The Issue The issue is whether, for the 2001-02 cost-reporting year, Respondent is entitled to recoupment of Medicaid reimbursements that it paid to Petitioner, in connection with its operation of numerous intermediate care facilities for the developmentally disabled (ICF/DD) and, if so, what is the amount of the overpayments.
Findings Of Fact The Audit For over 40 years, Petitioner has operated as a not- for-profit provider of ICF/DD services. These cases involve a compliance audit of ten of Petitioner's 2001-02 cost reports. During 2001-02, Petitioner operated over 300 ICF/DDs-- both owned and leased--in eight states and earned an annual revenue of over $90 million. A typical facility is a group home serving 24 developmentally disabled residents, although some of Petitioner's facilities serve much larger numbers of residents. Respondent outsourced the compliance audit of Petitioner's 2001-02 cost reports, as well as a similar audit of Petitioner's 2002-03 cost reports, which are not involved in these cases. Prior to completing the audit, the outside auditor withdrew from the engagement because it had concluded that it would be required to issue a disclaimer of opinion--an auditing nonopinion, as described below. In late 2005, two and one-half years after the outside auditor had commenced its work, Respondent's staff auditors assumed responsibility for the compliance audit. After examining the outside auditor's workpapers, Respondent's staff auditors found it necessary to re-perform at least some of the field work. By letter dated January 3, 2006, Respondent advised Petitioner of this development and, among other things, requested information about 16 identified motor vehicles and a statement concerning the 1981 Piper airplane noted in the May 29, 2002 Insurance sub-committee minutes. What was the plane used for and in what cost centers and accounts are the costs recorded? Possible costs would include fuel, insurance, depreciation, maintenance, and any salaries. Petitioner responded by a letter dated March 3, 2006, but this letter is not part of the record. Evidently, not much audit activity took place for the next couple of years. By letter dated January 25, 2008, Respondent advised Petitioner of several potential audit adjustments and noted that Petitioner had not provided the "detail general ledger" and information on aircraft and vehicles that Respondent had sought in its January 3, 2006 letter. In March 2008, Respondent's staff auditor visited Petitioner's main office in Miami and audited Petitioner's records for three days. He confirmed the existence of a 1981 Piper aircraft and a second aircraft, which he was unable to identify. Respondent's staff auditor determined that he still lacked information necessary to determine if Petitioner's aircraft expenses were reasonable when compared to common- carrier expenses. By letter dated May 12, 2008, Respondent informed Petitioner that, after the March 2008 onsite visit, several issues remained. Among the issues listed were the costs of two private aircraft, for which Respondent requested access to all flight and maintenance logs and detailed documentation of business purpose of trips, identification of aircraft bearing two cited tail numbers, the names of pilots on Petitioner's payroll, and any other cost information justifying the cost of the aircraft compared to common-carrier costs. By letter dated June 13, 2008, Petitioner responded to the May 12, 2008 letter. This letter states that the 1981 Piper was sold at an undisclosed time, and the maintenance logs had been delivered with the plane. The letter supplies registration documentation for the two tail numbers, a personnel file checklist for the pilot, and justification for the cost of operating an aircraft compared to the cost of using common carriers. On December 4, 2008, Respondent's staff auditor conducted an exit conference by telephone with Petitioner's principals and its independent auditor. Respondent's staff auditor proposed audit adjustments of various cost items that the auditor had guessed involved the aircraft. Petitioner did not agree with these proposed audit adjustments or various others that Respondent's staff auditor proposed. For the next 17 months, neither side contacted the other, until, on May 12, 2010, Respondent issued examination reports for the 2001-02 cost-reporting period. It had taken Respondent over seven years to issue examination reports based on cost reports that Petitioner had filed on February 3, 2003, for a cost-reporting year that had ended almost two years earlier. Cost Items in Dispute On January 28, 2011, Respondent filed a Notice of Filing of a spreadsheet that lists all of the adjustments that have been in dispute. During the hearing, the parties announced the settlement of other cost items. As noted by the Administrative Law Judge, these adjustments are shown on the judge's copy of this filing, which is marked as Administrative Law Judge Exhibit 1 among the original exhibits. Most of the items in dispute are Home Office costs, which are allocated to each of Petitioner's audited facilities. With the reason for disallowance, as indicated in the examination reports, as well as the Schedule of Proposed Auditing Adjustment (SOPAA) number, the Home Office costs in dispute are: Other consultants. "To disallow out of period costs." $7,000. SOPAA #19. Professional fees--other. "To disallow out of period costs." $1,500. SOPAA #20. Administrative Travel. "To disallow out of period costs." $1,038. SOPAA #21. Transportation--repairs. "To remove airplane costs not documented as being reasonably patient care related." $36,496. SOPAA #22. Transportation--fuel and oil. "To remove airplane costs not documented as being reasonably patient care related." $78,336. SOPAA #22. Insurance. "To remove airplane costs not documented as being reasonably patient care related." $24,000. SOPAA #22. Transportation--Depreciation. "To remove airplane costs not documented as being reasonably patient care related." $106,079. SOPAA #22. Transportation--Interest. "To remove airplane costs not documented as being reasonably patient care related." $57,714. SOPAA #22. Staff Development Supplies. "To remove unreasonable cash awards." SOPAA #26. At the conclusion of the hearing, the Administrative Law Judge encouraged the parties to try to settle as many of the issues as they could and, as to the aircraft issues, consider entering into a post-hearing stipulation due to the lack of facts in the record concerning this important issue. The parties produced no post-hearing stipulation and have not advised the Administrative Law Judge of any settled issues. The Administrative Law Judge has identified the remaining issues based on the issues addressed in the parties' Proposed Recommended Orders. With two exceptions, the remaining issues are all addressed in each Proposed