King County Pub. Hosp. 2 v. Dep't of Health

• Court: Washington Supreme Court
• Decided: September 5, 2013
• Docket: 87574-0
• Status: Published

Opinion

Fl LE IN CLERKS OFFICE SUPREME COURT, STATE OF WASHINGTON

DATE SFP Q~ 2013 77&1~ Jumceff· . cj

IN THE SUPREME COURT OF THE STATE OF WASHINGTON

KING COUNTY PUBLIC HOSPITAL) DISTRICT No.2, d/b/a EVERGREEN ) HEALTHCARE, a Washington public ) No. 87574-0 hospital district, SWEDISH HEALTH ) SERVICES, d/b/a SWEDISH ) VISITING NURSE SERVICES, a ) Washington non-profit corporation, ) PROVIDENCE HOSPICE AND ) HOME CARE OF SNOHOMISH ) EnBanc COUNTY, a Washington non-profit ) corporation, and HOSPICE OF ) SEATTLE, a Washington non-profit ) corporation, ) ) Petitioners, ) ) v. ) ) WASHINGTON STATE ) DEPARTMENT OF HEALTH, a ) Washington governmental agency, ) SECRETARY MARY SELECKY, ) Secretary of Washington's Department) of Health in her official and individual ) capacity, ODYSSEY HEAL THCARE ) OPERATING B, LP, a Delaware ) corporation, and ODYSSEY ) Filed - - - - 06 - - - :SEP 2013 - HEALTHCARE, INC., a Delaware ) corporation, ) ) Respondents. ) _______________________) King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

GONZALEZ, J.-Rival hospice organizations challenge the Washington State

Department of Health's decision (approved by a health law judge) to grant a

certificate of need to Odyssey in connection with settling a federal lawsuit. The King

County Superior Court revoked the certificate and remanded. The Court of Appeals

reversed and reinstated Odyssey's certificate of need. We affirm that decision.

I. BACKGROUND

Since 1979, Washington has controlled the number of healthcare providers

entering the market. Ch. 70.38 RCW; Univ. of Wash. Med. Ctr. v. Dep't a,[ Health,

164 Wn.2d 95, 99, 187 P.3d 243 (2008) (UWMC). Providers may open certain

healthcare facilities only after receiving a certificate of need from the Department of

Health. RCW 70.38.105. The legislature intended the certificate of need requirement

to provide accessible health services and assure the health of all citizens in the state

while controlling costs. RCW 70.38.015(1), (2). When reviewing a certificate of

need application, the department must provide notice to interested parties (such as

providers that offer similar services), take public comment, and if requested, hold a

public hearing. WAC 246-310-160, -170, -180; RCW 70.38.115(9). Ifthe

department denies a certificate of need application, the applicant has the right to an

adjudicative proceeding governed by the Administrative Procedure Act, chapter 34.05

RCW. RCW 70.38.115(10)(a). A health law judge (HLJ) presides over this

adjudicative proceeding and issues a final order resolving whether the certificate of

need application should be approved. See WAC 246-10-102 (definition of "presiding

2 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

officer"). Any competing health care facility that participated in a public hearing

"shall be provided an opportunity to present oral or written testimony and argument"

in such an adjudicative proceeding. RCW 70.38.115(10)(b )(iii); WAC 246-310-610.

If the department desires to settle with the applicant before the end of an adjudicative

proceeding, the department must notify the competitors and "afford them an

opportunity to comment, in advance, on the proposed settlement." RCW

70.38.115(10)(c).

Hospice care agencies, such as Odyssey Healthcare Operating B, LP and

Odyssey Healthcare Inc. (Odyssey), are required to obtain a certificate of need. RCW

70.38.105(4)(a), .025(6). When determining whether to grant a certificate, the

department considers four criteria: need for the proposed project, financial feasibility

of the project, structure and process of care, and containment of the costs of health

care. WAC 246-31 0-200(1 ). These criteria are defined in WAC 246-310-210, -220,

-230, and -240, respectively.

The department also adopted particular standards and need forecasting methods

for hospice agencies. WAC 246-310-290. To determine whether need exists for

additional hospice care providers, the department considers the statewide hospice care

use rate, the number of resident deaths in the applicant's planning area, the projected

population growth, and the current hospice capacity. WAC 246-310-290(7). If

existing providers in a planning area will offer services at a rate that is 3 5 patients

below the state average daily census-the average number of hospice patients per

3 King County Pub. Ho.sp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

day-under this methodology there is need for one additional hospice provider in that

area. WAC 246-310-290(l)(a), (7)(g). A hospice agency applying for a certificate of

need must demonstrate that it can meet a minimum average daily census of 35 patients

by its third year of operation. WAC 246-310-290(6).

