STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

NEW RIVIERA HEALTH RESORT, )

)

Petitioner, )

)

vs. ) Case No. 85-1943

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the above matter was heard before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on October 18, 1985, in Miami, Florida.

APPEARANCES

For Petitioner: Octavia F. Verdeja

814 Ponce de Leon Boulevard Coral Gables, Florida 33134

For Respondent: Harden King, Esquire

Building One, Room 406 1323 Winewood Boulevard

Tallahassee, Florida 32301 BACKGROUND

This proceeding began when respondent, Department of Health and Rehabilitative Services, issued proposed agency action on March 20, 1985, advising petitioner, New Riviera Health Resort, Inc., that petitioner's reimburseable Medicaid costs for the fiscal year ending November 30, 1983, would be reduced as the result of a field audit conducted by HRS auditors.

By letter dated April 22, 1985, petitioner requested a formal hearing pursuant to Subsection 120.57(1), Florida Statutes, to contest some of the above audit findings. These included the proposed disallowance of owner-administrator's salary and related costs ($50,246.00), repairs to roof ($11,613),

the-write-off of certain assets ($5,442), and the pension plan contribution ($6,000.00). The matter was referred to the Division of Administrative Hearings on June 13, 1985, with a request that a hearing officer be assigned to conduct a formal hearing.

By notice of hearing dated July 22, 1985, a final hearing was scheduled for October 1, 1985 in Miami, Florida. At the request of petitioner, and without objection by respondent, the matter was rescheduled to October 18, 1985 at the same location. At final hearing, petitioner presented the testimony of Octavia

F. Verdeja, its certified public accountant, and its owner- president, Shirley H. St. Clair. It also offered petitioner's exhibits 1-4. All were received in evidence. Respondent presented the testimony of John T. Donaldson, audit supervisor for the Department's Office of Audit and Quality Control Services, and Rafael P. Gomez, field auditor, and offered respondent's exhibits 1 and 2 which were received in evidence.

The transcript of hearing was filed on November 30, 1985.

Proposed findings of fact and conclusions of law were due on December 16, 1985. However, none were filed.

As clarified during the course of the hearing, the issue herein is whether petitioner's reimburseable costs for participation in the Medicaid program in fiscal year ending November 30, 1983, should have been reduced by $71,561.00 as proposed in respondent's audit report.

Based on the evidence, the following facts are determined:

FINDINGS OF FACT

1. Introduction

   
   

   1. Petitioner, New Riviera Health Resort, Inc. (New Riviera or petitioner), operates a fifty-two bed nursing home at 6901 Yumuri Street, Coral Gables, Florida. The facility is licensed by respondent, Department of Health and Rehabilitative Services (HRS). At all times relevant hereto, New Riviera was a participant in the Florida Medicaid Program.

      
      

   2. Respondent is designated as the state agency responsible for the administration of Medicaid funds under Title XIX of the Social Security Act. In this regard, HRS requires providers such as New Riviera to follow cost reimbursement principles adopted by the federal government. These principles, rules and regulations

      are codified in publications known as HIM-15 and the Cost Provider Reimbursement Manual.

      
      

   3. Pursuant to Rule 10C-7.48(4)(a)5.a., Florida Administrative Code, petitioner filed a cost report for its fiscal year ending November 30, 1983, reflecting what it perceived to be its reimburseable costs for providing Medicaid services during the fiscal year. The cost report was audited by HRS field auditors in 1984. Thereafter, on March 20, 1985, HRS issued a Schedule of Audit Adjustments, Statement of Costs, and Statement of Cost and Statistics. As is pertinent here, the Schedule of Audit Adjustments recommended that reimburseable costs be reduced by $71,561.00 in order to bring the cost report in conformity with Federal and State Medicaid reimbursement principles.1 These adjustments relate to the owner's salary and fringe benefits ($50,246), certain roof repairs ($11,613.00), a pension plan contribution ($6,000), and the write-off of certain assets ($3,772).

