Opinion ID: 1810729
Heading Depth: 2
Heading Rank: 5

Heading: MSDH's Methodology

Text: ¶ 20. The Board's argument on appeal focuses on the methodology utilized by the MSDH in its comparative review of the competing CON applications, and it contends the MSDH's action was arbitrary and capricious. ¶ 21. This Court has stated: The methodology used in any given case should not be carved in granite; instead, some flexibility is required. It is prudent to utilize a methodology that will accommodate the various and sundry circumstances found in each individual case. HTI Health Servs., 603 So.2d at 853. ¶ 22. This Court defined both arbitrary and capricious in the context of administrative agencies in Natchez Cmty. Hosp., 743 So.2d at 977. An administrative agency's decision is deemed to be arbitrary when it is not done according to reason and judgment, but depending on will alone. Id. (citing Burks v. Amite County Sch. Dist., 708 So.2d 1366, 1370 (Miss.1998)). A action is defined as being capricious when done without reason, in a whimsical manner. Id. ¶ 23. Under MSDH's ten-factor comparative scoring methodology, Hughes finished in first place with a composite score of 16. The Board finished in last place with a composite score of 34. [3] On appeal, the Board contests Hughes's projection and statements as to the following: (1) square footage; (2) capital expenditure; (3) cost per square foot; (4) staffing; (5) medicare utilization; and (6) certification.
¶ 24. The Board contends that because the hearing officer found that Hughes's 15,919 square footage projection was understated, his application was substantially incomplete or noncompliant with the criteria in the Plan and the Manual. Johnny Wynne (Wynne), Hughes's architect, testified that in calculating the square footage, the non-heated areas were inadvertently left out of the calculations. Wynne prepared the preliminary schematic drawings on his computer but failed to take in to account the non-heated areas. The 479 square-foot understatement represented approximately 3% of the total project. The hearing officer determined that if there are any modifications to the Kennington [Hughes] floor plan, these modifications will be only minor and will not result in an appreciable difference from the 15,919 square feet proposed in the Kennington's application. ¶ 25. Dale Carr of the MSDH's Licensure Division testified at the CON hearing that it makes absolutely no sense that anyone would prepare full scale, full blown architectural plans and drawings prior to receiving a CON. Typically, a basic plan is a projection. ¶ 26. Wynne rebutted the testimony by the Board's architectural expert witness, Brett Gasaway (Gasaway), that Hughes's nursing home plan for a 15,919 square foot facility did not comply with the licensing regulations. Wynne testified that he had been employed as an architect since 1963, with vast experience in the construction of nursing homes. In 1983, Wynne started his own business. Wynne estimated that since 1983, he builds 3 to 4 nursing homes a year. Prior to that while employed with Mediplex, an architectural company which builds nursing homes, he built 47 nursing homes. Based on his vast experience, Wynne was confident the 15,919 square foot facility would comply with the licensure regulations. Wynne noted that the areas for the clean linen storage and laundry that Gasaway claimed was missing was located at the center court on the design. ¶ 27. The Board also raised questions about whether Hughes could provide adult day care, social and recreational activities, therapy and barber and beauty shop services in a 15,919 square foot facility. ¶ 28. Armstrong testified that an adult day care center program is not required as part of a skilled nursing facility. Carr also testified that Mississippi does not license in a category called adult day care. Hughes stated that unoccupied rooms could be used for adult day care for the first year with future expansion to accommodate such a program. According to Armstrong, while it may be listed in an application, there is no requirement that it be done. No points are provided for having adult day care. ¶ 29. Larry Fortenberry (Fortenberry) is the owner of Southern Health Care, the company designated to manage and operate the Kennington. Fortenberry testified that he has been a licensed nursing home administrator for approximately 30 years, managing 3 nursing homes, including Hughes's nursing home, Willow Creek, located in Byram, Mississippi. Fortenberry is a member of the Independent Nursing Home Association. Based on his experience, Fortenberry testified that while there is no requirement that a therapy room be provided, you do have to meet the needs of the residents and provide therapy as we do in our facilities. Our therapy is done in the [resident's] room which provides a little more dignity and privacy to the residents which is a big issue in patient rights and that's where they want most of their therapy provided. Fortenberry noted that the semi-private rooms would be equipped with curtains which can be drawn and doors that would close in order to provide privacy for the therapy. ¶ 30. The Board argues that Hughes's plan does not contain a separate activity or recreation room. Wynne testified that Hughes planned to have a folding curtain in the dining room to be able to hold assemblies. Wynne observed that his design as opposed to small separate rooms would better accommodate the trend of residents wanting to have space for an assembly of all the people at Christmas or family gatherings. According to Wynne, the building would accommodate all of the requirements. ¶ 31. The Board also argues that Hughes's floor plan does not account for barber/beauty shop services. However, Carr testified that a barber/beauty shop is not required under the licensing regulations. Therefore, it does not count against the applicant. Wynne testified that while the service is not required, the building plan is large enough to accommodate the service. Wynne noted that the barber/beauty shop service is not offered on an eight hour per day basis but on a contract basis. ¶ 32. The chancery court did not find that the MSDH erred in considering Hughes's bid. The chancery court stated: It is true that Mr. Hughes's bid was not complete when originally submitted and that in the hearing process, the hearing officer, apparently, treated it as modified in some areas, but there was substantial evidence to support part of his proposal. The system used by the Department [MSDH] permits amendments to the proposal, and the system permits adjustments to be made in the hearing process when deficiencies or errors are discovered. ¶ 33. This Court finds that the chancery court did not err in finding substantial evidence to support the decision of the hearing officer and the SHO. The MSDH's decision was not arbitrarily or capriciously made as to Hughes's ranking in this category.
