STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

TALLAHASSEE MEMORIAL REGIONAL MEDICAL ) CENTER, et at., )

)

Petitioners, )

)

vs. ) CASE NO. 84-4398

) DEPARTMENT OF INSURANCE, STATE OF FLORIDA, ) AND FLORIDA PATIENT'S COMPENSATION FUND, )

)

Respondents. )

) SOUTHEAST VOLUSIA HOSPITAL DISTRICT, et al.,)

)

Petitioners, )

)

vs. ) Case No. 84-4399

) DEPARTMENT OF INSURANCE, STATE OF FLORIDA, ) AND FLORIDA PATIENT'S COMPENSATION FUND, )

)

Respondents. )

) MIAMI GENERAL HOSPITAL, INC., d/b/a MIAMI ) GENERAL HOSPITAL, )

)

Petitioner, )

)

vs. ) Case No. 85-0992

) DEPARTMENT OF INSURANCE, STATE OF FLORIDA, ) AND FLORIDA PATIENT'S COMPENSATION FUND, )

)

Respondents. )

)

RECOMMENDED ORDER

A hearing was held in the above-captioned cases on April 4-5, 1985, at Tallahassee, Florida, before Thomas C. Oldham, Hearing Officer.

APPEARANCES

For Petitioners, William C. Owen and Tallahassee Memorial Doug Hall, Esquires Regional Medical Center, Carlton, Fields, Ward,

et al.: Emmanuel, Smith and Cutler Post Office Drawer 190 Tallahassee, Florida 32302

For Petitioners, Cathi C. O'Halloran, Esquire Southeast Volusia Pennington, Wilkinson & Dunlap Hospital Post Office Box Box 3985 District, et al.: Tallahassee, Florida 32315-0985

For Petitioners, James Wing, Esquire

Gateway Hospital Corp. Myers, Kenin, Levingson, Frank and Mount Sinai and Richards

Medical Center: 1428 Brickel Avenue Miami, Florida 33131

For Petitioner, Louis F. Robinson, III, Esquire Miami General Hospital: Barnett and Alagia

250 South County Road, Suite 201 Palm Beach, Florida 33480

For Respondent, David A. Yon and

Department of Insurance: Dennis S. Silverman, Esquires

Department of Insurance Legal Division

Room 413-B Larson Building Tallahassee, Florida 32301

For Respondent, E. Clay McGonagill, Jr., Esquire Florida Patient's 241 Virginia Street Compensation Fund: Tallahassee, Florida 32301

ISSUE PRESENTED

Whether Petitioners are liable for the payment of amounts set forth in Respondent's Notice of Assessment for fiscal fund years 1977-78, 1979-80, 1980- 81, and 1981-82, dated November 9, 1984, pursuant to Chapter 768, Florida Statutes.

This proceeding arose as a result of petitions filed by two groups of hospitals contesting Notice of Assessment issued by the Department of Insurance on November 9, 1984, based upon the certification by the Board of Governors of the Florida Patient's Compensation Fund to the Insurance Commissioner of a deficiency in the amount of money available to pay claims for the 1977-78, 1979- 80, 1980-81, and 1981-82 fiscal Fund Years. The proposed assessment seeks payment of the alleged deficiency in the total amount of some 57 million dollars from health care providers who were members of the Fund during the fund years in question, pursuant to Section 768.54, Florida Statutes. Two groups of hospitals subsequently filed petitions contesting the proposed assessment. They consist of Tallahassee Memorial Regional Medical Center and 42 other hospitals (Case No. 34-4398), and Southeast Volusia Hospital District and 64 other hospitals (Case No. 85-4399). A third petition was filed by Miami General Hospital, Inc. shortly before the final hearing herein (Case No. 85-0992). The three cases were consolidated for hearing. An additional petition filed by Harborside Hospital was merged with the petition of Tallahassee Memorial Regional Hospital, et al. Mount Sinai Medical Center of Greater Miami, Inc., one of the petitioners in Case No. 84-4398, filed a "Supplemental Petition" raising additional disputed issues, including the question of whether the Department of Insurance was required to consider the impact of the loss of Medicare reimbursement on individual member hospitals in allocating the proposed assessment to such hospitals.