      
      

   4. Prior to the preparation of the above reports, an exit conference was held by HRS representatives and petitioner to discuss the proposed adjustments. When no resolution was reached, the reports were issued. That precipitated the instant proceeding.

      
      

2. Owner's Salary & Benefits ($50,246.00)

   
   

   1. Petitioner's facility is owned by Shirley El. St. Clair. Using an HRS formula, New Riviera allocated $30,934.00 of her total salary during the fiscal year to the cost report for reimbursement. It also sought to be reimbursed for $2,312.00 in related payroll taxes, and $17,000.00 for pension plan contributions. All were disallowed by HRS on the ground the costs were "unnecessary" under applicable federal regulations. Specifically, Section 902.2 of HIM-15 provides in part that compensation paid to an owner may be included in allowable provider cost "only to the extent that it represents reasonable renumeration for managerial, administrative, professional, and other services related to the operation of the facility and rendered in connection with patient care." The regulation goes on to provide that "services rendered in connection with patient care include both direct and indirect activities in the provision and supervision of patient care." The same section prohibits reimbursement where services rendered are not related to either direct or indirect patient care but are, for example, rendered "for the purpose of managing or improving the owner's financial investment." The agency takes the position that Ms. St. Clair's efforts are focused in the direction of managing and improving her investment, and that her salary and benefits should be

      accordingly disallowed. It also contends that the facility had three licensed administrators during fiscal year 1983, and that New Riviera does not need that number to adequately operate a 52- bed facility, which is small by industry standards.

      
      

   2. St. Clair has been owner-president-administrator of the facility since its inception some thirty two years ago. In response to an audit inquiry, St. Clair gave the following description of her duties:

      
      

      . . . in general terms. I am the Chief Executive Officer of the Corporation and Trustee of the New Riviera Pension Trust. Though I no longer keep regular business hours in the traditional sense, I generally work a 30-50 hour week depending on circumstances, frequently on weekends. Much of my time is spent managing the financial aspect of New Riviera and the Pension Plan. I do most of the banking and a great deal of the grocery and "odds and ends" shopping for New Riviera.

      
      

      At final hearing she described her working hours in 1983 as being "irregular"; but still totaling 30 to 50 hours per week. Her duties included "a bit of everything," including keeping the books, admitting patients, performing marketing and banking activities, and relieving other personnel on weekends. There is no dispute that St. Clair has a voice in all business decisions of the nursing home. Because there are no secretaries or receptionists employed by the facility, she also performed various secretarial tasks.

      
      

   3. During the fiscal year in question, St. Clair also had two other licensed and full-time individuals performing administrative duties. One was a Mrs. Campbell whose primary duty was to keep the books while the other was her son, Michael, who acted as assistant administrator. According to St. Clair, Michael has a masters -degree in health care administration, supervised the maintenance of the facility, and was there "just to learn the business" in anticipation of her retirement. He recently left New Riviera in September, 1985 and had not been replaced as of the time of final hearing. Mrs. Campbell still remains on the payroll.

      
      

   4. HRS has allowed Campbell's and Michael's salary and fringe benefits but has proposed to disallow all salary and fringe benefits of Mrs. St. Clair. In this regard, there is no credible evidence that a 52-bed facility requires three licensed

      administrators. Indeed, a 52-bed facility is unique in terms of size, and is roughly one-half the size of a typical nursing facility. Mrs. St. Clair did perform numerous administrative duties during the fiscal year in question, and without contradiction, it was established she devoted some 30 to 50 hours per week at the facility. On the other hand, her son was simply "learning the trade," and his sole function was described as "supervising the maintenance." Under these circumstances, it is found that Shirley St. Clair's salary and fringes are related to "services rendered in connection with patient care" and should be reimbursed. Conversely, the son's salary and fringe benefits were not necessary, were duplicative in nature, and should be disallowed. This finding is substantiated by the fact that the son has not been replaced since leaving the facility.

      Reimburseable expenses should be accordingly adjusted.

