vs. ) CASE NO. 87-3536
Respondent. )
A hearing was held in this matter on August 16, 1988, in Miami, Florida, before William R. Dorsey, Jr., the Hearing Officer designated by the Division of Administrative Hearings. A transcript of the proceeding was filed on December 22, 1988, and both parties have filed proposed findings of fact and conclusions of law. Rulings on proposed findings of fact are made in the appendix to this Recommended Order. At the hearing David Farkas and Barry Scutlllo testified for the Petitioner. Daniel Doll testified for the Respondent.
For Petitioner: James M. Barclay, Esouire
For Respondent: Kenneth M. Muszynski, Esquire
The issue is whether the Medicaid cost report filed by the Respondent for the fiscal year ending June 30, 1985, should be amended as the result of an audit adjustment by the Department of Health and Rehabilitative Services. The adjustment would reduce the ending equity capital for the Miami Jewish Home and Hospital for the Aged by $2,734,270, which in turn would reduce the return on equity to the Home by $1,800,515. In its cost report the Home had included in its equity capital $2,734,270 in securities which it had deposited with the Sun Bank of Miami as a self-insurance fund for the protection of trust funds it held for residents. The proper accounting treatment for those funds forms the heart of this controversy.
The parties filed a prehearing stipulation containing certain admitted facts and the following findings are based upon this stipulation:
The Miami Jewish Home and Hospital for the Aged, Inc., (Home) is a Florida nonprofit corporation which operates a 454-bed licensed nursing home and a 32-bed specialty hospital in Miami, Florida. As of the close of the fiscal year at issue, it operated a 232-bed nursing home; 40 beds were certified for Medicaid.
The nursing home participates in the Medicaid program and holds Provider No. 20050-6.
The statutes and rules governing Medicaid require providers to file Nedicaid cost reports for each fiscal year. The applicable fiscal year in this proceeding ended on June 30, 1985.
Section 400.162(5)(c), Florida Statutes, requires that nursing homes provide security for funds which are deposited with the nursing home by residents. That security may take one of two forms. The home may post a surety bond with the Department of Health and Rehabilitative Services in an amount equal to twice the average monthly balance of resident trust funds held during the prior year, or may enter into a self-insurance agreement pursuant to rules promulgated by the Department of Health and Rehabilitative Services. On May 31, 1985, the Department approved the Patient Trust Fund self-insurance agreement which Miami Jewish Home and Hospital for the Aged, Inc., had entered into with Sun Bank of Miami.
On or about October 15, 1985, the nursing home submitted its Medicaid cost report for the fiscal year ending June 30, 1985.
Peat Marwick Mitchell & Company was engaged by the Department of Health and Rehabilitative Services to audit the Medicaid cost report submitted by the nursing home.
On or about November 13, 1986, Peat Marwick personnel met with the Director of Fiscal Affairs of the nursing home, David Farkas, for an exit conference regarding adjustments Peat Marwick proposed to make to the cost report.
By correspondence dated November 18, 1986, Peat Marwick forwarded a provider statement to Mr. Farkas which contained proposed adjustments.
On or about November 26, 1986, Peat Marwick personnel met with Mr. Farkas and Lourdes Boue, the nursing home's assistant Director of Financial Operations.
By correspondence dated January 26, 1986, the Department issued an audit report which contains the adjustments which are the subject of this administrative proceeding. The nursing home made a timely request for an administrative hearing regarding the proposed adjustments. The nursing home's request for hearirg dated February 10, 1987, was received by the Department on February 13, 1987, but was not filed with the Agency Clerk for the Department until July 30, 1987.
In an effort to explore settlement possibilities, a meeting was held between representatives of the Home and the Department of Health and Rehabilitative Services on October 13, 1987. At the meeting, the parties agreed to seek a non-binding determination from the Health Care Financing Administration (HCFA) of the United States Department of Health and Human Services on whether the Provider Reimbursement Manual, Section 1218.9, required a Medicaid provider such as the Home to exclude from equity capital a self- insurance fund set up for the protection of residents' funds.
