STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

Y & S PARTNERSHIP, LTD., d/b/a ) MANHATTAN CONVALESCENT CENTER, )

)

Petitioner, )

)

vs. ) CASE NO. 82-372

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

) Y & S PARTNERSHIP, LTD., d/b/a ) MANHATTAN CONVALESCENT CENTER, )

)

Petitioner, )

)

vs. ) CASE NO. 82-696

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

) Y & D PARTNERSHIP, LTD., d/b/a ) WELLINGTON MANOR, )

)

Petitioner, )

)

vs. ) CASE NO. 82-697

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings by its duly designated Hearing Officer, R. L. Caleen, Jr., held a formal hearing in these cases on August 19, 1982, in Tampa, Florida.

APPEARANCES

For Petitioners: Robert J. Saner II, Esquire and

Peter S. Leyton, Esquire White, Fine & Verville

1156 15th Street, Northwest, Suite 302

Washington, D.C. 20005

For Respondent: Joseph L. Shields, Esquire

Department of Health and Rehabilitative Services

1317 Winewood Boulevard

Tallahassee, Florida 32301 ISSUE PRESENTED

Whether respondent Department of Health and Rehabilitative Services should disallow petitioners' claims for Medicaid reimbursement for certain expenses incurred in 1980 and 1981 by the two nursing homes owned by petitioners.

BACKGROUND

In these consolidated cases, petitioners Y & S Partnership, Ltd., d/b/a Manhattan Convalescent Center and Y & D Partnership, Ltd., d/b/a Wellington Manor challenge adjustments to their Medicaid cost reports made by respondent Department of Health and Rehabilitative Services ("Department"). The cost reports cover the years ending June 30, 1980 and June 30, 1981. The effect of the Department's adjustments is to reduce the reimbursement which petitioners receive for costs allegedly incurred while participating in Florida's Medicaid program.

In December and March 1982, petitioners requested hearings on the Department's adjustments. The Department granted the requests and forwarded these cases to the Division of Administrative Hearings for assignment of a hearing officer. On March 17, 1982, the cases were consolidated for final hearing, which was set for August 19, 1982.

At final hearing, petitioners presented the testimony of Leroy D. Williams, Paul E. Hekker and Donn Szaro; Petitioners' Exhibit 1/ Nos. 1-13, 15-19, 22, and 24-28 were received into evidence. The Department presented the testimony of June Denny and Sebastian Gomes; Respondent'S Exhibit 1/ Nos. 1-3 were received into evidence. Respondent's Exhibit No. 4, on which ruling was reserved, is now received into evidence.

The transcript of hearing was filed on September 16, 1982. Proposed findings of fact and conclusions of law were filed by November 5, 1982.

Proposed findings of fact not included herein are rejected as unsupported by the evidence, or unnecessary to resolution of the issues.

Based on the evidence presented, the following facts are determined: FINDINGS OF FACT

1. The Department is charged with setting rates of payment for nursing home services provided to beneficiaries of Florida's medical assistance ("Medicaid") program. To this end, it audits cost reimbursement reports filed by Medicaid providers and proposes adjustments by applying Medicaid reimbursement principles.

   
   

2. Petitioner Y & S Partnership, Ltd. ("Manhattan"), owns Manhattan Convalescent Center; petitioner Y & D Partnership Ltd. ("Wellington Manor"), owns Wellington Manor. Both are nursing homes in Tampa, Florida, which provide skilled and intermediate nursing care. The majority of their patients are Medicaid beneficiaries.

   1. DISALLOWANCE OF MANAGEMENT FUNDS

      
      

3. Petitioners challenge the Department's disallowance of a portion of management expenses. These expenses consisted of management fees paid, under contract, to Healthcare Management Inc. In December, 1980, the Department's auditors, under contract, completed their examination of the Medicaid cost report submitted by Manhattan covering the year ending June 30, 1980. The auditors disallowed $38,930 of expenses reported as management fees "[t]o remove fees in excess of prudent buyer concept amount. HIM-15, Section 2103." HIM-15 is the Federal Medicare reimbursement manual. One year later, different auditors employed by the Department examined and disallowed $40,359 of expenses which Manhattan claimed as management fees on the cost report covering the year ending June 30, 1981. HIM-15, Section 2103, was again given as the basis for disallowance. In the same reporting year, Department auditors also disallowed

   $61,014 in management fees claimed as expenses by Wellington Manor. The auditors, citing HIM-15, Section 2103, stated that this disallowance was necessary "[t]o remove management fees in excess of amount determined to be allowable."

