Findings Of Fact The Parties. The Petitioner in case number 91-4632, Brighton Hall Co. (hereinafter referred to as "Brighton"), is a general partnership. Prior to March 6, 1990, Brighton owned and operated West Bay Nursing Center (hereinafter referred to as "West Bay"), a 120-bed nursing home in Oldsmar, Florida. The Petitioner in case number 91-4634, Shive Nursing Centers, Inc. (hereinafter referred to as "Shive Nursing"), is a corporation. Prior to March 6, 1990, Shive Nursing owned and operated Sunset Point Nursing Center (hereinafter referred to as "Sunset Point"), a 120-bed nursing home located in Clearwater, Florida. The Petitioner in case numbers 91-4635 and 91-4636, GHF, Inc. (hereinafter referred to as "GHF"), is a corporation. Prior to March 6, 1990, GHF owned and operated Oakhurst Manor Nursing Center (hereinafter referred to as "Oakhurst") and Orchard Ridge Nursing Center (hereinafter referred to as "Orchard Ridge"), two 120-bed nursing homes located in Ocala and New Port Richey, Florida, respectively. The Petitioner in case number 4637, Springwood Nursing Center, Ltd. (hereinafter referred to as "Springwood"), is a Florida limited partnership. Prior to March 6, 1990, Springwood owned and operated Springwood Nursing Center, a 120-bed nursing home located in Sarasota, Florida. All of the Petitioners owned and operated nursing homes which participated in the Florida Medicaid program, provided services to Medicaid patients and received reimbursement for Medicaid services from the Respondent. The Respondent in these cases, the Department of Health and Rehabilitative Services (hereinafter referred to as the "Department"), is the state agency charged with administering the Florida Medicaid program. The Florida Medicaid Program. The Florida Medicaid program is a program for the reimbursement of the costs of providing medical care to certain patients in Florida. The State of Florida enters into contracts with nursing homes for the treatment of Medicaid patients. Nursing homes agree to provide medical care and the State of Florida agrees to reimburse the nursing homes on a per diem basis for those services. One of the components of costs which are considered in determining the Medicaid per diem rate is the property cost component. Included within the property cost component is a reimbursement for depreciation expense. Generally, depreciation is the allocation of the cost of certain assets over the useful life of those assets. For example, if an asset cost $100,000.00 and it will be useful for 10 years, it is reasonable to assume that 10% of its cost, or $10,000.00, will be attributable to each year of the asset's useful life. Only assets considered to have a limited useful life are considered depreciable. For Medicaid purposes, those assets generally include tangible assets, such as buildings, equipment and furnishings. Land is not a depreciable asset. Medicaid recognizes that assets with a limited useful life which are used in providing medical services constitute part of the costs which should be reimbursed to providers of Medicaid services. Therefore, depreciation expense is included as part of the property component of the Medicaid per diem reimbursement rate. Sale of the Nursing Home Facilities. When a change of ownership of a nursing home facility which has participated in the Florida Medicaid program takes place, the nursing home terminates its participation in the Medicaid program. Any amounts which were paid for depreciation to the former owner of a nursing home may be recovered (hereinafter referred to as "depreciation recapture"). Depreciation recapture may occur to the extent that there is a gain realized by the former owner of the nursing home facility on the sale of the facility's depreciable assets. There is a gain realized on the sale of depreciable assets when the amount received for a depreciable asset exceeds the net book value (cost less accumulated depreciation) of the asset. To the extent that a gain is realized on the sale of a depreciable asset, the owner may be receiving a reimbursement for amounts the Medicaid program has already paid the owner for depreciation. On or about November 29, 1989, Brighton, Shive Nursing and GHF entered into an Asset Purchase Agreement with Krupp I, Inc., a Massachusetts corporation, for the sale of West Bay, Sunset Point, Oakhurst and Orchard Ridge. On or about November 29, 1989, Springwood entered into an Asset Purchase Agreement with Krupp Yield Plus Limited Partnership, a Massachusetts limited partnership, for the sale of Springwood Nursing Center. The sale of the five nursing home facilities was part of the sale of nine facilities by the principal owner of the facilities. The November 29, 1989, Asset Purchase Agreements referenced in findings of fact 22 and 23 (hereinafter referred to as the "Asset Purchase Agreements"), included as an attachment a schedule titled the "Purchase Price Allocation" allocating the purchase price to the assets of each nursing home facility sold. The total purchase price of $42,239,650.00 was allocated on the Purchase Price Allocation among the nine nursing homes and the corporate offices which were the subject of the sale. The purchase price allocated to each nursing home facility was further allocated on the Purchase Price Allocation to the various assets of each facility, including land (a non-depreciable asset), buildings and improvements, furniture, fixtures and equipment, computer software, supplies and inventory, certificate of need, patient lists, covenant not to compete, assembled work force, favorable lease and enterprise/going concern. The closing of the Asset Purchase Agreements took place on March 6, 1990. The Department's Treatment of the Sale of the Nursing Home Facilities. When the Department was informed of the sale of the five nursing home facilities at issue in this proceeding, the Department made a determination of whether depreciation recapture was due on the sale. The Department, in determining the amount of gain on the sale, utilized the amounts allocated to the various depreciable assets of each nursing home facility on the Purchase Price Allocation as the amount realized for those assets. The amount realized for depreciable assets reported by the Petitioners less the net book value for the depreciable assets was determined to be the gain realized on the sale of the Petitioners' nursing homes facilities. This gain, which was less than the depreciation of the depreciable assets, was determined to be the amount subject to depreciation recapture. After calculating the amount of depreciation recapture for each facility, the Department notified each Petitioner by letter that depreciation recapture was due in the following amounts: Date of Letter Petitioner Recapture June 25, 1991 Brighton $175,627.00 June 5, 1991 Shive Nursing 94,631.00 June 15, 1991 GHF (Oakhurst) 278,169.00 June 14, 1991 GHF (Orchard) 115,492.00 June 7, 1991 Springwood 231,320.00 On July 5, 1991, the Petitioners challenged the Department's proposed action. Following discussions with Department officials by a representative of the Petitioners, the Department amended the amount of depreciation recapture on October 10, 1991, by reducing the amount of recapture for the following Petitioners: Petitioner Recapture Reduction Brighton $3,485.00 Shive Nursing 69,370.00 GHF (Orchard) 36.00 The parties stipulated that these proceedings would take into account these amended amounts and a Motion for Leave to Amend Letter Requesting Depreciation Recapture was granted by Order entered October 23, 1991. The Manner in Which the Department Determined the Amount of Depreciation Recapture. Rule 10C-7.0482, Florida Administrative Code, provides the framework for the operation of the Medicaid program in Florida. This Rule specifically incorporates Florida Title XIX Long-Term Care Reimbursement Plan, Version IV, as a part of the Rule. The manner in which depreciation recapture is determined by the Department is governed by Section III.H.1. of Florida Title XIX Long-Term Care Reimbursement Plan, Version IV (hereinafter referred to as "Title XIX"), which provides, in pertinent part: Recapture of depreciation resulting from sale of assets. The sale of depreciable assets, or substantial portion thereof, at a price in excess of the cost of the property as reduced by accumulated depreciation, resulting in a gain on sale, and calculated in accordance with Medicare (Title XVIII) Principles of Reimbursement, indicates the fact that depreciation used for the purpose of computing allowable costs was greater than the actual economic depreciation. . . . The gross recapture amount shall be the lesser of the actual gain on the sale allocated to the periods during which depreciation was paid or the accumulated depreciation after the effective date of January 1, 1972 and prior to the implementation of payments based on FRVS to the facility. . . . [Emphasis added]. The terms "Medicare (Title XVIII) Principles of Reimbursement", are defined in Section IX of Title XIX as "Health Insurance for the Aged, Blind or Disabled (Medicare), as provided in the Social Security Act (42 U.S.C. 1395- 1395pp)." Medicare (Title XVIII) Principles of Reimbursement, do not contain specific provisions governing how gain on a sale of depreciable assets is to be calculated. The federal regulations to implement Medicare (Title XVIII), however, including the following: (iv) If a provider sells more than one asset for a lump sum sales price, the gain or loss on the sale of each depreciable asset must be determined by allocating the lump sum sales price among all the assets sold, in accordance with the fair market value of each asset as it was used by the provider at the time of sale. If the buyer and seller cannot agree on an allocation of the sales price, or if they do agree but there is insufficient documentation of the current fair market value of each asset, the intermediary for the selling provider will require an expert to establish the fair market value of each asset and will make an allocation of the sales price in accordance with the appraisal. 