Recommended Order. One exception is the Country Meadows return-on-equity issue, which neither party addressed. There is a small discrepancy between the amount of this adjustment on Administrative Law Judge Exhibit 1 and elsewhere in the record, so this issue may have been settled. If so, Respondent may ignore the portions of the Recommended Order addressing it. Also, Respondent failed to address the $123,848 in transportation salaries and benefits. Based on the services corresponding to these expenses and the motivation of Respondent's staff auditor in citing these reimbursements as overpayments, as discussed below, the decision of Respondent's counsel not to mention these items is understandable. The remaining issues are thus: Burial costs of $4,535 at the Ambrose Center. Return on equity adjustment of $3,418 at the Country Meadows facility. Legal fees of $4,225 for the Bayshore Cluster as out-of-period costs. Inclusion of state overhead of $9,529 at Mahan Cluster, $9,529 at Dorchester Cluster, and $9,529 at Bayshore Cluster. Transportation Salaries and Benefits of $123,848 at Main Office. Individual Cost Items Burial Costs After the death of an indigent resident at Petitioner's Ambrose Center, the family contacted Petitioner and informed it that they desired a burial, not a cremation, but could not afford to pay for any services. Petitioner's staff contacted several vendors about the cost of a simple burial service and, after negotiating a discount due to the unfortunate circumstances, selected a vendor. The vendor duly performed the burial service, which was attended by survivors of the deceased's group home, and Petitioner paid the vendor $4,535 for the service. For a burial service, the amount paid was reasonable. Petitioner's staff determined that the burial would have therapeutic value to the surviving residents of the deceased's group home. The quality of life of the residents is enhanced to the extent that they identify with each other as family. Petitioner's staff justifiably determined that a burial service would help sustain these familial relationships by bringing to the survivors a sense of closure, rather than subjecting them to the jarring experience of an unmarked departure of their fellow resident from their lives. However, routine counseling or therapy could have achieved the same results at less cost than a burial service. Out-of-Period Costs The so-called out-of-period costs are $1,038 of rental-car fees, $1,500 of computer consultation fees, $4,225 of legal fees, and $7,000 of "duplicated" insurance broker services. "Out-of-period" means that the expenses were incurred, and should properly be reported, outside of the cost- reporting year ending June 30, 2002. Generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP) incorporate the principle of materiality. At least for the purpose of determining the cost-reporting year in which to account for an expense, the materiality threshold for Petitioner is tens of thousands of dollars. The out-of-period issue, which involves the integrity of the cost-reporting year, is different from the other issues, which involve the allowability of specific costs. The cost items under the out-of-period issue are all allowable; the question is in which cost-reporting year they should be included. The test of materiality is thus whether the movement of these cost items from one cost-reporting year to an adjoining cost-reporting year will distort the results and, thus, Petitioner's Medicaid reimbursements. Given Petitioner's revenues, distortion would clearly not result from the movement of the subject cost items, even if considered cumulatively. In theory, Petitioner could be required to amend the cost report for the year in which any of these expenses were incurred, if they were not incurred in the subject cost- reporting year. Unfortunately, by the time Respondent had generated the SOPAAs, the time for amending the cost reports for the adjoining cost-reporting years had long since passed, so a solution of amending another cost report means the loss of the otherwise-allowable cost. This result has little appeal due to Respondent's role in not performing the audit in a timely, efficient manner, but each out-of-period cost is allowable for different reasons. The car-rental expense arises out of an employee's rental of a car for business purposes in June 2001. The submittal and approval of the travel voucher, which are parts of the internal-control process, did not take place until after June 30, 2001. Although Petitioner's liability to the rental-car company probably attached at the time of the rental, the contingency of reimbursement for an improper rental was not removed until the internal-control process was completed, so it is likely that this is not an out-of-period expense. The legal expenses included services provided over the three months preceding the start of the subject cost-reporting year. The attorney submitted the invoice to Petitioner's insurer. After determining that Petitioner had not satisfied its applicable deductible, after June 30, 2001, the insurer forwarded the bill to Petitioner for payment. Absent evidence of the retainer agreement, it is not possible to determine if Petitioner were liable to the law firm prior to the insurer's determination that the payment was less than the deductible, so it is unclear whether this is an out-of-period expense. The computer-consulting work occurred about three months before the end of the preceding cost-reporting year, but the vendor did not bill Petitioner until one year later. This is an out-of-period expense. To the extent that these three items may have been out-of-period expenses, it is not reasonable to expect Petitioner to estimate these liabilities and include them in the preceding cost-reporting year. This is partly due to the lack of materiality explained above. For the car-rental and computer expenses, it is also unreasonable to assume that Petitioner's employees responsible for the preparation of the cost reports would have any knowledge of these two liabilities or to require them to implement procedures to assure timely disclosure of liabilities as modest as these. The last cost item is $7,000 for insurance broker services. This is not an out-of-period expense. In its audit, Respondent determined that this amount represents a sum that was essentially a duplicate payment for services over the same period of time to two different insurance brokers. This is a payment for services over the same period of time to two different insurance brokers for nonduplicated services reasonably required by Petitioner. Given the size and the nature of its operations, Petitioner has relatively large risk exposures that are managed through general liability, automobile liability, director and officer liability, property, and workers' compensation insurance. Paying