The nursing home's brief was sent to the Department of Health and Rehabilitative Services to be forwarded to HCFA With the brief of the Department. For reasons which are not clear, the Department sent its request to the HCFA for a determination of the issue whether the nursing home was entitled to a return on equity for the self-insurance fund on February 5, 1988, but the Home's brief was not included. The Home's position was submitted by its attorney to HCFA on February 24, 1988.
The Director of Payment and Reporting Policy for the HCFA, William Goeller, answered the question the parties posed on April 1, 1988, and stated that the self-insurance fund must be excluded from equity capital according to the provider Reimbursement Manual, Section 1218.9.
FINDINGS OF FACT BASED ON THE HEARING
The Home
The Miami Jewish Home and Hospital for the Aged is a multi-faceted operation located on an entire city block in Miami. It provides a variety of services including an adult congregate living facility, an auditorium, a nursing home and a 32-bed hospital. Residents may come to the Home bringing with them their cash, and property and other possessions, to be sold. An account is opened for the resident from which charges made by the Home may be deducted. This fund is the Resident Asset Fund. Earings on the Resident Asset Fund are applied to reduce the Home's operating deficit.
The Home provides Medicare and Medicaid services. Medicaid provides for long-term care for the indigent. About 60% of the Home's patient days were devoted to Medicaid patients in 1985. By participating in the Medicaid program, the Home is required to file cost reports each year to determine its allowable costs under Medicaid rules. The fiscal year for the nursing home runs from July
1 to June 30.
The Medicaid Program
Medicaid costs are shared between the federal government and the State of Florida. The Medicaid program is administered at the federal level by the Department of Health and Human Services (HHS), and at the state level by the Department of Health and Rehabilitative Services (HRS). The Health Care Financing Administration (HCFA) of HHS establishes the Medicaid costs the federal government will pay for. HCFA's Provider Reimbursement Manual, also referred to as HIM-15, contains reimbursement guidelines.
Medicaid reimbursement is calculated as a rate per Medicaid patient per day. Reimbursement is provided prospctively and is based on prior cost reports, inflated forward to the period of reimbursement. The Home's unaudited cost report data is used for that purpose. In order to insure the accuracy of the Medicaid cost reports, HRS performs either test reviews or full field audits
of the reports. Full audits are done either by HRS auditors or by outside auditors on contract with HRS. Here the Home's cost report was audited for HRS by Peat Marwick Mitchell & Co. HRS reviews the preliminary audit reports of its contract auditors, which can result in changes before the final audit report is issued.
The 1985 Medicaid Cost Report
A Medicaid cost report for the fiscal year ending June 30, 985 was filed by the Home in mid-October 1985. David Farkas, the Director of Financial Operations for the nursing home prepared that Medicaid cost report; he also had it reviewed by the accounting firm of Deloitte Haskins & Sells before it was submitted to the Department.
In the Medicaid cost report, a nursing home's costs are broken down into four components: (a) those from operations; (b) those from patient care,
(c) return on equity and (d) property. Costs within each of those four categories are determined and then divided by the number of patient days at the nursing home to determine a cost per patient day. The cost per patient day for the categories of operating costs and patient care are compared to a ceiling or cap that is generated through surveys performed by the Department of Health and Rehabilitative Services. Caps are adjusted for the geographical location and size of the facility. Assuming that the nursing home is at or below the cap for operations and patient care determined from the survey, the cost per patient day in each of the four components are added to form a composite reimbursement rate. Costs incurred in excess of the caps for operations and patient care are not reimbursed. An inflation factor is then added to a provider's costs because the State of Florida operates on prospective reimbursement system.