42 C.F.R. 413.134(f)(2)(iv). The Department of Health and Human Services, the agency responsible for administering the federal Medicaid program, has also promulgated a Provider Reimbursement Manual for guidance in the federal Medicare reimbursement program. Of pertinence to this proceeding is Chapter One, Section 104.14.B, which contains language similar to the provisions of 42 C.F.R. 413.134(f)(2)(iv), quoted in finding of fact 38. The terms "fair market value" are defined in Medicare (Title XVIII), as follows: Fair market value is the price that the asset would bring by bona fide bargaining between well-informed buyers and sellers at the date of acquisition. Usually the fair market value is the price that bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition. 42 U.S.C. 413.134(b)(2). The federal regulations implementing Medicare (Title XVIII), and the Provider Reimbursement Manual are not specifically incorporated by reference in the Department's rules or in Title XIX. As a matter of policy, the Department relies upon the federal regulations and the Provider Reimbursement Manual in determining the amount of gain on the sale of depreciable assets. To the extent that an issue involving depreciation recapture is not resolved by the foregoing rules and policies, the Department relies on Generally Accepted Accounting Principles. These policies are reasonable. The Department, in applying 42 C.F.R. 413.134(f)(2)(iv), treats a written allocation of the sales price between a buyer and a seller included in a sales and purchase agreement as sufficient documentation of the fair market value of each asset sold. Absent other evidence which would cause some question about the reasonableness of relying upon such an allocation, this policy is reasonable. Absent such contrary evidence, there is no reason why the Department should not assume that the parties to a sales and purchase agreement have reached an arms length agreement as to the fair market value of the assets being sold and that a schedule or other document setting out the agreement of the parties is sufficient documentation of that agreement. In this case, the Department has utilized a written allocation of the sales price (the Purchase Price Allocation) to determine gain on the sales at issue despite other documentation indicating that the allocated amounts may not constitute fair market value and raising a question as to whether the Purchase Price Allocation is sufficient documentation. It may be reasonable for the Department to conclude that a sale of assets does not involve "insufficient documentation" if the only evidence of the allocation of the sales price to the assets being sold is a written allocation of the sales price included as part of the sales and purchase agreement. But where other documentation of the fair market value of the assets is provided to the Department which is inconsistent with the written allocation included in the sales and purchase agreement, it is unreasonable for the Department to ignore that additional evidence. Absent a specific rule to the contrary, if other documentation is provided to the Department that calls into question the accuracy of a written allocation of the sales price, the Department should review and consider that documentation in determining whether the written allocation alone constitutes "insufficient documentation". In this case, the Department reasonably relied upon the Purchase Price Allocation originally provided to it to determine the amount of depreciation recapture. It was not reasonable, however, for the Department to ignore appraisals of the depreciable assets at issue performed on behalf of the Petitioners or to ignore other information concerning industry averages for new nursing home equipment in Florida on a per bed basis once this information was provided to the Department. Information Provided by the Petitioners. The Petitioners do not dispute that the Department is entitled to depreciation recapture on the sale of the facilities at issue in this proceeding. They dispute the amount of depreciation recapture, however. During the hearing of these cases, evidence was presented concerning industry averages for new nursing home equipment in Florida: generally, a Florida nursing home facility can be equipped with new equipment for $1,500.00 to $3,500.00 per bed. The cost of equipping the nursing home facilities at issue in these cases with used equipment based upon the allocation of values included in the Purchase Price Allocation is between $8,000.00 and $10,000.00. During 1988 and early 1989, prior to the time that the Asset Purchase Agreements were entered into, Craig Smith, appraised twelve nursing home facilities, including the nursing home facilities at issue in this proceeding. Mr. Smith holds a M.A.I. (Member Appraisal Institute) designation. The appraisals conducted by Mr. Smith were provided to the Department's Office of Licensure and Certification as required by Rule 10D- 29.103, Florida Administrative Code. The appraisals were provided by the purchasers of the nursing home facilities as part of the process of obtaining a license from the Department to operate the nursing homes facilities. The Department did not, however, rely upon or take into account the appraisals in determining the amount of depreciation recapture even though they were provided to the office responsible for making that determination. The Department, for purposes of determining the amount of recapture relied only on the Asset Purchase Agreement. The disparity between the amounts allocated to the depreciable assets of the nursing home facilities in the Purchase Price Allocation and the appraised values is significant. Based upon the weight of the evidence, the appraisals conducted by Mr. Smith and his determination of the fair market value of the depreciable assets of the nursing home facilities at issue in this proceeding are more reflective of the fair market value of those assets. The Petitioners presented evidence as to the amount of depreciation recapture which should be paid to the Department based upon the appraised value of the assets at issue in this proceeding. These amounts were not refuted by the Department. The amount of depreciation recapture the Department may reasonably receive from the Petitioners, based upon appraised fair market value, is as follows: Petitioner Recapture Brighton $ 95,915.00 Shive Nursing 27,502.00 GHF (Oakhurst) 229,222.00 GHF (Orchard) 78,141.00 Springwood 161,762.00 The Treatment of the Purchaser of Nursing Home Facilities. Prior to the change of ownership of a nursing home facility in Florida which intends to continue participating in the Medicaid program, the new owner must file an application with the Department's Office of Licensure and Certification for approval of the change and issuance of a license to operate the facility. Among the things to be reported by the new owner, is a fair market value appraisal of the nursing homes assets conducted by an appraisal expert. This requirement is specified, however, by the specific provisions of Rule 10D- 29.103(7)(i)9.b., Florida Administrative Code. This Rule does not specifically apply to the determination of depreciation recapture. The amount (known as "basis") which may be used by the new owner in the determination of the amount of depreciation expense entering into the new owner's per diem reimbursement rate is determined by a comparison of the fair market value appraisal required by Rule 10D-29.103(7)(i)9.b., Florida Administrative Code, the sales contract price and the cost of the facility for the owner of the facility on July 18, 1984. The manner utilized by the Department in its determination of depreciation recapture on the sale of a nursing home facility and the determination of the basis for the assets of the same facility for the new owner pursuant to Rule 10D-29.103, Florida Administrative Code, can result in the use of different amounts as the amount paid for those assets. In light of the conclusion concerning the invalidity of the Department's policy in these cases, it is not necessary to determine whether the Department's difference in treatment of the Petitioners and the buyers of the Petitioners' nursing homes was improper.