According to the department, it assumed need findings would be available

before the October deadline to apply for a certificate of need. Clerk's Papers (CP) at

338; WAC 246-310-290(2). However, need information for the year is not generally

available by October, so applicants must prepare an application and pay a large fee

without knowing whether there is actually need for a hospice agency. CP at 338; see

WAC 246-310-990. After a potential hospice provider applies for a certificate of need

in a planning area, the department conducts a statewide need analysis based in part on

surveys it sends to existing providers. See CP at 53, 338. The results of this analysis

are apparently made available to existing providers.

This case primarily concerns the need criterion to start a hospice care agency.

The department denied Odyssey's 2003 applications to provide hospice care in King,

Pierce, and Snohomish counties, finding there was no need for additional providers.

CP at 74; Odyssey Healthcare Operating B, LP v. Dep 't ofHealth, 145 Wn. App. 131,

135, 185 P.3d 652 (2008) (Odyssey I). Odyssey challenged the department's denial of

its 2003 applications, arguing in part that the department had misapplied the need

methodology. Odyssey I, 145 Wn. App. at 137-38. The Court of Appeals disagreed

4 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't ofHealth, eta!., No. 87574-0

with Odyssey and did not modify the department's decision to deny the 2003

applications. Id. at 146.

In 2006 Odyssey again applied for certificates of need in King, Pierce, and

Snohomish counties. Administrative Record (AR) at 13-14, 53-54, 92-93. Odyssey

anticipated its King County hospice facility would become operational by July 1,

2008. AR at 25. To analyze need for a new hospice care provider, the department

surveyed existing providers about services they had provided in 2003 through 2005.

AR at 17. Using this and other data, the department concluded Odyssey had not

established need for another hospice provider or met any of the other three criteria.

AR at 11, 15.

Odyssey started an adjudicative proceeding to contest the department's

decision before an HLJ. AR at 1. The HLJ allowed King County Public Hospital

District No. 2, d/b/a Evergreen Healthcare (Evergreen) to intervene. AR at 151-54.

The adjudicative proceeding was continued pending the outcome of Odyssey I and

resolution of a petition Odyssey filed to amend the rules. AR at 175-86, 189.

In 2008, while Odyssey's adjudicative proceeding was pending, other entities

applied for certificates of need to provide hospice care in a different county, triggering

a new statewide hospice care need calculation. CP at 78, 146-54. This 2008 need

analysis, which included data from existing providers based on services offered in

2005 through 2007, showed need for one additional King County hospice provider by

5 King County Pub. Hasp. No. 2 eta!. v. Wash. State Dep 't of Health, eta!., No. 87574-0

2009 and two by 2013. CP at 147, 154. 1 In February 2009 Odyssey asked the

department to grant it a certificate of need in light of the recent need finding in King

County, but the department refused, observing that "we always look at the facts that

existed during review. So, we can't approve your application based on a

Methodology run long after the record closed. In such cases, applicants must re-

apply." CP at 877.

Odyssey did not reapply, but it did file a federal lawsuit in April2009 alleging

that the certificate of need program violated the Sherman Act, 15 U.S.C. § 1, and the

commerce clause of the United States Constitution, actionable under 42 U.S.C. §

1983. CP at 69-90. In its complaint, Odyssey claimed that since adopting the need

methodology in 2003, the department had not found need for any new hospice agency

in any county for which an application was submitted. CP at 80. The department

denied this allegation in its answer but admitted that whenever need had been found in

a county other than one for which an application had been submitted, by the time

another provider applied for the county with need, the department determined that

need no longer existed. CP at 80, 235. This suggests that existing providers expand

their capacity to meet any unmet need. The department also reasserted that it could

not use the 2008 calculation to evaluate the 2006 application. CP at 84-85, 236.

1 The finding of need in 2009 conflicts both with the department's original evaluation of Odyssey's 2006 application and with the results of an evaluation conducted in response to a 2007 hospice certificate of need application, which found no need in King County through 2012. AR at 38, 1329-42.

6 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

The department and Odyssey negotiated to settle both the adjudicative proceeding and

the federal lawsuit. Among the settlement terms, Odyssey agreed to dismiss its

federal lawsuit and the department agreed to initiate rule making to consider

amending WAC 246-310-290 and to enter into a proposed settlement in the

adjudicative proceeding before the HLJ. CP at 265-66. The federal court settlement

also precludes Odyssey from seeking damages, costs, or attorney fees related to any

event occurring before the settlement date, but that condition would not apply if the

department decided in bad faith not to present the proposed settlement of the

adjudicative proceeding to the HLJ. CP at 266.

Under the proposed settlement in the adjudicative proceeding, the department

would consider stipulating to the approval of Odyssey's certificate of need application

for King County in light of the recent finding of need in that area, but only after

providing interested entities notice and opportunity to comment. CP at 95-96.