Patient Trust Fund
A nursing home which holds residents' funds is required by Section 400.162, Florida Statutes (1987) to provide a bond equal to twice the average monthly balance of the funds it held during the preceding year in order to ensure that the funds will be available to residents. The nursing home also has the option, in lieu of a bond, to provide a self-insurance fund protecting the monies it holds in trust.
By letter dated May 31, 1985, the nursing home received approval from the Department to establish a self-insurance fund under Section 400.162 Florida Statutes. Its account was opened with Sun Bank of Miami. When the account was established the Home was required to deposit in it twice the average monthly balance of its Resident Asset Fund for the preceding year. As of June 30, 1985, the Patient Trust Fund contained $2,750,000, representing twice the $1,375,000 in resident assets held in the Resident Asset Fund.
The money the Home placed in the Patient Trust Fund came from donations and from the building fund for the Home. Those funds are held in the form of treasury notes and certificates of deposit. The nursing home treated the Patient Trust Fund as part of the building fund in its 1985 Medicaid cost report.
When the funds which comprise the Patient Trust Fund are placed with a trustee, they are restricted. The trustee holds the securities, and the State has the right to draw against those securities when a default occurs in the nursing home's handling of residents' funds. Only the principal amount of the Home's self-insurance fund is restricted, however. The Home itself receives the
benefit of interest or dividends which accrue on the monies deposited in the self-insurance fund. Those earnings accrue to the benefit of the Home's building fund.
The premium for a surety bond of the type required by Section 400.162(5)(b)1. Florida Statutes in 1985 would have cost the Home 2 percent of the amount bonded; based on 2 percent of $2,750,000, the premium would have been
$55,000. This bond premium would have been treated as an allowable operating cost. The Home's operating costs exceeded the cap, however, so it actually would have received no additional reimbursement for the $55,000 bond premium if a bond had been purchased.
The Audit
After the nursing home submitted its 1985 Medicaid cost report, Barry Scutillo of Peat Marwick contacted the Home on behalf of HRS to audit the Home's records supporting its 1985 report. The audit resulted in a number of adjustments which were discussed with representatives of the nursing home at an exit conference. The issue of the proper treatment of the nursing home's funds deposited in the Patient Trust Fund at Sun Bank was discussed during the audit. The auditor for Peat Marwick, Mr. Scutillo, thought that the Home had accounted for the use of those funds correctly by seeking a return on equity from Medicaid for the securities in the Patient Trust Fund.
The Audit Report
Ultimately, Mr. Scutillo's field work was reviewed by more senior members of Peat Marwick and by HRS. An audit report was issued by Peat Marwick Mitchell & Company dated November 18, 1986 which did propose adjustments to the Home's cost report arising from the treatment of the funds which had been deposited in the Patient Trust Fund in Sun Bank. The audit report proposed to reduce nursing home's equity by $2,734,270 and to adjust the return on equity before apportionment by $108,515. The other adjustments proposed are of no consequence, because the nursing home is already at or exceeds the Medicaid cost caps, and federal regulations would prevent the Home from receiving additional reimbursement on the other adjustments even if they were made in the nursing home's favor.
After the nursing home filed a request for an administrative hearing on the adjustments made in the Peat Marwick audit, representatives of the nursing home and HRS met to discuss the issues, and agreed to present a joint position paper to HCFA for a non-binding determination on the issue whether the Home was entitled to a return on equity for the funds in the Patient Trust Fund at Sun Bank. The parties agreed that each would prepare a position paper which would be forwarded to the appropriate federal officials for review. The Home's position paper was submitted to HRS but HRS failed to submit it to the federal government. Instead, HRS submitted only its own position paper. After the Home discovered this, it sent its position paper directly to the HCFA.
