STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

INDIGO MANOR NURSING HOME )

)

Petitioner, )

)

vs. ) CASE NO. 92-6950RU

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

FINAL ORDER

This case was heard pursuant to Notice by Stephen F. Dean, assigned Hearing Officer of the Division of Administrative Hearings, on December 7, 1992, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Theodore E. Mack, Esquire

Cobb, Cole & Bell

131 North Gadsden Street Tallahassee, Florida 32301

For Respondent: David G. Pius, Esquire

Senior Attorney Department of Health and

Rehabilitative Services 1317 Winewood Boulevard

Building 6, Room 234

Tallahassee Florida 32399-0700 STATEMENT OF THE ISSUE

Whether the Respondent, Department of Health and Rehabilitative Services's (Department) interpretative policy limiting application of Section IV.D. of the Plan adopted by reference by Rule 10C-7.0482, Florida Administrative Code, to projects upon which there were enforceable contracts for construction or for financing should have been adopted as a rule in order to comply with Section 120.535(1), Florida Statutes.

PRELIMINARY STATEMENT

This proceeding was initiated by a petition filed by Indigo Manor Nursing Home (Indigo Manor), pursuant to Section 120.535, Florida Statutes, alleging that an "interpretive policy" of the Department is an invalid exercise of delegated legislative authority.

At the final hearing, Petitioner submitted Petitioner's Exhibits 1-A, 1-B, 2, 3, 4, and 5 into evidence but presented no testimony other than cross-

examination of Respondent's witness. Respondent presented the testimony of Frank D. Hughes, Manager, Medicaid Cost Reimbursement Analysis, Nursing Home Section. Respondent also submitted Respondent's Exhibit 1 into evidence. At the conclusion of the hearing the parties agreed to submit proposed recommended orders. No transcript was ordered of the proceedings and the parties agreed to prepare their proposed orders from their handwritten notes. Both parties submitted proposed findings which were read and considered. Appendix A states which proposed findings were adopted, and which were rejected and why.

FINDINGS OF FACT

1. Petitioner, Indigo Manor, is a Florida licensed nursing home and Medicaid provider. Petitioner is a long term provider, and the successor in interest in the facility originally built by Health Care and Retirement Corporation of America (HCRC). Petitioner's address is 595 Williamson Boulevard, Daytona Beach, Florida.

   
   

2. Respondent is the single state agency responsible for administering the Florida Medicaid program pursuant to Section 409.913, Florida Statutes, and rules promulgated thereunder.

   
   

3. Reimbursement to nursing homes is governed by the Florida Title XIX Long-Term Care Reimbursement Plan (the Plan). The Plan is adopted by reference by Rule 10C-7.0482, Florida Administrative Code.

   
   

4. Under the Plan, long-term care providers are reimbursed under a prospective reimbursement methodology. Rates are projected for a rate semester based on historical cost data.

   
   

5. The provider is either reimbursed for depreciation and interest or is reimbursed under the Fair Rental Value System ("FRVS") for the property cost component of the provider's rate. Under FRVS, reimbursement is based on the acquisition costs of a capital asset. These acquisition costs are indexed forward based on a portion of the rate of increase in the Dodge Construction Index. (See Long-Term Care Reimbursement Plan at Section V.E.I.a.)

   
   

6. Nursing homes participating in the Medicaid program on October 1, 1985, when the FRVS was implemented, were allowed to base their reimbursement on depreciation of actual property and interest costs. Most facilities entering the program after October 1, 1985, were put on FRVS.

   
   

7. To prevent any facility from receiving lower reimbursement under the FRVS method as opposed to the depreciation plus interest method, there was a transition period during which some facilities continued to be paid depreciation plus interest payments until the FRVS payments exceeded the depreciation and interest payments as specified in Section V.E.1.h. of the Plan. At that time, a facility would receive reimbursement under the FRVS method. (See Long-Term Care Reimbursement Plan at Section IV.D.)

   
   

8. Frank D. Hughes, an expert in Medicaid reimbursement to nursing homes, testified in behalf of the Department. He identified a chart, Respondent's Exhibit 1, which shows that costs reimbursement to a provider may start at a higher reimbursement per diem than FRVS, but that component of the provider's total reimbursement rate will decline over time; and FRVS will start a provider at a lower initial rate, but the property component of the total reimbursement rate will increase over time.