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered by the Department requiring the Petitioners to pay to the Department the amounts set our in finding of fact 55 as depreciation recapture owed as a result of the sale of depreciable assets utilized by the Petitioners in the Florida Medicaid program. DONE and ENTERED this 20th day of February, 1992, in Tallahassee, Florida. LARRY J. SARTIN Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 20th day of February, 1992. APPENDIX Case Number 91-4632 The parties have submitted proposed findings of fact. It has been noted below which proposed findings of fact have been generally accepted and the paragraph number(s) in the Recommended Order where they have been accepted, if any. Those proposed findings of fact which have been rejected and the reason for their rejection have also been noted. The Petitioner's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection 1 1-2, 9 and hereby accepted. 2 3-4, 9 and hereby accepted. 3 5-6, 9 and hereby accepted. 4 7-9 and hereby accepted. 5 10 and hereby accepted. 6 11-12 and hereby accepted. 7 See 13-14. 8-11 Not relevant. 12 35. 13 15-16. 14 13-14 and 16. 15 18-19. 16 56 and hereby accepted. 17 57. 18 58. 19 19. 20 20-21. 21 36. 22 Hereby accepted. 23 Not relevant. 24 See 36-41. 25 See 38-39. 26 41. 27 42. 28 22-25. 29 50 and hereby accepted. 30 25. 31 26-28. 32 Not relevant. 33 Not supported by the weight of the evidence. 34-35 Not relevant. 36-37 51. 38 32. 39 34 and hereby accepted. 40 34. 41 33. 42 42-44. 43 38-39. 44 40. 45 42-43. The last sentence is not relevant to this proceeding. 46 43. 47 52 48-51 Not relevant to this proceeding. 52-54 See 42-47. 55 49 and 51. 56 Not supported by the weight of the evidence. 57 49 and 52. 58 See 42-47. 59 Hereby accepted. 60 42-47 and 54-55. 61 Not supported by the weight of the evidence. 62 See 42-47 and 54-55. 63 Not relevant to this proceeding. 64-65 54-55. The Respondent's Proposed Findings of Fact Proposed Finding Paragraph Number in Recommended Order of Fact Number of Acceptance or Reason for Rejection 1-2, 5-8, 14-16 Summary of some of the rulings during the final hearing. Facts which primarily relate to credibility or weight of the evidence. 3 9. 4 48. 9 30-31 and 43-44. 10-13 See 43 and 45-47. 17-19 See 30-31 and 43-44. 20 32. 21 30-32. 22 42. 23 38. 24 Hereby accepted. 25-26 See 43 and 45-52. 27 30-31. 28 43. 29 Not relevant to this proceeding. COPIES FURNISHED: William B. Wiley, Esquire Darrell White, Esquire 600 First Florida Bank Building Tallahassee, Florida 32301 Gordon B. Scott, Esquire Department of Health and Rehabilitative Services 1317 Winewood Boulevard Building 6, Room 230 Tallahassee, Florida 32399-0700 Sam Power Agency Clerk Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32399-0700 John Slye General Counsel Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32399-0700
Findings Of Fact The Agency issued a Notice of Intent to Impose Fine stating the intent to impose an administrative fine in the sum of five thousand dollars ($5,000.00) against the Respondent, Diplomat Home Care, Inc. (hereinafter "Respondent"), a home health agency. The Notice of Intent to Impose Fine charged that Respondent failed to timely submit a quarterly report for the quarter ending June 30, 2009, violating Section 400.474(6)(f), Florida Statutes (2008). The cause was properly referred to the Division of Administrative Filed February 12, 2010 12:47 PM Division of Administrative Hearings. Hearings for proceedings according to law, See, Section 120.57(1), Florida Statutes (2009). By Orders dated December 21, 2009, the Division of Administrative Hearings determined that no material issue of fact remained in dispute and relinquished jurisdiction to the Agency for Health Care Administration, copies of which are attached hereto and incorporated herein (Comp. Ex. 2). The facts, as alleged and found, establish that Respondent failed to timely submit a quarterly report for the quarter ending June 30, 2009, violating Section 400.474(6)(f), Florida Statutes (2008). The fine imposed is five thousand dollars ($5,000.00).
Conclusions Having reviewed the Notice of Intent to Impose Fine dated September 17, 2009, attached hereto and incorporated herein (Ex. 1), and all other matters of record, the Agency for Health Care Administration (hereinafter "Agency") finds and concludes as follows:
Recommendation Based on the foregoing, it is RECOMMENDED: That petitioners be reimbursed the disputed Medicaid management and professional fees. DONE AND ORDERED this 22nd day of February, 1983, in Tallahassee, Florida. R. L. CALEEN, JR. 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 February, 1983.
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.
Findings Of Fact Petitioner is a real estate broker. After 18 years in the business in Michigan, Petitioner moved to Florida in August, 1988. After about one and one- half years working in residential real estate, Petitioner devoted his efforts exclusively to the sale of mobile homes. He soon began to specialize in the resale of mobile homes. In June 1990, Petitioner became self-employed and registered, or was required to register, as a dealer. He engaged in two types of mobile home sales: mobile homes with land and mobile homes without land. This case involves solely the sale of mobile homes without land. From June 20, 1990, through April 26, 1991, Petitioner was involved in the sale of 11 mobile homes without land, and these sales are the subject of the present case. In each transaction, Petitioner never took title or possession of the mobile homes; they remained on a rented lot in a mobile home park. In each transaction, Petitioner stated, on a notarized bill of sale, the sales price of the mobile home and the sales price of associated tangible personal property, such as sheds, carports, and furniture. The associated tangible personal property is typically referred to as "appurtenances." In most transactions, Petitioner listed the mobile home and found the buyer. At these closings, he collected a $2000 commission. In one transaction, which closed March 18, 1991, Petitioner did not secure the buyer, nor did he have the listing. The buyer and seller approached Petitioner and asked him to prepare the closing papers. In this case, Petitioner charged only $250. The sales price of this transaction was $18,900 with $7560 allocated to the appurtenances. The resulting additional tax liability was $453.60. In another transaction, Petitioner did not secure the buyer so he charged a reduced commission. In a third transaction, which closed April 5, 1991, Petitioner was not the listing agent, but agreed to prepare the closing documents because the listing broker was under sales tax audit and evidently did not wish to increase his potential liability. Only one more transaction followed the April 5 closing. The total sales price allocated to appurtenances in the 11 transactions is $145,280. The sales tax arising from these 11 transactions is $8716.80. On January 15, 1992, Respondent mailed to Petitioner a Notice of Intent to Make Sales and Use Tax Audit Changes. The notice sought to impose additional sales taxes of $8716.80, penalties of $2179.20, interest through said date of $1034.94, and per diem interest thereafter of $2.87. Respondent maintained this position through subsequent informal conferences. Petitioner acted in the capacity of a dealer in all transactions except the one on March 18, 1991, when he closed the transaction as an accommodation and charged a nominal fee. After deducting the sales tax on the appurtenances from the March 18 transaction, the remaining sales tax liability is $8263.20. There is no doubt that at all material times the Lee County Tax Collector's Office misinformed Petitioner and other dealers that they were not required to collect the sales tax on the casual sale of appurtenances in connection with the casual sale of a mobile home on a rented lot. However, there is no evidence that the Lee County Tax Collector's Office is an agent of Respondent. Petitioner failed to prove that Respondent misinformed him as to his liability as a dealer to collect the tax on the sale of the mobile home and appurtenances.
