STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
UNITED HEALTH, INC., )
)
Petitioner, )
)
vs. ) Case No. 85-4288
)
DEPARTMENT OF HEALTH AND )
REHABILITATIVE SERVICES, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to notice, a formal hearing in the above captioned case was held before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on August 29, 1986, in Orlando, Florida.
APPEARANCES
For Petitioner: Karen L. Goldsmith, Esquire
Post Office Box 1980 Orlando, Florida 32802
For Respondent: Theodore E. Mack, Esquire
Building One, Room 407 1323 Winewood Boulevard
Tallahassee, Florida 32301 INTRODUCTION
This matter arose when respondent, Department of Health and Rehabilitative Services (HRS), issued proposed agency action on October 21, 1985, advising petitioner, United Health, Inc., that its request to have the July 1, 1985 reimbursement rates for thirteen facilities adjusted to reflect certain annualized costs as submitted on supplemental schedules with its December 31, 1984 cost reports was denied.
Petitioner thereafter filed a petition on November 1, 1985 requesting a Section 120.57(1) hearing to contest the agency's proposed action. The matter was transmitted by respondent to the Division of Administrative Hearings on December 17, 1985 with a request that a Hearing Officer be assigned to conduct a formal hearing.
By notice of hearing dated January 30, 1986 a final hearing was scheduled on May 13, 1986 in Orlando, Florida. Petitioner's motion for continuance was granted and the matter was rescheduled to July 9, 1986. Upon request of respondent, the final hearing was thereafter rescheduled to August 28, 1986 in Orlando, Florida.
At final hearing, petitioner presented the testimony of Erwin T. Bodo, an expert in Medicaid reimbursement and statistics, Arthur Harris, a nursing home administrator, and Sebastian Gomez, Jr., an expert in accounting and medicaid cost reports. It also offered petitioner's exhibits 1-8. All were received into evidence. Respondent presented the testimony of Thomas Arnold, an expert in Medicaid reimbursement and accounting, and Carlton D. Snipes, an HRS Medicaid cost reimbursement analyst who was also accepted as an expert in Medicaid reimbursement and accounting. It also offered respondent's exhibits 1-3. All were received into evidence.
The transcripts of hearing (two volumes) were filed on September 22, 1986. Proposed findings of fact and conclusions of law were filed by the parties on October 20, 1986. A ruling on each proposed finding is made in the Appendix attached to this order.
At the outset of the hearing the parties announced they had agreed to present evidence only on certain disputed concepts, and that the deficiency owed by the petitioner, if any, would be calculated using the concepts ultimately approved in the agency's Final Order. The issue is whether petitioner's July 1, 1985 reimbursement rates should be adjusted to reflect certain annualized costs as submitted on supplemental schedules with its December 31, 1984 cost reports.
Based on all the evidence, the following facts are determined:
FINDINGS OF FACT
Background
Petitioner, United Health, Inc. (United), is the owner and operator of approximately one hundred and twenty-three nursing homes in thirteen states. In the State of Florida, it owns and operates sixteen nursing homes and one intermediate care facility for the mentally retarded that are licensed by respondent, Department of Health and Rehabilitative Services (HRS). At issue in this proceeding are the cost reports and supplemental schedules filed by thirteen nursing home facilities.1
In accordance with Medicaid guidelines, petitioner was required to annually submit cost reports to HRS reflecting its allowable costs in providing Medicaid services to its patients. HRS is designated as the state agency responsible for the administration of Medicaid funds under Title XIX of the Social Security Act. In order to be reimbursed for said costs, the facility was required to show that the costs were in conformity with Federal and State Medicaid reimbursement principles. Those principles are embodied in the Long Term Care Reimbursement Plan (Plan) adopted by the State.2 This document contains the reimbursement methodology to be used for nursing homes who provide Medicaid services. In addition, providers must comply with Health Insurance Manual 15 (HIM-15), a compendium of federal cost reimbursement guidelines utilized by HRS, and generally accepted accounting principles.
