STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

GOLDEN GLADES REGIONAL MEDICAL ) CENTER, )

)

Petitioner, )

)

vs. ) CASE NO. 90-0204H

) STATE OF FLORIDA, HEALTH CARE ) 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 before Larry J. Sartin, a duly designated Hearing Officer of the Division of Administrative Hearings, on March 16, 1990, in Tallahassee, Florida.

APPEARANCES

For Petitioner: James M. Barclay, Esquire

Cobb, Cole and Bell Suite 500

315 South Calhoun Street Tallahassee, Florida 32301

For Respondent: Robert D. Newell, Jr., Esquire

NEWELL & STAHL, P.A.

817 North Gadsden Street Tallahassee, Florida 32303-6313

For Intervenor: David R. Terry, Esquire

Peter Schwarz, Esquire Office of Public Counsel c/o The Florida Legislature 812 Claude Pepper Building

111 West Madison Street Tallahassee, Florida 32399-1400

STATEMENT OF THE ISSUES

Whether the Respondent, the Health Care Cost Containment Board, should waive the requirement that Golden Glades Regional Medical Center file its audited actual experience or was the Respondent correct in declining to review the Petitioner's fiscal year 1990 proposed budget?

PRELIMINARY STATEMENT

On or about September 26, 1989, the Petitioner, Golden Glades Regional Medical Center, filed a budget request for its fiscal year ending December 31, 1990, with the Respondent, The Health Care Cost Containment Board. On December 22, 1989, the Respondent issued its preliminary findings and recommendations proposing to maintain the Petitioner at its 1988 budget levels. The Petitioner filed a Petition for Administrative Hearing with the Respondent on January 10, 1990, challenging the Respondent's preliminary findings and recommendations.

The Petition was filed with the Division of Administrative Hearings on January 11, 1990. The Petition was assigned case number 90-0204H.

The Petitioner filed three other Petitions for Formal Administrative Hearing with the Respondent concerning certain Public Medical Assistance Trust Fund assessments. The Petitions were assigned case numbers 89-4619H, 89-5970H and 89-6108H.

Case numbers 89-4619H, 89-5970H and 89-6108H were consolidated for purposes of the formal hearing. The formal hearing in those cases was held at the same time that the hearing of this case was conducted. The parties stated that testimony presented in case numbers 89-4619H, 89-5970H and 89-6108H was not to be relied upon in making findings of fact in this case. The parties also indicated that the exhibits presented in this case and case numbers 89-4619H,

89-5970H and 89-6108H could be relied upon in all of the cases. A Recommended Order in case numbers 89-4619H, 89-5970H and 89-6108H has been issued simultaneously with this Recommended Order.

The Citizens of the State of Florida, by and through the Public Counsel, intervened in this case.

At the formal hearing the Petitioner presented the testimony of Ronald Garland Huneycutt and Henry A. Brown. Mr. Huneycutt was accepted as an expert in health care accounting. Mr. Brown was accepted as an expert in health care finance.

The Respondent presented the testimony of Richard H. Law and Duane A. Ashe.

Mr. Law was accepted as an expert in certified public accounting and auditing.

The parties filed Joint Exhibit 1, a composite exhibit, which consisted of pages 1-57 and 60-A, B and C. The Joint Exhibit was accepted into evidence.

The Intervenor did not call any witnesses or offer any exhibits.

The parties have filed proposed recommended orders containing proposed findings of fact. A ruling on each proposed finding of fact has been made either directly or indirectly in this Recommended Order or the proposed finding of fact has been accepted or rejected in the Appendix which is attached hereto.

FINDINGS OF FACT

1. On or about September 26, 1989, the Petitioner filed its proposed budget for its fiscal year beginning January 1, 1990, and ending December 31, 1990, with the Respondent. The Petitioner's proposed 1990 budget was submitted pursuant to Section 407.50(3), Florida Statutes.

