STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
MEMORIAL MEDICAL CENTER OF )
JACKSONVILLE, )
)
Petitioner, )
)
vs. ) CASE NO. 88-0398H
)
STATE OF FLORIDA, HOSPITAL )
COST CONTAINMENT BOARD, )
)
Respondent, )
and )
) CITIZENS OF THE STATE OF FLORIDA, )
)
Intervenor. )
)
RECOMMENDED ORDER
Pursuant to written notice, a formal hearing was held in this case in Tallahassee, Florida, on March 4, 1988, before William F. Quattlebaum, Hearing Officer of the Division of Administrative Hearings.
APPEARANCES
For Petitioner: W. David Watkins, Esquire
OERTEL & HOFFMAN, P.A.
Post Office Box 6507 Tallahassee, Florida 32314
For Respondent: David R. Terry, Esquire
Gary Walker, Esquire
Hospital Cost Containment Board Building L, Suite 101
325 John Knox Road Tallahassee, Florida 32303
For Intervenor: John M. Knight, Esquire
Office of the Public Counsel 624 Fuller Warren Building Tallahassee, Florida 32303
BACKGROUND
Petitioner, Memorial Medical Center of Jacksonville, requested a formal hearing to contest the preliminary findings and recommendations of the Hospital Cost Containment Board staff relating to the Petitioner's 1988 budget amendment. At the hearing, Petitioner presented the testimony of Mark Mrozek, accepted as an expert in hospital administration; Martin Gutkin, accepted as an expert in hospital finance; and Mills Smith, accepted as an expert in health care
financial regulation. Petitioner's Exhibits 1-5 were offered and admitted into evidence.
The Respondent, Hospital Cost Containment Board, presented the testimony of Judy Cooper, an analyst with the HCCB; Terry Richardson, accepted as an expert in HCCB matters and hospital financial regulation; and James Bracher, accepted as an expert in hospital financial regulation. Respondent's Exhibit 1 was offered and admitted into evidence.
Intervenor, Citizens of the State of Florida, presented the testimony of James Bracher, Terry Richardson, and Judy Cooper. Intervenor Exhibits 1 and 2 were offered and admitted into evidence.
A Prehearing Stipulation filed pursuant to the Hearing Officer's Order was admitted into evidence as Hearing Officer's Exhibit 1.
Upon request of Respondent, official notice was taken of Chapter 395, Part II, Florida Statutes, and Chapter 10N, Florida Administrative Code, which are the statutes and rules under which the Hospital Cost Containment Board operates. Official notice was also specifically taken of two rules which address transactions between related parties. One rule, addressing the cost of services provided to a hospital by a related party, was filed on November 25, 1987 and became effective prior to the filing of the Petitioner's request to amend the budget. The other rule, applicable to the determination of allowable interest expense charged between related parties, was filed on February 29, 1988, after the Petitioner's request to amend was filed with the HCCB and became effective
20 days later after the final hearing in this matter was held.
The issue in this case is whether the rate of increase in Petitioner's requested amended 1988 budget is just, reasonable and not excessive.
Proposed Recommended Orders were filed by the parties. The Proposed Findings of Fact are ruled upon in the Appendix which is hereby made a part of this Recommended Order.
FINDINGS OF FACT
The Prehearing Stipulation filed by the parties included stipulated facts which are found as follows:
Petitioner's 1988 budget amendment request was timely filed.
HCCB staff preliminary findings and recommendations were timely provided to Petitioner.
Petitioner timely filed objections and requested a hearing regarding staff's preliminary findings and recommendations.
Petitioner's original 1988 budget was subject to automatic approval and was automatically approved.
The Petitioner, Memorial Medical Center of Jacksonville (hereinafter Petitioner or Memorial) is a 353-bed not-for-profit hospital located in Jacksonville, Florida. Memorial is a full service, acute care hospital, which offers a wide range and high level of medical services and is involved in efforts to improve services, and to contain costs.
Health South, Inc., is the parent corporation of Memorial. Other subsidiary corporations of Health South, Inc., which are relevant to this matter, include Memorial Regional Rehabilitation Center, a 128-bed, full service rehabilitation center, and HSI Support systems, Inc., which provides financial support and other services to Memorial. Health South, Inc., Memorial, Memorial Regional Rehabilitation Center, and HSI Support Systems, Inc., are related parties for purposes of HCCB reporting requirements.
Memorial's administrator, Mark Mrozek, reports to the president of Health South, Inc. Memorial's vice-president of finance, Martin Gutkin, reports to a senior vice-president of Health South, Inc.
Memorial's fiscal year runs from May 1 to April 30. Memorial's fiscal year 1988 budget covered the period from May 1, 1987, through April 30, 1988. Preparation of the FY 1988 budget began in mid-August of 1986, therefore, only three to four months of actual data from FY 1987 were available for use in preparing the FY 1988 budget. The gross revenue per adjusted admission (hereinafter GRAA) which was automatically approved by the HCCB for Memorial in its original 1988 budget was $5,816.
Memorial implemented a rate increase of between 8.1 percent to 8.3 percent in May 1987.
On December 23, 1987, Memorial filed a request to amend its budget. In the amendment, Memorial requested an increase in its GRAA of $556, which would increase Memorial's GRAA to $6,372.
The amendment requested by Memorial was reviewed by Judy Cooper, an analyst employed by the HCCB. Ms. Cooper's analysis was reviewed by Terry Richardson, a Regulatory Analyst Supervisor, and James Bracher, HCCB Executive Director, both of whom approved her analysis.