premiums of $4-5 million annually for these coverages, which exclude health insurance, Petitioner retains insurance brokers to negotiate the best deals in terms of premiums, collateral postings, and other matters. Petitioner experienced considerable difficulty in securing the necessary insurance in mid-2001. At this time, Petitioner was transitioning its insurance broker services from Palmer and Kay to Gallagher Bassett. Difficulties in securing workers' compensation insurance necessitated an extension of the existing policy to July 15, 2001--evidently from its original termination date of June 30, 2001. Due to these market conditions, Petitioner had to pay broker fees to Palmer and Kay after June 30, 2001, even though, starting July 1, 2001, Petitioner began to pay broker fees to Gallagher Bassett. There was no overlap in insurance coverages, and each broker earned its fee, even for the short period in which both brokers earned fees. Employee Cash Awards Petitioner paid $8,500 in employee cash awards in the 2001-02 cost-reporting year as part of a new policy to provide relatively modest cash awards to employees with relatively long terms of service. For employees with at least 20 years of service, Petitioner paid $100 per year of service. The legitimate business purpose of these longevity awards was to provide an incentive for employees to remain with Petitioner, as longer-tenured employees are valuable employees due to their experience and lack of need for expensive training, among other things. The disallowance arose from the application of a nonrule policy that has developed among Respondent's staff auditors: employee compensation is not an allowable cost unless it is includible in the employee's gross income. The evident purpose of the nonrule policy is to exclude from allowable costs payments to employees who, due to their prominence in the ranks of the provider, are able to cause the provider to structure the payments so as to avoid their inclusion in the recipient's gross income (and possibly deprive a for-profit provider of an offsetting deduction for the payments). For the 2001-02 cost-reporting year, only three employees qualified for these payments. Two had 30 years of service, so each of them received $3,000, and one had 25 years of service, so he or she received $2,500. The total of the payments at issue is thus $8,500. The record contains ample support for the finding that the addition of $3,000 to the annual compensation paid to any of Petitioner's employees would not result in excessive compensation. Return on Equity During the cost-reporting year, Petitioner maintained $128,000 in a bank account dedicated for the use of the Country Meadows facility. This sum represented about three months' working capital for Country Meadows. At the time, Respondent encouraged providers to maintain cash reserves of at least two months' working capital, so this sum was responsive to Respondent's preferred working capital levels. Consistent with its purpose as working capital, funds in this account were regularly withdrawn as needed to pay for the operation of Country Meadows. The record does not indicate whether the bank paid interest on this account. Also, the concept of return on equity does not apply to a not-for-profit corporation such as Petitioner, which, lacking shareholders, lacks equity on which a return might be calculated or anticipated. State Overhead at Three Clusters This item involves three ICF/DD clusters that, at the time, were owned by, and licensed to, the State of Florida. Petitioner operated the facilities during the cost-reporting year pursuant to a lease and operating agreement. As in prior cost-reporting years, Respondent did not disallow the depreciation included in the subject cost reports for these three clusters. The record does not reveal whether Petitioner or the State of Florida bore the economic loss of these capital assets over time. But the treatment of depreciation costs is not determinative of the treatment of operating or direct care costs. During the subject cost-reporting year, for these three clusters, the State of Florida retained various operational responsibilities, including admissions. However, the costs at issue arise from the expenditures of the State of Florida, not the provider. The costs include the compensation paid to several, state-employed Qualified Mental Retardation Professionals, who performed various operational oversight duties at the three clusters, and possibly other state employees performing services beneficial to these three clusters. Petitioner never reimbursed the State of Florida for these costs. There is no dispute concerning the reasonableness of the compensation paid these employees by the State of Florida, nor the necessity of these services. The issue here is whether Petitioner is entitled to "reimbursement" for these costs, which amount to $5,139 per cluster, when the costs were incurred by the State of Florida, not Petitioner. Disallowed Transportation Costs and Airplane Costs The $123,848 in disallowed Main Office Transportation salary and benefits represents the salary and benefits of eight Main Office van drivers, who earn about $15,000 per year in pay and benefits. At least 40 residents of the Main Office are not ambulatory, but, like all of the other residents, need to be transported for medical, recreational, and other purposes. There probably remains no dispute concerning these expenses. They are reasonable and necessary. The explanation for why these costs were disallowed starts with the inability of Respondent's staff auditor to find the aircraft expenses in the financial records of Petitioner. It is not possible to determine why the audit failed to identify these expenses prior to the issuance of the examination report. On this record, the only plausible scenario is that Respondent's outside auditor was off-the-mark on a number of items while conducting the audit, Petitioner's representatives lost patience and became defensive, and, when the outside auditor withdrew from the engagement, Respondent's staff auditors, already fully engaged in other work, may not have had the time to add this substantial responsibility to their workload. It is clear, though, that, after the departure of Respondent's outside auditor, the audit failed due to a combination of the lack of Petitioner's cooperation and Respondent's lack of diligence. Unable to identify the aircraft expenses after years of auditing left Respondent with options. It could have continued the audit process with renewed diligence until it found the aircraft expenses. Or it could have declared as noncompliant the cost report, the underlying financial records, or Petitioner itself. Instead, Respondent converted the examination report from what it is supposed to be--the product of an informed analysis of Petitioner's financial