STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

G & J INVESTMENTS CORPORATION, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 83-1769

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, Sharyn L. Smith, held a formal hearing in this case on October 13 and 14, 1983, in Miami, Florida. The following appearances were entered:

APPEARANCES

For Petitioner: Patricia A. Peoples, Esquire

R. Stuart Huff, Esquire

330 Alhambra Circle

Coral Gables, Florida 33134

For Respondent: Joseph L. Shields, Esquire

1317 Winewood Boulevard

Tallahassee, Florida 32301

The issue for determination is whether the Respondent Department of Health and Rehabilitative Services (hereafter "Department") is required to accept a cost report submitted by the Petitioner G & J Investments Corporation, Inc. (hereafter "G & J").

At the final hearing, Ruth N. Eldridge, a member of the Board of Directors of Suburban Nursing Homes, Inc. and Nursing Home Consultants, Inc., John T. Donaldson, audit evaluation and review analyst for the Department, Stanley W. Swindling, Jr., internal audit supervisor for the Department, Charles Stophel, director of the Office of Audit and Quality Control Services for the Department, and Roy McCaslin, audit services administrator for the Department, testified for the Petitioner. John Donaldson also testified for the Respondent Department.

Petitioner's Exhibits 1-29 and Respondent's Exhibits 2-4(a) were offered and admitted into evidence.

Proposed Recommended Orders containing findings of fact have been submitted by the parties and considered in the preparation of this Recommended Order.

When the parties' findings of fact were consistent with the weight of the credible evidence introduced at final hearing, they were adopted and are reflected in this Recommended Order. To the extent that the findings were not consistent with the weight of the credible evidence, they have been either

rejected, or when possible, modified to conform to the evidence. Additionally, proposed findings which were subordinate, cumulative, immaterial or unnecessary have not been adopted.

1. PROCEDURAL BACKGROUND

This proceeding arose as a result of the Department's refusal to accept nursing home cost reports filed by the Petitioner under cover letter dated February 7, 1983, for the period from June 1, 1978 through May 31, 1979, for two nursing homes, Krestview Nursing Home and Towne House Convalescent Center and the Department's contention that cost cost reports filed by the facility and audited for the period May 5, 1977 through May 31, 1978, were not properly the subject of an administrative proceeding.

The Department's position was set forth in a letter dated March 25, 1983, Petitioner's Exhibit 15, in which the following grounds for denial were asserted: (1) the cost reports were filed after the fiscal year end of B & K Investments, at one time a subsidiary of G & J; (2) the cost reports could only be used to set a new rate for the month following the filing of the cost report;

1. a retroactive payment could not be made to a facility whose costs exceed annual payment; and (4) the cost reports in question had been subject to a final audit by the Department and the provider or trustee was required to timely file its request for hearing after the final audits were issued. The denial letter of March 25, 1983, established the parameters of the administrative hearing.

   
   

   FINDINGS OF FACT

   
   

   1. Suburban Nursing and Mobile Homes, Inc., of Ohio, at all material times, wholly owned the stock of G & J, an owner of land, buildings and equipment of two nursing homes, Krestview Nursing Home and Towne House Convalescent Center located in Miami, Florida. Suburban was a holding company which owned the stock of numerous subsidiary corporations engaged in the nursing home or mobile home park business. Among its subsidiaries was B & K Investments, Inc. (hereafter "B & K") a Florida corporation. All of the stock of Suburban was controlled by Gerald D. Keller.

      
      

   2. On May 5, 1977, at the request of the Department, B & K became the licensed provider for Krestview and Towne House and G & J became the landlord. Both landlord and tenant were wholly owned by the same parent corporation. Since Medicaid rules and regulations prohibited the payment of rent by a provider to a related-party landlord, Keller arranged in May of 1977, for the sale of the stock of B & K to unrelated parties in an arm's-length transaction.

      
      

   3. Petitioner's assignor, B & K, entered into written provider agreements with the Department for the operation of the two nursing homes. That provider agreement states, in pertinent part, that:

      
      

      In instances of non-payment or underpayment conditions due to error(s) not attributable to provider who has furnished nursing home services and care to persons properly certified and eligible, the single state agency (HRS) shall make payment to the provider upon receipt of properly completed claims documents. (Petitioner's Exhibit 13, 13a.) (Emphasis added.)

   4. During 1978 and 1979, the Department set reimbursement rates for B & K inconsistently. During this period of time, B & K experienced at least eight different retroactive increases or decreases in a period of less than twelve months. Additionally, the relationship between the parties was increasingly strained during 1978, as evidenced by Petitioners Exhibit 18, in which a medicaid audit evaluation and review analyst, in considering cost factors at Krestview, speculated that the "Ohio group would get out of the business in Florida."

