STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

KERNON'S SU CASA, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 82-517

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

) KERNON'S SU CASA, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 82-1573

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was held before the Division of Administrative Hearings by its duly designated Hearing Officer, DONALD R. ALEXANDER, on October 13, 1982, in Tampa, Florida.

APPEARANCES

For Petitioner: Karen L. Goldsmith, Esquire

Post Office Box 1980 Orlando, Florida 32802

For Respondent: Joseph L. Shields, Esquire

Building One, Room 406 1323 Winewood Boulevard

Tallahassee, Florida 32301 BACKGROUND

In Case No. 82-517 Petitioner, Kernon's Su Casa, Inc., has contested the results of an audit of its Medicaid cost report for the eight months ending May 31, 1980 by Respondent, Department of Health and Rehabilitative Services. In the audit report Respondent has proposed that reimbursable Medicaid patient costs be reduced by $55,387.

Petitioner requested a formal hearing pursuant to Subsection 120.57(1), Florida Statutes, to contest the audit. Thereafter was forwarded by Respondent to the Division of Administrative Hearings on February 19, 1982 with a request

that a Hearing Officer be assigned to conduct a hearing. By notice of hearing dated April 9, 1982 the matter was set for final hearing on June 28, 1982 in Tampa, Florida. At the request of Petitioner, the final hearing was rescheduled to October 13, 1982 at the same location. A second motion to continue the hearing filed by Petitioner on August 10, 1982 was denied by order dated August 19, 1982.

On August 2, 1982, this case was consolidated with Case No. 82-1573 which involves an audit of Petitioner's cost report for the year ending September 30, 1979. In that audit report Respondent has proposed that $66,955 in costs be disallowed. The two cases were heard on a consolidated record and a single recommended order is being issued disposing of the matters.

At the final hearing Petitioner presented the testimony of Randolph Kernon, Jr., the provider's former administrator, and Ray Bolt, a CPA, and offered Petitioner's Exhibits 1-8; all were received in evidence. Respondent presented the testimony of Norman S. Powe, a Department field auditor, and John T. Donaldson, a Department audit evaluation and review analyst, and offered Respondent's Exhibits 1 and 2; both were received in evidence.

The transcript of hearing was filed on November 8, 1982. Proposed findings of fact and conclusions of law were filed by the parties on November 24 and 30, 1982 and have been considered by the undersigned in the preparation of this order. Findings of fact not included in this order were considered irrelevant to issues, immaterial to the results reached, or were not supported by competent and substantial evidence. The parties have waived the requirement that a recommended order be entered by the undersigned within thirty days after the transcript of hearing was filed. The issue herein is whether Petitioner's reimbursable Medicaid costs should be reduced in accordance with the adjustments proposed in Respondent's audit reports.

Based upon all the evidence, the following findings of fact are determined: FINDINGS OF FACT

1. INTRODUCTION

   
   

   1. Petitioner, Kernon's Su Casa, Inc., is a licensed nursing home facility located at 1514 Chelsea Avenue, Tampa, Florida. It holds a license from Respondent, Department of Health and Rehabilitative Services. As is relevant here, Petitioner, was certified to participate in the Medicaid program during the year ending September 30, 1979 and the eight months ending May 31, 1980.

      
      

   2. The Medicaid program is a joint federal-state program. It is governed by the Florida Title XLX Medicaid Reimbursement Plan and the applicable doctrines in HIM-15.

      
      

   3. Petitioner had always maintained 120 nursing home beds until mid-1979 when the facility opened a new wing which expanded the facility to 240 beds.

      
      

   4. The facility was sold by the Kernons in June, 1980. After the sale was completed Respondent conducted an audit on the provider's Medicaid cost reports for the year ending September 30, 1979 and the eight months ending May 31, 1980. In those reports it concluded that Petitioner had improperly claimed reimbursement for expenses totaling $55,387 and $66,955 respectively during those two fiscal years. Because of this, Petitioner has placed $100,000 in escrow pending resolution of the controversy.

