STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

) FLORIDA CLUB CARE CENTER, )

LTD., )

)

Petitioner, )

)

vs. ) CASE NO. 89-2251

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

) GRAMERCY PARK NURSING )

CENTER, )

)

Petitioner, )

)

vs. ) CASE NO. 89-2252

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, this cause came on for hearing before P. Michael Ruff, duly-designated Hearing Officer of the Division of Administrative Hearings, on October 9, 1989, in Tallahassee, Florida. The appearances were as follows:

APPEARANCES

For Petitioners: Karen L. Goldsmith, Esquire

and R. Bruce McKibben, Esquire Dempsey & Goldsmith, P.A.

605 D. Robinson Street Suite 500 - Day Building Post Office Box 1980 Orlando, Florida 32802

and

P.O. Box 10651 Tallahassee, Florida 32302

For Respondent: Ken Muszynski, Esquire

Department of Health and Rehabilitative Services

Building One, Room 407 1323 Winewood Boulevard

Tallahassee, Florida 32399-0700 and

Harold Lewis, Esquire

(by post-hearing appearance) Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32399-0700 STATEMENT OF THE ISSUES

The issue to be resolved in this proceeding concerns whether certain costs in a medicaid cost report filed with the Department of Health and Rehabilitative Services ("HRS" or "Department") should be disallowed to the extent they represent costs of construction, including profits paid to a "related party" construction company. The issue, in other words, concerns whether a construction company, related to the owner of the two facilities involved, is owned by or has common ownership of those two companies and is, thus, a "related party" for purposes of pertinent regulations and whether an exception to that "related party principle" applies such that the construction cost (profit) to the construction company can be allowed as a reimbursable medicaid cost.

PRELIMINARY STATEMENT

This cause concerns whether the Petitioner nursing centers, Gramercy Park Nursing Center and Florida Club Care Center, are entitled to medicaid reimbursement for an incremental cost representing construction costs, including profit, paid to a related construction company, by virtue of a regulatory exception to the so-called "related party principle." HRS has determined that application of medicaid reimbursement principles to allowable costs, as reported on cost reports for Florida Club Care Center and Gramercy Park Nursing Center for the fiscal year ended December 31, 1985, results in an adjustment

disallowing depreciation expense attributable to a related party building contractor's profit, which was included in the building costs of the nursing centers. The Department maintains that Lazovitz, Inc., which is the builder and contractor, is a related party to the limited partnership that holds title to the two nursing facilities. In fact, the parties stipulate that it is a related party. The Department maintains that, because of that, the builder's profit should be disallowed under certain rules in the "Provider Reimbursement Manual" (HIM-15), part one, section 1010, official recognition of which has been taken by the Hearing Officer pursuant to stipulation of the parties. The Petitioners maintain that the builder involved is a related party, but that the construction of those two facilities falls within the exception to the related organization principle set forth in the provider reimbursement manual, official recognition of which has been taken. In fact, the Petitioners assert that Lazovitz, Inc. is a bona fide separate corporation. It allegedly does a substantial portion of its construction business with parties to which it is not related. Its construction business predated, by many years, the development of the two nursing centers at issue. The services allegedly supplied by Lazovitz, according to the Petitioners, are services which are commonly obtained by institutions, such as the providers in this case, from outside unrelated organizations; and Lazovitz, Inc.'s charges for construction, according to the Petitioners, were comparable to any such charges in the open construction industry market.

This cause came on for hearing as noticed, at which the Petitioners introduced exhibits 1 through 9, which were received into evidence, and called witnesses, Leonard Brown and Stanley W. Swindling. The Respondent submitted exhibits 1, 2 and 3, which were received into evidence. It adduced the testimony of witness, John Donaldson.

The issues stated above, which related to Oceanview Convalescent Home, Broward Convalescent Home, Tamarac Convalescent Home, and Plantation Nursing Home, were resolved shortly prior to hearing by stipulation of the parties such that no disputed issues of material fact as to those entities and the related case numbers remain for resolution in this forum. Consequently, they should be dismissed.