Although the department does not generally consider evidence collected after the

public comment period has ended, it referred to special circumstances that prompted it

to consider approving Odyssey's 2006 application. CP at 337-39. The special

circumstances are that Odyssey did not know about the need finding until after the

2008 application deadline had passed; Odyssey's 2003 and 2006 applications had

been denied in part because of a finding of no need, so it was reasonable for the

company not to reapply in 2008 when it did not know whether need would exist; the

new calculation showed need for a provider in 2009, which is within the three-year

7 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

window included in Odyssey's 2006 application; and no entities applied for a King

County certificate of need in 2007, so applying the 2008 calculation to Odyssey's

2006 application would not prejudice any other potential providers. CP at 338-39.

Odyssey agreed to withdraw its request for an adjudicative proceeding regarding the

Pierce County and Snohomish County applications. CP at 95-96.

In accord with the proposed settlement, the department provided notice to

interested entities and gave them the opportunity to comment. See CP at 92-93.

Evergreen, Providence Hospice and Home Care of Snohomish County, and Hospice

of Seattle (collectively Providence), and two other existing hospice care providers

opposed the settlement in written comments sent to the department. AR at 1104-29.

The department then submitted the proposed settlement to the HLJ for approval. CP

at 330-42.

The HLJ allowed Providence and the two other providers to intervene for the

limited purpose of commenting on the proposed settlement. 2 AR at 1002, 1009. The

existing providers submitted briefs to the HLJ opposing the settlement. AR at 1179-

1527, 1700-20. On December 8, 2009, the HLJ approved the settlement, finding (1)

there was proper notice and opportunity to comment, as required by RCW

70.38.115(1 0)( c); (2) "[i]n the exercise of discretion," the December 2008 need

calculation could be used in evaluating need for Odyssey's proposed service; and (3)

2 Evergreen intervened earlier in the proceeding. AR at 151-53.

8 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

the application met all certificate of need criteria. CP at 346-4 7. The department

issued a certificate of need to Odyssey. CP at 347, 972.

Evergreen, Providence, and another provider filed a petition for judicial review

of the HLJ's order in King County Superior Court. CP at 1-20. The Superior Court

reversed the HLJ's order approving the settlement, revoked Odyssey's ce1iificate of

need, and remanded the matter to the HLJ for a determination based on evidence

available at the time the record was open. CP at 974. Odyssey appealed, and the

Court of Appeals reversed the Superior Court. King County Pub. Hasp. Dist. No. 2 v.

Dep 't of Health, 167 Wn. App. 740, 275 P.3d 1141 (2012). Evergreen and

Providence petitioned for review, which this court granted. 175 Wn.2d 1013, 287

P.3d 10 (2012).

II. STANDARDS OF REVIEW

The standards of review in certificate of need cases stem from the

Administrative Procedure Act (APA). RCW 70.38.115(10)(a); Providence Hasp. of

Everett v. Dep 't of Soc. & Health Servs., 112 Wn.2d 353, 355, 770 P.2d 1040 (1989)

(referring to former RCW 34.04.130 (1977), recodified as RCW 34.05.570). "The

agency decision is presumed correct and the challenger bears the burden of proof."

Providence, 112 Wn.2d at 355 (citing In re All-State Constr. Co., 70 Wn.2d 657, 659,

425 P.2d 16 (1967)). This court sits in the same position as the superior court and

applies the APA standards directly to the record before the agency. Tapper v. Emp 't

Sec. Dep't, 122 Wn.2d 397,402,858 P.2d494 (1993). Under the error oflaw

9 King County Pub. Hasp. No.2 eta!. v. Wash. State Dep 't ofHealth, eta!., No. 87574-0

standard, the court may substitute its interpretation of the law for that of the agency,

but it substantially defers to the agency's interpretation, particularly where the agency

has special expertise. Providence, 112 Wn.2d at 356 (citing Franklin County Sheriff's

Office v. Sellers, 97 Wn.2d 317, 325, 646 P.2d 113 (1982)). The court affirms an

agency's factual findings unless they are not supported by substantial evidence. RCW

34.05.570(3)(e); Tapper, 122 Wn.2d at 402. 3 The court may also grant relief from an

agency order that is arbitrary and capricious, meaning that "the decision is the result

of willful and unreasoning disregard of the facts and circumstances." Providence, 112

Wn.2d at 356 (citing Barrie v. Kitsap County, 93 Wn.2d 843,850,613 P.2d 1148

(1980)). 4 We review an administrative law judge's evidentiary decisions for abuse of

discretion. See UWMC, 164 Wn.2d at 104.