2. YELLOW PAGE ADVERTISING

   
   

   1. In both fiscal years the nursing home placed a quarter-page advertisement in the Tampa Yellow Page directory. The advertisement included the name of the facility, its operators, a list of services provided, the number of beds, a small map showing where the facility was located, a picture drawing of the home, the telephone number, and other miscellaneous information.

      
      

   2. The purpose of the advertisement was to inform the public that the name of the facility had recently changed, that additional beds had been added, and to entice nurses to seek employment at the facility. No advertising was done in the local newspapers. Applicable regulations provide that if the nature of the advertisement is promotional rather than informational, and is designed to increase patient utilization, the costs should be disallowed. Because the facility has a waiting list of Medicaid patients, and was already operating at or near full capacity, the advertisement was not promotional in nature, but merely informed the public as to the services being offered. Therefore, the expenditures were proper and in accordance with Department regulations.

      
      

3. TRUCK EXPENSES

   
   

   1. During 1979 and 1980 Petitioner owned and operated a station wagon, a Cadillac and a 1979 GMC truck. In its audit reports Respondent disallowed all of the truck and Cadillac expenses, but reclassified 50 percent of the Cadillac's expenses to administrator's compensation.

      
      

   2. The truck in question was a large double-cab pickup truck that holds five to six passengers. The provider's administrator estimated that the truck was used 85 percent of the time for business purposes and 15 percent for personal use. This estimate was not contradicted. The vehicle was used to transport patients to and from their personal physicians, on shopping errands, on social outings, and in moving furniture and the like. It was kept at all times on the provider's premises except when being used. It was also used as an emergency back-up vehicle in the event no other vehicles were on the premises.

      
      

   3. In its audit reports Respondent proposed to disallow the truck expenses on the ground the expenditures were not related to patient care. Petitioner was also criticized because no vehicle log has been maintained to document the actual use of the truck. However, this criticism was not contained in the audit reports nor was it raised during a later exit conference when all proposed adjustments were discussed by the provider and the Department's auditors. At some point just prior to the hearing Petitioner was first advised that this objection would be used. Although applicable regulations provide that a nursing home must maintain adequate records to permit the agency to verify the legitimacy and accuracy of all costs, there is no requirement that an actual log be maintained. Moreover, the Department's internal procedures manual allows a reasonable estimate to be made if no log is kept. The Department's representative also conceded the amount of vehicle expenses being claimed was reasonable. The Department has an informal policy that nursing homes having at least 40 beds are entitled to one vehicle, if only for emergency or security purposes. Because the size of Petitioner's facility is six times larger (240 beds) than this, its transportation need are much greater, and allowance for a second vehicle is not unreasonable.

4. SALES TAX

   
   

   1. When Petitioner purchased the facility in 1974, it was necessary to create a second corporation to lease the facility from the owning corporation. The Kernons were stockholders in both corporations and all transactions between the two were treated as related party transactions. In conjunction with the lease agreement, Petitioner paid a sales tax on the rental agreement. It now claims reimbursement for those taxes. However, applicable regulations provide that lease costs cannot be reimbursed, and the same rationale is applicable to the sales tax associated with the lease. Therefore, such taxes should not be allowed.

      
      

5. MEDICARE ADJUSTMENT

   
   

   1. In both audit years, Respondent proposed that Medicaid reimbursable expenses be reduced by that amount of costs that were reimbursable under the Medicare program. This adjustment is commonly referred to as the Medicare adjustment and is vigorously opposed by Petitioner. The rationale for this adjustment is two-fold. First, if none were made, a provider would theoretically receive reimbursement for the same costs under both the Medicaid and Medicare programs. Therefore, reimbursement could exceed the actual costs incurred by the facility. Second, HIM-15 regulations provide that no costs shall be borne by the Medicaid program that are covered by other programs. Therefore, the adjustment is consistent and indeed required by governing regulations. The Department's disallowance of these costs was proper, and no reimbursement is due.

      
      

6. MISCELLANEOUS ADJUSTMENTS

1. Petitioner claimed $200 for repairs and maintenance on its station wagon during 1980. It produced the cancelled check evidencing the expenditure but was unable to provide other supporting documentation for the auditors. The failure to do so was contrary to Department regulations, and the disallowance of the cost was proper.