Recommendation Based on the foregoing, it is hereby RECOMMENDED that the Department of Revenue enter a final order assessing Respondent for $8263.20 in sales tax, plus interest, but waiving all penalties. ENTERED on October 18, 1994, in Tallahassee, Florida. ROBERT E. MEALE Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings on October 18, 1994. APPENDIX Rulings on Petitioner's Proposed Findings 1-2: adopted or adopted in substance. 3: rejected as subordinate. 4: adopted or adopted in substance. 5: rejected as unsupported by the appropriate weight of the evidence. 6: adopted or adopted in substance. 7: rejected as unsupported by the appropriate weight of the evidence and irrelevant. 8: adopted or adopted in substance. 9: rejected as subordinate. 10: rejected as subordinate and recitation of evidence. 11-13: rejected as subordinate and irrelevant. Rulings on Respondent's Proposed Findings 1-2: adopted or adopted in substance. 3-4: rejected as subordinate and recitation of evidence. 5: adopted or adopted in substance. 6-16: rejected as subordinate. 17: rejected as unsupported by the appropriate weight of the evidence. 18: rejected as subordinate. COPIES FURNISHED: Larry Fuchs, Executive Director Department of Revenue 104 Carlton Building Tallahassee, FL 32399-0100 Linda Lettera, General Counsel Department of Revenue 204 Carlton Building Tallahassee, FL 32399-0100 James G. Decker Decker and Smith, P.A. P.O. Box 9208 Ft. Myers, FL 33902-9208 Lealand L. McCharen Assistant Attorney General Department of Legal Affairs The Capitol--Tax Section Tallahassee, FL 32399-1050
The Issue Whether Petitioners' proposed rates are justified pursuant to the requirements of Section 627.062, Florida Statutes, or whether the Department of Financial Services, Office of Insurance Regulation (OIR) was correct in denying the requested rate increases.
Findings Of Fact The Hartford companies are property and casualty insurers transacting insurance in the State of Florida pursuant to valid certificates of authority and the Florida Insurance Code. Two types of personal lines insurance filings submitted by Hartford to the OIR are at issue in this proceeding: two filings for homeowners insurance (Case Nos. 07-5185 and 07-5186) and two filings for dwelling fire insurance (Case Nos. 07-5187 and 07- 5188). Hartford's substantial interests are affected by the notices disapproving the filings in this case. Homeowners insurance includes coverage for a variety of perils in and around a home, is usually purchased by a homeowner, and covers both the structure and the contents of a home. Dwelling/fire insurance is usually purchased by the owners of properties that are leased or rented to others, and provides coverage for the structure only. Both types of insurance cover damage caused by hurricanes. The New Legislation and its Requirements In a special session held in January 2007, the Florida Legislature enacted changes to the Florida Hurricane Catastrophe Fund (CAT Fund), as reflected in Chapter 2007-1, Laws of Florida. The special session was precipitated by a perceived crisis regarding the cost and availability of homeowners insurance after the 2004 and 2005 hurricane seasons. As a result of the substantial number of claims incurred after multiple severe hurricanes each of these years, changes in the insurance marketplace resulted in some insurance companies withdrawing from the Florida market, others non-renewing policies, one company becoming insolvent, and the cost for reinsurance available to all insurers rising dramatically. One of the primary features of the legislation was an expansion of the CAT Fund. The CAT Fund was established in 1993 after Hurricane Andrew to provide reinsurance to insurers for property insurance written in Florida at a price significantly less than the private market. The CAT Fund is a non-profit entity and is tax exempt. Prior to the enactment of Chapter 2007-1, the CAT Fund had an industry-wide capacity of approximately $16 million. The purpose of the changes enacted by the Legislature was to reduce the cost of reinsurance and thereby reduce the cost of property insurance in the state. As a result of Chapter 2007-1, the industry-wide capacity of the CAT Fund was increased to $28 billion, and insurers were given an opportunity to purchase an additional layer of reinsurance, referred to as the TICL layer (temporary increase in coverage limit), from the CAT Fund. Section 3 of Chapter 2007-1 required insurers to submit a filing to the OIR for policies written after June 1, 2007, that took into account a "presumed factor" calculated by OIR and that purported to reflect savings created by the law. The new law delegated to the OIR the duty to specify by Order the date such filings, referred to as "presumed factor filings" had to be made. On February 19, 2007, the OIR issued Order No. 89321-07. The Order required insurers to make a filing by March 15, 2007, which either adopted presumed factors published by the OIR or used the presumed factors and reflected a rate decrease taking the presumed factors into account. The presumed factors were the amounts the OIR calculated as the average savings created by Chapter 2007-1, and insurers were required to reduce their rates by an amount equal to the impact of the presumed factors. The OIR published the presumed factors on March 1, 2007. In its March 15, 2007, filings, Hartford adopted the presumed factors published by OIR. As a result, Hartford reduced its rates, effective June 1, 2007, on the products at issue in these filings by the following percentages: Case No. 07-5185 homeowners product: 17.7% Case No. 07-5186 homeowners product: 21.9% Case No. 07-5187 dwelling/fire product: 8.7% Case No. 07-5188 dwelling/fire product: 6.2% The Order also required that insurers submit a "True-Up Filing" pursuant to Section 627.026(2)(a)1., Florida Statutes. The filing was to be a complete rate filing that included the company's actual reinsurance costs and programs. Hartford's filings at issue in these proceedings are its True-Up Filings. The True-Up Filings Hartford submitted its True-Up filings June 15, 2007. The rate filings were certified as required by Section 627.062(9), Florida Statutes. The filings were amended August 8, 2007. Hartford's True Up Filings, as amended, request the following increases in rates over those reflected in the March 15, 2007, presumed factor filings: Case No. 07-5185 homeowners product: 22.0% Case No. 07-5186 homeowners product: 31.6% Case No. 07-5187 dwelling and fire product: 69.0% Case No. 07-5188 dwelling and fire product: 35.9% The net effects of Hartford's proposed rate filings result in the following increases over the rates in place before the Presumed Factor Filings: Case No. 07-5185 homeowners product: .4% Case No. 07-5186 homeowners product: 2.8% Case No. 07-5187 dwelling/fire product: 54.3% Case No. 07-5188 dwelling/fire product: 27.5% Case Nos. 07-5185 and 07-5186 (homeowners) affect approximately 92,000 insurance policies. Case Nos. 07-5187 and 07-5188 (dwelling/fire) affect approximately 2,550 policies. A public hearing was conducted on the filings August 16, 2007. Representatives from Hartford were not notified prior to the public hearing what concerns the OIR might have with the filings. Following the hearing, on August 20, 2007, Petitioners provided by letter and supporting documentation additional information related to the filings in an effort to address questions raised at the public hearing. The OIR did not issue clarification letters to Hartford concerning any of the information provided or any deficiencies in the filings before issuing its Notices of Intent to Disapprove the True-Up Filings. All four filings were reviewed on behalf of the OIR by Allan Schwartz. Mr. Schwartz reviewed only the True-Up Filings and did not review any previous filings submitted by Hartford with respect to the four product lines. On September 10, 2007, the OIR issued Notices of Intent to Disapprove each of the filings at issue in this case. The reasons give for disapproving the two homeowners filings are identical and are as follows: Having reviewed the information submitted, the Office finds that this filing does not provide sufficient documentation or justification to demonstrate that the proposed rate(s) comply with the standards of the appropriate statute(s) and rules(s) including demonstrating that the proposed rates are not excessive, inadequate, or unfairly discriminatory. The deficiencies include but are not limited to: The premium trends are too low and are not reflective of the historical pattern of premium trends. The loss trends are too high and are not reflective of the historical pattern of loss trends. The loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. The loss trends are excessive and inconsistent compared to other sources of loss trends such as Fast Track data. The catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. The catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. The particular time period from 1992 to 2006 used to calculate these values has not been justified. There has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. The underwriting profit and contingency factors are excessive and not supported. Various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. The underwriting expenses and other expenses are excessive and not supported. The non-FHCF reinsurance costs are excessive and not supported. The FHCF reinsurance costs are excessive and not supported. The fact that no new business is being written has not been taken into account. No explanation has been provided as too [sic] Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. As a result of the deficiencies set forth above, the Office finds that the proposed rate(s) are not justified, and must be deemed excessive and therefore, the Office intends to disapprove the above-referenced filing. The Notices of Intent to Disapprove the two dwelling/fire filings each list nine deficiencies. Seven of the nine (numbers 1-6 and 8) are the same as deficiencies listed for the homeowners filings. The remaining deficiencies named for Case No. 07-5187 are as follows: 7. The credibility standard and credibility value are not supported. 