Intervention as a party respondent was granted to the Florida Patient's Compensation Fund.

By prehearing orders, it was determined that questions involving Medicare reimbursement, the setting of fees for various classes of health care providers, and the repeal of the "statutory cap" by Chapter 83-206, Laws of Florida, amending Section 768.54, Florida Statutes, were not properly in issue in this proceeding. The parties entered into a prehearing stipulation that set forth certain agreed facts. However, Respondents reserved the right to object to their relevance or materiality. Such of the agreed facts as are deemed relevant are included hereinafter. The following issues of law remain for determination:

1. Whether the Fund and the Department properly applied Section 768.54, Florida Statutes, in certifying and approving a deficit and assessment for each of the subject Fund years based on the reserving practices and procedures employed by the Fund; particularly: (a) in failing to adjust or write down reserves to reflect the amounts of known settlements and verdicts, plus accrued interest as of the certification date. (b)

   by the manner in which claims supervisors and the claims committee for the Fund posted or

   set reserves on individual cases. (c) in that the reserves set by the Fund on known cases

   are redundant.

2. Whether the Fund and the Department properly applied the $15 million maintenance cap with respect to the actual assessment for each Fund Year.

At the hearing, Petitioners presented the testimony of Lee M. Smith, who was accepted as an expert in actuarial science, and Catherine M. Sims, Administrative Manager of the Florida patient's Compensation Fund.

Additionally, petitioners submitted deposition testimony of Michael Rinehart, Administrator for Automobile and General Liability Claims for the Division of Risk Management, Department of Insurance, and excerpts of prior testimony of John W. Odem. Petitioners submitted 16 exhibits in evidence which are numbered according to the exhibit list contained in the Prehearing Stipulation.

Respondents presented the testimony of Ms. Sims, Charles Portero, Claims Manager of the Florida Patient's Compensation Fund, who was accepted as an expert in claims handling and reserving practices, and Jerome Vogel, an actuary with the Department of Insurance who was accepted as an expert in that field.

Respondents also submitted the deposition testimony of Ward Johnson, Vice President of Claims for Alexsis Risk Management, and James O. Wood, a Consultant Actuary employed by Tillinghast, Nelson and Warren, Inc. Respondents submitted

18 exhibits, including supplemental excerpts of the prior testimony of John W. Odem and Michael Rinehart. Respondents' exhibits also follow the numbers set forth in the Prehearing Stipulation, except for exhibits which were not listed therein. At the conclusion of the hearing, certain of Respondents' answers to Petitioners' request for admissions were received in evidence. Certain other answers were proffered, as were a number of Petitioners' exhibits, as reflected on the record. The parties have submitted proposed recommended orders that have been fully considered. All matters therein have been ruled on directly or indirectly herein, except for proposed findings of fact that have been rejected as subordinate, cumulative, immaterial, or unnecessary.

FINDINGS OF FACT

1. The Florida Patient's Compensation Fund (Fund) is established under Chapter 768, Florida Statutes, for the purpose of paying claims against member health care providers, including hospitals, in amounts exceeding statutory limits which must be maintained by the health care provider as primary coverage. The Fund is operated subject to the supervision and approval of a Board of Governors which consists of members representing the insurance industry, the legal and medical professions, hospitals and the general public. Annually, each health care provider electing to become a member of the Fund pays certain fees established by statute for deposit into the Fund. Each fiscal year of the Fund operates independently of preceding fiscal years and participants are only liable for assessments for claims from years during which they were members of the Fund. If the Fund determines that the amount of money in an account for a given fiscal year is insufficient to satisfy claims, it certifies the amount of projected excess or insufficiency to the Insurance Commissioner with a request that he levy an assessment against Fund participants for that fiscal year. Subsection 768.54(3)(c), Florida Statutes (1981), which was the statutory language applicable during all fund years in question, provides that the Insurance Commissioner shall levy such assessment against the participants in amounts that "fairly reflect the classifications prescribed above and are sufficient to obtain the money necessary to meet all claims for said fiscal year." For all years at issue in this proceeding, a statutory limitation was in effect on the amount physician members of the Fund could be assessed.