   
   

2. In its 1980 audit report, Respondent erroneously made an $18,615 adjustment for amortization Of deferred start-up costs in Petitioner's favor.

   It discovered the error on the day of the final hearing and requested that it be reversed. However, because of a lack of notice and reasonable opportunity for Petitioner to contest the change, the request was denied.

   
   

   CONCLUSIONS OF LAW

   
   

3. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties thereto pursuant to Subsection 120.57(1), Florida Statutes.

   
   

4. The burden of proof in this proceeding rests upon Petitioner. Therefore, it must affirmatively demonstrate its entitlement to reimbursement of expenses incurred while participating in the Medicaid program. Department of Transportation vs. J.W.C. Co., Inc. 396 So.2d 778 (Fla. 1st DCA 1981); Rule IOC- 7.481(6), Florida Administrative Code.

   
   

5. At the outset of the hearing, a ruling was entered that only those reasons cited in the Department's audit reports could be used as a basis for disallowing the questioned expenditures unless it was shown that Petitioner had been given sufficient and timely notice that other bases would be used to

   support their disallowance. The purpose of she ruling was to preclude Respondent from belatedly raising new objections without affording Petitioner an opportunity to adequately respond to and contest those matters. To permit Respondent to do so would have effectively denied Petitioner its right to due process. With this standard in mind, each of the contested expenditures will be examined.

   
   

   1. YELLOW PAGE ADVERTISING

      
      

6. Section 2136.2, HIM-15, provides in pertinent part as follows:

   
   

   Costs of advertising to the general public which seeks to increase patient utilization of the provider's facilities are not allowable . . . On the other hand, reasonable costs of activities involving professional contacts with physicians, hospitals, public health agencies, nurses associations, State and county medical societies, and similar groups and institutions, to apprise them of the availability of the provider's covered services are allowable. Such contacts make known what facilities are available to persons who require such information in providing for patient care, and serve other purposes related to patient care . . . The cost of listing the facility in a telephone directory of similar facilities in a given area is allowable . . .

   
   

   Respondent contends that the advertising in question was promotional in nature, and therefore its costs should not be allowed. It also relies upon a prior agency proceeding involving Petitioner in which the same issue was resolved in Respondents favor. Kernon's Su Casa, Inc., v. Department of HRS, DOAH Case No. 79-712, Final Order entered 1/7/80.

   
   

7. While it is true that any advertising of a facility may be said to increase patient utilization, the facts herein do not support this conclusion as to the advertising in issue. Because the facility had a waiting list of Medicaid patients, and was already operating at or near full capacity, Petitioner sustained its burden of demonstrating that the advertisements were for informational purposes rather than increasing patient utilization. 1/ Therefore it is concluded that the Yellow Page advertising was not proscribed by Section 2136.2, and these costs should be allowed. 2/

   
   

   1. TRUCK EXPENSES

      
      

8. Initially, it must be determined whether Petitioner need only show that the truck expenses were related to patient care, or whether it must also demonstrate that the provisions of Section 2300, HIM-15 have been met. In the audit reports which prompted this proceeding, Respondent proposed that all truck expenses be eliminated because they were not related to patient care. See Section 2103.3, HIM-15. It later asserted that Section 2300, HIM-15 was also applicable and that Petitioner must furnish "adequate cost data" in order to substantiate its claim. Petitioner contends that the latter provision is not controlling since it was not referred to in the audit reports and it had insufficient notice to counter that objection. Respondent disagrees and asserts

   that in order to prove that costs are patient related, sufficient documentation must be produced in order for the auditors to verify the expenditures. Thus, it contends the two are so intertwined that both provisions must be complied with before reimbursement can be made.

   
   

9. It is unclear when Petitioner became aware of the Department's intention to rely upon Section 2300, HIM-15 as a basis for disallowing these costs. In any event, it occurred after the post-audit exit conference was completed but prior to the hearing. Even at that late juncture the matter could have been raised had adequate and timely notice been given the provider. But Respondent did not rebut Petitioner's claim that insufficient notice was given, and the injection of a new issue during the latter part of the proceeding constituted error. Cf. Hopwood v. Department of Environmental Regulation, 402 So.2d 1296 at 1299 (Fla. 1st DCA 1981). Therefore, Petitioner need only demonstrate that the costs in question are related to patient care. 3/ This is not to say that the adequate documentation rule is totally irrelevant. Rather, compliance with the rule would obviously enhance the quality of Petitioner's evidence.