records--to a demand to pay up or identify these expenses and, if related to aircraft, justify them. The problem with Respondent's choice is that, as noted in the Conclusions of Law, an audit requires Respondent to proceed, on an informed basis, to identify the expenses, analyze them, and, if appropriate, determine that they are not allowable--before including them as overpayments in an examination report. Proceeding instead to cite overpayments on the basis of educated guesses, Respondent entirely mischaracterized the $123,848 in transportation salaries and benefits, which did not involve any aircraft expenses. Respondent's educated guesses were much better as to the remaining items, which are $36,496 in transportation repairs, $78,336 in transportation fuel and oil, $24,000 in insurance, $106,079 in transportation depreciation, and $57,714 in transportation interest. But the process still seems hit-or-miss. Thinking that he had found the pilot's salary in the item for the van drivers' salaries, Respondent's staff auditor missed the pilot's salary, which was $30,000 to $40,000, as it was contained in an account containing $1.3 million of administrative salaries. Respondent's staff auditor also missed the hanger expense, which Petitioner's independent auditor could not find either. On the other hand, Respondent's staff auditor hit the mark with the $78,336 of fuel and oil, $106,079 of depreciation, and $36,496 in repairs--all of which were exclusively for Petitioner's aircraft. Respondent's staff auditor was pretty close with the transportation interest, which was actually $60,168. It is difficult to assess the effort of Respondent's staff auditor on insurance; he picked a rounded number from a larger liability insurance account, which includes aircraft insurance, but other types of insurance, as well. Respondent correctly notes in its Proposed Recommended Order that the auditing of aircraft expenses requires, in order, their identification, analysis, and characterization as allowable or nonallowable. As Respondent argues, the analysis must compare the aircraft expenses to other means of transportation or communication to determine the reasonableness of the aircraft expenses. As Respondent notes elsewhere in its Proposed Recommended Order, the analysis also must ensure that a multijurisdictional provider, such as Petitioner, has fairly allocated its allowable costs among the jurisdictions in which it operates. Although Respondent's staff auditor found a number of aircraft expenses, he did not try to compare these expenses with other means of travel or communication, so as to determine the reasonableness of these aircraft expenses, or determine if Petitioner had allocated these costs, as between Florida and other jurisdictions, in an appropriate manner. The failure of the examination report, in its treatment of the expenses covered in this section, starts with the failure to secure the necessary information to identify the expenses themselves, but continues through the absence of any informed analysis of these expenses. Respondent's staff auditor used the examination report's treatment of the items covered in this section as a means to force Petitioner both to identify and explain these costs. The fact that Respondent's staff auditor guessed right on many of the aircraft expenses does not mean that he had an informed basis for these guesses. At one point during his testimony, Respondent's staff auditor seemed pleasantly surprised that he had been as accurate as he was in finding these expenses. But, regardless of the basis that he had for the identification of these expenses, Respondent's staff auditor never made any effort to analyze the expenses that he had chosen to include in the examination report as aircraft expenses. Nor is the record insufficient to permit such analysis now. Among the missing data is the number of planes that Petitioner owned at one time during the subject cost-reporting year. It is now clear that, for awhile, the number was two, probably at the end of the cost-reporting year, but this was unknown at the time of the issuance of the examination report. It is unclear, even now, for how long Petitioner owned two planes, or whether it operated both planes during the same timeframe. Cost comparisons are impossible without the knowledge that the cost-comparison exercise is for one or two private aircraft. Likewise, Respondent lacked basic information about the aircraft, such as the planes' capacities and costs of operation, per hour or per passenger mile. Again, this information remains unknown, so it is still impossible to establish a framework for comparison to the costs of common carriers. The record includes a three-page log provided during the audit process by Petitioner to Respondent, which appears never to have analyzed it, probably due to its determination that it had not identified the aircraft expenses adequately. The log shows 118 trips for purposes other than maintenance or engineering during the subject cost-reporting year. The log shows the cities visited and a very brief description of the purpose of the trip. Not the detailed description requested by Respondent, the proffered description is often not more than the mention of a facility or meeting. The log does not show the duration of the trip, but often notes the number of persons on the plane. If the aircraft costs identified above, including the unassessed pilot salary, are divided by the number of trips, the per trip cost is about $2,600. Some trips list several persons, as many as seven. Some trips list only one or two persons. Some trips list "staff," so it is impossible to tell how many persons traveled. And some trips provide no information about the number of travelers. It is a close question, but these findings alone do not establish that the use of the aircraft was unreasonable when compared to common carriers. Also, Respondent lacked any information about the purpose of the trips, so as to be able to determine if they were necessary or whether they could have been accomplished by videoconference or telephone. And the hearing did not provide this information. Respondent's staff auditor also never considered allocation methods, which is understandable because this analysis would necessarily have followed the identification process, in which he justifiably lacked confidence, and the cost-comparison analysis, which he had never undertaken. At the hearing, Respondent's staff auditor briefly mentioned other allocation methods, but never criticized the approved allocation method used by Petitioner. Although an approved allocation method might not offset disproportionate travel expenses to West Virginia and Connecticut, the record is insufficient to determine that the chosen allocation method was inappropriate or transferred excessive expenses to Florida for Medicaid reimbursement.