III. ANALYSIS

Evergreen and Providence first claim the HLJ should not have considered the

2008 need calculation because that finding was not available when Odyssey's

certificate of need application was first evaluated and that even if the HLJ could rely

on the 2008 calculation, the department's finding of need was arbitrary and

3 In Providence we stated that the court applies the clearly erroneous standard of review to factual issues, 112 Wn.2d at 355, but the APA has since been amended to apply the substantial evidence standard, RCW 34.05.570(3)(e). 4 Evergreen and Providence contend that the court should overlay the AP A standard for review with the summary judgment standard, meaning that the court should view the facts in the light most favorable to the nomnoving party and review facts de novo. Joint Suppl. Br. ofPet'rs at 16-17 (quoting Verizon Nw., Inc. v. Emp 't Sec. Dep't, 164 Wn.2d 909, 915-16, 194 P.3d 255 (2008)). Unlike in Verizon, however, the administrative law judge did not resolve this case at summary judgment, so we do not overlay the summary judgment standard here. See Verizon, 164 Wn.2d at 915-16.

10 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

capricious. Next, Evergreen and Providence allege the HLJ's approval of the

certificate was arbitrary and capricious because other, non-need, criteria were not met.

Finally, Evergreen and Providence claim their due process rights were violated

because the HLJ did not hold an adjudicative proceeding before approving the

settlement.

1. The 2008 Need Calculation

Evergreen and Providence argue that the department's decision to consider

Odyssey's 2006 application in light of the 2008 calculation conflicts with certificate

of need laws and the department's long standing policy. Joint Suppl. Br. ofPet'rs at

17-29. Indeed, the department does not claim that its original finding of no need for

the 2006 calculation was incorrect. Moreover, the department's informal policy

generally forbids new evidence to come into the record at the adjudicative proceeding.

See CP at 877; AR at 1260.

Nevertheless, the HLJ did not abuse his discretion by considering the new

finding of need. Administrative law judges, such as HLJ s, have considerable

discretion to determine the scope of admissible evidence. UWMC, 164 Wn.2d at 104

(citing Port of Seattle v. Pollution Control Hearings Bd., 151 Wn.2d 568, 597, 90

P.3d 659 (2004)). In UWMC, a medical center opposing another provider's certificate

of need contested the HLJ' s evidentiary cutoff, which excluded evidence the medical

center sought to admit. 164 Wn.2d at 101-02. The department responded that the

decision to grant a certificate of need is based on a "'snapshot"' of facts that existed

11 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

around when the application was filed. 164 Wn.2d at 103. But the department is not

necessarily limited to that snapshot. We noted that nothing in the rules or statutes

specifically addresses the record before an HLJ, concluding that "[i]t was within the

sound discretion of the health law judge to admit, or not admit, evidence that came

into existence after the close of the public comment period." 164 Wn.2d at 103-04. 5

In light of the special circumstances described by the department, the HLJ did

not abuse his discretion by considering the 2008 need calculation. Certificate of need

applications are due in October, but the 2008 need finding was not available until

December, so Odyssey was not able to apply for a certificate in 2008 after need had

been found in King County. See CP at 154; WAC 246-31 0-290(3)(b ). Odyssey could

have reapplied in 2009, but as the department admitted in federal court, each time

need has been found in a county for which no providers had applied that year, that

need was eliminated by the time a provider applied for a certificate in that planning

area. CP at 80, 235.

Odyssey also could have applied for a certificate of need in 2008, without

knowing whether there would be need for a new hospice provider in King County, but

that would have required it to wager a substantial expense for a benefit that was far

5 Department Secretary Mary C. Selecky drafted a memo while UWMC was pending, affirming "the department's long practice of not allowing new evidence to come into the record at the adjudicative proceeding." AR at 1260. Although Evergreen and Providence rely on this memo to support their claim that the HLJ in this case violated department policy, Secretary Selecky expressly limited the statement in the memo to the time while UWMC was pending. Id. We found that an HLJ has considerable discretion over the admission of evidence, so Secretary Selecky's memo is of little authority.

12 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

from guaranteed. In 2008 the certificate of need application fee for a hospice agency

was over $18,000. Former WAC 246-310-990 (2008). That fee does not include the

cost of preparing an application or defending it through the approval process.

Considering that the department had already denied Odyssey's applications twice for

lack of need and that Odyssey was challenging the certificate of need rules in federal

court, it is reasonable that the company would choose to avoid the extensive and

perhaps fruitless expense of applying again in 2008.

We also find it significant that no certificate of need applicants were prejudiced

by the department's decision to rely on the later need finding. If another entity had

applied for a certificate of need to offer hospice care in King County in 2007, our

analysis might have been different.

Evergreen and Providence imply that the department must conduct need

analysis consistently with how it interpreted the methodology in Odyssey I. Joint

Suppl. Br. ofPet'rs at 18-19. In Odyssey I, the department evaluated Odyssey's 2003

applications apparently in light of hospice use data from the prior three years, see 145

Wn. App. at 139, so Evergreen and Providence argue that the department should

consider Odyssey's 2006 applications using data from only 2003 through 2005. But

the Odyssey I court did not bind the department to considering data from any specific

time. The court merely held that the department did not act in an arbitrary and

capricious manner by using survey data collected after Odyssey had filed its

13 King County Pub. Hasp. No.2 eta!. v. Wash. State Dep't ofHealth, eta!., No. 87574-0

applications and relying on historical hospice use data for counties that did not

respond to the survey. Id. at 145-46.