By letter dated September 9, 1985 petitioner requested that HRS adjust its July 1, 1985 reimbursement rates for the thirteen facilities to reflect certain annualized costs incurred during the preceding fiscal year ending December 31, 1984. According to the letter, the adjustment was appropriate under Section V.B.I.b. of the September 1, 1984 Plan.
On October 21, 1985, an HRS Medicaid cost reimbursement analyst issued a letter denying the request on the following grounds:
Our review of the information submitted with the fiscal year end 12/31/84 cost reports revealed that the annualized operating and patient care costs were not documented to be new and expanded services or related to licensure and certification requirements.
The annualized property cost appeared to be
1
2
various purchases, repairs and maintenance and was not documented to be capital improvements.
The denial prompted the instant proceeding. B. Reimbursement Principles In General
Under the Medicaid reimbursement plan adopted for use in Florida, nursing homes are reimbursed by HRS on a prospective basis for their allowable costs incurred in providing Medicaid services. This method is commonly referred to as the prospective plan, and has been in use since 1977. Under this concept, a nursing home files with HRS, within ninety days after the close of its fiscal year, a cost report reflecting its actual costs for the immediate preceding fiscal year. Within the next ninety days, the nursing home is given a per diem reimbursement rate (or ceiling) to be used during the following twelve months.3 For example, if a provider's fiscal year ended December 31, 1984, its cost report would be due by March 31, 1985. HRS would then provide estimated reimbursement rates to be used during the period from July 1, 1985 through June 30, 1986. As can be seen, there is a time lag between the end of a cost reporting year and the provider's receiving the new rate. The new reimbursement rate is based upon the provider's actual costs in the preceding fiscal year (reporting period) adjusted upward by an inflation factor that is intended to compensate the provider for cost increases caused by inflation. The prospective plan enables a provider to know in advance what rates it will be paid for Medicaid services during that year rather than being repaid on a retroactive basis. If a provider operates efficiently at a level below the ceiling, it is "rewarded" being allowed to keep a portion of the difference. Conversely, if it exceeds the caps, it is penalized to the extent that it receives only the rates previously authorized by HRS, and must absorb the shortfall. At the same time, it should be noted that the reimbursement rate is not intended to cover all costs incurred by a provider, but only those that are reasonable and necessary in an efficiently operated facility. These unreimbursed costs are covered through other provider resources, or by a future cut in services.
When the events herein occurred, there were two types of adjustments allowed under the prospective plan. The first adjustment is the inflation factor, and as noted above, it
3
authorizes the provider to adjust certain reported costs by the projected rate of inflation to offset anticipated cost increases due to inflation. However, because the prospective plan (and the inflation factor) ignores other cost increases that occur during the given year, HRS devised a second type of adjustment for providers to use. This adjustment is known as the gross-up provision, and allows the annualization of certain costs incurred by a provider during a portion of the reporting period. The concept itself .s embodied in subparagraph B.1.b. of Part V of the September 1, 1984 Plan. Its use may be illustrated with the following example. A provider constructs an addition to its facility with an in-service date at the end of the sixth month of the reporting period. By reflecting only the depreciation associated with the addition during the last six months of the reporting period, the facility understates its actual costs, and is reimbursed for only one-half of the facility's depreciation during the following year. Under the gross-up provision the provider grosses up, or annualizes, the reported cost to give it a full year's effect, thereby ensuring that the next year's rates will be more realistic.
Although the provision has application to this proceeding, over objection by the nursing home industry it was eliminated from the Plan on October 1, 1985 and is no longer available to providers. At hearing HRS contended the provision should have been eliminated in 1984, but through oversight remained in effect until 1985. However this contention is rejected as not being credible, and is contrary to the greater weight of evidence. Finally, neither party could recall if a request under this provision had ever been filed. They do acknowledge that HRS has never approved such a request during the more than two years when the provision was operative.
