STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PALMS HEALTH CARE CENTER, )

)

Petitioner, )

)

vs. ) Case No. 90-1770

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a final hearing in the above-styled matter was held on February 28, 1991, in Orlando, Florida, before Joyous D. Parrish, a designated hearing officer of the Division of Administrative Hearings. The parties were represented at the hearing as follows:

APPEARANCES

For Petitioner: Karen L. Goldsmith

Goldsmith & Grout, P.A.

1201 S. Orlando Avenue, Suite 401 Post Office Box 2011

Winter Park, Florida 32790-2011

For Respondent: Scott D. LaRue

Assistant General Counsel Department of Health and Rehabilitative Services 1323 Winewood Boulevard Building One, Room 407

Tallahassee, Florida 32399-0700 STATEMENT OF THE ISSUES

The central issue in this case is whether the Medicaid adjustments claimed by Petitioner are appropriate.

PRELIMINARY STATEMENT

This case began on March 7, 1990, when the Petitioner, Palms Health Care Center (Palms), filed a petition with the Department of Health and Rehabilitative Services (Department) seeking a review of the Department's Medicaid audit of the Palms facility. The challenge centered on adjustments made to a cost report for the Palms' facility for the period that ended December 31, 1987.

The matter was forwarded to the Division of Administrative Hearings for formal proceedings on March 20, 1990. At the hearing, Rodney May, Ronald Shuck, Dale Harkin, and Stanley Swindling testified on behalf of the Petitioner.

Charles Patterson testified for the Department. The Palms' exhibits numbered 1 through 4 were admitted into evidence.

The transcript of the proceedings was filed with the Division of Administrative Hearings on March 11, 1991. Specific rulings on the proposed findings of fact submitted by the parties are included in the attached appendix.

At the hearing, the parties entered a stipulation which resolved many of the audit adjustments in dispute. The issue remaining is whether the Department properly disallowed interest in the amount of $298,500 for the cost report period that ended December 31, 1987.

FINDINGS OF FACT

Based upon the testimony of the witnesses and the documentary evidence received at the hearing, the following findings of fact are made:

1. Florida Brethren Homes, Inc. is a not for profit corporation doing business as the Palms. The Palms is a nursing home facility certified to participate in the Medicaid program.

   
   

2. The Department is the state agency charged with the responsibility of reviewing costs claimed by facilities participating in the Medicaid program.

   
   

3. The Palms filed a cost report for Medicaid reimbursement for the fiscal period ending December 31, 1987. The cost report reviews the past payment rate and sets the prospective rate. The Department reviewed Petitioner's report and disallowed interest costs in the amount of $298,500 which were included by the Palms. The Palms timely challenged that disallowance.

   
   

4. In 1984, the Palms participated in a revenue bond issuance in order to finance the construction of certain improvements to its health care facilities. That bond issue in the amount of $13,970,000 bore a tax exempt interest rate of approximately 12.89 %.

   
   

5. For the period ending December 31, 1987, the interest which was due on that bond debt was $298,500.

   
   

6. On April 5, 1988, the Palms filed a Chapter 11 action in the Bankruptcy Court for the Southern District of Florida.

   
   

7. The Palms did not pay the accrued interest prior to filing its petition in bankruptcy. In fact, the Palms was in default on the interest at the time of the bankruptcy petition.

   
   

8. The Medicaid rate which had been established prior to that time had presumed an allowable interest cost for the period and had included that interest payment in the calculation of the rates then available to the Palms.

   
   

9. In filing bankruptcy, the Palms sought to restructure its debt. As a result, the Palms executed an Amended And Restated Indenture of Trust which included the accrued but unpaid interest which had accumulated under the 1984 revenue bond issue. The plan called for a bond issuance and for deferred interest certificates to cover the unpaid interest. The deferred interest

   certificates had not been issued as of the date of the final hearing. The accrued but unpaid interest provided in the deferred interest certificate has a maturity date of December 1, 2016.

   
   

10. The unpaid interest is subject to a mandatory prepayment from available net cash flow after December 1, 1992.

    
    

11. The restructure of Petitioner's debt has allowed it to remain in business. The plan of reorganization was entered into as a good faith, arm's length transaction.

    
    

12. The plan of reorganization was confirmed by the Bankruptcy Court and the proceedings before that tribunal have concluded.

    
    

13. In its audit of the Palms, the Department determined that the deferred interest obligation does not mature and become due and payable until December 1, 2016, and that, therefore, the interest expense is not a reimbursable cost for the period that ended December 31, 1987.

    
    

14. The Palms' claims that for cost reimbursement purposes the accrued interest was paid by the refinancing of the debt and that the amount should remain an allowable cost to be included for that period.

    
    

    CONCLUSIONS OF LAW

    
    

15. The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of these proceedings

    
    

16. Rule 10C-7.0482, Florida Administrative Code, provides, in pertinent part:

    
    

    Reimbursement to participating nursing homes for services provided shall be in accord with the Florida Title XIX Long-Term Care Reimbursement Plan Version III and incorporated herein by reference.

    
    

17. The hierarchy of authority for determining the allowable costs for Medicaid reimbursement purposes is as follows: first the plan described in paragraph 2, then to HIM-15, and, finally, to generally accepted accounting principals.

    
    

18. The plan does not specifically address the treatment of interest expense relative to the issue in this case.

    
    

19. Generally, interest is an allowable cost. Interest on bonds is an allowable cost insofar as the funds obtained (monies borrowed) are used for activities related to patient care. See Provider Reimbursement Manual--Chapter 2, P. 4903 (PRM).