   
   

2. Petitioner hospitals were members of the Fund during one or more of Fund Years 1977-78, 1979-80, 1980-81, and 1981-82 (Stipulation).

   
   

3. Each month, the Administrative Manager of the Fund follows a prescribed procedure to determine if an assessment is required for a particular Fund Year, utilizing what is termed a "retrospective rating plan." The plan provides that assessments will not be levied in any year until the cash available for paying claims in that membership year is down to 33 percent of the loss and expense reserves for all known losses. It further provides that the amount should be sufficient to create enough cash flow to pay known reserved claims for the year showing such deficit. In reviewing the Fund's monthly financial report of March 31, 1984, it was determined that a sufficient deficit existed to warrant the levy of an assessment. Thereafter, an outside audit of the Fund accounts was conducted and presented to the Fund Board for certification. At a meeting of the Fund Board of Governors on May 12, 1984, the Board approved the verifications that assessments had been triggered for the 1978, 1980, 1981, and 1982 fiscal years and voted to submit the deficit certification to the Insurance Commissioner for assessment. Thereafter, by letter of May 23, 1984, the proposed assessment was certified to the Insurance Commissioner. (Respondents' Exhibits 2 a, b, c, 4-5, 7, 9, 17; Testimony of Sims.)

   
   

4. Prior to the issuance by the Department of an assessment order, the 1982 Fund Year triggered an additional deficit in excess of nine million dollars. The Fund's Board of Governors, at their October 25, 1984 meeting, accepted the audit substantiating the need for the additional amount to be added to the 1982 Fund Year assessment. On November 9, 1984, the Department issued a Notice of Assessment for Fund Years 1977-78, 1979-80, 1980-81, and 1981-82. The Notice of Assessment announced that the Insurance Commissioner intended to levy and authorized the Fund to collect an assessment in accordance with the Fund's certification of deficits as follows:

   1977-78	Membership Year	$ 7,467,603.00
   1979-80	Membership Year	3,952,812.00
   1980-81	Membership Year	18,448,460.00
   1981-82	Membership Year	16,154,699.00
   	(amount certified May	23, 1984)
   1981-82		9,047,785.00

   (amount certified October 29, 1984)

   
   

5. The Notice of Assessment of November 9, 1984, further provided that the assessment shall be divided among the various classes of health care providers for each year as follows:

CLASS OF HEALTH CARE PROVIDERS AMOUNT OF ASSESSMENT Class 1977-78 1979-80 1980-81 1981-82

1. Physicians & Surgeons

   (a) Class 1 0	0	0	$ 1,370,677
   (b) Class 2 0	0	0	1,974,946
   (c) Class 3 0	0	0	6,476,422
   2. Hospitals 7,467,603	3,924,941	18,309,420	14,668,665
   3. HMO 0	9,764	44,203	97,207
   4. Ambulatory Surg. Center 0	18,107	94,837	38,555
   5. Professional Assoc. 0	0	0	576,012

   
   

   1. The notice further provided that each health care provider that was a member of the Fund during one or more of the specified Fund Years shall pay a pro rata portion (based on premium paid) of the total amount assessed against the class of health care providers for each year of which the health care provider was a member. It further stated that each health care provider failing to pay its share of the assessment within 21 days of date of receipt of the order or its publication in the Florida Administrative Weekly, whichever date is earlier, shall pay an additional amount in interest of 12 percent per year. (Respondents' Exhibits 3 a-d, 6, 11-12, Stipulation, Testimony of Sims.)