9. Section IV.D. of the Department's Plan limits applicability of the hold harmless/payback clause to facilities entering the Medicaid program after October 1, 1985, which had committed to construction or purchase loans prior to October 1, 1985. The Department's witness clarified that the Department interpreted the language "committed to construction or purchase loans" in the disjunctive, i.e., "committed to construction" or "committed to purchase loans" prior to October 1, 1985. Further, the witness clarified that the Department interpreted the language "committed to construction" to be limited to providers who were subject to legally enforceable agreements for construction or financing. The Department's rationale was that only those providers who were subject to legally enforceable agreements would be adversely effected by the Plan's new method, and needed that protection of the hold harmless/payback clause.

   
   

10. Mr. Hughes clarified that, if enforceable commitments had been made for loans, the Department would consider the entity to have met the "commitment" requirement.

    
    

11. Mr. Hughes also clarified that, if a provider was able to finance a construction project without loans and accomplish the construction itself, the Department would consider the provider "committed" to construction at the point it entered into subcontracts for the project, or alternatively, at the point actual construction of the facility was begun. A stated intent to build a nursing home or nonbinding preparation prior to October 1, 1985 was insufficient to establish a commitment to construction.

    
    

12. In September through November 1985, Health Care and Retirement Corporation of America (HCRC) began the permitting process to construct the subject nursing home on property it owned in Daytona Beach, Volusia County, Florida. The Department conceded that HCRC, the predecessor of Indigo Manor, had taken certain actions towards constructing the facility to include purchasing the property, architectural and engineering drawings and plans, obtaining building permits, and obtaining a Certificate of Need. In November 1985, construction on the project actually began.

    
    

13. On November 25, 1985, HCRC entered into a construction contract with a subsidiary of HCRC to construct the nursing home. Funds for construction were obtained through internal transfers at HCRC via lines of credit available to HCRC. It was conceded by Petitioner that there were no loans obtained for the construction of the facility.

    
    

14. The facility was completed and enrolled in the Medicaid program in July 1987. At that time, it was placed on the FRVS for its property costs. Subsequently, in December of 1987, the facility was transferred to the cost reimbursement system, effective retroactively to its date of entry in July. There is no documentation in the Department's files to indicate the reason the change was made, and no documentation to indicate additional or revised information was submitted to the Department to justify the change.

    
    

15. The facility remained on the cost basis until February 1992, when the Department reviewed the audits in the facility's reimbursement file and determined the facility should not have been changed to cost, but instead should have remained on FRVS. Revised rate sheets dated February 20, 1992, covering all rate setting periods since July 22, 1987, were provided to the Petitioner that advised Petitioner would have its rate recalculated using the FRVS method and indicated the amended rates.

16. On June 1, 1992, Petitioner's accounting firm sent a letter to the Department's Medicaid Cost reimbursement Administrator stating the facility believed the Department made a mistake by recalculating the rates. The letter asked that the matter be reviewed and the "error" corrected.

    
    

17. On June 22, 1992, Petitioner was advised that the Department had determined the amount of overpayment received by Indigo Manor based upon the recalculated rates. Petitioner was directed to repay $250,935.46 which represented the difference between the actual rate paid which used the cost reimbursement method, and the rate that should have been paid using the correct FRVS method.

    
    

18. By letter dated June 23, 1992, Mr. Hughes explained that, based on the Florida Title XIX Long-Term Care Reimbursement Plan, facilities entering the Medicaid program after October 1, 1985, would have their property costs recognized under the FRVS method. The letter pointed out that the Plan held harmless only those new facilities that had committed to facility construction or purchase loans prior to October 1, 1985. The letter, Petitioner Exhibit 1-B, also stated:

    
    

    The Department has consistently interpreted "committed" to mean enforceable agreements regarding facility construction or purchase loans specific to the facility in question,

    e.g. a contract for construction or an agreement for purchase loans specific to the facility in question.

    
    

19. Based on the Department's June 23, 1992 letter, Petitioner filed a request for formal proceedings pursuant to Section 120.57(1), Florida Statutes, to challenge the Department's determination it should be on FRVS. Subsequent to the filing of that petition, Indigo Manor filed the instant petition alleging the Department is relying on non-rule policy. As of the date of the hearing, the Department had not initiated rulemaking regarding its challenged statement of policy, and the Department offered no evidence showing that rulemaking was not feasible or practicable.

    
    

20. Petitioner conceded the phrase "committed to construction or purchase loans" is found within 109C-7.0482, Section IV, D., Florida Administrative Code. Petitioner does not allege that 10C-7.0482, Florida Administrative Code, is not a validly promulgated rule. Petitioner further concedes that contracts were not executed for construction of the facility, and actual construction was not begun until after October 1, 1985.

