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HEALTH CARE AND RETIREMENT, D/B/A KENSINGTON MANOR vs. DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES, 89-002590 (1989)
Division of Administrative Hearings, Florida Number: 89-002590 Latest Update: Jul. 31, 1990

Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: Introduction Petitioner, Health Care and Retirement Corporation of America (HCRC), owns and operates approximately one hundred forty nursing homes in nineteen states including seven in the State of Florida which are licensed by respondent, Department of Health and Rehabilitative Services (HRS). The seven licensees are Rosedale Manor, Wakulla Manor, Jacaranda Manor, Pasadena Manor, Community Convalescent Manor, Heartland of St. Petersburg and Kensington Manor, all of whom are participants in the Florida Medicaid program administered by HRS. As Medicaid participants, each nursing home was required to annually file with HRS cost reports on its own behalf and its parent, HCRC. Those reports set forth, among other things, the costs which the providers allege were incurred in providing Medicaid services during specified cost reporting years. This controversy involves the cost reports filed by the seven providers for fiscal years ending during varying times in 1986 and 1987. After the cost reports were filed with HRS, an audit was conducted by an independent public accounting firm, Touche & Ross, and an audit report and management letter were issued as to each provider on March 30, 1989. Among other things, the audit reports proposed to disallow various claimed expenditures in the reports. Upon receiving the proposed agency action, each nursing home requested a formal hearing to contest the proposed adjustments. The parties have settled some of the contested items prior to hearing. The disposition of these items is set forth in the parties' prehearing stipulation. This recommended order deals with the remaining contested items. New Beds at Jacaranda Manor Petitioner Jacaranda Manor has challenged HRS's proposed disallowance of part of the costs related to the purchase of new beds at its facility in 1987. The facility was originally constructed in 1970. In 1974 a plant addition was made to the facility which resulted in an increase of one hundred authorized beds. In 1987 Jacaranda Manor replaced both the original beds placed in service in 1970 as well as those added in 1974. The total cost of this expenditure was $74,055. At issue is Jacaranda Manor's request to be reimbursed as a capital expenditure the difference between the estimated cost of the original beds ($38,025) and the cost of the replacement beds ($74,055), or $36,030. The beds in question are considered capital (property) items under the reimbursement process and are reimbursed in accordance with the fair value rental system (FVRS), a valuation method established by HRS in July 1984 for valuing the property assets of a nursing home. At that time, HRS required each provider to file a FVRS base which contained a listing of relevant nursing home assets and their respective value as of July 1, 1984. The valuation was obtained by taking the original cost of the asset and then indexing (inflating) that cost forward to the current time period by the Dodge Construction Index. The information in the base is used by HRS to calculate a FVRS rate which is then used to determine the amount of reimbursement received by a provider for all of its property costs, except taxes, insurance, home office property costs and replacement costs. As to the latter four categories of costs, which are not included in the base, providers are reimbursed separately for those costs through what is known as the pass-through form of reimbursement. Whenever a new item is purchased by a nursing home to replace an existing asset, and it significantly increases or enhances the usefulness of an asset in the FVRS base, the cost of the new asset may be added to the base only after the original cost of the improved (existing or old) asset is removed from the base. By removing the improved asset, HRS ensures that a provider does not receive duplicate reimbursement. To determine the value of the improved asset to be removed from the base, HRS first determines whether the provider has previously identified the asset and its original cost in the FVRS base. If the item is not shown separately in the base, HRS requires that the provider furnish an invoice documenting the original cost of the improved asset. HRS does not accept an estimate of an asset's cost on the grounds it would be inundated with estimates from providers, and an estimate is not susceptible to audit verification. In taking this position, HRS relies upon section 2315 of Health Insurance Manual No. 15 (HIM 15), a compendium of federal Medicare regulations adopted by HRS for use in resolving cost disputes such as this. The cited section reads in relevant part as follows: Cost information as developed by the provider must be current, accurate, and in sufficient detail to support payments for services rendered to beneficiaries. This includes all ledgers, books, records, and original evidences of cost (purchase requisitions, purchase orders, vouchers, requisitions for materials, inventories, labor time cards, payrolls, bases for apportioning costs, etc.), which pertain to the determination of reasonable cost, capable of being audited. (Emphasis supplied) In addition to relying on the above regulation, HRS also takes the position that the new beds are a capital replacement and not a capital improvement. Such a distinction is significant since an asset must fall within the definition of a capital improvement in order to qualify as an addition to the FRVS base. The term is defined in the cost report instructions which have been adopted by HRS for use in assisting providers complete their cost reports. There, a capital improvement is defined as a betterment of land, buildings, building equipment and major moveable equipment or leasehold property which either extends the useful life at least two years beyond the original useful life of such an asset or significantly increases the productivity over the original productivity of such asset, a cost of at least $500 and is not a replacement of a previously acquired asset. (Emphasis in original text) The same instructions define a capital replacement as land, buildings, building equipment, major moveable equipment and leasehold improvements which would be classified as a capital addition or improvement under the above definitions, except that such asset is a replacement of a previously acquired asset. A replacement is an asset which fills the place, position or purpose once filled by an asset which has been lost, destroyed, discarded or is no longer useable or adequate. (Emphasis in original text) When HCRC purchased Jacaranda Manor around 1986, it learned that the prior owners did not have their original accounting records. Indeed, the only invoices now available for the years 1970-1974 simply show the total cost to construct the facility in 1970 and the total cost of the addition in 1974. As a consequence, when Jacaranda Manor's prior owners filed their FVRS base with HRS in 1985, they did not specifically identify the beds installed in 1970 and 1974 nor did they give their original cost. HRS did not reject the filing because it did not require invoices for assets and accepted the amounts shown on the schedule. However, HRS is now in the process of auditing the FRVS schedules and, if original invoices are not available, it intends to rely upon the results of prior audits which presumably would have been based upon the original invoices in establishing the cost of the assets. Whether Jacaranda Manor's schedules are the subject of an on-going audit and whether prior audits establish the costs of the beds is not of record. In an effort to determine the reasonable cost of the original beds, HCRC contacted both the vendor who sold the beds to the original owners and the facility's administrator in 1970-1974. Neither were able to furnish petitioner with the original invoices. However, based upon information supplied by those persons, petitioner arrived at an estimated cost of $38,025 for the beds installed in 1970 and 1974. That amount, which was obtained from a corporate officer of the bed manufacturer, was derived by taking the current price of the old beds. According to section 2315 of HIM 15, which is relied upon by HRS in rejecting the expenditure, the "cost information" supplied by the provider must be current, accurate, and in sufficient detail to support the claimed cost and must be capable of being audited. In this case, the documentation is current, that is, it is based on information supplied by the manufacturer in February 1990, it contains sufficient detail concerning the make, model and cost of the beds that were used to derive the $38,025 figure, and it is capable of being verified in the audit process. Although the number used by Jacaranda Manor represents the current cost of the old beds and thus is only an estimate of the original cost, that amount, with its supporting data, is sufficient under the circumstances to satisfy the above cited regulation. 1/ The affidavit of Alma Hirsch, the long-time administrator of Jacaranda Manor, has been stipulated into evidence, and the parties have agreed that her statements can be treated as competent evidence. According to Hirsch, the new beds installed in 1987 were Triflex beds, which are fully adjustable beds with revolving rails, and are much superior to the old beds which were replaced. For example, the old Easy Care beds were basic beds with no modern improvements or conveniences. They were not moveable and had only the most basic bed rails. In contrast, the new beds can be adjusted for the comfort and convenience of the patient to enter or leave the bed and enables the staff to position the patient in the most appropriate position for the form of care being rendered. In short, the new beds are significantly superior to the old beds and thus significantly increase or enhance the usefulness of the old equipment. Therefore, they should be considered a capital improvement rather than a capital replacement. Given the satisfaction of this criterion and section 2315 above, the proposed disallowance of the capital expenditure should not be made. Subsequent Year Audit Issue While these proceedings were pending, HRS conducted audits of the cost reports filed by Jacaranda Manor, Rosedale Manor, and Kensington Manor for the year ending August 31, 1988. As a result of those audits, HRS proposed to disallow certain costs reported by the nursing homes on the ground the costs were incurred during the cost reporting period ending August 31, 1987. In other words, HRS has proposed to disallow certain costs reported on the 1988 cost report because they should have been reported on the 1987 cost report. It is noted that, as to Jacaranda Manor, Rosedale Manor and Kensington Manor, their 1987 cost reports are the subject of these proceedings. The nursing homes do not disagree with HRS's audit findings as they pertain to the above adjustments. However, the controversy concerns HRS's refusal to allow the costs to be included on the 1987 reports because those reports are in the process of being reviewed in these proceedings. However, through testimony of an HRS representative, it was established that if the audit for the prior year has