In addition to the gross-up and inflation provisions, there exists an alternative means for additional rate reimbursement through what is known as the interim rate provision. Under this provision, a provider can request an interim rate increase from HRS during the period when its prospective rates are in effect to cover major unexpected costs. Assuming a request is valid and substantiated, a provider is eligible for immediate cash relief dating back to the date of the actual expense. However, because of HRS' concern that this provision was being "abused", only those costs which exceed
$5,000 and cause a change of 1% or more in the total prospective per diem rate are now eligible for reimbursement. These monetary thresholds on interim rate requests became effective September 1, 1984. When these higher thresholds were imposed,
HRS made representations to the nursing home industry that a provider could still utilize the gross-up provision to cover other unexpected costs. Finally, it is noted that unlike the prospective rate, an interim rate is cost settled. This means the provider's cost reports are later audited, and excess reimbursements must be repaid to HRS. This differs from the prospective plan where any "overpayments" are not subject to recoupment by HRS. Even so, a provider is limited by the reasonableness and prudent buyer concepts which serve as a check on potential abuse by a provider.
The Gross-Up Feature
In its relevant form, the gross-up provision was first adopted for use by HRS in its April 1, 1983 Plan.4 It required HRS to:
Review and adjust each provider's cost report referred to in A. (1.) as follows:
* * *
b. to compensate for new and expanded or discontinued services, licensure and certification requirements, and capital improvements which occurred during the reporting year but were not included or totally accounted for in the cost report.
This language was incorporated with only minor changes into the September 1, 1984 Plan and is applicable to the cost reports in issue. In its 1984 form, the provision required HRS to review and adjust each provider's cost report as follows:
b. To compensate for new and expanded or discontinued services, licensure and certification requirements, and capital improvements not included or totally accounted for in the reporting year. For additional costs to be provided, the provider must furnish adequate supporting documentation.
4
Accordingly, if a cost fits within one of the three categories, HRS is required to adjust a provider's report to compensate it for the expenditure.
The April 1, 1983 Plan was negotiated by the nursing home industry and HRS representatives at a meeting in Gainesville, Florida. For this reason, it is commonly referred to as the Gainesville Plan. Through testimony of negotiators who participated at the meeting, it was established that the Plan had three objectives: to give proper payment to nursing homes; to meet state and federal regulations; and to help upgrade care in the nursing homes. At the same time, the negotiators recognized that a prospective plan based on inFla.ion alone overlooked other cost increases that occurred during a given year. Therefore, the gross-up provision was added to the Plan to ensure that providers could estimate (and recoup) their future costs in as accurate a manner as possible, and to bring the plan into compliance with federal guidelines. It was also designed to ensure that a provider did not have to wait an extraordinarily long time for expenses to be recognized. In addition, HRS was hopeful that the gross-up provision would minimize the providers' reliance upon the interim rate feature (which was intended to cover only major items) thereby reducing the agency's overall workload. Indeed, the interim and gross-up features were intended to complement each other, in that one provided immediate relief on major unexpected items while the other provided a means to adjust partial year costs incurred during the reporting period. The implementation of thresholds on the interim rate provision in September, 1984 increased the importance of the gross-up provision to handle smaller items. Therefore, HRS' contention that the interim and gross-up provisions are in conflict is hereby rejected.
In order for a cost to be eligible for annualization, it must fall within one of three categories: new or expanded service, a capital improvement, or a cost to meet HRS' licensure and certification requirements. The parties have stipulated that HRS' denial of United's request was based solely upon HRS' perception that the costs did not fall within any of the three categories.
The three types of costs within the feature are not defined in the Plan. Testimony from the Plan's negotiators established that the language in the gross-up feature was meant to be construed broadly and to encompass many costs. For this reason, no limitations were written into the Plan. Even so, the
provision was not intended to give carte blanche authority to the providers to annualize every partial cost.
There is conflicting testimony regarding the meaning of the term "capital improvement" and what expenditures are included within this category. However, Sections 108.1 and
108.2 of HIM-15, of which the undersigned has taken official notice, define a capital item as follows:
If a depreciable asset has, at the time of its acquisition, an estimated useful life of at least 2 years and a historical cost of at least $500, its cost must be capitalized, and written off ratably over the estimated useful life of the asset. . .