      
      

   2. The Fund used the same procedure in preparation of Certification to the Department in this fifth assessment since the inception of the Fund as it used in the first four assessments. The Department used the same procedure and methodology (indicated rate method), in allocating the assessment among the various classes as it used in the first four assessments. The Fund levies assessments based on the amount needed to pay known claims. Usually, the Fund becomes aware of a claim by service of process incident to a civil action. The Fund's reserves are estimates of the amount needed to pay known claims. The Fund follows standard industry reserving practices, as modified in several respects by its particular needs and procedures. Each claim is assigned to a claims supervisor who obtains information concerning the claims incident from the primary insurance carrier. The initial reserve on a claim is based on a variety of factors, including the type of injury, potential damages, liability considerations, geographic location, and the particular attorney for the claimant. After a determination that a reserve is needed on the file, the claims supervisor makes an initial determination of the amount which is referred to the claims manager for approval. Final approval of the posted reserve lies in the hands of the Claims Committee of the Fund. The figure is usually fixed at a sum for which it is believed that the claim could be settled and the potential liability arising from a jury verdict. The necessity of obtaining approval of the Claims Committee for the initial reserve and any subsequent changes creates a certain amount of delay in obtaining such decisions. Changes may be effected in the reserve when injuries are found to be greater than

      anticipated, or because of the discovery of additional facts affecting potential liability. It is not unusual for a particular claim to be submitted three or four times to the Claims Committee before it is settled.

      
      

   3. In recent years, the Fund has not had sufficient cash available to pay all the required settlements or verdicts due to the lack of ability to collect prior assessments which have been in litigation. The Fund has found that such delays have increased the settlement value of claims, and plaintiffs unwilling to wait for payment of a settlement amount have gone on to trial and obtained verdicts in excess of what the case could have been settled for if the funds had been available. The reserve for a particular case is normally adjusted following settlement or verdict within a period of approximately 90 days. Although such an adjustment includes anticipated interest, interest is not taken into consideration in setting initial reserves. Past experience has shown that a lag time of about two years will elapse before funds are available to pay settled claims and, accordingly, interest is projected for a substantial period when reserves are adjusted. (Testimony of Portero.)

      
      

   4. Although individual claims have been found to be "over-reserved" at a particular point in time, it is also true that other claims are sometimes "under-reserved." The setting of reserves is based upon past experience and is necessarily subjective to a certain extent. As indicated above, changes in the status of a claim may require an increase or decrease in the amount of reserve. Additionally, a number of claims settled shortly before certification of the deficit for the assessment herein reflected that the Fund did not reduce the reserves to the amount of settlement prior to the certification dates. Several such instances were brought to the attention of the Fund in a claims audit made

      by an independent firm in March 1984. However, the audit report also noted that although the claims staff recognized the potential of large exposure claims, the Claims Committee was not allowing them to set a sufficient reserve on the "million dollar plus exposure claims." The auditor found that overall, the file reserves were in line by the time a case went to trial, but that the reserves could probably have been established more promptly if traditional claims handling procedures had been employed. The report found that there were many cases of reserve requests being made by the claims personnel which were turned dawn or drastically cut by the Claims Committee, and recommended that the claims staff should be allowed to set the reserves to properly reflect the exposure that the claim had at the time the file is examined. It was the opinion of the individual who conducted the claims audit, Ward W. Johnson, Vice President Of Claims, Alexsis Risk Management Services, Inc., that the number of cases that were under-reserved exceeded the cases that had potential of being over- reserved. He was of the further opinion that generally the Fund did a "good job of reserving." (Respondents' Exhibits 13, 23, (Deposition of Ward Johnson); Petitioners' Exhibits 23, 58.)