Evergreen and Providence refer to UWMC for the certificate of need program's

objectives of meaningful public input and expeditious decision making, arguing that

the settlement in this case deviates from those goals. Joint Suppl. Br. ofPet'rs at 27-

28. Although it is unusual for the department to rely on data from a different time

span after the public comment period and public hearing have passed, the situation

was itself unusual and the department and the HLJ both invited interested parties to

submit written comments. Furthermore, allowing the department to rely on its most

recent need findings when negotiating with a certificate of need applicant serves the

goal of expeditious decision making. The department's desire to settle the federal

lawsuit apparently motivated it to consider the more recent need finding, but the

HLJ' s use of that information was not an abuse of discretion.

Evergreen and Providence also argue that no need exists under the 2008

calculation, when properly applied. Id. at 30-32. Specifically, they claim the

department failed to include Kline Galland and Providence ElderPlace 6 in its need

calculation and that the department improperly extended the planning horizon to make

it seem as though the 2008 calculation would support two providers. According to

6 Evergreen and Providence essentially raise a factual dispute regarding whether ElderPlace is a hospice care agency. Before the HLJ, the department argued that ElderPlace is not a licensed hospice, but instead coordinates Providence-based services for the elderly. CP at 336-37. The department also submitted a description of ElderPlace from the Providence web site, which does not seem to describe a hospice provider. AR at 1024-25, 1142-50. The department's finding that ElderPlace is not a hospice provider is supported by substantial evidence.

14 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

Evergreen and Providence, Kline Galland should have been included in the need

analysis because it received an exemption to provide hospice services before the

department granted a certificate to Odyssey. Id. at 31 (citing AR at 1191-92, 1194).

The department did not receive Kline Galland's application until August 18, 2009,

however, months after it had completed the 2008 need calculation. AR at 1191.

Moreover, the department contends Kline Galland had no patient census even at the

time of settlement because it was not yet licensed or operating. The department did

not act arbitrarily or capriciously by excluding Kline Galland from its calculation.

We affirm the department's decision not to consider Kline Galland and

Providence ElderPlace. 7

2. Non-need Criteria

Evergreen and Providence assert that approval of the certificate of need was

arbitrary and capricious because the department did not resolve deficiencies that are

unrelated to need. ld. at 32-34. In its original evaluation denying Odyssey's

certificate of need application, the department found Odyssey's application was not

consistent with any of the four certificate of need criteria. AR at 11. The HLJ did not

include a reevaluation of the four criteria in his order but instead referred to the

department's evaluation and settlement proposal, concluding that Odyssey's hospice

application met the requirements of the four applicable regulations. CP at 347. The

department contends the HLJ's conclusion regarding the non-need criteria was not 7 We do not consider Evergreen and Providence's claim the department improperly extended the need projection to 2013. There was need for at least one more provider through 2012.

15 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, eta!., No. 87574-0

arbitrary or capricious because each of those criteria would have been met, but for the

lack of need. Suppl. Br. ofDep't of Health at 20.

In its original review of Odyssey's 2006 certificate of need application, the

department found Odyssey had not met two subcriteria of the financial feasibility

factor. First, the department concluded Odyssey had not shown the immediate and

long-range capital and operating costs of the project could be met. Odyssey

anticipated it would operate at a profit by the end of its second full year of business,

but the department observed that the average length of patient stay that Odyssey

predicted was higher than the state average and higher than the numbers Odyssey

provided in its own forecasts in another part of the application-resulting in an

inaccurately high average daily census and, in turn, an inflated projected profit. AR at

25. The department was also concerned because some of Odyssey's projected patient

data was exactly the same for each of the three counties for which Odyssey submitted

an application. AR at 25. The department suspected Odyssey's projections "may not

be reflective of what the applicant actually expects to provide but instead is what is

needed to project having an average daily census by the 3rd year of operation as

required by rule." AR at 25. However, Odyssey's projected average daily census was

inaccurate in light of the 2006 finding that there would not be enough patients in need

of hospice services to warrant an additional hospice provider. Because the department

found in the 2008 need analysis that need would exist for another provider in King

County (meaning the average daily census was higher than predicted in 2006), the

16 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't ofHealth, et al., No. 87574-0

department's decision to consider that new need finding also satisfied this sub-

criterion of the financial feasibility factor. See AR at 26 ("need for an additional

Medicare certified hospice agency has not been demonstrated. As a result, the

department concludes that Odyssey's projected number of patient days is not reliable .

. . "(emphasis added)).

