

acute care providers. The trend is for LTCHs to be increasingly

used to meet the needs of patients in other settings who for a

variety of reasons are better served in LTCHs.

d. Market Conditions

64. Market conditions do not favor the application.

65. The occupancy rate overall in the District indicates

that beds are available. Of the two "Jacksonville area" LTCHs,

Specialty has had an occupancy rate below 60 percent. According

to "data over the past few years . . . [it has] been operating

at that level for some period of time." 2 (Tr. 73).

66. It is reasonable to assume that Volusia County

patients in need of LTCH services and their families, no matter

how inconvenient or what hardship may be entailed, will seek

admission to the existing LTCHs in the District or to Orange

County facilities if LTCH services are truly needed and valued.

67. Other changes in the market that have occurred in the

last several years also diminish Kindred's case. Besides

approval to Kindred-North Florida to add another 20 beds at its

facility in Clay County, additional beds can now be added by

existing LTCH facilities at will. These include both the

Kindred-North Florida facility and the Specialty facility.

68. Kindred's claim of favorable market conditions is

undercut, moreover, by recent objections to two other District 4

LTCH applications on the basis that there was no need in

District 4, and the implication, if not direct statement, that

there is no access problems for Volusia County residents in need

of LTCH services.

69. In a letter on Kindred Healthcare letterhead, dated

April 12, 2004, Mr. Wurdock wrote:

On behalf of Kindred Hospital North Florida,

this letter is submitted in opposition to

the Certificate of Need application (action

number 9752) filed by Select Specialty

Hospital - Duval, Inc. to establish a long-

term acute care hospital of up to 40 beds at

Shands-Jacksonville Medical Center. Kindred

Hospital North Florida has consistently

provided high quality long-term acute care

in District 4 for many years. Approval of

an application for an additional long term

hospital in District 4 will have a

significantly adverse impact on the future

of Kindred Hospital North Florida and will

result in a wasteful duplication of services

in District 4.

In January of 2004, the Agency for Health

Care Administration (AHCA) granted Kindred

Hospital North Florida a Certificate of Need

to add 20 beds, increasing our total

offering to 80 beds and enhancing our

capacity to serve the residents of District

4. Including this bed increase, the long-

term acute care occupancy of District 4 is

approximately 59 percent. Utilizing

existing providers is the most cost-

effective option for the district, thus

eliminating any duplication of services and

minimizing additional start-up costs. The

occupancies of existing providers in the

district clearly indicate there is not a

need for an additional long-term acute care

hospital in District 4.

AHCA Ex. 4, page 1 (emphasis supplied).

70. Less than six months earlier, Mr. Simpson in a letter

dated October 31, 2003, on Kindred Hospital North Florida

letterhead, objected to a Volusia County LTCH CON application:

On behalf of Kindred Hospital North Florida,

I submit this letter in opposition to the

Certificate of Need application (action

number 9706) filed by SemperCare of Volusia,

Inc. to establish a long-term acute care

hospital of up to 50 beds at Florida

Hospital Oceanside. Kindred Hospital North

Florida has been providing high-quality

long-term acute care in District 4,

including many patients in Volusia Count,

for the past nine years. Approval of an

application for an additional hospital in

District 4 will have a significant adverse

impact on the future of Kindred Hospital

North Florida and will result in a wasteful

duplication of services in District 4.

In December 2002, the Agency for Health Care

Administration (AHCA) granted Kindred

Hospital North Florida with preliminary

approval to add 20 beds, increasing our

total offering to 80 beds and enhancing our

capacity to serve the residents of District

4. Including this bed increase, the long-

term acute care occupancy of District 4

would be approximately 59 percent (Kindred

Hospital North Florida: 68 percent and

Specialty Hospital Jacksonville: 52 percent

- Florida Hospital Bed Service Utilization

by District, July 2003). Utilizing the

existing providers is the most cost

effective option for the district, thus

eliminating any duplication of services and

minimizing additional start-up costs that

are ultimately passed on to the consumer.

The occupancies of existing providers in the

district clearly indicate there is not a

need for an additional long-term acute care

hospital in District 4.

Kindred Hospital North Florida has a strong

working relationship with hospitals in

Volusia County. In 2002, approximately 26

percent of our patients were referred from

hospitals in Volusia County.

AHCA Ex. 5 (emphasis supplied). The evidence, as a whole, in

this proceeding supports the claims made by Kindred North

Florida in the two letters. Data has not changed significantly,

moreover, since the letters were written.