Recommendation Based on the foregoing, it is RECOMMENDED that the Agency for Health Care Administration enter a Final Order determining that, for the 2001-02 cost- reporting year, Petitioner has been overpaid $23,370 (including $3,418 for return on equity, if not already settled), for which recoupment and a recalculation of Petitioner's per-diem reimbursement rate are required. DONE AND ENTERED this 25th day of April, 2011, in Tallahassee, Leon County, Florida. S ROBERT E. MEALE 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) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 25th day of April, 2011. COPIES FURNISHED: Daniel Lake, Esquire Agency for Health Care Administration 2727 Mahan Drive, Suite 3431 Tallahassee, Florida 32308 Steven M. Weinger, Esquire Kurzban Kurzban Weinger Tetzeli & Pratt, P.A. 2650 Soutwest 27th Avenue Miami, Florida 33133 Richard J. Shoop, Agency Clerk Agency for Health Care Administration 2727 Mahan Drive, Suite 3431 Tallahassee, Florida 32308 Justin Senior, General Counsel Agency for Health Care Administration 2727 Mahan Drive, Suite 3431 Tallahassee, Florida 32308 Elizabeth Dudek, Secretary Agency for Health Care Administration 2727 Mahan Drive, Suite 3431 Tallahassee, Florida 32308
Findings Of Fact Based on stipulations of the parties and on the testimony and exhibits presented at the hearing, I make the following findings of fact: Findings based on stipulations According to current records of the Department of Insurance, the Petitioner currently possesses a Certificate of Authority to do business in the State of Florida as a life insurer. Family Services Life Insurance Company Policy Form No. 01285-NV and Certificate No. 01285-NV-3 constitute out-of- state group forms filed and approved in the State of Nevada. The Petitioner filed its request for approval of its out-of-state group trust plan and certificate pursuant to section 627.5515(2), Fla. Stat. on September 29, 1986. The Department denied Petitioner's filing March 2, 1987. Petitioner gives a Certificate of Insurance at no cost to the consumer providing for 24 months of burial protection in exchange for their agreement to listen to a sales presentation on pre-need cemetery care. There is no requirement that the consumer actually purchase a pre-need cemetery plan to receive the Certificate of Insurance. The pre-need cemetery plan consists of the sale-of real or personal property and services connected therewith respecting an individual's burial. There is no identifiable and additional charge for the insurance which is given to all consumers attending the pre-need cemetery presentation. Findings based on evidence adduced at the hearing The Certificate of Insurance providing for 24 months of burial protection is provided to the prospective customer before the sales presentation, but the prospective customer must listen to the sales presentation. An additional condition to receipt of the Certificate of Insurance is non-ownership of other local cemetery property. The sales personnel of Service Corporation International ("SCI"), the Petitioner's parent company, use the 24 month burial protection plan in the actual sales presentation. At the close of the sales presentation, potential customers are shown what the average cost of burial services and products will be at death and are shown what those costs will be if they happen to purchase the cemetery plan and can factor in the 24 month coverage provided for by the plan. The 24 months of free burial protection insurance is used for price comparison purposes. SCI is offering the 24 month burial protection plan as a marketing tool to obtain entry into a prospective customer's home in order to make a sales presentation on pre-need cemetery property and services. The Certificate of Insurance is offered as an inducement to the sale of real or personal property and services connected therewith. The benefits of the 24 month burial protection plan are guaranteed by Certificate of Insurance Form No. 01285-NV-3, issued under the master group policy of insurance Form No. 01285- NV.
Recommendation Based on all of the foregoing, it is recommended that the Department of Insurance and Treasurer enter a final order in this case disapproving Petitioner's Burial Protection Policy Form 01285-NV and Certificate Form 01285- NV-3. DONE AND ENTERED this 15th day of March, 1988, at Tallahassee, Florida. MICHAEL M. PARRISH, 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 March, 1988. APPENDIX TO RECOMMENDED ORDER IN CASE NO. 87-1361 The following are my specific rulings on all findings of fact proposed by the parties. Findings proposed by the Petitioner: Paragraphs 1 and 2: Accepted. Paragraph 3: Rejected as subordinate and unnecessary details. Paragraph 4: Rejected as irrelevant. Paragraphs 5, 6, and 7: Accepted in substance. Paragraphs 8, 9, and 10: Accepted. Paragraph 11: Rejected as irrelevant. Paragraphs 12, 13, and 14: Rejected as subordinate and unnecessary details. Paragraph 15: Accepted. Paragraph 16: Rejected as irrelevant. Paragraph 17: Rejected as subordinate, unnecessary, and irrelevant. Paragraph 18: Rejected as subordinate and unnecessary details and as not Supported by persuasive competent substantial evidence. Paragraphs 19, 20, 21, and 22: Rejected as subordinate and irrelevant details. Paragraphs 23 and 24: Rejected as irrelevant. Paragraphs 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, and 36: Rejected as subordinate and unnecessary details. Paragraphs 37, 38, 39, and 40: Rejected as irrelevant. Paragraph 41: Rejected as irrelevant and as not supported by persuasive competent substantial evidence. Paragraphs 42, 43, 44, 45, 46, and 47: Rejected as irrelevant and because Dr. Downs' ultimate conclusions are not persuasive. Paragraphs 48 and 49: Rejected as irrelevant. Paragraph 50: Rejected as irrelevant and because it lacks persuasive competent substantial evidence. Paragraphs 51, 52, 53, 54, 55, 56, 57, and 58: Rejected as subordinate, unnecessary, and irrelevant. Paragraph 59: Rejected as subordinate and unnecessary and as not Supported by persuasive competent substantial evidence. Further, the proposed interpretation conflicts with the clear language of the statute. Paragraph 60: Rejected as subordinate, unnecessary, and irrelevant. Paragraphs 