STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

HEALTH QUEST REALTY, II, )

HEALTH QUEST MANAGEMENT ) CORPORATION IV and HEALTH ) QUEST MANAGEMENT CORPORATION ) VII, )

)

Petitioners, )

)

vs. ) CASE NO. 92-7451RP

)

AGENCY FOR HEALTH CARE )

ADMINISTRATION, )

)

Respondent. )

)

FINAL ORDER

This matter came on for hearing in Tallahassee, Florida, before Robert T. Benton, II, Hearing Officer of the Division of Administrative Hearings, on January 21, 1993. The Division of Administrative Hearings received the hearing transcript on February 11, 1993, and the parties filed proposed orders on February 22, 1993. The attached appendix addresses proposed findings of fact by number.

APPEARANCES

For Petitioners: Elizabeth W. McArthur, Esquire

Aurell, Radey, Hinkle, Thomas & Beranek

101 North Monroe Street Tallahassee, Florida 32301

and

Charles M. Loeser, Esquire Health Quest Group

315 West Jefferson Boulevard South Bend, Indiana 46601

For Respondent: Richard Patterson, Esquire

Agency for Health Care Administration 2727 Mahan Drive

Tallahassee, Florida 32308

STATEMENT OF THE ISSUE

Whether respondent's proposed amendment to Rule 59C-1.008(5)(g), Florida Administrative Code, constitutes an invalid exercise of delegated legislative authority?

PRELIMINARY STATEMENT

On November 25, 1992, respondent published its proposal to amend Rule 59C- 1.008(5)(g), Florida Administrative Code, in volume 18 of the Florida Administrative Weekly, No. 48, at page 7310, by deleting subsection 4, which provides: "Audited financial statements that are a combination of legal entities shall not qualify as an audit of the applicant."

On December 16, 1992, petitioners filed their petition for formal administrative hearing, seeking an order invalidating the proposed amendment on grounds, inter alia, "that a financial statement which presents assets, liabilities, revenues, expenses, and cash flow on a basis which combines information relating to the applicant with non-applicant information, in a manner which does not specifically identify the information that would be presented in a financial statement of the applicant alone, cannot qualify as a financial statement" of the applicant.

An order of assignment was entered on December 24, 1992. At the final hearing, petitioners presented the testimony of Christopher Guy Farmer and two exhibits. Respondent presented the testimony of Roger Bell and two exhibits. Both Mr. Farmer and Mr. Bell are certified public accountants, and were stipulated to be experts in accounting. The parties waived the 30-day time limit for entry of the final order.

FINDINGS OF FACT

1. The proposed amendment under challenge would repeal or delete the fourth numbered paragraph of a provision in one of the respondent's rules, entitled "Certificate of Need Application Contents," Rule 59C-1.008(5)(g), Florida Administrative Code. Respondent has succeeded the Department of Health and Rehabilitative Services as administrator of the certificate of need program. The provision now reads:

(g) With respect to paragraph 408.037(3), F.S., which requires an audited financial statement of the applicant the following provisions apply:

1. The audited financial statement of the applicant must be for the most current fiscal year. If the most recent fiscal year ended within 120 days prior to the application filing deadline and the audited financial statements are not yet available, then the prior fiscal year will be considered the most recent.

2. Existing health care facilities must provide audited financial statements for the two most recent consecutive fiscal years in accordance with subparagraph 1. above.

3. Only audited financial statements of the applicant will be accepted. Audited financial statements of any part of the applicant, including but not limited to subsidiaries, divisions, specific facilities or cost centers, will not qualify as an audit of the applicant. Nor shall the audited financial statements of the applicant's parent

   corporation qualify as an audit of the applicant.

4. Audited financial statements that are a combination of legal entities shall not qualify as an audit of the applicant.

As construed by respondent, the sentence proposed for deletion prohibits combining information from separate legal entities in financial statements used to support certificate of need applications (in any circumstances other than those in which generally accepted accounting principles dictate the use of an applicant's consolidated financial statements.)