not been closed or is under appeal such as here, a prior year expense disallowed in a current year audit should be considered in the prior year. Since the 1987 cost year is still open, the costs should be included in the 1987 cost reports and reimbursed in accordance with the plan. Home Office Property Costs As noted earlier, HCRC is the parent corporation of the seven nursing homes and, in regulatory parlance, is called a home office or related organization. In that role, HCRC provides various support functions for its affiliates from its headquarters located in Toledo, Ohio. At issue is the manner in which certain indirect home office property costs incurred by HCRC on behalf of the chain members are reimbursed. To resolve this issue, a brief overview of the Medicaid reimbursement process is necessary. There are two separate and distinct steps in the reimbursement process: (1) the completion and filing of a cost report by the provider, and (2) the audit process to confirm whether the reported expense classifications in the report have been made in accordance with reimbursement principles. To aid the provider in completing its cost report, HRS has adopted a set of instructions which are contained in a document known as "Instructions to Cost Report for Nursing Homes Participating in the Florida Medicaid Program Adopted April 1, 1983." The agency has also prescribed a basic classification of accounts which assists the provider in classifying costs into the proper cost centers when reporting its expenditures to HRS. Both documents have been received in evidence. After the reports are filed, through a series of allocations and other steps the unaudited information in the report is used to calculate prospective reimbursement rates for the provider for each of the four cost components used by HRS in the reimbursement process: patient care costs, property costs, operating costs, and return on equity. In some cases, the cost reports are later subjected to an audit which may result in the rates being revised in a manner consistent with the audit results. During the audit process, and as an aid in resolving cost disputes, HRS relies upon the following principles in descending order of importance: the reimbursement plan adopted and incorporated by reference in rule 10C-7.0482, federal Medicare reimbursement principles embodied in Health Insurance Manual No. 15 (HIM 15), and generally accepted accounting principles (GAAP). Therefore, whenever a cost dispute arises, the plan is controlling except where it fails to address an issue. In those cases, HRS looks to HIM 15 for guidance, and if the issue is not addressed in that document, the problem is resolved in accordance with GAAP. As noted in finding of fact 4, nursing homes are reimbursed for their property costs in one of two ways. First, HRS has established an FRVS base containing most of the provider's property assets which is indexed forward to take into account the effects of inflation. However, certain property costs, including home office property costs, property taxes and property insurance, are not included in the indexed portion of the FRVS calculation and are reimbursed instead through what is known as the pass-through form of reimbursement. Under this latter method, the provider receives reimbursement of the actual property cost. If the provider does not receive reimbursement for these costs as a pass- through, it would lose reimbursement for those items as a property component. The dispute herein arises over HRS's requirement that indirect home office property costs be classified on the cost report as general and administrative (G & A) costs and thereafter reimbursed as an operating component. The requirement that costs be recorded in this manner is based on language contained in paragraph E of the instructions which reads as follows: Home office costs which are not directly allocated to the provider but are allocated on a functional or pooled basis should be included in the provider's cost report as part of the provider's general and administrative costs. Relying on the foregoing language, HRS required each provider to record indirect (functional or pooled) home office property costs as G & A costs in the operating component of the cost report. Once the costs were recorded in that manner, HRS applied its long-standing policy of not allowing such costs to be reclassified to their original character for reimbursement purposes. By final order issued on July 24, 1990, in Case No. 90-1492R, the undersigned declared the above language in the instructions to be an invalid exercise of delegated legislative authority and the policy to be an unpromulgated rule. Therefore, the classification of such costs on the cost report is not dispositive of the manner in which they are reimbursed, and HRS is obliged to prove up the legitimacy of its policy in order to sustain its prescribed manner of reimbursement. Home office and home office costs are not referred to by name in the plan. However, paragraph F of section III of the plan provides that home home costs shall be reimbursed in the following manner: Cost applicable to services, facilities, and supplies furnished to a provider by organizations related to a provider by common ownership or control shall be governed by 42 CFR 405.427, Medicare (Title XVIII) Principles of Reimbursement, and Chapter 10, HIM 15. Thus, the plan requires that home office (related organization) costs be reimbursed in accordance with federal Medicare reimbursement principles and HIM 15. The record shows that HCRC incurs property costs at its home office. These include depreciation of furniture, fixtures, interest expense, rental expense, and a minor cost related to insurance and taxes. The agency proposes to treat these costs as operating costs for reimbursement purposes under the authority of the instructions, incipient policy and its interpretation of other regulations. Although the plan itself does not distinguish between direct and indirect costs, HRS takes the position that home office property costs necessarily fall into one of two categories: direct costs and indirect costs. If a property cost is a direct cost, that is, a cost that can be specifically identified with an individual facility, HRS reimburses that cost as a property cost for the individual nursing home. If the property cost is deemed to be an indirect cost, that is, a cost that has no specific identification with a particular facility, the item is classified in the operating cost component and reimbursed on that basis. Even though the plan permits the reclassification of costs from one cost center to another for reimbursement purposes, once the costs are classified as G & A costs, HRS will not allow them to be reclassified to another cost center irrespective of their original character. As discussed in subsequent findings, such a position is contrary to a number of plan regulations and accepted testimony. In making this finding, it is important to note that the classification and reimbursement of costs are two separate and distinct steps in the Medicaid reimbursement process, and while certain plan provisions may support the classification and allocation of a cost in a particular manner, other provisions may then dictate that the cost be reimbursed differently. HRS reasons, although not entirely correctly, 2/ that a home office provides nothing more than general and administrative services for the chain members and thus any costs other than direct costs should be classified on the cost report in that manner. Indeed, this classification treatment is consistent with both the Florida plan instructions and the corresponding instructions for Medicare providers (paragraph E, section 9904 of federal instructions). However, section 2150.3 of HIM 15 requires that home office costs be "identified as capital related costs and noncapital related costs" and then allocated as provided by the instructions. In this regard, the record supports a finding that property costs are capital related costs within the meaning of the plan. After home office costs are classified on one line of the cost report as a G & A entry, other HIM 15 provisions, which are controlling as to the reimbursement of home office costs, call for reclassifying property costs out of the G & A entry into the property cost center. More specifically, section 1310 of HIM 15 provides instructions for "necessary reclassifications and adjustments to certain accounts." The section goes on to identify numerous costs which may be initially entered as G & A costs on the trial balance but do not permanently remain in that cost center. The same section also provides that Where a provider is including on the cost report costs incurred by a related organization, the nature of the costs (i.e., capital related or operating costs) do not change. The provider must treat capital related costs incurred by a related organization as capital related costs of the provider. In other words, the character of a cost should not be changed for reimbursement purposes simply because it was incurred by a related party (home office). This regulation is consistent with petitioner's accepted testimony which supports a finding that a property cost remains a property cost, whether it is allocated directly or indirectly to a specific facility. Put another way, there is nothing in the plan or HIM 15 which suggests that the nature of costs should be changed depending on whether they are allocated directly or indirectly. This is particularly true since the rationale for direct and indirect allocations is to more equitably allocate costs incurred by the home office to the facility or entity which benefitted from those costs. Therefore, after a cost is found to be capital related or noncapital related, its character should not change irrespective of whether it is allocated on a direct, functional or pooled basis. The agency's policy of reimbursing indirect home office costs as operating costs is grounded in part on the fact that the operating component is capped, that is, there is a ceiling or cap on the amount of operating costs for which a provider may be reimbursed. This cap is based on a somewhat complicated statewide median of operating costs, plus one standard deviation, and it may not be exceeded even if the provider incurs operating costs above that ceiling. HRS reasons that because the property component is not similarly capped, its policy is necessary to prevent a provider from abusing the process by shifting an operating cost to the property cost center in order to avoid the operating component limitation. However, this argument incorrectly assumes that the character of a cost can be changed from property to operating if the cost is allocated on an indirect basis, and it is contrary to various provisions of the plan, including section 1310 of HIM 15 which permits the reclassification of G & A costs to other components. HRS also justifies its policy on the theory that the function of an asset is the best way to determine whether the asset is directly or indirectly related to the provider, and that reimbursement should be consistent with this determination. While this methodology may be useful in the classification and allocation of a cost, the more logical and persuasive evidence supports a finding that the nature of a cost is not determined by its method of allocation and that this type of determination is not appropriate for reimbursement purposes.

Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that a final order be entered consistent with this recommended order and that the agency's proposed disallowance or treatment of the challenged expenditures not be made. DONE AND ORDERED this 31st day of July, 1990, in Tallahassee, Leon County, 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 31st day of July, 1990.

USC (1) 42 CFR 405.427 Florida Laws (1) 120.57
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RIVERSIDE CARE CENTER vs. DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES, 87-000924 (1987)
Division of Administrative Hearings, Florida Number: 87-000924 Latest Update: Sep. 17, 1987

Findings Of Fact Introduction Petitioner, Stacey Health Care Centers, Inc. d/b/a Riverside Care Center (RCC or petitioner), operates an eighty bed nursing home at 899 Northwest Fourth Street, Miami, Florida. The facility is licensed by respondent, Department of Health and Rehabilitative Services (HRS). At all times relevant hereto, RCC was a participant in the Florida Medicaid Program. The facility has been in operation since March, 1983, and has always attained a superior rating. In July, 1984 it filled all eighty beds and has remained full since that time. As a Medicaid participant, RCC was required to submit to HRS a cost report for the fiscal year ending December 31, 1984. This was filed in the latter part of March, 1985. The report sets forth those costs which RCC claims it incurred in providing Medicaid services during the fiscal year. In 1985, HRS contracted with Grant Thornton, an independent accounting firm, to perform a field audit of RCC's books and records to verify whether RCC's reported costs for fiscal year 1984 were proper expenditures and therefore reimbursable. On May 7, 1986 an audit report and management letter were issued by Grant Thornton proposing that RCC's cost report be adjusted in nineteen respects. The report and letter were later forwarded by HRS to RCC on January 7, 1987. Contending that seven of the adjustments (2, 3, 5, 6, 7, 12 and 15) were not appropriate or justified, RCC requested a formal hearing to contest the report. This resulted in the instant proceeding. Audit Principles and Guidelines Under the Medicaid contract entered into by RCC and HRS, the provider agreed to conform with all pertinent rules and regulations governing Medicaid providers. These include, in order of importance, (a) relevant agency rules codified in the Florida Administrative Code, (b) the Florida Title XIX Long-Term Care Reimbursement Plan (Long Term Plan) then in effect, (c) the Health Insurance Manual (HIM-15), which is a compendium of federal cost reimbursement principles for nursing homes, and (d) where applicable, generally accepted accounting principles (GAAP). Of particular relevance to this proceeding is Subsection III.G.1. of the September 1, 1984 Long Term Plan which provides that "the 0wner administrator . . . compensation will be limited to reasonable levels determined in accordance with HIM-15." The latter document utilizes Bureau of Health Insurance (BHI)/2 data to determine reasonable compensation for owner- administrators in other similar sized institutions in the same geographic area. From this data, a cap or limitation is derived, and any owner compensation above this cap is disallowed and not reimbursed. The theory behind this cap is that an owner- administrator should receive no more compensation than does a non- owner administrator. Also relevant is the so-called prudent buyer concept embodied in section 2103 of HIM-15. Paragraph A of that section provides in part that "the prudent and cost- conscious buyer not only refuses to pay more than the going price for an item or service, he also seeks to economize by minimizing cost." Put another way, the buyer will pay no more than is necessary to procure a supply or service and if he does not, the expense is disallowed. The Concept of Hateriality (Items 2, 7 and 12) The audit report proposes to disallow items 2, 7 and 12 on the ground RCC did not provide adequate documentation to support the expenditures. In sum, the three items total $145. The parties have stipulated that the issue of adequate documentation is not yet ripe. Even so, petitioner suggests the expenses should be allowed since they are "immaterial to the overall cost report." However, the testimony herein reflects that even though an item is immaterial, it may still be disallowed if not in compliance with pertinent regulations. Put another way, there is no regulation or rule which requires an expenditure to be automatically approved simply because it is immaterial. Therefore, the proposed adjustments are proper. Owner's Compensation (Items 3, 5, 6 and 15) Corporate structure The majority (95 percent) of the capital stock of RCC is owned by Stacey Enterprises, Inc. (SEI) located in Cincinnati, Ohio. SEI also owns and operates a 63-bed skilled nursing facility, Gerrard Convalescent Home (GCH), in Covington, Kentucky which is subject to that state's regulatory jurisdiction. Under this corporate structure, which is called a "chain organization" in federal bureaucratese, SEI is considered to be a "home office" providing certain administrative and support functions to RCC. In theory, a home office managing more than one facility should be more efficient than a nursing home that provides its own administrative functions. This is because a home office should reduce costs through economy of scale. In the health care industry, a home office may provide such services as purchasing, personnel, payroll, accounting, computer, and the like. Ralph L. Stacey, Jr. (Stacey), who resides in Covington, Kentucky, is the president and sole stockholder of SEI. He is licensed as a nursing home administrator in Florida and Kentucky, and serves in that capacity at both RCC and GCH. However, in 1984 he had another full-time licensed administrator at RCC and consequently did not claim reimbursement for a full- time salary at either facility. Stacey is also the sole employee of the home office. As such, his duties for the three entities (RCC, GCH and SEI) overlap, and coupled with his place of residence, constitute the source of this controversy. Filing requirements Because of the chain organizational setup, HRS required the provider to file two annual cost reports, one in the name of RCC and the other by SEI as the home office. Both purported to reflect those costs which were properly allocated to Florida operations and were therefore reimbursable under the Florida Medicaid program. However, since the RCC report contains Florida's allocated portion of home office costs, the HRS audit refers only to RCC's 1984 Medicaid cost report. Content of two reports Since SEI claims it provided services in 1984 to both RCC and GCH, an allocation of its regulatory expenses ($7,504) was necessary in order to determine what portion applied to Florida operations. To do this, and for purposes of filing the home office report, SEI developed a ratio based on total patient days of the two facilities, an accepted method for making such an allocation. After removing $139 in non-regulatory expenses, SEI then allocated 54.4 percent of the remaining home office expenses to RCC, or a total of $4,007. Of that amount, over ninety-seven percent fell within the category of "travel." Included within this category are $2,103 in airline tickets, while the make up of the remaining expenses has not been identified. However, the parties have suggested they include primarily "living" expenses incurred by Stacey while living part- time in Miami in 1984. All were ostensibly incurred while Stacey served in the role of a home office employee. The home office charges are referred to on the audit report as adjustment number 5. In addition to the home office charges, RCC's cost report claims reimbursement for a pro rate portion of expenses incurred by Stacey while serving as administrator for both RCC and GCH in 1984. To allocate these costs, Stacey determined the amount of time devoted to each facility, and then assigned appropriate portions of his total expenses to each operation. The precise factor used is not of record. It is noted that the audit report classifies these expenses into three categories (gas and electric, other travel and rent) while the witnesses referred to them as rent, meals, utilities, motor vehicle expenses, supplies, salary, and other miscellaneous items. Whatever their nature, they are reflected on the audit report as adjustment numbers 3, 6 and 15. The controversy and HRS' Proposed action The principal controversy herein centers around Stacey's claimed expenses while commuting to and living in Florida in 1984, and which were charged to RCC as administrative costs or as indirect home office charges. The commuting was necessary since Stacey's primary residence was Covington, Kentucky, and he was also required to tend to duties as an administrator in Kentucky and a home office employee in Ohio. In its audit report, the agency has proposed to disallow all such costs on the general ground they were not related to patient care, relying principally on Sections 2102.3 and 2304 of HIM- 15 as authority for such action. As clarified at hearing, HRS then relied upon the prudent buyer concept and owner's compensation rule to combine Stacey's travel and lodging expenses and certain other minor items with his salary and treat them as part of owner's compensation. These items are characterized in the audit report as gas and electric charges ($2,114), "other" travel ($9,243), and rent expense ($5,910), and, as noted above, are identified as adjustments 3, and 15, respectively.2/ In addition, HRS concluded that all of the home office expenses ($4,007) were violative of the prudent buyer concept since none would be needed if RCC had used a Florida resident as administrator. Accordingly, it reclassified them as owner's compensation on the theory the expenditures benefited the owner and therefore constituted personal compensation to Stacey. These charges (both home office and administrative) collectively totaled $37,082/4 The agency then utilized what it perceived to be the proper cap under then-applicable BHI guidelines ($33,830) for owner's compensation, and applied a 55.9 percent factor to that amount./5 This produced a cap for RCC in the amount of $18,911. All expenses ($21,274) above that cap were disallowed. An analysis of the services provided During 1984, and as reflected in petitioner's exhibit 1, Stacey made numerous trips by airline between Cincinnati and Miami while visiting the RCC facility. Each month Stacey spent between nine and eighteen days in Miami. This is confirmed by his personal calendar introduced in evidence as petitioner's exhibit 1. He also executed a one-year lease on an apartment in Miami on February 1, 1984 at a cost of $465 per month. He did so on the theory it was cheaper to rent than to pay nightly motel charges. However, Stacey acknowledges that if he had elected to spend $50 per day on lodging, he would have spent $7,040, or $984 less than that amount claimed on the cost report for apartment rent and utilities. While in Miami, Stacey utilized the RCC station wagon to transport patients between the hospital and the facility, for screening purposes, and for errands to purchase supplies. This was not controverted. However, the vehicle was also used by Stacey to carry him from his apartment to the facility and return, a use considered personal by HRS. To separate the two functions, Stacey should have kept a record (e.g. a trip log) to show what part of the usage was personal, and what part was related to patient care. Here no such records were apparently maintained, and consequently a precise allocation cannot be made. But, since documentation is not in issue, this point is not now germane. In his role as administrator and home office employee, Stacey's duties included staffing the facility, dealing with governmental agencies, developing and implementing policies and procedures, handling payroll and purchasing, and approving vouchers for both reasonableness and payment. The duties and functions, if prudent and necessary, are clearly within the scope of those performed by an administrator and home office employee. However, the record is less than clear as to which duties were performed when and in what capacity. Reconciling what happened with HRS rules - A cost difficult task There is no rule or regulation that prohibits a Florida nursing home from employing a nonresident administrator. /6 Moreover, it is not uncommon for an administrator to serve in that capacity at more than one facility. At the same time HRS routinely reimburses a provider for legitimate, reasonable home office expenses such as travel, lodging and administrative functions that are incurred while performing necessary support. Notwithstanding the lack of a rule that prohibits Stacey from being administrator, his position must be viewed in light of the prudent buyer concept. Under this concept, Stacey must show that it is more efficient and economical to utilize his services as administrator than to hire one who lives in the Miami area. In this regard, the proof is lacking. More Specifically, other than self-serving statements that this type of setup was more economical and efficient, Stacey did not provide any concrete evidence that contradicted the testimony of HRS witness Donaldson./7 This is especially true since Stacey already had a full-time licensed administrator (Tim Newren) on RCC's payroll who was able to run RCC's day-to-day operations in Stacey's absence. Indeed, their functions seemed to be duplicative in nature, and Stacey, when asked to describe Newren's duties when both were in Miami, indicated that Newren "consults with me." There was also no evidence to show that Stacey performed special services that Newren could not, or that it was necessary he be in Florida around twelve days each month, particularly since Stacey acknowledged he was in daily telephonic contact with Newren when in Ohio and Kentucky. Therefore, with one exception noted hereinafter, the expenditures in adjustments 3, 6 and 15 were not prudent and were properly disallowed. As noted earlier, the RCC station wagon was used to transport and screen patients, and for errands related to patient care. Such usage would have occurred even if Stacey had not come to Florida. Because their reasonableness has not been questioned, and the expenses relate to patient care, they should be allowed subject to the provision by RCC of proper documentation. HRS regulations and acknowledged prior audit policy allow reimbursement for reasonable travel expenses associated with the provision of home office services. However, to prove their legitimacy, they must be shown to be necessary, and to ef- fectuate savings to the provider. In this case, the charges to Florida operations were principally airline tickets for periodic trips to Florida, and living expenses for Stacey while in Miami. Although the record is not altogether clear, these charges were incurred by Stacey to come to Florida where he presumably then performed certain tasks that would normally be provided by a home office. Here again, the provider did not show that it was essential to perform the services in Florida, or that they could not have been performed by Newren. As such, they were not prudent, and should be disallowed. Finally, HRS utilized the wrong BHI cap in computing compensation to be allowed the owner. Instead of using $35,824, HRS erroneously used the figure of $33,830. The former limitation is the correct amount, and results in an increase in owner's compensation of $1,131.

Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that petitioner's cost report be adjusted and reimbursement accordingly made in a manner consistent with this Recommended Order subject to the furnishing of proper documentation by the provider where necessary. DONE AND ORDERED this 17th day of September, 1987, in Tallahassee, Leon County, Florida. DONALD R. ALEXANDER 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 17th day of September, 1987.

Florida Laws (1) 120.57
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SOUTHERN HEALTH CARE, INC. vs. DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES, 84-000223 (1984)
Division of Administrative Hearings, Florida Number: 84-000223 Latest Update: Nov. 14, 1984

Findings Of Fact Petitioner filed an application for a Certificate of Need for a 180-bed nursing home in Dade County, a subdistrict of Respondent's District 11 service area. The application was not offered into evidence, and no testimony was presented describing Petitioner's proposed project. Respondent reviewed Petitioner's application in accordance with statutory criteria and Section 10-5.11(21), Florida Administrative Code, which contains a formula or methodology for computing whether there is a need for additional community nursing home beds in any health district or subdistrict in Florida. In applying that formula, Respondent utilized the following planning data: the number of licensed and approved beds within the service area, the average patient census data, the number of elderly living in poverty within the service area, and the projected number of persons aged 65 and older residing within the service area three years in the future (the formula's planning horizon). Respondent then projected the theoretical need in the district and subdistrict, subtracted the inventory of licensed and approved beds, and thereby obtained the need / no need ratio. Although a need was demonstrated in both the district and subdistrict, the methodology then further requires a current utilization rate in excess of 85 percent and a prospective utilization rate in excess of 80 percent before additional beds can be approved. In this case, the current utilization rate of 93.4 percent exceeds the 85 percent requirement. However, when the proposed 180 beds are added to the number of already licensed and approved beds, the prospective utilization rate decreases to 69 percent, a figure below the required 80 percent prospective utilization threshold. In accordance with its application of its need methodology, Respondent issued a State Agency Action Report determining there is no need for Petitioner's proposed nursing home facility. Even though District II and the Dade County subdistrict have a current utilization rate of 93.4 percent, Petitioner presented no evidence to show that persons in need of nursing home beds are unable to secure them or that any special or extenuating factors exist to mitigate against the strict application of Respondent's need methodology.

Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that a Final Order be entered denying Petitioner's application for a Certificate of Need. DONE and RECOMMENDED this 14th day of November, 1984, in Tallahassee, Florida. LINDA M. RIGOT Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 14th day of November, 1984. COPIES FURNISHED: John D. Whitaker, Esquire 10700 Caribbean Boulevard Suite 202-H Miami, Florida 33189 Culpepper, Turner and Mannheimer 318 North Calhoun Street Post Office Drawer 11300 Tallahassee, Florida 32302-3300 David Pingree, Secretary Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32301

Florida Laws (1) 120.57
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HOLLYWOOD HILLS NURSING HOME vs. DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES, 82-001228 (1982)
Division of Administrative Hearings, Florida Number: 82-001228 Latest Update: Jun. 07, 1984

Findings Of Fact The parties stipulated during the course of the formal hearing in this cause that the adjustments made by Respondent to Petitioner's Medicaid cost report for the fiscal year ending June 30, 1981, were the same as the adjustments made by Respondent to Petitioner's Medicaid cost report for the fiscal year ending June 30, 1980. They therefore presented evidence and arguments on the adjustments made for 1980 with the stipulation that if Petitioner prevailed regarding any item which was adjusted for 1980, then that item would automatically be so adjusted for 1981. The parties further stipulated that the cost item "return on equity" is merely a function of the other proposed adjustments and, therefore, if the Petitioner prevailed on other disputed adjustments herein, then "return on equity" would be automatically revised to reflect an increase. Respondent proposed an adjustment to Petitioner's Medicaid cost report for the fiscal year ending June 30, 1980, in the amount of $15,223 for short- term liabilities. At the commencement of the formal hearing, Respondent withdrew its adjustment to that item and stipulated that Petitioner was correct in its position. Accordingly, that portion of the dispute has been withdrawn from consideration herein. Petitioner claimed $5,191 as the advertising cost for Hollywood Hills Nursing Home in the fiscal year ending June 30, 1980, which amount represents the cost of a large, yellow pages advertisement in the Southern Bell Telephone Directory. Respondent disallowed all Southern Bell advertising cost except for the sum of $178.20, which represents the cost of a simple alphabetical listing in the yellow pages. The advertisement in question is excessive in size and primarily consists of the name of the facility, a reproduction of the facility's logo, a picture of the facility, and a picture of a very happy couple. The ad is not primarily informational but rather is clearly promotional and intended to increase patient utilization. Accordingly, Respondent properly, disallowed this cost item and properly allowed the cost of a simple alphabetical listing, the norm in the nursing home industry at the time. In the fiscal year ending June 30, 1980, Petitioner included in its cost report the sum of $37,147.18 representing the "Herlee consulting fee," and Petitioner further claimed a similar amount as a cost item in its 1981 report. Respondent disallowed this reported home office cost. This cost includes salaries for Herbert and Leonore Kallen and other allocated expenses of the "home office" such as rent, automobiles, utilities, insurance, depreciation and amortization thereof, legal fees, and outside consulting fees. Respondent disallowed all Herlee expenses. The Kallens own three health care providers which are located in two facilities, to wit: Hollywood Hills Nursing Home and Hollywood Pavilion Psychiatric Hospital located in the same facility in Hollywood, Florida; and Norwichtown Convalescent Home located in Norwichtown, Connecticut. Contracts were entered into on behalf of these providers whereby they would be managed by Herlee Management Company, another of the Kallens' corporations. Although Herlee, Inc., was formed to manage the Kallens' two physical facilities under the "chain organization" provisions of the health insurance manual, none of the Herlee or home office costs are proper. No documents reflect the proportion of the Kallens' time which is spent in managing Hollywood Hills Nursing Home. Petitioner's evidence ranges from the Kallens spending an approximate 12.5 percent of their time to them spending an approximate 75 percent of their time related to Petitioner. The evidence is simply not credible. No time sheets exist; likewise, no records exist regarding any duties performed at any particular time. Rather, both the administrator and the "executive manager" of Hollywood Hills Nursing Home are full-time employees of Herlee Management Corporation, both of whom were capable of performing and did perform all of the duties alleged to have been performed by the Kallens at unknown times. The Herlee home office cost/Herlee consulting fee is not documented, is not reasonable, is duplicitous rather than necessary, and is not related to any patient care. Any time spent by the Kallens in the management of Hollywood Hills Nursing Home, if any, was spent merely as a protection of their financial investment. In further support of the lack of documentation to substantiate this cost item, it is noteworthy that Petitioner's witnesses did not even agree on the location of the Kallens' home office. Respondent properly disallowed the Herlee cost items as to the Kallens and properly allowed only that portion of the cost which related to the salary and benefits paid to the full-time employee of Herlee who also served as the nursing home administrator. The Kallens acquired Hollywood Hills Nursing Home through a purchase of stock rather than through a purchase of assets. Petitioner, therefore, took its vendor's basis for depreciation purposes directly from the books of its predecessor. When the audit of 1980 and again of 1981 revealed that Petitioner had no documentation on which to substantiate the basis used for depreciation, Respondent could have disallowed all property costs. Rather than doing so and possibly forcing Petitioner out of the Medicaid program or out of business, Respondent utilized the next best source of information, a 1969 appraisal indicating a verified construction cost, although utilizing that appraisal was admittedly a departure from normal audit procedures. The deviation from normal auditing principles is proper in this situation where Petitioner could provide no documentation to substantiate its basis for depreciation, and the appraisal provided estimates of cost at the time the facility was constructed. The adjustments made by Respondent for both 1980 and 1981 were therefore proper. Petitioner claimed $7,844 as an amortization expense for the fiscal year ending June 30, 1980, and $6,747 as the amortization expense for the fiscal year ending June 30, 1981. Amortization expense is the cost of acquiring the original mortgage on the facility and is a legitimate and recognized expense which is reimbursable under Medicaid regulations. Respondent totally disallowed Petitioner's claimed amortization expense since Petitioner possesses no data showing the actual cost of financing. Petitioner also failed to present any evidence as to when the Kallens purchased the facility, as to when the mortgage was placed on the facility, and as to whether the Kallens assumed a prior mortgage or obtained their own financing. Accordingly, Respondent properly disallowed the amortization expense in both Petitioner's 1980 and 1981 cost reports. Respondent had made a total adjustment for non-legend drugs in the amount of $15,244 for 1980 and 1981 combined. At the formal hearing, counsel requested an opportunity to attempt to work out an independent solution to this adjustment in order to remove that adjustment from consideration herein. The parties have agreed posthearing that $11,185 out of the Respondent's $15,244 adjustment should be disallowed and overpayment deductions by Respondent have been erroneous. Accordingly, Petitioner is entitled to receive from the Respondent the amount of $11,185 representing this non-legend drugs item.

Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that a Final Order be entered upholding Respondent's adjustments to Petitioner's Medicaid cost reports for the fiscal years ending June 30, 1980, and June 30, 1981, as to advertising, the Herlee consulting fee/home office costs, depreciation, and amortization; making any adjustment necessary as to Petitioner's return on equity; withdrawing Respondent's adjustment for short- term liabilitites for 1980; and memorializing the terms of the parties' stipulation as to non-legend drugs. DONE and RECOMMENDED this 4th day of April, 1984, in Tallahassee, Leon County, Florida. LINDA M. RIGOT, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 4th day of April, 1984. COPIES FURNISHED: Howard Todd Jaffe, Esquire 1915 Harrison Street Hollywood, Florida 33020-5098 Jay Adams, Esquire Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32301 David H. Pingree, Secretary Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32301

Florida Laws (1) 120.57
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HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, COMMUNITY CONVALESCENT CENTER, ROSEDALE MANOR, KENSINGTON MANOR, JACARANDA MANOR, WAKULLA MANOR, PASADENA MANOR, AND HEARTLAND OF ST. PETERSBURG vs DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES, 90-001492RU (1990)
Division of Administrative Hearings, Florida Filed:Tallahassee, Florida Feb. 27, 1990 Number: 90-001492RU Latest Update: Jul. 24, 1990

Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: Background Petitioners, Community Convalescent Center, Rosedale Manor, Kensington Manor, Jacaranda Manor, Wakulla Manor, Pasadena Manor and Heartland of St. Petersburg (petitioners, providers or nursing homes), are nursing homes operating in the State of Florida and licensed by respondent, Department of Health and Rehabilitative Services (HRS). They are owned and operated by the parent corporation, Health Care and Retirement Corporation of America (HCRC), which is also a petitioner in this cause. As the parent corporation, HCRC is commonly known in regulatory parlance as both a home office and a related party to all nursing homes in the chain organization. The parties have stipulated that HCRC provides various functions for the individual nursing homes and incurs property costs at the home office'. The nursing homes are participants in the Medicaid program administered by HRS. As such, each nursing home annually files with HRS a Medicaid cost report for itself and its home office. For regulatory purposes, the cost reports are identified as HRS Form 1542 and are revised from time to time by the agency. In conjunction with those reports, HRS has prepared a twenty-nine page document entitled "Instructions to Cost Report for Nursing Homes Participating in the Florida Medicaid Program Adopted April 1, 1983" (the instructions). The instructions have been distributed to all nursing homes in the State that participate in the Medicaid program, including petitioners. A copy of the instructions has been received in evidence as respondent's exhibit 3. Use of the instructions in the preparation of a provider's cost report is mandatory, and if not followed by the provider, may result in the rejection of the provider's cost report. This is evidenced by language in the cover letter sent with the instructions to each provider and which reads in pertinent part as follows: Please review these cost reports carefully, including the general instructions and basic classification of accounts, before attempting to complete these forms. Failure to use the current official forms or to abide by the current instructions will result in rejection of your cost report. Even so, in those instances where a provider ignores the instructions and records a cost in a manner different from that prescribed in the instructions, HRS does not summarily reject the report. However, during the audit process, the cost will be reclassified by HRS so that conformity with the instructions is achieved. Thus, at least as to the manner in which costs are treated for reimbursement purposes, the instruction form is the substantive standard for allocating such costs in all instances. In this regard, HRS agrees the instructions are enforced as if they were a rule. This controversy involves an allegation by petitioners that a portion of the instructions which requires nursing homes to classify and allocate certain indirect home office property costs as operating costs is a rule, not duly promulgated by the agency, and is therefore invalid. In the alternative, they contend that the instructions, if properly promulgated, are nonetheless an invalid exercise of delegated legislative authority because they are arbitrary, vague and vest unbridled discretion in the agency. Finally, they contend that HRS has utilized a policy, not adopted as a rule, which has the effect of permanently classifying indirect home office property costs as operating costs for reimbursement purposes. In this case, petitioners filed their cost reports, and after the audit process was concluded, suffered a reduction in their Medicaid reimbursement because of the challenged instructions and use of the policy. Accordingly, they have standing to initiate this action. Have the instructions been adopted as a rule? The parties are in disagreement as to whether the instructions have been adopted as a rule. To resolve this issue, the following facts have been established. To implement the Medicaid program, HRS has adopted a seventy-nine page plan known as the Florida Title XIX long Term Care Reimbursement Plan (the plan), which establishes a reimbursement by for nursing homes. The plan, which has been amended from time to time, has been adopted and incorporated by reference in Rule 10C-7.0482, Florida Administrative Code (1989). The relevant portion of that rule reads as follows: Reimbursement to participating nursing homes for services provided shall be in accord with the Florida Title XIX long-Term Care Reimbursement Plan as revised July 1, 1986 and incorporated herein by reference. (Emphasis supplied) Each time the plan has been revised, the rule has likewise been amended and a copy of the plan filed with the Department of State. The above rule does not make reference to the instructions. Moreover, the plan does not use the words "incorporated by reference" when it refers to the instructions. However, the following advice to its users is found in paragraph A of section I of the plan: Each provider participating in the Florida Medicaid nursing home program shall submit a uniform cost report and related documents required by this Plan using Department of Health and Rehabilitative Serviced (HRS) form HRS 1542, April 1983, as revised and prepared in accordance with the related instructions. (Emphasis supplied) Until June 1986 HRS did not file the instructions with the Department of State nor did it refer to the instructions in the plan. At that time HRS was in the process of amending rule 10C-7.0482 to incorporate by reference the latest version of the plan and was advised by the Joint Administrative Procedures Committee, which reviews all agency rules, to reference the cost report (Form 1542) and related instructions in the plan and to file a copy of both documents with the committee Pursuant to that suggestion, HRS amended its plan by adding the above underscored language and thereafter filed a copy of both documents with the Department of State and the committee when the rule amendment was adopted. Thus, the instructions and the form are an integral part of the plan, and the users of the plan have been placed on notice that the cost report must be "prepared in accordance with the related instructions", a copy of which is on file for public scrutiny with the Department of State. C. A general overview of the reimbursement process Petitioners have alleged that a portion of paragraph E of the instructions which directs providers to record indirect home office costs as operating costs on Form 1542 vests unbridled discretion in the agency and is arbitrary and vague. The paragraph which underlies this controversy is found on page 6 of the instructions and reads in relevant part as follows: Inclusion in Provider Costs. Home office costs not directly allocated to the providers should be included in each account in the provider's trial balance and then through the provider's cost-finding process. . . Home office costs which are not directly allocated to the provider but are allocated on a functional or pooled basis should be included in the provider's cost report as part of the provider's general and administrative costs. (Emphasis supplied) To resolve this technical issue, it is necessary to briefly review the manner in which costs are recorded and allocated in the Medicaid reimbursement process as well as the pertinent guidelines used by HRS in performing that task. In the most basic terms, there are two separate and distinct steps in the Medicaid reimbursement process: (1) the completion and filing of a cost report by the provider, and (2) the audit process to confirm whether the reported expense classifications in the report have been made in accordance with reimbursement principles. As to the first step, a Medicaid provider must annually file a cost report with HRS setting forth both its own and its parent's costs incurred in providing services to Medicaid patients during a specified accounting period. To this end, HRS has prescribed a cost report form, basic classification of accounts and related instructions for use by the provider. The classification of accounts assists providers in classifying costs into the proper cost centers when reporting their expenditures to HRS while the instructions provide directions to the nursing home for completion of the cost report. After the reports are filed, through a series of allocations and other steps the unaudited information in the report is used to calculate prospective reimbursement rates for the provider for each of four cost components used by HRS in the reimbursement process: patient care costs, property costs, operating costs, and return on equity. It is noted here that for the operating component, HRS has established a "cap" on the amount of reimbursement which may not be exceeded even if a provider's costs exceed that limitation. For that reason, a provider might wish to shift a cost from the operating component to the property component in the event the ceiling had already been reached. Finally, in some cases, the cost reports are later subjected to an audit which may result in the rate being revised in a manner consistent with the audit results. Indeed, it was after petitioners' cost reports were audited that this proceeding ensued. As noted earlier, HRS has adopted by reference in rule 10C-7.0482 the Florida Title XIX long Term Care Reimbursement Plan which establishes the methodology for reimbursement of nursing home Medicaid providers. It is fair to say that, whenever a cost issue arises, the plan is controlling except where the plan does not address the issue. In that case, HRS looks to the federal Medicare principles of reimbursement for guidance. These principles are contained in Health Insurance Manual No. 15 (HIM 15), a compendium of federal regulations pertaining to Medicare which have been adopted for use by the plan. If the issue is not addressed in HIM 15, generally accepted accounting principles (GAAP) control the resolution of the problem. Therefore, except where modified by the plan or administrative rule, HRS utilizes the same cost finding principles as Medicare. As noted in finding of fact 8, paragraph E of the instructions directs a provider to record indirect home office costs on its cost report in the following manner: Home office costs which are not directly allocated to the provider but are allocated on a functional or pooled basic should be included in the provider's cost report as part of the provider's general and administrative costs. Although the plan itself makes no distinction between direct and indirect costs, the instructions distinguish between direct, functional and pooled home office costs. Relying on the above language, HRS considers all home office functional and pooled costs to be indirect in nature, and requires that they be recorded and then allocated as G & A (operating) costs irrespective of their original character. 1/ Once the home office property costs are recorded in the cost report pursuant to the instructions, HRS utilizes a policy of treating the classification as permanent, that is the cost item cannot be reclassified to another component or reimbursed other than as an operating cost. This policy has all of the attributes of a rule, is given the force and effect of a rule in the reimbursement process but has never been formally promulgated as a rule under chapter 120. The agency has given a number of reasons to justify its actions, including the use of an asset's function as a means of determining whether the asset is directly or indirectly related to the home office or provider, its view that the home office provides nothing more than general and administrative services to the chain members, and its laudable goal of not allowing providers to abuse the Medicaid process by shifting costs from one cost center to another to avoid a capped component. However, as will be shown hereinafter, and within the context of the issues framed in the petition, the justification for such actions is not pertinent to a resolution of this controversy. D. Differences between the instructions and the plan Petitioners point to a number of provisions in the plan which provide for a different treatment of home office property costs in the reimbursement process and which are at odds with HRS's policy of prohibiting a reclassification of such costs once they are recorded in the cost report. To begin with, home office costs are not referred to by name in the plan. Rather, the plan provides that home office costs be reimbursed in accordance with principles applicable to related organizations. According to paragraph F of section III of the plan: Costs applicable to services, facilities, and supplies furnished to a provider by organizations related to a provider by common ownership or control shall be governed by 42 CFR 405.427, Medicare (Title XVIII) Principles of Reimbursement, and Chapter 10, HIM 15. Thus, the plan requires that home office (related organization) costs be reimbursed in accordance with federal Medicare reimbursement principles and HIM In this vein, it is noted that Chapter 10 of HIM 15, which governs the Medicaid reimbursement principles applicable to home office costs, is facially at variance in several respects with the treatment of home office costs required by the instructions. More specifically, section 1005 provides that: The related organization's costs include all reasonable costs, direct and indirect, incurred in the furnishing of services, facilities and supplies to the provider. The intent is to treat the costs incurred by the supplier as if they were incurred by, the provider itself. (Emphasis supplied) This means that if a home office incurs property costs, they should be treated as if they were incurred by the facility itself. Next, section 2150.3, which pertains to the allocation of home office costs to components in the chain, requires that the following identification and classification of home office costs be made: Starting with its total costs, including those costs on behalf of providers, the home office must delete all costs which are not allowable in accordance with program instructions. The remaining costs (total allowable costs) will then be identified as capital-related costs and noncapital-related costs and allocated as stated below to all the components . . . in the chain which received services from the home office. In other words, inn the reimbursement process, after the elimination of nonallowable costs all remaining costs must be segregated into capital and noncapital classifications and allocated on that basis. It should be noted here that for purposes of both Medicare and Medicaid reimbursement principles, a capital-related cost is a property cost. Finally, section 1310 of HIM 15 establishes the following general prohibition regarding the character of home office costs: Where the provider is including in the cost report costs incurred by related organizations, the nature of the costs (i. e., capital-related or operating costs) do not change. The provider must treat capital- related costs incurred by a related organization as capital-related costs of the provider. (Emphasis supplied) Put another way, the foregoing regulation provides that the character of a cost should not be changed simply because it was incurred by a related party. Accordingly, under the literal language of the regulation, if the home office incurs a capital- related cost, it should be treated in the same fashion by the provider for reimbursement purposes. This principle is further supported by section 1311 of HIM 15 which allows a G & A cost to be reclassified to a property cost in order to satisfy the requirements of section 1310. Therefore, as to the above principles enunciated in the plan, the challenged instructions are facially at variance and leave the user in doubt as to which allocation and reimbursement scheme will be used by the agency. In addition to the foregoing Medicare principles, petitioners rely on two other definitions and an allocation principle within the plan which support their position. First, the plan defines "nursing home property costs" as: Those costs related to the ownership or leasing of a nursing home. Such costs may include property taxes, insurance, interest and depreciation or rent. It also defines "nursing home operating costs" as: Those costs not directly related to patient care or property costs, such as administrative, plant operation, laundry and housekeeping costs. Return on equity or use allowance costs are not included in operating costs. Finally, paragraph B.4. of section V of tee plan provides that, in calculating the reimbursement rates for a provider, HRS must: . . . determine allowable Medicaid property costs, operating costs, patient care costs, and return on equity or use allowance. Patient care costs include those costs directly attributable to nursing services, dietary costs, activity costs, social services costs, and all medically ordered therapies. All other costs, exclusive of property costs and return on equity or use allowance costs, are considered operating costs. These definitions, if taken literally, would lead a user of the plan to believe that if a cost had the characteristics of a property cost, it would be so classified and allocated on that basis. Finally, petitioners cite to provisions within the chart of accounts which define property and operating costs in a manner similar to those in the preceding paragraph. These provisions can also be reasonably construed to mean that a cost will be classified and allocated in a manner consistent with those definitions. Of particular significance is the fact that HRS has failed to include language in either the plan or instructions which advises the user which choice is controlling where facial differences between the plan and instructions exist.

