STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ADVENTIST HEALTH SYSTEMS/ ) SUNBELT, INC., d/b/a FLORIDA ) HOSPITAL, EAST, )

)

Petitioner, )

)

vs. ) Case No. 97-2931

)

AGENCY FOR HEALTH CARE )

ADMINISTRATION, )

)

Respondent. )

)

RECOMMENDED ORDER

A hearing was held in this case in Tallahassee, Florida, on April 13, 1999, before Arnold H. Pollock, an Administrative Law Judge with the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Joanne B. Erde, Esquire

Broad and Cassel Miami Center Suite 3000

201 South Biscayne Boulevard Miami, Florida 33131

Jonathan E. Sjostrom, Esquire Steel, Hector & Davis, LLP

215 South Monroe Street Suite 601

Tallahassee, Florida 32301-1804

For Respondent: Mark S. Thomas, Esquire

Madeline McGuckin, Esquire Agency for Health Care

Administration 2727 Mahan Drive

Fort Knox Building 3, Suite 3431

Tallahassee, Florida 32308

STATEMENT OF THE ISSUE

The issue for consideration in this case is whether the Agency for Health Care Administration is required by law and rule of the Agency to include the gain or loss on the sale of depreciable assets as the result of a sale or disposal, in the calculation of Medicaid allowable costs.

PRELIMINARY MATTERS

By Petition for Administrative Hearing filed June 10, 1997, Petitioner challenged the Agency's determination of Medicaid reimbursement per diem rates and reimbursement for the period October 24, 1984 through December 31, 1990. The matter was forwarded to the Division of Administrative Hearings for formal hearing on June 23, 1997, but on July 8, 1997, after the issuance of the Division's Initial Order, the parties filed two Joint Motions for Extension of Time to Respond to Initial Order, citing their efforts at settlement of this matter without formal hearing.

By Notice of Hearing dated September 26, 1997, Administrative Law Judge Mary Clark set the matter for hearing on March 2 and 3, 1998 in Tallahassee but, based on several motions for abeyance and continuance from the parties, the hearing was delayed repeatedly until, on December 30, 1998, Judge Clark denied Petitioner's request to enforce an alleged settlement of the issues, and set the matter for hearing in Tallahassee on March 2, 1999. Thereafter, on the basis of a telephone

conference hearing held on February 23, 1999, at the request of Petitioner, the matter was reset for April 13 and 14, 1999, at which time the hearing was held as scheduled.

At the hearing, Petitioner presented the testimony of William G. Nutt, director of reimbursement for Petitioner, Adventist Health System; Roy Rydell Samuel, the Medicaid cost reimbursement planning administrator for the Agency for Health Care Administration; and John A. Owens, regulatory analyst supervisor for the Agency. Petitioner also introduced Petitioner's Exhibits 2, 4, 6 and 7. Respondent also presented the testimony of John A. Owens, a Certified Public Accountant, as its own witness; and presented the testimony of Carey Franklin Britt, a branch audit supervisor with First Coast Service Operations, a wholly-owned subsidiary of Blue Cross-Blue Shield of Florida, responsible for the auditing of the Medicare and Medicaid cost reports submitted for reimbursement. Respondent also introduced Respondent's Exhibits A and B. The parties also introduced Joint Composite Exhibit 1.

A Transcript of the proceedings was provided and subsequent to the receipt thereof, both counsel submitted post-hearing matters which were carefully considered in the preparation of this Recommended Order.

FINDINGS OF FACT

1. Prior to the hearing, the parties submitted a Joint Stipulation which is incorporated in part herein as follows:

   1. Petitioner purchased Orlando General Hospital ("OGH"), Medicaid provider number 120065, on December 31, 1990.

      
      

   2. Upon its sale, OGH merged into and became part of Adventist Health System/Sunbelt, Inc., wherein after it was known as Adventist Health System/Sunbelt, Inc., d/b/a Florida Hospital East ("Florida Hospital East").

      
      

   3. Adventist Health System/Sunbelt, Inc., d/b/a Florida Hospital East is a wholly owned subsidiary of Adventist Health System Sunbelt Healthcare Corporation.

      
      

   4. Florida Hospital East assumed all of the assets and liabilities of OGH.

      
      

   5. OGH filed a terminating cost report for the fiscal period ending December 31, 1990.

      
      

   6. On December 31, 1990, the date of sale of OGH to Petitioner, OGH incurred a loss on the sale of the hospital, a depreciable asset.

