Opinion ID: 2504321
Heading Depth: 1
Heading Rank: 3

Heading: A. Allocation of Shared Costs

Text: DHEC regulations define total project cost as: [T]he estimated total capital cost of a project including land cost, construction, fixed and moveable equipment, architect's fee, financing cost, and other capital costs properly charged under generally accepted accounting princip[le]s as a capital cost. The determination of project costs involving leased equipment o[r] buildings will be calculated based on the total value (purchase price) of the equipment or building being leased. 24A S.C.Code Ann. Regs. 61-15 § 103(25). The six modalities in the imaging center shared several of the costs enumerated in this definition. For example, they shared common areas of the leased building, certain fixed and moveable equipment, and financing costs. Appellants argue it was improper for DHEC to allocate these shared costs equally among the modalities. We agree under the circumstances of this case. The parties have focused much debate on whether DHEC was required to apply generally accepted accounting principles (GAAP) when allocating shared costs. Each party contends application of GAAP can only lead to one result, and that result is the one advocated by its expert. The competing opinions of the GAAP experts refute the premise of a single answer. GAAP are not a precise science. GAAP require the exercise of professional judgment and can lead to varying results. Here, the parties presented conflicting expert testimony with regard to whether DHEC's method of allocating shared costs was GAAP-compliant. Thus, given the inherent mix of objective and subjective considerations at play in a GAAP determination, application of GAAP is easier said than done. There is no bright-line application of GAAP in this case that easily answers the CON monetary threshold. Instead, we turn to [t]he cardinal rule of statutory construction that we must ascertain and effectuate the legislative intent whenever possible. Strother v. Lexington County Recreation Comm'n, 332 S.C. 54, 62, 504 S.E.2d 117, 121 (1998). The express purposes of the CON Act are to promote cost containment, prevent unnecessary duplication of health care facilities and services, guide the establishment of health facilities and services which will best serve public needs, and ensure that high quality services are provided in health facilities in this State. S.C.Code Ann. § 44-7-120 (2002). The calculation of total project cost, then, is part of the mechanism by which the CON Act achieves its goal of cost containment. As such, DHEC must calculate total project cost in a manner that reflects the true cost of the project at issue. If a reasonable estimate of the cost of a project exceeds $600,000, it would be directly contrary to the purposes of the CON Act to allow that project to avoid CON review. See id. (To achieve these purposes, this article requires: (1) the issuance of a Certificate of Need before undertaking a project prescribed by this article. . . .). The CON regulations require DHEC to use [c]ommon practice and common sense in determining whether a proposal presents a single expenditure for purposes of the $600,000 threshold, and further provide that [a]n applicant should not be allowed to split what is really one expenditure into two or more for the purpose of avoiding review. 24A S.C.Code Ann. Regs. 61-15 § 102(2). Accordingly, DHEC must not allow a potential CON applicant to avoid the CON process based on an arbitrary factor. DHEC's method for allocating shared costs in this case had precisely that effect. At the contested case hearing, DHEC witnesses explained that DHEC had recently changed its approach to allocating shared costs in imaging centers. Previously, DHEC's practice had been to calculate the total project cost using two alternative allocation methods, then use whichever figure was higher to make its Non-Applicability Determination. DHEC would (1) divide shared costs by the number of modalities and (2) allocate shared costs in proportion to the amount of clinical space dedicated to each modality. The latter method, referred to as the relative square footage method, is one of the allocation methods now advanced by Appellants. When a new DHEC employee assumed responsibility for NAD requests, she proposed a change to DHEC's practice. This employee testified as follows: [I]t made more sense toto allocate as a percentage [of] clinical space with physician practices because often within physician practices there's only one modality. And that's certainly not theirtheir sole practice oror their main function. Their main function is to see patients, and this is there as a service to their patients. With an imaging center there's often more than one modality, and their main function is to provide imaging services. It made sense to me to prorate based on the amount of clinical space to physician's practices and to prorate based on the number of modalities with imaging centers. On the suggestion of this employee, DHEC began allocating shared costs in imaging centers by dividing by the number of modalities. DHEC nevertheless continued to apply the relative square footage method advanced by Appellants to other entities, such