Under the second subcriterion of the financial feasibility factor, the department

found in its initial review that Odyssey had failed to show the costs of the project

would probably not have an unreasonable impact on the costs of health services. AR

at 26. Again, the department found this subcriterion had not been met because no

need existed: "Absent sufficient unmet need to support a new hospice agency, the

department concludes that any capital or operating expenditures incurred pursuing this

project would be an unnecessary duplication of those made by existing providers and

may result in an increase in the costs and charges for health services in the county."

AR at 26 (emphasis added). Thus, the department's updated 2008 need analysis

resolved the financial feasibility issues, and the HLJ did not act arbitrarily or

capriciously by finding this factor had been satisfied.

Next, Evergreen and Providence contend the HLJ acted arbitrarily and

capriciously by finding that Odyssey's application met the structure and process of

care criterion because the department failed to reassert conditions it proposed in the

original evaluation. Joint Suppl. Br. ofPet'rs at 33. At the Court of Appeals, both the

department and Odyssey agreed that those conditions still applied, however, so this

17 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

argument lacks merit. Reply Br. ofDep't of Health at 8-9; Reply Br. of Appellants

Odyssey at 22-23. 8

Finally, Evergreen and Providence cite the HLJ's failure to address testimony

from the public hearing, which was allegedly strongly opposed to Odyssey's

application. Evergreen and Providence do not refer to any authority requiring an HLJ

to expressly address public hearing testimony, so this argument lacks merit as well.

In sum, although the department had earlier criticized deficiencies in Odyssey's

application concerning non-need factors, the 2008 need calculation resolved the issues

and the HLJ' s finding that those factors were satisfied is not arbitrary or capricious.

3. Due Process

Evergreen and Providence contend the HLJ violated their due process rights by

refusing to allow them to provide oral or written testimony and argument in a hearing

on the merits. Joint Suppl. Br. ofPet'rs at 34-36. Evergreen and Providence argue

that RCW 70.38.115(1 O)(b )(iii) and long standing policy guarantee them this right.

The Court of Appeals did not consider this due process claim because it found

the issue was not adequately raised before the court. 167 Wn. App. at 750 n.8.

Although the providers discussed the issue in only a footnote, the footnote extends

8 Although Evergreen and Providence do not directly discuss subcriteria within the structure and process of care and cost containment factors that the department found were unmet in 2006, we note that the 2008 need analysis also resolved these issues. Under structure and process of care, the department concluded Odyssey's project had the potential to fragment hospice services because there was no need through 2011. AR at 29-30. For the same reason, the department found Odyssey had not satisfied the cost containment subcriterion of showing superior alternatives were not available. AR at 30. The 2008 need finding resolved the issue behind both of these previously unmet subcriteria.

18 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

over two pages and thoroughly describes the argument. Br. ofResp'ts at 20 n.S. The

due process claim was sufficiently briefed.

However, the providers' due process rights were not violated. The basic

requirements of procedural due process are notice and the opportunity to be heard.

Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306,314-15,70 S. Ct. 652,

94 L. Ed. 2d 865 (1950). Certificate of need laws provide that any applicant denied a

certificate of need has the right to an adjudicative proceeding, and similar existing

providers within the applicant's service area that participated in a public hearing

"shall be provided an opportunity to present oral or written testimony and argument"

at the proceeding. RCW 70.38.115(10)(a), (b). And "[i]fthe department desires to

settle with the applicant prior to the conclusion of the adjudicative proceeding, the

department shall so inform the health care facility or health maintenance organization

and afford them an opportunity to comment, in advance, on the proposed settlement."

RCW 70.38.115(10)(c). 9 Evergreen and Providence argue this authority to settle does

not authorize the department to circumvent established evaluation procedures or

modify its decision without an adjudicative proceeding. Joint Suppl. Br. ofPet'rs at

9 Evergreen and Providence refer to the final bill report accompanying this provision, which states that an interested party may "present testimony and argument at any adjudicative proceeding of the application on appeal. . . . The interested party must also be afforded an opportunity to comment in advance of any proposed settlement." Joint Suppl. Br. of Pet'rs at App. D, Ex. A (emphasis added). Because the bill report indicates that interested parties also have the right to comment on any proposed settlement, Evergreen and Providence imply that the HLJ must hold an adjudicative proceeding, even though the parties chose to settle. See id at 22. A more likely reading of this statement is simply that interested parties must be given a chance to participate-whether that means arguing at an adjudicative proceeding or commenting on a proposed settlement.

19 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

21-22; CP at 973. But it is unclear what purpose settlement would serve if a

competing provider could simply request a full adjudicative proceeding whenever the

department attempted to negotiate with an applicant.