      
      

   7. The loss on the sale of OGH was included on both OGH's Medicaid and Medicare terminating cost reports.

      
      

   8. A loss on the sale of a depreciable asset is the amount that the net book value of the asset sold exceeds the purchase price.

      
      

   9. A gain or loss on the sale of a depreciable asset is a capital cost.

      
      

   10. Due to the mechanism of the cost report, a loss on the sale of a depreciable asset is divided into "periods" based upon the time period to which the loss relates. The portion of the loss related to the fiscal year in which the asset is sold is referred to as a "current period" loss. The portion of the loss that relates to all fiscal years prior to the year in which the asset is sold is referred to as a "prior period" loss.

   11. Gains and losses related to the current period are included on Worksheet A of the Medicare and Medicaid cost report.

       
       

   12. Current period capital costs flow to Worksheet B-II Part and B Part III [sic] of the Medicaid cost report.

       
       

   13. Gains and losses related to the prior period are included on Worksheet E of the Medicare and Medicaid cost reports.

       
       

   14. OGH's current period is the fiscal year ending 12/31/90.

       
       

   15. OGH's prior periods in which it participated in the Medicaid Program are 10/24/84 through 12/31/89.

       
       

   16. OGH's audited Medicaid cost report included in allowable Medicaid costs a loss on the sale of OGH related to the current period.

       
       

   17. OGH's audited Medicaid cost report did not include in allowable Medicaid costs a loss on the sale of OGH related to the prior periods.

       
       

   18. The loss on the sale of OGH related to the current period was included in Worksheet A of OGH's audited Medicaid cost report. These costs, including the loss on the sale of OGH, flowed to Worksheet B Part II.

       
       

   19. OGH's audited Medicare cost report included as allowable Medicare costs the loss on the sale of OGH related to both the current and prior periods in the amount of

       $9,874,047.

       
       

   20. The loss from the sale of OGH related to the current period was included on Worksheet A of OGH's audited Medicare cost report.

       
       

   21. The costs from Worksheet A of OGH's audited Medicare cost report flowed to

       Worksheet B Part II of OGH's audited Medicare cost report.

       
       

   22. The loss related to the prior period was included on Worksheet E Part B of OGH's audited Medicaid cost report.

       
       

   23. The Agency utilizes costs included on Worksheet A of the Medicaid cost report to calculate Medicaid allowable costs.

       
       

   24. The Agency utilizes the capital costs included on Worksheet B Part II and/or B Part III to calculate allowable Medicaid fixed costs.

       
       

   25. The Agency does not utilize costs included on Worksheet E Part III to calculate Medicaid allowable costs.

       
       

   26. The Agency reimburses providers based upon Medicaid allowable costs.

       
       

       aa. The Agency did not include the portion of the loss on the sale of OGH related to the prior periods in the calculation of the OGH's Medicaid allowable costs.

       
       

       bb. Blue Cross and Blue Shield of Florida, Inc. (Intermediary), contracted with the Agency to perform all audits of Medicaid cost reports.

       
       

2. Agency reimbursement to Medicaid providers is governed by Florida's Title XIX Inpatient Hospital Reimbursement Plan (Plan), which has been incorporated in Rule 59G-6.020, Florida Administrative Code. The Plan provides that Medicaid reimbursement for inpatient services shall be based upon a prospectively determined per diem. The payment is based upon the facility's allowable Medicaid costs which include both variable

   costs and fixed costs. Fixed costs include capital costs and allowable depreciation costs.

3. The per diem payment is calculated by the Agency based upon each facility's allowable Medicaid costs which must be taken by the agency from the facility's cost report. Capital costs, such as depreciation, are found on Worksheet B, Part II and Part III.

4. The Plan requires all facilities participating in the Medicaid program to submit an annual cost report to the Agency. The report is to be in detail, listing their "costs for their entire reporting year making appropriate adjustment as required by the plan for the determination of allowable costs." The cost report must be prepared in accordance with the Medicare method of reimbursement and cost finding, except as modified by the Plan.

5. The cost reports relied upon by the Agency to set rates are audited by Blue Cross/Blue Shield of Florida, Inc. which has been directed by the Agency to follow Medicare principles of reimbursement in its audit of cost reports.

6. Prior to January 11, 1995, the Plan did not expressly state whether capital gains or losses relating to a change of facility ownership were allowable costs. The 1995 amendment to the Plan contained language expressly providing "[f]or the purposes of this plan, gains or losses resulting from a change of ownership will not be included in the determination of allowable cost for Medicaid reimbursement." No change was made by the

   amendment to the Medicare principles of reimbursement regarding the treatment of gains and losses on the sale of depreciable assets.