HCFA's Response
The HCFA responded, after reviewing the position of both parties, that the self-insurance fund should be excludedfrom the Home's equity capital. 1/ The HCFA believed that the fund was segregated and not used to provide patient care. 2/
The manual which HCFA relied upon, (HIM-15), contains in Section 1202.1 a definition of equity capital which includes the health care provider's investment in property, plant and equipment related to patient care, and that working capital necessary for the proper operation of patient care activities. A proprietary provider is entitled to a rate of return on its equity capital which is "a percentage equal to 1 and 1/2 times the average of the rates of interest on special issues of public debt obligations issued to the Federal Hospital Insurance Trust Fund for each of the months during the provider's reporting period." (HIM-15, Section 1206).
The manual also describes items which are to be excluded from the computation of equity capital, and in Section 1218.9 states:
Where a provider maintains a self- insurance program in lieu of purchasing conventional insurance, the funds in the
self-insurance reserve fund must be set aside in a segregated account to cover possible losses and not used to provide patient care. Therefore, the amount deposited in the fund and the earnings on the self-insurance reserve remaining in the fund are not included in equity capital.
The nursing home argues that Section 1218.9 focuses on self-insurance funds which a health care provider maintains to protect itself, and that the section is inapplicable here, because the funds deposited with Sun Bank were deposited for the protection of patients, not of the nursing home. This is unpersuasive. The nursing home itself is responsible for any defalcations in the handling of residents' assets placed with it as trustee. The Patient Trust Fund which serves as self-insurance for claims against the Home for mismanagement of the Resident Trust Funds is similar to conventional insurance.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over this matter. Section 120.57(1) Florida Statutes.
Section 400.162(5)(a), Florida Statutes, (1987) requires that property belonging to nursing home residents, received by the nursing home, be held in trust. Section 400.162(5)(c) permits a licensee, as an alternative to obtaining a surety bond, to enter into a self-insurance agreement to protect the residents' funds it holds. It states:
As an alternative to posting a surety bond, the licensee may enter into a self-insurance agreement to pool its liability for resident trust funds with one or more other licensees in accordance with rules adopted by the department. Funds contained in the pool shall run to any resident suffering financial loss as a result of the violation by the licensee of the provisions of this section.
Such funds shall be awarded to any resident in an amount equal to the amount that the resident can establish, by affidavit or other adequate evidence, was deposited in trust
with the licensee and could not be paid to the resident within 30 days of the resident's request. The department shall promulgate rules with regard to the establishment, organization, and operation of such self- insurance pools. Such rules shall include, but not be limited to, requirements for monetary reserves to be maintained by such self-insurers to assure their financial solvency.
The audit adjustments which Peat Marwick Mitchell made to the 1985 Medicaid cost report were different in type and amount from those discussed with the nursing home during the exit conference. Rule 10C-7.0481, Florida Administrative Code provides in (4) that:
Upon completion of an audit and before publication of the audit report, the provider 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.
The rule does not provide any penalty for the failure of an auditor to discuss an audit adjustment with a health care provider at an exit conference. The Home argues that the department has violated Rule 10C-7.0481(4) Florida Administrative Code and implicit in that argument is the contention that the Department's rules prohibit HRS from raising this adjustment in the audit report finalized after the exit conference. Nothing in the rule indicates an intention to bar recoupment of costs erroneously included in a Medicaid cost report because an auditor fails to bring an item up at an exit conference. To the extent the rule addresses the question, it implies a contrary result. Rule 10C- 7.0481 provides that
[The] audit report shall constitute prima facie evidence of the propriety of the adjustments contained therein. The burden of proof is upon the provider to affirmatively demonstrate its entitlement to the Medicaid reimbursement, except as otherwise is provided in this rule Chapter, Chapter 28-5, Florida Administrative Code shall be applicable to any administrative proceeding under this rule. Rule 10C-7.0481(6) F.A.C.
A Medicaid cost report is, essentially, a bill from the health care provider to HRS and the federal government. There is no reason why HRS cannot require the health care provider to fully justify its billings. The nursing home has had a full and fair opportunity to challenge the adjustment contained in the final audit report of Peat Marwick by participating in this Section 120.57(1) administrative proceeding. Whether the health care provider is entitled to a return on equity for securities deposited in the Patient Trust Fund should be determined on the merits, not by some mechanical application of Rule 10C- 7.0481(4) F.A.C. which would require the department to ignore errors in the
Home's cost report merely because they were not raised at an exit conference. The public interest is best served by dealing with the substance of the issue.