9. No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%. The deficiencies listed for Case No. 07-5188 are the same as those listed for Case No. 07-5187, with the exception that with respect to deficiency number 9, the rate change implemented for the program in Case No. 07-5188 from 2001 to 2006 was a decrease of about -3%. Documentation Required for the Filings Florida's regulatory framework, consistent with most states, requires that insurance rates not be inadequate, excessive, or unfairly discriminatory. In making a determination concerning whether a proposed rate complies with this standard, the OIR is charged with considering certain enumerated factors in accordance with generally accepted and reasonable actuarial techniques. Chapter 2007-1 also amended Section 627.062, Florida Statutes, to add a certification requirement. The amendment requires the chief executive officer or chief financial officer and chief actuary of a property insurer to certify under oath that they have reviewed the rate filing; that to their knowledge, the rate filing does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading; that based on their knowledge, the information in the filing fairly presents the basis of the rate filing for the period presented; and that the rate filing reflects all premium savings reasonably expected to result from legislative enactments and are in accordance with generally accepted and reasonable actuarial techniques. § 627.062(9)(a), Fla. Stat. (2007). Actuarial Standards of Practice 9 and 41 govern documentation by an actuary. Relevant sections of Standard of Practice 9 provide: Extent of documentation - . . . Appropriate records, worksheets, and other documentation of the actuary's work should be maintained by the actuary and retained for a reasonable length of time. Documentation should be sufficient for another actuary practicing in the same field to evaluate the work. The documentation should describe clearly the sources of data, material assumptions, and methods. Any material changes in sources of data, assumptions, or methods from the last analysis should be documented. The actuary should explain the reason(s) for and describe the impact of the changes. Prevention of misuse - . . . The actuary should take reasonable steps to ensure that an actuarial work product is presented fairly, that the presentation as a whole is clear in its actuarial aspects, and that the actuary is identified as the source of the actuarial aspects, and that the actuary is available to answer questions.. . . . * * * 5.5 Availability of documentation- Documentation should be available to the actuary's client or employer, and it should be made available to other persons when the client or employer so requests, assuming appropriate compensation, and provided such availability is not otherwise improper. . . . In determining the appropriate level of documentation for the proposed rate filings, Petitioner relied on its communications with OIR, as well as its understanding of what has been required in the past. This reliance is reasonable and is consistent with both the statutory and rule provisions governing the filings. Use of the RMS Catastrophic Loss Projection Model In order to estimate future losses in a rate filing, an insurer must estimate catastrophic and non-catastrophic losses. Hartford's projected catastrophic losses in the filings are based upon information provided from the Risk Management Solutions (RMS) catastrophic loss projection model, version 5.1a. Hartford's actuaries rely on this model, consistent with the standards governing actuarial practice, and their reliance is reasonable. Catastrophe loss projection models may be used in the preparation of insurance filings, if they have been considered by and accepted by the Florida Commission on Hurricane Loss Projection Methodology (the Hurricane Commission). The Hurricane Commission determined that the RMS model, version 5.1a was acceptable for projecting hurricane loss costs for personal residential rate filings on May 17, 2006. In addition to approval by the Hurricane Commission, use of the model is appropriate "only if the office and the consumer advocate appointed pursuant to s. 627.0613 have access to all of the assumptions and factors that were used in developing the actuarial methods, principles, standards, models, or output ranges, and are not precluded from disclosing such information in a rate proceeding." §627.0628(3)(c), Fla. Stat. Both the Consumer Advocate and a staff person from the OIR are members of the Hurricane Commission. In that context, both have the ability to make on-site visits to the modeling companies, and to ask any questions they choose regarding the models. Both OIR's representative and the Consumer Advocate participated in the meetings and had the same opportunity as other commissioners to ask any question they wished about RMS 5.1a. The Hurricane Commission members, including the Consumer Advocate, clearly have access to the information identified in Section 627.0628(3)(c). However, there are restrictions on the Hurricane Commission members' ability to share the information received regarding trade secrets disclosed by the modeling companies. For that reason, the Commission's deliberations are not, standing alone, sufficient to determine that the Office of Insurance Regulation has access. In this case, credible evidence was submitted to show that RMS officials met with staff from the Office in July and October 2006 to discuss the model. RMS offered to provide any of its trade secret information to the OIR, subject to a non- disclosure agreement to protect its dissemination to competitors. RMS also opened an office in Tallahassee and invited OIR staff to examine any parts of the model they wished. In addition, both RMS and Hartford have answered extensive questionnaires prepared by OIR regarding the RMS model, and Hartford has offered to assist OIR in gathering any additional information it requires. Most of the questions posed by OIR involve the same areas reviewed by the Commission. RMS' representative also testified at hearing that RMS would not object to disclosure of the assumptions during the hearing itself if necessary. Finally, OIR Exhibit 1 is the Florida Hurricane Catastrophe Fund 2007 Ratemaking Formula Report. The Executive Summary from the report explains how rates were recommended for the Florida Hurricane Catastrophic Fund (CAT Fund) for the 2007- 2008 contract year. The report stated that the RMS model, as well as three other models accepted by the Hurricane Commission, were used for determining expected aggregate losses to the CAT Fund reinsurance layer. Three models, including the RMS model, were also used for analysis of detailed allocation to type of business, territory, construction and deductible, as well as special coverage questions. The models were compared in detail and given equal weight. The report notes that these three models were also used in 1999-2006 ratemaking. The report is prepared by Paragon Strategic Solutions, Inc., an independent consultant selected by the State Board of Administration, in accordance with Section 215.555(5), Florida Statutes. While OIR did not prepare the report, they show no hesitation in accepting and relying on the report and the modeled information it contains in these proceedings. Indeed, one of OIR's criticisms is Hartford's failure to use the report with respect to CAT Fund loss recovery estimates. Based upon the evidence presented at hearing, it is found that the OIR and Consumer Advocate were provided access to the factors and assumptions used in the RMS model, as contemplated by Section 627.0628. The Alleged Deficiencies in the Homeowners Filings1/ A rate is an estimate of the expected value of future costs. It provides for all costs associated with the transfer of risk. A rate is reasonable and not excessive, inadequate or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer. In preparing a filing, an actuary identifies the time period that its proposed rates are expected to be in effect. Because ratemaking is prospective, it involves determining the financial value of future contingent events. For the rate filings in question, actuaries for Hartford developed their rate indications by first considering trended premium, which reflects changes in premium revenue based on a variety of factors, including construction costs and the value of the buildings insured. Trended premium is the best estimate of the premium revenue that will be collected if the current rates remain in effect for the time period the filing is expected to be in place. Expenses associated with writing and servicing the business, the reinsurance costs to support the business and an allowance for profit are subtracted from the trended premium. The remainder is what would be available to pay losses. This approach to ratemaking, which is used by Hartford, is a standard actuarial