¶ 34. The Board contends that Hughes cannot build the Kennington for $39.16 per square foot. Hughes has been a contractor and developer since 1963. Hughes stated that he can be cost efficient when building because of his years of experience. The Board argues that its expert, Gasaway, testified that Hughes's figure is contrary to the R/S Means data which sets the minimum cost per square foot at $66.00 for a compared projection in the South. ¶ 35. Hughes testified that he built his nursing home, Willow Creek, in Byram, Mississippi, for the actual cost $41.33 per square foot. Hughes noted that the cost of Willow Creek was higher than the Kennington because Willow Creek's exterior was brick rather than vinyl siding, the rooms were larger, the commercial area was larger and the bathrooms, kitchen areas and commercial areas all contained concrete blocks. Hughes also identified other areas that would save money on the project by doing their own work rather than subcontracting: finish carpentry, roofing, drywall, earth work and landscaping. Hughes said that these savings, as well as, the variance in construction fees in different parts of the State are not taken into account in the R/S Means data. ¶ 36. The hearing officer stated: On cross-examination, however, Mr. Gasaway admitted that the R/S Means Index is only a reference guide and that it has no legal effect. (Gasaway 156). He further testified he had no personal knowledge of Willow Creek and Mr. Hughes's ability to construct that facility for $41.13 per square foot. (Gasaway 162, 169). He could not identify anything wrong with the Willow Creek construction. (Gasaway 162). Mr. Hughes adequately explained why his projected cost of $39.16 is less than the figures shown in the R/S Means Index. Because he is the owner and contractor, Mr. Hughes will not be paying himself a profit. (Hughes 154). According to Mr. Hughes, on this particular project, the contractor's profit would be approximately $71,000. (Hughes 155). He also explained he would be only operating at about 4% overhead, which would result in another $28,000 in savings. (Hughes 155). Because he will be on the job every day, he will not have to pay a superintendent's salary. (Hughes 156). This salary would be about $32,000. (Hughes 156). He estimates saving $20,000 on the concrete work because he has his own equipment for the job and therefore will not be required to hire a subcontractor. (Hughes 156). He projects a savings of $15,000 on the rough carpentry. (Hughes 156). For finish carpentry, Mr. Hughes stated that he would hang his own doors, do his own base and run his own handrails. (Hughes 157). This would result in a savings of approximately $10,800. (Hughes 157). He also projects savings on roofing and drywall due to the fact he will not have to hire subcontractors for this work. (Hughes 157). In all, Mr. Hughes projects he will save about $206,000 on the Kennington construction as a result of having his own equipment and manpower. (Hughes 157). If this figure is added to the $623,388 figure, the total would be $829,388. At 15,919 square fee, the cost per square foot would be approximately $52.10 per square foot, a figure that is in line with the data supplied by the R/S Means Index. With respect to the numbers submitted for the Kennington's new construction, this Hearing Officer finds that Mr. Hughes's testimony is more reliable and a more accurate indicator of what the Kennington's actual cost will be. It is undisputed that he has already built a nursing home in Byram, Mississippi, and that he used the numbers from this construction as a reference guild for projecting his costs to build the Kennington. While the R/S Means Index may as a useful resource for builders, the Willow Creek numbers shown in Exhibit 30 and the backup documentation for those numbers provide a much more reliable source for projecting the Kennington's new construction costs. Moreover, even if the Kennington is required to modify its preliminary plans to provide, for example, 16,500 square feet as opposed to the 15,919 it has projected, such an adjustment would not have the type of impact on new construction costs that would result in the Kennington not receiving one point for the capital expenditure factor. ¶ 37. The Board also argues that Hughes's capital expenditure figures are inaccurate because the facility will actually be larger than the 15,919 square feet projected in the application. As previously discussed, the facility's projected square footage failed to include 500 additional square feet of non-heated space. Hughes testified that 500 square feet of non-heated space would only be a minor adjustment in the total capital expenditure. Hughes further stated that the application contained $30,000 in contingency costs that probably would cover any additional space. ¶ 38. Hughes offered competing testimony to that provided by the Board's expert, Gasaway. The hearing officer heard the testimony of both Hughes and Gasaway, and he determined that substantial evidence existed to support Hughes's position. In Cain, 767 So.2d at 213, this Court stated: A review of the testimony and