The Issue The issue is whether Petitioner's request for an upgrade in her insurance coverage from individual to family status should be granted with a retro-active effective date of October 13, 1994; the date of birth of Respondent's son.
Findings Of Fact Stipulated Facts Petitioner was initially employed and covered under the State Employees' State Group Health Self Insurance Plan on July 1, 1993. Petitioner selected individual coverage and completed the appropriate forms indicating such coverage. Effective January 1, 1994, Petitioner's coverage for the 1994 Plan Year continued with individual coverage. Petitioner became pregnant in April, 1994, with an estimated due date of December 6, 1994. However, she went into premature labor on October 12, 1994, at 32 weeks gestation. Attempts to stop her labor were unsuccessful and she delivered a son, Gavon K. Brown, by caesarean delivery on October 13, 1994. On October 22, 1994, Petitioner completed the required forms to change from individual coverage to family coverage. Respondent changed Petitioner's coverage to family coverage effective December 1, 1994. Other Facts Petitioner did not inform the personnel office at her place of state employment, Columbia Correctional Facility in Lake City, Florida of her pregnancy. Petitioner saw a private physician in Gainesville, Florida. The physician was concerned about Petitioner's excessive weight and referred her to the Park Avenue Women's Center in Gainesville sometime near the end of April, 1994. The Park Avenue Women's Center, associated with the University of Florida College of Medicine, treats women with at risk pregnancies. Petitioner was seen there by Dr. Kenneth Kelner, also a professor of the Department of Obstetrics and Gynecology of the University of Florida College of Medicine. As a registered nurse, Petitioner was aware that she was at an increased general risk for difficulty with her pregnancy as a result of her excessive weight. On August 5, 1994, as a result of problems with getting a medical bill paid by the State Employees' State Group Health Self Insurance Plan, Petitioner called offices of the administrator of the Plan, Blue Cross and Blue Shield (BCBS) in Jacksonville, Florida. In the course of her telephone conversation, Petitioner maintains that she was told she could switch to family coverage in order to cover expenses of her unborn child as late as 30 days prior to the birth, estimated and expected to occur on December 6, 1994. Petitioner had previously received The Benefit Payment Schedule on July 13, 1994, which contained a warning to pregnant women policyholders that single or individual coverage did not include coverage for a child following its birth and that family coverage would need to be in effect prior to the month of the child's birth to afford coverage for the child. During the August 5, 1994 telephone conversation with the representative of BCBS in Jacksonville, Petitioner inquired regarding the amount of the monthly premium for family coverage. Petitioner was referred to the Division of State Employees' Insurance (DSEI) and provided with that telephone number in order to acquire coverage for her unborn child and get further detailed information. Petitioner did not call DSEI. On October 12, 1994, in the course of a routine check-up, it was determined that Petitioner's cervix was dilated. Subsequently, Petitioner gave birth to her son at 1 a.m. on October 13, 1994. On October 13, 1994, Petitioner called the personnel office at her place of employment with the Department of Corrections and informed that office of the birth of her son. Although Petitioner maintains that she was told at that time by someone in the personnel office that her son would immediately be afforded insurance coverage, Petitioner presented no direct admissible evidence in corroboration of this allegation and her testimony in this respect is not credited. On October 22, 1994, while sitting in the hospital lobby waiting to visit her son, who remained in hospital care following his premature birth, Petitioner signed the required papers and forms to change from individual to family coverage. The forms, bearing an effective date for coverage change of December 1, 1994, were returned to Petitioner's personnel office without an accompanying check or other payment for any employee premium co-payment which would have permitted a construction that an earlier coverage effective date should have been assigned the policy change. Based upon the timing of the election made by Petitioner, expenses attributable solely to medical services received by the child prior to December 1, 1994, were not covered by the State Employees' State Group Health Self Insurance Plan.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Management Services, Division of State Employees' Insurance enter a Final Order dismissing Susie Simone Brown's petition in this matter. DONE and ENTERED in Tallahassee, Florida, this 6th day of September, 1995. DON W. DAVIS, 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 6th day of September, 1995. APPENDIX In accordance with provisions of Section 120.59, Florida Statutes, the following rulings are made on the proposed findings of fact submitted on behalf of the parties. Respondent's Proposed Findings 1.-24. Adopted, not verbatim. 25.-28. Rejected, unnecessary. 29.-40. Adopted by reference. 41.-42. Rejected, unnecessary. Petitioner's Proposed Findings Petitioner's proposed findings consisted of one paragraph requesting that Respondent provide coverage for Petitioner's son effective on the date of his birth, October 13, 1994. The proposed finding is rejected as not supported by the greater weight of the evidence. COPIES FURNISHED: Augustus D. Aikens, Jr., Chief Department of Management Services Division of State Employees' Insurance 2002 Old St. Augustine Rd., B-12 Tallahassee, FL 32301-4876 Susie Simone Brown 2931 Bay Rd. Orange Park, FL 32065 William H. Linder Secretary Department of Management Services 2737 Centerview Dr., Ste. 307 Tallahassee, FL 32399-0950 Paul A. Rowell General Counsel Department of Management Services 2737 Centerview Dr., Ste. 312 Tallahassee, FL 32399-0950
Recommendation Based on the foregoing Findings Of Fact and Conclusions Of Law, it is recommended that the Respondent, the Department of Administration, enter a final order denying coverage for the orthodontia recommended for Sandra Walsh. RECOMMENDED this 18th day of March, 1988, in Tallahassee, Florida. J. LAWRENCE JOHNSTON Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 18th day of March, 1988.
Findings Of Fact The Respondent, Richard Sidney Cole, is currently eligible for licensure and licensed in this state as a Health Insurance Agent, and was so licensed at all times relevant to these proceedings. The Respondent, at all times relevant to these proceedings, was licensed in this state to solicit health insurance on behalf of National States Insurance Company (National States). Count I -- Edith Kastel. On or about June 24, 1988, the Respondent visited the home of Edith Kastel of St. Petersburg, Florida, for the purpose of soliciting health insurance. She had responded to a "lead card" National States had sent to her, and her request for follow- up information was referred to the Respondent. Since Kastel was not yet eligible for Medicare, and could not purchase a Medicare supplement policy, the Respondent showed her the National States Limited Medical-Surgical Expense policy. This policy pays 40% of doctors' charges, outpatient hospital charges and outpatient charges for diagnostic laboratory and x- ray examinations and ambulance charges. During the application process, Kastel disclosed to the Respondent that she had suffered from diverticulitis in the past. The Respondent took this opportunity to explain to Kastel that the policy would not pay on preexisting conditions (i.e., according to the policy, loss "which results from sickness or disease for which treatment was advised or received, or medical advice given by a doctor, during the 180 day period just before the Policy Date") until after the expiration of a six-month waiting period. Kastel fully understood this provision of the policy. Kastel did not disclose to the Respondent during the application process any other preexisting conditions to which the waiting period would apply. She did tell him that she had an eye examination appointment that she had just scheduled for July 6, 1988, but she gave no indication that she knew there was something wrong with her eyes or that the appointment was for anything other than a routine vision check. She continued to maintain at the hearing that she did not know, at the time she applied for coverage through the Respondent, that she had cataracts. She did vaguely ask whether she would be covered if the examination revealed that something was wrong with her eyes, and the Respondent assured her that she would be covered and that she should submit any bills she might get with a claim on the policy. Kastel bought the policy, effective July 1, 1988. At her eye examination on July 6, 1988, Kastel was diagnosed with cataracts and was advised that elective cataract surgery would be beneficial. Kastel scheduled the surgery and had it performed in October, 1988. When she submitted her bills with a claim on the policy, National States rejected the claim as a preexisting condition for which claim was made within the policy's six_month waiting period. When the claim was rejected, Kastel complained to the Respondent, who made a written request to National States that the claim be paid. He reasoned that the claim should be covered because Kastel maintained that she did not know of the condition at the time she applied for coverage. Kastel and the Respondent were not able to change National States' position, and the claim still has not been paid. It was not proven that the Respondent misrepresented to Kastel that the policy paid 40% of all charges (as opposed to 40% of only doctors' charges, outpatient hospital charges and outpatient charges for diagnostic laboratory and x-ray examinations and ambulance charges) or that Kastel would not have purchased the policy if the Respondent had communicated to her exactly what kinds of charges it covered. Up to the time of the hearing, there is no indication that Kastel had any complaint against National States or the Respondent except that her cataract surgery claim was rejected as a preexisting condition. 2/ (All other claims Kastel has made under the policy have been paid.) Kastel's testimony elicited at the hearing, that the Respondent told her only that the policy covered 40% of all expenses, was not persuasive. Count II -- The Ogletrees. Like Kastel, Jack and Margaret Ogletree of Palm Bay, Florida, responded to National States advertising by sending in a "lead card" that was referred to the Respondent. The Respondent visited the Ogletrees on or about August 11, 1988. Margaret Ogletree was not yet eligible for Medicare, and the Respondent sold both her and her husband a National States Limited Medical-Surgical Expense Policy. These were not Medicare supplement policies, and the policies themselves state in bold print: "THIS POLICY IS NOT A MEDICARE SUPPLEMENT POLICY." The Respondent explained that the policy was totally unrelated to Medicare and would pay under its terms regardless of Medicare coverage. The evidence did not prove that the Respondent said or did anything to lead the Ogletrees to believe that they were buying a Medicare supplement policy, except perhaps to say that the policy would pay for some things that Medicare would not pay for. It was not proven that Jack Ogletree had a Medicare supplement policy in force at the time or whether he planned to, or did, replace a Medicare supplement policy with the policy the Respondent sold him. It was not proven that the Respondent was required to submit a replacement form or indicate on the application that the policy was "intended to replace any accident or sickness insurance, health service or health maintenance contract." The evidence proved that the Ogletrees told the Respondent during the application process that Jack Ogletree had successful open heart surgery for an aortic valve replacement in April, 1984, and remained on medication for his heart condition. The Respondent led the Ogletrees to believe that losses resulting from the heart condition would be covered after the six-month waiting period for preexisting conditions. In completing Jack Ogletree's application, the Respondent wrote "no" in answer to: question 6.c., asking whether he had or ever had "high or low blood pressure, varicose veins or disorder of the heart or circulatory system; question 7.a., asking whether he had consulted or been treated by any physician or practitioner in the last five years; and question 7.b., asking whether he had been confined in a hospital in the last five years. The evidence is that, under National States' underwriting policies, a successful aortic valve replacement performed over four years before an application would not mean automatic rejection of the application. Had questions 6.c., 7.a. and 7.b. on Jack Ogletree's application been answered correctly, National States typically would have investigated and may or may not have rejected the application, depending on the results of the investigation. Likewise, it is not clear from the evidence whether National States would consider the misrepresentation on the Jack Ogletree application to be a material misrepresentation that would require rejection if Jack Ogletree were to make a claim based on his heart disorder. To the date of the hearing, no such claim had been made. (Claims that have been made have been paid.) Count III -- Gunnar Sundstrom. Like Edith Kastel and the Ogletrees, Gunnar Sundstrom sent in a "lead card" that was referred to the Respondent. The Respondent visited Sundstrom on or about December 9, 1987. At the time, Sundstrom had in force an Old Southern Life Insurance Company (Old Southern) Medicare supplement policy. Sundstrom wanted to replace the Old Southern policy with a National States policy which the Respondent sold him. He wanted a minimum of overlap between the effective date of the new National States policy and the lapse of the Old Southern policy, but he also wanted to be sure that there would be no gap in coverage of any preexisting conditions. He and the Respondent discussed this thoroughly, but the Respondent could not answer all of Sundstrom's questions because he was not sure at the time whether National States was going to increase the waiting period for preexisting conditions from three to six months. It was decided that Sundstrom would apply for the policy, review it upon receipt, and cancel it and ask for a full refund within 30 days, as he had a right to do under the policy, if the waiting period for preexisting conditions turned out to be six months. On the Sundstrom application, the Respondent answered "no" to the question whether the National States policy for which Sundstrom was applying was "intended to replace any accident or sickness insurance, health service or health maintenance contract." The Respondent did not submit any replacement forms as required by F.A.C. Rule 4-51.007 when a Medicare supplement policy is being replaced. 3/ The Respondent explained that he thought the "no" answer on the Sundstrom application was appropriate and that no replacement form was necessary because Sundstrom was not cancelling the Old Southern policy, only perhaps allowing it to lapse. He now concedes that perhaps he was wrong. All claims Sundstrom made under the National States policy through the date of the hearing were paid.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that the Petitioner, the Department of Insurance, enter a final order suspending the license, and eligiblity for licensure, of the Respondent, Richard Sidney Cole, for four (4) months. RECOMMENDED this 28th Tallahassee, Florida. day of August, 1990, in J. LAWRENCE JOHNSTON 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 28th day of August, 1990.
