STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA HEALTH CARE PLAN, )

INCORPORATED, )

)

Petitioner, )

)

vs. ) CASE NO. 96-2857

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

On September 25, 1996, a formal administrative hearing was held in the above-captioned case in Orlando, Florida, before Daniel M. Kilbride, Administrative Law Judge, Division of Administrative Hearings.

APPEARANCES

For Petitioner: Pamela J. Thomas, Esquire

Florida Health Care Plans 1340 Ridgewood Avenue Holly Hill, Florida 32117

For Respondent: Kevin J. O'Donnell, Esquire

Department of Revenue Post Office Box 6668

Tallahassee, Florida 32314-6668 STATEMENT OF THE ISSUES

Whether Petitioner qualifies for a consumer's certificate of exemption from sales and use tax as a charitable institution.

Whether Petitioner provides medical services for free or at a substantially reduced cost to a reasonable percentage of persons unable to pay, as provided in the statute.

PRELIMINARY STATEMENT

On or about March 31, 1995, Petitioner, Florida Health Care Plan, Inc., filed an application for a Consumer's Certificate of Exemption with the Respondent. The Department denied Petitioner's application for this sales tax exemption on the grounds that Petitioner did not meet the statutory requirements.

The Department notified the Petitioner of its right to protest the Department's determination. The Petitioner filed a Petition challenging the

determination and the matter was forwarded to the Division of Administrative Hearings for formal proceedings. Respondent timely filed its response to the Petition.

A formal administrative hearing was held on September 25, 1996, in Orlando, Florida. At the hearing, Petitioner presented the testimony of one witness, its President and CEO, Edward F. Simpson. Three exhibits from Petitioner were admitted into evidence. Respondent did not call any witnesses; two exhibits were admitted into evidence. One joint exhibit was admitted. During the final hearing, the parties stipulated that Petitioner does expend in excess of 50 percent of its expenditures on a qualified charitable service.

A transcript of the proceedings was filed on October 17, 1996. Petitioner filed its proposed recommended order on October 30, 1996 and Respondent filed its proposals on November 8, 1996. Each parties' proposals have been given careful consideration and incorporated in this Order when supported by the greater weight of evidence.

FINDINGS OF FACT

1. The Petitioner is a not-for-profit Florida corporation, licensed by the Florida Department of Insurance to do business as a Health Maintenance Organization (HMO). It enrolls members and provides them with direct medical care.

   
   

2. Petitioner was acquired by the Halifax Hospital Taxing District, a special taxing district and political sub-division of the State of Florida, in 1994.

   
   

3. Respondent is the state agency authorized to implement the collection and enforcement of Florida tax laws.

   
   

4. Petitioner is a staff model HMO which enrolls people who become members and provides direct medical aid to these members. This medical aid is provided by physicians employed by Petitioner, as well as some outside physicians who have contracted with Petitioner.

   
   

5. Membership consists of these major groups: Medicare subscribers, school children enrolled in the Florida Healthy Kids Programs and private employers.

   
   

6. Petitioner enrolls two classes of members that would fall into the category of "persons unable to pay", i. e. Medicare beneficiaries and Healthy Kids participants.

   
   

7. Petitioner has two Medicare Programs for Medicare beneficiaries. One in which the member pays nothing and receives medical aid and a reduced prescription benefit, and another in which the member pays $15.50 per month and receives medical aid and additional benefits such as a prescription benefit, hearing aid benefit, and optometry benefit with small co-pays.

   
   

8. Petitioner provides this comprehensive medical aid under a contract with the Health Care Financing Administration at a HCFA-approved capitation rate.

   
   

9. Prescription benefits provided to Petitioner's Medicare members cost Petitioner $36.18 per member, per month, approximately fifty percent of average

   wholesale price. Non-members of Petitioner seeking their Medicare benefits through traditional Medicare, would pay an average of $70.00 per month for their prescription benefit.

   
   

10. Approximately eight percent of the Medicare population in Petitioner's service area fall below Federal Poverty Guidelines. The economic make-up of Petitioner's Medicare membership is inferred to be reflected in its Medicare membership. Petitioner infers that eight percent of its membership falls below Federal Poverty Guidelines and are persons unable to pay.