20. PRM, Part I, Section 202, contains the definition of "interest." That provision provides, in pertinent part:

    
    

    To be allowable under the Medicaid program, interest must be: (1) supported by evidence of an agreement that funds were borrowed and that payment of interest and repayment of the funds are required; (2) identifiable in the provider's accounting records; (3) related to the reporting period in which the costs are incurred; and (4) necessary and proper for the operation, maintenance, or acquisition of the provider's facilities.

    
    

21. Section 202.2 of that provision explains "necessary" as used in the foregoing criteria. "Necessary" means that the interest is incurred on a loan made to satisfy a financial need of the provider and for a purpose reasonably related to patient care.

    
    

22. Chapter 23, Section 2305 of HIM-15, provides, in part:

    
    

    1. General.--A short term liability must be liquidated within 1 year after the end of the cost reporting period in which the liability is incurred... Liquidation must be made by check or other negotiable instrument, cash or legal transfer of assets such as stocks, bonds, real property, etc. Where liquidation is made by check or other negotiable instrument, these forms of payment must be redeemed through an actual transfer of the provider's assets within the time limits specified in this section.

       
       

23. Based upon the foregoing, the alleged payment of the accrued interest could not be considered a short term liability since, at the earliest, the repayment of the interest will not be made until December, 1992.

    
    

24. Moreover, no actual transfer of the provider's assets occurred to effect the alleged payment. Additionally, the deferred interest certificate evidencing the obligation to pay the 1987 interest is not a negotiable instrument. Section 673.104, Florida Statutes.

    
    

25. In this case, Petitioner's negotiated bankruptcy plan provided for the repayment of the accrued interest at a future date. The amount of the indebtedness was not reduced nor discharged by reason of the bankruptcy action. The bondholders in accepting the restructuring of the debt merely delayed receipt of the payment which was due and payable on December 31, 1987.

    
    

26. Additionally, it should be noted that if the Petitioner's argument were correct (that the interest was paid by a refinancing), the interest would not be allowable as it was not incurred incidental to patient care costs. Clearly, in this case the "payment" in the form of the deferred interest certificate was an inducement or consideration to allow the restructuring plan to be acceptable to the original investors who no doubt hoped payment would be made "better late, than never."

27. Medicaid reimbursements are calculated to remit monies based upon the costs associated with a provider's effort to render patient care. In this case, had the provider made the interest payment as originally contemplated that amount could have been considered a cost of doing business for the period in review. In this case, however, the provider has "paid" the interest with a future promise to pay. Consequently, it cannot be determined that such amount was incurred for the period audited as an allowable cost for reimbursement purposes.

RECOMMENDATION

Based upon the foregoing, it is RECOMMENDED:

That the Department audit disallowing interest claimed for the period that ended December 31, 1987, be confirmed.

DONE and ENTERED this 14th day of June, 1991, in Tallahassee, Leon County, Florida.

Joyous D. Parrish Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32301

(904)488-9675

Filed with the Clerk of the Division of Administrative Hearings this 14th day of June, 1991.

APPENDIX TO CASE NO. 90-1770

Rulings on the proposed findings of fact submitted by the Petitioner:

1. Paragraphs 1 through 3 are accepted.

   
   

2. Paragraphs 4 and 5 are not findings of fact but restate the stipulation reached by the parties at the outset of the hearing.

   
   

3. Paragraphs 6 through 11 are accepted.

   
   

4. Paragraph 12 is rejected as it is not a finding of fact but, if accurate, would be a conclusion of law. Such conclusion has not been reached in this case.

   
   

5. Paragraph 13 is rejected as irrelevant.

   
   

6. Paragraph 14 is accepted.

7. With regard to paragraph 15, it is accepted that the repayment of the accrued interest is not a short term liability. Otherwise, the paragraph is rejected as irrelevant.

   
   

8. Paragraph 16 is rejected as a restatement of the issue or fact not supported by the weight of the evidence.

   
   

9. Paragraph 17 is rejected as irrelevant.

   
   

10. Paragraph 18 is accepted.

    
    

11. Paragraph 19 is rejected as irrelevant.

    
    

12. Paragraphs 20 and 21 are rejected as irrelevant or a conclusion of

    law.

    
    

13. Paragraph 22 is accepted.

    
    

14. Paragraph 23 is rejected as irrelevant.

    
    

15. Paragraph 24 is rejected as a conclusion of law not supported by the

    record in this case.

    
    

16. Paragraph 25 is rejected to the extent that the term "refinancing" is used to suggest a payment of allowable interest; it is accepted that restructuring the Palms' debt was required to allow it to continue in business.

    
    

17. Paragraph 26 is rejected as irrelevant.

Rulings on the proposed findings of fact submitted by the Department:

1. Paragraphs 1 through 14 are accepted.

COPIES FURNISHED:

Scott D. LaRue

Assistant General Counsel Department of Health and Rehabilitative Services 1323 Winewood Boulevard Building One, Room 407

Tallahassee, Florida 32399-0700

Karen L. Goldsmith Goldsmith and Grout, P.A.

P.O. Box 2011

Winter Park, Florida 32790-2011

Sam Power, Agency Clerk Department of Health and Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32399-0700

Linda K. Harris Acting General Counsel

Department of Health and Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32399-0700

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for fi1ing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 90-001770

Orders for Case No: 90-001770