71. By way of explanation of its earlier position, Kindred

pointed out that at the time of the submission of the letter

opposing the establishment of a Volusia County LTCH, neither it

nor Kindred North Florida had conducted a detailed need analysis

for Volusia County. A need analysis conducted subsequent to the

statement of opposition to a Volusia County LTCH is presented in

the CON application in this proceeding. It includes Kindred's

need methodology.

Kindred's Need Methodology

72. The need methodology employed by Kindred is a

variation of commonly used and accepted methodologies 3 in the

LTCH industry for determining need in a proposed service area.

In this case the proposed service area is Volusia County.

73. The methodology provides a multi-step process. It

begins with the examination of AHCA discharge data for short-

term hospitals. Kindred began the process in this case,

therefore, with identification of short term hospital patients

in Volusia County and limited this population to Florida

citizens. The methodology incorporates two assumptions: one,

that patients will require five days to transfer from the short

term hospital after the geometric mean of the length of stay

(GMLOS) for the patient's DRG and that the patient will be in

the LTCH for at least 10 days. The result of the assumptions in

Kindred's calculation in this case is that the potential pool of

Volusia County LTCH patients "had to have exceeded their [GMLOS]

by more than two weeks." Tr. 88. Application of the

assumptions to AHCA's database, therefore, arrived at a

population "that could reasonably be expected to be long-term

hospital admissions." Tr. 88. For that population, a

population that exceeded the GMLOS by more than two weeks, the

Kindred summed up the number of days the population spent in the

hospital in excess of the GMLOS plus five days as required by

the methodology. This sum equaled potential LTCH days. This

grand total of days was divided by the number of days in a year,

365, as called for by the methodology. The calculation for the

twelve month period ending in March of 2004 yielded an average

daily census of 40.8. The methodology further considered

Volusia County patients receiving services at Kindred North

Florida. When they were added into the calculation, the average

daily census of potential LTCH patients from Volusia County

increased to 47.2. The methodology includes the impact of

future population growth at an 8.2 percent rate. This yielded

an additional average daily census of 3.9 so that the potential

average daily census increased to 51.1. As a final step, the

methodology assumes operation of a new LTCH at an 85 percent

occupancy rate. Application of this assumption yielded a bed

need in Volusia County of 60 beds.

74. The methodology assumes that 100 percent of the

eligible pool of potential LTCH patients are going to be

referred to an LTCH. Kindred concedes that the actual referral

rate is likely to be less than 100 percent and certainly so in

the beginning. Kindred's application, therefore, provides a

ramp up period. Kindred believes furthermore that the less than

100 percent referral rate is offset by patients that do not come

from acute care hospitals.

75. Application of the methodology in this case is flawed.

It is also not applicable legally to this CON case.

76. The methodology is flawed in this case first because

it does not account for beds available elsewhere in the

District. Kindred postulated that Specialty's sub-60 percent

occupancy rates are due to Specialty's decision to limit

utilization of the number of beds far below the licensed

capacity for beds. This assertion by Kindred is rejected as

unsupported by adequate proof. See endnote 2, below.

77. The methodology, moreover, determines need generated

solely by and within Volusia County, one county in District 4, a

multi-county district. Consistent with the CON Law, AHCA

approaches LTCH need on a district-wide basis. Methodologies

for LTCH bed need on a county basis in a multi-county district

have been held by AHCA to be invalid to legally establish need

for CON purposes. See Select Specialty Hospital-Marion, Inc. vs

Agency for Health Care Administration , Case No. 04-0444CON (DOAH

October 31, 2005, AHCA December 21, 2005).

Competition

78. Kindred concedes that "[h]aving an LTCH in Volusia

County would not foster competition in the traditional sense."

Kindred's Proposed Recommended Order , p. 33.

79. The Agency did not intend to give considerations of

competition much weight in this proceeding.

CONCLUSIONS OF LAW

80. The Division of Administrative Hearings has

jurisdiction over the parties to and the subject matter of this

81. Kindred has the burden to prove by a preponderance of

the evidence that its CON application should be approved. See

Boca Raton Artificial Kidney Center, Inc. v. Department of

Health and Rehabilitative Services , 475 So. 2d 260 (Fla. 1st DCA

1985).

82. In light of the parties' stipulation and the neutral

role of criteria related to competition, a balancing of

statutory and rule criteria turns on need and access to LTCH

services. The balance does not favor Kindred's application.

83. The determination of need in this case is governed by

the Rule since AHCA does not have an LTCH need methodology. The

Rule requires the applicant to demonstrate need through a "needs

assessment methodology." Fla. Admin. Code R. 59C-1.008(2)(e).