      
      

   5. In August, 1979, the independently owned B & K d/b/a Krestview Nursing Home and Towne House Convalescent Center, filed a petition in bankruptcy. Among its creditors were G & J, the landlord, which filed a secured claim in excess of

      $300,000 for unpaid rents. At that time B & K had not yet filed cost reports for its fiscal year ending May 31, 1979, and had filed no cost reports for the period May 31 through August 31, 1979. The trustee made a determination to file those cost reports on behalf of the bankrupt if the cost reports could be prepared.

      
      

   6. The trustee requested B & K's former accountant to prepare the cost reports. When it became apparent that the accountant was unwilling to prepare the reports without a substantial advance payment and that no funds were available to pay for such services, the trustee looked elsewhere.

      
      

   7. Keller's holding company, Suburban, owned the stock of Nursing Home Consultants, Inc., an Ohio corporation engaged in the business of providing accounting services to health care organizations. Keller had an obvious interest in offering the services of his corporation on a contingent basis since he had a $300,000 secured claim against the bankrupt whose only visible asset was the monies it asserted were due from the Department as a result of reimbursable expenses.

      
      

   8. The proposal advanced by Keller was accepted by the trustee in bankruptcy, Jennette E. Tavormina, and Judge, Thomas C. Brutton, bankruptcy judge. The court entered an order appointing Nursing Home Consultants to prepare the cost reports. Nursing Home Consultants attempted to obtain the accountant's work papers to begin preparing the cost reports, however, it was not until December, 1980, when faced with possible action from the court, that the accountant made his papers available and the time-consuming tasks of matching checks to invoices, verifying patient records and documenting expenses began.

      
      

   9. In July of 1981, Nursing Home Consultants completed the first of the cost reports and forwarded it to the trustee. The trustee in turn filed the cost report with the Department. It was returned to Nursing Home Consultants because the person who had certified the reports was not a certified public accountant in Ohio. Nursing Home Consultants had the returned cost report recertified by an independent firm of certified public accountants in Ohio.

      
      

   10. Considerable time elapsed and as of July, 1982, the cost reports for the second facility had not been completed. Both the trustee and the bankruptcy judge desired to close the estate and ascertain what, if any, assets were present. G & J made a written offer to the trustee to purchase the trustee's right, title and interest and claims, if any, in and to the Medicare/Medicaid cost reports of the bankrupt. In consideration, G & J offered the sum of $5,000 together with the waiver of its claim for rents due and owing from B & K and any and all claims against the estate for the costs and expenses incurred in the preparation of the cost reports.

   11. A hearing was held on September 23, 1982, after notice to all creditors, concerning whether G & J's offer should be accepted. The Department appeared at the hearing and opposed the sale. The offer was accepted by the trustee and ratified and approved by the court on September 24, 1982. The objection entered by the Department to the sale was specifically denied. No appeal of the court's order was taken by the Department.

       
       

   12. On February 7, 1983, G & J, as assignee, under the bankruptcy court's order, filed the cost reports with the Department for review and audit. The Department returned the cost reports outlining its reasons by letter dated March 25, 1983, and set forth above.

       
       

   13. The cost reports for the period May 5, 1977 through May 31, 1978, were initially submitted by B & K and accepted by the Department on November 1, 1978. The final audit of those reports was not completed until December 26, 1979, for Krestview, and February 15, 1980, for Towne House, after B & K had filed for bankruptcy. While the audit was being conducted, B & K was granted extensions of time for the filing of the 1978-1979 cost reports. After the trustee in bankruptcy was appointed and began the process of attempting to prepare the cost reports, the Department conducted a final audit of the 1977-1978 cost reports. The Department failed to provide either B & K or the trustee with a copy of any proposed audit adjustments. No evidence was presented that B & K or the trustee was given an exit conference where the audit findings were discussed and explained. Instead, the Department distributed the final audit but failed at that time to advise B & K, the trustee or the Bankruptcy Court of any right to challenge the audit pursuant to Section 120.57, Florida Statutes.

       
       

       CONCLUSIONS OF LAW

       
       

   14. The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this dispute. Section 120.57(1), Florida Statutes.

       
       

   15. Section 409.268, Florida Statutes, requires nursing homes entering into contracts to provide services for indigent patients pursuant to Section 409.266, Florida Statutes, inter alia, to annually forward to the Department a true and accurate, properly certified statement of its cost of providing care.

       
       

       1. The Department's assertion that cost reports must be filed within ninety

          days after the end of the cost report period under Rule 10C-7.48(5) (c), Florida Administrative Code.

          
          

   16. At final hearing, counsel for the parties agreed that the ninety-day rule set forth at Rule 10C-7.48 (5)(c), Florida Administrative Code, is not, in and of itself, a defense to the proposed reimbursement which would occur more than ninety days after the end of the cost report period.