Moreover, although we have held that competing health care providers have

standing to obtain judicial review of a certificate of need the department grants to

another provider, it does not follow that a competitor has the right to demand an

adjudicative proceeding before an HLJ. In St. Joseph Hospital & Health Care Center

v. Department ofHealth, 125 Wn.2d 733,735, 887 P.2d 891 (1995), we considered a

competitor's challenge to the grant of a certificate of need to open a kidney dialysis

center. Concluding the competitor was within the zone of interests of the certificate

of need statute, we reasoned: "While an applicant who is denied a CN [(certificate of

need)] has both a motive and a statutory right to seek review of the Department's

determination, no comparable motivation or statutory authority to seek review exists

when the Department grants a CN. Practically, this review can only be achieved if

competitors have standing." !d. at 742. 10 Regarding a competitor's right to

participate in certificate of need litigation, we considered the procedures the

department must follow. !d. The competitor claimed the department erred by failing

to provide notice of the applicant's request for adjudicative proceedings following the

initial denial of its application, failing to notify the competitor of a stipulation

10 Odyssey argues that interested parties are not allowed full judicial review of certificate of need settlements, Suppl. Br. of Resp't Odyssey at 11 n.4, but this conflicts with the reasoning behind St. Joseph. See 142 Wn.2d at 742.

20 King County Pub. Hasp. No. 2 et al. v. Wash. State Dep 't of Health, et al., No. 87574-0

reopening review of the application, and not affording the competitor a hearing when

its request for reconsideration was denied and a certificate issued to the applicant. !d.

Significantly, of these three alleged errors, we found only the failure to provide notice

of the stipulation reopening review violated the statutory procedures. !d. We

concluded that the department's failure to afford the challenger a hearing when its

request for reconsideration was denied did not violate the statutory procedures

governing certificates of need. !d.

Evergreen and Providence were allowed to seek judicial review of the grant of

a certificate to Odyssey. Although they assert they were also entitled to an

adjudicative proceeding, we considered a similar claim in St. Joseph and declined to

find there was such a statutory right.

IV. CONCLUSION

The HLJ did not abuse his discretion under these circumstances by relying on

new evidence in approving the previously denied certificate of need. The

department's 2008 need analysis was proper, and the providers had sufficient notice

and opportunity to participate in the settlement process to satisfy their statutory and

due process rights. We affirm the Court of Appeals.

21 King County Pub. Hasp. No. 2 eta!. v. Wash. State Dep 't of Health, et al., No. 87574-0

WE CONCUR:

{)

22 King County Pub. Hosp. Dist. No. 2 v. Dep 't ofHealth Dissent by C. Johnson, J.

No. 87574-0

C. JOHNSON, J. (dissenting)-The majority allows the Washington State

Department of Health to essentially reward an applicant with the license to which it

was not legally entitled because the department was sued. Here, until the federal

lawsuit was filed, the department's consistent and correct legal position in this case

was that historical data up to the application deadline determined future need. This

position is compelled by the applicable statutes and regulations. The department

applied and defended this position in reaching its initial decision and throughout

agency adjudications and appeals. That decision was challenged and correctly

upheld in the trial court and the Court of Appeals in Odyssey I. 1 Yet, when

confronted with a separate federal lawsuit for monetary damages, the department

changes its position and decides it is not bound by the decision it has steadfastly

defended, even though nothing about the statutes or regulations changed. And this

1 Odyssey Healthcare Operating B, LP v. Dep't ofHealth, 145 Wn. App. 131, 135, 185 P.3d 652 (2008). No. 87574-0- C. Johnson, J., dissenting

about-face is especially egregious here because this change in position denied

interested parties their statutory rights and their opportunity for meaningful

participation. Such action is the very definition of arbitrary and capricious decision

making and is contrary to the law. The trial court correctly recognized the

peculiarity of the State's argument, vacated the certificate of need, and remanded

with directions to, in essence, follow the law. We should do the same.

The majority applies the wrong standard of review and resolves this case

under the discretion generally afforded administrative law judges to determine

what evidence to consider. Within this discretion, reasons the majority, the health

law judge (HLJ) could consider the "special circumstance" that "2008 need data"

was not available until after the application deadline. But this is not remarkable or

special and is largely irrelevant to the actual "special circumstance" in this case.

The question, properly framed, is whether the settlement of a separate lawsuit,

claiming monetary damages, can be a "special circumstance" that allows the

agency to abandon the statutory and regulatory requirements, the "facts" of the

case, and the agency's consistent legal position throughout.

The "special" circumstance relied on by both the agency and the majority,

and the unavailability of the 2008 data by the application deadline, is not actually

special at all. Circumstances will often change after the fact and cannot be

"special." As the department admits and the majority recognizes, when WAC 246-

2 No. 87574-0- C. Johnson, J., dissenting

310-290 was adopted, it provided that need data would be available before the

application deadline, not at some future date. However, in the department's own

words, these "assumptions proved incorrect, meaning that applicants unfortunately

had to apply without knowing whether need existed." Clerk's Papers at 338. This

situation was not unique to Odyssey Healthcare Operating B, LP and Odyssey

Healthcare Inc. (Odyssey) and, as such, the department's after-the-fact reliance on

the lack of timely 2008 data was an improper departure from specific department

rules and regulations. Ch. 70.38 RCW; ch. 246-310 WAC.