    
    

21. At the formal hearing, the Department did not dispute that Petitioner was substantially affected by the Department's action. The Department did argue, however, that Petitioner did not have standing to bring the instant action as it did not actually own the property or facility at issue, nor did it have a contract in effect with the owner, Health Care and Retirement Corporation (HCRC), prior to October 1, 1985. While the Petitioner did not own the facility, the Department recognizes that Petitioner is the successor in interest to HCRC and is the entity impacted by the Department's rule and Department's policy of construing the term "committed to construction" to be limited to enforceable contracts for construction or purchase loans.

    
    

22. HCRC has no present interest in the facility, and the Department's action.

    CONCLUSIONS OF LAW

    
    

23. The Division of Administrative Hearings has jurisdiction over the parties and the subject matter presented herein, pursuant to Section 120.535, Florida Statutes, and this hearing is conducted pursuant to that section and Section 120.57(1), Florida Statutes.

    
    

24. The Department's challenge to Petitioner's standing was denied because Petitioner was impacted by the Department's action and the Department interpretation of the rule's provision regarding commitment to construction.

    The original owner, Health Care and Retirement Corporation (HCRC) has no present interest in the Department's action, and did not have such an interest at the time ownership was transferred. However, Petitioner, as the successor in interest to HCRC, is entitled to be treated as HCRC would have been treated.

    Petitioner has standing.

    
    

25. Section 120.535,(1), Florida Statutes, provides that rulemaking is not a matter of agency discretion, and every agency statement defined as a rule under Section 120.52(16), Florida Statutes, shall be adopted by the rulemaking procedures of Section 120.54, Florida Statutes. Section 120.535,(2), Florida Statutes, provides that anyone substantially effected by the agency's statement may seek an administrative determination that the statement violates subsection (1). If the hearing officer determines that the statement is a rule and that it has not been adopted as a rule, the agency will immediately discontinue all reliance upon the statement or any substantially similar statement as a basis for agency action.

    
    

26. Petitioner argues that the Department's statement interprets the term "committed", and that the Department's interpretation, as explained in its June 23, 1992 letter, should have been adopted by the rule because a provider would not know from the language of the rule that it had to have a legally enforceable contract for construction in order to qualify for the hold harmless/payback provision.

    
    

27. The Department's position is that the hold harmless provision in the Plan is an indemnity concept, and "committed" means "to bind or obligate, as by a pledge." The word "commitment" is defined as something pledged, especially an engagement by contract involving financial obligations. The American Heritage Dictionary, 298 (2d College ed. 1985).

    
    

28. The Department argues that, if a facility during the time period the system was in flux could have qualified for the hold harmless/payback provision simply by saying it was "committed" to building a nursing home, every entity giving any consideration to such a project prior to October 1, 1985, could have obtained permits (which do not actually require construction) or have taken other steps that could lead to the construction of a nursing home without building the facility, and without exposure to financial loss. Without exposure to financial loss, there would be nothing to hold the provider harmless from.

    
    

29. The Department's interpretation is reasonable, and its policy statement is justifiable; however, it begs the question of whether it should have adopted the statement as a rule. From a reading of Section IV.D. of the Plan adopted by reference by Rule 10C-7.0482, Florida Administrative Code, it is not apparent that "committed to construction" means having entered into a legally enforceable contract for construction.

30. The facts in this case reveal that HCRC, Petitioner's predecessor and in whose shoes it now stands, had obtained a certificate of need for construction of this facility. The record is unclear whether this was a contested application and issuance, but even if it were not, the process of obtaining such a certificate of need (CON) is a significant business decision or commitment.

    
    

31. The application must be supported by submissions to include demographic studies, by engineering and architectural plans of the proposed facility, by financial projections based upon certain fiscal assumptions, and by formal resolutions of the Board of Directors of a corporation. The applicant must typically commit to a stated percentage of Medicaid service which has a adverse impact on the financial profitability of the facility's operation. This information is used by the Department to choose which applicant will be granted the CON.

    
    

32. Once the CON is issued, it is an agreement between the provider and the Department, and while the Department cannot force the provider to proceed to construction, the provider's failure to proceed will be considered in future assessment's of that provider's applications. Further, once the facility is built, the Department assesses whether the provider's charges and services to the community are consistent with its proposals. Lastly, the issuance of the CON may be contested in major litigation entailing large amounts of time and money on the part of the litigants.