   17. This is consistent with Department policy which permits the filing of costs reports later than ninety days. In a few cases, the Department has imposed a 10 percent discretionary penalty for late filed reports. However, the practice of imposing penalties has been applied infrequently and this has not occurred recently.

       
       

       1. The Department's defense that cost reports can only be used to set a new rate.

          
          

   18. In this case, Department was aware that the Petitioner was preparing cost reports for audit and that since B & K was out of business, the purpose of the reports was not to establish a new rate. While one purpose of cost reports is obviously to establish a new rate for an ongoing facility, it is not necessarily the only purpose. As noted by the Petitioner, if retroactive payments to the provider are not prohibited, then such payments can only be paid after the filing and auditing of a cost report. Thus, if the retroactive payments are allowed, the issue involving the use of cost reports is moot.

       
       

       1. The Department's interpretation of Rule 10C-7.48(6)(i), Florida Administrative Code, to prohibit retroactive payments.

          
          

   19. The crux of the Department's position is that since Rule 10C- 7.48(6)(i), Florida Administrative Code prohibits retroactive payments to providers, the Department had no basis to accept the cost reports in question. Rule 10C-7.48(6)(i), Florida Administrative Code, provides that:

       
       

       Retroactive payments shall not be made

       to nursing homes whose costs exceeds (sic) annual payment.

       
       

       This provision clearly does not prohibit all retroactive payments but rather only those whose costs have exceeded "annual payment". An initial determination is, therefore, necessary in order to ascertain what is meant by "costs" and "annual payment", since the Department has not by rule or written policy attempted to interpret or define these terms.

       
       

   20. The Petitioner presented through live and deposition testimony, four employees of the Department whose primary responsibilities include auditing of cost reports in a direct or supervisory capacity. Each Department employee attempted to explain his interpretation of the rule and the definition of the term "annual payment". Mr. Donaldson stated that annual payment was defined as:

       
       

       The rates derived will be effective on

       the first day of the first month following the month the cost report is received until the next cost report is received. (Tr. 223.)

       
       

   21. Mr. Stophel, a Department head and supervisor, disagreed with this interpretation, and stated that Donaldson had defined a rate setting period between cost reports and added that he was personally unfamiliar with the concept of "annual payment". (Tr. 298, 300, 301.)

       
       

   22. Mr. McCaslin, another Department supervisor was familiar with the term "annual payment" and defined it in "several ways". Mr. Swindling, the final Department employee, did not believe a definition of "annual payment" was

       meaningful since monthly rates rather than annual payments were utilized by the Department. (Tr. 349.)

       
       

   23. However, in this case, B & K never experienced a rate during 1978 and 1979 that was set and consistently applied. Instead, B & K had a series of eight different rates in less than twelve months. As a result, B & K never had an established rate while it operated. Although the Department attempted to demonstrate that rates would always become effective the first day of the month after the report was filed, this concept is inapplicable in this case, as demonstrated by Petitioner's Exhibit 9, which shows that B & K's rates were not set with any consistent pattern or principle in mind.

       
       

   24. Finally, the Department asserts that reimbursements cannot be made to any provider for underpayments under any circumstances. During the hearing, this concept was said to underly a "totally new prospective system of payment" to providers. It was uncontradicted that this "totally new system", which was noticed in the Administrative Weekly, Volume 2, No. 44 October 29, 1976, was summarized therein as a "repromulgation of existing medicaid rules" with "no new or additional economic impact to the state, private persons or others" since the rules were "merely a continuation of the Medicaid program." (Petitioner's Exhibit 17.)

       
       

   25. However, even assuming that the prospective system was properly in place and in effect as of 1977, the Department's actions would indicate otherwise to providers. For example, in December of 1980, four years after the prospective system was allegedly in effect, the Department prepared and issued "Instructions to Cost Reports for Nursing Homes Participating in the Florida Medicaid Program". (Petitioner's Exhibit 19.) This form which was provided to nursing homes, provides for a calculation of the net settlement between the provider and the Department and contains specific provisions to determine net overpayment and underpayment. Rule 10C-7.48, Florida Administrative Code, provides that the cost reports are to be prepared in accordance with the Department's instructions. The only logical reason to require a calculation on the schedule of a net underpayment is to use this figure in the event of an underpayment. It is noteworthy that the only time that this figure is actually used by the Department to reimburse a provider for underpayments is when it is ordered to do so as the result of an administrative or judicial proceeding.