      
      

   5. Conflicting expert testimony and statistical data concerning the reasonableness of the Fund's reserving practices in general and for the Fund Years in question were presented by the parties at the hearing. Based on the totality of the evidence presented, it is found that the Fund's procedures conform generally to standard insurance industry practices. Although there is evidence as indicated heretofore that individual cases have been both "over- reserved" and "under-reserved," and that required adjustments to reserves have not always been made in a timely manner, the evidence does not show that the reserves as a whole or as to the instant assessment are unreasonable. (Petitioners' Exhibits 10-13, 62-63; Respondents' Exhibits 13, 18, 20-24; Testimony of Wood (deposition), Johnson (deposition), Vogel, Smith, Portero, Rinehart (deposition), Odem (prior testimony).)

   6. It is further found that the present assessment was prepared in accordance with standard procedures, that the amounts proposed to be levied as an assessment for each Fund Year in question represent a deficiency in the Fund Account for such years, and that the proposed allocations of such amounts among the specified health care providers are appropriate. (Respondents' Exhibits 2- 3, 5-7, 9, 11-12, 17, 29; Joint Exhibit 1 (Stipulation) testimony of Sims, Vogel.)

12. During Fund Years 1979-80, 1980-81, and 1981-82, Section 768.54, Florida Statutes, provided that the Fund shall be "maintained" at no more than

$15 million per fiscal year. There was a $25 million maintenance cap applicable to Fund Years prior to 1979-1980. The limitation was removed by statutory amendment in 1982 (Chapter 82-236, Laws of Florida). Petitioners contend that the present assessment exceeds the $15 million "can" for Fund Years 1980-81 and 1981-82, but failed to submit competent substantial evidence to support such contention. The Fund apparently used the limitation as applicable to membership fees and not to assessments. The letter of the Fund to the Department, dated May 23, 1984, certifying the assessment, stated in part as follows:

During the 1981-82 membership year the Fund's membership fees exceeded the $15 million cap and, by your Order, the excess was returned to

those members. We are requesting that your Order of Assessment for the 1982 membership year include an Order for the overage refunds to be repaid to the Fund.

In any other respects, the Fund did not take the monetary limitation into consideration with regard to the present assessment. (Petitioners' Exhibit 24; Respondents' Exhibit 2b; Testimony of Sims, Vogel.)

CONCLUSIONS OF LAW

1. As indicated above, a number of issues raised by Petitioners in their petitions were resolved adversely to them in the prehearing process. As a result, only two issues concerning the validity of the assessment in question remain for resolution. As heretofore stated, they concern the question of whether the reserving practices and procedures employed by the Fund were reasonable and thus properly applied in the certification of the assessment in question, and whether the $15 million maintenance cap was properly applied to the assessment for each Fund Year.

   
   

2. The pertinent language of Section 768.54, Florida Statutes (1981), as to the criteria for `assessments against health care providers was basically the same during the Fund Years in question. The 1981 version provided as follows:

   
   

   If the fund determines that the amount of money in an account for a given fiscal year is in excess of or not sufficient to satisfy the claims made against the account, the fund shall certify the amount of the projected excess or insufficiency to the Insurance Commissioner and request the Insurance Commissioner to levy an assessment against or refund to all participants in the fund for that fiscal year, prorated, based on the

   number of days of participation during the year in question. The Insurance Commissioner shall order such refund to, or levy such assessment against, such participants in amounts that fairly reflect the classifica- tions prescribed above and are sufficient to obtain the money necessary to meet all claims for said fiscal year. (Emphasis added.)

   
   

   Although the above wording does not specifically refer to the question of reserves, Section 768.53(3)(c) was amended again in 1983 to provide that the assessment shall be in "an amount sufficient to satisfy reserve requirements for known claims, including expenses to satisfy the claims, made against the account for a given fiscal year." The amendment also created the following procedural presumption that is deemed applicable to the instant proceeding:

   
   

   In any proceeding to challenge the amount of the refund or assessment, it is to be presumed that the amount of refund or assessment requested by the fund is correct, if the fund demonstrates that it has used reasonable claims handling and reserving procedures.