84. The methodology used by Kindred does not account for

unused LTCH beds in the district. There is inadequate proof,

moreover, for Kindred's assumption that Volusia County patients

do not have access to the unused District 4 LTCH beds.

Furthermore, the methodology yields bed need as if Volusia

County were the health planning district. The methodology fails

to determine need on a district-wide basis as required by law.

Select Specialty Hospital-Marion, Inc. vs. Agency for Health

Care Administration , Case No. 04-0444CON (DOAH October 31, 2005,

AHCA December 31, 2005).

85. In short, Kindred's methodology yielded bed need in

Volusia County, rather than on a district-wide basis as required

by law. Kindred failed to prove that Volusia County patients do

not have access to unutilized beds elsewhere in District 4. The

failure to take into account available beds in the district also

makes the methodology inapplicable in this case.

86. Kindred has not met its burden of proof in this case.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is recommended that the Agency for Health Care

Administration deny CON application No. 9831 filed by Kindred

Hospitals East, LLC.

DONE AND ENTERED this 20th day of January, 2006, in

Tallahassee, Leon County, Florida.

S

DAVID M. MALONEY

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 20th day of January, 2006.

ENDNOTES

1/ The Rule refers to evaluation on either a District or sub-

district basis. "'Subdistricts' mean a subdivision of a

district designated by the local health council as established

under Rules 59C-2.100 and 59C-2.200, F.A.C." Fla. Admin. Code

R. 59C-1.002(38). Kindred did not counter the Agency's approach

with proof that Volusia County is a validly designated

subdistrict. The Agency's evaluation on a District basis

follows the Rule.

2/ Kindred attempted to explain away the low occupancy rate of

Specialty with this assertion made by Mr. Wurdock in his

testimony: ". . . based on information from the market our

understanding now is that Jacksonville Specialty does have a lot

of paper beds that exist[.] [I]in reality, they have chosen not

to use those beds." (Tr. 73). This testimony was objected to

on the basis that it was hearsay. No attempt was made to have

the hearsay ruled admissible over objection in civil actions.

See § 120.57(1)(c), Fla. Stat. The testimony of Mr. Wurdock

supplemented deposition testimony by Timothy L. Simpson, CEO of

Kindred-North Florida. Mr. Simpson was asked why Specialty

"operates at the 50 to 56 percent level . . ." Kindred Ex. 4,

p. 21. Mr. Simpson's testimony also appears to be hearsay but

no objection was raised to it. It was more specific than

Mr. Wurdock's: "My understanding is that they limit the types

of patients they take. They do not take the acuity that we do

here at North Florida. They limit their ventilator census . . .

[a]nd they also are 98 percent Medicare patients." Kindred

Ex. 4, pgs. 21-22. Taken together, the testimony of Mr. Wurdock

at hearing as a supplement to Mr. Simpson's deposition testimony

and the deposition testimony itself is not adequate to support a

finding of fact that beds are not available in the district.

Other evidence with regard to acuity levels of Kindred North

Florida patients and inferences to be gathered thereby with

regard to the higher acuity levels of the Specialty patient

population as a whole likewise are not adequate to draw the

conclusion that beds are not available at Specialty. The

questions remain: does Specialty restrict access to patients

with acuity lower than the level of its population who are

nonetheless appropriate LTCH patients? Or does Kindred North

Florida admit patients who are at acuity levels that could be

treated appropriately in other post-acute care settings?

3/ See Select Specialty Hospital-Marion, Inc. v. AHCA , Case No.

03-2483CON (DOAH April 20, 2004, AHCA September 17, 2004);

Select Specialty Hospital-Escambia Inc. v. AHCA , Case No. 05-

0319CON (DOAH June 17, 2005, AHCA July 14, 2005.)

COPIES FURNISHED :

M. Christopher Bryant, Esquire

Oertel, Fernandez, Cole & Bryant, P.A.

301 South Bronough Street, Fifth Floor

Post Office Box 1110

Tallahassee, Florida 32302-1110

Timothy B. Elliot, Senior Attorney

Agency for Health Care Administration

2727 Mahan Drive, Mail Station 3

Tallahassee, Florida 32308

Richard Shoop, Agency Clerk

Agency for Health Care Administration

2727 Mahan Drive, Mail Station 3

Tallahassee, Florida 32308

Christa Calamas, General Counsel

Agency for Health Care Administration

2727 Mahan Drive, Mail Station 3

Tallahassee, Florida 32308

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.