Findings Of Fact At all times material hereto, Respondent was an Ordinary Life, including Disability Agent, and a Disability Agent licensed by the State of Florida. During this period, Respondent was licensed to sell life and health insurance policies for National States Insurance Company, American Guaranty Life Insurance Company, and Old Southern Life Insurance Company. Respondent was employed as an agent by Diversified Health Services, an insurance agency whose office is located in St. Petersburg, Florida. At no time material hereto was Respondent employed by any agency of the State of Florida. As indicated above, there remain viable in the Administrative Complaint ten counts charging Respondent with various violations of provisions of the Florida Insurance Code. For purposes of clarity, the findings of fact with regard to each of those remaining counts will be set forth separately. COUNT I On February 12, 1983, Respondent visited Lucille Shock at her home in Bradenton, Florida. Mrs. Shock had earlier purchased a Medicare supplement policy from National States Insurance Company through another agent, but had decided to cancel that policy. Respondent visited Mrs. Shock's home in response to her notice of cancellation in hopes of persuading her to reinstate coverage. In paragraph three of Count I of the Administrative Complaint, Respondent is charged with having told Mrs. Shock that he was ". . . authorized by the Florida Department of Insurance to investigate the Diversified Health Agency" when, in fact, he was not employed by any state agency. While it is true that Respondent was not at the time of his visit to Mrs. Shock employed by any state agency, the record in this cause is insufficient to establish the foregoing allegation of the Administrative Complaint. Respondent denies having made any c representation to Mrs. Shock that he was employed by the State of Florida. Further, Mrs. Shock's testimony in this regard is inconsistent and conflicting. In a February 21, 1983, letter to a representative of the Florida Department of Insurance, Mrs. Shock stated that at the time of his visit to her home the Respondent represented that he ". . . was an investigator for the Diversified Health Agency. . . . At final hearing, Mrs. Shock testified that Respondent told her that he was an investigator for the "insurance department," but also, on cross-examination, testified that Respondent told her that he was an investigator for Diversified Health. Despite these inconsistencies, it is clear from the record in this proceeding that before the end of Respondent's visit with Mrs. Shock on February 12, 1983, she knew that Respondent was an insurance agent for National States Insurance Company. Because of the inconsistencies in Mrs. Shock's testimony, it is specifically concluded that her testimony concerning Respondent's representation about his employment is unreliable. Other than Mrs. Shock's testimony, there is no other record basis to establish that Respondent represented himself to be an employee of the Department of Insurance as alleged in Count I. Respondent is also charged in paragraph five of Count I of the Administrative Complaint with having "falsely represented the financial condition of several insurance companies licensed to do business in Florida as part of your sales presentation to induce Mrs. Shock to buy insurance policies from you." The record in this cause establishes that Respondent and Mrs. Shock discussed several insurance companies, including Vulcan Insurance Company, Tara Life Insurance Company, and Bankers Life during their visit on February 12, 1983. Respondent reviewed with Mrs. Shock data contained in certain A. M. Best Company reports concerning these insurance companies.Respondent advised Mrs. Shock that Vulcan Insurance Company was "a rather shaky company" and that Tara Life Insurance Company had been experiencing "financial problems." There is, however, nothing of record in this proceeding to establish either that these companies are licensed in Florida or that the representations made by Respondent to Mrs. Shock concerning these insurance companies were false. Accordingly, the allegations contained in paragraph five of Count I have not been established. COUNT II On or about February 10, 1983, Respondent visited Koy B. Cook at his home in Port Orange, Florida. The purpose of Respondent's visit to Mr. Cook was to dissuade Mr. Cook from cancelling a policy with National States Insurance Company whichir. Cook had previously bought from another agent. After buying the National States policy initially, Mr. Cook had attempted to cancel a preexisting policy with Bankers Life Insurance Company, but had been advised by that company that the policy could not be cancelled. Mr. Cook determined that he could not afford duplicated coverage, so he contacted National States Insurance Company and advised them of his desire to cancel his National States policy. Be was advised, in writing, by National States, that his policy had been cancelled and that his premium had been returned to the insurance agency which had sold him the policy for refund. Sometime prior to January 12, 1983, Respondent contacted Mr. Cook by telephone, identified himself by name, and arranged an appointment to visit with Mr. Cook in his home. Mr. Cook understood from the conversation with Respondent that the purpose of their appointment was to return Mr. Cook's refund check from his cancelled National States policy. Immediately prior to Respondent's arrival at Mr. Cook's home, Mr. Cook had been asleep. When Respondent arrived at Mr. Cook's door, Mr. Cook was still in a "daze," having just awakened. This fact is of significance, because at various times in his testimony Mr. Cook testified that Respondent identified himself as . . . an adjuster with Bill Gunter out of Tallahassee, or . . . an adjuster for the insurance company out of Tallahassee." Mr. Cook also testified that Respondent showed him some identification which bore a photograph of Insurance Commissioner Bill Gunter. This photograph was apparently attached to a document, the contents of which were unknown to Mr. Cook. Respondent denies having represented that he was an employee of the Department of Insurance. During the course of their conversation, Mr. Cook advised Respondent that he preferred the coverage offered under the National States policy to that of the Bankers Life policy, but simply could not afford duplicate coverage. Respondent and Mr. Cook discussed the amount of unearned premium outstanding on the Bankers Life policy as compared to the cost of reinstating the National States policy. Mr. Cook had originally paid $630 for the issuance of the National States policy. Respondent returned to Mr. Cook a check in that amount during the course of their visit. Further, by offering to reinstate the National States policy for a $526 annual premium, Respondent demonstrated to Mr. Cook that he would save approximately the amount that remained in unearned premiums on the Bankers Life policy. Mr. Cook agreed to this proposal, Respondent completed an application form, and Mr. Cook gave Respondent a check for approximately $526 to reinstate the National States policy, with the understand- ing that the National States and Bankers Life policies would overlap for some period of time. Upon leaving Mr. Cook's house, Respondent gave Mr. Cook one of his business cards, which identi- fied Respondent as an agent of National States Insurance Company. In Count II of the Administrative Complaint, Respondent is charged with having told Mr. Cook that he was an "insurance adjuster working out of Tallahassee" and that he "worked for the Florida Department of Insurance. Respondent is further charged with having told Mr. Cook that he "had a refund check for a cancelled Bankers Life policy when in fact the] had no such check." The testimony of Mr. Cook and Respondent on the issues alleged in Count II are diametrically oooosed. Viewing the transaction between Mr. Cook and Respondent in its totality, it is concluded that Respondent's version of the transaction is the more credible. Mr. Cook's testimony concerning Respondent's representations about his employment status contained several contradictions and inconsistencies. In addition, it is clear that Mr. Cook expected to receive a refund check from National States Insurance Comoany, that Mr. Palesky contacted him by telephone prior to his February 10 visit to advise him that he had his refund check, and that Respondent conducted himself during the entire transaction in a manner which clearly identified him as an insurance salesman. Finally, Respondent furnished Mr. Cook with a business card during the course of their meeting which clearly showed Respondent to be an agent of National States Insurance Company. It is also clear that Mr. Cook was aware during this entire transaction that his Bankers Life policy had not been cancelled, and that as a result of his transaction with Respondent he would be carrying policies with National States and Bankers Life which afforded duclicate coverage, and that he was advised of this fact by Respondent. These facts are clearly inconsistent with Mr. Cook's testimony that Respondent advised him that he had a refund for a cancelled Bankers Life policy in his possession. COUNT IV On or about March 2, 1982, Respondent visited Marjorie Brubaker in her home in Bradenton, Florida. The purpose of Respondent's visit to Mrs. Brubaker was to dissuade her from cancelling an insurance policy with National States Insurance Company which she had previously purchased through another agent and had subsequently cancelled. Mrs. Brubaker testified that, upon arrival at her home, Respondent represented to her that he was an "investigator for the state" or a "state investigator," looking into her cancellation of her policy with National States Insurance Company. Respondent denies having made that representation. The record is clear, however, that shortly after entering Mrs. Brubaker's home, Respondent showed Mrs. Brubaker materials which clearly identified him as an agent of National States Insurance Company, and that Mrs. Brubaker clearly understood within minutes after his entering her home that he was, in fact, a salesman for National States Insurance Company. Under these circumstances, it is specifically found that Respondent's testimony concerning his employment status is more credible. If, as is clear from the record, Respondent intended to sell insurance to Mrs. Brubaker, there is little logic to his having represented himself as a state employee at the door to her home, and within minutes clearly divulging to her that that was indeed not the case. Petitioner also alleges in the Administrative Complaint that Respondent displayed a photograph of Insurance Commissioner Bill Gunter to Mrs. Brubaker to establish his position as an investigator for the state. Mrs. Brubaker, however, was unable to identify the person in the photograph displayed to her by Respondent, other than to assert that the person in the photograph was not the Respondent, but instead a clean-shaven person with light hair and fair, reddish complexion. Those facts, standing alone, are insufficient to establish that the person in the photograph was, in fact, Mr. Gunter. Respondent is alleged in paragraph twenty of Count IV of the Administrative Complaint of having ". . . . falsely represented the status of Medicare coverage in this state in order to induce Mrs. Brubaker to purchase' new insurance policies from you." The only evidence in the record on this issue is Mrs. Brubaker's testimony that Respondent told her that Blue Cross-Blue Shield would soon cease to be the Medicare carrier in Florida, and that there existed a substantial possibility that National States Insurance Company would be designated as the new Medicare carrier in Florida. The record in this cause is absolutely devoid of any evidence that that representation, even if it had been made, was false. Accordingly, Petitioner has failed to establish facts to support the allegations that Respondent has falsely represented the status of Medicare coverage in Florida. Finally, paragraph twenty-one of Count IV of the Administrative Complaint alleges that Respondent falsely told Mrs. Brubaker that her present insurer, Orange State Life Insurance Company, was cancelling its Medicare Supplement policies. . . . It is undisputed that Mrs. Brubaker, at the time she was visited by Respondent, had insurance coverage through Orange State Life Insurance Company. Mrs. Brubaker, it is clear from the record, was under the impression that her policy with Orange State Life Insurance Company was a Medicare supplement policy. Respondent testified that her policy was not a Medicare supplement policy, and, in fact, bore a statement across the top of the policy to the effect that the policy was not a Medicare supplement policy. Petitioner offered no evidence to rebut Respondent's testimony in this regard, and neither party sought to introduce the policy into evidence. The only evidence offered by Petitioner to support the allegation that Respondent's representation that Orange State Life Insurance Company was cancelling its Medicare supplement policv was the fact that Mrs. Brubaker had continued to pay premiums on her policy after the representation was made by Respondent without receiving notice of any cancellation. However, any inference that might be drawn from continued payment of premiums fails if, in fact, the policy held by Mrs. Brubaker was not a Medicare supplement policy. Neither party having offered competent evidence to establish that Mrs. Brubaker's Orange State Life Insurance Company policy was in fact a Medicare supplement policy, the allegations contained in paragraph twenty-one of Count IV of the Administrative Complaint are deemed to be without factual support. COUNT VI In Count VI f the Administrative Complaint, it is alleged that Respondent visited the home of Leila Mueller on October 18, 1979. It is further alleged that at that time Respondent told Mrs. Mueller that he was ". . . from Medicare and that [Respondent] had called at one of [Mrs. Mueller's] neighbor's homes to explain the changes in Medicare coverage." It is further alleged that Respondent ". . . misrepresented [his] actual employment in order to induce Mrs. Mueller to buy insurance policies. The record in this cause establishes that on or about October 18, 1979, Mrs. Mueller was visited in her home by two insurance salesmen whom she believed to be in some way affiliated with Medicare. Mrs. Mueller did not recall the names of either of the two men, was not asked to physically identify the Respondent, and could not recall which of the two men led her to believe that they were affiliated with "Medicare." Mrs. Mueller inquired about whether there existed any written material that she could review to decide whether to purchase insurance coverage. One of the men furnished her a brochure which had the name "Palesky" on it. There is no evidence of record in this proceeding to establish that Respondent was ever in the home of Mrs. Mueller or that he in any fashion ever represented to her or to anyone else that he was a representative of Medicare. The only testi- mony in this record that in any way connects Respondent with Mrs. Mueller was her testimony that she was given a brochure, which was not introduced into evidence, containing Respondent's name. This fact, standing alone, is insufficient to establish the factual allegations contained in Count VI of the Adminis- trative Complaint. COUNT XI On or about March 21, 1982, Respondent visited William F. and Winifred M. Bell in their home in Sarasota, Florida. The purpose of Respondent's visit to the Bells was to sell them a Medicare supplement policy. The Bells had previously purchased a policy from Union Fidelity Insurance Company. During the course of Respondent's visit with the Bells, Respondent advised them that Union Fidelity was "not a good company" and that the policy they had with Union Fidelity was "not a good policy." In addition, Respondent advised the Bells that if anything happened to Mr. Bell that Mrs. Bell would not be insured within two months after Mr. Bell's death. Paragraph fifty-five of Count XI of the Administrative Complaint alleges that Respondent told the Bells ". . . that their present insurance coverage was no good" and that if Mr. Bell died, Mrs. Bell would not be insured when in fact [Respondent] knew that both of those statements were false." The record in this cause contains no