The State of Florida has enacted legislation which requires nursing homes to incur expenses in protecting patient assets. The Home acknowledges that the state would treat a surety bond premium as an allowable operating cost. That cost is not necessarily one which will be recaptured dollar-for-dollar by every provider, for if a provider's operating costs exceed the reimbursement caps, it will receive only the capped amount. To avoid this result, this nursing home has attempted to recharacterize the issue as one falling under the rubric of return on equity, which is not capped.
The securities the Home deposited with Sun Bank in the self-insurance fund (the Patient Trust Fund) are not dedicated to patient care. The theory behind providing a return on equity to a for-profit health care provider or a "use allowance" to a non-profit health care provider is to compensate it for dedicating assets to the benefit of patients, and thereby foregoing the opportunity to obtain investment income on those securities, cash or physical assets. The Home actually received the investment income generated by the securities it placed in the Patient Trust Fund and applied it to its building fund. Those securities cannot be regarded as having been dedicated to patient care because the institution received the income that they generated; it did not forgo any investment opportunity. There is no reason why the Home should receive a return on the principal amount of these securities twice, once through the income generated by the securities, and the second time when the state and HCFA would pay a return on equity for those funds.
The arguments made by the nursing home in its proposed conclusions of law regarding Section 261B of the Provider Reimbursement Manual cannot be adequately addressed because that portion of the manual was not placed in evidence.
The argument that Section 1218.9 is inapplicable is not persuasive. That section, which is quoted in the Findings of Fact, excludes self-insurance reserve funds maintained in lieu of conventional insurance from equity capital. There is no reason to distinguish those types of self-insurance from the fund at issue here. The statute mandates a rather conventional form of insurance. A surety bond would operate as insurance for the benefit of the trust beneficiaries against employee defalcations in dealing with residents' assets deposited with the Home. The self-insurance trust fund also provides insurance to the residents against defalcations by nursing home employees. Certainly it is more prudent and economical for the nursing home to establish a self- insurance fund using building funds it has on hand, while maintaining the right to retain and use the earnings on those funds, instead of spending more than
$50,000 a year on premiums for a bond. That such action is prudent does not, however, mean that the nursing home is entitled to obtain a double return on the assets deposited in the Patient Trust Fund.
The nursing home has failed to affirmatively demonstrate that it is entitled to Medicaid reimbursement for the funds deposited with Sun Bank in order to comply with Section 400.162(5)(c) Florida Statutes (1987).
It is recommended that the challenge filed by the Miami Jewish Home and Hospital for the Aged to the audit report issued by Peat Marwick Mitchell & Company of the Home's 1985 cost report be dismissed.
DONE and ENTERED this 24th day of April, 1989, in Tallahassee, Leon County, Florida.
WILLIAM R. DORSEY
Filed with the Clerk of the Division of Administrative Hearings this 24th day of April, 1989.
1/ Technically, a return on equity capital is provided only to for-profit providers. The State of Florida's Medicaid plan does, recognize, however, a "use allowance" on equity capital dedicated to providing patient care rendered by nongovernmental, non-profit providers. This is, for the purposes at hand, the same thing as return on equity.
2/ The HCFA found that the self-insurance fund is excluded from equity capital because, by definition, it is segregated at Sun Bank and not dedicated to patient care. There is no provision in the federal manuals regulating reimbursement which permits a health care provider to obtain a return on equity when it pledges or encumbers its own funds to protect patient assets from dissipation rather than by purchasing a surety bond.
James M. Barclay, Esquire
R. S. Power, Esquire Agency Clerk
Gregory L. Coler, Secretary Department of Health and