1. The repeal proposed by the amendment would permit the use, in appropriate circumstances, of combined, as well as of consolidated, financial statements. Testimony at hearing identified situations in which a flat prohibition against combined financial statements may inhibit fair and meaningful statements concerning an applicant's financial position, and meaningful comparison with competing applicants.

   
   

2. In the case of a partnership subject to financial control by a corporation, generally accepted accounting principles do not permit consolidated statement of the corporation's revenues, costs, income, expenses, assets, liabilities or cash flows with the partnership's. Generally accepted accounting principles do require that a corporation exercising financial control over (an)other corporation(s) present financial information on a consolidated basis, however.

   
   

3. The consolidation requirement prevents shifting assets or other items among parent and subsidiary corporations in a way that might mislead. Of course, separate financial statements for a corporation and a partnership over which it exercises financial control create similar possibilities for misleading shifts of assets and other items. To preclude this, generally accepted accounting principles require combined statements, in certain circumstances.

   
   

4. Forbidding combined statements, as respondent's rules now do, creates the possibility that corporations in economically identical postures will appear otherwise depending solely on technicalities concerning the legal form in which entities they control are organized. If two corporations are competing for certificates of need, one may receive an unfair advantage, unless combined statements are permitted to put the parent of a corporate joint venturer on the same footing as the parent of a corporate subsidiary with minority stock ownership equivalent to the unaffiliated partners' share in the joint venture.

   
   

5. A joint venture might itself be an applicant for a certificate of need. In that event, according to petitioners' expert, combined financial statements would be appropriate, in support of the application.

   
   

6. Deleting the language proposed for repeal by the amendment under challenge would have no bearing on "combined financial statements" in the sense of a combination of governmental funds required by law to be maintained in separate accounts, although belonging to a single governmental entity, since the provision at issue concerns only "a combination of legal entities."

   
   

7. For the same reason, a combination of one legal entity's assets, liabilities, revenues, costs or the like with only selected assets, liabilities, revenues, costs or the like of another entity would not be condoned by the proposed amendment. As the notice published in the Florida Administrative

   Weekly and Rule 59C-1.002(5), Florida Administrative Code, make clear, the proposed amendment is not a retreat from respondent's insistence on audited financial statements, prepared in accordance with generally accepted accounting principles.

   
   

8. Respondent does not propose to repeal the fundamental requirement that "[o]nly audited financial statements of the applicant will be accepted." Rule 59C-1.008(5)(g) 3., Florida Administrative Code. (Emphasis supplied.) The proposed amendment cannot be construed to countenance combining an applicant's assets or revenues with the assets or revenues of an unrelated entity, not legally responsible for complying with conditions that may be placed on a certificate of need.

   
   

   CONCLUSIONS OF LAW

   
   

9. The Division of Administrative Hearings has jurisdiction of petitions like the present one challenging a proposed amendment to an administrative rule as an invalid exercise of delegated legislative authority. Section 120.54(4), Florida Statutes (1991).

   
   

10. Only persons likely to be substantially affected by a proposed rule amendment, if it takes effect, have standing to bring such challenges. Here the parties stipulated that petitioners, who both provide health care currently and are potential applicants for additional certificates of need, would be substantially affected.

    
    

11. As the parties "who attack[] the proposed rule [amendment]," Agrico Chemical Co. v. State Department of Environmental Regulation, 365 So.2d 759, 763, (Fla. 1st DCA 1978) cert. den 376 So.2d 74 (Fla. 1979), petitioners have the burden to:

    
    

    show that (1) the agency adopting the rule has exceeded its authority; (2) that the requirements of the rule are not appropriate to the ends specified in the legislative act; and (3) that the requirements contained in the rule are not reasonably related to the purpose of the enabling legislation but are arbitrary or capricious

    
    

    Department of Administration, Division of Retirement v. Albanese, 455 So.2d 639, 641 (Fla. 1st DCA 1984). The challengers' burden "is a stringent one indeed." Agrico Chemical Co. v. State Department of Environmental Regulation, 365 So.2d 759, 763 (Fla. 1st DCA 1978) cert. den 376 So.2d 74 (Fla. 1979).