61 and 62: Rejected because the opinion proposed is contrary to the greater weight of the evidence. Paragraphs 63, 64, 65, 66, and 67: Rejected as subordinate and unnecessary details. Paragraph- 68: Rejected as contrary to the greater weight of the evidence. Paragraphs 69, 70, 71, 72, and 73: Rejected as subordinate and unnecessary details. Paragraphs 74, 75, and 76: Rejected as subordinate, unnecessary, and irrelevant. Paragraphs 77, 78, 79, 80, 81, 82, and 83: Rejected as irrelevant. Findings proposed by the Respondent: Paragraphs 1, 2, 3, and 4: Accepted. Paragraph 5: Accepted in substance. Paragraphs 6 and 7: Accepted. Paragraph 8: Rejected as subordinate and unnecessary details. Paragraphs 9 and 10: Rejected as irrelevant. Paragraphs 11, 12, 13, and 14: Accepted. Paragraphs 15, 16, 17, and 18: Rejected as subordinate and unnecessary details. Paragraph 19: Rejected as redundant. Paragraph 20: Rejected as subordinate, irrelevant, and redundant. Paragraphs 21, 22, and 23: Rejected as subordinate and unnecessary details. Paragraph 24: The bottom line opinion is accepted, but most of the details in this paragraph have been omitted as subordinate and unnecessary. Paragraphs 25, 26, 27, 28, 29, 30, 31, and 32: Rejected as subordinate and unnecessary details. COPIES FURNISHED: Douglas A. Mang, Esquire Mang, Rett & Collette, P.A. P. O. Box 1019 Tallahassee, Florida 32302 Michele Guy, Esquire Legal Division 413-B Larson Building Tallahassee', Florida 32399-0300 Honorable William Gunter State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Don Dowdell General Counsel Department of Insurance and Treasurer The Capitol, Plaza Level Tallahassee, Florida 32399-0300
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: Background Respondent, Department of Banking and Finance, Division of Finance (Division), is the state agency charged with the responsibility of administering and enforcing the Florida Cemetery Act, as amended, which regulates the operation of cemetery companies in the State of Florida. Among other things, the Act prohibits, with certain exceptions, any person from operating a cemetery company in this State without first obtaining a license from the Division. On August 1, 1990, respondent, Cedar Wood Memorial Park (Cedar Wood or applicant), a partnership consisting of Charles L. Overturf, Jr. and C. Ben Bates, Jr., filed an application with the Division for a license to organize a new cemetery company to be located on State Road 20 in Palatka, Florida. The application was deemed to be complete on October 9, 1990. Although the application was initially denied by the Division on December 28, 1990, on the ground the existing facilities were adequate to meet all reasonable needs, on January 24, 1991, the Division reversed its earlier action and gave notice of its intention to approve the application. Thereafter, on February 21, 1991, petitioner, Masters Memorial Gardens, Inc., d/b/a Palatka Memorial Gardens (PMG), which holds a license to operate a cemetery company in Putnam County (County), filed its protest and request for hearing. In its protest, as amended, PMG contended that the addition of a new cemetery company in the County would be harmful to the cemetery industry and not benefit the public. The parties agree that PMG has standing to initiate this action. Statutory Criteria To demonstrate entitlement to a license, an applicant must first create a legal entity to operate the cemetery, propose a site containing not less than fifteen contiguous acres, and demonstrate that it possesses the ability, experience, financial stability, and integrity to operate the company. In this regard, Cedar Wood proposes to establish a cemetery site containing not less than fifteen contiguous acres. Also, Cedar Wood has created a legal entity to operate the cemetery site, and the parties agree that the applicant has demonstrated that it possesses the ability, experience, financial stability, and integrity to operate a cemetery. Besides the above criteria, the Division also considers other factors to determine need, including the adequacy of existing licensed and unlicensed facilities, the solvency of trust funds of existing facilities, and certain statistics concerning population, death rates, and rate of growth. However, the Division may waive these criteria in order to "promote competition" so that each county may have at least "six cemeteries operated by different licensees." In this case, the Division has proposed to waive these criteria in order to promote competition. It is noted that at the present time, there are three licensed cemeteries in the County, including PMG, Evergreen Cemetery (Evergreen), and Resthaven Cemetery and Memorial Park (Resthaven). In addition, there are a number of unlicensed cemeteries in the County, including two operated by the City of Palatka. Applicant's Proposed Cemetery Applicant's partnership was formed two years ago for the purpose of establishing a new cemetery in the community. According to Overturf, who also operates a funeral home, he views the venture as a good investment, particularly since the community now has only three licensed cemetaries, two of which are used primarily by the black community. The facility will be fifteen acres in size and contain an estimated 18,000 burial spaces. It will also offer substantially the same services and charges as PMG. Neither partner has had any prior experience in operating a cemetery. However, the parties have stipulated that the applicant has sufficient experience to satisfy the statutory criteria of "ability" and "experience". The applicant intends to make an initial capital investment of $500,000, of which $149,200 will be kept in reserve. After the venture is ten years old, the applicant expects to make a profit on its investment. However, this projection is based on several incorrect assumptions. First, the partners have assumed that every lot sale will be a cash transaction for the full amount. Most sales, though, are financed and this will significantly reduce the projected cash flow. Second, after year five, it will be necessary to deduct ten percent of all lot sales revenues for maintenance and trust fees which will further reduce the projected income. Third, although the new cemetery plans a mausoleum, no