At the conclusion of the proceeding, the parties elected to obtain a transcript thereof and avail themselves of the right to file proposed findings of fact and conclusions of law. Those proposed findings of fact have been considered in this Recommended Order and are treated once again in the Appendix attached hereto and incorporated by reference herein.

FINDINGS OF FACT

1. Gramercy Park Nursing Center is a licensed nursing home facility participating in Florida's medicaid program. Florida Club Care Center is also a licensed nursing home facility participating in that program. They are similarly situated parties for purposes of the factual and legal issues involved in this proceeding.

   
   

2. Gramercy Park Nursing Center is operated by Gramercy Nursing Care Center, Limited, a Florida Limited Partnership. Gramercy Nursing Care Center, Limited was organized in 1983. Gramercy Nursing Care Center, Limited does not, itself, build nursing homes; it is not in the construction business.

   
   

3. Florida Club Care Center is owned by Florida Club Care Center, Limited, a Florida Limited Partnership. Florida Club Care Center was organized in 1982.

   It operates nursing homes but does not engage in the construction of nursing home facilities.

   
   

4. Both Gramercy and Florida Club Care were constructed by Lazovitz, Inc., a company which conducts general construction operations, including health care facilities. It does not operate health care facilities. Lazovitz Inc. was organized in 1963 in the State of Pennsylvania as a general building contractor. It has built health care facilities for approximately ten years.

   
   

5. Gramercy Nursing Care Center, Limited, Florida Club Care Center, Limited, and Lazovitz, Inc., are related parties in that Stephen Lazovitz is a shareholder in Lazovitz, Inc. and is the general partner in both the above-named Limited Partnerships, the Petitioners herein. However, none of these entities holds any interest in any of the others.

   
   

6. As a result of operating in the State of Florida, both Gramercy and Florida Club Care filed medicaid cost reports claiming entitlement to the costs of construction, including profit. See exhibit 1 in evidence. Audits were conducted by the Department which disallowed profits based on the fact that Lazovitz, Inc., Gramercy Park Nursing Center, and Florida Club Care Center, Limited were related parties and in the opinion of the Department, did not meet the "related party exception." No other costs in the cost report were challenged by the Department.

   
   

7. The disallowance of related party profit affects return on equity and depreciation. There are four elements which must be met in order to meet the exception for related parties. The facts shown in this hearing establish that all four criteria have been met. The first criterion involves the related party being a bona fide separate organization. Lazovitz, Inc. is not an alter ego of either Gramercy or Florida Club Care nor are Gramercy or Florida Club Care alter egos of Lazovitz, Inc. Each is an entirely separate entity. In fact, Lazovitz, Inc. was organized some twenty years prior to the two health care Limited Partnerships. It is organized in a different state; and it is a corporation, whereas Gramercy and Florida Club Care are Limited Partnerships. Each of these businesses is a totally separate legal entity with no direct involvement, one with the other.

   
   

8. A substantial portion of the work performed by the related party must be for non-related clients. A substantial portion of the work done for Lazovitz, Inc. by Lazovitz, Inc. is done for other than related parties. While Lazovitz had done some projects for related parties, most were unrelated. Lazovitz utilized the same kind of contracts with all of its entities, whether related or not. Over a ten year period, some 54% of the beds built for health care providers by Lazovitz were for unrelated parties. 57% of the dollars generated by Lazovitz, Inc. by health care projects were for construction of unrelated nursing home beds. This does not take into consideration the non- health care related construction business done by Lazovitz, Inc. Lazovitz routinely does significant work for others and operates in the same way for related and non-related parties. The construction of Gramercy and Florida Club Care were performed in the same manner as was construction on non-related projects by Lazovitz, including the employment of competitive bidding.

