Top NC court asks whether DHHS can appeal CON rulings

The North Carolina Supreme Court is raising questions about state health regulators’ authority to appeal decisions in certificate-of-need cases. A court order Friday calls on parties in a Wake County CON dispute to address the issue.

The high court heard oral arguments nearly a year ago in the case pitting Pinnacle Health Services against the North Carolina Department of Health and Human Services. Pinnacle challenges DHHS’ decision in 2021 to award a CON to Duke Health for a magnetic resonance imaging scanner.

An administrative law judge from the Office of Administrative Hearings ruled in 2022 that health care regulators made legal errors when choosing Duke. The ALJ’s decision reversed the state agency and granted the CON to Pinnacle.

DHHS appealed the decision to the North Carolina Court of Appeals. Appellate judges split, 2-1, in upholding the ALJ in 2023.

Both the department and Duke have asked the state Supreme Court to reverse the lower court and restore the original agency decision granting the CON  to Duke. Justices heard oral arguments in the case in September 2024.

Rather than announce a decision in the case Friday, the court instead issued a four-page order seeking new briefs. Pinnacle is considered the petitioner in the case. DHHS is the respondent.

“In the Court of Appeals, petitioner raised a jurisdictional issue under N.C.G.S. § 131E-188 concerning respondent’s authority to appeal a final decision from the Office of Administrative Hearings,” according to the order. “The Court of Appeals stated in its opinion that it had jurisdiction over the appeal pursuant to N.C.G.S. § 7A-29(a) but never addressed the specific jurisdictional argument advanced by petitioner under our Certificate of Need (CON) law.”

“In CON cases, N.C.G.S. § 131E-188 specifically provides that following the issuance of a final decision by an Administrative Law Judge, ‘[a]ny affected person who was a party in a contested case hearing shall be entitled to judicial review of all or any portion of any final decision’ by the Court of Appeals,” the order explained.

The section defines “affected person” and includes CON applicants, people who live or use health services in the affected area, and other health care providers.

“This section does not appear to expressly include respondent among those individuals and organizations defined as an ‘affected person,’” the Supreme Court order added.

A DHHS brief argued “that the General Assembly contemplated agency appeals based upon the language in N.C.G.S. § 131E-188(b1),” the order continued. That section of state law required an “affected person” to post a bond for an appeal “but states that ‘[t]he bond requirements of this subsection does not apply to any appeal filed by the Department.’”

“No party briefed or argued the jurisdictional issue to this Court,” the order explained. “Because the Court of Appeals only has ‘such appellate jurisdiction as the General Assembly may prescribe,’ the parties are therefore ordered to provide supplemental briefing.”

Pinnacle, Duke, and DHHS must answer whether the department is included within the definition of “affected person.” “If respondent does not fall within the definition of an ‘affected person,’ what statutory provision entitles it to appeal or otherwise seek judicial review of a final decision of an Administrative Law Judge in CON cases?” the high court asked.

New briefs are due within the next month.

Last year’s oral arguments focused on different issues in the dispute.

Pinnacle failed to prove that it suffered “substantial prejudice” from the original CON decision, state Special Deputy Attorney General Derek Hunter argued before the high court. Without that legal prejudice, Pinnacle cannot overturn the health regulators’ choice.

“The type of harm that Pinnacle has alleged is competition-based harm,” Hunter said. “And the competition-based harm that Pinnacle has alleged  — loss of profits, loss of savings, loss of patients — is the same type of competition-based harm that the appellate courts have consistently struck down as not sufficient to establish substantial prejudice.”

Justice Richard Dietz distinguished Pinnacle’s case from other CON disputes.

“If you’re a stranger to the case and you come in and say, ‘Hey, hey, hey, the agency made an error,’ we’d be like, ‘Well, so what? You’ve got to have some stake here,’” Dietz said. “it’s more than just that the agency made an error. It’s that the agency made an error and you had the legal right to benefit from it, and you’re not because of the error. Why isn’t that the substantial prejudice?”

“If you’re someone who applied to be given a certificate of need from the government, and the government made a legal error and gave it to someone else when you had the right under the statute to get it, that to me seems like essentially per se substantial prejudice.”

Pinnacle’s lawyer asked the court to uphold the Appeals Court’s decision.

“Here Pinnacle itself … applied, met all the statutory review criteria, and was only denied the right to obtain an MRI because Duke was wrongly approved,” Marcus Hewitt argued.

“Your argument is … your client applied for it and has a legal right to receive it, and it would be odd to say, ‘Well, you don’t have any substantial prejudice,’ when you’re told you can’t get it,” Dietz said to Hewitt.

“That’s exactly right,” Hewitt responded.

During his rebuttal time, Hunter suggested a ruling favoring Pinnacle would go against longstanding court precedent.

“If this court believes that it is in your province to make that legal determination as far as substantial prejudice, then what you have before you is decades of case law that says the competition-based harm alleged by Pinnacle is not substantial prejudice,” he said. “It would certainly be within your authority to overrule those decades of case law. Certainly, that would be up to you all to do that.”

Pinnacle filed paperwork in North Carolina’s highest court in March 2024 criticizing state regulators and Duke Health for their legal strategy in the CON dispute.

“Here, an executive agency told Pinnacle that it could not install a fixed MRI scanner in Wake Forest, even though that geographic area is currently served by zero such scanners and even though Pinnacle demonstrated that it could provide the service at lower cost than other providers,” Pinnacle’s lawyers wrote in a brief. “The agency instead let Duke add a fixed MRI scanner to its facility in the heart of Raleigh, where Duke and other providers already have a bevy of scanners available for the public.”