evidence that the representations set forth above made by Respondent to the Bells were false. The Bells' insurance policy was not received into evidence because Petitioner failed to respond fully to Respondent's Request for Production of Documents, and had further failed to fully exchange exhibits with Respondent, including a copy of the Bells' policy, as required by the Pre-hearing Order entered by the Hearing Officer approximately two months prior to the date set for final hearing in this cause. Accordingly, there are no facts to substantiate the allegations contained in Count XI of the Administrative Complaint. COUNT XII On or about February 4, 1983, Respondent visited Louise S. Donovan at her home in Daytona Beach, Florida. Respondent visited Mrs. Donovan in response to her cancellation of a previous policy purchased from National States Insurance Company from another agent on or about November 17, 1982. Soon thereafter, she cancelled that policy but on December 22, 1982, reinstated the policy after having available coverages explained to her by the other agent. Sometime thereafter she again can- called the National States policy. By letter dated January 17, 1983, from the home office of National States Insurance Company, Mrs. Donovan was advised that her refund-check had been returned to her agency for refund to her. On February 4, 1983, Respondent visited Mrs. Donovan in her home. Under direct examination, Mrs. Donovan testified as follows concerning that visit: Q So, you showed [the January 27, 1983] letter to Mr. Palesky; and, how did he respond to the letter? A He said sort of -- it's a little vague now after all these months -- that, oh, well, they didn't pay any attention to those things, or some- thing like that, and that the company would not refund any money on the policy. Q Be made the statement to you that the company was not going to refund? A The company would not -- now, I believe his interpretation of that, but it wasn t clear to me, was that there was a certain clause in that policy that I was not satisfied with and that he would not reissue the same policy under the same conditions. Well, I'm a lay person. I don't know all these fine points. And, I under- stood that he meant that the company would not refund any money to me at all... During the course of their discussions, Mrs. Donovan advised Respondent that she had cancel led the policy because she did not have nursing home coverage. Respondent explained to her that, under those circumstances she would have to either add nursing home coverage to the policy she had cancelled, which he was not sure that he could do for her because the so-called "RS 100 feature" was in the process of being discontinued, or she could take out a separate nursing home policy. Resnondent advised her that in order to keep the RS 100 feature she would have to reinstate the policy which she had cancelled, and take out a separate nursing home policy at a later date. This is the option which Respondent recommended to Mrs. Donovan, and the option that she ultimately chose. Accordingly, Mrs. Donovan opted to fill out an application reinstating the cancelled policy. She had originally paid $659 for the policy she took out on December 22, 982, but premium rates had increased since that time. The application filled out by Mrs. Donovan on February 4, 1983, reflects the premium rate increased to $691. Mrs. Donovan testified that she did not recall endorsing a refund check in the amount of $659 from National States Insurance Company and allowing Respondent to submit the endorsed check to National States along with the application dated February 4, 1983. Respondent testified that she did, in fact, endorse that check, which he forwarded to National States Insurance Company with the February 4, 1983, application. According to Respondent's testimony, which is uncontradicted, he submitted the $659 check to National States, notwithstanding the fact that the premium rate had increased to $691, with the understanding that the company had the option of either reinstating the policy for $659 or insisting upon the increased premium rate. Thereafter, Mrs. Donovan again decided to cancel the coverage she received as a result of the February 4, 1983, application submitted through Respondent. Mrs. Donovan signed a sworn statement on March 30, 1983, which provided, in part, as follows: Mr. Palesky has shown me the com- plaint filed against him by the Department of Insurance. I totally disagree with the accusa- tions in the complaint. My only problem with Mr. Pale sky was a misunderstanding concerning the fact that the RS 100 rider could not be refunded and reissued (as it was being discontinued) [sic] I thought he meant the entire policy could not be refunded. . . . Count XII of the Administrative Complaint alleges that Respondent ". . . refused to return [premium] money to Mrs. Donovan. . ., and that ". . . as a result of your refusal Mrs. Donovan felt pressured into applying for a new policy at a higher premium." Further, Count XII alleges that ". . . the new policy was written for a higher premium, that [Resoondent] signed a receipt acknowledging receipt of the higher premium, and that Mrs. Donovan gave [Respondent] no money during [the] visit [of] February 4, 1983." The evidence in this cause does not establish that Respondent refused to return premium money to Mrs. Donovan, nor does the evidence establish that Mrs. Donovan was pressured into applying for a new policy at a higher premium. Finally, the evidence in this cause establishes that Respondent attempted to have National States Insurance Company reinstate Mrs. Donovan's coverage at the premium originally paid in December of 1982, notwithstanding a premium increase that had occurred in the interim, a procedure which has not been shown by the record in this cause to be in any way improper. COUNT XV On or about January 24, 1983, Kenneth E. Fritz bought a National States Insurance Company policy from an agent other than Respondent. On or about February 12, 1983, Mr. Fritz cancelled that policy and asked for a full refund. Mr. Fritz subsequently received a letter dated March 11, 1983, from National States Insurance Company acknowledging his request for cancellation, and advising him that a full refund of his premium was being sent to the agency office which had sold the policy to him, with instructions to deliver the refund to him. On or about March 24, 1983, Respondent visited Mr. Fritz in his home in Largo, Florida, with Mr. Fritz' refund check. In paragraph eighty-eight of Count XV of the Administrative Complaint, Respondent is charged with having ". told Mr. Fritz that [Respondent was] an `investigator with Florida' and that [Respondent] pointed to an emblem on [Respondent's] jacket which gave [Mr. Fritz] the idea [Respondent was] employed by the State of Florida' when in fact [Respondent was] not and are not employed by the Florida Deoartment of Insurance in any capacity." It is further alleged that Resoondent made this representation to influence Mr. Fritz to buy insurance policies, and that Mr. Fritz did not realize that Respondent was not a government employee until reading a newspaper article on or about April 2, 1983, concerning the emergency suspension of Respondent's licensed. Respondent denies ever having represented to Mr. Fritz that he was an employee of the State of Florida. Indeed, Mr. Fritz testified on this issue only that: Mr. Palesky came here, and he had a thing on his coat, and he says[sic] you bought some policies from the -- and he mentioned the name of the company in St. Louis, and he says[sic] I'm here to check on that, and he rattles this thing and give [sic] me the impression that he was the--was from the State of Florida checking this. . . . As mentioned above, Respondent is charged with representing to Mr. Fritz that Respondent was an "investigator with Florida." Nothing contained in the record in this cause establishes that Respondent ever made such a representation to Mr. Fritz. Indeed, Mr. Fritz clearly testified that he could not remember exactly what Respondent said to him to give him the "impression" that he was an employee of the State of Florida. It is, however, clear from the record in this cause that the allegation of the Administrative Complaint that Mr. Fritz did not know that Respondent was not a state employee until reading of Respondent's emergency suspension in a newspaper article on or about April 2, 1983, is false. What is clear is that Respondent made a sales presentation to Mr. Fritz which resulted not only in Mr. Fritz' reinstating the policy he had earlier purchased from another agent and cancelled, but in fact buying another policy from Respondent at the same time. It is also clear that Respondent gave Mr. Fritz a business card during the course of their conversation which clearly identified Respondent as a salesman for National States Insurance Company. In short, this record does not establish that Respondent ever represented himself as an employee of the State of Florida during the course of his sales presentation to Mr. Fritz, nor did Mr. Fritz reinstate his cancelled policy and purchase a second policy based upon any such representation. COUNT XVII On April 15, 1981, Esther Huddleson purchased two Medicare supplement policies issued by National States Insurance Company from agent Michael Frye. On April 16, 1901, she requested a refund on the National States policies. On June 1, 1981, she was visited in her home by Respondent. Count XVII alleges that Respondent falsely advised Mrs. Huddleson that he was an "insurance investigator" and an "investigator for the State." It is also alleged that Respondent was not an "investigator" for National States Insurance Company and that his status with the company had always been that of a sales representative. Further, it is alleged that Respondent ". . . falsely told Mrs. Huddleson her statutory `free look' had expired and so persuaded her to sign a conservation notice." It is clear from the record in this proceeding that Respondent never advised Mrs. Huddleson that he was an "investigator for the State" or in any other manner employed by the State of Florida or the Department of Insurance. A sworn statement signed by Mrs. Huddleson upon which she was closely interrogated by counsel and the Bearing Officer during the course of this proceeding clearly reflects that Respondent identified himself either as "an investigator from National States Insurance Company" or "States Insurance Company." Fur ther, there is no evidence in the record in this cause from which it can be concluded that this representation by Respondent was in any way false. Finally, the only testimony in the record in this cause concerning Mrs. Huddleson's statutory "free look" period occurred on the direct examination of Mrs. Buddleson as follows: Q Did [Respondent] lead you to believe that your 30-day period had passed? A yes. At least, that was in my mind. Mrs. Buddleson's testimony in this regard is, at best, equivocal, and does not persuasively establish that Respondent did, in fact, advise her that her "free look" period had expired as alleged in the Administrative Complaint. There is, accordingly, insufficient evidence of record in this proceeding to establish the allegations against Respondent contained in Count XVII of the Administrative Complaint. The Bearing Officer feels constrained, further, to note with concern the failure of Petitioner's counsel to deal with both Mrs. Huddleson's sworn statement and direct testimony concerning the fact that Respondent never represented himself to her to be an employee of the State of Florida. In fact, to say that Petitioner's counsel failed to deal with those issues is most charitable. It would perhaps be more accurate to say that the proposed findings submitted by Petitioner's counsel on this particular issue have absolutely no factual basis in this record, despite citations to a portion of the transcript purportedly supporting the allegations of the Administrative Complaint. COUNT XXI In December of 1982 Mary Ellen Stapleton purchased a Medicare supplement policy from an agent, other than Respon- dent, representing National States Insurance Company. After reviewing the policy and deciding that she did not want to retain it, Mrs. Stapleton returned the policy on or about February 8, 1983, to National States Insurance Company, and requested a refund of her premium. Through a series of correspondence with National States Insurance Company, Mrs. Stapleton's cancellation request was acknowledged, and she was advised that her premium refund had been returned to the office of the agency selling the policy, with instructions to make immediate delivery to her. On or about March 8, 1983, Respondent telephoned Mrs. Stapleton at her home and advised her that he was an investigator for National States Insurance Company and that he was investigating a Mr. Buffer, who had sold Mrs. Stapleton her National States policy. Count XXI, in pertinent part, alleges: That on or about March 8, 1983, you, JOSEPH MICHAEL PALESKY, telephoned Mrs. Stapleton at her home in Lakeland, Florida, and told her you were "an investigator for National States and [that you were] investi- gating Mr. Buffer" when in fact you were not and are not an investigator for National States Insurance Company but were and are only a salesman. That at no time did you tell Mrs. Stapleton that you represented Diversified Health Services of St. Petersburg, Florida. That you, JOSEPH MICHAEL PALESKY, created the false impression of your employ- ment status in order to induce Mrs. Stapleton to keep the [cancelled] policy. . Respondent did not tell Mrs. Stapleton that he represented Diversified Health Services of St. Petersburg, Florida. It is undisputed that Respondent was, on March 8, 1983, a salesman for National States Insurance Company. Petitioner has not established by any evidence whatsoever that Respondent was not an investigator for National States Insurance Company with authority to investigate Mr. Buffer. Neither has it been shown in this record that Respondent was under any obligation to identify the insurance agency by whom he was employed after having first clearly identified himself as being affiliated with National States Insurance Company. It is, therefore, specifically concluded that there are no facts of record to establish the violations alleged in Count XXI of the Administrative Complaint. COUNT XXII On September 24, 1980, Respondent visited John Capers Smith and Lillian H. Smith in their home in Bradenton, Florida. Respondent went to the Smiths' home in response to the Smiths having sent a card to National States Insurance Company requesting information concerning Medicare supplement policies. Upon his arrival at the Smiths' home, Respondent was advised by Mrs. Smith initially that she did not wish to speak with him further on that day because her husband had recently undergone surgery and was still recuperating. However, uoon Respondent's insistence, he was admitted to the Smiths' home at approximately 1:00 p.m. Respondent remained in the Smiths' home until approximately 8:00 p.m. on September 24, 1980. When he first arrived in the Smiths' home, Respondent told the Smiths that he worked for the State of Florida and that Bill Gunter was his boss. In the course of discussing National States Insurance Company policies, Respondent advised the Smiths that this type of policy was something that Mr. Gunter was attempting to do to assist elderly Floridians. During the course of his conversation with the Smiths, Respondent displayed a photograph of Mr. Gunter to the Smiths as proof of his affiliation with the State of Florida, and offered to call Mr. Gunter on the telephone to verify his credentials. After a long period of discussion, the Smiths purchased an insurance policy from Respondent, and gave him a check for $694. The Smiths' purchase of the policy was due in large part to Respondent's representation that he was an employee of the State of Florida, and that Mr. Gunter approved of the policy. Respondent denies having made any representation to the Smiths concerning his employment by the State of Florida, but, under the circumstances here present, it is specifically concluded that the Smiths' versions of the transaction occurring on September 24, 1980, are more credible.
The Issue Whether the School Board of Broward County's award of a contract for Excess General and Auto Liability insurance coverage to United National Insurance Company is barred because of illegality?