   
   

2. The Respondent determined that the Petitioner's proposed 1990 budget should not be approved. The Respondent proposed in its preliminary findings and recommendations to hold the Petitioner to its 1988 budget levels of gross revenue per adjusted admission of $8,532.00 and net revenue per adjusted admission of $5,835.00.

   
   

3. About the same time that the Petitioner filed its proposed 1990 budget, the Petitioner filed unaudited financial statements for its fiscal year ending December 31, 1988, with the Respondent. The financial statements were not accompanied by an audit opinion letter from the Petitioner's certified public accountants. Therefore, the statements did not constitute "audited actual experience" or "audited actual data".

   
   

4. The Respondent rejected the Petitioner's proposed 1990 budget because of the Petitioner's failure to file audited actual experience.

   
   

5. Hospitals subject to Chapter 407, Florida Statutes, are required to file audited actual experience which is used by the Respondent in reviewing hospital budgets.

   
   

6. In February or March, 1989, the Petitioner retained an independent, Florida licensed certified public accountant (hereinafter referred to as the "Auditors"), to prepare audited financial statements for its 1988 fiscal year.

   
   

7. The Auditors completed all the field work they could complete in April or May, 1989.

   
   

8. An audit opinion letter must be included with an audit report pursuant to generally accepted auditing standards. The Auditors have delayed issuing an audit opinion letter for the Petitioner's 1988 fiscal year, which is required in order to issue audited financial statements. Audit opinion letters typically contain a description of the scope of the work performed by the auditors, a description of the audit process and an opinion concerning whether the financial statements are fairly stated in all material respects in accordance with generally accepted accounting principles.

   
   

9. The Auditors have been requested by the Petitioner to withhold issuance of their final audit report for the Petitioner's 1988 fiscal year.

   
   

10. As of the date of the formal hearing of this case, the Auditors had not issued an audit opinion letter, and thus an audit report, because they needed to be provided by the Petitioner with information concerning the restructuring of the Petitioner's debt, updated legal letters from the Petitioner's attorneys and a management representation letter from the Petitioner.

11. The Petitioner's source of working capital for its daily operations has been a line of credit with First American Bank. The line of credit expired during 1989. A new source of working capital has not been arranged by the Petitioner. Therefore, the Auditors could not issue an audit opinion letter concluding that the Petitioner is viable as a "going concern."

    
    

12. Unless the Petitioner can restructure its debt or find another source of debt-financing, increase its equity capital or achieve profitable operations, the Auditors will not be able to opine that the Petitioner is a going concern. This problem has been in existence almost since the inception of the Petitioner's ownership of the hospital. The Petitioner has requested three extensions of time to file its proposed 1990 budget. It did not inform the Respondent of the debt restructuring problem in any of the extension requests.

    
    

13. Without resolving the debt restructuring problem of the Petitioner, the Auditors cannot determine what effect a renegotiation of the Petitioner's debt may have on the Petitioner's financial statements for its 1988 fiscal year. There will be uncertainty concerning the 1988 fiscal year financial statements of the Petitioner until the Auditors issue their final audit report.

    
    

14. If the Auditors issued an opinion letter as of the date of the formal hearing, they would have to issue a "disclaimer" letter. In issuing a disclaimer, an auditor declines to render an opinion concerning the financial statements. To avoid a disclaimer opinion letter, the Petitioner requested that the Auditors not issue their final audit report.

    
    

15. Whether the Petitioner is a going concern does not impact on the calculation of its operational revenues and expenses as represented in the Petitioner's unaudited 1988 fiscal year financial statements. If the Petitioner is not considered a going concern the Petitioner would be considered on a liquidation basis for purposes of its financial statements. Therefore, the question of whether the Petitioner is a going concern does impact the manner in which its assets would be valued and the determination of the Petitioner's liabilities.

    
    

16. A management representation letter, which the Auditors also need to complete their audit of the Petitioner, is a letter from the management of a business, such as a hospital, representing that management has made available all of the books and records of the hospital, that management understands generally accepted accounting principles and the financial statements of the hospital have been prepared in accordance with such principles, that all liabilities have been accrued and that proper disclosures have been made in the financial statements.