“Pinnacle brought a contested case against the agency, and Duke intervened,” the brief continued. “As required by statute, an Administrative Law Judge held an evidentiary hearing over several days. The Agency could not defend its decisionmaking process. Its decision was riddled with logical fallacies and math errors. It deviated from its usual practice in several respects but could not explain why.”

”Again as required by statute, the ALJ issued a detailed ruling, including findings of fact supported by record evidence and conclusions of law that followed therefrom,” Pinnacle’s lawyers wrote.

The administrative law judge reversed the state agency decision and awarded the CON to Pinnacle. A split 2-1 Court of Appeals panel upheld that decision.

Pinnacle argues that a 2011 change in the state Administrative Procedure Act requires courts to defer to the ALJ, not the DHHS regulators. “Should the courts ignore the 2011 amendments to the Administrative Procedure Act?”

“Because of … litigation choices made by appellants, the issues squarely presented to this Court are now greatly simplified,” Pinnacle’s lawyers wrote.

The legal action started when Pinnacle challenged the state’s 2021 decision to award a CON to Duke. Pinnacle and Duke were competing for state approval of a single new MRI scanner for either Raleigh or Wake Forest.

Administrative Law Judge Melissa Owens Lassiter reversed the state’s decision in July 2022. Lassiter determined that Pinnacle should have won the CON from the state Department of Health and Human Services.

“ALJ Lassiter concluded the Agency’s decision was based on material errors in the geographic accessibility analysis that led to the erroneous decision that Duke’s application would be more effective,” wrote Judge Julee Flood for the Appeals Court majority that upheld Lassiter’s decision. “ALJ Lassiter further concluded the Agency erroneously failed to follow principles used to determine historical utilization, which would have revealed Pinnacle’s as the more effective application. Finally, ALJ Lassiter concluded Pinnacle met its burden of demonstrating the Agency’s decision substantially prejudiced its rights.”

Flood wrote that a change in state law in 2011 influenced the decision in the Pinnacle case.

“Duke implores this Court to review this case by giving deference to the Agency’s decision, and not to the Final Decision of the ALJ,” she wrote. “To support this argument, Duke cites several of this Court’s precedents that did, in fact, analyze agency decisions by giving deference to the agency’s expertise and experience in the particular field.”

“While this review would have been correct in the cases preceding the 2011 legislative session, it is not a correct application of current law,” Flood added. “What Duke failed to note, either fortuitously or conveniently, is that our legislature amended the Administrative Procedure Act (the ‘APA’) in 2011, ‘conferring upon [ALJs] the authority to render final decisions in challenges to agency actions, a power that had previously been held by the agencies themselves.’”

“Before the legislature amended the APA, an ALJ would issue a recommended decision to the respective agency, which the agency was then free to adopt in full or in part, or reject in full,” Flood explained. “Since the 2011 amendment, however, the ALJ decision is no longer a recommendation but rather is the final decision binding on parties. In reviewing an agency decision, the ALJ ‘shall decide the case based upon the preponderance of the evidence, giving due regard to the demonstrated knowledge and expertise of the agency with respect to facts and inferences within the specialized knowledge of the agency.’”

“Most of Duke’s brief is dedicated to showing why the Agency decision was correct, while failing to specifically show this Court where the ALJ’s Final Decision was incorrect,” the majority opinion explained.

Flood also critiqued the state’s arguments. “The Agency argues this Court’s role is to review whether Pinnacle met its burden of showing substantial prejudice,” she wrote. “The question before this Court, however, is ‘whether the whole record contains relevant evidence that a reasonable mind might accept as adequate to support the [ALJ’s] decision’ that Pinnacle showed it suffered substantial prejudice from the Agency’s granting of the CON to Duke.”

“Our review is not conducted with an eye towards whether Pinnacle met its burden of proof to the ALJ; instead, our review is focused on whether the ALJ’s Final Decision concluding Pinnacle did meet its burden is supported by substantial evidence,” Flood explained.

Judge Jeff Carpenter joined Flood’s opinion. Judge John Tyson dissented.

Tyson emphasized that the CON process originates with state health regulators, not an administrative law judge in the state Office of Administrative Hearings.

“The ALJ is not writing on a clean slate and is statutorily constrained and mandated to “giv[e] due regard to the demonstrated knowledge and expertise of the agency with respect to facts and inferences within the specialized knowledge of the agency,’” he wrote. “While the OAH and the ALJ, since the 2011 amendments to the statute, can issue a Final instead of a Recommended Decision, those amendments and the standards and constraints in the NCAPA do not allow an ALJ to merely disagree with and substitute its judgment for that of ‘the specialized knowledge of the agency.’”

“Here, both applicants, Pinnacle and Duke, submitted conforming applications,” Tyson added. “NC DHHS could approve only one application, as only one CON was authorized. There was necessarily going to be a winner and a loser, as in all competitive environments and contests. The Agency conducted an extensive and competitive review of the applications within its expertise to determine which was more effective for the purposes of awarding the CON.”

State regulators chose Duke, and Lassiter “was not free to substitute her personal preferences for the record, expertise, and knowledge of the agency merely to reach a contrary result,” Tyson wrote.

He specifically targeted Lassiter’s finding that the state’s decision would cost Pinnacle $400,000 in annual savings and $97,000 in additional net income. “While both may be true, as between two admittedly qualified applicants and only one CON available, those findings will be equally true no matter which party is not awarded the CON,” Tyson wrote. “It is not up to the ALJ under the statute to make that determination, but only to review ‘whether the whole record contains relevant evidence that a reasonable mind might accept as adequate to support the Agency’s conclusion.’”

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