Findings Of Fact The Parties Ranger Insurance Company, Petitioner, is the holder of a Certificate of Authority dated September 9, 1996 and issued by the Department of Insurance and Bill Nelson, Insurance Commissioner and Treasurer. Good through June 1, 1997, the certificate authorizes Ranger to write in a number of lines of insurance business, including, Private Passenger Auto Liability, Commercial Automobile Liability, Private Passenger Automobile Auto Physical Damage, Commercial Auto Physical Damage and Other Liability. As such, Ranger is an "authorized" or "admitted" insurer in the State of Florida. L.B. Bryan & Company, Alexander & Alexander, Inc., and Benefactor Financial Group, Inc., is a joint venture and co- petitioner with Ranger in this proceeding through whom Ranger proposed to procure the Excess General and Auto Liability (“Excess GL/AL”) coverage. A timely proposal under Request for Proposal 97- 072S was submitted to the School Board of Broward County by the petitioners to provide the Excess GL/AL Insurance Coverage sought by the RFP. United National Insurance Company is an "eligible" surplus lines insurer, approved by the Florida Department of Insurance to transact all surplus lines coverages in the State of Florida and licensed as such. The Department has notified insurance agents of United Nation's eligibility as a surplus lines insurer since 1978. It is the insurer of the Excess General and Excess Auto Liability insurance coverage awarded by the School Board under RFP 97-072S. Arthur J. Gallagher & Company ("Gallagher,") is the eighth largest insurance broker in the world. It has four sales offices, nine service offices, and approximately 150 employees in the State of Florida alone. The office from which it conducted business related to this proceeding is in Boca Raton, Florida, an office for which Area President David L. Marcus is responsible. Gallagher submitted a timely proposal (the "Gallagher proposal,") in response to the RFP on behalf of United National. The School Board of Broward County is the authority that operates, controls, and supervises all free public schools in the Broward County School District, "[i]n accordance with the provisions of s. (4)(b) of Article IX of the State Constitution ...". Section 230.03(2), F.S. In accord with its powers, the School Board may contract directly to purchase insurance. It is not required by its purchasing rules to use a competitive bidding or procurement process to purchase insurance. Nonetheless, on Friday, April 26, 1996, it issued a request for proposals, the RFP at issue in this proceeding, for insurance coverages including for Excess GL/AL insurance coverages. Siver Insurance Management Consultants Siver Insurance Management Consultants ("Siver,") are the drafters of RFP 97-072S. The School Board relied on Siver to draft the RFP, particularly its technical sections. Technical review of the proposals made under the RFP was conducted by Siver. And Siver put together for the School Board's use a summary of the policies proposed by both United National and Ranger. The summary was considered by the School Board's Evaluation Committee when it evaluated the competing proposals. The determination of whether the competing proposers were properly licensed was made by Siver. The School Board's Evaluation Committee, indeed the School Board, itself, played no role in determining the licensing credentials of the proposers while the proposals were under consideration. Under the arrangement between Siver and the School Board, however, the School Board retained the primary responsibility for administering the RFP. The RFP Request for Proposal 97-072S was mailed to 324 vendors (prospective proposers) the same day as its issuance, April 26, 1996. None of the vendors knew the contents of the RFP until it was issued. The RFP sought proposals for seven coverages, each of which was severable from the remainder of the coverages and was allowed to be proposed separately. The scope of the request was described in the RFP as follows: The School Board of Broward County, Florida ... is seeking proposals for various insurance coverages and risk management services. To facilitate distribution of the underwriting data and the requirements for each of the coverages, this consolidated Request for Proposals ... has been prepared. However, each of the coverages is severable and may be proposed separately. The following are included: Boiler & Machinery Excess General and Automobile Liability Excess Workers' Compensation School Leaders Errors & Omissions Crime Including Employee Dishonesty - Faithful Performance, Depositor's Forgery Claim and Risk Management Services (Including Managed Care Services) Statutory Death Benefits Petitioner's Ex. 1, pg. I-1. Since the seven coverages are severable and no proposer had to submit a proposal on all seven coverages, one way of looking at RFP 97-072S is as a consolidated RFP composed of seven, separate proposals, each for a different type of insurance coverage. Of the 324 vendors to whom the RFP was sent, only two, Gallagher, on behalf of United National, and Ranger, through the action of the joint venture, submitted proposals with respect to the Excess GL/AL coverages. Reasons for Using an RFP The School Board, under the auspices of Siver, chose to seek insurance coverage through an RFP rather than an Invitation to Bid, or what is colloquially referred to as a "straight bid," for a number of reasons. As one familiar with RFPs and Invitations to Bid might expect, the School Board and Siver were attracted to the RFP by the increased flexibility it offered in the ultimate product procured in comparison to the potentially less flexible product that would be procured through an invitation to bid. More pertinent to this case, however, Siver chose to use an RFP for the School Board in this case because "as explained ... by the Department of Insurance over the ... years, while there may... [be a] prohibition against any surplus lines agents submitting a straight bid, there would not be a prohibition against a ... [surplus lines] agent responding to a request for proposal " (Tr. 149.) The RFP approach was not chosen, however, in order to avoid any legal requirement or to circumvent the Insurance Code. As explained by Mr. Marshall, the approach was born of hard reality: Id. [O]ne of the primary motivations [for using an RFP rather than an Invitation to Bid] was to allow us [The School Board and Siver] to consider surplus lines companies because of the fact that very often they were the only insurers that would respond on the number of coverages and clients that we were working for. The Insurance Code and the Surplus Lines Law The Insurance Code in Section 624.401, Florida Statutes, requires generally that an insurer be authorized by the Department of Insurance (the "Department,") to transact business in the State of Florida before it does so: (1) No person shall act as an insurer, and no insurer or its agents, attorneys, subscribers, or representatives shall directly or indirectly transact insurance, in this state except as authorized by a subsisting certificate of authority issued to the insurer by the department, except as to such transactions as are expressly otherwise provided for in this code. One place in the code where transactions are "expressly otherwise provided for ...," is in the Surplus Lines Law, Section 626.913 et seq., Florida Statues. The purposes of the law are described as follows: It is declared that the purposes of the Surplus Lines Law are to provide for orderly access for the insuring public of this state to insurers not authorized to transact insurance in this state, through only qualified, licensed, and supervised surplus lines agents resident in this state, for insurance coverages and to the extent thereof not procurable from authorized insurers, who under the laws of this state must meet certain standards as to policy forms and rates, from unwarranted competition by unauthorized insurers who, in the absence of this law, would not be subject to similar requirements; and for other purposes as set forth in this Surplus Lines Law. Section 626.913(2), F.S. Surplus lines insurance is authorized in the first instance only if coverages cannot be procured from authorized insurers: If certain insurance coverages of subjects resident, located, or to be performed in this state cannot be procured from authorized insurers, such coverages, hereinafter designated "surplus lines," may be procured from unauthorized insurers, subject to the following conditions: The insurance must be eligible for export under s. 626.916 or s. 626.917; The insurer must be an eligible surplus lines insurer under s. 626.917 or s. 626.918; The insurance must be so placed through a licensed Florida surplus lines agent; and The other applicable provisions of this Surplus Lines Law must be met. Section 626.915, Florida Statutes, and then only subject to certain other conditions: No insurance coverage shall be eligible for export unless it meets all of the following conditions: The full amount of insurance required must not be procurable, after a diligent effort has been made by the producing agent to do so, from among the insurers authorized to transact and actually writing that kind and class of insurance in this state ... . Surplus lines agents must verify that a diligent effort has been made by requiring a properly documented statement of diligent effort from the retail or producing agent. However, to be in compliance with the diligent effort requirement, the surplus lines agent's reliance must be reasonable under the particular circumstances surrounding the risk. Reasonableness shall be assessed by taking into account factors which include, but are not limited to, a regularly conducted program of verification of the information provided by the retail or producing agent. Declinations must be documented on a risk-by-risk basis. It is not possible to obtain the full amount of insurance required by layering the risk, it is permissible to export the full amount. Section 626.916, F.S. Authorized vs. Unauthorized Insurers Unlike authorized insurers, unauthorized insurers do not have their rates and forms approved by the Department of Insurance, (the "Department.") Similarly, unauthorized insurers are not member of the Florida Insurance Guaranty Association, which guarantees payment of claims if an insurer becomes insolvent. Unauthorized insurers may qualify to transact Florida insurance business under the Surplus Lines Law and so, for purposes of the Surplus Lines Law, be considered "eligible" to transact surplus lines business in Florida. When a Surplus Lines insurer is eligible, Department of Insurance employees refer to the insurer in Surplus Lines terms as "authorized," a term in everyday English that is synonymous with "eligible." But an eligible surplus lines insurer remains an "unauthorized" insurer when compared to an "authorized" insurer for purposes of the Insurance Code and that part of the code known as the Surplus Lines Law. Submission and Review of Proposals Both L.B. Bryan & Company, Alexander & Alexander, Inc., and Benefactor Financial Group, Inc., (the "Joint Venture") and Gallagher submitted timely proposals with regard to Excess GL/AL coverage in response to the RFP. The Joint Venture's proposal was submitted, of course, on behalf of Ranger, an authorized insurer, and Gallagher's was submitted on behalf of United National, an insurer eligible to transact insurance in the State of Florida as a surplus lines insurer but otherwise an unauthorized insurer. The School Board's Insurance Evaluation Committee met on May 30, 1996, to evaluate proposals received pursuant to the RFP. Although briefly discussed by the Evaluation Committee, the issue of proper licensing was not determined independently by the committee. Instead of making that determination, the committee turned to its insurance consultant, Siver. Siver had determined that both proposers, Ranger and United National, were properly licensed for purposes of responding to the RFP and being considered by the committee. Siver communicated that determination to the committee. The committee relied on Siver's determination. Aside from receiving Siver's determination of proper licensing when "briefly discussed" (Tr. 108,) the Evaluation Committee did not address whether either Ranger or United National were properly licensed. Certainly, no issue of whether Ranger should take precedence over United National by virtue that it was an authorized insurer when United National was an unauthorized insurer and a mere eligible Surplus Lines insurer was ever discussed by the committee. In evaluating the proposals, the Committee awarded 73 points to the Gallagher proposal and 69 points to the Ranger proposal. Points were awarded on the basis of three criteria or in three categories: Qualifications (20 points maximum); Scope of Coverages/Services Offered (30 points maximum); and, Points for Projected Costs (50 points maximum.) The Ranger proposal outscored the Gallagher proposal in the "projected cost" category, 50 to 23, but it scored lower in the "qualifications" category, 14 versus 20 for Gallagher, and significantly lower in the "scope of coverages" category, five points versus 30 for Gallagher. The United National coverage was more than twice as costly as Ranger's, a $491,000 annual premium as opposed to Ranger's $226,799, which explains the points awarded in the "projected cost" category. The Gallagher proposal received more points than the Ranger proposal in the "qualifications" category because United National has provided the School Board with Excess GL/AL coverage for a number of years and Ranger has never provided the School Board with such coverage. The Ranger proposal fell so drastically short of the Gallagher proposal in the "scope of coverages/services offered" category primarily because of an athletic participation exclusion appearing in a rider to the specimen policy appearing in its proposal. Ranger had intended to cover athletic participation and the rider was included with the Ranger proposal in error. Ranger notified the School Board of its intent immediately after the tabulations were released. Nonetheless, the Evaluation Committee was never informed of the error and no attempt was made by the School Board to negotiate with Ranger to improve the coverages offered, despite authority in the RFP for the School Board to negotiate with any of the proposers. (The language used in the RFP is "with one or more" of the proposers.) The Ranger proposal also fell short of the Gallagher proposal in the "scope of coverages/service offered" category because the Gallagher proposal was made in several ways. One way was as to only Excess GL/AL coverage. Another way included School Leaders' Errors and Omissions ("E & O") coverage. The E & O coverage was offered by United National in the Gallagher proposal together with the Excess GL/AL coverage in a "combined lines" package, similar to United National coverages already existing for the School Board. Furthermore, the Ranger proposal expressly excluded coverage for Abuse and Molestation, a needed coverage due to the School Board's prior claims history. On June 5, 1996, the Evaluation Committee submitted its recommendations to the School Board's Purchasing Department. With regard to GL/AL coverage, the Evaluation Committee recommended the purchase of the GL/AL/E & O "combined lines" coverage offered by Gallagher through United National. The School Board posted its Proposal Recommendation/Tabulations adopting the recommendation, two days later, on June 7, 1996. Ranger Seeks Redress from the Department Following the School Board's award, Ranger, thinking that it should have received the award under the RFP as the only authorized insurer to submit a proposal for Excess GL/AL coverage, sought redress from the Department. On June 14, 1996, Ranger personnel met with the head of the Department's Surplus Lines Section, Carolyn Daniels, alleging a violation of the Insurance Code's Surplus Lines Law. On June 18, 1996, Ranger reiterated its complaint in writing and asked Ms. Daniels to find a violation that day. On June 24, 1996, Ranger, now through its attorneys, met with Ms. Daniels and her supervisor. Again, on July 4, 1996, Ranger's attorneys wrote to Ms. Daniels, further pleading for her to find a violation and asking for an administrative hearing if Ms. Daniels did not find in favor of the Ranger position. On a fifth attempt, Ranger wrote Ms. Daniels on July 11, 1996, requesting that she adopt Ranger's position. Ms. Daniels reviewed Ranger's five complaints with her supervisor, the Chief of the Bureau of Property and Casualty Solvency and Market Conduct. In a letter dated August 14, 1996, to the School Board's Purchasing Agent, Ms. Daniels announced her determination: I did not find any evidence to indicate that Mr. David L. Marcus of Arthur J. Gallagher & Company or United National Insurance Company violated the Surplus Lines Law in providing a quote for the School Board. Intervenor's Ex. No. 2. Ms. Daniel's determination was based on a number of factors, including the School Board's position in the transaction as an "informed consumer," (Tr. 422-423,) and that the School Board had possessed a United National policy for 13 years. But, the determination was primarily based on the fact that Gallagher had received three declinations from authorized insurers to provide Excess GL/AL coverage and so had performed that which was required prior to deciding that the coverage was eligible for export and provision by a surplus lines insurer: due diligence. Due Diligence Section 626.916(1)(a), Florida Statutes, provides, [n]o insurance coverage shall be eligible for export unless it meets ... the following condition[]: ... [t]he full amount of insurance required must not be procurable, after a diligent effort has been made by the producing agent to do so, from among the insurers authorized to transact and actually writing that kind and class of insurance in this state, and the amount of insurance exported shall be only the excess over the amount so procurable from authorized insurers. (e.s.) The statute goes on to require that the diligent effort, "be reasonable under the particular circumstances surrounding the export of that particular risk." Reasonableness is assessed by taking into account factors which include, but are not limited to, a regularly conducted program of verification of the information provided by the retail or producing agent. Declinations must be documented on a risk-by- risk basis. Section 626.916(1)(a), F.S. "'Diligent effort' means seeking coverage from and having been rejected by at least three authorized insurers currently writing this type of coverage and documenting these rejections." Section 626.914(4), F.S. Under this definition, the "producing agent should contact at least three companies that are actually writing the types of clients and the business in the area [that they are] wanting to write." (Tr. 268.) A specific form to help insurance agents document their three rejections is adopted by Department rule. The rule provides: When placing coverage with an eligible surplus lines insurer, the surplus lines agent must verify that a diligent effort has been made by requiring from the retail or producing agent a properly documented statement of diligent effort on form DI4-1153 (7/94), "Statement of Diligent Effort", which is hereby adopted and incorporated by reference. Rule 4J-5.003(1), F.A.C. Fully aware of the requirement for documentation of diligent effort to find authorized insurers, and cognizant that it would be unlikely that an authorized insurer could be found based on experience, Gallagher began soliciting proposals for coverage in the middle of April, 1996, several weeks before the School Board had issued the RFP. In fact, at the time that Gallagher started soliciting bids, the School Board had not yet assembled or distributed the underwriting data needed by bidders. Nonetheless, with good reason based on experience, Gallagher expected that the School Board would seek a "combined lines" package of GL/AL/E & O coverages like the School Board then received through United National, and that it would be unlikely that an authorized insurer would step forward to propose coverage. Gallagher, therefore, used the policy form current in April of 1996, that is the form providing Excess GL/AL/E & O coverage in a "combined lines" package, "as an example of what the School Board had been looking for this type of program and seeking a program similar to that and similar in coverage." (Tr. 242.) But it also sought Excess GL/AL without combination with E & O coverage. As Mr. Marcus testified, when seeking coverage from authorized insurers beginning in April of 1996, Gallagher "would be looking at a variety of different ways, whether they were package or not." (Tr. 243.) One authorized insurer, Zurich-American, declined to quote because it could not offer a combined line SIR program (a package of excess general liability and excess auto liability coverages) as requested by the RFP. Furthermore, the School Board risk was too large for Zurich-American to handle. A second authorized insurer, American International Group, declined to quote due to the School Board's adverse loss experience. A third authorized insurer, APEX/Great American, declined to provide a quote to Gallagher due to the large size of the School Board account. The responses of these three authorized insurers were listed in a Statement of Diligent Effort provided to Ms. Daniels, which she considered in determining that Gallagher and Mr. Marcus had committed no violation of the Surplus Lines Law. Gallagher also provided Ms. Daniels with a second Statement of Diligent Effort. The statement documented the attempt to attract quotes by adding a school leaders errors and omission component to the Excess GL/AL coverage. It, too, was used by Ms. Daniels in making her determination of no violation of the Surplus Lines Law by Gallagher. The same three insurers refused to quote for the "combined lines" program. Attempts by other Authorized Insurers Gallagher requested that any responses to its requests for quotes be submitted by May 10, 1996, so that it could prepare and submit its proposal by the RFP's deadline for submission of original proposals by all vendors, 2:00 p.m. May 16, 1996. One insurer, Discover Re/USF&G attempted to submit a quote on May 15, 1996, one day before the RFP deadline but five days after May 10. By then, Gallagher had already started printing its 625 page proposal. Furthermore, the company failed to provide the required policy forms until the day after the School Board's deadline for filing proposals. Coregis Insurance Company offered coverage of up to $700,000 for each claim and for each occurrence, but like Discover Re/USF&G, failed to provide the required policy forms until after the RFP deadline. Furthermore, definitive coverage under the Coregis policy would only be provided on the condition that the Florida Legislature pass a Legislative Claims bill, a limiting condition not authorized in the RFP or requested by Gallagher. American Home Assurance Company never responded to Gallagher with the School Board's required quote or policy forms. Rather, the company merely provided an "indication" that the company declined to provide a quote. An "indication" consists of an approximate premium rate, without any terms or conditions. A "quote," on the other hand, includes the terms and conditions of a policy. The Department places with the producing agent the responsibility of determining whether an insurer's communication constitutes and "indication" or a "quote." An agent, according to Ms. Daniels, can only violate the Surplus Lines Law if the agent receives a reliable quote. Gallagher even requested a quote from Ranger, despite never having been appointed to transact insurance on its behalf. But Ranger declined. In response to a request by Gallagher's minority business partner, McKinley Financial Services, Ranger, through E. Michael Hoke on American E & S letterhead, wrote in a letter dated May 6, 1996, "[w]e have received a prior submission on this account so we are returning the attached." Intervenor's Ex. No. 7. The Petition Ranger's petition for formal administrative hearing is the letter dated June 19, 1996, to the Director of Purchasing for the School Board under the signature of E. Michael Hoke, CPCU, Assistant Vice President of AES/Ranger Insurance Company. The letter asks its readers to "bear[] in mind we are not attorneys," p. 1 of the letter, before it outlines three protest issues. The third protest issue is the one about which Ms. Daniels made her determination that no violation of the statute had been committed by Gallagher or its employees: "3) Florida Statute 626.901 (Representing or aiding unauthorized insurer prohibited)." The other two issues deal not with the propriety of Gallagher's actions but the legality of the School Board's award to an unauthorized insurer, United National, when coverage was available from an authorized insurer, Ranger: Florida Statute 626.913 (Surplus Lines Law). . . Our Position * * * Ranger Insurance Company is an admitted authorized insurer ... Its proposal for excess general and auto liability is proof that the Board requested coverage was procurable. United National Insurance Company is an unauthorized insurer under the laws of the State of Florida ... . The United National Insurance Company proposal and/or its offer to extend it's current policies appear to us as "unwarranted competition." Ranger Insurance Company is protected from unwarranted competition from United National Insurance Company in accordance with the Florida Statute 626.913. Florida Statute 626.913 (Eligibility for Export) ... Our Position * * * Ranger Insurance Company is an admitted authorized insurer under the laws of the State of Florida. ... It's proposal for excess general and auto liability is proof that the Board requested amounts were available. The proposal and/or contract extensions offered by United National are for the full amount of coverage sought and not excess over the amount procurable from Ranger, an authorized insurer. The petition, therefore, set in issue not just whether Gallagher acted illegally but whether the School Board acted illegally when it made the award to United National, an unauthorized insurer when Ranger, an authorized insurer, had also submitted a proposal. Extension As soon as the School Board was made aware of the Ranger protest, it extended the existing insurance contracts procured under RFP 92-080S, awarded approximately five years earlier. The extension was on a month-to-month basis until resolution of the protest. The extension was necessary to avoid a lapse in the School Board's coverage during this proceeding.