   
   

3. As heretofore found, the Fund has demonstrated that it used reasonable claims handling and reserving procedures in arriving at the present assessment, and also showed that the amounts stated therein "fairly reflect" the statutory classifications set forth in Section 768.54, and represent the amount necessary to "meet all claims" for the fiscal years specified in the Notice of Assessment,

   
   

4. The $15 million "maintenance cap" which petitioners contend should be applied to the assessment was in effect during Fund Years 1979-80, 1980-81, and 1981-82. Section 768.54, Florida Statutes, stated in the following language:

The fund shall be maintained at not more than

$15,000,000 per fiscal year.

As found above, the Fund has viewed the limitation in the past as being applicable to membership fees, but not to assessments. It is acknowledged by Respondents that there was no application of the "cap" to the deficits certified as the basis for the assessment herein. Petitioners contend that the Fund's cash-on-hand plus sources of funds in the form of levied assessments of each fiscal year should not exceed the actual current pay out liabilities of the Fund by more than $15 million dollars. On the other hand, Respondents maintain that the limitation should not apply to outstanding amounts, such as assessments due or potentially due, but should be limited to only money in hand under the theory that the limitation was imposed simply to ensure that large amounts of unnecessary funds did not accumulate in the Fund's accounts. Section 768.54(3)(c) requires that when a deficiency is certified by the Fund, it must be levied in an amount sufficient to obtain the money necessary to meet all claims for the particular fiscal year. In addition, as pointed out by Respondents, the Fund never knows when it will collect the assessment or even how much of the amount will be collected. It is well settled that the administrative construction of a statute by the agency charged with its administration is entitled to great weight and should not be overturned unless clearly erroneous. State ex rel. Biscayne Eennel Club v. Board of Business Regulation, 276 So. 2d 823, 828 (Fla. 1973); Pan Am World Airways, Inc. v.

Florida Public Service Commission, 427 So. 2d 716 (Fla. 1983). It is therefore

concluded that the word "fund" as used in the statutory language relates solely to fees that are paid annually by each health care provider. This construction is in keeping with the common usage and meaning of the word "maintain" which signifies literally "to hold in the hand" and is defined as "to keen in an existing state." Webster's New Collegiate Dictionary (1979). Although it is concluded that the maintenance cap does not apply to assessments, Respondents' claim that its repeal in 1983 alone makes, it inapplicable to the prior Fund Years is without merit.

RECOMMENDATION

In view of the foregoing, it is recommended that a final order be entered by the Department of Insurance levying assessments in accordance with the Notice of Assessment, dated November 9, 1984, for the Fund Years specified therein.

DONE and ENTERED this 9th day of May, 1985, in Tallahassee, Florida.

THOMAS C. OLDHAM

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 9th day of May, 1985.

COPIES FURNISHED:

Honorable William Gunter Treasurer and Insurance

Commissioner

The Capitol Legal Division Tallahassee, Florida 32301

William C. Owen and Doug Hall, Esquires

Carlton, Fields, Ward, Emmanuel, Smith and Cutler

Post Office Drawer 190 Tallahassee, Florida 32302

Cathi C. O'Halloran, Esquire Pennington, Wilkinson and Dunlap Box 3985

Tallahassee, Florida 32315-0985

James Wing, Esquire

Myers, Kenin, Levingson, Frank and Richards

1428 Brickel Avenue

Miami, Florida 33131

Louis F. Robinson, III, Esquire Barnett and Alagia

250 South County Road Suite 201

Palm Beach, Florida 33480

David A. Yon and

Dennis S. Silverman, Esquires Department of Insurance Legal Division

Room 413-B Larson Building Tallahassee, Florida 32301

E. Clay McGonagill, Jr., Esquire

241 East Virginia Street Tallahassee, Florida 32301

Docket for Case No: 84-004398

Orders for Case No: 84-004398