Appeals Court rejects CON complaint over MRI for northeastern NC

The North Carolina Court of Appeals has rejected a legal complaint over which health care provider can add a new magnetic resonance imaging scanner to serve four northeastern counties.

Virginia-based Chesapeake Diagnostic Imaging Centers had sued state regulators over the decision to award the new MRI scanner to Sentara Advanced Imaging Solutions. The state selected Sentara over Chesapeake for a government-mandated certificate of need.

Chesapeake challenged the CON decision on the grounds that the state allowed Sentara to maintain a monopoly on MRI services provided in Pasquotank, Perquimans, Currituck, and Camden counties. The lawsuit labeled the state’s decision a case of “agency error” that caused “substantial prejudice” against Chesapeake’s interests.

An administrative law judge upheld state regulators’ decision. A unanimous Appeals Court panel affirmed the ALJ’s ruling Wednesday.

“Petitioner’s substantial prejudice argument centers around two key factors: (1) its inability to construct its proposed imaging center in a market currently served by Sentara; and, (2) its loss of forecasted revenue from that inability,” wrote Judge John Tyson. “The harm required to establish substantial prejudice must be concrete, particularized, and actual or imminent. The argument for projected loss of revenue is legally insufficient, as it points to notions, which are both conjectural and hypothetical.”

Regulators from the North Carolina Department of Health and Human Services did not need to approve a CON that would have allowed Chesapeake to add another MRI machine in Elizabeth City, the Appeals Court ruled.

“DHHS deciding a CON application between two applicants in a manner, which fails to increase competition in one city, is not an unauthorized, erroneous, arbitrary or capricious action, was not made from improper procedure, or is inapposite to rule or law,” Tyson wrote. “For Petitioner to meet its burden, it must show an erroneous or improper action by the Agency during evaluation of the applications, which in turn resulted in substantial prejudice. DHHS has no statutory obligation to favor one CON applicant over another, simply because granting one would allow a new provider to enter the same city in the service market.”

“Petitioner’s argument for unconstitutionality of the ALJ’s decision hinges on the allegation DHHS’ granting Respondent’s CON application prevents it from entering the market and restricts its ‘ability to do business’ within the service area,” Tyson added. “The ALJ was under no obligation to consider the effects of Petitioner’s denial on its ability to compete with Respondent within Elizabeth City specifically or in the greater prescribed 4-county area. While DHHS’ CON authority does not permit decisions to perpetuate or develop a monopoly, its authority allows CON applications where monopolies might exist as a byproduct of the determined medical need.”

Judges Donna Stroud and Allegra Collins joined Tyson’s opinion. The three judges heard oral arguments in the case on June 12.

“If a new provider seeking to come into an area and needing a certificate of need is disapproved, and that disapproval is based on agency error, and that is not substantial prejudice, then in the CON context nothing is. Who could bring a case?” asked Noah Huffstetler, one of Chesapeake’s lawyers.

“It essentially eviscerates the law,” Huffstetler added.

Sentara argued during the state’s CON process that its new machine would increase competition for MRI services in the targeted four-county area of northeastern North Carolina.

“That’s pretty rich,” Huffstetler said, pointing to Sentara’s success in convincing state regulators five years in a row to remove a new MRI scanner from its plans for the four-county region.

When Chesapeake successfully advocated to keep the new MRI machine in the state’s 2022 health facilities plan, “Sentara flipped 180 degrees and said, ‘Not only is it needed, but we need it here.’”

“There is no possible way that approving the Sentara application — the monopolist who had the only service within that service area to supply MRI procedures — approving their application and denying the application of a would-be competitor, there’s no way that conforms” with CON competition standards, Huffstetler argued. That’s true “particularly given the undisputed facts of how Sentara over and over had attempted to prevent the need from being recognized.”

Sentara countered in the Appeals Court argument that Chesapeake has no legal basis to overturn a valid decision from DHHS.

“Look at the agency’s decision overall — it was a close one,” argued lawyer Alexander Gormley. “Both applications were found conforming, and then they applied a number of comparative factors. Sentara won, 3-2. What tipped it is they won on geographic accessibility.”

“They proposed to put their MRI in Currituck County, where none exists, whereas Chesapeake proposed to put theirs right on top of the existing MRI” in Elizabeth City, Gormley added. “So I think the agency exercised a lot of wisdom and common sense and found this is the better application. It’s going to spread the MRI’s throughout the area.”

Chesapeake asks the court to “make a new rule as to what substantial prejudice is,” Gormley argued.

Sentara disputed Chesapeake’s arguments about competition. “The right to compete is the right to file for and apply for a CON,” Gormley said. “It’s not the right to be in that market. At bottom, the allegation that being denied means they can’t put the MRI in that area is no different than the underlying allegations of the many denied applicants in the many ‘substantial prejudice’ cases when this court has said, ‘You’re just making a competition claim, and, I’m sorry, that’s not what substantial prejudice is.’”

State Special Deputy Attorney General Derek Hunter also urged the Appeals Court to reject Chesapeake’s arguments.

“Chesapeake invites the court to disavow decades of its own precedent,” Hunter said.

“The CON law is not designed to level the playing field between healthcare providers,” Hunter added. “Its purpose is to ensure that all North Carolinians, and particularly those in rural areas, are able to access necessary, cost-effective healthcare.”

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