Recommendation Based on the foregoing, it is, hereby, RECOMMENDED: That the award to United National under the Gallagher proposal in response to RFP 97-072S be rescinded. DONE AND ENTERED this 28th day of January, 1997, in Tallahassee, Florida. DAVID M. MALONEY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (904) 488-9675 SUNCOM 278-9675 Fax Filing (904) 921-6847 Filed with the Clerk of the Division of Administrative Hearings this 28th day of January, 1997. COPIES FURNISHED: Paul R. Ezatoff, Esquire Christopher B. Lunny, Esquire Katz, Kutter, Haigler, Alderman, Marks, Bryant & Yon, P.A. Post Office Box 1877 Tallahassee, Florida 32302-1877 Edward J. Marko, Esquire Robert Paul Vignola, Esquire Office of the School Board Attorney K.C. Wright Administrative Building 600 Southeast Third Avenue - 11th Floor Fort Lauderdale, Florida 33301 A. Kenneth Levine, Esquire Blank, Risby and Meenan, P.A. Post Office Box 11068 Tallahassee, Florida 32302-3068 Dr. Frank Petruzielo, Superintendent Broward County School Board 600 Southeast Third Avenue Fort Lauderdale, Florida 33301-3125
Findings Of Fact Petitioner was employed with the Collier County Health Department, Department of Health and Rehabilitative Services, on March 9, 1973. Petitioner's date of birth is November 26, 1916. On October 1, 1980, Petitioner's medical insurance coverage was entered into the payroll system under the Spouse Program, State of Florida plan. The proper amount of premiums under the Spouse Program were paid to Blue Cross Blue Shield from October 1, 1980, up to and including June, 1983. On November 26, 1981, Petitioner reached the age of 65. Under the State plan, coverage at age 65 is automatically reduced and changed to Medicare Supplement Coverage. In order to have remained fully covered, Petitioner would have had to apply for the Medicare insurance prior to reaching age 65, which he did not do. Due to both spouses being covered, there was no change in policy premium deductions even after Petitioner reached age 65 and his State coverage was reduced. The Blue Cross Blue Shield (State program) paid several claims of Petitioner subsequent to his 65th birthday and through December, 1982. On March 8, 1983, Petitioner was admitted to the hospital and on March 11, 1983, heart bypass surgery was performed. Respondent normally notifies the employee and employing agency of the coverage change prior to the employee's 65th birthday, as required by Rule 22K- 1.16, F.A.C. In this case, Respondent did not do so due to a failure in its computer program. Petitioner could have determined that he was required to apply for Medicare coverage had he read in detail a copy of the plan's benefit booklet furnished to all State employees in 1978.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent direct its insurer to pay Petitioner's claims arising from his March, 1983, hospitalization. DONE and ENTERED this 2nd day of September, 1983, in Tallahassee, Florida. R. T. CARPENTER, 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 2nd day of September, 1983. COPIES FURNISHED: Mr. John H. Adams 2596 Linwood Avenue Naples, Florida 33962 Daniel C. Brown, Esquire Department of Administration 435 Carlton Building Tallahassee, Florida 32301 Nevin G. Smith, Secretary Department of Administration Carlton Building Tallahassee, Florida 32301
The Issue The issue is whether the Petitioner, Amjad Shamim, is eligible for continuation coverage of health insurance and reimbursement, under the State of Florida Employees Group Insurance Plan, for medical care expenses he incurred after he left state employment.
Findings Of Fact Mr. Shamim became a full-time employee of the Department of Health and Rehabilitative Services (HRS) in September, 1986, and worked at the Palm Beach County Health Department. Effective August 1, 1987, Mr. Shamim was insured with family coverage under the State of Florida, Employee Group Health Insurance Program. His enrollment continued until his insurance termination effective date of January 1, 1989. On November 15, 1988, Mr. Shamim met with Martina L. Walker, Personnel Technician I for HRS at the Palm Beach County Health Department, in connection with his decision to leave the Department's employ on November 18, 1988. At that meeting he executed the documents required by HRS to discontinue his health insurance coverage. As part of that November 15, 1988, conference, Martina Walker informed Mr. Shamim of his rights to continued health insurance coverage after his termination of employment. Mr. Shamim advised Ms. Walker that he no longer needed the State coverage because his new employer offered a health insurance plan to its employees. Ms. Walker, nonetheless, cautioned Mr. Shamim that any pre-existing conditions are usually not covered by new employer policies. Ms. Walker's notification of Mr. Shamim's right to continued health insurance coverage for up to 18 months was not in writing. Mrs. Walker never told Mr. Shamim orally the specifics of continuation coverage, i.e., that he had 60 days to elect continuation coverage from the coverage effective date of January 1, 1989, that his application and premium were required to be postmarked by March 1, 1989; or that he could continue his family coverage for 18 months at monthly premium of $273.01 per month. In addition to disclosures when an employee leaves, all employees of the Palm Beach County Health Department are advised of their opportunity to elect continuation coverage under the State Plan at the time of their employment, by means of a notice furnished by HRS. Mr. Shamim received a general notice of benefits, including the availability of post employment continuation coverage, at the time of his employment. The termination form completed by Ms. Walker was processed routinely, and caused the Division of State Employee Insurance to mail Mr. Shamim written notification by first class mail of the availability of continuation coverage in a letter dated December 1, 1988. Due to the appearance of the handwritten address on the notice mailed to Mr. Shamim, it is more likely than not that this notice failed to arrive at Mr. Shamim's home address. The portion of the address for the apartment number could be read as D201 or 2201, which would account for misdirection of the notice in the mail. Mr. Shamim's claim that he did not receive the notification is accepted. Had the notice been properly addressed and had he received it, Mr. Shamim would have had the opportunity to decide whether to exercise his legal right to continue his health insurance. On January 27, 1989, Mr. Shamim had surgery to his hand. He had been treated for that condition while he was employed with the Palm Beach County Health Department. Because it was deemed to be a pre-existing condition, the expense he incurred of almost $4,000 was not covered under the health insurance policy of his new employer. There is no evidence of the length of time the pre- existing condition exclusion in the policy offered by Mr. Shamim's new employer lasts. Mr. Shamim first notified HRS of his desire for post termination health insurance coverage on September 19, 1989. A second request was made on November 7, 1989. Finding no success with HRS, Mr. Shamim contacted the Respondent on December 29, 1989.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a Final Order be entered accepting the request of Mr. Shamim for continuation coverage, accepting his premiums and processing his claim. DONE and ENTERED this 11th day of November, 1990, at Tallahassee, Florida. WILLIAM R. DORSEY, JR. 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 11th day of November, 1990.
The Issue The issue in these consolidated cases is whether the Agency for Health Care Administration ("AHCA") properly disallowed Petitioners' expense for liability insurance and accrued contingent liability costs contained in AHCA's audit of Petitioners' Medicaid cost reports.
Findings Of Fact Based upon the oral and documentary evidence presented at the final hearing, and on the entire record of this proceeding, the following findings of fact are made: Petitioners operate licensed nursing homes that participate in the Florida Medicaid program as institutional providers. The 14 Palm Gardens facilities are limited liability companies operating as subsidiaries of New Rochelle Administrators, LLC, which also provides the facilities with management services under a management contract. AHCA is the single state agency responsible for administering the Florida Medicaid program. One of AHCA's duties is to audit Medicaid cost reports submitted by providers participating in the Medicaid program. During the audit period, Petitioners provided services to Medicaid beneficiaries pursuant to Institutional Medicaid Provider Agreements that they entered into with AHCA. The Provider Agreements contained the following relevant provision: (3) Compliance. The provider agrees to comply with local, state, and federal laws, as well as rules, regulations, and statements of policy applicable to the Medicaid program, including Medicaid Provider Handbooks issued by AHCA. Section 409.908, Florida Statutes (2002)1, provided in relevant part: Reimbursement of Medicaid providers.-- Subject to specific appropriations, the agency shall reimburse Medicaid providers, in accordance with state and federal law, according to methodologies set forth in the rules of the agency and in policy manuals and handbooks incorporated by reference therein. These methodologies may include fee schedules, reimbursement methods based on cost reporting, negotiated fees, competitive bidding pursuant to s. 287.057, and other mechanisms the agency considers efficient and effective for purchasing services or goods on behalf of recipients. . . . * * * (2)(a)1. Reimbursement to nursing homes licensed under part II of chapter 400 . . . must be made prospectively. . . . * * * (b) Subject to any limitations or directions provided for in the General Appropriations Act, the agency shall establish and implement a Florida Title XIX Long-Term Care Reimbursement Plan (Medicaid) for nursing home care in order to provide care and services in conformance with the applicable state and federal laws, rules, regulations, and quality and safety standards and to ensure that individuals eligible for medical assistance have reasonable geographic access to such care. . . . AHCA has adopted the Title XIX Long-Term Care Reimbursement Plan (the "Plan") by reference in Florida Administrative Code Rule 59G-6.010. The Plan incorporates the Centers for Medicare and Medicaid Services ("CMS") Publication 15-1, also called the Provider Reimbursement Manual (the "Manual" or "PRM"), which provides "guidelines and policies to implement Medicare regulations which set forth principles for determining the reasonable cost of provider services furnished under the Health Insurance for the Aged Act of l965, as amended." CMS Pub. 15-1, Foreword, p. I. The audit period in these cases spans two versions of the Plan: version XXIII, effective July 1, 2002, and version XXIV, effective January 1, 2003. It is unnecessary to distinguish between the two versions of the Plan because their language is identical as to the provisions relevant to these cases. Section I of the Plan, "Cost Finding and Cost Reporting," provides as follows, in relevant part: The cost report shall be prepared by a Certified Public Accountant in accordance with chapter 409.908, Florida Statutes, on the form prescribed in section I.A. [AHCA form 5100-000, Rev. 7-1-90], and on the accrual basis of accounting in accordance with generally accepted accounting principles as established by the American Institute of Certified Public Accountants (AICPA) as incorporated by reference in Rule 61H1-20.007, F.A.C., the methods of reimbursement in accordance with Medicare (Title XVIII) Principles of Reimbursement, the Provider Reimbursement Manual (CMS-PUB. 15-1)(1993) incorporated herein by reference except as modified by the Florida Title XIX Long Term Care Reimbursement Plan and State of Florida Administrative Rules. . . . Section III of the Plan, "Allowable Costs," provides as follows, in relevant part: Implicit in any definition of allowable costs is that those costs shall not exceed what a prudent and cost-conscious buyer pays for a given service or item. If costs are determined by AHCA, utilizing the Title XVIII Principles of Reimbursement, CMS-PUB. 15-1 (1993) and this plan, to exceed the level that a prudent buyer would incur, then the excess costs shall not be reimbursable under the plan. The Plan is a cost based prospective reimbursement plan. The Plan uses historical data from cost reports to establish provider reimbursement rates. The "prospective" feature is an upward adjustment to historical costs to establish reimbursement rates for subsequent rate semesters.2 The Plan establishes limits on reimbursement of costs, including reimbursement ceilings and targets. AHCA establishes reimbursement ceilings for nursing homes based on the size and location of the facilities. The ceilings are determined prospectively, on a semiannual basis. "Targets" limit the inflationary increase in reimbursement rates from one semester to the next and limit a provider's allowable costs for reimbursement purposes. If a provider's costs exceed the target, then those costs are not factored into the reimbursement rate and must be absorbed by the provider. A nursing home is required to file cost reports. The costs identified in the cost reports are converted into per diem rates in four components: the operating component; the direct care component; the indirect care component; and the property component. GL/PL insurance costs fall under the operating component. Once the per diem rate is established for each component, the nursing home's reimbursement rate is set at the lowest of four limitations: the facility's costs; the facility's target; the statewide cost ceiling based on the size of the facility and its region; or the statewide target, also based on the size and location of the facility. The facility's target is based on the initial cost report submitted by that facility. The initial per diem established pursuant to the initial cost report becomes the "base rate." Once the base rate is established, AHCA sets the target by inflating the base rate forward to subsequent six- month rate semesters according to a pre-established inflation factor. Reimbursement for cost increases experienced in subsequent rate semesters is limited by the target drawn from the base rate. Thus, the facility's reimbursement for costs in future rate semesters is affected by the target limits established in the initial period cost report. Expenses that are disallowed during the establishment of the base rate cannot be reclaimed in later reimbursement periods. Petitioners entered the Medicaid program on June 29, 2002. They filed cost reports for the nine- month period from their entry into the program through February 28, 2003. These reports included all costs claimed by Petitioners under the accrual basis of accounting in rendering services to eligible Medicaid beneficiaries. In preparing their cost reports, Petitioners used the standard Medicaid Cost Report "Chart of Accounts and Description," which contains the account numbers to be used for each ledger entry, and explains the meaning of each account number. Under the general category of "Administration" are set forth several subcategories of account numbers, including "Insurance Expense." Insurance Expense is broken into five account numbers, including number 730810, "General and Professional Liability -- Third Party," which is described as "[c]osts of insurance purchased from a commercial carrier or a non-profit service corporation."3 Petitioners' cost report stated the following expenses under account number 730810: Facility Amount Palm Garden of Clearwater $145,042.00 Palm Garden of Gainesville $145,042.00 Palm Garden of Jacksonville $145,042.00 Palm Garden of Largo $171,188.00 Palm Garden of North Miami $145,042.00 Palm Garden of Ocala $217,712.00 Palm Garden of Orlando $145,042.00 Palm Garden of Pinellas $145,042.00 Palm Garden of Port St. Lucie $145,042.00 Palm Garden of Sun City $145,042.00 Palm Garden of Tampa $145,042.00 Palm Garden of Vero Beach $217,712.00 Palm Garden of West Palm Beach $231,151.00 Palm Garden of Winter Haven $145,042.00 AHCA requires that the cost reports of first-year providers undergo an audit. AHCA's contract auditing firm, Smiley & Smiley, conducted an examination4 of the cost reports of the 14 Palm Gardens nursing homes to determine whether the included costs were allowable. The American Institute of Certified Public Accountants ("AICPA") has promulgated a series of "attestation standards" to provide guidance and establish a framework for the attestation services provided by the accounting profession in various contexts. Attestation Standards 101 and 601 set out the standard an accountant relies upon in examining for governmental compliance. Smiley & Smiley examined the Palm Gardens cost reports pursuant to these standards. During the course of the audit, Smiley & Smiley made numerous requests for documentation and other information pursuant to the Medicaid provider agreement and the Plan. Petitioners provided the auditors with their general ledger, invoices, audited financial statements, bank statements, and other documentation in support of their cost reports. The examinations were finalized during the period between September 28, 2006, and October 4, 2006. The audit report issued by AHCA contained more than 2,000 individual adjustments to Petitioners' costs, which the parties to these consolidated proceedings have negotiated and narrowed to two adjustments per Palm Gardens facility.5 As noted in the Preliminary Statement above, the first adjustment at issue is AHCA's disallowance of Palm Gardens' accrual of expenses for contingent liability under the category of GL/PL insurance, where Palm Gardens could not document that it had purchased GL/PL insurance. The second adjustment at issue is ACHA's disallowance of a portion of the premium paid by Palm Gardens for the Mature Care Policies. The total amount of the adjustment at issue for each facility is set forth in the Preliminary Statement above. Of that total for each facility, $18,849.00 constituted the disallowance for the Mature Care Policies. The remainder constituted the disallowance for the accrual of GL/PL related contingent liabilities. Janette Smiley, senior partner at Smiley & Smiley and expert in Medicaid auditing, testified that Petitioners provided no documentation other than the Mature Care Policies to support the GL/PL entry in the cost reports. Ms. Smiley testified that, during much of the examination process, she understood Petitioners to be self-insured. Ms. Smiley's understanding was based in part on statements contained in Petitioners' audited financial statements. In the audited financial statement covering the period from June 28, 2002, through December 31, 2002, Note six explains Petitioners' operating leases and states as follows, in relevant part: The lease agreement requires that the Company maintain general and professional liability in specified minimum amounts. As an alternative to maintaining these levels of insurance, the lease agreement allows the Company to fund a self-insurance reserve at a per bed minimum amount. The Company chose to self-insure, and has recorded litigation reserves of approximately $1,735,000 that are included in other accrued expenses (see Note 9). As of December 31, 2002, these reserves have not been funded by the Company. . . . The referenced Note nine, titled "Commitments and Contingencies," provides as follows in relevant part: Due to the current legal environment, providers of long-term care services are experiencing significant increases in liability insurance premiums or cancellations of liability insurance coverage. Most, if not all, insurance carriers in Florida have ceased offering liability coverage altogether. The Company's Florida facilities have minimal levels of insurance coverage and are essentially self-insured. The Company has established reserves (see Note 6) that estimate its exposure to uninsured claims. Management is not currently aware of any claims that could exceed these reserves. However, the ultimate outcome of these uninsured claims cannot be determined with certainty, and could therefore have a material adverse impact on the financial position of the Company. The relevant notes in Petitioner's audited financial statement for the year ending December 31, 2003, are identical to those quoted above, except that the recorded litigation reserves were increased to $4 million. The notes provide that, as of December 31, 2003, these reserves had not been funded by Petitioners. Ms. Smiley observed that the quoted notes, while referencing "self-insurance" and the recording of litigation reserves, stated that the litigation reserves had not been funded. By e-mail dated April 21, 2005, Ms. Smiley corresponded with Stanley Swindling, the shareholder in the accounting firm Moore Stephens Lovelace, P.A., who had primary responsibility for preparing Petitioners' cost reports. Ms. Smiley noted that Petitioners' audited financial statements stated that the company "chose to self-insure" and "recorded litigation reserves," then wrote (verbatim): By definition from PRM CMS Pub 15-1 Sections 2162.5 and 2162.7 the Company does in fact have self-insurance as there is no shifting of risk. You will have to support your positioning a letter addressing the regs for self-insurance. As clearly the financial statement auditors believe this is self- insurance and have disclosed such to the financial statement users. If you cannot support the funding as required by the regs, the provider will have to support expense as "pay as you go" in accordance with [2162.6] for PL/GL. * * * Please review 2161 and 2162 and provide support based on the required compliance. If support is not complete within the regulations, amounts for IBNR [incurred but not reported] will be disallowed and we will need to have the claims paid reports from the TPA [third party administrator] (assuming there is a TPA handling the claims processing), in order to allow any expense. Section 2160 of the Manual establishes the basic insurance requirement: A. General.-- A provider participating in the Medicare program is expected to follow sound and prudent management practices, including the maintenance of an adequate insurance program to protect itself against likely losses, particularly losses so great that the provider's financial stability would be threatened. Where a provider chooses not to maintain adequate insurance protection against such losses, through the purchase of insurance, the maintenance of a self-insurance program described in §2161B, or other alternative programs described in §2162, it cannot expect the Medicare program to indemnify it for its failure to do so. . . . . . . If a provider is unable to obtain malpractice coverage, it must select one of the self-insurance alternatives in §2162 to protect itself against such risks. If one of these alternatives is not selected and the provider incurs losses, the cost of such losses and related expenses are not allowable. Section 2161.A of the Manual sets forth the general rule as to the reimbursement of insurance costs. It provides that the reasonable costs of insurance purchased from a commercial carrier or nonprofit service corporation are allowable to the extent they are "consistent with sound management practice." Reimbursement for insurance premiums is limited to the "amount of aggregate coverage offered in the insurance policy." Section 2162 of the Manual provides as follows, in relevant part: PROVIDER COSTS FOR MALPRACTICE AND COMPREHENSIVE GENERAL LIABILITY PROTECTION, UNEMPLOYMENT COMPENSATION, WORKERS' COMPENSATION, AND EMPLOYEE HEALTH CARE INSURANCE General.-- Where provider costs incurred for protection against malpractice and comprehensive general liability . . . do not meet the requirements of §2161.A, costs incurred for that protection under other arrangements will be allowable under the conditions stated below. . . . * * * The following illustrates alternatives to full insurance coverage from commercial sources which providers, acting individually or as part of a group or a pool, can adopt to obtain malpractice, and comprehensive general liability, unemployment compensation, workers' compensation, and employee health care insurance protection: Insurance purchased from a commercial insurance company which provides coverage after a deductible or coinsurance provision has been met; Insurance purchased from a limited purpose insurance company (captive); Total self-insurance; or A combination of purchased insurance and self-insurance. . . . part: Section 2162.3 of the Manual provides: Self-Insurance.-- You may believe that it is more prudent to maintain a total self- insurance program (i.e., the assumption by you of the risk of loss) independently or as part of a group or pool rather than to obtain protection through purchased insurance coverage. If such a program meets the conditions specified in §2162.7, payments into such funds are allowable costs. Section 2162.7 of the Manual provides, in relevant Conditions Applicable to Self-Insurance.-- Definition of Self-Insurance.-- Self- insurance is a means whereby a provider(s), whether proprietary or nonproprietary, undertakes the risk to protect itself against anticipated liabilities by providing funds in an amount equivalent to liquidate those liabilities. . . . * * * Self-Insurance Fund.-- The provider or pool establishes a fund with a recognized independent fiduciary such as a bank, a trust company, or a private benefit administrator. In the case of a State or local governmental provider or pool, the State in which the provider or pool is located may act as a fiduciary. The provider or pool and fiduciary must enter into a written agreement which includes all of the following elements: General Legal Responsibility.-- The fiduciary agreement must include the appropriate legal responsibilities and obligations required by State laws. Control of Fund.-- The fiduciary must have legal title to the fund and be responsible for proper administration and control. The fiduciary cannot be related to the provider either through ownership or control as defined in Chapter 10, except where a State acts as a fiduciary for a State or local governmental provider or pool. Thus, the home office of a chain organization or a religious order of which the provider is an affiliate cannot be the fiduciary. In addition, investments which may be made by the fiduciary from the fund are limited to those approved under State law governing the use of such fund; notwithstanding this, loans by the fiduciary from the fund to the provider or persons related to the provider are not permitted. Where the State acts as fiduciary for itself or local governments, the fund cannot make loans to the State or local governments. . . . The quoted Manual provisions clarify that Ms. Smiley's message to Mr. Swindling was that Petitioners had yet to submit documentation to bring their "self-insurance" expenses within the reimbursable ambit of Sections 2161 and 2162 of the Manual. There was no indication that Petitioners had established a fund in an amount sufficient to liquidate its anticipated liabilities, or that any such funds had been placed under the control of a fiduciary. Petitioners had simply booked the reserved expenses without setting aside any cash to cover the expenses. AHCA provided extensive testimony regarding the correspondence that continued among Ms. Smiley, Mr. Swindling, and AHCA employees regarding this "self-insurance" issue. It is not necessary to set forth detailed findings as to these matters, because Petitioners ultimately conceded to Ms. Smiley that, aside from the Mutual Care policies, they did not purchase commercial insurance as described in Section 2161.A, nor did they avail themselves of the alternatives to commercial insurance described in Section 2162.A. Petitioners did not purchase commercial insurance with a deductible, did not self- insure, did not purchase insurance from a limited purpose or "captive" insurance company, or employ a combination of purchased insurance and self-insurance. Ms. Smiley eventually concluded that Petitioners had no coverage for general and professional liability losses in excess of the $25,000 value of the Mutual Care Policies. Under the cited provisions of the Manual, Petitioners' unfunded self- insurance expense was not considered allowable under the principles of reimbursement. Petitioners were uninsured, which led Ms. Smiley to further conclude that Section 2162.13 of the Manual would apply: Absence of Coverage.-- Where a provider, other than a governmental (Federal, State, or local) provider, has no insurance protection against malpractice or comprehensive general liability in conjunction with malpractice, either in the form of a limited purpose or commercial insurance policy or a self-insurance fund as described in §2162.7, any losses and related expenses incurred are not allowable. In response to this disallowance pursuant to the strict terms of the Manual, Petitioners contend that AHCA should not have limited its examination of the claimed costs to the availability of documentation that would support those costs as allowable under the Manual. Under the unique circumstances presented by their situation, Petitioners assert that AHCA should have examined the state of the nursing home industry in Florida, particularly the market for GL/PL liability insurance during the audit period, and further examined whether Petitioners had the ability to meet the insurance requirements set forth in the Manual. Petitioners assert that, in light of such an examination, AHCA should have concluded that generally accepted accounting principles ("GAAP") may properly be invoked to render the accrued contingent liabilities an allowable expense. Keith Parnell is an expert in insurance for the long- term care industry. He is a licensed insurance broker working for Hamilton Insurance Agency, which provides insurance and risk management services to about 40 percent of the Florida nursing home market. Mr. Parnell testified that during the audit period, it was impossible for nursing homes to obtain insurance in Florida. In his opinion, Petitioners could not have purchased commercial insurance during the audit period. To support this testimony, Petitioners offered a study conducted by the Florida Department of Insurance ("DOI") in 2000 that attempted to determine the status of the Florida long-term care liability insurance market for nursing homes, assisted living facilities, and continuing care retirement communities. Of the 79 companies that responded to DOI's data call, 23 reported that they had provided GL/PL coverage during the previous three years but were no longer writing policies, and only 17 reported that they were currently writing GL/PL policies. Six of the 17 reported writing no policies in 2000, and five of the 17 reported writing only one policy. The responding insurers reported writing a total of 43 policies for the year 2000, though there were approximately 677 skilled nursing facilities in Florida. On March 1, 2004, the Florida Legislature's Joint Select Committee on Nursing Homes issued a report on its study of "issues regarding the continuing liability insurance and lawsuit crisis facing Florida's long-term care facilities and to assess the impact of the reforms contained in CS/CS/CS/SB 1202 (2001)."6 The study employed data compiled from 1999 through 2003. Among the Joint Select Committee's findings was the following: In order to find out about current availability of long-term care liability insurance in Florida, the Committee solicited information from [the Office of Insurance Regulation, or] OIR within the Department of Financial Services, which is responsible for regulating insurance in Florida. At the Committee's request, OIR re-evaluated the liability insurance market and reported that there has been no appreciable change in the availability of private liability insurance over the past year. Twenty-one admitted insurance entities that once offered, or now offer, professional liability coverage for nursing homes were surveyed by OIR. Six of those entities currently offer coverage. Nine surplus lines carriers have provided 54 professional liability policies in the past year. Representatives of insurance carriers that stopped providing coverage in Florida told OIR that they are waiting until there are more reliable indicators of risk nationwide to re-enter the market. Among the Joint Select Committee's conclusions was the following: In the testimony the Committee received, there was general agreement that the quality of care in Florida nursing homes is improving, in large part due to the minimum staffing standards the Legislature adopted in SB 1202 during the 2001 Session. There was not, however, general agreement about whether or not lawsuits are abating due to the tort system changes contained in SB 1202. There was general agreement that the long-term care liability insurance market has not yet improved. After hearing the testimony, there is general agreement among the members of the Joint Select Committee that: * * * General and professional liability insurance, with actual transfer-of-risk, is virtually unavailable in Florida. "Bare- bones" policies designed to provide minimal compliance with the statutory insurance requirement are available; however, the cost often exceeds the face value of the coverage offered in the policy. This situation is a crisis which threatens the continued existence of long-term care facilities in Florida. To further support Mr. Parnell's testimony, Petitioners offered actuarial analyses of general and professional liability in long-term care performed by AON Risk Consultants, Inc. (AON) on behalf of the American Health Care Association. The AON studies analyzed nationwide trends in GL/PL for long-term care, and also examined state-specific issues for eight states identified as leading the trends in