* * *
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.
Repairs and maintenance costs are always allowed in the current accounting period.
With respect to the costs of betterments and improvements, the guidelines established in Section 108.1 must be followed, i.e., if the cost of a betterment or improvement to an asset is $500 or more and the estimated useful life of the asset is extended beyond its original estimated life by at least 2 years, or if the productivity of the asset is increased significantly over its original productivity, then the cost must be capitalized.
The above guidelines are more credible and persuasive than the limited definition of capital item enunciated at final hearing by HRS personnel. Therefore, it is found that the HIM-15 definition is applicable to the gross-up feature and will be used to determine the validity of petitioner's claim to gross up certain expenditures.
There is also conflicting testimony as to what the term "new and expanded or discontinued services" includes.
Petitioner construes this item to include any costs that increase the volume of services to a resident. Therefore, petitioner posits that an increase in staffing which likewise increases services to residents is subject to annualization. Conversely, HRS construes the term to cover any costs for new or expanded services that enable a facility to provide patients with services not previously provided or to expand an existing service to more patients in the facility. The latter definition is more credible and persuasive and will be used by the undersigned in evaluating petitioner's request.
Finally, petitioner interprets the term "licensure and certification requirements" to cover any costs incurred to meet staffing requirements that are required by HRS rules. According to petitioner, the category would include expenditures that are made for so-called preventive maintenance purposes and to avoid HRS sanctions. On the other hand, HRS construes the language to cover costs incurred by a provider to either meet a new licensure and certification requirement, or to correct a cited deficiency. It also points out that salary increases were intended to be covered by the inflation factor rather than through this feature of the plan. This construction of the term is more reasonable, and is hereby accepted as being the more credible and persuasive.
Petitioner's Request
Petitioner's fiscal year ends on December 31. According to HRS requirements its cost reports must be filed by the following March 31. In accordance with that requirement petitioner timely filed its December 31, 1984 cost reports for the thirteen facilities on or before March 31, 1985. The reports have been received into evidence as petitioner's composite exhibit 3. Attached to the reports were schedules supporting a request for gross-up of certain capital items, additions and deletions of various personnel, and union salary increases that exceeded the inflation rate. The parties have not identified the actual dollar value of the items since only the concepts are in issue.
In preparing the supporting schedules, United's assistant director of research reviewed all so-called capital items purchased by the thirteen facilities during the fiscal year, and determined which were purchased after the beginning of the year.5 He then calculated the depreciation on those
5
expenditures made after the beginning of the year and has included those amounts on the supporting schedules to be annualized. Consistent with the definition contained in Sections 108.1 and 108.2 of HIM-15, those items that are in excess of $500 (after annualization), that extend the useful life of the asset for two years or more, or that increase or extend the productivity of the asset are subject to annualization. It should be noted that repairs and maintenance items, as defined in Sections 108.1 and 108.2, are excluded from this category.
Petitioner next seeks to adjust its rates by grossing up the net increase in costs associated with additions and deletions of various staff during the reporting period. Any net staffing additions that provide patients with services not previously provided or that expand an existing service to more patients in a given facility are properly subject to the gross- up provision. All others should be denied. Petitioner also contends that these costs should be considered as a licensure and certification requirement since they satisfy staffing requirements under HRS rules. To the extent the filling of old positions occurred, such expenditures are appropriately covered by the gross-up provision. The remainder do not fall within the purview of the provision.
Finally, petitioner seeks to adjust its rates to cover all salary increases over and above the inflation factor that were awarded to union employees pursuant to its union contract. Under petitioner's theory, if such costs were not paid, United stood to lose staff through a strike which in turn could result in licensure and certification problems. But these concerns are speculative in nature, and such an interpretation would result in automatic approval of any salary increase called for by a union contract, no matter how unreasonable it might be. Since the expenditures do not meet the previously cited criteria, they must be denied.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter and the parties thereto pursuant to Subsection 120.57(1), Florida Statutes (1985).