7. The Medicare principles of reimbursement provides that gains and losses from the disposition of depreciable assets are includable in computing allowable costs. The Provider Reimbursement Manual (HIM-15)(PRM), identifies the methods of disposal for assets that are recognized. They include a bona fide sale of depreciable assets, but do not mention a change of ownership. PRM Section 132 treats a loss on a sale of a depreciable asset as an adjustment to depreciation for both the current and periods.

8. Depreciable assets with an expected life of more than two years may not be expensed in the year in which they are put into service. They must be capitalized and a proportionate share of the cost expensed as depreciation over the life of the property. To do so, the provider must estimate the useful life of the property based upon the guidelines of the American Hospital Association, and divide the cost by the number of years of estimated life. It is this yearly depreciation figure which is claimed on the cost report and which is reimbursed.

9. When a depreciable asset is sold for less than book value (net undepreciated value), the provider suffers a loss. Petitioner claims that Medicare holds that in such a case it must be concluded that the estimated depreciation was erroneous and

   the provider did not receive adequate reimbursement during the years the asset was in service. Medicare accounting procedures do not distinguish between the treatment of a loss on the sale of depreciable assets as related to current and prior periods. PIM Section 132 requires that Medicare recognize the entire loss as an allowable cost for both the current and prior periods, and Medicare treated Petitioner's loss from the sale of its facility as an allowable cost for Medicare reimbursement under both current and prior periods.

10. With the adoption of the January 1995 amendment, however, the wording of the state plan was changed to specifically prohibit gains or losses from a change of ownership from being included in allowable costs for Medicaid reimbursement. This was the first time the state plan addressed gains and losses on the disposal of depreciable assets resulting from a change of ownership. The Agency contends, however, that it has never reimbursed for losses on disposal of property due to a change of ownership, and that the inclusion of the new language was to clarify a pre-existing policy which was being followed at the time of the 1995 amendment, and which goes back to the late 1970s. It would appear, however, that the policy was never written down; was never conveyed to Blue Cross/Blue shield; was never formally conveyed to Medicaid providers; and was never conveyed to the community at large. When pressed, the Agency

    could not identify any specific case where the policy was followed by the Agency.

11. While admitting that it is Agency practice not to treat losses from the sale of depreciable assets in prior periods as an allowable cost, Petitioner contends that it has been the Agency's practice to treat the loss on the sale of depreciable assets relating to the current period as an allowable cost, and cited several instances where this appears to have been done. The Agency contends that any current period losses paid were paid without knowledge of the Agency, in error, and in violation of the plan.

12. On October 25, 1996, the Agency entered a Final Order in a case involving Florida Hospital/Waterman, Inc., as Petitioner, and the Agency as Respondent. This case was filed by the Petitioner to challenge the Agency's treatment of the loss on the sale of Waterman Medical Center, Inc., another of Adventist Health Systems/Sunbelt Healthcare Corporation, and the Final Order in issue incorporated a stipulation into which the parties had entered and which addressed the issue in question here. The stipulation included certain position statements including:

    1. A loss on the sale of depreciable assets is an allowable cost under the Medicare Principles of Reimbursement.

       
       

    2. The State Plan does not specify that the loss on the sale of a depreciable asset is to be treated in a manner different than under the Medicare Principles of Reimbursement. Thus the loss on the sale of a depreciable

       asset is an allowable cost under the State Plan.

       
       

    3. The Agency agrees, in accordance with the Medicare Principles of Reimbursement, that under the terms of the State Plan, prior period losses for Waterman will be allocated to prior periods and included in the calculation of the per diem and per visit rates.

       
       

       According to William G. Nutt, Petitioner's director of reimbursement, the only difference between the facts of the Waterman case and the instant case is that they relate to the sale of different facilities.

13. The treatment of loss on the sale of depreciable assets as outlined in the Waterman stipulation is in conflict with the amended Plan and with the unwritten and unuttered Agency policy as urged by the Agency in this case. The Agency agreed in one case to a treatment of loss which it now rejects in the instant case.