    
    

11. Petitioner's total expenses for the nine-month period ending March 31, 1995, were $64,675,533.32. The Medicare costs for that period were

    $37,421,480.36. Eight percent or $2,993,718.40, were spent for persons who were unable to pay.

    
    

12. Petitioner provides comprehensive medical aid to children in its Healthy Kids Program.

    
    

13. The Healthy Kids Program is a state-subsidized program in which children, who were not eligible for medicaid but whose parents do not have health insurance for them, could obtain health coverage.

    
    

14. Petitioner was the HMO selected by the Healthy Kids Corporation, the corporation created by the Florida Legislature to operate the Healthy Kids Program, to provide this comprehensive medical aid under a monthly capitation.

    
    

15. Petitioner operates its Healthy Kids Program at a loss ratio of approximately 101 percent, i. e. over one hundred cents of every dollar collected goes to direct medical aid to Healthy Kids participants.

    
    

16. HMO's traditionally operate with a loss ratio of eighty percent, i. e. eighty cents of every dollar collected goes to the provision of medical care and the other twenty percent would go into administrative expenses.

    
    

17. Eighty two point two (82.2) percent of participants in Petitioner's service area fall below Federal Proverty Guidelines and are persons unable to pay.

    
    

18. The Healthy Kids' costs for the period ending March 31, 1995 were

    $3,890,964.65; 82.2 percent, or $3,198,372.90, was spent for persons who were unable to pay.

    
    

19. For the nine-month period ending March 31, 1995, a total of

    $6,192,091.30, or 9.6 percent, was spent on persons who were unable to pay.

    
    

20. Any surplus generated from the activities of Petitioner, other than through its participation in the Healthy Kids Program, is turned over to the Halifax Hospital Taxing District. Any surplus generated from participation in the Healthy Kids Program contract is returned to the Healthy Kids Corporation.

    
    

21. Petitioner spends in excess of fifty percent of its expenditures on medical aid for the relief of disease, injury, or disability.

    
    

22. Medicare is a federally sponsored program available to people sixty- five and over who do not receive medical benefits through an employer. It is

    available without regard to the person's income level. Medicare is also available to persons under sixty-five who are totally disabled for two months or longer.

    
    

23. Medicare subscribers accounted for 12,917 of Petitioner's total of 45,759 subscribers during the relevant nine month period. Petitioner is reimbursed by the federal government at the fixed capitation rate of $365 per month for each Medicare subscriber enrolled as a member of the HMO. Thus, for a nine month period corresponding to Petitioner's financial data, the Petitioner received $42,432,345 from the federal government attributable to Medicare subscribers. Medicare expenses for a nine month period were $37,421,000. Petitioner's federal Medicare revenue exceeded its total Medicare cost by

    $5,011,345 for the relevant nine month period. This figure is understated because it does not reflect revenue received from the $15.50 supplemental premium for additional benefits.

    
    

24. There are two competitors for Medicare subscribers in the Petitioner's market area. Each provider receives the same capitation rate from the federal government. The competitors offer Medicare recipients different programs in which they may enroll. The competitors offer a slightly different product at a higher premium.

    
    

25. No testimony was introduced to compare the premium charged and the plans offered by other providers with that offered by other providers with that offered by Petitioner.

    
    

26. Prescription medicine is not being provided free of charge or at a substantially reduced cost to those unable to pay. It is not Petitioner's policy to waive the supplemental premium based upon the subscriber's income level, although some Medicare subscribers who get behind on the co-payment are not terminated for that reason.

    
    

27. Petitioner's prescription benefit plan is part of a marketing strategy intended to attract Medicare subscribers. Petitioner subsidizes the prescription benefit to attract subscribers. Without the necessary subscriber base, Petitioner would be forced to lay off a portion of its physician employee workforce.