claim activity, including Florida. They provided an historical perspective of GL/PL claims in Florida during the audit period. The 2002 AON study for Florida was based on participation by entities representing 52 percent of all Florida nursing home beds. The study provided a "Loss Cost per Occupied Bed" showing GL/PL liability claims losses on a per bed basis. The 2002 study placed the loss cost for nursing homes in Florida at $10,800 per bed for the year 2001. The 2003 AON study, based on participation by entities representing 54 percent of Florida nursing home beds, placed the loss cost for nursing homes in Florida at $11,810 per bed for the year 2002. The studies showed that the cost per bed of GL/PL losses is materially higher in Florida than the rest of the United States. The nationwide loss per bed was $2,360 for the year 2001 and $2,880 for the year 2002. The GL/PL loss costs for Texas were the second-highest in the country, yet were far lower than the per bed loss for Florida ($5,460 for the year 2001 and $6,310 for the year 2002). Finally, Petitioners point to the Mature Care Policies as evidence of the crisis in GL/PL insurance availability. The aforementioned SB 1202 instituted a requirement that nursing homes maintain liability insurance coverage as a condition of licensure. See Section 22, Chapter 2001-45, Laws of Florida, codified at Subsection 400.141(20), Florida Statutes. To satisfy this requirement, Petitioners entered the commercial insurance market and purchased insurance policies for each of the 14 Palm Gardens facilities from a carrier named Mature Care Insurance Company. The policies carried a $25,000 policy limit, with a policy premium of $34,000. These were the kind of "bare bones" policies referenced by the Joint Select Committee's 2004 report. The fact that the policies cost more than they could ever pay out led Mr. Swindling, Petitioners' health care accounting and Medicaid reimbursement expert, to opine that a prudent nursing home operator in Florida at that time would not have purchased insurance, but for the statutory requirement.7 The Mature Care Policies were "bare bones" policies designed to provide minimal compliance with the statutory liability insurance coverage requirement. The policies cost Petitioners more than $37,000 in premium payments, taxes, and fees, in exchange for policy limits of $25,000. In its examination, AHCA disallowed the difference between the cost of the policy and the policy limits, then prorated the allowable costs because the audit period was nine months long and the premium paid for the Mature Care Policies was for 12 months. AHCA based its disallowance on Section 2161.A of the Manual, particularly the language which states: "Insurance premiums reimbursement is limited to the amount of aggregate coverage offered in the insurance policy." Petitioners responded that they did not enter the market and voluntarily pay a premium in excess of the policy limits. They were statutorily required to purchase this minimal amount of insurance; they were required to purchase a 12-month policy; they paid the market price8; and they should not be penalized for complying with the statute. Petitioners contend they should be reimbursed the full amount of the premiums for the Mature Care Policies, as their cost of statutory compliance. Returning to the issue of the contingent liabilities, Petitioners contend that, in light of the state of the market for GL/PL liability insurance during the audit period, AHCA should have gone beyond the strictures of the Manual to conclude that GAAP principles render the accrued contingent liabilities an allowable expense. Under GAAP, a contingent loss is a loss that is probable and can be reasonably estimated. An estimated loss from a loss contingency may be accrued by a charge to income. Statement of Financial Accounting Standards No. 5 ("FAS No. 5"), Accounting for Contingencies, provides several examples of loss contingencies, including "pending or threatened litigation" and "actual or possible claims and assessments." Petitioners assert that the contingent losses reported in their cost reports were actual costs incurred by Petitioners. The AICPA Audit and Accounting Guide for Health Care Organizations, Section 8.05, provides: The ultimate costs of malpractice claims, which include costs associated with litigating or settling claims, are accrued when the incidents that give rise to the claims occur. Estimated losses from asserted and unasserted claims are accrued either individually or on a group basis, based on the best estimates of the ultimate costs of the claims and the relationship of past reported incidents to eventual claims payments. All relevant information, including industry experience, the entity's own historical experience, the entity's existing asserted claims, and reported incidents, is used in estimating the expected amount of claims. The accrual includes an estimate of the losses that will result from unreported incidents, which are probable of having occurred before the end of the reporting period. Section 8.10 of AICPA Guide provides: Accrued unpaid claims and expenses that are expected to be paid during the normal operating cycle (generally within one year of the date of the financial statements) are classified as current liabilities. All other accrued unpaid claims and expenses are classified as non-current liabilities. As noted above, Petitioners' audited financial statements for the fiscal years ending December 31, 2002, and December 31, 2003, showed that the accrual was incurred and recorded by Petitioners during the audit period. Mr. Swindling prepared Petitioners' cost reports, based on information provided by Petitioners, including trial balances reflecting their costs, statistics on patient days, cost data related to square footage, and revenue information. Mr. Swindling advised Petitioners to include the accrued losses. He believed that the loss contingency was probable and could be reasonably estimated. The losses were probable because it was "a given in the state of Florida at that time period that nursing homes are going to get sued." Mr. Swindling testified that the accrual reflected a per bed loss amount of $1,750, which he believed to be a reasonable estimate of the contingent liabilities faced by Petitioners during the audit period. This amount was much less than the per bed loss indicated by the AON studies for Florida. Mr. Swindling used the criteria set forth in Section 8.05 of the AICPA Guide to establish the estimate. He determined that the lesser amount was adequate based on his discussions with Petitioners' management, who indicated that they had a substantial risk management program. Management also disclosed to Mr. Swindling that Petitioners' leases required $1,750 per bed in liability coverage. See Finding of Fact 22, supra. Mr. Swindling believed that the estimated loss per bed was reasonable based on the AON studies and his knowledge and experience of the state of the industry in Florida during the audit period, as further reflected in the DOI and Joint Committee on Nursing Homes materials discussed above. Mr. Swindling's opinion was that the provisions of the Manual relating to GL/PL insurance costs do not apply under these circumstances. The costs at issue in this proceeding are not general and professional liability insurance costs subject to CMS Pub. 15-1; rather, they are loss contingencies related to general and professional liability, including defense costs, litigation costs, and settlement costs. Mr. Swindling placed the loss contingency under number 730810, "General and Professional Liability -- Third Party" because, in the finite chart of accounts provided by Medicaid, that was the most appropriate place to record the cost.9 Despite the initial confusion it caused the agency's auditors, the placement of the loss contingency under number 730810 was not intended to deceive the auditors. Mr. Swindling opined that, under these circumstances, Sections 2160 through 2162 are in conflict with other provisions in the Manual relating to the "prudent buyer" concept, and further conflict with the Plan to the extent that the cited regulations "relate to a retrospective system as opposed to prospective target rate-based system." Mr. Swindling agreed that the application of Sections 2160 through 2162 to the situation presented by Petitioners would result in the disallowance of the loss contingencies. Mr. Swindling observed, however, that Sections 2160 through 2162 are Medicare regulations. Mr. Swindling testified that Medicare reimbursements are made on a retrospective basis.10 Were this situation to occur in Medicare -- in which the provider did not obtain commercial insurance, self-insurance, or establish a captive insurer -- the provider would be deemed to be operating on a pay-as-you-go basis. Though its costs might be disallowed in the current period, the provider would receive reimbursements in subsequent periods when it could prove actual payment for its losses. Mr. Swindling found a conflict in attempting to apply these Medicare rules to the prospective payment system employed by Florida Medicaid, at least under the circumstances presented by Petitioners' case. Under the prospective system, once the contingent loss is disallowed for the base period, there is no way for Petitioners ever to recover that loss in a subsequent period, even when the contingency is liquidated. During his cross-examination, Mr. Swindling explained his position as follows: . . . Medicare allows for that payment in a subsequent period. Medicaid rules would not allow that payment in the subsequent period; therefore you have conflict in the rules. When you have conflict in the rules, you revert to generally accepted accounting principles. Generally accepted accounting principles are what we did. Q. Where did you find that if there's a conflict in the rules, which I disagree with, but if there is a conflict in the rules, that you follow GAAP? Where did you get that from? I mean, we've talked about it and it's clear on the record that if there is no provision that GAAP applies, but where did you get that if there's a conflict? Just point it out, that would be the easiest way to do it. A. The hierarchy, if you will, requires providers to file costs on the accrual basis of accounting in accordance with generally accepted accounting principles. If there's no rules, in absence of rules -- and I forget what the other terms were, we read it into the record before, against public policy, those kind of things -- or in my professional opinion, if there is a conflict within the rules where the provider can't follow two separate rules at the same time, they're in conflict, then [GAAP] rules what should be recorded and what should be reimbursed. * * * Q. [T]he company accrued a liability of $2 million for the cost reporting period of 2002-2003, is that correct? A. Yes. * * * Q. Do you have any documentation supporting claims paid, actually paid, in 2002-2003 beyond the mature care policy for which that $2 million reserve was set up? A. No. Q. So what did Medicaid pay for? A. Medicaid paid the cost of contingent liabilities that were incurred by the providers and were estimated at $1,750 per bed. Generally accepted accounting principles will adjust that going forward every cost reporting period. If that liability in total goes up or down, the differential under [GAAP] goes through the income statement, and expenses either go up or they go down. It's self-correcting, which is similar to what Medicare is doing, only they're doing it on a cash basis. Mr. Swindling explained the "hierarchy" by which allowable costs are determined. The highest governing law is the Federal statutory law, Title XIX of the Social Security Act, 42 U.S.C. Subsection. 1396-1396v. Below the statute come the federal regulations for implementing Title XIX, 42 C.F.R. parts 400-426. Then follow in order Florida statutory law, the relevant Florida Administrative Code provisions, the Plan, the Manual, and, at the bottom of the hierarchy, GAAP. Mr. Swindling testified that in reality, a cost report is not prepared from the top of the hierarchy down; rather, GAAP is the starting point for the preparation of any cost report. The statutes, rules, the Plan and the Manual are then consulted to exclude specific cost items otherwise allowable under GAAP. In the absence of an applicable rule, or in a situation in which there is a conflict between rules in the hierarchy such that the provider is unable to comply with both rules, the provider should fall back on GAAP principles as to recording of costs and reimbursement. John A. Owens, currently a consultant in health care finance specializing in Medicaid, worked for AHCA for several years up to 2002, in positions including administrator of the audit services section and bureau chief of the Office of Medicaid Program Analysis. Mr. Owens is a CPA and expert in health care accounting and Medicare/Medicaid reimbursement. Mr. Owens agreed with Mr. Swindling that AHCA's disallowance of the accrued costs for GL/PL liability was improper. Mr. Owens noted that Section 2160 of the Manual requires providers to purchase commercial insurance. If commercial insurance is unavailable, then the Manual gives the provider two choices: self-insure, or establish a captive program. Mr. Owens testified that insurers were fleeing the state during the period in question, and providers were operating without insurance coverage. Based on the state of the market, Petitioners' only options would have been to self-insure or establish a captive. As to self-insurance, Petitioners' problem was that they had taken over the leases on their facilities from a bankrupt predecessor, Integrated Health Services ("IHS"). Petitioners were not in privity with their predecessor. Petitioners had no access to the facilities' loss histories, without which they could not perform an actuarial study or engage a fiduciary to set up a self-insurance plan.11 Similarly, setting up a captive would require finding an administrator and understanding the risk exposure. Mr. Owens testified that a provider would not be allowed to set up a captive without determining actuarial soundness, which was not possible at the time Petitioners took over the 14 IHS facilities. Thus, Petitioners were simply unable to meet the standards established by the Manual. The options provided by the Manual did not contemplate the unique market situation existing in Florida during the audit period, and certainly did not contemplate that situation compounded by the problems faced by a new provider taking over 14 nursing homes from a bankrupt predecessor. Mr. Owens agreed with Mr. Swindling that, under these circumstances, where the requirements of the Manual could not be met, Petitioners were entitled to seek relief under GAAP, FAS No. 5 in particular. In situations where a loss is probable and can be measured, then an accounting entry may be performed to accrue and report that cost. Mr. Owens concluded that Petitioners' accrual was an allowable cost for Medicaid purposes, and explained his rationale as follows: My opinion is, in essence, that since they could not meet -- technically, they just could not meet those requirements laid out by [the Manual], they had to look somewhere to determine some rational basis for developing a cost to put into the cost report, because if they had chosen to do nothing and just moved forward, those rates would be set and there would be nothing in their base year which then establishes their target moving forward. So by at least looking at a rational methodology to accrue the cost, they were able to build something into their base year and have it worked into their target system as they move forward. Steve Diaczyk, an audit evaluation and review analyst for AHCA, testified for the agency as an expert in accounting, auditing, and Medicaid policy. Mr. Diaczyk was the AHCA auditor who reviewed the work of Smiley & Smiley for compliance with Medicaid rules and regulations, and to verify the accuracy of the independent CPA's determinations. Mr. Diaczyk agreed with Mr. Swindling's description of the "hierarchy" by which allowable costs are determined. Mr. Diaczyk affirmed that Petitioners employed GAAP rather than Medicaid regulations in preparing their cost reports. Mr. Diaczyk testified regarding the Notes to Petitioners' audited financial statements, set forth at Findings of Fact 22-24, supra, which left AHCA's auditors with the understanding that Petitioners were self-insuring. Mr. Diaczyk pointed out that Section 2162.7 of the Manual requires a self- insurer to contract with an independent fiduciary to maintain a self-insurance fund, and that the fund must contain monies sufficient to cover anticipated losses. The fiduciary takes title to the funds, the amount of which is determined actuarially. Mr. Diaczyk explained that, in reimbursing a provider for self-insurance, Medicaid wants to make sure that the provider has actually put money into the fund, and has not just set up a fund on its books and called it "self-insurance" for