   
   

10. The evidence discloses that the reasonableness of the total transportation expenses claimed by Petitioner was not challenged. Further, while only one vehicle per facility is reasonable for smaller nursing homes, a facility with 240 beds logically requires more. 4/ Therefore, the truck was necessary in order to meet the reasonable transportation needs of the facility. Petitioner estimated that its truck was used 85 percent of the time on business trips. Admittedly, a log would enhance and support the credibility of this number but there was no showing that the estimate was unreasonable, or that vehicle expenses were unusually high for that type of facility. Moreover, the Department acknowledges that a reasonable estimate may be used where no log is kept. Accordingly, it is concluded that Petitioner has met its burden of proof in establishing its entitlement to truck expenses. 5/ J.W.C. Co. Inc., supra.

    
    

    1. SALES TAX ON LEASE

       
       

11. This item involves the payment of sales tax by Petitioner on a lease arrangement entered into with a related party. Section 1006, HIM-15 is controlling and provides in pertinent part:

    
    

    the rent paid to the lessor by the provider is not allowable at cost. The provider, however, would include its costs of ownership of the facility. Generally, these would be costs such as depreciation, interest on the mortgage, real estate taxes and other expenses attributable to the leased facility.

    
    

    Petitioner contends that sales tax is an expense "attributable to the leased facility", and as such, is allowable under the above regulation. Respondent disagrees and points out that since the rent (or lease costs) is specifically non-reimbursable, it follows that the sales tax on the lease cannot be claimed.

    
    

12. Because the sales tax is directly related to the lease agreement, and the lease payments cannot be reimbursed, the sales tax associated with the lease should not be allowed.

    1. MEDICARE ADJUSTMENT

       
       

13. Respondent has proposed that allowable Medicaid costs be reduced by

    $102,628 on the ground such costs are reimbursed to the provider under another program. This being so, it asserts that Section 2102.1, HIM-15 proscribes reimbursement of these costs. Petitioner counters that the adjustment is not sanctioned by Section 2102.1, supra, and that the Department's policy of making this adjustment in each Medicaid case is in actuality an unpromulgated rule, and is therefore illegal.

    
    

14. The regulation in question has been in effect for a number of years and provides in pertinent part as follows:

    
    

    Reasonable costs of any services are determined in accordance with regulations establishing the method of methods to be used, and the items to be included.

    Reasonable cost takes into account both direct and indirect costs of providers of services, including normal standby costs. The objective is that under the methods of determining costs, the costs with respects to individuals covered by the program will not be borne by others not so covered, and the costs with respect to individuals not so covered will not be borne by the program. (Emphasis added)(Sec. 2102.1)

    
    

    Under the term of the foregoing regulation, those costs related to another program such as Medicare should be separated from costs to be reimbursed under the Medicaid program. This interpretation has been consistently followed over the years in administrative proceedings. See, e.g. Dept. of Health and Rehabilitative Services v. Fountainhead Nursing and Convalescent Home, DOAH Case No. 79-765, Final Order entered 9/13/79; Dept. of Health and Rehabilitative Services v. Shore Acres Nursing and Convalescent Home, DOAH Case Nos. 77-1523 and 77-1524, Final Order entered 12/13/78; Hillshaven Convalescent Center of Gainesville v. Dept. of Health and Rehabilitative Services, DOAH Case No. 79- 586, Final Order entered 1/7/80; Martin Luther Foundation, Inc. d/b/a Swanholm Nursing Home v. Dept. of Health and Rehabilitative Services, DOAH Case No. 80- 1542, Final Order entered 3/26/81. The latter decision was later affirmed by the First District Court Appeal and is reported at 411 So.2d 396 (Fla. 1st DCA 1981). Adherence to this long-standing interpretation requires that the adjustment be made. Therefore, Petitioner's contention that the regulation does not sanction the adjustment is rejected. Petitioner also contends that the adjustment is a policy or rule, and because it has never been formally adopted, the Department's action is illegal. But whether the Department's action was indeed a "rule" within the meaning of Subsection 120.52(14) must be determined in a 120.56 proceeding rather than a formal hearing under Subsection 120.57(1). Petitioner did not precisely allege that the Medicare adjustment was non-rule policy requiring agency explication and justification in this proceeding.