    
    

28. Another portion of the Petitioner's subscriber base consists of school age children enrolled in the Healthy Kids Program (the Program). During the nine month period reflected in Petitioner's financial data, 7,130 children were enrolled in the Program. Enrollment in the program is open to all Volusia County school children who do not have health insurance and are not eligible for federal Medicaid health coverage. Approximately 80 percent of those enrolled fell below 135 percent of the federal poverty guideline.

    
    

29. The Florida Healthy Kids Corporation is empowered to enter into contracts with health care providers to provide health care benefits to participants. The idea is to provide children who would not otherwise receive coverage with regular health care.

    
    

30. Petitioner entered into a competitive bidding process to act as the Volusia area provider for the Healthy Kids Program.

    
    

31. Participation in the Program requires the Petitioner to provide health care services to those children who qualify for admission into the program. The Petitioner receives a monthly premium payment per child based upon enrollment.

    This rate is set by the competitive bidding process. For the period of time reflected in the Petitioner's nine month financial data, the rate was $46.50 per month. This rate generated a surplus. The rate is presently $43 per month.

    
    

32. The Program is funded by a combination of state and local tax dollars and premium contributions from parents. Parental contributions are based on a sliding scale which adjusts for income. Parents with incomes below federal poverty guidelines do not have to contribute towards the premium payment; any difference is made up by state and local tax dollars. That a percentage of children live at or below a federal poverty guideline has no demonstrated affect on the cost of Petitioner's services to those children.

    
    

33. Petitioner does not establish the economic guidelines used to fix a parent's share of the premium. Petitioner does not receive more or less revenue based upon the income status of a parent or child. Petitioner is not aware of the particular economic status of individual children enrolled in the Program.

    
    

34. Petitioner does not provide children in the Program with medical services for free or at a substantially reduced cost to those unable to pay. The Healthy Kids Corporation, in cooperation with state and local governments,

    provides the subsidy for enrollment of children in families with an income at or below the federal poverty guidelines.

    
    

    CONCLUSIONS OF LAW

    
    

35. The Division of Administrative Hearings has jurisdiction over the subject matter of this proceeding and the parties thereto pursuant to Section 120.57(1), Florida Statutes (1995).

    
    

36. Petitioner seeks an exemption from tax. It is well recognized that tax exemptions must be construed strictly against the taxpayer seeking their benefit. E.g., Capital City Country Club v. Tucker, 613 So.2d 448, (Fla. 1993). "While doubtful language in taxing statutes should be resolved in favor of the taxpayer, the reverse is true in construction of exceptions and exemptions from taxation." Department of Revenue v. Skop, 363 So.2d 678, 680 (Fla. 5th DCA 1980).

    
    

37. The burden of proof in this case is on the Petitioner to show by clear evidence that it is entitled to a sales tax exemption. Green v. Pederson, 99 So.2d 292, 296 (Fla. 1957).

    
    

38. Section 212.08(7)(o)2., Florida Statutes (1995), states in pertinent part that, "The provisions of this section . . . shall be strictly defined, limited and applied in each category."

    
    

39. To demonstrate that it is entitled to a consumer's certificate of exemption from sales and use tax, an applicant must show that it meets all the criteria of one of the definitions under Section 212.08(7), Florida Statutes. See Gainesville Amateur Radio Society, Inc. v. Department of Revenue, D.O.A.H. Case Number 94-1200 (Final Order dated June 23, 1995). An organization that meets only part of a category's requirements is not eligible for an exemption certificate.

    
    

40. Petitioner is claiming an exemption as a charitable institution.

    
    

41. Petitioner must show that it is a non-profit entity whose sole or primary function is to provide one of the seven services listed in Section

    212.08(7)(o)2.b., Florida Statutes or raise funds for organization which provide one of the seven services.