reimbursement purposes. AHCA's position is that it would be a windfall for a provider to obtain reimbursement for an accrued liability when it has not actually set the money aside and funded the risk. Medicaid wants the risk transferred off of the provider's books and on to the self-insurance fund. Mr. Diaczyk testified as to the differing objectives of Medicaid and GAAP. Medicaid is concerned with reimbursing costs, and is therefore especially sensitive regarding the overstatement of costs. Medicaid wants to reimburse a provider for only those costs that have actually been paid. GAAP, on the other hand, is about report presentation for a business entity and is concerned chiefly with avoiding the understatement of expenses and overstatement of revenue. Under GAAP, an entity may accrue a cost and not pay it for years. In the case of a contingent liability, the entity may book the cost and never actually pay it. Mr. Diaczyk described the self-insurance and liquidation provisions of 42 C.F.R. Section 413.100, "Special treatment of certain accrued costs." The federal rule essentially allows accrued costs to be claimed for reimbursement, but only if they are "liquidated timely." Subsection (c)(2)(viii) of the rule provides that accrued liability related to contributions to a self-insurance program must be liquidated within 75 days after the close of the cost reporting period. To obtain reimbursement, Petitioners would have had to liquidate their accrued liability for GL/PL insurance within 75 days of the end of the audit period. Mr. Diaczyk also noted that, even if the 75-day requirement were not applicable, the general requirement of Section 2305.2 of the Manual would apply. Section 2305.2 requires that all short-term liabilities must be liquidated within one year after the end of the cost reporting period in which the liability is incurred, with some exceptions not applicable in this case. Petitioners' accrued liability for general and professional liability insurance was not funded or liquidated for more than one year after the cost reporting period. It was a contingent liability that might never be paid. Therefore, Mr. Diaczyk stated, reimbursement was not in keeping with Medicaid's goal to reimburse providers for actual paid costs, not for potential costs that may never be paid. Petitioners responded that their accrued liabilities constituted non-current liabilities, items that under normal circumstances will not be liquidated within one year. Mr. Parnell testified that there is great variation in how long it takes for a general and professional liability claim against a nursing home to mature to the point of payment to the claimant. He testified that a "short" timeline would be from two to four years, and that some claims may take from eight to eleven years to mature. From these facts, Petitioners urge that 42 C.F.R. Section 413.100 and Section 2305.2 of the Manual are inapplicable to their situation. As to Section 2305.2 in particular, Petitioners point to Section 2305.A, the general liquidation of liabilities provision to which Section 2305.2 provides the exceptions discussed above. The last sentence of Section 2305.A provides that, where the liability is not liquidated within one year, or does not qualify under the exceptions set forth in Sections 2305.1 and 2305.2, then "the cost incurred for the related goods and services is not allowable in the cost reporting period when the liability is incurred, but is allowable in the cost reporting period when the liquidation of the liability occurs." (Emphasis added.) Petitioners argue that the underscored language supports the Medicare/Medicaid distinction urged by Mr. Swindling. In its usual Medicare retroactive reimbursement context, Section 2305.2 would operate merely to postpone reimbursement until the cost period in which the liability is liquidated. Applied to this Medicaid prospective reimbursement situation, Section 2305.2 would unfairly deny Petitioners any reimbursement at all by excluding the liability from the base rate. Mr. Diaczyk explained that, where the Medicaid rules address a category of costs, the allowable costs in a provider's cost report are limited to those defined as allowable by the applicable rules. He stated that if there is a policy in the Manual that addresses an item of cost, the provider must use the Manual provision; the provider cannot use GAAP to determine that cost item. In this case, Mr. Diaczyk agreed with Ms. Smiley as to the applicable rules and the disallowance of Petitioners' contingent liability costs. According to Mr. Diaczyk, GAAP may be used only if no provisions farther up the chain of the "hierarchy" are applicable. In this case, the Medicaid rules specifically addressed the categories of cost in question, meaning that GAAP did not apply. Under cross-examination, Mr. Diaczyk testified that the accrual made by Petitioners in their cost reports would be considered actual costs under GAAP, "[a]ssuming that they had an actuarial study done to come up with the $1.7 million that they accrued." Mr. Diaczyk acknowledged that AICPA Audit and Accounting Guide for Health Care Organizations, Section 8.05, does not limit the provider to an actuarial study in estimating losses from asserted and unasserted claims. See Finding of Fact 49, supra, for text of Section 8.05. Mr. Diaczyk pointed out that the problem in this case was that Petitioners gave AHCA no documentation to support their estimate of the accrual, despite the auditor's request that Petitioners provide documentation to support their costs. Mr. Diaczyk's testimony raised a parallel issue to Mr. Swindling's concern that Medicaid's prospective targeting system permanently excludes any item of cost not included in the base rate. Mr. Swindling solved the apparent contradiction in employing Medicare rules in the Medicaid scenario by applying GAAP principles. Responding to the criticism that GAAP could provide a windfall to Petitioners by reimbursing them for accrued costs that might never actually result in payment, Mr. Swindling responded that GAAP principles would adjust the cost for contingent liabilities going forward, "truing up" the financial statements in subsequent reporting periods. This truing up process would have the added advantage of obviating the agency's requirement for firm documentation of the initial accrual. Mr. Swindling's "truing up" scenario under GAAP would undoubtedly correct Petitioners' financial statements. However, Mr. Swindling did not explain how the truing up of the financial statements would translate into a correction of Petitioners' reimbursement rate.12 If costs excluded from the base rate cannot be added to future rate adjustments, then costs incorrectly included in the base rate would also presumably remain in the facility's rate going forward.13 Thus, Mr. Swindling's point regarding the self-correcting nature of the GAAP reporting procedures did not really respond to AHCA's concerns about Petitioners' receiving a windfall in their base rate by including the accrual for contingent liabilities. On April 19, 2005, Petitioners entered into a captive insurance program. Petitioners' captive is a claims-made GL/PL policy with limits of $1 million per occurrence and $3 million in the aggregate. Under the terms of the policy, "claims-made" refers to a claim made by Petitioners to the insurance company, not a claim made by a nursing home resident alleging damages. The effective date of the policy is from April 21, 2005, through April 21, 2006, with a retroactive feature that covers any claims for incidents back to June 29, 2002, a date that corresponds to Petitioners' first day of operation and participation in the Medicaid program. The Petitioners' paid $3,376,906 for this policy on April 22, 2005. Mr. Parnell testified that April 2005 was the earliest time that the 14 Palm Gardens facilities could have established this form of insurance program. In summary, the evidence presented at the hearing regarding the contingent liabilities established that Petitioners took over the 14 Palm Gardens facilities after the bankruptcy of the previous owner. Petitioners were faced with the virtual certainty of substantial GL/PL expenses in operating the facilities, and also faced with a Florida nursing home environment market in which commercial professional liability insurance was virtually unavailable. Lacking loss history information from their bankrupt predecessor, Petitioners were unable to self-insure or establish a captive program until 2005. Petitioners understood that if they did not include their GL/PL expenses in their initial cost report, those expenses would be excluded from the base rate and could never be recovered. Petitioners' leases for the facilities required them to fund a self-insurance reserve at a per bed minimum amount of $1,750. Based on the AON studies and the general state of the industry at the time, Petitioners' accountant concluded that, under GAAP principles, $1,750 per bed was a reasonable, conservative estimate of Petitioners' GL/PL loss contingency exposure for the audit period.14 Based on all the evidence, it is found that Petitioners' cost estimate was reasonable and should be accepted by the agency. Petitioners included their GL/PL loss contingency expenses in their initial Medicaid cost report, placing those expenses under a heading indicating the purchase of insurance from a third party. The notes to Petitioners' audited financial statements stated that the facilities were "essentially self- insured." These factors led AHCA to request documentation of Petitioners' self-insurance. Petitioners conceded that they were not self-insured and carried no liability insurance aside from the Mature Care policies. The parties had little dispute as to the facts summarized above. The parties also agreed as to the applicability of the "hierarchy" by which allowable costs are determined. Their disagreement rests solely on the manner in which the principles of the hierarchy should be applied to the unique situation presented by Petitioners in these cases.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that AHCA enter a final order that allows Petitioners' accrual of expenses for contingent liability under the category of general and professional liability ("GL/PL") insurance, and that disallows the Mature Care policy premium amounts in excess of the policy limits, prorated for a nine- month period. DONE AND ENTERED this 24th day of October, 2008, in Tallahassee, Leon County, Florida. S LAWRENCE P. STEVENSON 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 24th day of October, 2008.
Findings Of Fact Petitioner is the state agency charged with licensing insurance agents of all types, regulating licensure status, and enforcing the practice standards of licensed agents within the powers granted by the Legislature in Chapter 626, Florida Statutes. At all times material to the disciplinary action, Respondent Mahle was licensed as an insurance agent in the following areas: Life and Health Insurance and Health Insurance. During the last quarter of the year 1988, New Concept Insurance, Inc. mailed brochures to residents of Naples, Florida, which stated that representatives of the company were willing to provide information about long- term care insurance, including nursing facility benefits, to interested parties. Those who wanted to learn more about the insurance were asked to return their name, address and telephone number to the company on an enclosed card. Eleanor Drown responded to the advertisement, and an appointment was arranged for Thomas DiBello and Respondent Mahle to meet with her regarding the insurance program. On November 10, 1988, Thomas DiBello and Respondent Mahle met with Ms. Drown and discussed the benefits of a long-term care policy with a nursing facility daily benefit of one hundred dollars ($100.00). After the discussion, Ms. Drown completed an application for the insurance and gave it to Respondent Mahle, along with a check for five thousand one hundred and eighty-three dollars and forty-nine cents ($5,183.49). During the insurance transaction on November 10, 1988, Ms. Drown was given a receipt which states: This receipt is given and accepted with the express understanding that the insurance you applied for will not be in force until the policy is issued and the first premium is paid in full. If your application cannot be approved, we will promptly refund your money. Application is made to the company checked (/) on this receipt. On another area of the receipt, it is clearly written, as follows: If Acknowledgement of Application does not reach you within 20 days, write to: Mutual Protective Insurance Company, 151 South 75th Street, Omaha, Nebraska 68124. The Respondent Mahle did not forward the application and the check completed by Ms. Drown to Mutual Protective Insurance Company. The check issued by Ms. Drown to Mutual Protective Insurance Company was deposited into the account of New Concept Insurance, Inc. A cashier's check for the same amount of money was issued by New Concept Insurance, Inc. to Ms. Drown on March 7, 1989. The letter from New Concept that was mailed with the check represented that the check was the refund of the money paid to Mutual Protective Insurance Company by Ms. Drown. Mitigation An application for long-term care insurance from a different insurance company was sent to Ms. Drown by Respondent Mahle on March 2, 1989. Although this course of conduct was not directly responsive to the duties owed by the Respondent to Mutual Protective Insurance Company or his customer, Ms. Drown, it does demonstrate a concern about the insurance needs requested by the customer. This conduct also reveals that there was no intention to convert the funds received to the Respondent's own use, and it explains some of the delay in the return of the premium funds to the customer. The Respondent has been an insurance agent for twenty years. This was the only complaint against the Respondent the Hearing Officer was made aware of during the proceedings. The allegations in the Complaint involve a single insurance transaction.
Recommendation Accordingly, it is RECOMMENDED: That the Respondent be found guilty of one violation of Section 626.561(1), Florida Statutes, and one violation of Section 626.611(7), Florida Statutes, during a single insurance transaction. That the Respondent pay an administrative penalty of $500.00 for the two violations of the Insurance Code within thirty days of the imposition of the penalty. That the Respondent be placed upon six month's probation. During this probation period, he should file a report with the Department demonstrating the manner in which he intends to keep accurate business records which assure him, the insurance company, and the customer that he is continuously accounting for premium funds and promptly carrying out his fiduciary responsibilities. That the Respondent's requests for licensure dated October 10, 1989 and May 18, 1990, be granted. DONE and ENTERED this 12th day of September, 1990, in Tallahassee, Leon County, Florida. VERONICA E. DONNELLY 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 12th day of September, 1990. APPENDIX TO RECOMMENDED ORDER IN CASE No. 89-6040 The Petitioner's proposed findings of fact are addressed as follows: Accepted. See HO #2. Accepted. See HO #2. Accepted. Accepted. See HO #5. Accepted. See HO #5. Accepted. See HO #5. Accepted. See HO #5. Rejected. Conclusion of Law. Rejected. See HO #6. Accepted. See HO #7. Accepted. See HO #7. Accepted. See HO #7. Accept that Ms. Drown's funds remained in the insurance agency's financial accounts for four months. Reject that the interest bearing ability of these funds is relevant in any manner to this case. Respondent's proposed findings of fact are addressed as follows: Accepted. See HO #3 and #4. Accepted. See HO #5. Accepted. See HO #5. Accepted. See HO #5. Accepted. Rejected. This testimony was rejected by the hearing officer as self serving. It was not found to be credible. Rejected for the same reasons given immediately above. Accepted, but not particularly probative. Rejected. Contrary to the testimony of Ms. Drown which was believed by the hearing officer. Accepted. Rejected. Contrary to the testimony of Ms. Drown which was believed by the hearing officer. Accept that an application for Penn Treaty Insurance was sent to Ms. Drown on this date. Accepted. Rejected. Contrary to the testimony of Ms. Drown which was believed by the hearing officer. Rejected. Self serving. Not believed or found to be credible by the hearing officer. Accepted. See HO #9. COPIES FURNISHED: C. Christopher Anderson III, Esquire Department of Insurance Division of Legal Services 412 Larson Building Tallahassee, Florida 32399-0300 Mark P. Smith, Esquire GOLDBERG, GOLDSTEIN & BUCKLEY, P.A. 1515 Broadway Post Office Box 2366 Fort Myers, Florida 33902-2366 Honorable Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Don Dowdell, Esquire Department of Insurance The Capitol, Plaza Level Tallahassee, Florida 32399-0300 =================================================================