    
    

33. In short, obtaining a CON is a significant commitment to the construction of a facility. However, notwithstanding these facts, the CON is not strictly legally enforceable, and the Department, as it has in this case, does not consider obtaining a CON a commitment for purposes of the rule.

    
    

34. One challenging the facial validity of a rule construing a statute must show the agency's interpretation of the statute is clearly erroneous or unauthorized. Humhosco, Inc. v. Department of Health and Rehabilitative Services, 4 76 So.2d 258, 261 (Fla. 1st DCA 1985) (citations omitted). The agency's interpretation is arguably sustainable if the agency had adopted it's policy as a rule. However, this is not a proceeding to determine the validity of a rule pursuant to Section 120.56, Florida Statutes.

    
    

35. This is a proceeding pursuant to Section 120.535, Florida Statutes, to determine if a long standing policy of an agency (an agency statement) is a rule under 120.52(16), Florida Statutes, which defines a rules as "each agency statement of general applicability that implements, interprets, or prescribes law or policy. . ." Clearly, the Department's policy statement that "commitment to construction" requires an obligation to construction under a legally enforceable contract is an interpretation of Section IV, D. of the Plan adopted in Rule 10C-7.0482, Florida Administrative Code, and should have been adopted as a rule.

    
    

    HOLDING

    
    

36. Based upon the foregoing findings of fact and conclusions of law, it is ORDERED that the statement of Departmental policy interpreting Section IV.D. of the Plan adopted by reference in the Department's Rule 10C-7.0482, Florida Administrative Code, is a rule. The Department's interpretation has not be duly adopted by the Department, and the Department did not show that it was not feasible for it to adopt this statement as a rule. The challenged statement of

policy violates Section 120.535,(1), supra, and agency is advised that it must cease to rely upon the statement as a basis for agency action.

DONE and ORDERED this 8th day of JANUARY, 1993, in Tallahassee, Florida.

STEPHEN F. DEAN

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 8th day of JANUARY, 1993.

APPENDIX

CASE NO. 92-6950RU

Indigo Manor's proposed findings were read and considered. The following proposed findings of Indigo Manor were adopted in the paragraph of the Final Order indicated, or rejected for reason stated:

Proposed Findings Final Order

Paragraph 1 Paragraph 21

Paragraph 2 Paragraph 15

Paragraph 3 Paragraph 17

Paragraph 4 Paragraph 16

Paragraph 5 Paragraph 18

Paragraph 6 Paragraph 12

Paragraph 7 Paragraph 9

Paragraph 8 Paragraph 19

Paragraph 9 Paragraph 19

The Department of Health and Rehabilitative Services' proposed findings were read and considered. The following list indicated which findings were adopted, and which were rejected and why:

Proposed Findings Final Order

Paragraph 22 Paragraph 19

Paragraph 23 Paragraph 20

Paragraph 24 Paragraph 21

COPIES FURNISHED:

Theodore E. Mack, Esquire Cobb Cole & Bell

131 North Gadsden Street Tallahassee, FL 32301

David G. Pius, Esquire Department of Health and

Rehabilitative Services 1317 Winewood Boulevard

Building 6, Room 234

Tallahassee, FL 32399-0700

John Slye, General Counsel Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, FL 32399-0700

Robert L. Powell, Agency Clerk Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, FL 32399-0700

Carroll Webb, Executive Director Administrative Procedure Committee

120 Holland Building Tallahassee, FL 32399-1300

A PARTY WHO IS ADVERSELY AFFECTED BY THIS FINAL ORDER IS ENTITLED TO JUDICIAL REVIEW PURSUANT TO SECTION 120.68, FLORIDA STATUTES. REVIEW PROCEEDINGS ARE GOVERNED BY THE FLORIDA RULES OF APPELLATE PROCEDURE. SUCH PROCEEDINGS ARE COMMENCED BY FILING ONE COPY OF A NOTICE OF APPEAL WITH THE AGENCY CLERK OF THE DIVISION OF ADMINISTRATIVE HEARINGS AND A SECOND COPY, ACCOMPANIED BY FILING FEES PRESCRIBED BY LAW, WITH THE DISTRICT COURT OF APPEAL, FIRST DISTRICT, OR WITH THE DISTRICT COURT OF APPEAL IN THE APPELLATE DISTRICT WHERE THE PARTY RESIDES. THE NOTICE OF APPEAL MUST BE FILED WITHIN 30 DAYS OF RENDITION OF THE ORDER TO BE REVIEWED.

Docket for Case No: 92-006950RU

Orders for Case No: 92-006950RU