## Facts

- Washington’s certificate of need (CN) program requires Department of Health approval to establish or expand certain health facilities, including ambulatory surgical facilities (ASFs), to prevent unnecessary duplication and align development with health-planning priorities.
- ASFs are subject to CN review under RCW 70.38 and related regulations, but operating rooms located in private physician or dental offices are exempt from the ASF definition when use is limited to the physician(s) within the practice.
- For ASF applications, the Department evaluates “need” using a three-step rule-based methodology: (1) determine existing operating-room capacity in the planning area; (2) project surgeries three years forward; and (3) decide whether existing capacity can meet projected demand.
- Swedish Health Services applied for a CN to build a five-operating-room ASF in East King County.
- In applying the methodology, the Department excluded exempt physician-office operating rooms from the existing-capacity count, but included surgeries performed in those offices when projecting future surgical demand.
- Using this approach, the Department found need for approximately 5.39 additional operating rooms and granted Swedish a CN for five operating rooms.
- Existing providers Overlake and Evergreen challenged the Department’s methodology as internally inconsistent and therefore arbitrary and capricious.

## Issues

1. Whether the Department reasonably interpreted and applied the ASF need methodology in WAC 246-310-270(9) by excluding exempt physician-office operating rooms from “existing capacity” while including surgeries performed there in projected demand.
2. Whether the Department’s CN decision was arbitrary or capricious, or otherwise contrary to law under judicial review standards for agency action.

## Decision

- The Washington Supreme Court reversed the Court of Appeals and reinstated the Department’s CN approval for Swedish.
- The Court held the Department’s interpretation of its CN regulations and its implementation of the three-step methodology were reasonable and consistent with the regulatory text and statutory purposes.
- The Court concluded the methodology was not arbitrary and capricious because the Department applied an established framework, explained its policy rationale, and acted within the discretion allowed by the rules.
- The Court faulted the Court of Appeals for insufficient deference to the agency’s interpretation and for substituting its own judgment in a technical, health-planning setting.

## Legal Principles

- Courts give substantial weight to an agency’s interpretation of ambiguous regulations the agency administers, particularly in technical subject areas, so long as the interpretation does not conflict with the regulation’s or statute’s plain language.
- An agency decision is arbitrary and capricious only if it is willful and unreasoning and taken without regard to the attending facts or circumstances; choosing among reasonable policy options within delegated authority is not arbitrary.
- Regulatory exemptions may justify excluding exempt facilities from “capacity” calculations for regulated facilities, even if utilization data from exempt settings is considered in forecasting demand for regulated services.
- In CN determinations, agencies may use broader utilization data to project future demand than the subset of facilities counted as regulated capacity, where that approach is reasonably explained and consistent with statutory goals to avoid duplication while ensuring adequate access.

## Conclusion

The court upheld the Department’s CN approval for a new ASF, holding that the Department reasonably applied its regulations by treating exempt physician-office operating rooms as outside regulated capacity while still using office-based surgery volumes to project future demand, and that this policy-based technical judgment was entitled to deference and was not arbitrary or capricious.


Overlake Hosp. Ass’n v. Dep’t of Health, 239 P.3d 1096 (Wash. 2010)