    
    

17. A management representation letter is required by the American Institute of Certified Public Accountants before an audit opinion letter may be issued.

    
    

18. A management representation letter should provide assurances to the auditors that management has made available all financial records and related data, and minutes of the meetings of the stockholders and directors, if a corporation, and that there are no irregularities involving management employees that could have a significant effect on the financial statements.

    
    

19. Without a management representation letter there are no assurances that a hospital such as the Petitioner's has engaged in related-party transactions or, if so, the nature and impact on expenses of such transactions.

20. In addition to submitting unaudited financial statements to the Respondent, the Petitioner provided the Respondent with a "comfort letter" from the Petitioner's Auditors.

    
    

21. The Respondent needs audited actual experience in order for it to perform a full budget review of a hospital's proposed budget submitted pursuant to Section 407.50(3), Florida Statutes. The financial data contained in the audited actual reports of a hospital is used in the methodologies and formulas utilized by the Respondent in its budget review.

    
    

22. The purpose of conducting a budget review is to determine the recommended levels of charges that a hospital may impose upon its patients in the budget year. Audited actual experience provides the starting point for determining whether a hospital's proposed budget is reasonable. A comfort letter merely indicating that the information on the financial statements should not change is not sufficient to provide the reliability the Respondent should demand of a hospital's financial statements.

    
    

23. The Respondent's budget review includes an analysis of a hospital's ability to earn a reasonable rate of return. This analysis requires reliance upon the financial data contained in the hospital's balance sheet and income statement. The data must be reliable. Accuracy of the data can only be assured if it is part of an auditor's final report.

    
    

24. As part of the audited actual experience of a hospital such as the Petitioner's hospital, it is reasonable for the Respondent to require that an audit opinion letter be provided. Without an audit opinion letter the Respondent cannot determine whether there are any disclaimers, qualifying statements or notes about subsequent events of the hospital.

    
    

25. The Respondent does not have the resources necessary to perform its own audit of hospitals. Therefore, it is reasonable for it to require that hospital's provide audited actual experience to the Respondent.

    
    

26. The rules of the Respondent allow it to waive the requirement that a hospital file audited financial statements. Rule 10N-1.006, Florida Administrative Code.

    
    

27. The Respondent grants waivers pursuant to Rule 10N-1.006, Florida Administrative Code, if it is "impossible" for a hospital to file audited financial statements. The Petitioner did not file a request for such a waiver. The evidence failed to prove that the Respondent was prejudiced by the Petitioner's failure to file a request for a waiver.

    
    

28. The Petitioner has failed to prove that the information necessary for it to file audited financial statements for its 1988 fiscal year was "not available at the time nor can be reasonably developed by the hospital "

    
    

29. Unaudited financial statements may be relied upon for some purposes. The Respondent relies upon unaudited data for some purposes. But not for full budget review purposes. The weight of the evidence failed to prove that it is unreasonable for the Respondent to refuse to rely upon the Petitioner's 1988 fiscal year unaudited financial statements to complete the budget review the Respondent is required to conduct for 1990.

    CONCLUSIONS OF LAW

    
    

30. The Division of Administrative Hearings has jurisdiction of the parties to and the subject matter of this proceeding. Section 120.57(1), Florida Statutes (1989).

    
    

31. Section 407.50(3), Florida Statutes, provides in pertinent part:

    
    

    (3) At least 90 days prior to the beginning of its fiscal year, each hospital requesting a rate of increase in gross revenue per adjusted admission in excess of the maximum

    . . . shall be subject to detailed budget review and shall file its projected budget with the board for approval. In determining the base, the hospital's prior year audited actual experience shall be used unless the hospital's prior year audited actual experience exceeded the applicable rate of increase . . . . [Emphases added].