    
    

42. Section 212.08(7)(o)2.b, Florida Statutes, defines "charitable institution" as:

    
    

    1. nly nonprofit corporations qualified as nonprofit pursuant to s.501(c)(3), United States Internal Revenue Code of 1954, as amended, and other nonprofit entities, the sole or primary function of which is to provide, or to raise funds for organizations which provide, one or more of the following services if a reasonable percentage of such service is provided free of charge, or at a

       substantially reduced cost, to persons, animals, or organizations that are unable to pay for

       such service:

       1. Medical aid for the relief of disease, injury, or disability;

       2. Regular provision of physical necessities such as food, clothing, or shelter;

       3. Services for the prevention of or rehabilitation of persons from alcoholism or drug abuse; the prevention of suicide; or the alleviation of mental physical, or sensory health problems;

       4. Social welfare services including adoption placement, child care, community care for the elderly, and other social welfare services which clearly and substantially benefit a client population which is disadvantaged or suffers

          a hardship;

       5. Medical research for the relief of disease, injury, or disability;

       6. Legal services; or

       7. Food, shelter, or medical care for animals or adoption services, cruelty investi- gations, or education programs concerning animals; and the term includes groups providing volunteer staff to organizations designated as charitable institutions under this sub-paragraph; nonprofit organizations the sole or primary purpose of which

          is to coordinate, network, or link other institutions designated as charitable institutions under this sub- paragraph with those persons, animals, or organi- zations in need of their services; and nonprofit national, state, district, or other governing, coordinating, or administrative organizations the sole or primary purpose of which is to represent

          or regulate the customary activities of other institutions designated as charitable institutions under this sub-paragraph. Notwithstanding any other requirement of this section, any blood bank that relies solely upon volunteer donations of blood and tissue, that is licensed under chapter 483, and that qualifies as tax exempt under s 501(c)(3) of the

          Internal Revenue Code constitutes a charitable institution and is exempt form the tax imposed by this part.

          
          

43. Rule 12A-1.001(3)(g)3.d, Florida Administrative Code, defines "sole or primary function" as follows:

    
    

    [A] charitable organization, excluding hospitals, must establish and support its function as providing or raising funds for services outlined in subpara- graphs 1. and 2. above, by expending in excess of

    50.0 percent of the charitable organization's expenditures towards referenced charitable concerns, within the charitable organization's most recent fiscal year.

    
    

44. Rule 12A-1.001(3)(g)4.a., Florida Administrative Code, defines "reasonable percentage" as follows:

    
    

    [T]he charitable services provided without cost to those unable to pay for institutions, other than hospitals, will be determined by the particular circumstances of each institution.

    
    

45. Rule 12A-1.001(3)(g)3.a.I., Florida Administrative Code, defines "Persons unable to pay" as follows:

    
    

    [P]ersons whose annual income is 150 percent or less of the current Federal Poverty Guidelines or whose uncompensated hospital charges exceed 25 percent of their annual family income for the preceeding 12 months. A charity day shall be computed from the amount of uncompensated services to persons unable to pay. However,

    in no case shall any of the hospital's charges for an individual or family whose income exceeds four (4) times the Federal Poverty Level for a family of four be considered charity days.

    
    

46. The Petitioner is a nonprofit corporation and so meets this requirement of 212.08(7)(o)b, Florida Statutes. The Respondent has agreed that the Petitioner's primary purpose is to provide a charitable service - medical aid for the relief of disease, injury, or disability. Therefore, Petitioner meets this requirement of the statute.

    
    

47. The thrust of Petitioner's argument rests on the contention that it is entitled to an exemption certificate if it can show that it provides medical aid to Medicare recipients and to children with family incomes which are below federal poverty guidelines. However, that is not the statutory test.

    
    

48. The statutory test asks whether a reasonable percentage of the charitable service is provided free of charge, or at a substantially reduced cost to persons unable to pay. Id,. Rule 12A-1.001(3)(g)1.b., Florida Administrative Code.

    
    

49. Rule 12A-1.001(3)(g)3.d., Florida Administrative Code defines "substantially reduced cost" to mean "the normal charge, market price, or fair

    market value to a purchaser or recipient, diminished in an amount of considerable quantity."

    
    

50. No testimony was introduced to show that Petitioner's medical services were provided to Medicare subscribers for considerably less than the market price generally. In fact, the testimony showed that the Petitioner received market price for providing Medicare services.