      
      

3. Roof Repairs ($11,613.00)

   
   

   1. During the fiscal year, repairs costing $11,613.00 were made to a part of the roof structure due to leaks. The facility's accountant recorded these repairs as an expense on the cost report. This accounting treatment was made, according to the provider, on the theory the repairs did not extend the useful life of the building, and were necessary for continued operation of the facility.

      
      

   2. Section 108.2 of HIM-15 in controlling and provides in part as follows:

      
      

      Betterments and improvements extend the life or increase the productivity of an asset as opposed to repairs and maintenance which either restore the asset to, or maintain it at, its normal or expected service life.

      Repair and maintenance costs are always allowed in the current accounting period.

      
      

      The more credible and persuasive evidence of witness Donaldson supports a finding that the roof expenditure was a "betterment and improvement" that extended the life of the roof (asset). In view of this, it is found that the cost of the repair should have been capitalized, rather than expensed, and that reimburseable costs should be reduced by $11,613 as proposed by the agency.

      
      

4. Pension Plan Contribution ($6,000.00)

   
   

   1. Petitioner reflected $51,000.00 on its cost report for contributions to its employee pension plan during the fiscal year. This included separate payments of $10,000.00, $35,000.00

      and $6,000.00 made in April and May, 1983 and January, 1984, respectively. This information is contained on Schedule B of the firm's Form 5500-R filed with the Internal Revenue Service on September 7, 1984. During the course of its audit, HRS requested the pension plan consultant to furnish information concerning minimum funding standards and retirement benefits for the participants. This was required to verify the charges on the cost report. In a letter dated July 3, 1984, the consultant advised in pertinent part:

      
      

      Based on salary and financial information provided by New Riviera, a $45,000.00 contribution to the pension plan met the minimum funding standards and was deductible.

      
      

      Relying upon this information, HRS disallowed $6,000.00 of the

      $51,000.00 in total costs allocated for the plan during the year ended November 30, 1983.

      
      

   2. On January 19, 1984, New Riviera issued a check in the amount of $26,000.00 payable to Shearson American Express for a pension plan contribution. Of that total, $6,000.00 was a contribution to 1983 costs. According to New Riviera's accountant, the additional $6,000.00 was required by the plan's actuary. However, this was not confirmed by any documentation or testimony from the actuary.

      
      

   3. When the audit was being conducted by HRS in the summer of 1984, the check written to Shearson American Express was in its business records, but was not produced for the auditors' inspection. Further, it was not produced at the exit conference held at a later date. In this regard, it was petitioner's responsibility to furnish that information during the course of the audit and exit conference rather than assuming that the auditors would discover the document while reviewing the auditee's books and records. This is particularly true since petitioner was placed on notice that the $6,000.00 was in dispute and subject to being disallowed by the agency.2

   4. Even if the check had been disclosed to the auditors, it does not change the character of the $6,000 payment. The check was issued during the fiscal year ending November 30, 1984 and was therefore outside the scope of the audit year in question. If it is an appropriate expenditure, it is reimburseable on the 1984 cost report rather than the cost report for the year ending November 30, 1983. Therefore, 1983 reimburseable costs should be reduced by $6,000, as proposed by the agency.

5. Write-off of Certain Assets ($3,772.00)

1. During fiscal year 1983 petitioner wrote off $3,722.00 in remaining balances related to certain equipment.3 This amount related to the remaining or salvage value of certain assets whose useful lives had expired according to depreciation guidelines, but which assets were still in service. Even though the assets had not been retired or sold, petitioner wrote off the undepreciated balances remaining on the books. The undepreciated balances arose by virtue of petitioner using the declining balance method of depreciation.

   
   

2. Under Medicaid guidelines, assets acquired after 1966 must be depreciated by the straight line method. Therefore, petitioner was in error in using a declining balance method. Even so, according to generally accepted accounting procedures, it was incorrect to write-off a remaining balance related to certain assets before the assets were actually sold or retired. At hearing petitioner agreed that its accounting treatment was contrary to HRS requirements, and accordingly these costs ($3,772.00) should be disallowed.