USC (1) 42 CFR 405.427 Florida Laws (4) 120.54120.56120.57120.68 Florida Administrative Code (2) 15-1.0051S-1.005
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JULIA RICE vs. DEPARTMENT OF BANKING AND FINANCE, 78-001070 (1978)
Division of Administrative Hearings, Florida Number: 78-001070 Latest Update: Apr. 10, 1979

Findings Of Fact The Petitioner owns property in Dade County, Florida, located at 47 Northwest 32nd Place, Miami, Florida. Improvements have been erected on the property. The Petitioner leases the property and improvements to Flordean Nursing Home, Inc., a Florida corporation. The corporation operates a skilled nursing home on the premises, and pays a monthly rent of five hundred dollars to the Petitioner for the exclusive occupation of the property and improvements. The Petitioner is the president and majority stockholder of the corporation, and the administrator of the nursing home. The nursing home is licensed by the Florida Department of Health and Rehabilitative Services. The corporation provides extended care treatment and skilled nursing home services to its clients or patients. The clients pay a single charge for the services which include a room, nursing care, laundry, meals, activities, and medical attentions. Activities include movies, religious services, birthday and other holiday celebrations, and similar functions. The corporation does not and has never simply rented a room to any client. The nursing home is a commercial venture for profit, and it in fact makes a profit. The average age of the nursing home guests is 84. Typically they are admitted through physicians. They become permanent residents. They receive their mail at the home and typically do not leave until they die. The average stay is three years, five months. At the time of hearing the nursing home housed 52 guests in 19 rooms. The rooms are private, semiprivate and three in a room. The petitioner applied for a certificate of registration from the Florida Department of Revenue in June, 1968. The certificate was issued under sales tax number 23-08-102316-82. The Petitioner has paid sales taxes on the monthly rental payments that she has received from the corporation. She is seeking a refund of these taxes for the period from March 1, 1972 through and including May 30, 1978. The corporation does not collect sales taxes from the nursing home guests.

Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is hereby, RECOMMENDED: That the Respondent enter a final order denying the petitioner's refund application. DONE and ORDERED this 9th day of January, 1979, in Tallahassee, Florida. G. STEVEN PFEIFFER, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Joseph C. Mellichamp, III, Assistant Attorney General The Capitol, Rm. LL04 Tallahassee, Florida 32304 Jack R. Rice, Jr., Esquire P. O. Box 350838 2424 N. W. First Street Miami, Florida 33135

Florida Laws (5) 120.57212.03212.031212.08215.26
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CONVALESCENT CENTER OF GAINESVILLE vs. DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES, 79-000585 (1979)
Division of Administrative Hearings, Florida Number: 79-000585 Latest Update: Aug. 10, 1983

Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant facts are found: At all times pertinent to this proceeding, petitioner University Home Foundation, Inc., d/b/a Convalescent Center of Gainesville, was a nursing home providing skilled nursing care to Medicaid eligible patients. Petitioner was certified to participate in the Florida Medicaid Program. Respondent is the agency responsible for the administration and payment of Medicaid funds. An eligible entity is required to maintain adequate business records capable of audit by the respondent. Fiscal Year 1975 Petitioner filed with the respondent its cost report for the fiscal year January 1, 1975 to December 31, 1975, claiming reimbursable expenses of some $737,000. After an audit of the cost report by respondent, petitioner was informed in January of 1979 that adjustments amounting to approximately $131,000 were necessary and that petitioner was responsible for an overpayment of $56,183. Petitioner was advised by the respondent that its accounting records for the 1975 fiscal year were maintained in an incomplete and unsatisfactory manner. At the time petitioner's Administrator, Paul C. Allen, received this audit report, he did not have access to the work papers of the certified public accountant who prepared the cost report, but he did have access to the nursing home's financial records. As noted in the Introduction, petitioner is not contesting all the audit adjustments made by the respondent to its 1975 cost report. It is contesting only those disallowances of expenses relating to two automobiles and a mobile telephone, life and general insurance, a $20,000 bonus to the owner, social security taxes, a directory advertisement, interest, food and depreciation. Automobiles and mobile telephone. While allowing automobile expenses claimed for a 1969 Dodge Dart (used by the kitchen and maintenance staff for purchasing supplies) and a 1973 Ford station wagon (used mainly to transport patients), the respondent's auditor disallowed expenses claimed for a 1973 Cadillac (11 months) and a 1975 Lincoln Continental (1 month), as well as the expenses related to a telephone in these cars. The auditor concluded that these automobiles were used by the owner for personal use, were not related to patient care and that the expenses claimed were not documented. Administrator Paul C. Allen admitted that he drove these cars between the nursing home and his residence located 22 miles away and that he did not keep mileage logs for those vehicles. He estimates that 52 percent of the use of the automobiles was directly related to the nursing home business and patient care, and reimbursement is sought for this amount. This estimate is derived from starting with an average of 25,000 miles per year which the cars were driven, and deducting the 44 mile round trip to and from the Administrator's residence for 260 working days in a calendar year, resulting in 11,440 miles of the car's use for personal purposes. The remaining mileage, 13,560 (52 percent of 25,000) is claimed as being used for nursing home business or patient care. A telephone in these cars was also claimed as a reimbursable expense inasmuch as it was used like a "pager" when the Administrator was not on the nursing home premises. This mobile telephone expense, as well as the interest claimed, was disallowed by the respondent's auditor on the basis that it was an unnecessary cost of running a nursing home and was not directly related to patient care. Insurance. On its cost report, petitioner claimed expenses for a general hospitalization insurance policy on its employees and a life insurance policy on the Administrator. No supporting documentation was offered on the general insurance, and this expense was consequently disallowed because there was no indication that such insurance coverage was ever furnished. According to the Administrator, the mortgage loan commitment for the nursing home required that a $100,000 life insurance policy be maintained on the owner/Administrator to secure repayment of the loan in the event of his death. The documentation for such a requirement was not available to the Administrator because the nursing home was refinanced in 1976. Expenses claimed for life insurance on Mr. Allen was disallowed because the $100,000 life insurance policy constituted a fringe benefit to the owner, and the nursing home was at least an indirect beneficiary of an insurance policy on the Administrator. Bonus to owner and taxes. While petitioner contests the respondent's disallowance of a $20,000 bonus to the owner and $3,893 claimed as expenses related to the payment of social security taxes, no competent evidence was presented by the petitioner on these two items. In fact, Administrator Allen could not recall whether or not he received a bonus in 1975, and petitioner's expert accountant did not know what was actually paid to petitioner's staff in 1975. The $20,000 bonus was adjusted out by the respondent because it exceeded the amount allowable as an owner's salary. The tax expenses disallowed were those which exceeded the comparison between petitioner's general ledger and the payroll tax returns. Food expenses. While the respondent's auditors were able to verify from invoices approximately $63,800 claimed by petitioner as food expenses, there was no supporting documentation for the remaining $848 claimed. Petitioner was unable to provide such documentation at the hearing. Depreciation expense. Normally, an asset is capitalized and expensed or depreciated when it is incurred or installed. The fire sprinkler system for the petitioner's nursing home was capitalized in May of 1974, but payment on the system was expensed again in 1975. The petitioner provided no supporting documentation for this expenditure. Directory advertisement. According to Mr. Allen, the petitioner spent $317 for an advertisement in the yellow pages of a local telephone directory. The ad consisted of a small box to show the address of the facility for the benefit of the families of present and future patients. The ad itself was not produced as evidence at the hearing. Expenses for yellow page advertisements are allowed when the ads inform the public of the services which are provided. Such expenses are not allowed when the contents of the ad are not related to patient care or when the ad is in excess of what other nursing homes in the same geographic location are using. No evidence was produced as to other nursing home directory advertisements in the area. Fiscal Year 1979 Apartment rental. For the 1979 fiscal year, the petitioner claimed as an allowable expense the sum of $1,190 paid as apartment rental for the Administrator's son who performed maintenance duties for the nursing home. The Administrator testified that the apartment was near the facility, that a maintenance person needed to be on call 24 hours a day, and that the rental amount was considered part of the son's compensation for his duties with the nursing home. This expense was disallowed by the respondent inasmuch as there was not sufficient supporting documentation to illustrate that the rental costs were part of the services provided to the nursing home. Since the $1,190 was paid to a related party for the cost of apartment rental, it must be demonstrated that such costs do not exceed the price of comparable services or supplies which could be purchased elsewhere. There was nothing in the rental agreement to indicate that payment of the rent was considered part of the lessee's salary by the nursing home to assure 24 hours of maintenance care, nor was any other documentary evidence adduced to this effect. Travel. In its 1979 cost report, petitioner claimed travel expenses for trips taken by the Administrator and his wife to Hawaii, Mexico and Australia. It was alleged that these trips were taken for educational purposes. While expenses for the Hawaii program were allowed, respondent did not allow $3,528 claimed as expenses for the trips to Australia and Mexico. Petitioner presented an agenda of the program relating to the Australia trip which revealed that the program was in connection with the annual meeting of INTERCARE, an international nonprofit association dedicated to the improved quality of life for the convalescent and chronically ill. No evidence was produced relating to the trip to Mexico. The respondent disallowed expenses relating to the trips to Mexico and Australia taken by the Administrator and his wife on the basis that such expenses were unreasonable and unnecessary. It was not considered prudent for a nursing home administrator to travel this extensively and claim reimbursement in his Medicaid nursing home cost report. Respondent also considered the fact that a portion of the expenses claimed were for a party related to the owner/Administrator. Business entertainment. The respondent disallowed $565 claimed by petitioner as business entertainment, because this amount related to liquor purchased for an employee Christmas party. Expenses claimed for food for that social function were allowed by the respondent. Loss on sale of fixed asset. Petitioner claimed as an expense the loss it realized from a wrecked 1979 Lincoln automobile. It was requested that the loss be added to the cost of the new replacement vehicle, also a 1979 Lincoln, for depreciation purposes and recovered over the useful life of such vehicle through depreciation write-offs. Whether or not either of the 1979 Lincoln's were allowed for reimbursement purposes was not established at the hearing. According to the Health Insurance Manual 15, gains or losses realized from the exchange or trade-in of depreciable assets are not included in the determination of allowable costs. Proprietor's compensation. The respondent disallowed the amount of $15,000 claimed by the petitioner as compensation for the Director of Social Services for the third and fourth quarters of 1979. That position was held by the Administrator's wife, Marjorie Allen, who also was a 95 percent stockholder in the corporation which owned the nursing home. According to Mrs. Allen, the duties she performed as social services director, a full-time position, included the transporting of patients to medical appointments, the taking of social histories from newly admitted patients, working with the patients and their families and working with different organizations and agencies. The petitioner's facility also had an Activities Director in 1979, who assisted in such things as crafts and sewing and cooking classes. The $15,000 was disallowed by respondent because there was no supporting documentation produced that the salary related to patient care, because Mrs. Allen was a related party and because there appeared to be a duplication of services between the Activities Director and the Social Services Director. Medicare adjustment. Adjustments for Medicare can be made to reflect changes resulting from Medicare audits in the year that the differences become known. The recomputation is performed in the provider's cost report for the year in which the difference becomes known. Petitioner did introduce evidence that the Medicare adjustment for 1979 should be $119,398 in lieu of the respondent's adjustment of $123,648. As of the date of the hearing, respondent had not been afforded the opportunity to review the final adjusted Medicare cost report.

Recommendation Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that a Final Order be entered finding the petitioner liable for the overpayments set forth in the final audit reports of the petitioner's Medicaid cost reports for 1975 and 1979, less any adjustment required for the 1979 Medicare cost report. Respectfully submitted and entered this 22nd day of June, 1983, in Tallahassee, Florida. DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 22nd day of June, 1983. COPIES FURNISHED: Mitzie Cockrell Austin, Esquire Scruggs & Carmichael One Southeast First Avenue Post Office Drawer C Gainesville, Florida 32602 Joseph L. Shields, Esquire Office of Audit & Quality Control Services Department of Health and Rehabilitative Services Building One, Room 406 1323 Winewood Blvd. Tallahassee, Florida 32301 David Pingree Secretary Department of Health and Rehabilitative Services 1323 Winewood Blvd. Tallahassee, Florida 32301

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I.H.S. OF BRADEN RIVER vs AGENCY FOR HEALTH CARE ADMINISTRATION, 03-004736MPI (2003)
Division of Administrative Hearings, Florida Filed:Tallahassee, Florida Dec. 16, 2003 Number: 03-004736MPI Latest Update: Dec. 24, 2024
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