    
    

    Section 407.50, Florida Statutes, also contains specific provisions providing for a detailed review by the Respondent of a proposed budget filed by a hospital pursuant to Section 407.50(3), Florida Statutes. The Respondent must determine if the rate of increase requested by a hospital is just, reasonable and not excessive. Any budget that is unjust, unreasonable or excessive must be disapproved by the Respondent. See Section 407.50(8), Florida Statutes. The Respondent is also required to disapprove any budget that "contains a rate of increase which is not necessary to maintain total hospital costs at a level reasonably related to total services provided and is not necessary to maintain a prudently managed hospital." Section 407.50(7), Florida Statutes.

    
    

32. The terms "audited actual experience" are defined in Section 407.002(2), Florida Statutes, as follows:

    
    

    (2) "Audited actual data" or "audited actual experience" means data contained within financial statements examined by an independent, Florida-licensed, certified

    public accountant in accordance with generally accepted auditing standards.

    
    

33. Section 407.05(7), Florida Statutes, requires that hospitals file their audited actual experience for each fiscal year within 120 days after the end of the fiscal year.

    
    

34. In order for the Respondent to carry out its budget review responsibility, the Respondent is given authority to require the submission by hospitals of "financial, nonfinancial, accounting, and actual charge data by diagnostic groups as the board deems necessary in order . . . to properly conduct financial analyses and budget review . . . ." Section 407.02(1), Florida Statutes. The Respondent is required by Section 407.05(1), Florida Statutes, to establish a uniform system of financial reporting, including "information relating to the cost to both the provider and the consumer of any service provided in such hospital "

35. Pursuant to the foregoing provisions, the Respondent requires that hospitals submit audited actual experience. The audited actual experience is utilized by the Respondent in carrying out its budget review responsibility. The Respondent's rules provide that audited actual experience is to be utilized in determining a hospital's base gross revenue per adjusted admission, in analyzing a hospital's costs and efficiency, in comparing the rate of change in a hospital's proposed budget from its most recent audited actual experience, in determining a hospital's ability to earn a reasonable rate of return and in determining the appropriate level of gross revenue per adjusted admission from its recommended net revenue per adjusted admission. See Rules 10N-5.012 and 10N-5.015-18, Florida Administrative Code.

    
    

36. The evidence in this case proved that the Petitioner filed its proposed 1990 budget pursuant to Section 407.50(3), Florida Statutes. The Petitioner failed, however, to file audited actual experience for its 1988 fiscal year as required by Section 407.05(7), Florida Statutes. The Respondent could not, therefore, utilize audited actual experience of the Petitioner to perform its budget review responsibilities pursuant to Section 407.50, Florida Statutes, and the Respondent's rules, on the Petitioner's proposed 1990 budget. The Respondent's refusal to approve the Petitioner's proposed 1990 budget was consistent with the requirements of Chapter 407, Florida Statutes.

    
    

37. Rule 10N-1.006, Florida Administrative Code, does allow the Respondent to waive the filing of audited financial statements:

    
    

    The Board may grant any written request for a waiver from any or all portions of Rule

    10N-1.003, Rule 10N-1.004, Rule 10N-1.010, and

    Rule 10N-1.014, which require a submission to the Board of the prior year audited actual data report, audited financial statements, interim report, budget report or any special information required from each hospital in the State of Florida, which information is not available at that time nor can be reasonably developed by the hospital, provided the written request for a waiver is received by the Board by the due date of the report or information.

    
    

38. The Petitioner has not filed a written request for a waiver of the requirement that the Petitioner file 1988 fiscal year audited financial statements. The evidence failed to prove that the failure to comply with this requirement will prejudice the Respondent. Nor has the Respondent argued that the Petitioner is estopped from seeking a waiver in this proceeding because of its failure to file a written request. Instead, the Respondent has argued that a waiver should not be granted because the Petitioner has failed to prove that it was "impossible" for it to file audited financial statements. The Petitioner has argued that the Respondent's policy is contrary to the clear language of Rule 10N-1.006, Florida Administrative Code. The Petitioner suggests that the clear language of Rule 10N-1.006, Florida Administrative Code, only requires that the Petitioner prove that audited financial statements cannot be "reasonably" developed.

39. Whether the Respondent's "impossibility" policy is valid need not be decided in this case. The weight of the evidence failed to prove that audited financial statements could not be "reasonably" developed by the Petitioner. At best the evidence only proved that audited financial statements favorable or acceptable to the management of the Petitioner could not be developed at the time of the formal hearing. The evidence did not prove that accurate audited financial statements which could be relied upon by the Respondent in carrying out its budget review function could not be developed. Therefore, the weight of the evidence failed to prove that the Respondent was unreasonable in failing to waive the requirement that the Petitioner file 1988 fiscal year audited financial statements or in denying approval of the Petitioner's proposed 1990 budget.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Respondent issue a Final Order dismissing the

Petitioner's Petition for Administrative Hearing.

DONE and ENTERED this 31st day of May, 1990, in Tallahassee, Florida.

LARRY J. SARTIN

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 31st day of May, 1990.

APPENDIX TO RECOMMENDED ORDER

The parties have submitted proposed findings of fact. It has been noted below which proposed findings of fact have been generally accepted and the paragraph number(s) in the Recommended Order where they have been accepted, if any. Those proposed findings of fact which have been rejected and the reason for their rejection have also been noted.

The Petitioner's Proposed Findings of Fact

Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection

1 1-7 and hereby accepted. The last two sentences of proposed finding of fact 6 is not supported by the weight of the evidence. 8 2.

9 1-2.

10 3 and 10.

1. See 29.

2. Not relevant.

3. Hereby accepted. The proposed finding of fact that the data on the financial statements "will not change" and the last sentence are not supported by the weight of the evidence.

4. 11-14. The last sentence is not relevant.

5. See 26.

16 See 27-28.

The Respondent's Proposed Findings of Fact

Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection

1 1.

2 2.

3 4.

1. Hereby accepted.

2. 2 and 4.

6 6.

7 6-7 and 9.

8 8.

9 9-11.

10 12.

11-12 15.

13 12.

14 21.

15 3, 22 and 29.

16 21-22.

17 22-23.

18 16-19.

19 25.

20 Not relevant.

The Intervenor's Proposed Findings of Fact

Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection

1 1.

2 3.

3 2.

4-8 Hereby accepted.

9-11 10.

12 16.

13 18.

14 16-19.

15 11-12.

16 11 and 13.

17 10, 14-15 and hereby accepted.

18 15.

19 Hereby accepted.

20 11.

21 14.

22 Hereby accepted.

23-26 8

27 20 and 22.

28 Hereby accepted.

29 9 and 14.

30 Hereby accepted.

31 8.

32 Not supported by the weight of the evidence.

33 21 and 24.

34 13.

35 12.

36 9.

37 12.

38 13.

39 29.

40 Hereby accepted.

41 26-27.

42 Hereby accepted.

43 9.

44 8 and hereby accepted.

45 21.

46 23.

47 24.

48 25.

49 22.

50 23 and hereby accepted.

COPIES FURNISHED:

James M. Barclay, Esquire Suite 500

315 South Calhoun Street Tallahassee, Florida 32301

Robert D. Newell, Jr., Esquire 817 North Gadsden Street Tallahassee, Florida 32303-6313

Jack Shreve Public Counsel David R. Terry

Associate Public Counsel Peter Schwarz

Associate Public Counsel c/o The Florida Legislature 812 Claude Pepper Building

111 West Madison Street Tallahassee, Florida 32399-1400

Stephen Presnell, General Counsel Health Care Cost Containment Board Woodcrest Office Park

325 John Knox Road Building L, Suite 101

Tallahassee, Florida 32303

Docket for Case No: 90-000204

Orders for Case No: 90-000204