   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. Subsections 409.266(1) and (2), Florida Statutes, provide in part that:

   
   

   1. The department is designated as the state agency responsible for the administration of Medicaid funds under Title XIX of the Social Security Act . . .

      
      

   2. The department is authorized to:

      
      

      * * *

      
      

      (d) Contract with the following entities . .

      . for the provision of . . . services to persons determined eligible for Medicaid services:

      1. Any licensed health care provider . . .

      
      

5. Rule 10C-7.481, Florida Administrative Code, authorizes HRS to make audits of Medicaid cost reports "at the discretion of the Department," and to issue an "audit report" containing the

   audit adjustment to the cost report. The rule also provides that "the audit report shall constitute prima facie evidence of the propriety of the adjustments contained therein," and that "the burden of proof is upon the provider to affirmatively demonstrate its entitlement to the Medicaid reimbursement." With the foregoing in mind, each of the disputed areas will be discussed separately.

   
   

6. Owner's Salary and Benefits - The evidence discloses that Shirley St. Clair devoted a sufficient number of hours each week (30 to 50) during the audit year to the nursing home, and engaged in a variety of duties related to "patient care." Therefore, her salary and benefits should be allowed. However, she was one of three licensed administrators working full-time at a 52-bed facility. Because one of the administrators (her son) was simply "learning the trade" in anticipation of Shirley's retirement, it is concluded that his salary and benefits were unnecessary, were duplicative in nature, and should be disallowed.

   
   

7. Roof Repairs - Petitioner has failed to establish that the roof repairs were not a "betterment and improvement" that extended the life of the roof within the meaning of Section 108.2 of HIM-15. Therefore, the cost of such repairs should be capitalized, and 1983 reimburseable expenses should be reduced by

   $11,613.

   
   

8. Pension Plan Contribution - The evidence establishes that the pension plan expenditure of $6,000 was made in fiscal year 1984 and cannot be included on the 1983 cost report. It is concluded, therefore, that 1983 reimburseable expenses should be reduced by that amount.

   
   

9. Write-Off of Certain Assets - Petitioner having conceded that its accounting treatment of this item was improper, and not in accordance with HRS regulations and generally accepted accounting principles, 1983 expenses should be reduced by $3,722.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is

RECOMMENDED that petitioner's cost report for fiscal year ending November 30, 1983 be adjusted in accordance with paragraphs 4 through 7 of the Conclusions of Law portion of this Recommended Order.

DONE and ORDERED this 13th day of January, 1986, in Tallahassee, Florida.

DONALD R. ALEXANDER, Hearing Officer Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32399

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 13th day of January, 1986.

ENDNOTES

1/ Other adjustments were also recommended by the agency. However, they have not been challenged by petitioner.

2/ HRS's workpapers received in evidence do reveal a copy of a letter dated July 30, 1984 from the plan's consultants which sets forth the contribution allocations for 1983 and which specifically mentions that $51,000.00 has been accrued for pay meet. This should have alerted the auditors that $51,000.00 had been actually paid into the plan rather than $45,000.00. Neither party relied upon the letter at hearing.

3/ The HRS audit report discussed two adjustments relating to the write-off of assets, one in the amount of $1,720 and the second in the amount of $3,722. At final hearing petitioner's representative acknowledged that petitioner was only challenging the latter proposed adjustment. That relates to small miscellaneous equipment such as a stove, two air-conditioners, wheelchairs, a dryer, freezer, dishwasher, side table, and the like.

COPIES FURNISHED:

Mr. Octavia F. Verdeja 814 Ponce de Leon Blvd.

Coral Gables, Florida 33134

Harden King, Esquire Bldg. One, Room 407 1323 Winewood Blvd.

Tallahassee, Florida 32301

Ms. Shirley H. St. Clair, Administrator New Riviera Health Resort

6901 Yumuri Street Coral Gables, Florida

Docket for Case No: 85-001943

Orders for Case No: 85-001943