    
    

12. "[T]he validity of . . . [a challenged] rule [amendment] must be upheld if it is reasonably related to the purpose of the legislation interpreted and it is not arbitrary and capricious." Department of Professional Regulation

    v. Durrani, 455 So.2d 515, 517 (Fla. 1st DCA 1984). See Motel 6 Operating L.P.

    v. Department of Business Regulation, 560 So.2d 1322 (Fla. 1st DCA 1990); Florida Beverage Corp. v. Wynn, 306 So.2d 200 (Fla. 1st DCA (1975). Special deference is owed, moreover, to "an administrative agency's exercise of delegated discretion in respect to technical matters requiring substantial expertise." Island Harbor Beach Club, Ltd. v. Department of Natural Resources, 495 So.2d 209, 223 (1st DCA 1986) rev. den. 503 So.2d 327 (Fla. 1987).

13. The thrust of petitioners' argument is that the proposed rule amendment is arbitrary and capricious and "enlarges, modifies, or contravenes the specific provisions of law implemented," Section 120.52(8)(c), Florida Statutes (1991), in that the rule would, after amendment to repeal subsection (g)(4), allow the combination of "information relating to the applicant with non-applicant information, in a manner which does not specifically identify the information that would be presented in a financial statement of the applicant alone." But petitioner did not show that the rule amendment would authorize inclusion of any arguably "non-applicant" information, except where generally accepted accounting principles dictate combined statements, in order to present information concerning an applicant's subsidiaries fairly and meaningfully.

    
    

14. The settled rule is that "an agency's construction of its governing statutes . . . will be upheld unless clearly erroneous." Motel 6, Operating

L.P. v. Department of Business Regulation, 560 So.2d 1322, 1323 (Fla. 1st DCA 1990).

Moreover, the agency's interpretation of a statute need not be the sole possible interpretation or even the most desirable one; it need only be within the range of possible interpretations. Department of Health and Rehabilitative Services v. Wright, 439 So.2d 937 (Fla. 1st DCA 1983) (Ervin C.J.,

dissenting); Department of Administration v. Nelson, 424 So.2d 852 (Fla. 1st DCA 1982); Department of Health and Rehabilitative Services v. Framat Realty, Inc., 407 So.2d 238 (Fla. 1st DCA 1981).

Department of Professional Regulation v. Durrani, 455 So.2d 515, 517 (Fla. 1st DCA 1984). The interpretation of Section 408.037(3), Florida Statutes (1992 supp.), formerly Section 381.707(3), Florida Statutes (1991), which the proposed amendment to Rule 59C-1.008(5)(g), Florida Administrative Code, embodies, is clearly "within the range of possible interpretations." It is, accordingly,

ORDERED:

Petitioners' request for an order invalidating the proposed rule amendment is denied.

DONE AND ENTERED this 16th day of March, 1993, in Tallahassee, Florida.

ROBERT T. BENTON, II

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 16th day of March, 1993.

APPENDIX TO FINAL ORDER, CASE NO. 92-7451RP

Petitioners' proposed findings of fact Nos. 1-4, 6, 7, 8, 11, 12, 13, 15,

17, 26, 27, 29, 37, 43, 44, 45, 54 have been adopted, in substance, insofar as material.

Petitioners' proposed findings of fact Nos. 5, 9, 19, 21, 24, 40, 41 and 47 pertain to subordinate matters.

With respect to petitioners' proposed finding of fact No. 10, there are differences and similarities between consolidated and combined statements.

With respect to petitioners' proposed findings of fact Nos. 14 and 16, these definitions were not proven, but did not seem to be in dispute.

With respect to petitioners' proposed finding of fact No. 18, a corporate applicant's combined statement may combine corporate assets and so forth with those of a partnership the corporation controls.

Petitioners' proposed finding of fact No. 20 is immaterial, since other provisions define the applicant, not some division or other fragment of the applicant, as the pertinent entity.

With respect to petitioners' proposed findings of fact Nos. 22, 23, 25, 30,

31, 32, 33, 34, 35, 38, 42, 46 and 48, whether or not the Section 120.57 case in question was decided correctly is immaterial to the validity of the rule.