evidence in the record supports the conclusion that the present case is largely one of competing testimony, and it is apparent the Health Officer is in a better position than this Court to evaluate this evidence. ¶ 39. As to the capital expenditure issue raised by the Board, the chancery court did not find that the MSDH's decision should be altered as to Hughes's ranking in this category. The chancery court stated: [The Board] challenges Kennington's [Hughes's] figures. The evidence reveals that [t]he Kennington had erroneously stated its total square footage and that its facility would, clearly, have to be larger that the 15,919 square feet its application indicates. There was also evidence that its site preparation costs would be more than indicated in its application. However, if its capital expenditures went up 25%, it would still be over 25% lower than Attala's [the Board's]. Since it is, apparently, the Department's policy to allow modifications in applications, the Court finds that even with a 25% increase in this category, it would not change the rankings assigned, for its costs would still be way below Attala Care Center [the Board] and Attala Healthcare. The next item is costs per square foot, and though its costs will go up if its square footage goes up, this should not affect its costs per square foot much since there would be a larger square footage to spread the costs over. In addition, Attala Care Center's [the Board's] costs per square foot is about 30% more than [t]he Kennington's, so the change should not affect the ranking in this category. The Court recognizes that there is not a great deal of difference between [t]he Kennington figure and the Attala Healthcare figure in this category, but from the data available, the Court cannot find that any change in square foot costs would move Kennington from a one ranking to a two in this category. With extreme difference in costs per bed between Kennington and Attala Care Center [the Board] and Attala Healthcare, even a 25% increase in costs in order to give Kennington the required square footage should not change the ratings in this category either. ¶ 40. We find that there is no evidence to support the Board's position that the MSDH's decision was either arbitrary or capricious. Substantial evidence was presented by Hughes as to his plans for the Kennington. The chancery court did not err in finding that Hughes's ranking for this category should not be altered.
¶ 41. Hughes's application projected that 77 full-time employees would be hired at the Kennington during its first year. Hughes testified that he relied on Ann Davis (Davis) and Fortenberry for the operational numbers for the facility in the application. Davis, formerly of the Independent Nursing Association, was recommended to assist in preparation of the CON application. She in turn recommended Fortenberry to manage the Kennington. Davis, who had been sick, subsequently died before the hearing took place. Hughes testified that before she got sick, Davis was instrumental in putting the operational numbers together. ¶ 42. Fortenberry testified that he provided the numbers to Davis for the number of employees that would be needed. He testified that at that time he was not aware that the CON application required full-time employees to be based on a 40-hour week. Fortenberry based his number on his staffing schedule that he used in his other facilities. He classified some employees as a full-time employee with a 32-hour week. ¶ 43. After MSDH scored the CON applications, Hughes discovered the 40 hours per week requirement. At the hearing, Hughes adjusted his projection for full-time employees. Fortenberry never informed Davis that some of the employees were figured at a 32-hour week. Fortenberry testified that Davis asked him to submit numbers based on what he does, but she did not tell him it had to be on a 40-hour per week basis. ¶ 44. Darryl Bueker (Bueker), a CPA who specializes in nursing home financial matters, testified as the Board's expert that in his opinion the Kennington's actual full-time employees would be 37.1 on a 40-hour per week basis. However, Tom Barnett (Barnett), Hughes's CPA, disputed Bueker's figure. Barnett testified it was impossible to operate a 24 hour a day, 7 days a weeks nursing home like the Kennington with 37.1 full-time employees. According to Barnett, after converting all full-time employees to a 40-hour per week basis, 66 full-time employees would be needed. ¶ 45. The hearing officer stated in his findings and conclusions: Mr. Bueker's calculation fails to take into account that 23 employees submitted as part of the Kennington's 77 FTE [full-time employees]. Projection were on a 40-hour week.... Mr. Barnett's calculations .... are consistent with Mr. Fortenberry's testimony that he will hire employees on an as-needed basis or ramping during the first year... Mr. Barnett's calculations are based on actual data and factual information, as opposed to flawed assumptions. As a result, a projection of 66 FTEs is substantially more accurate than 37.1. On this basis, the Kennington would not lose any points on the conversion, nor