14. Petitioner urges that subsequent to the settlement of the Waterman case, but before the instant case was set for hearing, the parties engaged in settlement negotiations during which, according to counsel for the Agency, they made "significant" progress toward applying the settlement in the Waterman case to the current case. In a motion filed to delay the setting of this case for hearing, counsel for the Agency indicated the parties were "finalizing" settlement to resolve the case without resorting to a final hearing, and in a follow-up agreed motion for continuance, advised that the "parties [had]

    finalized a settlement document [which they were] in the process of executing. The settlement agreement reached by the parties was signed by a representative of the Petitioner and then forwarded to the Agency for signature. The document was not signed by the Agency, and when Petitioner sought enforcement of the "settlement" by an Administrative Law Judge of the Division of Administrative Hearings, the request was denied as being outside the jurisdiction of the judge, and the matter was set for hearing.

    CONCLUSIONS OF LAW

    
    

15. The Division of Administrative Hearings has jurisdiction over the parties and the subject matter in this case. Section 120.57(1), Florida Statutes.

16. The Plan is incorporated into law by the Agency's Rule 59G-6.020, Florida Administrative Code, and requires the Agency to reimburse inpatient providers through a per diem that is based upon allowable Medicaid costs. These allowable Medicaid costs shall be determined in accordance with Medicare Principles of Reimbursement.

17. The evidence presented by the Agency witnesses suggests it was not Agency intent to reimburse providers for capital losses due to the sale of a facility. The parties agree that the provider is to be reimbursed for capital losses pursuant to Medicare reimbursement principles. The issue for determination here is whether the Agency's determination that reimbursement is

    not authorized when the loss is due to the disposition of assets due to sale of a facility is correct.

18. The Plan in effect at the time of Petitioner's purchase of Orlando General Hospital in 1990 provided for the treatment of reimbursement of losses on depreciable assets consistent with the Medicare Principles of Reimbursement. The Plan in effect at that time did not contain any modification of those principles when applied to Medicaid reimbursement. The amendment of the Plan in January 1995 to specifically exclude reimbursement for losses on the sale of depreciable assets due to transfer of ownership of the facility was the first publication of this Agency position. Any pre-existing Agency policy consistent with this amendment iteration in the Plan had not been reduced to writing or disseminated to the public before that time.

19. Notwithstanding the Agency is not bound in this case by its treatment of similar issues in the Waterman case, the final order entered therein gives an insight into Agency thinking at the time. Though the facts of the Waterman case were not introduced into evidence here, the stipulation entered into in that case contains very definite indications of the Agency's acceptance of the dictates of the Medicare Principles of Reimbursement as called for in PRM Section 132. Nothing has been shown to contradict this except the testimony of Agency representatives that the 1995 amendment was no more than a codification of the Agency's pre-existing policy. It is

    significant that that "policy" was not shown to have ever been formalized or applied by the Agency in word or deed.

20. Careful examination of the evidence in this case, disregarding the consistent provisions of the "settlement negotiations" conducted herein, leads to the inescapable conclusion that the Agency is attempting to impose a standard for reimbursement which, at the time in issue, was inconsistent with its own rules. While Agencies are given wide latitude in the interpretation of their own rules, such interpretation must be reasonable. If not, or if it is clearly erroneous, it cannot stand. Legal Environmental Assistance Foundation v. Board of County Commissioners, 642 So. 2d 1081 (Fla. 1994).

21. The controversy here is not a challenge to the Agency's rule, nor is it a challenge to attempted rulemaking. The issue here is whether the Agency is properly applying its own standard for reimbursement, and, clearly, it is not.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that the Agency for Health Care Administration enter a Final Order including the loss on the sale of Orlando General Hospital as an allowable cost for determining Petitioner's entitlement to Medicaid reimbursement for both current and prior years.

DONE AND ENTERED this 30th day of June, 1999, in Tallahassee, Leon County, Florida.

ARNOLD H. POLLOCK

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6947 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 30th day of June, 1999.

COPIES FURNISHED:

Joanne B. Erde, Esquire Broad and Cassel

Miami Center Suite 3000

201 South Biscayne Boulevard Miami, Florida 33131

Jonathan E. Sjostrom, Esquire Steel Hector & Davis LLP

215 South Monroe Street Suite 601

Tallahassee, Florida 32301-1804

Mark S. Thomas, Esquire Madeline McGuckin, Esquire Agency for Health Care

Administration 2727 Mahan Drive

Fort Knox Building 3, Suite 3431

Tallahassee, Florida 32308

Sam Power, Agency Clerk Agency for Health Care

Administration 2727 Mahan Drive

Fort Knox Building 3, Suite 3431

Tallahassee, Florida 32308

Julie Gallagher General Counsel

Agency for Health Care Administration

2727 Mahan Drive

Building 3

Tallahassee, Florida 32308

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: 97-002931

Orders for Case No: 97-002931