   
   

4. Both parties now stipulate that the basis for disallowing administrative expense claimed by Manhattan and Wellington Manor is the "prudent buyer" principle as defined in the Federal Medicare statute, regulation, and

   HIM-15, Section 2103. (Prehearing Stipulation, p. 10)

   
   

   1. The Federal Medicare statute defines "reasonable costs" in pertinent part as follows:

      The reasonable cost of any services shall be the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be established in accordance with regulations establish ing the method or methods to be used

      (emphasis supplied) 42 U.S.C. s1395x(v)(1)(A)

      
      

   2. Medicare's implementing regulation provides:

      The provision in Title XVIII of the Act for payment of reasonable cost of services is intended to meet the actual costs, however widely they may vary from one institution

      to another. This is subject to a limitation where a particular institution's costs are found to be substantially out of line with other institutions in the same area which are similar in size, scope of services, utilization, and other relevant factors.

      42 C.F.R. s405.451(c)(2); and,

      
      

      The reasonable cost basis of reimbursement contemplates that the providers of services would be reimbursed the actual cost of providing quality care, however widely the actual costs may vary from provider to provider and from time to time for the

      same provider. (emphasis supplied) 42 C.F.R. s405.451(c)(3).

      
      

   3. Finally, Section 2103A generally describes the "prudent buyer" principle:

   The prudent and cost conscious buyer not only refuses to pay more than the going price for an item or service, he also seeks to economize by minimizing costs. s2103A.

   
   

   Section 2103B discusses its application:

   
   

   1. Application of Prudent Buyer Principle.-- Intermediaries may employ various means for detecting and investigating situations in which costs seem excessive. Included may

      be such techniques as comparing the prices paid by providers to the prices paid for similar items or services by comparable purchasers, spotchecking, and querying providers about indirect, as well as direct, discounts . . . . Also, when most of the costs of a service are reimbursed by Medicare

      . . . costs should be examined with partic ular care. In those cases where an inter mediary notes that a provider pays more than the going price for a supply or service, in the absence of clear justification for the pre mium, the intermediary will exclude excess costs in determining allowable costs under Medicare. (emphasis supplied) s2103B.

      
      

      1. MANAGEMENT SERVICES PROVIDED BY HEALTHCARE MANAGEMENT

         
         

5. In January, 1978, the Federal Bankruptcy Court appointed Healthcare Management, Inc. ("HMI"), a company which specializes in managing health care facilities, to manage Manhattan and Wellington Manor during bankruptcy reorganization. These nursing homes were having serious financial difficulties. The court selected HMI after evaluating its qualifications and those of at least one other applicant.

   
   

6. In October, 1978, the two nursing homes were purchased by petitioners Y & S Partnership, Ltd. and Y & D Partnership, Ltd., both principally owned by Joseph Yachknowitz. The new owners had no prior experience in owning or managing nursing homes--businesses, which, by their nature, are complex and multifaceted operations.

   
   

7. So they entered a management service contract with HMI, a company which manages 42 health care facilities in various states. Under the contract, HMI was required to provide a variety of management services in return for an annual fee calculated as a percentage (ten percent) of gross revenues. During the 1980 and 1981 cost reporting years, management fees were calculated pursuant to the contract, paid to HMI, and properly identified as a cost of administration on the Medicaid cost reports of Manhattan and Wellington Manor. (P-1, P-2, P-3).

8. Manhattan and Wellington Manor documented the management fees paid to HMI by providing the Department's auditors with the management contract, a description of the services provided thereunder, and an opportunity to question its employees concerning the services. (Tr. 100, 189). There is no evidence that the Department ever requested additional documentation as to the nature and extent of the management services provided under the contract. (Tr. 192-193, 224). Nor is there any evidence that HMI failed to provide the services described in the contract.

   
   

9. The percentage management fee adjusts, automatically, to facility size and volume--factors which affect management costs. HMI has historically used a percentage fee in their management contracts. It normally ranges from eight to twelve percent, and is arrived at through negotiation.

   
   

10. Although Department auditors are, generally, critical 2/ of percentage fee arrangements, no evidence was presented to establish that these fees unreasonably increased the operational costs of Manhattan and Wellington Manor. Year-to-year increases in the management fees simply kept pace with inflation. (Tr. 117). The 1980 and 1981 HMI fees were calculated on the same basis as the preceding 1979 fee, a fee which, after questioning, had been accepted as reasonable by the Department. (Tr. 45, 114-115).

    
    

11. Under the contract, HMI managed the day-to-day operations of the nursing homes and provided a broad range of services in several operational categories: dietary, nursing, maintenance, housekeeping and laundry, social services and activities, and accounting. (P-7). HMI had home-office professionals in each of these areas who advised and made regular scheduled visits to the two nursing homes, and who remained available on a stand-by basis. All accounting work for the homes was performed by HMI.

    
    

12. The management contract translated into cost savings for Manhattan and Wellington Manor. They received a level of professional expertise not ordinarily available to nursing homes of similar size, run solely by owner- operators or in-house employees. Because of HMI expertise and bulk purchasing power, Manhattan and Wellington Manor had lower raw food costs than most other similar nursing homes in the state. (Tr. 129-130; P-11, P-18) . Because it bought supplies direct from manufacturers or distributors, the two nursing homes also had lower housekeeping costs. (Tr. 134; P-12, P-19). It realized nursing service economies by closely monitoring labor time and costs, and purchasing medical supplies in bulk. (Tr. 136-140; P-15, P-22). Its purchasing power also allowed it to achieve lower maintenance and equipment costs. For example, when a washing machine at Wellington Manor required replacement, HMI bought it directly from the manufacturer for $4,700, rather than from the local distributor for $7,700. (Tr. 142).

    
    

    1. COMPARISON OF PETITIONER'S OPERATING AND ADMINISTRATIVE COSTS WITH

       THOSE OF SIMILAR FACILITIES

       
       

13. Total Operating Costs. Petitioners' total operating costs in 1980 and 1981 compared favorably with Medicaid facilities of comparable size. In 1980, Manhattan's total cost per day was lower than most facilities of comparable size, statewide (P-9), and was near the median of facilities in the Tampa area, irrespective of size. In 1981, Manhattan's and Wellington Manor's total costs per day were lower than most facilities of similar size and were near the median of other facilities in the Tampa area, irrespective of size. (P-16).

14. Administrative Costs. Petitioner's administrative costs, including the disputed management fees, were not substantially out of line with other Medicaid facilities of similar size, location, and scope of service. In 1980, Manhattan's administrative costs per day were lower than five other facilities of similar size throughout Florida, and lower than two in Hillsborough County. One facility's costs were 40 percent higher than Manhattan's. (P-10). In 1981, Manhattan's administrative costs per day were lower than nine homes of similar size, statewide; one facility had costs 30 percent higher than Manhattan's. (P- 17). In Hillsborough County, Manhattan had the highest administrative costs per day ($5.02); but this was only marginally higher than that incurred by the next highest nursing homes ($4.79). (P-17).

    
    

15. As to Wellington Manor, in 1981 its administrative costs per day were lower than the costs of four other Medicaid homes of similar size in Florida: one home had costs at least 20 percent higher than Wellington Manor's. When compared to other homes in Hillsborough County, Wellington Manor's cost of $5.43 was only marginally higher than the home with the next highest cost, $4.79. (P- 17)

    
    

16. The figures used in these comparisons came from the Department's "nursing home data input documents." (Tr. 237). These documents, which are profile sheets taken from Medicaid cost reports, are used in calculating annual Medicaid class reimbursement ceilings. But these documents have inherent limitations when used for survey purposes: some are unaudited; they do not include all Medicaid nursing homes; they do not delineate specific information, such as management fees; and they do not reflect different types of nursing home ownership. Yet, these are the only government documents, currently available, which may be used for comparison purposes. Although imperfect and incomplete, the Department considers them sufficiently reliable to use in calculating class ceilings for Medicaid reimbursement purposes. So to, they form a sufficiently reliable basis for comparing operating and administrative costs in the instant case. The Department's contrary assertion is rejected since it has not been shown, convincingly, why this Medicaid statistical information is acceptable for one comparative purpose, but not for another. (Tr. 238-240).