expense for this item has been set aside. Fourth, the cemetery intends to hire an experienced cemetery operator but has set aside only $22,500 in commissions and management fees for this purpose. Finally, because of these protracted proceedings, certain recurring expenses such as legal and accounting expenses have been underestimated. After making the foregoing corrections to the pro forma statement, it is clear that the new cemetary would not be profitable during its first decade of operations, and contrary to applicant's projection, would not achieve a profit in the tenth year. Existing Facilities in the Community For purposes of determining the need for a new cemetary, the Division is obliged to consider the existing facilities in the community to be served, or the area from which 75% of sales of burial spaces are expected to be derived. In this case, the parties have agreed that the "community" is a fifteen mile radius around the City of Palatka. As noted above, there are presently three licensed cemeteries in the community. From a geographical perspective, all are within six miles of the proposed cemetary. More specifically, PMG and Evergreen are three and two miles, respectively, from the proposed site of Cedar Wood's cemetery while Resthaven is approximately six miles away in the small community of San Mateo. Besides the licensed cemetaries, there are also a number of unlicensed cemeteries within the community. They are operated by various cities, towns, churches and families. Two of them, Oakhill and Westview Cemeteries, are operated by the City of Palatka and are open to the general public. Conversely, several church and family-operated cemetaries are restricted to family or church members while one is dedicated primarily to members of the Masons and their families. Even so, the unlicensed cemetaries have the potential to take customers away from licensed cemeteries, and all have the ability to expand without the Division's approval. All cemeteries offer the public the option of buying their burial spaces "pre-need". This means that a lot can be sold to a customer prior to his or her death. Money from pre-need sales must be deposited into a perpetual trust account and cannot be used by the licensed cemetery company for day-to-day operations. In addition, pre-need sales are generally at low, discount prices which are substantially below the price charged for an "at-need" sale, which is made at the time of death. The evidence establishes that PMG offers discounted, pre-need spaces, and while its other charges are higher than those of its two licensed competitors, they are not unreasonable or excessive in relation to the charges at other cemetaries around the state. Projected Need and Unused Spaces As a part of its preliminary investigation, the Division prepared a need survey in accordance with Rule 3D-30.015(4), Florida Administrative Code. The purpose of the survey was to ensure that there is sufficient space available for burials in the community for the next thirty years or conversely to determine if no need is projected. In developing the need survey, the Division used data from the three licensed cemetaries in the community, the two cemetaries operated by the City of Palatka, and one by a small church in the community of Peniel, which lies three miles from applicant's property. The parties have stipulated to the accuracy of the survey. It reflects that during the next thirty years, a total of 23,270 burial spaces will be needed for the community, assuming that 100% of all people cremated are buried in cemetery lots. However, if only 15% of the cremations are buried in cemetery lots, the projected need is reduced to 18,823 burial spots. The three licensed cemeteries in the community have a combined total of 35,889 unused burial spaces, some of which are already sold. However, there are currently 28,052 and 2,740 unsold spaces at PMG and Resthaven, respectively. It is noted that in November 1989 PMG purchased an additional 8.6 acres of land adjacent to its facility and in August 1991 dedicated that property to the cemetary business. The new property is included in the Division's need survey. Evergreen has 495 total unused spaces, of which the number of unsold spaces is not of record. In addition, Oakhill Cemetery, which is operated by the City of Palatka, has 1,004 unused spaces of which 746 are unsold. PMG considers Oakhill to be its primary competitor. However, at its current rate of sales, Oakhill will have no more unsold spaces within the next four and one-half years to six years. The other city-operated cemetary is now virtually filled. Although Peniel Baptist Church has only four unsold spaces, two other unlicensed facilities within the community but not counted in the Division's survey, Pinelawn and Pineview Cemetaries, which are thirteen and fifteen miles from Cedar Wood, respectively, have approximately 31,000 unused spaces. Thus, the amount of space currently unsold and available far exceeds the projected need in the community during the thirty year period from the date of Cedar Wood's application. Despite this lack of need, the Division proposes to grant the application for the purpose of promoting competition. If the application is approved, Cedar Wood intends to add 18,000 more spaces to the community's already existing inventory. Will the New Cemetery "Promote Competition"? The term "promote competition" is not defined by statute, and there are no agency rules which clarify the term or provide guidance in making this determination. However, three experts presented testimony on the existence or lack of competition in the Putnam County area and whether the addition of a new cemetary in the community would promote the same. As might be expected, the experts reached different conclusions regarding this issue. In resolving this conflict, the undersigned has accepted the more credible and persuasive testimony and this accepted testimony is embodied in the findings below. Despite its dominance in the community in terms of unsold spaces, PMG is only burying approximately twenty percent of the people interred in the County in a given year. Thus, around eighty percent of the people interred in the County are buried in other cemetaries. Some of this may be attributable to "heritage", which means that once someone is buried in a cemetary, that person's relatives will likely want to be buried within the same cemetary. Because of heritage, all of the cemetaries in the community compete with PMG. For the years 1987 through 1990, PMG sold only 65, 71, 216 and 202 spaces, respectively. The increase in sales during the last two years may be the result of an aggressive sales campaign recently initiated by PMG. Indeed, PMG is the only cemetary company in the County that actively advertises for new business. Since Cedar Wood will offer the same services as PMG, this will undoubtedly cause PMG to lose some of its sales. A loss of even one-half of its business to a competitor would have a serious financial impact on PMG. Petitioner's experts established that it would not be financially feasible to establish a new company in the Palatka area given that area's population of around 60,000, the number of existing licensed and unlicensed competitors, and the fact that several cemetary companies have recently failed in other areas of the state. These findings are corroborated by the applicant's own financial projections. The balance sheet of PMG as of December 31, 1990, reflected that it had only $2,500 in the bank as of that date. In addition, after receiving a $60,000 refund from the Internal Revenue Service and reclassifying certain items on the balance sheet, PMG's retained earnings approximated only $125,000 after fifteen years of operation. It is also noted that since the business was purchased by its present owners in 1977, no dividends have been paid to the stockholders of the corporation. At the present time, there are several factors which indicate the presence of an oligopoly in the Putnam County cemetary business. First, there are a small number of sellers (existing licensed cemetaries) in the community. Of the three, PMG is clearly the most dominant for it now controls around 89.7 percent of the unused spaces among licensed cemetaries. This degree of dominance has enabled PMG to set a price for its services without regard to the prices charged by the two other licensees. In making this finding, however, it should be remembered that PMG considers Oakhill, a city-owned, unlicensed cemetary as its chief competitor. At the same time, there are a number of barriers to entry into the cemetary business. These include a requirement for governmental approval (a license) to enter the market, a $25,000 initial fee for the perpetual care and maintenance fund, and a minimum of fifteen acres of unencumbered, contiguous land. Where such barriers as these exist, the effect is to lessen the potential competition. However, even if an oligopoly or pure monopoly exists, this does not mean that the community can support another cemetary. Indeed, the evidence shows that if Cedar Wood's projected lot sales over the next decade are achieved, it would still operate at a loss. In addition, most, if not all, of such sales would be made at the expense of PMG. Given these circumstances, it is found that competition will not be promoted by granting the application.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the agency enter a final order denying the application of Cedar Wood Memorial Park. DONE and ENTERED this 2nd day of June, 1992, in Tallahassee, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 2nd day of June, 1992.
The Issue Whether the Funeral Director's license and/or the Embalmer's License of Donald B. Johns should be suspended or revoked. Whether the license of the Donald B. Johns Funeral Home should be suspended or revoked.
Findings Of Fact The Respondent, Donald B. Johns, holds a Funeral Director's license, No. 1473, and an Embalmer's license, No. 1633. The Donald B. Johns Funeral Home is licensed as No. 827. A complaint was filed against Respondent by Petitioner for the violation of Section 470.10(6), 470.12(1)(k), and 470.12(2)(p), Florida Statutes, and the Respondent Donald B. Johns Funeral Home was charged with violations of Section 470.12(4)(a), 470.12(4)(c), and 470.30(6), Florida Statutes. A request for a formal hearing for an appointment of a hearing officer was made by the Respondent, Donald B. Johns, and the Petitioner, State Board of Funeral Directors and Embalmers, petitioned for this hearing. Notice to appear were duly sent to the parties. Mr. and Mrs. James Jesse and the decedent's grandmother, Mrs. Jesse, contacted the Donald B. Johns Funeral Home in arranging for the funeral of the decedent, Jason Jesse, an infant. The Respondent, Donald B. Johns, as the funeral director and embalmer, appointed one Thomas Davis to make the arrangements for said funeral. The negotiations and arrangements included meeting the family at the funeral home; inquiry as to the desired services; quotation of the costs thereof; showing the family a casket catalog and ordering a casket for the family; requiring the family to complete the paperwork for the cremation; offering a cremation urn for sale; arranging a viewing for the family at the funeral home; advising the family on the availability of services at the cemetery selected by the family; discussing the availability of a sign-in book and name cards at the funeral home; attending services at the church; and attempting to correct defects in the casket and presentation of the body at the viewing. The Respondent Donald B. Johns was aware of and permitted Thomas Davis to handle the funeral arrangements on behalf of the funeral home which the Respondent owned and operated as the licensed funeral director in charge, when he knew that said Thomas Davis was only an attendant and not licensed as a funeral director. The funeral arrangements were not satisfactory to the family of the decedent and there were misunderstandings and unnecessary and trying experiences for the family.
Recommendation Revoke the licenses of Donald B. Johns and the Donald B. Johns Funeral Home, impose a fine under Section 470.34 in an amount not to exceed $1,000.00. DONE and ORDERED this 27th day of March, 1978, in Tallahassee, Florida. DELPHENE C. STRICKLAND Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Michael J. Dewberry, Esquire 1300 Florida Title Building Jacksonville Florida 32202 Donald B. Johns 3890 Andrews Avenue Ft. Lauderdale, Florida 33309