Petitioners' proposed findings of fact Nos. 28, 37, 49 and 50 are immaterial.

With respect to petitioners' proposed finding of fact No. 39, the statements must also be "of the applicant."

With respect to petitioners' proposed finding of fact No. 51, no statement of a group of legally or financially distinct entities can qualify as a statement "of the applicant."

Petitioners' proposed findings of fact Nos. 52 and 53 are speculative.

Respondent's proposed findings of fact No. 1-9, 11 and 13 have been adopted, in substance, insofar as material.

With respect to respondent's proposed finding of fact No. 10, the evidence showed that generally accepted accounting principles require combined statements in some circumstances, but did not show that such circumstances were dependent on the governmental or nonprofit nature of the parties.

With respect to respondent's proposed findings of fact No. 12, the evidence showed that generally accepted accounting principles require combined statements in some circumstances.

COPIES FURNISHED:

Liz Cloud, Chief

Bureau of Administrative Code The Capitol - 1802 Tallahassee, FL 32399-0250

Carroll Webb, Executive Director Administrative Procedure Committee

120 Holland Building Tallahassee, FL 32399-1300

Sam Power, Agency Clerk

Agency for Health Care Administration The Atrium, Suite 301

325 John Knox Road Tallahassee, FL 32303

Harold D. Lewis, Esq. General Counsel

Agency for Health Care Administration The Atrium, Suite 301

325 John Knox Road Tallahassee, FL 32303

Elizabeth W. McArthur, Esq.

Aurell, Radey, Hinkle, Thomas & Beranek

101 North Monroe Street Tallahassee, FL 32301

Richard Patterson, Esq.

Agency for Health Care Administration 2727 Mahan Drive

Tallahassee, FL 32308

Charles M. Loeser, Esq. Health Quest Group

315 W. Jefferson Blvd. South Bend, IN 46601

NOTICE OF RIGHT TO JUDICIAL REVIEW

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.

================================================================= DISTRICT COURT OPINION

=================================================================

IN THE DISTRICT COURT OF APPEAL FIRST DISTRICT, STATE OF FLORIDA

HEALTH QUEST REALTY II, HEALTH NOT FINAL UNTIL TIME EXPIRES TO QUEST MANAGEMENT CORP. IV, and FILE MOTION FOR REHEARING AND HEALTH QUEST MANAGEMENT DISPOSITION THEREOF IF FILED CORPORATION VII,

CASE NO. 93-884

Appellants, DOAH CASE NO. 92-7451RP

v.

AGENCY FOR HEALTH CARE ADMINISTRATION,

Appellee.

/ Opinion filed April 26, 1994.

An appeal from the Division of Administrative Hearings, Robert T. Benton, II, Hearing Officer. Charles Loeser, South Bend, Indiana, for Appellants. Richard Patterson, Senior Attorney, Tallahassee, for Appellee.

PER CURIAM.

AFFIRMED.

MINER, MICKLE and DAVIS, JJ, CONCUR.

M A N D A T E

From

DISTRICT COURT OF APPEAL OF FLORIDA FIRST DISTRICT

To the Honorable, Robert T. Benton, II, Hearing Officer

Division of Administrative Hearings

WHEREAS, in that certain cause filed in this Court styled:

HEALTH QUEST REALTY, II, HEALTH QUEST MANAGEMENT CORPORATION IV and HEALTH QUEST MANAGEMENT CORPORATION VII

vs. Case No. 93-884

Your Case No. 92-7451RP

AGENCY FOR HEALTH CARE ADMINISTRATION

The attached opinion was rendered on April 26, 1994,

YOU ARE HEREBY COMMANDED that further proceedings be had in accordance with said opinion, the rules of this Court and the laws of the State of Florida.

WITNESS the Honorable E. Earle Zehmer

Chief Judge of the District Court of Appeal of Florida, First District and the Seal of said court at Tallahassee, the Capitol, on this 12th day of May, 1994

Clerk, District Court of Appeal of Florida, First District

Docket for Case No: 92-007451RP

Orders for Case No: 92-007451RP