Two principal issues are raised herein. First, HRS contends that the gross-up provision has no application to United since it appeared in the September 1, 1984 Plan only through oversight, and because it conflicts with the Plan's new
interim rate feature. Secondly, the parties have disagreed over whether the expenditures in question are properly subject to annualization under the gross-up feature. These issues will be dealt with separately hereinafter.
Rule 10C-7.48, Florida Administrative Code, was in effect when the cost reports were filed. Paragraph (7)(g) of said rule read as follows:
(g) Reimbursement to participating nursing homes for services provided shall be in accord with the Florida Title XIX Long Term Care Reimbursement Plan, as revised April 1, 1983, and subsequently amended effective September 1, 1984. (Emphasis added).
Since the September 1, 1984 Plan contained the gross-up feature, HRS was bound to reimburse petitioner for any costs s-hat were in conformity with that provision. This is because an agency must enforce its own rules and regulations so long as they are in effect. Gadsden State Bank v. Lewis, 348 So.2d 343, 345 n.2 (Fla. 1st DCA 1977). Moreover, it must exercise its discretion in a manner consistent with its rules. See, Subsection 120.68(12)(b), Florida Statutes (1985).
Notwithstanding the foregoing principle, HRS asserts that under well-settled law, deference should be accorded to the agency's interpretation of its rules. According to HRS, it interprets the gross-up provision to be contrary to and in conflict with the new interim rate provision thresholds adopted in September, 1984. It reasons that the interim provision was intended to replace the gross-up feature, and that the latter provision remained in the Plan until October, 1985 only through inadvertence. But to support this interpretation, it is necessary that the agency provide an adequate record foundation. By the more credible and persuasive testimony it has been shown that the gross-up feature is consistent with the purposes of the prospective plan, and that the gross-up and interim provisions were intended to complement one another. Indeed, the former provision was intended to cover so-called minor expenditures while the latter provision was intended to cover major unexpected costs. Therefore, the record supports an interpretation that the gross-up feature was intended to remain operative from April, 1983 until October, 1985, and has application in this proceeding.
The evidence is sharply conflicting as to what expenditures were intended to be covered under the gross-up provision. The provision requires HRS:
to compensate for new and expanded or discontinued services, licensure and certification requirements, and capital improvements not included or totally accounted for in the reporting year.
As might be expected, HRS urges that a strict and narrow interpretation be given to the language while United contends that the language should be construed in a broad and unrestricted manner.
The more credible evidence supports an interpretation that expenditures for "new and expanded services" be limited to those that enable the nursing home to provide patients with services not previously provided or to expand an existing service to more patients in a facility. It is also concluded that expenditures incurred to either meet a new licensure and certification requirement or to correct a cited deficiency are covered by the term "licensure and certification requirements". Finally, the more credible and persuasive evidence supports a conclusion that an expenditure should be in accordance with the definitions contained in Sections 108.1 and 108.2-of HIM-15 in order to be annualized. Accordingly, the foregoing concepts should be utilized by the agency in evaluating United's request.
Based on the foregoing findings of fact and conclusions of law, it is
RECOMMENDED:
That petitioner's request to have its July 1, 1985 reimbursement rates adjusted for thirteen facilities to reflect annualized costs as submitted on supplemental schedules with its 1984 cost reports be approved in part, as set forth in the conclusions of law portion of this order. The remaining part of its request should be DENIED.
DONE AND ORDERED this 31st day of October, 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 31st day of October, 1986.
ENDNOTES
1/ Those facilities include Greenbriar Nursing Center, Richey Manor Nursing Home, Sunny Pines Nursing Center, Heritage Nursing and Rehabilitation Center, Grovemont Nursing Home, The Oaks Residential Rehabilitation Center, Alpine Nursing Center, Colonial Care Center, Greenbrook Nursing Home, New Horizon Rehabilitation Center, North Horizon Health Care Center, South Heritage Nursing Center and Sheffield Nursing Center.