    
    

51. Petitioner does not provide medical aid to Medicare subscribers for free or at a substantially reduced cost, since Petitioner is reimbursed by the federal government at the capitation rate for providing medical aid to Medicare subscribers. The capitation rate does not reflect an individual's economic status if they are eligible for Medicare due to age. Petitioner receives the same amount from the federal government as do its area's competitors. When a Medicare recipient agrees to subscribe to Petitioner's plan, the subscriber pays for medical aid provided by turning the available federal benefit over to Petitioner.

    
    

52. The fact that eight percent of the Volusia County Medicare population is at or below a particular federal poverty guideline has no demonstrated affect on the cost of Petitioner's services to those Medicare subscribers. Petitioner has failed to demonstrate that it has provided medical services to any portion of its Medicare subscribers for free, or at a substantially reduced cost.

    
    

53. Petitioner's maintains that its pharmacy expense for Medicare subscribers is greater than the total supplemental premiums received. The Medicare expense figure displayed in the Petitioner's financial information for the nine-month period reflects the cost of all benefits provided to Medicare subscribers and breaks out pharmacy expense cost. Proof that expenditures exceed costs is not relevant to the determination of whether Petitioner provides medical services for free or at a substantially reduced cost to any particular person. Proof that a particular component of the medical service provided by Petitioner requires a greater expenditure than the revenue generated by that service is not material.

    
    

54. Proof that a particular component of the medical services provided by the Petitioner was unprofitable does not support the "ultimate" fact asserted by the Petitioner - that eight percent of its total Medicare expenditure should be considered to have been provided for free, or at a substantially reduced charge, to those unable to pay.

    
    

55. The price for the Healthy Kids Program was the product of competitive bidding.

    
    

56. Under the administrative rule, those several factors which are considered in determining whether a "reasonable percentage" of services are provided a substantially reduced cost never come into play. Rule 12A- 1.001(3)(g)4.a., Florida Administrative Code. Such factors are only relevant once a Petitioner shows that the charitable service is provided free of charge, or at a substantially reduced rate.

    
    

57. Petitioner has failed its burden to show clearly that it meets the statutory criteria. It has failed to substantiate that it provided its services "free of charge" or at a "substantially reduced cost." It also failed to show that the Medicare recipients and children enrolled in the program are "unable to pay" for medical services. Petitioner does not provide any percentage of its medical services for free or at a reduced cost to these subscribers. Petitioner

    receives the same reimbursement without regard to an individual's financial status. Since Petitioner does not know the financial status of individual subscribers, it cannot reduce the cost to its subscribers because of the subscriber's financial status.

    
    

58. Petitioner put forth no persuasive evidence to show that its expenditure of any surplus revenue generated by the Program qualifies it as a "charitable institution" under Section 212.08(7)(o), Florida Statutes. Every nonprofit entity must do something with any available excess revenue it might generate. The Petitioner appears to allocate excess revenue generated from operations to the Halifax Hospital Taxing District and to the Florida Healthy Kids Corporation, both worth-while causes. But any such allocation does not serve to bolster a claim by the Petitioner that it is using these excess funds to provide medical aid free of charge or at substantially reduced cost to persons who are unable to pay.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that the Department of Revenue enter a Final Order denying a consumer's certificate of exemption to Petitioner.

DONE and ORDERED this 26th day of November, 1996, in Tallahassee, Florida.

DANIEL M. KILBRIDE

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(904) 488-9675 SUNCOM 278-9675

Fax Filing (904) 921-6847

Filed with the Clerk of the Division of Administrative Hearings this 26th day of November, 1996.

COPIES FURNISHED:

Pamela J. Thomas, Esquire Florida Health Care Plans 1340 Ridgewood Avenue Holly Hill, Florida 32117

Kevin J. O'Donnell, Esquire Department of Revenue

Post Office Box 6668 Tallahassee, Florida 32314-6668

Linda Lettera Department of Revenue

204 Carlton Building Tallahassee, Florida 32399-0100

Larry Fuchs Executive Director

Department of Revenue

104 Carlton Building Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15 days from the date of 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: 96-002857

Orders for Case No: 96-002857