as physicians' offices, that submitted NAD requests for the same equipment. We find this distinction arbitrary because the differing purposes of imaging centers, physicians' offices and other facilities have no real impact on the cost of the equipment each might seek to acquire. Clearly, DHEC's policy shift and distinction in allocation method can have a profound impact on the total project cost. For example, using the relative square footage method, the MRI in this case would have been allocated 32.422 percent of each shared cost, rather than one-sixth (16.667 percent) of each shared cost. [3] Moreover, the statutory and regulatory framework contemplates that imaging centers seeking to purchase the same equipment as other facilities must compete with those other facilities in the CON process. See 24A S.C.Code Ann. Regs. 61-15 § 307(2) (In the case of competing applications, [DHEC] shall award a Certificate of Need, if appropriate, on the basis of which [application], if any, most fully complies with the requirements, goals, and purposes of the [CON] program, State Health Plan, project review criteria, and any regulations developed by [DHEC].). Thus, DHEC's calculation of total project cost was affected by an arbitrary factor that strayed substantially from legislative intent and worked substantial prejudice to Southern MRI's competitors. Given legislative intent, specifically the need for DHEC's calculation to reflect the practical reality of the proposal, it follows that the function of multiple modalities in a single facility can be relevant to the choice of an appropriate allocation method. For example, if the equipment sought to be purchased forms the main basis for the construction of the facility as a whole, then it might be reasonable in light of the purposes of the CON Act to charge that equipment with a greater portion of the overhead costs of the facility than might be charged to other, smaller projects within the same building. In this way, DHEC retains the flexibility to choose an allocation method that best suits the realities, and more accurately captures the true capital cost, of a project proposal. Cf. 24A S.C.Code Ann. Regs. 61-15 § 102(2) (requiring DHEC to apply [c]ommon practice and common sense, to prevent applicants from splitting what is really one expenditure into two or more for the purpose of avoiding review, and to avoid lump[ing] projects together arbitrarily to bring them under review). Where, as here, DHEC's chosen method has no basis in the facts of the proposal and arbitrarily allows a potential applicant to avoid the CON review process, it is contrary to the purposes of the CON Act and therefore an error of law. We note that by maintaining a rational fit between the allocation method and the proposal at issue, DHEC can avoid creating incentives for potential applicants to manipulate the NAD process and avoid CON review. If DHEC always divides shared costs by the number of modalities in an imaging center, an imaging center seeking to avoid CON review could purchase unnecessary but inexpensive equipment in order to drive down the total project cost of other, more expensive equipment. This danger is especially pronounced where, as here, the modalities at issue are different in every meaningful way. For example, DHEC acknowledged at oral argument that the MRI was significantly more expensive and required considerably more space than the other imaging modalities. The MRI was also expected to generate more patient traffic and more revenue than the other modalities. DHEC's current allocation method left such disparities in the investment in and importance of each modality unaccounted for, making the NAD process vulnerable to manipulation. [4] In sum, DHEC's policy shift concerning imaging centers and its choice of allocation method in this case are manifestly at odds with legislative intent. Thus, the deference we normally accord an agency's policy determinations is not warranted. See S.C. Coastal Conservation League v. S.C. Dep't of Health and Envtl. Control, 363 S.C. 67, 75, 610 S.E.2d 482, 486 (2005) (Courts defer to the relevant administrative agency's decisions with respect to its own regulations unless there is a compelling reason to differ.). Where modalities are truly similar, a division by modalities may be an appropriate method of capturing and allocating total project costs for CON purposes. Here, however, DHEC conceded that the MRI was the key financial producer and main expenditure for the proposed imaging center. [5] Treating the other lesser modalities equally did not reflect the true cost of this project. DHEC's approval of an equal allocation of costs among manifestly unequal modalities resulted in an artificial reduction in total project cost. As a result, we find that DHEC erred as a matter of law. In so holding, we do not mandate any particular allocation formula, nor do we foreclose the possibility that DHEC might return to its previous practice of applying the highest figure obtained under any allocation method. Nevertheless, the method chosen by DHEC must provide a reasonable estimate of the true cost of the project at issue. We turn now to Appellants' challenge to the appraised value of the property.