2/ The Plan has been revised from time to time by HRS. Therefore, the Plan will be referred to as the October 1, 1977 Plan, April 1, 1983 Plan or the September 1, 1984 Plan.
3/ The per diem rate is arrived at by dividing total costs, as adjusted by an inflation factor, by patient days. The resulting per diem rate is intended to approximate the "reasonable" costs of a facility.
4/ A different gross-up feature was incorporated into the September 1, 1977 Plan. Its wording and purpose differed from the feature in the April 1, 1983 Plan.
5/ Included in this category were such items as freezers, furniture, parking lot improvements, new equipment and repairs to various equipment.
COPIES FURNISHED:
Karen L. Goldsmith, Esquire Post Office Box 1980 Orlando, Florida 32802
Theodore E. Mack, Esquire Department of Health and
Rehabilitative Services Building One, Room 407 1323 Winewood Boulevard
Tallahassee, Florida 32301
William Page, Jr. Secretary
Department of Health and Rehabilitative Services
1323 Winewood Boulevard
Tallahassee, Florida 32301
Steven W. Huss General Counsel
Department of Health and Rehabilitative Services
1323 Winewood Boulevard
Tallahassee, Florida 32301
APPENDIX
Petitioner:
Covered in finding of fact 1.
Covered in finding of fact 2.
Covered in finding of fact 2.
Covered in finding of fact 16.
Covered in finding of fact 4.
Covered in finding of fact 2.
Covered in findings of fact 6 and 10.
Covered in finding of fact 5.
Covered in finding of fact 5.
Covered in finding of fact 6.
Covered in finding of fact 6.
Covered in finding of fact 10.
Covered in finding of fact 10.
Rejected as being unnecessary.
Covered in finding of fact 8.
16a. Covered in findings of feet 3, 12 and 16.
b. Covered in finding of fact 18.
e. Covered in finding of fact 19.
Rejected in part as being contrary to the greater weight of evidence.
Covered in finding of fact 10.
Covered in findings of fact 6 and 19.
Accepted in part and rejected in part.
Covered in findings of fact 6 and 7.
Covered in footnote 4.
Respondent:
Essentially covered in finding of fact 2.
Covered in finding of fact 2.
Covered in finding of fact 2.
Covered in finding of fact 5 and footnote 3.
Covered in finding of fact s.
Covered in finding of fact s.
Covered in finding of fact 5.
Covered in finding of fact 5.
Rejected as being unnecessary.
Rejected as being unnecessary.
11. Covered | in | finding | of | fact | 8. | |
12. Covered | in | finding | of | feet | 8. | |
13. Covered | in | finding | of | feet | 8. | |
14. Covered | in | finding | of | feet | 8. | |
15. Covered | in | finding | of | fact | 8. | |
16. Covered | in | finding | of | feet | 9 and footnote | 4. |
17. Covered | in | finding | of | fact | 10. |
Rejected as being contrary to the greater weight of credible and persuasive evidence.
Rejected as being contrary to the greater weight of credible and persuasive evidence.
The first sentence is covered in finding of fact 14. The second sentence is rejected as being contrary to the evidence. The last sentence is covered in finding of feet 12.
Covered in findings of feet 15 and 19.
Covered in findings of feet 13 and 17.
Covered in findings of feet 14 and 18.
Rejected in part as being contrary to the evidence.
Covered in finding of feet 6.
Rejected as being contrary to the evidence. Witness Gomez did not acknowledge that this request was made to circumvent the interim rate provision.
Covered in finding of fact 8.
Covered in finding of fact 5.
| Issue Date | Proceedings |
|---|---|
| Oct. 31, 1986 | Recommended Order (hearing held , 2013). CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Dec. 10, 1986 | Agency Final Order | |
| Oct. 31, 1986 | Recommended Order | Request for adjustment of reimbursement rates on Medicaid cost reports approved. |