approach to present the information for a rate indication. As part of the process, expected claims and the cost to service and settle those claims is also projected. These calculations show the amount of money that would be available to pay claims if no changes are made in the rates and how much increased premium is necessary to cover claims. The additional amount of premium reflects not only claims payments but also taxes, licenses and fees that are tied to the amount of premium. The first deficiency identified by OIR is that "the premium trends are too low and are not reflective of the historical pattern of premium trends." In determining the premium trend in each filing, Hartford used data from the previous five years and fit an exponential trend to the historical pattern, which is a standard actuarial technique. Hartford also looked at the factors affecting the more recent years, which were higher. For example, the peak in premium trend in 2006 was a result of the cost increases driven by the 2004 and 2005 hurricanes, and the peak in demand for labor and construction supplies not matched by supply. Costs were coming down going into 2007, and Hartford believed that 2006 was out of pattern from what they could anticipate seeing in the future. The premium trends reflected in Hartford's filings are reasonable, reflective of historical patterns, and based on standard actuarial techniques. The second identified deficiency with respect to the homeowner filings was that the loss trends are too high and are not reflective of the historical pattern of loss trends. A loss trend reflects the amount an insurance company expects the cost of claims to change. It consists of a frequency trend, which is the number of claims the insurance company expects to receive, and a severity trend, which is the average cost per claim. The loss trend compares historical data used in the filing with the future time period when the new rates are expected to be in effect. Hartford's loss trends were estimated using a generalized linear model, projecting frequency and severity separately. The model was based on 20 quarters of historical information. The more credible testimony presented indicates that the loss trends were actuarially appropriate. The third identified deficiency is that the loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. As noted above, the generalized linear model uses actual, historical data. Sufficient documentation was provided in the filing, coupled with Hartford's August 20, 2007, letter. The method used to determine loss trends is reasonable and is consistent with standard actuarial practice. The fourth identified deficiency is that loss trends are excessive and inconsistent compared to other sources of loss trends, such as Fast Track data. Saying that the loss trends are excessive is a reiteration of the claim that they are too high, already addressed with respect to deficiency number two. Fast Track data is data provided by the Insurance Services Office. It uses unaudited information and is prepared on a "quick turnaround" basis. Fast Track data is based on paid claims rather than incurred claims data, and upon a broad number of companies with different claims settlement practices. Because it relies on paid claims, there is a time lag in the information provided. Hartford did not rely on Fast Track data, but instead relied upon its own data for calculating loss trends. Given the volume of business involved, Hartford had enough data to rely on for projecting future losses. Moreover, Respondents point to no statutory or rule requirement to use Fast Track data. The filings are not deficient on this basis. The fifth identified deficiency in the Notice of Intent to Disapprove is that catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. ALAE stands for "allocated loss adjustment expenses," and represents the costs the company incurs to settle a claim and that can be attributed to that particular claim, such as legal bills, court costs, experts and engineering reports. By contrast, ULAE stands for "unallocated loss adjustment expense" and represents the remainder of claims settlement costs that cannot be linked to a specific claim, such as office space, salaries and general overhead. Part of the OIR's objection with respect to this deficiency relates to the use of the RMS model. As stated above at paragraphs 25-33, the use of the RMS model is reasonable. With respect to ALAE, Hartford analyzed both nationwide data (4.4%) and Florida data (4.8%) and selected an ALAE load between the two (4.6%). This choice benefits Florida policyholders. It is reasonable to select between the national and Florida historical figures, given the amount of actual hurricane data available during the period used. With respect to ULAE, the factors used were based upon directions received from Ken Ritzenthaler, an actuary with OIR, in a previous filing. The prior discussions with Mr. Ritzenthaler are referenced in the exhibits to the filing. The more credible evidence demonstrates that the ALAE and ULAE expenses with respect to catastrophic hurricane losses are sufficiently documented in Hartford's filings and are based on reasonable actuarial judgment. The sixth identified deficiency is that the catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. According to OIR, the particular time period from 1992 to 2006 used to calculate these values has not been justified, and there has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. OIR's complaint with respect to non-hurricane losses is based upon the number of years of data included. While the RMS model was used for hurricane losses, there is no model for non- hurricane losses, so Hartford used its historical data. This becomes important because in both 1992 and 1993, there were unusual storms that caused significant losses. Hartford's data begins with 1992 and goes through 2006, which means approximately fifteen years worth of data is used. Hartford's explanation for choosing that time period is that hurricane models were first used in 1992, and it was at that time that non-hurricane losses had to be separated from hurricane losses. Thus, it was the first year that Hartford had the data in the right form and sufficient detail to use in a rate filing. Petitioners have submitted rate filings in the past that begin non-hurricane, ALAE and ULAE losses with 1992, increasing the number of years included in the data with each filing. Prior filings using this data have been approved by OIR. It is preferable to use thirty years of experience for this calculation. However, there was no testimony that such a time-frame is actuarially or statutorily required, and OIR's suggestion that these two high-loss years should be ignored is not based upon any identified actuarial standard. Hartford attempted to mitigate the effect of the severe losses in 1992 and 1993 by capping the losses for those years, as opposed to relying on the actual losses.2/ The methodology used by Hartford was reasonable and appropriate. No other basis was identified by the OIR to support this stated deficiency. The seventh identified deficiency is that the underwriting profit and contingency factors are excessive and not supported. The underwriting profit factor is the amount of income, expressed as a percentage of premium, that an insurance company needs from premium in excess of losses, settlement costs and other expenses in order to generate a fair rate of return on its capital necessary to support its Florida exposures for the applicable line of business. Hartford's proposed underwriting profit factor for its largest homeowners filing is 15.3%. Section 627.062(2)(b), Florida Statutes, contemplates the allowance of a reasonable rate of return, commensurate with the risk to which the insurance company exposes its capital and surplus. Section 627.062(2)(b)4., Florida Statutes, authorizes the adoption of rules to specify the manner in which insurers shall calculate investment income attributable to classes of insurance written in Florida, and the manner in which investment income shall be used in the calculation of insurance rates. The subsection specifically indicates that the manner in which investment income shall be used in the calculation of insurance rates shall contemplate allowances for an underwriting profit factor. Florida Administrative Code Rule 69O-170.003 is entitled "Calculation of Investment Income," and the stated purpose of this rule is as follows: (1) The purpose of this rule is to specify the manner in which insurers shall calculate investment income attributable to insurance policies in Florida and the manner in which such investment income is used in the calculation of insurance rates by the development of an underwriting profit and contingency factor compatible with a reasonable rate of return. (Emphasis supplied). Mr. Schwartz relied on the contents of this rule in determining that the underwriting profit factor in Hartford's filings was too high, in that Florida Administrative Code Rule 69O-170.003(6)(a) and (7) specifies that: (6)(a) . . . An underwriting profit and contingency factor greater than the quantity 5% is prima facie evidence of an excessive expected rate of return and unacceptable, unless supporting evidence is presented demonstrating that an underwriting profit and contingency factor included in the filing that is greater than this quantity is necessary for the insurer to earn a reasonable rate of return. In such case, the criteria presented as determined by criteria in subsection (7) shall be used by the Office