would any of the other applicants' positions change. ¶ 46. The chancery court also did not accept Bueker's calculation on behalf of the Board and stated: [T]he [C]ourt recognizes that the witness for Attala [the Board] testified that [t]he Kennington FTE number should be thirty-seven, but the Court does not understand how he [Bueker] arrived at that. The Court finds that when you convert a thirty-two hour week to a forty-hour week, you reduce the required number by 20%. ¶ 47. Since Hughes did not make clear in his application which full-time employees were calculated at a 32-hour week, the chancery court required that all of Hughes's full-time personnel be converted to a 40-hour week. The chancery court found that: [W]ith the leniency shown by the Department in permitting adjustments to the application, the Court concludes that the adjustment is in accord with the Department's procedure. The chancery court stated that with the adjustment the Kennington would moved to be ranked number 2, but the adjustment resulted in no change in the ranking between Kennington [Hughes] and Attala Care Center [the Board]. ¶ 48. This Court finds that there is substantial evidence to support the chancery court's decision that the MSDH's decision was not arbitrary and capricious.
¶ 49. Hughes submitted in his application a projected Medicare utilization percentage of 35%. The State's Medicare utilization rate is 5.3 %. Hughes's projection is over six times the State's rate. The Board argues that it was arbitrary or capricious for the MSDH to accept Hughes's Medicare utilization projection. However, the Board is silent to the fact that it is also over the State's average Medicare utilization rate. The Board submitted an application that is approximately four times the State's average at a Medicare utilization rate of 20%. In fact, all four applicants submitted a Medicare utilization rate substantially higher than the State's average. ¶ 50. The hearing officer stated that while Hughes's and the Board's projections seem high, they finished third and fourth in this category, respectively. That is, Hughes finished in third place, receiving only one more point than the Board in this category. Rather than find that all four applicants were substantially noncompliant and could not be considered by the MSDH, the hearing officer placed all the applicants on an even playing field, awarding each applicant a score of 1 in this category. ¶ 51. Armstrong testified that it is virtually impossible to accurately project the Medicare utilization rate for a nursing home before it begins operation. According to Armstrong, the MSDH accepts Medicare utilization projections as long as the projections are submitted and sworn to by each applicant. ¶ 52. The chancery court found that the same fallacy exists with all of the applications, and it appears that all of the applicants thought the Department would just accept whatever figure they submitted. The chancery court agreed with the hearing officer that all of the applicants should be treated the same. ¶ 53. The chancery court found that it was improper for the MSDH to accept the unsupported figures submitted by Hughes. Based on the fact that both Hughes and the Board submitted Medicare utilization rates far above the State's average and the fact that both applicants were provided the same score in this category, this Court finds that the chancery court did not err in agreeing with the hearing officer's decision to treat each applicant the same. The alternative to giving each applicant the same score would result in no long-term nursing home being built in Attala County. Since each of the applicants was awarded the same score, we find this issue to be without merit.
¶ 54. The Board contests the fact that Hughes did not certify the supplemental information to the original application that was filed. However, Armstrong's testimony established that the MSDH does not require that supplemental information have additional certification. Hughes's original application contained a certification as required for submission of a CON application. [4] Armstrong testified that [t]he additional information becomes the application in addition to what was originally filed. Armstrong testified that he had no knowledge of any requirement that a certification be sent with the additional information if the applicant is later required by the MSDH to submit supplemental information. ¶ 55. The Board also argues that Hughes's application did not contain a signed agreement that he would not transfer ownership of the facility for three years. The MSDH reduced Hughes's score by one point for the agreement even though Hughes's application contained a separate unsigned written agreement not to transfer. The chancery court found that it was whimsical for the MSDH to deduct this point from Hughes's score. ¶ 56. This Court finds that the chancery court did not err in not allowing the deduction of one point from Hughes's score for failing to sign the agreement. As stated by the chancery court, the minor alterations of the ranking scores had no effect on the overall ranking of the applicants.