   
   

9. The other requirement for finding an exception for a related party to the rule, that related party generated costs are not reimbursable, involves the question of whether the services for which reimbursement is sought are services commonly obtained by providers from outside sources. Since Lazovitz contracts with unrelated parties to construct nursing homes, it is obvious that this is a

   service commonly obtained in the market place. Unrefuted testimony establishes that nursing home construction is not a commodity normally furnished by the health care provider, itself. It is typically contracted out to a participant in the open construction market.

   
   

10. An additional determinant for the exception to the principle that costs attributable to work done by a related party are not reimbursable is that the costs and services must be similar to those available on the open competitive market. The projects built by Lazovitz were funded by the U.S. Department of Housing and Urban Development ("H.U.D."). H.U.D. financing limits the profit to related parties while it does not limit the profit to non-related parties. The costs associated with the construction, including the profit, were audited by H.U.D. auditors. All of the other costs relative to the construction were competitively bid. The H.U.D. limitation on profits assures that it is not in excess of that which would be available on the open market. In fact, the profit allowed is significantly lower than that available to non-related parties. No other construction costs were challenged by the Department.

    
    

11. The similar issues pertaining to the remaining Petitioners have been resolved by stipulation, which is referenced in the foregoing "Preliminary Statement" at page 3.

    
    

    CONCLUSIONS OF LAW

    
    

12. The Hearing Officer has jurisdiction over the subject matter of and the parties to this proceeding. Subsection 120.57(l), Florida Statutes.

    
    

13. Lazovitz, Inc., Gramercy Nursing Care Center, Limited and Florida Club Care Center, Limited are related parties for purposes of medicaid reimbursement. The applicable regulation is found at HIM-15, Subsection 1010, the above- referenced manual, which permits exceptions to the related party principle. The exceptions to the related party principle state:

    
    

    Section 1010: An exception is provided to the general rule applicable to related organizations. The exception applies if the provider demonstrates by convincing evidence to the satisfaction of the intermediary that the following criteria have been met:

    `a. The supplying organization is a bona fide separate organization. This means that the supplier is a separate sole proprietorship, partnership, joint partnership, association of corporation and not merely an operating division of the provider organization.'

    
    

14. All of the evidence established at this hearing shows that the operating entities and the related party construction company are separate business entities and not an operating division of the provider organization.

    
    

    b. A substantial part of the supplying organization's business activity of the type carried on with the provider is transacted with other organizations not related to the provider and the supplier by common ownership or control and there is an open competitive market or the type of services, facilities, or supplies

    furnished by the organization. In determining whether the activities are of a similar type, it is important to also consider the scope of the activity. For example, a full service management contract would not be considered the same type of business as a minor data processing contract. The requirement that there be an open competitive market is merely intended to ensure that the item supplied has a readily discernible price that is established through arms-length bargaining by well informed buyers and sellers.

    
    

15. The evidence established that well over 50% of the health care construction conducted by Lazovitz, Inc. is for non- related organizations. The service supplied to the providers by Lazovitz, Inc. was construction. Lazovitz, Inc. is a general construction company; and a substantial amount of its general construction is for non-health care facilities. It has been established that there is an open competitive market for construction in that Lazovitz, Inc. builds facilities for other providers and many providers seek the construction in the open market place. Testimony of Stanley W. Swindling established that it is not customary for a provider to construct his own facility. It is evident that Lazovitz, Inc. was not organized as a conduit to supply related party services to providers in which the principals of Lazovitz, Inc. have an interest. Rather, Lazovitz, Inc. is a bona fide construction business entity created to perform general construction work and, over the years, has performed a substantial amount of non-related work. The subcontracts for these contracts were competitively bid, thus assuring that the contract was at a price established through arms-length bargaining and not artificially inflated. Because this was a H.U.D. financed contract, the percentage of profit, at 4% for such a "related party", was set by H.U.D. and was outside the control of Lazovitz, Inc. It was substantially lower than that set by H.U.D. for non- related parties. To suggest that the fact that the profit of the general contractor was not competitive and was somehow artificially inflated, particularly when it is set by a government agency, would deny related reimbursement to the provider, even when the provider met the related party exception. This would be an absurd result. This would suggest that any time prices are regulated by government, costs related to construction profit would be disallowed for failure to competitively bid.