The maximum allowable rate of increase for the FY 1987 through FY 1988 period was 8.3 percent, as determined by the HCCB pursuant to the applicable statute. The FY 1988 budget amendment requested by Memorial was in excess of
8.3 percent.
In its request for approval of its budget amendment, Memorial identified a number of increased costs which, according to Memorial, provided justification for the request.
The Petitioner identified an increase in outlier experience beyond what was projected for the original 1988 budget as a justification for the budget amendment. An outlier is a hospital patient whose length of stay or cost of medical treatment exceeds the range established by Medicare as normal or the level of reimbursement applicable for a particular diagnosis. It is not possible to predict with any degree of certainty, the types of patients or types of illnesses that a hospital will experience from year to year, or the length of time it will take to treat those illnesses. For example, the fact that a hospital could have 1,000 outliers two years ago and 1,500 outliers last year, does not indicate that the hospital could expect 2,000 outliers this year.
The HCCB staff methodology for projecting outlier experience for the purpose of budget amendments is to project the ratio of outlier to total cases actually experienced by the hospital from the beginning of its current fiscal year to the remaining portion of the fiscal year covered by the budget amendment. In other words, a hospital is permitted to project outlier
experience consistent with that which it has experienced from the beginning of its fiscal year to the point of amendment.
Memorial proposes, and in its requested budget amendment attempted, to project outliers based on the rate of change in outliers experienced between the first and second six month period of FY 1987. In recent years Memorial has experienced a fluctuation in its outlier experience with a larger proportion of outliers occurring in the second half of the fiscal year. The fiscal year 1987 outlier data which Memorial used to project 1988 outliers in its budget amendment request reflects a greater rate of change between the first and second year halves in 1987 than Memorial has experienced in other years. Had Memorial used the rate of change in outliers it experienced in 1986 to calculate its amended request, a smaller request for outlier case credit would have resulted.
The unpredictability of projecting outliers indicates that Memorial's methodology is not more reasonable than the methodology employed by HCCB staff. There are two mechanisms which protect the Petitioner from being unfairly impacted by the staff methodology. Credit for outliers is available retrospectively to the Petitioner. In other words, if actual outliers exceed predicted outliers, the HCCB permits a revision of the entire year's outlier projection to reflect the actual outliers in a hospital. Further, if a hospital's revenue exceeds its budgeted revenue because of changes in outlier cases, any penalty which may be applied against the hospital for exceeding approved revenue limits would be reduced or eliminated by crediting the increase in outlier experience against the penalty. Accordingly, hospitals may recover any outlier credits to which they are entitled.
Utilizing the detailed outlier data submitted by Memorial and the HCCB methodology in projecting outliers, HCCB staff calculated that Memorial was entitled to additional GRAA of $87 based on its increase in outliers. Memorial is entitled to $87 in additional GRAA applied retroactively from the beginning of FY 1988.
In its 1988 budget amendment request, Memorial indicated that it was projecting an increase in insurance expense related to increased malpractice insurance and requested additional GRAA of $21. At hearing, Memorial indicated it does not now anticipate that this increase will occur. Memorial is not entitled to any related GRAA adjustment.
In its requested budget amendment, Memorial sought additional GRAA for an increase in pharmacy revenue. HCCB staff policy is to deny requests for increased GRAA for pharmacy revenue because pharmacy revenue is viewed as "an effect, rather than a cause." In other words, the staff policy classifies increased pharmacy revenue as a reflection of increased case mix and outlier- related revenue for which credit is already provided. The policy is reasonable. To provide credit for both an increase in pharmacy revenue and an increase in outlier and case mix revenue would constitute double credit. Memorial did not dispute this policy, therefore, Memorial is not entitled to additional GRAA related to these pharmacy revenues.
In its requested budget amendment, Memorial submitted information related to changes in Medicare reimbursement policy, which related to changes in the "blended rate" and the "capital pass through rate." Memorial requested additional GRAA of $58 related to Medicare program changes. The staff agreed that Memorial was entitled to the full $58. Accordingly, Memorial is entitled to receive the adjustment, which is credited prospectively from the time of the filing of the budget amendment.
As further justification for the requested budget amendment, Memorial sought additional GRAA for increases in Medicaid contractuals and HCCB staff agreed that it was appropriate. Utilizing the HCCB staff methodology as applied to data provided by Memorial, additional GRAA of $1 results. Memorial is entitled to the additional GRAA, applied prospectively from the date of the filing of the budget amendment.
Memorial, in its requested budget amendment, sought additional GRAA of
$24 based on an increase in its level of charity/uncompensated care. After clarifying information was provided to HCCB staff, the request for the $24 in GRAA was approved. Memorial is entitled to the additional GRAA, applied prospectively from the date of the filing of the budget amendment.
During the period of time in which the HCCB staff was reviewing Memorial's requested amended budget, Memorial submitted information related to an increase in its case mix index during FY 1988. The HCCB and Memorial agree that Memorial has justified $137 in additional GRAA to which the Petitioner is entitled, applied retrospectively from the beginning of the fiscal year.
Memorial originally requested additional GRAA of $48 based on interest expense of approximately $500,000 related to the acquisition of new equipment. Memorial subsequently withdrew its request for this expense item. Accordingly, no additional GRAA is appropriate.
Memorial sought, in its requested budget amendment, additional GRAA for the impact of increased costs associated with the drug, tissue plasmogen activator, which is used in the treatment of cardiac patients. HCCB staff agreed with the request. Application of staff methodology results in additional GRAA of $7. Memorial also provided information to HCCB staff related to the use of isoview contrasting during the course of cardiac procedures. HCCB staff also agreed with this request. Utilizing HCCB staff methodology results in additional GRAA of $26 based on the increased cost of the application of this new drug. Both adjustments are applied prospectively from the date of the filing of the amended budget.
At the hearing, Petitioner provided testimony related to $2,058,900 in additional expenses which were not reported in the original budget. Such expenses included increased costs related to nursing, quality assurance programs, and various efforts to improve efficiency. Other expenses were related to employee programs, additional hospital services, a generator repair and a tax related to the recently adopted medical malpractice tax. Some of the additional expenses were reflected in the 1988 amended budget requested by Petitioner, others were not. During the hearing, no evidence was introduced to support the claimed additional expenses.
Based on the absence of admissible supporting evidence, and the inability to allocate those costs in an appropriate manner between the pre- amendment and post-amendment periods, no finding can be made relative to the
$2,058,900 in additional expenses which were claimed at the hearing.
The Hospital Cost Containment Board has established policy which governs the examination of related party transactions during the budget review process. As authorized by the HCCB, Mr. Bracher expressed and explained the HCCB policy. The Respondent has recently promulgated rules which are the result of approximately one year's experience during which time the board's non-rule policy has evolved.
The Respondent's treatment of related party transactions is similar to the treatment accorded to any other cost. Related party transaction expenses which are disallowed are deducted from total expenses in computation of appropriate revenue levels.
The HCCB policy regarding related party transactions has resulted in the examination of other hospital's related party transactions and has been at issue in other litigation involving the HCCB.
Worksheet D-3-2 of the Florida Hospital Uniform Reporting System (FHURS) Manual, incorporated by reference in Rule 10N-1.018, Florida Administrative Code, requires that a hospital report the cost it pays to related parties for services, facilities and supplies furnished to the hospital by related parties. The worksheet requires that if such costs are in excess of "the amount a prudent and cost conscious buyer would pay for comparable services, facilities, or supplies that could be purchased elsewhere," an explanation of the cost is required.
Memorial projects to pay HSI Support Systems, Inc., $1,653,274 in rental payments during the FY 1988 period. The cost to HSI Support Systems, Inc., for the same rental payments is $866,774.
The difference between the rental payments by Memorial to HSI Support Systems, Inc., and the related cost to HSI Support Systems, Inc., is $786,500. Memorial provided no information which could identify the specific goods or facilities for which rental expense to Memorial was incurred, thus there is no information which would lead to a finding that the difference is reasonable.
The $786,500 difference between the rental payment made by Memorial and the related cost to HSI Support Systems is unreasonable and should be deducted from allowable expenses in the HCCB computation of permissible revenue levels.
Memorial projects total depreciation expense during FY 1988 of
$3,684,512. Health South, Inc., and HSI Support Systems, Inc., project combined depreciation expense of $3,184,512 during the same period. The difference between the depreciation expense of Memorial and the depreciation expense of Health South, Inc., and HSI Support Systems, Inc., is $500,000. (R 1)
The HCCB provided no information, beyond noting the difference between the stated depreciation expenses, which would indicate that such depreciation was related to services, facilities, and supplies provided to the Petitioner by related parties, as stated in the rule.
Although Memorial, in responding to the Interrogatories of the Public Counsel (R 1), indicated that these depreciation figures may result in payments to related organizations, there was no specific evidence introduced as to what was being depreciated and under what circumstances such depreciation could result in payments to related parties.
No finding is made related to depreciation. The HCCB did not introduce any evidence which would lead to a presumption that the depreciation was unreasonable. Depreciation is a method of allocating an asset's cost over the period of the asset's useful life. It is generally a non-cash expense. There was no evidence introduced at hearing which indicated that any payment of expenses would actually be made or was expected to be made.
Memorial projects to pay to Health South, Inc., a sum of $1,644,187 for management services during the FY 1988 period. The related cost to Health South, Inc., is $1,927,614. The cost to Health South, Inc., is $283,427 greater than the charge to Memorial.
Although, HCCB staff asserted at hearing that the $283,427 could be treated as a credit to Memorial, there is insufficient evidence to support a finding that such treatment methodology is appropriate.
Subsequent to the filing of the Petitioner's request to amend its original FY 1988 budget, the HCCB further amended the FHURS manual (incorporated by reference, Rule 10N-1.018, Florida Administrative Code, amendment filed February 29, 1988) to specifically address the issue of interest paid between related parties. The rule was not applicable at the time Petitioner filed the request to amend the FY 1988 budget.
The board's non-rule policy, as it has evolved during the past year, and which is now codified by the rule, is that interest paid to related parties is reviewed to determine whether the interest rate is reasonable in light of market conditions which existed at the time the obligation through which the interest is paid was incurred.
The board presumes that any interest paid by a hospital to a related party, which exceeds the cost to the related party for the same funds, is unreasonable.
The HCCB policy requires that the hospital establish the need for and reasonableness of interest charged by a related party which exceeds the cost to the related party.
In 1983, Health South, Inc., received $45,000,000 as proceeds from the sale of a fixed rate bond issue. The funds were used in part to construct hospital facilities. Health South, Inc., is a cost-effective negotiator for the use of funds. The interest rate charged to Health South, Inc., approximately
9.8 percent, is found to be reasonable. The relevant interest amount on the bonds to be paid by Health South, Inc., during Memorial's FY 1988 period is
$4,261,495. (R 1)
Memorial projects to pay to Health South, Inc., $7,584,576 in short- term interest related to the bonds during FY 1988. The interest is allegedly paid pursuant to a 31 year "lease" to Memorial from Health South, Inc., on the 500,000 square feet which constitutes the hospital facility used by Memorial.
Although at hearing, the arrangement giving rise to the short term interest was characterized by Memorial as a lease, it is not so identified in Memorial's responses to the Intervenor's interrogatories, where it is identified as an interest expense. Memorial did not introduce evidence of any agreement which would indicate that the expense is in fact a lease payment. The characterization of the arrangement as a lease arrangement is rejected. It is treated for the purposes of this finding as an interest expense. Based on the amount of interest being paid by Memorial to Health South, Inc., the imputed interest rate upon which the payment by Memorial to Health South, Inc., is based is approximately 14.5 percent.
The difference between the interest charges to Memorial by Health South, Inc., and the related interest cost to Health South, Inc., is $3,323,081.
Memorial projects to pay HSI Support Systems, Inc., $228,912 in interest during the FY 1988 period. The interest cost to HSI Support Systems, Inc., for the amount of funds loaned to Memorial is $140,523.
The difference between the interest charges to Memorial by HSI Support Systems, Inc., and the interest cost to HSI Support Systems, Inc., for the same funds is $88,389.
The total interest projected to be paid by Memorial to related parties is $7,813,488 ($7,584,576 to Health South, Inc., plus $228,912 to HSI Support Systems, Inc.). The interest cost to related parties for the same funds is
$4,402,018 ($4,261,495 to Health South, Inc., plus $140,523 to HSI Support Systems, Inc.). The difference in total interest charges to Memorial and the interest cost to related parties is $3,411,470.
Memorial did not introduce evidence which would lead to a finding that such interest as is charged to Memorial is reasonable. There was no evidence which indicated that Memorial would not have been able to obtain the same interest rate that Health South, Inc., obtained. Accordingly, the $3,411,470 difference between the interest paid by Memorial and the cost to related parties is unreasonable and should be deducted from allowable expenses in the HCCB computation of permissible revenue levels.
Memorial provides services in excess of $2,000,000 annually to Memorial Rehabilitation Center. Memorial bills such services at its cost, charging no mark-up to the Rehabilitation Center. Some of the services provided by Memorial to the Rehabilitation Center may be provided for less than Memorial's cost.
The effect of the expenses charged to Memorial for funds, facilities or services provided by related parties in which the charge to Memorial exceeds the cost of the funds, facilities, or services to the related parties, is to increase the total expenses of Memorial. The effect of Memorial's provision of services to related parties at Memorial's cost is to reduce the total revenue of Memorial.
The effect of disallowing expenses in Memorial's budget is to reduce levels of allowable gross revenue per adjusted admission. The reason is that disallowing such expenses reduces the underlying costs which influence the need for revenue.
Memorial is in HCCB group 8. (T 207) There are 19 hospitals in group
Hospitals are grouped to provide a meaningful basis for comparison. Relative to the other hospitals in group 8, Memorial ranked first in the amount of interest expense budgeted.
In the computation of the GRAA level, HCCB staff stated that the appropriate methodology which should be applied in deducting, from allowable expenses, those expenses which are not found to be reasonable, is to equally divide the expenses into two periods, the "actual" period which extends from May 1, 1987, to October 31, 1987, and the "projected" period which extends from November 1, 1987, to April 30, 1988, and then remove one half of the disallowed expenses from each period.
The methodology utilized to remove the disallowed expenses from Memorial's budget is reasonable.
One of the statistical measures used by the HCCB to determine the appropriateness of hospital revenue and expenses is operating margin. The operating margin is a source of funds which may be used by a hospital to make capital expenditures.
Memorial states that it experienced an operating loss in FY 1987, due primarily to problems related to reimbursement under prospective payment systems. In other words, losses were related to the fact that under prospective payment systems (in which a specific reimbursement level is established based on type of diagnosis) Memorial's reimbursement levels were not sufficient to cover the expense. However, there were additional factors in the FY 1987 loss which were not identified at hearing.
In the requested budget amendment, Memorial requested an approved GRAA of $6,372 which results in an operating margin of 0.9 percent (P-1). Memorial asserts that the 0.9 percent operating margin is reasonable (P-1).
According to Memorial, the average operating margin for hospitals in group 8 is 5.19 percent (P-4).
Assuming that the GRAA level was approved at the level requested by Memorial and that all related party expenses were excluded from Memorial's allowable expenses, Memorial's operating margin for FY 1988 would be 5.9 percent.
Assuming that the Petitioner's originally requested GRAA level was reduced to the staff recommended level, and that all related party expenses were deducted from Memorial's allowable expenses, the operating margin for FY 1988 would be .06 percent.
Two hospitals in group 8 have negative operating margins (P-4).
An operating margin of .06 percent, while not an acceptable margin for an extended period, would not be detrimental to a hospital's survival for a period of one or two years and under the circumstances in this case is reasonable.
Memorial's operating margin is between .06 and 5.9 percent. An operating margin of .06 percent is reasonable, as is an operating margin of 5.9 percent. Accordingly, an operating margin which falls within that range is reasonable. In light of the unreasonable expenses charged to Memorial by related parties and the failure of Memorial to increase revenue through charges for services provided to the Rehabilitation Center, the operating margin of Memorial is found to be reasonable.
The HCCB does not have the authority to force a hospital to renegotiate or otherwise alter a previously existing financial arrangement between a hospital and another entity and it is not doing so here.
The HCCB does have the authority to disallow inappropriate expenses in reviewing the proposed budget of a hospital.
The HCCB does not consider that the disallowance of certain expenses is a penalty in the sense of the meaning of the term "penalty" as provided in the statute.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter of and parties to this case. Sections 395.509(8)(b) and 120.57(1), Florida Statutes.
Section 395.509(1), Florida Statutes, requires that hospitals file their budgets with the Hospital Cost Containment Board.
In order to provide a meaningful basis for comparison between hospitals, the HCCB is required to establish groupings of hospitals according to criteria contained within Section 395.509(4)(a), Florida Statutes. Such criteria include, but are not limited to, the nature and range of services provided, teaching hospital status, medical specialties, Medicare inpatient days, average daily census, geographical differences, and case mix information. Id.
A budget filed with the HCCB is automatically approved unless the Board determines that, as compared to the other hospitals in its group, either "(t)he gross revenue of the hospital per adjusted admission equals or exceeds the upper 20th percentile value for gross revenue per adjusted admission. . ." or "(t)he rate of increase of the hospital in gross revenue per adjusted admission . . . exceeds the maximum allowable rate of increase; and the gross revenue of the hospital per adjusted admission equals or exceeds the 50th percentile value for gross revenue per adjusted admission . . ." Section 395.509(2), Florida Statutes. If a hospital budget is not automatically approved, the Respondent has the authority to "approve, or approve as amended, a budget with a rate of increase greater or lesser than the maximum allowable rate of increase . . ." Id.
After a hospital budget has been approved, amendments to the budget may be made pursuant to Section 395.509(3), Florida Statutes. Upon receipt of an amendment to a budget, the staff of the HCCB reviews the budget to determine "whether the budget should be approved, disapproved, disapproved in part, or amended." Section 395.509(8), Florida Statutes.
Memorial has the burden to show by a preponderance that the requested amended budget is reasonable, Section 395.5135, Florida Statutes, and that the rate of increase contained within the budget is just, reasonable, and not excessive. Section 395.509, Florida Statutes.
Section 395.509(5), Florida Statutes, states, in pertinent part: (i)n considering any budget amendment filed
by a hospital . . . the board shall consider
the following criteria:
The efficiency, sufficiency, and adequacy of the services and facilities provided by the hospital.
The cost of providing services and the value of the services to the public.
The ability of the hospital to improve services and facilities.
The ability of the hospital to reduce the cost of services.
The ability of the hospital to earn a reasonable rate of return.
The accuracy of previous budget submissions by the hospital compared to the actual experience of the hospital.
The number of patient days reimbursed by Medicare or Medicaid.
The number of patient days attributable to the medically indigent.
The research and educational services provided by the hospital if it is a teaching hospital.
The projected expenditures or revenues for or from construction of facilities or new services which are subject to regulation under ss. 381.701-381.715 may not be included in the budget of a hospital until the construction or services are approved or authorized by the state health planning agency.
The cost of opening a new hospital, for the first 3 years.
The Petitioner has met the burden of establishing that it is entitled to $340 in additional gross revenue per adjusted admission.
At hearing, Petitioner provided testimony as to additional expenses in excess of $2,000,000 which allegedly provided further justification for the requested budget amendment. No evidence beyond Petitioner's testimony was presented at the hearing. There was no documentation introduced in support of the testimony beyond the written list from which Mr. Gutkin testified.
A request by a hospital to amend its budget must be filed in writing with supporting documents. Section 395.09(3)(a), Florida Statutes.
No supporting documents related to the $2,058,900 in additional expenses were introduced or received into evidence at the hearing, and none are otherwise reflected in the record, in spite of the fact that such documentation is claimed to exist.
The Hospital Cost Containment Board "(s)hall require the submission by hospitals of such case-mix, financial, nonfinancial, accounting, and actual charge data by diagnostic groups as the board deems necessary in order to have the statistical information necessary to properly conduct budget review and approval . . . ." Section 395.504(1), Florida Statutes. The referenced statute specifically states that, while this "requirement shall be promulgated by rule" if the data is required of all hospitals or of any group of hospitals, "rules are not required . . . when information is being requested for a singe hospital." Id.
Rule 10N-1.0205, Florida Administrative Code, is relevant to the miscellaneous expenses claimed in support of the budget amendment. Subsection
(g) indicates that, in the case of a budget amendment, credit is only available for expenses which will be incurred during the portion of the fiscal year remaining from the date of the filing of the amendment. In other words, in order to determine the appropriate amount of expenditures which would be incurred in the portion of the fiscal year remaining after filing of the budget amendment, it is necessary to establish with particularity at what points in time such expenditures have been or will be incurred. The only exception, as
stated in the rule, is in the area of case mix variations, and, by HCCB policy, in the area of outliers, both of which a hospital may obtain credit for on a retrospective basis.
There was substantial testimony by the HCCB that the information introduced at hearing by Memorial would not be considered sufficient to permit the HCCB staff to make recommendations related to the appropriate effect on gross revenue per adjusted admission which would be attributable to the additional expenses. The testimony on behalf of Memorial by Mr. Smith, which purported to establish the appropriate additional GRAA justified by the testimony, admittedly relied on the oral representations of Memorial, which as stated above, would not be considered sufficient to permit the HCCB staff to make recommendations related to the appropriate effect. While the expenses may well exist, an administrative hearing should not be used to negate the requirement that adequate information be filed for consideration of a budget amendment.
Transactions between the Petitioner, the parent/owner, and the "sister" corporations were challenged by the HCCB. The challenge centers on the mark-up charged to Memorial for the provision of funds, goods; and services by corporations related by ownership to Memorial. The effect of the mark-up is to inflate Memorial's expenses. Conversely, Memorial provides services to a "sister corporation," Memorial Regional Rehabilitation Center, at Memorial's approximate cost, the effect of which is to deflate Memorial's revenue. The HCCB, which was created by the Legislature to assure access to affordable health care to the citizens of the state, Section 395.5025, Florida Statutes, is concerned that the operating margin of hospitals where such arrangements exist may be artificially decreased. The HCCB policy is to require justification from hospitals in order to ascertain the reasonableness of such arrangements.
Petitioner suggests that, because the requested budget amendment did not directly result from any increase in the cost of related party transactions, and that because such transactions were included in Petitioner's 1988 original budget which was automatically approved pursuant to Section 395.509(1), Florida Statutes, that such transactions are not properly subject to review at this time.
However, Section 395.509(8), Florida Statutes, clearly indicates that upon receipt of an amendment to a budget, the subject of the review is the budget, not simply the amendment. The review of the budget, pursuant to Section 395.509(5), requires that the board consider the rate of increase contained within the budget, not simply the amendment. The statute does not limit the board to consideration of only those expenses which have increased but, to the contrary, mandates a review of the entire budget.
Further, the fact that the Petitioner's related party transactions were not disapproved upon previous budget filings by Memorial to the HCCB does not lead to the conclusion that they were accepted or approved. There was no suggestion made by the Petitioner that its budget had ever been subjected to the close review of the HCCB pursuant to the board's authority. Specifically, the original FY 1988 budget was automatically approved by operation of Section 395.509(2), Florida Statutes. The HCCB's review authority becomes applicable only when the screening criteria of that section are broken by a hospital's budget and a review is triggered. The HCCB did not challenge the appropriateness of the Petitioner's related party transactions when the original FY 1988 budget was approved because the board did not have the authority to
either amend or disapprove the budget. It was automatically approved by operation of the statute.
Petitioner asserts that the HCCB related party transaction reporting rule fails to reveal the authorization for the disallowance of related party expenses. The authorization is contained within Section 395.509(6), Florida Statutes, wherein the HCCB is directed to "disapprove in its entirety, or disapprove in part, any budget . . . that contains a rate of increase which the board finds . . . to be unjust, unreasonable, or excessive." Accordingly, the board may disapprove any portion of a budget, including expenses which are part of a budget. The statute further states that, "(i)n disapproving or amending any portion of a budget, the board shall amend the budget and establish a rate of increase which is just, reasonable and not excessive." Id.
In addressing related party interest, the HCCB presumes that the difference between interest charged to the hospital by a related party for a transaction, and the related party's interest cost for the transaction, is unreasonable. In addressing other related party transactions, those involving the provision of services, facilities, or supplies, the HCCB requires that if such costs exceed that which a prudent and cost conscious buyer would pay for the same services, facilities or supplies that could be purchased elsewhere, the hospital must establish a reasonable explanation for the difference. Just as the burden in establishing that the rate of increase in a budget or in an amended budget is just, reasonable, and not excessive, rests with the Petitioner, section 395.5135, Florida Statutes, the burden is on the Petitioner to show that the specific elements which make up the budget are just, reasonable, and not excessive. If the Petitioner meets the burden by establishing a prima facie showing of reasonableness, the burden shifts to the HCCB to show that the expense, or the budget, is unjust, reasonable and excessive.
In determining whether a related party interest transaction meets the standard of reasonableness, the issue must be whether the hospital could have obtained better financing elsewhere. If the rate of interest that a hospital pays to a related party is similar to the rate of interest a hospital would pay to an unrelated party under the same circumstances, the fact that the payment is to a related party is not relevant. Likewise, the issue in the review of any other related party transaction must be whether the hospital could have obtained better prices for services, facilities, or supplies purchased elsewhere. If the price a hospital pays to a related party is similar to the price a hospital would pay to an unrelated party under the same circumstances, the fact that payment is made to a related party is not relevant.
As to the difference in interest charged to the Petitioner by Health South, Inc., and HSI Support Systems, Inc., there was no explanation provided as to the reason for the difference. Memorial did not claim that it was unable to obtain financing outside the parent. The fact that the interest rate charged to the parent was reasonable leads to a conclusion, absent any other information, that interest charged by the parent or "sister" corporation in excess of the cost of funds to the parent or "sister" corporation is unreasonable. Petitioner provided no explanation for the excess, other than to claim that the arrangement exists cannot be changed.
The HCCB has no authority to force such renegotiation and is not attempting to do so. The HCCB approves permissible levels of gross revenue per adjusted admission. The method by which the hospital or the parent responds to
the HCCB action is up to the hospital and parent so long as the approved levels are not exceeded.
One of the criteria which is considered in review of a hospital's budget centers on the cost of the services the hospital provides, and conversely, the cost to the hospital of the services provided. Memorial's budget, assuming related party transactions are not deducted, does not satisfy the cost criteria. The cost of providing services to the public is increased by the excess charges Memorial pays to related parties. The cost to Memorial's patients is further increased by Memorial's selling of its services to a related party at or below cost. These arrangements make it difficult to conclude that Memorial's requested budget rate of increase is not excessive.
The Petitioner did not establish that the $3,411,470 excess interest being charged by Health South, Inc., and by HSI Support Systems, Inc., and the
$786,500 excess rental charge by HSI Support Systems, Inc., are reasonable. The HCCB should deduct the total of $4,197,970 from Memorial's allowable expenses in computing the approved level of GRAA.
The HCCB did not allege in the record of hearing or in the documentary evidence which was introduced, that the depreciation amounts were unreasonable. Depreciation is a reduction in value attributable to the gradual deterioration of assets used in a business. No evidence, beyond the bare figures, indicates what was being depreciated or whether such depreciation is reasonable or unreasonable. Depreciation is not a cash expense. The rule which applies to related party transactions applies to the cost of services, facilities, or supplies. Worksheet D-3-2, which requires that a hospital report the cost it pays to related parties for services, facilities, and supplies furnished to the hospital by related parties is not applicable to depreciation in this case. Depreciation does not fall within the everyday definitions of services, facilities, or supplies. The HCCB raised no issue related to the depreciation figures (other than the fact that they exist and that Memorial's depreciation figure is $500,000 higher than that of Health South, Inc., and HSI Support Systems, Inc. While the burden to show the reasonableness of expenses falls on the hospital, the issue must be raised by the HCCB for consideration. In its proposed recommended order, the HCCB, as did the Intervenor, relied on the preliminary recommendations of HCCB staff, but neither the HCCB nor the Intervenor moved the staff document into evidence.
Another of the criteria to be considered in the budget review process is the ability of the hospital to earn a reasonable rate of return. Rate of return is not statutorily defined. One measure which can be utilized is the hospital's operating margin.
Memorial asserts that the requested amended budget would provide an operating margin of 0.9 percent. The HCCB states that, when the excess expense caused by related party transactions is deducted from the allowable expenses and credit is given for those increased costs which are found to be just, reasonable, and not excessive, the actual operating margin is larger. Memorial states that if all related party transaction expense is deducted and the increase in GRAA is based on the staff's initial recommendation, the operating margin is .06 percent.
While an operating margin of .06 percent is considered low, it is not unreasonable when substantial and unexplained expenses are paid to related business entities. It is also not unreasonable when, as is the case with the services provided by Memorial to the Rehabilitation Center, Memorial sells the
services at cost, inexplicably charging no "mark-up" which could increase the operating margin.
Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the HCCB amend and adopt a budget for Petitioner's FY 1988
period which contains gross revenue per adjusted admission and net revenue per
adjusted admission levels reflecting the following:
A total of $4,197,970 in related party expenses should be disallowed and deducted from the Petitioner's allowable expenses and in establishing the HCCB-approved revenue levels.
Credit should be given in the amount of $340 gross revenue per adjusted admission due to increased expenses related to outliers, case mix, Medicare program changes, Medicaid contractuals, additional charity/uncompensated care costs, and administration of TPA and Isoview contrast drugs. The net revenue per adjusted admission should be amended to reflect the same credit.
DONE and ORDERED this 15th day of April 1988, in Tallahassee, Florida.
WILLIAM F. QUATTLEBAUM
Hearing Officer
Division of Administrative Hearings The Oakland Building
2009 Apalachee Parkway
Tallahassee, Florida 32399-1550 904/488-9675
FILED with the Clerk of the Division of Administrative Hearings this 15th day of April 1988.
APPENDIX
The following constitute rulings on the proposed findings of fact which were contained in proposed recommended orders filed by the parties:
Petitioner:
1-3. Accepted.
4. Accepted insofar as necessary for purpose of identifying relevant related parties.
5-8. Rejected. Characterization as "lease" is not supported by the evidence, including Petitioner's identification of expense as "interest" in documentation.
Accepted, generally, in reference to increasing costs associated with operation of hospital. Use of word "skyrocketed" is rejected.
Accepted.
Accepted, generally, in reference to Memorial's attempts to monitor costs. Use of word "leader" is rejected.
Accepted.
Rejected, this is merely restatement of witness testimony.
Accepted.
Rejected, restatement of testimony.
Rejected, restatement of testimony. Hospital could increase revenue in other ways in order to reduce cost of services.
Accepted.
Accepted, generally, insofar as costs associated with operation of a hospital continue to increase.
19-20. Accepted.
Accepted, reflected in specific credit items sought by Memorial.
Accepted.
COPIES FURNISHED:
W. David Watkins, Esquire OERTEL & HOFFMAN, P.A. Post Office Box 6507 Tallahassee, Florida 32314
David R. Terry, Esquire Gary Walker, Esquire
Hospital Cost Containment Board Building L, Suite 101
325 John Knox Road Tallahassee, Florida 32303
John M. Knight, Esquire Office of the Public Counsel 624 Fuller Warren Building Tallahassee, Florida 32303
Gregory L. Coler, Secretary Department of Health and
Rehabilitative Services 1323 Winewood Boulevard
Tallahassee, Florida 32399-0700
Sam Power, Agency Clerk Department of Health and
Rehabilitative Services 1323 Winewood Boulevard
Tallahassee, Florida 32399-0700
=================================================================
AGENCY FINAL ORDER
=================================================================
STATE OF FLORIDA HOSPITAL COST CONTAINMENT BOARD
MEMORIAL MEDICAL CENTER OF JACKSONVILLE,
Petitioner,
vs. CASE NO. 88-0398H
STATE OF FLORIDA,
HOSPITAL COST CONTAINMENT BOARD,
Respondent,
and
CITIZENS OF THE STATE OF FLORIDA,
Intervenor.
/
FINAL ORDER
This cause came before the Hospital Cost Containment Board for consideration and final agency action, after notice, on April 28, 1988. A Recommended Order had been issued by the Division of Administrative Hearings (DOAH) on April 15, 1988, following a formal administrative hearing. Exceptions were filed by Petitioner and Respondent and oral arguments were presented by both parties. The issues in this case concern the proper levels of credit to be included in the hospital's amended budget for various expenses, the application of Board policy concerning related party transactions and interest expenses to Memorial's related party transactions and interest expense, and the effect of these items upon the level of gross and net revenue to be approved for Memorial's 1988 budget amendment.
Petitioner's Exceptions
Petitioner filed fourteen exceptions to the Recommended Order. Each was heard individually and rejected for the reasons stated below:
Exception #1 - Rejected because there was competent substantial evidence in the record to support the Finding that the staff methodology for projecting outliers was reasonable.
Exception #2 - Rejected because there was competent substantial evidence in the record to support the Finding concerning the correct outlier credit to be allowed.
Exception #3 - Rejected because there was not competent substantial evidence in the record to support the position taken by Petitioner.
Exception #4 - Rejected because the record establishes that Petitioner failed to sustain its burden of proof by supplying or introducing documentation to support oral testimony concerning additional expenses.
Exception #5 - Rejected because Petitioner's position is inconsistent with established Board policy.
Exception #6 - Rejected because there is not competent substantial evidence in the record to support the position urged by Petitioner.
Exception #7 - Rejected because Petitioner's position is inconsistent with established Board policy and because there is not competent substantial evidence in the record to support the position urged by Petitioner.
Exception #8 - Rejected because Petitioner's position is inconsistent with established Board policy and because there is not competent substantial evidence in the record to support the position urged by Petitioner.
Exception #9 - Rejected because there was not competent substantial evidence in the record to support Petitioner's characterization of the subject payments as lease payments and there was competent substantial evidence to support a characterization of the payments as interest payments.
Exception #10 - Rejected because the payments in question are deemed interest payments.
Exception #11 - Rejected because there is competent substantial evidence in the record to support the Finding of Fact relating to services provided to a related party.
Exception #12 - Rejected because there is competent substantial evidence in the record to support the Hearing Officer's finding that the staff's methodology was reasonable. There is not competent substantial evidence in the record to support the position taken by Petitioner.
Exception #13 - Rejected because there is competent substantial evidence in the record to support the Hearing Officer's finding concerning a certain level of operating margin and its effect on the hospital.
Exception #14 - Rejected because there is competent substantial evidence in the record to support the Hearing Officer's finding concerning the reasonableness of a certain level of operating margin for the hospital under the circumstances of the case.
Respondent's Exception
Respondent filed one limited exception to the Hearing Officer's Finding Of Fact #36, wherein Respondent excepted to the last sentence of that Finding to the extent that it implied that a payment of expenses must be made or be expected to be made by a hospital before a depreciation expense in a hospital's budget may be examined for reasonableness pursuant to Board policy. The Board rejects the last sentence of the above-described Finding to the extent that it is inconsistent with established Board policy which authorizes staff to examine all expenses, including unfunded depreciation, to determine if the expenses are reasonable and represent an expense that a reasonably prudent purchaser would incur for the subject goods or services.
It is also noted that the Hearing Officer's Recommendation #2, that credit be given in the amount of $340 gross revenue per adjusted admission due to certain increased expenses, is hereby revised to allow a credit of $398 for those expenses. This revision results from, and is consistent with, the Hearing Officer's Findings of Fact regarding those expenses. In calculating his recommendation regarding the appropriate total credit for the expenses, the Hearing Officer apparently combined blended and unblended credits, resulting in the double blending of certain credits. Such double blending is not Board policy.
It is therefore ordered that the Hearing Officer's Findings of Fact, except as noted above, are adopted and incorporated by reference. Likewise, the Hearing Officer's Conclusions of Law and recommendations, except as noted above, are adopted and incorporated by reference (copy attached). Pursuant thereto, it is further ordered that:
Memorial Medical Center of Jacksonville's budget for its 1988 fiscal year is approved for a gross revenue per adjusted admission of $6,003 and a net revenue per adjusted admission of $4,592 for the entirety of its 1988 fiscal year.
Memorial Medical Center of Jacksonville shall, within 18 days, submit a corrected budget pursuant to Rule 10N-1.0165, Florida Administrative Code.
DONE AND ORDERED this 4th day of May, 1988.
Peter J. Levin, Chairman Hospital Cost Containment Board
325 John Knox Road Building L, Suite 101
Tallahassee, Florida 32303 904/488-1295
COPIES FURNISHED:
W. David Watkins, Attorney for Petitioner David R. Terry, Attorney for Respondent John M. Knight, Attorney for Intervenor William F. Quattlebaum, Hearing Officer
NOTICE OF RIGHT TO JUDICIAL REVIEW
YOU ARE HEREBY NOTIFIED that you may be entitled, pursuant to Section 120.68, Florida Statutes, to judicial review of an Order which adversely affects you. Review proceedings are instituted by filing a petition with the appropriate District Court of Appeal, pursuant to Section 120.68(2), Florida Statutes. These proceedings must be conducted in accordance with the Florida Rules of Appellate Procedure. Pursuant to Rule 9.110, Florida Rules of Appellate Procedure, you must file a notice of appeal within 30 days of the rendition of this Order.
| Issue Date | Proceedings |
|---|---|
| Apr. 15, 1988 | Recommended Order (hearing held , 2013). CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| May 04, 1988 | Agency Final Order | |
| Apr. 15, 1988 | Recommended Order | Appropriate to disallow hospitals budgeted expenditures to related party in excess of reasonable expenses as determined between unrelated parties. |