of Insurance Regulation in evaluating this supporting evidence. * * * An underwriting profit and contingency factor calculated in accordance with this rule is considered to be compatible with a reasonable expected rate of return on net worth. If a determination must be made as to whether an expected rate of return is reasonable, the following criteria shall be used in that determination. An expected rate of return for Florida business is to be considered reasonable if, when sustained by the insurer for its business during the period for which the rates under scrutiny are in effect, it neither threatens the insurer's solvency nor makes the insurer more attractive to policyholders or investors from a corporate financial perspective than the same insurer would be had this rule not been implemented, all other variables being equal; or Alternatively, the expected rate of return for Florida business is to be considered reasonable if it is commensurate with the rate of return anticipated for other industries having corresponding risk and it is sufficient to assure confidence in the financial integrity of the insurer so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or reciprocal insurer, to accumulate surplus reasonably necessary to support growth in Florida premium volume reasonably expected during the time the rates under scrutiny are in effect. Mr. Schwartz also testified that the last published underwriting profit and contingency factor published by OIR was 3.7%, well below what is identified in Hartford's filings. Hartford counters that reliance on the rule is a misapplication of the rule (with no explanation why), is inconsistent with OIR's treatment of the profit factors in their previous filings, and ignores the language of Section 627.062(2)(b)11., Florida Statutes. No evidence was presented to show whether the expected rate of return threatens Hartford's solvency or makes them more attractive to policyholders or investors from a corporate financial perspective than they would have been if Rule 69O- 170.003 was not implemented. Likewise, it was not demonstrated that the expected rate of return for Florida business is commensurate with the rate of return for other industries having corresponding risk and is necessary to assure confidence in the financial integrity of the insurer in order to maintain its credit and to attract capital. While the position taken by OIR with respect to Hartford's filings may be inconsistent with the position taken in past filings, that cannot be determined on this record. The prior filings, and the communications Hartford had with OIR with regard to those filings, are not included in the exhibits in this case. There is no way to determine whether Petitioners chose to present evidence in the context of prior filings consistent with the criteria in Rule 69O-170.003, or whether OIR approved the underwriting profit and contingency factor despite Rule 69O- 170.003. Having an underwriting profit factor that is considered excessive will result in a higher rate indication. Therefore, it is found that the seventh identified deficiency in the Notices of Intent to Disapprove for the homeowners filings and the second identified deficiency in the Notices of Intent to Disapprove for the dwelling/fire filings is sustained. The eighth identified deficiency is that various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. Return on surplus is the total net income that would result from the underwriting income and the investment income contributions relative to the amount of capital that is exposed. Surplus is necessary in addition to income expected from premium, to insure that claims will be paid should losses in a particular year exceed premium and income earned on premium. Hartford's expected return on surplus in these filings is 15%. The return on surplus is clearly tied to the underwriting profit factor, although the percentages are not necessarily the same. It follows, however, that if the underwriting income and contingency factor is excessive, then the return on surplus may also be too high. Hartford has not demonstrated that the return on surplus can stand, independent of a finding that the underwriting profit and contingency factor is excessive. Premium-to-surplus ratio is a measure of the number of dollars of premium Hartford writes relative to the amount of surplus that is supporting that exposure. Hartford's premium-to- surplus ratio in the AARP homeowners filing is 1.08, which means that if Hartford wrote $108 of premium, it would allocate $100 of surplus to support that premium.3/ The premium-to-surplus ratio is reasonable, given the amount of risk associated with homeowners insurance in Florida. The OIR's position regarding investment income and tax rates are related. The criticism is that the filing used a low- risk investment rate based on a LIBOR (London Interbank Offering Rate), which is a standard in the investment community for risk- free or low-risk yield calculations. The filing also used a full 35% income tax rate applied to the yield. Evidence was presented to show that, if the actual portfolio numbers and corresponding lower tax rate were used in the filings, the rate after taxes would be the same. The problem, however, is that Section 627.062(2)(b)4., Florida Statutes, requires the OIR to consider investment income reasonably expected by the insurer, "consistent with the insurer's investment practices," which assumes actual practices. While the evidence at hearing regarding Hartford's investments using its actual portfolio yield may result in a similar bottom line, the assumptions used in the filing are not based on Petitioner's actual investment practices. As a result, the tax rate identified in the filing is also not the actual tax rate that has been paid by Hartford. The greater weight of the evidence indicates the data used is not consistent with the requirements of Section 627.062(2)(b)4., Florida Statutes. Therefore, the eighth deficiency is sustained to the extent that the filing does not adequately support the return on surplus, investment income and tax rate. The ninth identified deficiency is that the underwriting expenses and other expenses are excessive and not supported. Hartford used the most recent three years of actual expense data, analyzed them and made expense selections based on actuarial judgment. The use of the three-year time frame was both reasonable and consistent with common ratemaking practices. Likewise, the commission rates reflected in the agency filings are also reasonable. The tenth identified deficiency is that the non-FHCF (or private) reinsurance costs are excessive and not supported. The criticism regarding private reinsurance purchases is three- fold: 1) that Hartford paid too much for their reinsurance coverage; 2) that Hartford purchases their reinsurance coverage on a nationwide basis as opposed to purchasing coverage for Florida only; and 3) that the percentage of the reinsurance coverage allocated to Florida is too high. Hartford buys private reinsurance in order to write business in areas that are exposed to catastrophes. It buys reinsurance from approximately 40 different reinsurers in a competitive, arm's-length process and does not buy reinsurance from corporate affiliates. Hartford used the "net cost" of insurance in its filings, an approach that is appropriate and consistent with standard actuarial practices. Hartford also used the RMS model to estimate the expected reinsurance recoveries, which are subtracted from the premium costs. Hartford buys private catastrophic reinsurance on a nationwide basis to protect against losses from hurricanes, earthquakes and terrorism, and allocates a portion of those costs to Florida. Testimony was presented, and is accepted as credible, that attempting to purchase reinsurance from private vendors for Florida alone would not be cost-effective. The cost of reinsurance, excluding a layer of reinsurance that covers only the Northeast region of the country and is not reflected in calculating costs for Florida, is approximately $113 million. Hartford retains the first $250 million in catastrophe risk for any single event, which means losses from an event must exceed that amount before the company recovers from any reinsurer. In 2006, Hartford raised its retention of losses from $175 million to $250 million in an effort to reduce the cost of reinsurance. Hartford purchases reinsurance in "layers," which cover losses based on the amount of total losses Hartford incurs in various events. Hartford allocates approximately 65% of the private reinsurance costs (excluding the Northeast layer) to Florida in the AARP homeowners filing. Only 6-7% of Hartford's homeowners policies are written in Florida. The amount Hartford paid for reinsurance from private vendors is reasonable, given the market climate in which the insurance was purchased. Hartford has demonstrated that the process by which the reinsurance was purchased resulted in a price that was clearly the result of an arms-length transaction with the aim of securing the best price possible. Likewise, the determination to purchase reinsurance on a nationwide basis as opposed to a state-by-state program allows Hartford to purchase reinsurance at a better rate, and is more cost-effective. Purchasing reinsurance in this manner, and then allocating an appropriate percentage to Florida, is a reasonable approach. With respect to the allocation of a percentage of reinsurance cost to Florida, OIR argues that, given that Florida represents only 6-7% of Hartford's homeowner