    
    

17. The Department contends that the disputed management fees paid must be disallowed because they are substantially out of line with what other similar nursing homes are paying for comparable services. (Tr. 193). That contention is based solely on the admittedly subjective opinion, or "guesstimate", of the auditor who proposed the original disallowance in 1980. 3/ (Tr. 193, 233).

    An expert's opinion is worth no more than the facts upon which it is based.

    Here the auditor, in determining a substitute management fee which he found acceptable, did not include all of the services provided by HMI. (Tr. 52, 145- 147). The overhead allowance which he used included only payroll taxes. (Tr.

    54). And his estimate did not provide for bulk purchasing of food (Tr. 58), liability and property insurance (Tr. 55-56), a sophisticated management information system (Tr. 57), and professional review of unemployment claims (Tr. 56) -- all services which HMI provided to petitioners.

    
    

18. In making its 1981 adjustments to petitioners' claimed management expenses, the Department's auditors did not independently examine the value of HMI's services to petitioners or attempt to compare petitioners' costs with those of comparable facilities. They simply applied an inflation factor to the 1980 adjusted management fee, noting that the 1980 adjustment was under challenge. (Tr. 73, 221).

19. During the audit process neither the Department nor its auditors provided petitioners with a meaningful opportunity to understand the basis for the proposed 1980 disallowance, to rebut erroneous conclusions, or to provide additional documentation. (Tr. 46, 48, 49, 51, 74-77). The Department also mailed the final audit report for Wellington Manor's 1981 cost report before the 30-day period for submitting written comments under Section 10C-7.481,Florida Administrative Code, had elapsed. (Tr. 77).

    
    

20. In 1980, the Department's auditors, upon whose work all three disputed adjustments are based, relied in part upon a then proposed revision to HIM-15, the Medicare reimbursement manual. The revision was not final until well after the 1980 and 1981 cost reporting periods were closed and the audits completed. The revision, on its face, operates prospectively, not retroactively. During 1980 and 1981, the proposed revision was not contained in any Florida statute or Department rule, and petitioners were not notified by the Department of its applicability. (Tr. 112-114, 270-271; P-26, R-4).

    
    

    1. DISALLOWANCE OF A 1981 PROFESSIONAL FEE

    
    

21. The Department contends that a professional fee of $6,013, contained in Wellington Manor's 1981 cost report, should be disallowed for lack of documentation. The required documentation was provided, earlier, to the Department's auditors and referred to in subsequent correspondence by Wellington Manor. What appears to have been a simple oversight has now been cured by the receipt of Petitioner's Exhibit No. 4 into evidence. (Tr. 85-88, P-4).

    
    

    CONCLUSIONS OF LAW

    
    

22. The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. s120.57(1) Fla. Stat. (1981).

    
    

23. Petitioners have the burden of proving their entitlement to the disputed Medicaid reimbursements. See, Rule 10C-7.481(6) Fla. Admin. Code. Once a prima facie case is presented in support of reimbursement, the burden of going forward with contrary evidence shifts to the Department. See, Florida Department of Transportation v. J.W.C. Co., Inc., 396 So.2d 778, 787 (Fla. 1st DCA 1981).

    
    

24. Section 120.57(1) hearings are de novo in nature; their function is to formulate agency action, not to review action taken earlier and preliminarily. McDonald v. Department of Banking and Finance, 346 So.2d 569 (Fla. 1st DCA 1977). Whatever presumption an agency may wish to attach to its preliminary action, in Section 120.57 (1) proceedings, it must be prepared to support its position with evidence. See, J.W.C., supra, at 789. As the court noted in

    J.W.C. Co., supra, at 790, n. 19: "credible and credited evidence submitted by the applicant . . . [who ordinarily has the burden of proof] may not be ignored except upon the requisite kind and quality of contrary evidence."

