Court Rejects Novant’s Challenge to CON Policy AC-3 for Academic Medical Centers

by Poyner Spruill LLP

The North Carolina Court of Appeals recently affirmed a final agency decision to award a CON for a new ambulatory surgical facility to North Carolina Baptist Hospital (Baptist Hospital), on the basis that the petitioners failed to show the approval of the project substantially prejudiced their rights. The decision in Novant Health, Inc. v. N.C. DHHS (COA12-57) underscores prior opinions over the past several years in which the Court of Appeals has held that to successfully challenge the approval of a non-competitive CON application, a petitioner must prove more than competitive impact in order to establish that its rights have been substantially prejudiced. Otherwise, any alleged errors in the approval of the health service or facility, such as non-conformity with CON criteria, essentially are harmless as a matter of law.

This most recent decision on the issue of substantial prejudice involved an appeal from a decision awarding a CON to Baptist Hospital for a new facility in Forsyth County which would include eight new ORs, two procedure rooms, one robotic training room, and one simulation OR. Baptist Hospital applied for the new AmSurg Facility under Policy AC-3 of the State Medical Facilities Plan (SMFP), which establishes special criteria for evaluation of a CON application made by an academic medical center (AMC). Novant Health, Inc., doing business as Forsyth Medical Center and Medical Park Hospital, Inc. (both located in Forsyth), challenged the approval of Baptist Hospital’s application, and based its challenge in large part upon an attack against the merits of Policy AC-3.

At the time Baptist Hospital applied for its new AmSurg Facility, the SMFP indicated a surplus of five ORs in Forsyth County. However, the Division of Health Service Regulation (DHSR) concluded Baptist Hospital demonstrated that its proposed AmSurg Facility satisfied Policy AC-3 criteria, that the project was needed to address the growth in Baptist’s inpatient and outpatient surgeries and to accommodate the hospital’s teaching and research functions, and that the project conformed with applicable CON criteria.

Novant contended it was substantially prejudiced as a matter of law because Policy AC-3 gave Baptist Hospital an unfair competitive advantage by allowing Baptist to develop additional ORs when other providers in Forsyth County could not. In addressing this issue, the Court of Appeals acknowledged that through Policy AC-3, the Department of Health and Human Services has validly and specifically authorized AMCs such as Baptist Hospital to obtain new ORs which might not otherwise be permitted under the SMFP need determinations and CON law. The Court pointed Novant to the General Assembly as the proper forum for its public policy argument concerning the wisdom of Policy AC-3.

In keeping with the decisions of the Administrative Law Judge and DHSR below, the Court rejected Novant’s contentions that it proved substantial prejudice in the form of lost market share of outpatient surgeries. The Court concluded Novant failed to show that its harm “went beyond any harm that rises above that posed by mere competition . . . .” In other words, any harm that necessarily would result from additional competition flowing from Baptist Hospital’s approved AmSurg Facility did not equal substantial prejudice.

This decision illustrates the now well-established law developed by the Court of Appeals that a petitioner challenging the approval of another provider’s non-competitive CON application must show substantial prejudice through proof which amounts to something more than existing market conditions and competitive impact. Any petitioner challenging a decision to approve a non-competitive CON application will be well-advised to consider this line of cases carefully in developing and presenting evidence in its case.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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