    Nonetheless, even if it were, there is nothing that precludes an agency from formulating non-rule policy on a case-by-case basis so long as an adequate record foundation for its application exists. Fla. Cities Water' Co. v. Fla. Public Service Comm., 384 So.2d 1280 (Fla.1980). In so doing, the" . . . affected parties (must) have a forum in which to challenge . . . any change, and the basis on which the action it taken (must be) supported by the record". City of Plant City v. Mayo, 337 So.2d 966 at 975 (Fla. 1976). Here the rationale

    underlying the adjustment was shown to be a concern that the provider would receive excess reimbursement if the adjustment was not made, thereby resulting in reimbursement in excess of total costs. Moreover, the adjustment is consistent with Department regulations which require that such costs be treated in that manner. Further, it was not disputed that such costs are reimbursed to an undisclosed extent by another program.

    
    

    Therefore, even if the adjustment constituted non-rule policy, an adequate record foundation to support its use has been established. 6/

    
    

    1. MISCELLANEOUS ADJUSTMENTS

    
    

15. Petitioner claimed reimbursement for $200 allegedly expended for repairs on its station wagon in 1980. However, it failed to provide any other underlying documentation to support this claim. By failing to do so, it violated a regulation requiring such documentation, and accordingly the cost should not be allowed. See Section 2304, HIM-15.

    
    

16. In its 1980 audit report, Respondent erroneously made an $18,615 adjustment in favor of Petitioner. The error was not discovered until the day of the hearing. Clearly this did not afford Petitioner a reasonable opportunity to examine and review the nature of the adjustment, and to counter its effect. Therefore, it is concluded that no change in the adjustment should be made.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Petitioner be reimbursed for fiscal year 1979 and 1980 in

accordance with the foregoing adjustments.

DONE and ENTERED this 17th day of December, 1982, in Tallahassee, Florida.

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 17th day of December, 1982.

ENDNOTES

1/ Reliance upon Case No. 79-712 alone is not sufficient to substantiate the Department's claim. That case dealt with a different fiscal year, and the advertisements were not shown to be identical. Moreover, each case is a de novo proceeding requiring independent evidence to support an adjustment.

2/ It is noteworthy that subsequent to the audit periods in question, Section 2163.1 was amended to specifically allow the costs of Yellow Page advertising

"if the listings are consistent with practices that are common and accepted in the industry." It was demonstrated herein that the ads in question were similar to those of other nursing homes in the general area.

3/ Since auditors are not lawyers, it is understandable audit report may omit reference to all regulations which support the proposed disallowance. But ample opportunity exists prior to the hearing to alert a provider that additional grounds or regulations will be relied upon to disallow a cost. For example, additional grounds may be raised at the exit conference (Rule 10C-7.481(4), F.A.C), or by formally advising the provider during the lengthy period that transpires between the request for hearing and when the matter is finally heard.

4/ The Department representative testified that one vehicle for a 40 bed facility was reasonable; it follows that a 240 bed facility would require something more in terms of meeting its overall transportation needs.

5/ Since 85 percent of the use of the truck was related to patient care, the provider should also be entitled to recover a comparable portion of gasoline and maintenance costs associated with its use.

6/ It is not enough for an agency to merely argue that because an adjustment was made in prior cases, there is no need to produce any other evidence to substantiate its position. While such an argument was made herein, there was also other minimally sufficient evidence to support its position. See also footnote 1, supra.

COPIES FURNISHED:

Karen L. Goldsmith, Esquire Post Office Box 1980 Orlando, Florida 32802

Joseph L. Shields, Esquire Building 1, Room 406

1323 Winewood Boulevard

Tallahassee, Florida 32301

Docket for Case No: 82-000517

Orders for Case No: 82-000517