    
    

25. Here, petitioners presented a prima facie case in support of the reasonableness of the disputed management expenses. The burden of presenting evidence showing that the disputed expenses were excessive or out of line with those of other facilities similar in size, location, and scope of services, then shifted to the Department. Id.; See, 42 U.S.C. 1395, et seq.; 42 C.F.R. s405.451(c)(2),(3); Rule 10C-7.48(6) Fla. Admin. Code; HIM-15 ss2102, 2103. The Department failed to sustain this burden. The record shows that its disallowances are based on an auditors subjective opinion formed before gathering or considering facts relevant to the inquiry, including the

    operational and administrative costs incurred by other similar Medicaid providers. The disputed adjustments to management expenses claimed by petitioners must, therefore, be rejected. Accord, Home Health Services of Greater Philadelphia, Inc. v. Harris, 530 F. Supp. 1236 (D.C.E.D. Pa. 1982).

    
    

26. The Department contends that the management fee issue was recently decided, in its favor, in a hearing conducted before another hearing officer. See, Four Freedoms National Medical Services Company t/a Four Freedoms Manor v. Department of Health and Rehabilitative Services, DOAH Case No. 82-577, Recommended Order, dated September 28, 1982; Final Order dated November 9, 1982. That case, however, is distinguishable because, unlike here, the nursing home made no effort to furnish a detailed description of the services provided by the management company. The hearing officer also concluded that the nursing home failed to establish the reasonableness of the management fee by quantifying the value of the services provided. He did not, however, conclude that quantification was the exclusive method of proving reasonableness. 4/ In this case, reasonableness of the management fees has been established by other evidence.

    
    

27. As to the disputed $6,013 professional fee expense claimed by Wellington Manor for 1981, proper documentation, earlier provided, has now been received into evidence. The Department does not contest the sufficiency of the documentation. The disputed fees should, therefore, be allowed.

RECOMMENDATION

Based on the foregoing, it is RECOMMENDED:

That petitioners be reimbursed the disputed Medicaid management and professional fees.

DONE AND ORDERED this 22nd day of February, 1983, in Tallahassee, Florida.

R. L. CALEEN, JR. Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 22nd day of February, 1983.

ENDNOTES

1/ Petitioners' Exhibits will be referred to as "P- "; respondent's as "R-

". Pages in the transcript of hearing will be referred to as "Tr- "

2/ The 1980 audit of Manhattan, which established the pattern for the subsequent adjustments, cited an unidentified General Accounting Office study

critical of management contract fees. Percentage fees were not, however, forbidden by any statute or rule in effect in 1980 or 1981.

3/ The Department's additional contention that the proposed management fees should be disallowed because of lack of documentation is rejected. Additional documentation was never requested. Neither were petitioners told that lack of documentation was the basis for disallowance. (When inadequate documentation was a basis for an adjustment, the auditors clearly indicated such on their audit reports.) Finally, the parties have stipulated that the Department's disallowance was based on application of the "prudent buyer" principle (not lack of documentation).

4/ A proposition which the Department, seemingly, urges. Perhaps the Department could, by rule, make quantification of value an essential test for deciding reasonableness. Or, at hearing, it might prove the necessity for such a test. See, Anheuser-Busch, Inc. v. Department of Business Regulation, 393 So.2d 1177 (Fla. 1st DCA 1981) Here, however, it has done neither.

COPIES FURNISHED:

Robert J. Saner, II, Esquire Peter S. Leyton, Esquire White, Fine & Verville

1156 15th Street, N.W. Suite 302

Washington, D.C. 20005

Joseph L. Shields, Esquire Department of Health and

Rehabilitative Services 1317 Winewood Boulevard

Tallahassee, Florida 32301

David Pingree, Secretary Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32301

Docket for Case No: 82-000372

Orders for Case No: 82-000372