       
       

   26. Most significant in the instant case, is the provider agreement between B & K, the assignor, and the Department, which specifically contemplated that underpayments could be made upon receipt of a properly completed and audited claims document, such as an audited cost report. In this respect, this provision of the contract presents the opposite case from that discussed in Pan American Hospital Corporation v. Department of Health and Rehabilitative Services, 433 So.2d 568 (Fla. 3d DCA 1983), which also involved retroactive reimbursement of medicaid funds payable under provider agreements. In Pan American, supra, at 570, n.2, reimbursement was denied due to the hospital's contracts for 1975-1979 which provided that

       
       

       reimbursement will be made on the

       basis of an interim payment plan in the form of a per diem cost rate, plus a percentage allowance for the year, in lieu of retroactive payment adjustment.

       
       

   27. The agreement in Pan American provided that no retroactive corrective adjustments were to be made for underpayments, and the exclusive remedy for

       underpayments was the hospital's right to offset any underpayment against overpayments in the following year.

       
       

   28. This type of provision is absent in the provider agreement between B & K and the Department. To the contrary, the provider agreement contemplates that underpayments will be made under certain circumstances. As in Pan American, the contract which both parties signed must control, and accordingly, retroactive payments are not prohibited under the facts and circumstances of this case.

       
       

       1. The Department's contention that G & J waived its right to a bearing concerning the cost reports.

       
       

   29. Rule 10C-7.481, Florida Administrative Code, provides as follows:

       
       

2. Upon completion of an audit and before publication of the audit report, the provider (here, B & K) shall be given an exit conference at which all audit findings will be discussed and explained. A copy of the proposed audit adjustments will be given to the provider at least ten (10) days before the exit conference.

3. Following the exit conference, the provider has thirty (30) calendar

   days to submit documentation. . . to contest any disallowed expenditure or other adjustments....

4. All audit reports shall be

issued by certified mail, return receipt requested. The provider shall have thirty (30) calendar days from the date

of receipt of the audit report to contest the contents of the report by requesting an administrative hearing in accordance with Section 120.57, Florida Statutes and Chapter 28-5, Florida Administrative Code....

(Emphasis added.)

1. By failing to provide either B & K or the trustee with either an exit conference, a copy of the proposed audit adjustments, or an audit report by certified mail, which informed B & K of its right to seek an administrative hearing concerning the contents of the report, the Petitioner has not waived its right to a hearing contesting what the Department has characterized as a "final audit". In any administrative proceeding, an agency must provide a substantially interested party with a clear "point of entry" into such proceedings. See, e.g., Capeletti Brothers, Inc. v. Department of Transportation, 362 So.2d 346 (Fla. 1st DCA 1978); cert. den. 368 So.2d 1374 (Fla. 1979); Dickerson, Inc. v. Rose, 398 So.2d 922 (Fla. 1st DCA 1981); Sterman

   v. The Florida State University, 414 So.2d 1102 (Fla. 1st DCA 1982); Manasota- 88, Inc. v. Department of Environmental Regulation, 417 So.2d 846 (Fla. 1st DCA 1982); General Development Utilities, Inc. v. Department of Environmental Regulation, 417 So.2d 1068 (Fla. 1st DCA 1982); FFEC-Six, Inc. v. Public Service Commission, 425 So.2d 153 (Fla. 1st DCA 1983); Henry v. Department of Administration, 431 So.2d 657 (Fla. 1st DCA 1983); Hillsborough-Windsor Condominium Association v. Department of Natural Resources, 418 So.2d 359 (Fla. 1st DCA 1982). In order for the Department's final audit to be final as a

   matter of law, all substantially interested persons were entitled to a clear point of entry provided by notice which informs the parties of either the action or the proposed action to be taken by the agency, a time limit within which the affected person may request an administrative hearing and the applicable rule under which such a hearing may be requested.

   
   

2. In sum, since the Department has a detailed clear point of entry rule, the "final audit" issued in this case is non-final until the Department demonstrates compliance with Rule 10C-7.481, Florida Administrative Code.

   
   

3. Due to the disposition of this issue, it is unnecessary to determine whether the Department is estopped from asserting that the "final audit" completed during bankruptcy proceedings is a bar to G & J now filing cost reports for B & K for the period 1977-1979.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED:

That the Department enter a Final Order accepting for audit the cost reports submitted by the Petitioner G & J Investments Corporation, Inc., for B & K Investments, Inc., for the periods May, 1977 through August 1979.

DONE and ENTERED this 6th day of February, 1984, in Tallahassee, Florida.

SHARYN L. SMITH

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 6 day of February, 1984.

COPIES FURNISHED:

Patricia A. Peoples, Esquire

R. Stuart Huff, Esquire

330 Alhambra Circle

Coral Gables, Florida 33134

Joseph L. Shields, Esquire Department of Health and

Rehabilitative Services 1317 Winewood Boulevard

Tallahassee, Florida 32301

David H. Pingree, Secretary Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32301

Alicia Jacobs, Esquire General Counsel Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32301

Docket for Case No: 83-001769

Orders for Case No: 83-001769