But more importantly, even if this were a special circumstance, whether

Odyssey was somehow prevented from submitting a 2008 application should have

no bearing on whether need existed when the application was filed. The agency

had determined years earlier that no need existed, basing that decision on the 2006

data, a proposition that remains undisputed. The HLJ was not considering facts that

somehow changed this underlying information. Rather, Odyssey was able, in

exchange for settling a lawsuit, to achieve something to which it was not legally

entitled. Essentially, any "new" finding of need was not triggered by a change in

the original data, but by the threat of federal litigation. The majority now allows

Odyssey to use the leverage gained by litigation as a way to bypass the application

process and delay the proceedings until a time when favorable data is produced, a

3 No. 87574-0 ·-C. Johnson, J., dissenting

tactic which not only prejudices other interested parties but also completely

abandons the statutory and regulatory requirements.

The majority's reliance on University of Washington Medical Center v.

Department a,[ Health, 164 Wn.2d 95, 187 P.3d 243 (2008) (UWMC), is also

misplaced. There, we answered the question of whether an HLJ could set an

evidentiary cutoff, finding that these decisions fell within the HLJ' s discretion.

Importantly, however, UWMC involved limiting the record, not expanding it

indefinitely. Thus, it has little relevance on our case today other than for the

undisputed proposition that an HLJ has discretion on evidentiary determinations.

Additionally, the excluded evidence in UWMC that applied to the time period

covered by the initial application. But, as discussed above, the 2008 need data is

not additional evidence bearing on the 2006 application. Accordingly, UWMC is

inapplicable in this case.

The majority's reasoning also skirts the issue as to the meaning ofRCW

70.38.115(1 0)( c), which was the foundation of the Court of Appeals' decision. 2

The provision permits the department to settle with an applicant prior to the

conclusion of an adjudicative proceeding, provided that notice and an opportunity

to comment are given to other interested parties. None of this applies here. The

2 King County Pub. Hasp. Dist. No.2 v. Dep 't of Health, 167 Wn. App. 740, 751-52,275 P.3d 1141 (2012).

4 No. 87574-0- C. Johnson, J., dissenting

majority reasons that because the petitioners were given notice and an opportunity

to comment, the department's settlement stands. But this reasoning creates a

loophole in the application procedures and allows circumvention of the legal

requirements. Had Odyssey been granted a certificate of need when it first applied,

petitioners would likely have been entitled to an adjudication under the

Administrative Procedure Act, chapter 34.05 RCW. RCW 70.38.115(10)(b)(iii); St.

Joseph Hasp. & Health Care Crr. v. Dep 't ofHealth, 125 Wn.2d 733, 742, 887

P .2d 891 (1995). Now, however, petitioners are denied the opportunity for an

adjudication because the approval comes in the form of a "settlement" rather than

outright approval of the application.

This result is especially troubling when the legislative history ofRCW

70.38.115(1 0)( c) is considered. The provision was passed roughly seven months

after we issued our decision in St. Joseph Hospital and appears to have simply

codified our holding that the department must notify opponents of any settlement

and allow them an opportunity to comment. In addition to the striking similarity

between the holding in St. Joseph Hospital and RCW 70.38.115(10)(c), the final

bill report states that the "interested party must also be afforded an opportunity to

comment in advance of any proposed settlement." FINAL B. REP. on Engrossed

Second Substitute H.B. 1908, at 8, 54th Leg., 1st Spec. Sess. (Wash. 1995)

(emphasis added). The use of "also" means that the rights in RCW

5 No. 87574-0- C. Johnson, J., dissenting

70.38.115(10)(c) are additional to an opponent's right to a full adjudication when

an application is approved. That statutory requirement was avoided here.

When these issues are considered in tandem with the department's clear

disregard for the regulations and policies regarding the use of past data to

determine future need, the HLJ's decision is especially egregious. The department

has consistently considered and relied upon data from prior years in determining

whether a current need exists. This was the practice used by the department for

years, affirmed in Odyssey I, 3 and advocated by the department in the federal

litigation. Odyssey and all interested parties understood and relied on these

practices. Then, when confronted with a separate lawsuit, the department

acquiesces, creates an irrelevant "special circumstance," and allows circumvention

of the legal requirements. The HLJ then summarily, without allowing statutorily

required process, rubber stamps the department's decision. Approval of Odyssey's

application is completely inconsistent with the department's established and,

before now, ardently defended practices required under the law. It was arbitrary

and capricious and contrary to the law. We should reverse the Court of Appeals'

decision, revoke the certificate of need, and remand to the agency with instructions

to follow the law.

3 Odyssey I, 145 Wn. App. at 135.

6 No. 87574-0- C. Johnson, J., dissenting