    
    

16. Paragraph C of the above provision provides:

    
    

    C. The services, facilities, or supplies are those which commonly are obtained by institutions such as the provider from other organizations and are not a basic element of patient care ordinarily furnished directly to patients by such institutions. This requirement means that institutions such as the provider typically obtained the items of services, facilities, or supplies from outside sources, rather than producing the item internally.

    
    

17. This provision of the exception requires that the service offered be one that is not normally offered by the institution itself. Evidence submitted by the Petitioners established that construction is not a component of patient care nor is it ordinarily furnished by the institution itself. It is a service provided to the provider so that the provider has the wherewithal to supply the

    basic elements of patient care. Testimony of witnesses Swindling and Brown established that outside organizations normally provide construction of facilities. This is not normally undertaken by the provider internally.

    
    

    d. The charge to the provider is in line with the charges for such services, facilities, or supplies in the open market and no more than the charge made under comparable circumstances to others by the organization for such services, facilities, or supplies. The phrase `open market' takes the same meaning as `open, competitive market' ire b., above.

    
    

18. The evidence shows that the charge to the provider here was comparable to charges for such construction services in the open market. Stanley W. Swindling, a knowledgeable accountant in this area, testified and established that the cost of construction of these buildings was well within the average range of costs of comparable buildings during the same time period. The bidding process utilized by Lazovitz, Inc. in bidding the project to subcontractors guaranteed that the price was competitive and representative of the open market. Furthermore, the H.U.D. control over the project costs, and subsequent H.U.D. auditing, guaranteed that the charges were reasonable.

    
    

19. Where all the conditions of this exception are met, the charges by the supplier to the provider for such services, facilities, or supplies are allowable as reimbursable costs. Both Florida Club Care and Gramercy Park have met all the requirements for the exception to the related party principle. They are entitled to reimbursement for the profits of the builder, Lazovitz, Inc., and the adjustments to their cost reports should be reversed and appropriate reimbursement made to the providers.

RECOMMENDATION

Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record and the candor and demeanor of the witnesses, it is, therefore

RECOMMENDED that a Final Order be entered determining that the Petitioners referenced last above have met all requirements for the exceptions of the Related Party Principle; that therefore, they are entitled to the above- referenced reimbursement and that they are entitled to the return on equity and depreciation to which that reimbursement equates, as set forth in their initial cost reports. It is,

FURTHER RECOMMENDED that, in view of the above- referenced stipulation, which is accepted and incorporated herein, that the petitions of Oceanview Convalescent Home, Broward Convalescent Home, Tamarac Convalescent Home, and Plantation Nursing Home be remanded to the Respondent agency for informal adjudication.

DONE and ENTERED this 30th day of March, 1990, in Tallahassee, Florida.

P. MICHAEL RUFF Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, FL 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 2nd day of April, 1990.

APPENDIX TO RECOMMENDED ORDER

Petitioners' Proposed Findings of Fact 1-12. Accepted.

Respondent's Proposed Findings of Fact 1-3. Accepted.

4. Rejected, as contrary to the preponderant weight of the evidence and as subordinate to the Hearing Officer's findings of fact.

COPIES FURNISHED:

Karen L. Goldsmith, Esq. and R. Bruce McKibben, Esq. Dempsey & Goldsmith, P.A.

605 East Robinson Street Suite 500-Day Building Post Office Box 1980 Orlando, FL 32802

Karen L. Goldsmith, Esq. and R. Bruce McKibben, Esq. Dempsey & Goldsmith, P.A.

P.O. Box 10651 Tallahassee, FL 32302

Ken Muszynski, Esq. Assistant General Counsel Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, FL 32399-0700

R. S. Power, Agency Clerk Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, FL 32399-0700

Docket for Case No: 88-005972

Orders for Case No: 88-005972