insurance business, allocation of 65% of the reinsurance costs to Florida is per se unreasonable. However, the more logical approach is to examine what percentage of the overall catastrophic loss is attributable to Florida, and allocate reinsurance costs accordingly. After carefully examining both the testimony of all of the witnesses and the exhibits presented in this case, the undersigned cannot conclude that the allocation of 65% of the private reinsurance costs is reasonable, and will not result in an excessive rate.4/ The eleventh identified deficiency is that the FHCF (or CAT Fund) reinsurance costs are excessive and not supported. Hartford purchases both the traditional layer of CAT Fund coverage, which is addressed in a separate filing and not reflected in these filings, and the TICL layer made available pursuant to Chapter 2007-1, Laws of Florida. Hartford removed the costs of its previously purchased private reinsurance that overlapped with the TICL layer and those costs are not reflected in these filings and have not been passed on to Florida policyholders. In estimating the amount of premium Hartford would pay for the TICL coverage, it relied on information provided by Paragon, a consulting firm that calculates the rates for the CAT Fund. As noted in finding of fact number 31, the RMS model, along with three other models accepted by the Hurricane Commission, were used by Paragon for determining expected aggregate losses to the CAT Fund reinsurance layer, clearly a crucial factor in determining the rate for the CAT fund. Hartford did not use the loss recoveries calculated by Paragon, but instead estimated the total amount of premium it would pay for the TICL coverage and subtracted the expected loss recoveries based on the RMS model alone. The expected loss recoveries under the RMS model standing alone were 60% of the loss recovery estimate calculated by Paragon when using all four models. Hartford claimed that its use of the RMS model was necessary for consistency. However, it pointed to no actuarial standard that would support its position with respect to this particular issue. Moreover, given that the premium used as calculated by Paragon used all four models, it is actually inconsistent to use one number which was determined based on all four models (the Paragon-based premium estimate) for one half of this particular calculation and then subtract another number using only one model for the other half (the loss recoveries rate) in order to determine the net premium. To do so fails to take into account the unique nature of the CAT fund, in terms of its low expenses and tax-exempt status. Accordingly, it is found that the CAT-Fund reinsurance costs for the TICL layer are excessive. The twelfth identified deficiency is that Hartford did not consider in the filing that no new business is being written. OIR's explanation of this asserted deficiency is that the costs associated with writing new business are generally higher than that associated with writing renewals. Therefore, according to OIR, failure to make adjustments to their historical experience to reflect the current mix of business, means that the costs included in the filing would be excessive. Hartford began restricting the writing of new business for these filings in 2002. Ultimately, no new business for the AARP program was written after November 2006 and no new business was written for the agency program after June 2006. Credible evidence was presented to demonstrate that a very low percentage of new business has been written over the period of time used for demonstrating Hartford's historical losses. As a result, the effect of no longer writing new business is already reflected in the data used to determine expenses. No additional adjustment in the filing was necessary in this regard. The thirteenth identified deficiency is that no explanation has been provided as to why Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, OIR states that only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. OIR pointed to no actuarial standard that would require a specific explanation regarding how much of the premium should be returned to policyholders. Nor was any statutory or rule reference supplied to support the contention that such an explanation was required. Finally, the more credible evidence presented indicates that the correct percentage is 44%. In any event, this criticism is not a basis for finding a deficiency in the filing. Alleged Deficiencies in the Dwelling/Fire Filings The seventh deficiency identified in the dwelling/fire filings, not reflected in the homeowner filings, is that the credibility standard and credibility values are not supported. Credibility is the concept of identifying how much weight to put on a particular set of information relative to other potential information. Credibility value is determined by applying the "square root rule" to the credibility value, a commonly used actuarial approach to credibility. Hartford used the credibility standard of 40,000 earned house years in these filings. This credibility standard has been the standard within the industry for personal property filings for over forty years and has been used in prior filings submitted to OIR. Mr. Schwartz testified that his criticism with respect to the credibility standard and credibility values is that Hartford did not explain why they used that particular standard. However, Florida Administrative Code Rule 69O-170.0135 discusses those items that must be included in the Actuarial Memorandum for a filing. With respect to credibility standards and values, Rule 69O-170.0135(2)(e)5., provides that the basis need only be explained when the standard has changed from the previous filing. Given that no change has been made in these filings with respect to the credibility standard, this criticism is not a valid basis for issuing a Notice of Intent to Disapprove. The ninth deficiency in the Notice relating to the dwelling/fire filing in Case No. 07-5187 provides: "No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%." With respect to Case No. 07-5188, the deficiency is essentially the same, except the cumulative rate change identified for the same period of time is a decrease of about -3%. Testimony established that the dwelling/fire rate increases were larger than those identified for the homeowners filings because Hartford did not seek rate increases for these lines for several years. The decision not to seek increases was not based on the adequacy of current rates. Rather, the decision was based on an internal determination that, based on the relatively small number of policies involved in these two filings, the amount of increased premium reflected in a rate increase was not sufficient to incur the costs associated with preparing the filings. Mr. Schwartz pointed to no authority, either in statute, rule, or Actuarial Standard, that requires the explanation he desired. He acknowledged that he understood the basis of how Hartford reached the rate increase they are requesting. The failure to provide the explanation Mr. Schwartz was seeking is not a valid basis for a Notice of Intent to Disapprove.
Recommendation Upon consideration of the facts found and conclusions of law reached, it is RECOMMENDED: That a final order be entered that disapproves the rate filings in Case Nos. 07-5185 and 07-5186 based upon the deficiencies numbered 7,8,10 and 11 in the Notices of Intent to Disapprove, and that disapproves the rate filings in Case Nos. 07-5187 and 07-5188 based on the deficiencies numbered 2,3,5 and in the Notices of Intent to Disapprove. DONE AND ENTERED this 28th day of March 2008, in Tallahassee, Leon County, Florida. S LISA SHEARER NELSON 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 28th day of March, 2008.
Findings Of Fact The Agency issued three (3) Notices of Intent to Impose Fine stating the intent to impose an administrative fine in the sum of five thousand dollars ($5,000.00) against the Respondent, Senior Home Care, Inc. (hereinafter "Respondent"), a home health agency, for each license identified in the Notices of Intent for a total assessment against Respondent in the sum of fifteen thousand dollars ($15,000.00). The Notices of Intent to Impose Fine charged that Respondent failed to timely submit a quarterly report for its identified licenses for the quarter ending December 31, 2008, violating Section 400.474(6)(f), Florida Statutes (2008). The cause was properly referred to the Division of Administrative Hearings for proceedings according to law, See, Section 120.57(1), Florida Statutes (2009). By Order dated November 17, 2009, the Division of Administrative Hearings determined that no material issue of fact remained in dispute and relinquished jurisdiction to the Agency for Health Care Administration, a copy of which is attached hereto and incorporated herein (Ex. 2). The facts, as alleged and found, establish that Respondent failed to timely submit quarterly reports for the quarter ending December 31, 2008 for the identified licenses, violating Section 400.474(6)(f), Florida Statutes (2008). The fine imposed is five thousand dollars ($5,000.00) for each cause for the aggregate sum of fifteen thousand dollars ($15,000.00).
Conclusions Having reviewed the Notices of Intent to Impose Fine dated March 10, 2009, attached hereto and incorporated herein (Comp. Ex. 1), and all other Filed February 12, 2010 12:48 PM Division of Administrative Hearings. matters of record, the Agency for Health Care Administration (hereinafter "Agency") finds and concludes as follows:
