The Issue The issue is whether BayCare Long Term Acute Care Hospital, Inc.'s Certificate of Need Application No. 9753 and University Community Hospital's Certificate of Need Application No. 9754, both submitted to the Agency for Health Care Administration, should be approved.
Findings Of Fact LTCHs defined An LTCH is a medical facility which provides extended medical and rehabilitation care to patients with multiple, chronic, or clinically complex acute medical conditions. These conditions include, but are not limited to, ventilator dependency, tracheotomy care, total parenteral nutrition, long- term intravenous anti-biotic treatment, complex wound care, dialysis at bedside, and multiple systems failure. LTCHs provide an interdisciplinary team approach to the complex medical needs of the patient. LTCHs provide a continuum of care between short-term acute care hospitals and nursing homes, skilled nursing facilities (SNFs), or comprehensive medical rehabilitation facilities. Patients who have been treated in an intensive acute care unit at a short-term acute care hospital and who continue to require intensive care once stabilized, are excellent candidates for care at an LTCH. Included in the interdisciplinary approach is the desired involvement of the patient's family. A substantial number of the patients suitable for treatment in an LTCH are in excess of 65 years of age, and are eligible for Medicare. Licensure and Medicare requirements dictate that an LTCH have an average length of stay (ALOS) of 25 days. The Center for Medicare and Medicaid Services (CMS) reimburses for care received through the prospective payment system (PPS). Through this system, CMS reimburses the services of LTCHs separately from short-term acute care providers and other post acute care providers. The reimbursement rate for an LTCH under PPS exceeds that of other providers. The reimbursement rate for an LTCH is about twice that of a rehabilitation facility. The increased reimbursement rate indicates the increased cost due to the more intensive care required in an LTCH. The Agency The Agency is a state agency created pursuant to Section 20.42. It is the chief health policy and planning entity for the State of Florida. The Agency administers the Health Facility and Services Development Act found at Sections 408.031-408.045. Pursuant to Section 408.034, the Agency is designated as the single state Agency to issue, revoke, or deny certificates of need. The Agency has established 11 health service planning districts. The applications in this case are for facilities in District 5, which comprises Pinellas and Pasco counties. UCH UCH is a not-for-profit organization that owns and operates a 431-bed tertiary level general acute care hospital and a 120-bed acute care general hospital. Both are located in Hillsborough County. UCH also has management responsibilities and affiliations to operate Helen Ellis Hospital, a 300-bed hospital located in Tarpon Springs, and manages the 300-bed Suncoast Hospital. Both of these facilities are in Pinellas County. UCH also has an affiliation to manage the open heart surgery program at East Pasco Medical Center, a general acute care hospital located in Pasco County. As a not-for-profit organization, the mission of UCH is to provide quality health care services to meet the needs of the communities where it operates regardless of their patients' ability to pay. Baycare BayCare is a wholly-owned subsidiary of BayCare Healthsystems, Inc. (BayCare Systems). BayCare Systems is a not-for-profit entity comprising three members that operate Catholic Health East, Morton Plant Mease Healthcare, and South Florida Baptist. The facilities owned by these organizations are operated pursuant to a Joint Operating Agreement (JOA) entered into by each of the participants. BayCare Systems hospitals include Morton Plant Hospital, a 687-bed tertiary level facility located in Clearwater, Pinellas County; St. Joseph's Hospital, an 887-bed tertiary level general acute care hospital located in Tampa, Hillsborough County; St. Anthony's Hospital, a 407-bed general acute care hospital located in St. Petersburg, Pinellas County; and Morton Plant North Bay, a 120-bed hospital located in New Port Richey, Pasco County. Morton Plant Mease Health Care is a partnership between Morton Plant Hospital and Mease Hospital. Although Morton Plant Mease Healthcare is a part of the BayCare System, the hospitals that are owned by the Trustees of Mease Hospital, Mease Hospital Dunedin, and Mease Hospital Countryside, are not directly members of the BayCare System and are not signatories to the JOA. HealthSouth HealthSouth is a national company with the largest market share in inpatient rehabilitation. It is also a large provider of ambulatory services. HealthSouth has about 1,380 facilities across the nation. HealthSouth operates nine LTCHs. The facility that is the Intervenor in this case is a CMR located in Largo, Pinellas County. Kindred Kindred, through its parent company, operates LTCH facilities throughout Florida and is the predominant provider of LTCH services in the state. In the Tampa Bay area, Kindred operates three LTCHs. Two are located in Tampa and one is located in St. Petersburg, Pinellas County. The currently operating LTCH in District 5 that may be affected by the CON applications at issue is Kindred-St. Petersburg. Kindred-St. Petersburg is a licensed 82-bed LTCH with 52 private beds, 22 semi-private beds, and an 8-bed intensive care unit. It operates the array of services normally offered by an LTCH. It is important to note that Kindred-St. Petersburg is located in the far south of heavily populated District 5. The Applications UCH proposes a new freestanding LTCH which will consist of 50 private rooms and which will be located in Connerton, a new town being developed in Pasco County. UCH's proposal will cost approximately $16,982,715. By agreement of the parties, this cost is deemed reasonable. BayCare proposes a "hospital within a hospital" LTCH that will be located within Mease Hospital-Dunedin. The LTCH will be located in an area of the hospital currently used for obstetrics and women's services. The services currently provided in this area will be relocated to Mease Hospital- Countryside. BayCare proposes the establishment of 48 beds in private and semi-private rooms. Review criteria which was stipulated as satisfied by all parties Section 408.035(1)-(9) sets forth the standards for granting certificates of need. The parties stipulated to satisfying the requirements of subsections (3) through (9) as follows. With regard to subsection (3), 'The ability of the applicant to provide quality of care and the applicant's record of providing quality of care,' all parties stipulated that this statutory criterion is not in dispute and that both applicants may be deemed to have satisfied such criteria. With regard to subsection (4), 'The availability of resources, including health personnel, management personnel, and funds for capital and operating expenditures, for project accomplishment and operation,' it was stipulated that both applicants have all resources necessary in terms of both capital and staff to accomplish the proposed projects, and therefore, both applicants satisfy this requirement. With regard to subsection (5), 'The extent to which the proposed services will enhance access to health care for residents of the service district,' it was stipulated that both proposals will increase access. Currently there are geographic, financial and programmatic barriers to access in District 5. The only extant LTCH is located in the southernmost part of District 5. With regard to subsection (6), 'The immediate and long-term financial feasibility of the proposal,' the parties stipulated that UCH satisfied the criterion. With regard to BayCare, it was stipulated that its proposal satisfied the criterion so long as BayCare can achieve its utilization projections and obtain Medicare certification as an LTCH and thus demonstrate short-term and long-term feasibility. This issue will be addressed below. With regard to subsection (7), 'The extent to which the proposal will foster competition that promotes quality and cost- effectiveness,' the parties stipulated that approval of both applications will foster competition that will promote quality and cost effectiveness. The only currently available LTCH in District 5, unlike BayCare and UCH, is a for-profit establishment. With regard to subsection (8), 'The costs and methods of the proposed construction, including the costs and methods of energy provision and the availability of alternative, less costly, or more effective methods of construction,' the parties stipulated that the costs and methods of construction for both proposals are reasonable. With regard to subsection (9), 'the applicant's past and proposed provision of health care services to Medicaid patients and the medically indigent,' it was stipulated that both UCH and BayCare have a demonstrated history and a commitment to providing services to Medicaid, Medicaid HMO, self-pay, and underinsured payments. Technically, of course, BayCare has no history at all. However, its sponsors do, and it is they that will shape the mission for BayCare. BayCare's Medicare certification as an LTCH The evidence of record demonstrates that BayCare can comply with Medicare reimbursement regulations and therefore can achieve its utilization projections and obtain Medicare certification as an LTCH. Thus short-term and long-term feasibility is proven. Because BayCare will be situated as a hospital within a hospital, in Mease Hospital Dunedin, and because there is a relationship between that hospital and BayCare Systems, Medicare reimbursement regulations limit to 25 percent the number of patients that may be acquired from Mease Hospital Dunedin or from an organization that controls directly or indirectly the Mease Hospital Dunedin. Because of this limitation, it is, therefore, theoretically possible that the regulator of Medicare payments, CMS, would not allow payment where more than 25 percent of admissions were from the entire BayCare System. Should that occur it would present a serious but not insurmountable problem to BayCare. BayCare projects that 21 percent of its admissions will come from Mease Hospital Dunedin and the rest will come from other sources. BayCare is structured as an independent entity with an independent board of directors and has its own chief executive officer. The medical director and the medical staff will be employed by the independent board of directors. Upon the greater weight of the evidence, under this structure, BayCare is a separate corporate entity that neither controls, nor is controlled by, BayCare Systems or any of its entities or affiliates. One must bear in mind that because of the shifting paradigms of federal medical regulation, predictability in this regard is less than perfect. However, the evidence indicates that CMS will apply the 25 percent rule only in the case of patients transferring to BayCare from Mease Hospital Dunedin. Most of the Medicare-certified LTCHs in the United States operate as hospitals within hospitals. It is apparent, therefore, that adjusting to the CMS limitations is something that is typically accomplished. BayCare will lease space in Mease Hospital Dunedin which will be vacated by it current program. BayCare will contract with Mease Hospital Dunedin for services such as laboratory analysis and radiology. This arrangement will result in lower costs, both in the short term and in the long term, than would be experienced in a free-standing facility, and contributes to the likelihood that BayCare is feasible in the short term and long term. Criteria related to need The contested subsections of Section 408.035 not heretofore addressed, are (1) and (2). These subsections are illuminated by Florida Administrative Code Rule 59C- 1.008(2)(e)2., which provides standards when, as in this case, there is no fixed-need pool. Florida Administrative Code Rule 59C-1.008(2)(e)2., provides as follows: 2. If no agency policy exists, the applicant will be responsible for demonstrating need through a needs assessment methodology which must include, at a minimum, consideration of the following topics, except where they are inconsistent with the applicable statutory or rule criteria: Population demographics and dynamics; Availability, utilization and quality of like services in the district, sub district or both; Medical treatment trends; and Market conditions. Population Demographics and Dynamics The applicants presented an analysis of the population demographics and dynamics in support of their applications in District 5. The evidence demonstrated that the population of District 5 was 1,335,021 in 2004. It is anticipated that it will grow to 1,406,990 by 2009. The projected growth rate is 5.4 percent. The elderly population in the district, which is defined as persons over the age of 65, is expected to grow from 314,623 in 2004, to 340,676, in 2009, which represents an 8.3 percent increase. BayCare BayCare's service area is defined generally by the geographic locations of Morton Plant Hospital, Morton Plant North Bay Hospital, St. Anthony's Hospital, Mease Hospital Dunedin, and Mease Hospital Countryside. These hospitals are geographically distributed throughout Pinellas County and southwest Pasco County and are expected to provide a base for referrals to BayCare. There is only one extant LTCH in Pinellas County, Kindred, and it is located in the very southernmost part of this densely populated county. Persons who become patients in an LTCH are almost always moved to the LTCH by ambulance, so their movement over a long distance through heavy traffic generates little or no problem for the patient. Accordingly, if patient transportation were the only consideration, movement from the north end of the county to Kindred in the far south, would present no problem. However, family involvement is a substantial factor in an interdisciplinary approach to addressing the needs of LTCH patients. The requirement of frequent movement of family members from northern Pinellas to Kindred through congested traffic will often result in the denial of LTCH services to patients residing in northern Pinellas County or, in the alternative, deny family involvement in the interdisciplinary treatment of LTCH patients. Approximately 70 letters requesting the establishment of an LTCH in northern Pinellas County were provided in BayCare's application. These letters were written by medical personnel, case managers and social workers, business persons, and government officials. The thread common to these letters was, with regard to LTCH services, that the population in northern Pinellas County is underserved. UCH Pasco County has experienced a rapid population growth. It is anticipated that the population will swell to 426,273, in 2009, which represents a 10.1 percent increase over the population in 2004. The elderly population accounts for 28 percent of the population. This is about 50 percent higher than Florida as a whole. Rapid population growth in Pasco County, and expected future growth, has resulted in numerous new housing developments including Developments of Regional Impact (DRI). Among the approved DRI's is the planned community of Connerton, which has been designated a "new town" in Pasco County's Comprehensive Plan. Connerton is a planned community of 8,600 residential units. The plan includes space for a hospital and UCH has negotiated for the purchase of a parcel for that purpose within Connerton. The rate of growth, and the elderly population percentages, will support the proposed UCH LTCH and this is so even if BayCare establishes an LTCH in northern Pinellas County. Availability, utilization, and quality of like services in the district, sub-district, or both The Agency has not established sub-districts for LTCHs. As previously noted, Kindred is the only LTCH extant in District 5. It is a for-profit facility. Kindred was well utilized when it had its pediatric unit and added 22 additional beds. Subsequently, in October 2002, some changes in Medicare reimbursement rules resulted in a reduction of the reimbursement rate. This affected Kindred's income because over 70 percent of its patients are Medicare recipients. Kindred now uses admission criteria that have resulted in a decline in patient admissions. From 1998, the year after Kindred was established, until 2002, annual utilization was in excess of 90 percent. Thereafter, utilization has declined, the 22-bed addition has been shut down, and Kindred projects an occupancy of 55 percent in 2005. Kindred must make a profit. Therefore, it denies access to a significant number of patients in District 5. It denies the admission of patients who have too few "Medicare- reimbursable days" or "Medicaid-reimbursable days" remaining. The record indicates that Kindred only incurs charity care or Medicaid patient days when a patient admitted to Kindred with seemingly adequate funding unexpectedly exhausts his or her funding prior to discharge. Because of the constraints of PPS, Kindred has established admission criteria that excludes certain patients with conditions whose prognosis is so uncertain that it cannot adequately predict how long they will require treatment. Kindred's availability to potential patients is thus constrained. HealthSouth, a licensed CMR, is not a substitute for an LTCH. Although it is clear that there is some overlap between a CMR and an LTCH, HealthSouth, for instance, does not provide inpatient dialysis, will not accept ventilator patients, and does not treat complex wound patients. The nurse staffing level at HealthSouth is inadequate to provide for the type of patient that is eligible for treatment in an LTCH. The fact that LTCHs are reimbursed by Medicare at approximately twice the rate that a CMR is reimbursed, demonstrates the higher acuity level of LTCH services when compared to a CMR. HealthSouth is a facility which consistently operates at high occupancy levels and even if it were capable of providing the services typical of an LTCH, it would not have sufficient capacity to provide for the need. A CMR is a facility to which persons who make progress in an LTCH might repair so that they can return to the activities of daily living. SNFs are not substitutes for LTCHs although there could be some limited overlap. SNFs are generally not appropriate for patients otherwise eligible for the type of care provided by an LTCH. They do not provide the range of services typically provided by an LTCH and do not maintain the registered nurse staffing levels required for delivering the types of services needed for patients appropriate for an LTCH. LTCHs are a stage in the continuum of care. Short- term acute care hospitals take in very sick or injured patients and treat them. Thereafter, the survivors are discharged to home, or to a CMR, or to a SNF, or, if the patients are still acutely ill but stable, and if an LTCH is available, to an LTCH. As noted above, currently in northern Pinellas County and in Pasco County, there is no reasonable access to an LTCH. An intensive care unit (ICU) is, ideally, a treatment phase that is short. If treatment has been provided in an ICU and the patient remains acutely ill but stable, and is required to remain in the ICU because there is no alternative, greater than necessary costs are incurred. Staff in an ICU are not trained or disposed to provide the extensive therapy and nursing required by patients suitable for an LTCH and are not trained to provide support and training to members of the patient's family in preparation for the patient's return home. The majority of patients suitable for an LTCH have some potential for recovery. This potential is not realized in an ICU, which is often counterproductive for patients who are stabilized but who require specialized long-term acute care. Patients who remain in an ICU beyond five to seven days have an increased morbidity/mortality rate. Maintaining patients suitable for an LTCH in an ICU also results in over-utilization of ICU services and can cause congestion when ICU beds are fully occupied. UCH in Pasco County, and to a lesser extent BayCare in northern Pinellas County, will bring to the northern part of District 5 services which heretofore have not been available in the district, or, at least, have not been readily available. Persons in Pasco County and northern Pinellas County, who would benefit from a stay in an LTCH, have often had to settle for some less appropriate care situation. Medical Treatment Trends LTCHs are relatively new cogs in the continuum of care and the evidence indicates that they will play an important role in that continuum in the future. The evidence of record demonstrates that the current trend in medical treatment is to find appropriate post acute placements in an LTCH setting for those patients in need of long-term acute care beyond the stay normally experienced in a short-term acute care hospital. Market conditions The federal government's development of the distinctive PPS for LTCHs has created a market condition which is favorable for the development of LTCH facilities. Although the Agency has not formally adopted by rule a need methodology specifically for LTCHs, by final order it has recently relied upon the "geometric mean length of stay + 7" (GMLOS +7) need methodology. The GMLOS +7 is a statistical calculation used by CMS in administering the PPS reimbursement system in determining an appropriate reimbursement for a particular "diagnostic related group" (DRG). Other need methodologies have been found to be unsatisfactory because they do not accurately reflect the need for LTCH services in areas where LTCH services are not available, or where the market for LTCH services is not competitive. GMLOS +7 is the best analysis the Agency has at this point. Because the population for whom an LTCH might be appropriate is unique, and because it overlaps with other populations, finding an algebraic need expression is difficult. An acuity measure would be the best marker of patient appropriateness, but insufficient data are available to calculate that. BayCare's proposal will provide beneficial competition for LTCH services in District 5 for the first time and will promote geographic, financial, and programmatic access to LTCH services. BayCare, in conducting its need calculations used a data pool from Morton Plant Hospital, Mease Dunedin Hospital, Mease Countryside Hospital, Morton Plant North Bay Hospital, and St. Anthony's Hospital for the 12 months ending September 2003. The hospitals included in the establishment of the pool are hospitals that would be important referral sources for BayCare. BayCare then identified 160 specific DRGs historically served by existing Florida LTCHs, or which could have been served by Florida LTCHs, and lengths of stay greater than the GMLOS for acute care patients, and compared them to the data pool. This resulted in a pool of 871 potential patients. The calculation did not factor in the certain growth in the population of the geographic area, and therefore the growth of potential LTCH patients. BayCare then applied assumptions based on the proximity of the referring hospitals to the proposed LTCH to project how many of the patients eligible for LTCH services would actually be referred and admitted to the proposed LTCH. That exercise resulted in a projected potential volume of 20,265 LTCH patient days originating just from the three District 5 BayCare hospitals and the two Mease hospitals. BayCare assumes, and the assumption is found to be reasonable, that 25 percent of their LTCH volume will originate from facilities other than BayCare or Mease hospitals. Adding this factor resulted in a total of 27,020 patient days for a total net need of 82 beds at 90 percent occupancy. BayCare's GMLOS +7 bed need methodology reasonably projects a bed need of 82 beds based on BayCare's analysis of the demand arising from the three District 5 BayCare hospitals and the two Mease hospitals. UCH provided both a GMLOS +7 and a use rate analysis. The use rate analysis is suspect in a noncompetitive environment and, obviously, in an environment where LTCHs do not exist. UCH's GMLOS +7 analyses resulted in the identification of a need for 159 additional LTCH beds in District 5. This was broken down into a need of 60 beds in Pasco County and 99 additional beds in Pinellas County. There is no not-for-profit LTCH provider in District The addition of BayCare and UCH LTCHs to the district will meet a need in the case of Medicaid, indigent, and underinsured patients. Both BayCare and UCH have agreed in their applications to address the needs of patients who depend on Medicaid, or who are indigent, or who have private insurance that is inadequate to cover the cost of their treatment. The statistical analyses provided by both applicants support the proposed projects of both applicants. Testimony from doctors who treat patients of the type who might benefit from an LTCH testified that those types of facilities would be utilized. Numerous letters from physicians, nurses, and case managers support the need for these facilities. Adverse impacts HealthSouth and Kindred failed to persuade that BayCare's proposal will adversely impact them. HealthSouth provides little of the type of care normally provided at an LTCH. Moreover, HealthSouth is currently operating near capacity. Kindred is geographically remote from BayCare's proposed facility, and, more importantly, remote in terms of travel time, which is a major consideration for the families of patients. Kindred did not demonstrate that it was currently receiving a large number of patients from the geographic vicinity of the proposed BayCare facility, although it did receive some patients from BayCare Systems facilities and would likely lose some admissions if BayCare's application is approved. The evidence did not establish that Kindred would suffer a material adverse impact should BayCare establish an LTCH in Mease Dunedin Hospital. HealthSouth and Kindred conceded that UCH's program would not adversely impact them. The Agency's Position The Agency denied the applications of BayCare and UCH in the SAARs. At the time of the hearing the Agency continued to maintain that granting the proposals was inappropriate. The Agency's basic concern with these proposals, and in fact, the establishments of LTCHs throughout the state, according to the Agency's representative Jeffrey N. Gregg, is the oversupply of beds. The Agency believes it will be a long time before it can see any measure of clinical efficiency and whether the LTCH route is the appropriate way to go. The Agency has approved a number of LTCHs in recent years and is studying them in order to get a better understanding of what the future might hold. The Agency noted that the establishment of an LTCH by ongoing providers, BayCare Systems and UCH, where there are extant built-in referring facilities, were more likely to be successful than an out-of-state provider having no prior relationships with short-term acute care hospitals in the geographic vicinity of the LTCH. The Agency noted that both a referring hospital and an LTCH could benefit financially by decompressing its intensive care unit, and thus maximizing their efficiency. The Agency did not explain how, if these LTCHs are established, a subsequent failure would negatively affect the delivery of health services in District 5. The Agency, when it issued its SAAR, did not have the additional information which became available during the hearing process.
Recommendation Based upon the Findings of Fact and Conclusions of Law, it is RECOMMENDED that UCH Certificate of Need Application No. 9754 and BayCare Certificate of Need Application No. 9753 satisfy the applicable criteria and both applications should be approved. DONE AND ENTERED this 29th day of November, 2005, in Tallahassee, Leon County, Florida. S HARRY L. HOOPER 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 29th day of November, 2005. COPIES FURNISHED: Robert A. Weiss, Esquire Parker, Hudson, Rainer & Dobbs, LLP The Perkins House, Suite 200 118 North Gadsden Street Tallahassee, Florida 32301 J. Robert Griffin, Esquire J. Robert Griffin, P.A. 1342 Timberlane Road, Suite 102-A Tallahassee, Florida 32312-1762 Patricia A. Renovitch, Esquire Oertel, Hoffman, Fernandez, Cole, & Bryant P.A. Post Office Box 1110 Tallahassee, Florida 32302-1110 Geoffrey D. Smith, Esquire Blank, Meenan & Smith, P.A. 204 South Monroe Street Tallahassee, Florida 32301 Timothy Elliott, Esquire Agency for Health Care Administration 2727 Mahan Drive Building Three, Mail Station 3 Tallahassee, Florida 32308 Alan Levine, Secretary Agency for Health Care Administration Fort Knox Building, Suite 3116 2727 Mahan Drive Tallahassee, Florida 32308 Christa Calamas, General Counsel Agency for Health Care Administration Fort Knox Building, Suite 3431 2727 Mahan Drive Tallahassee, Florida 32308 Richard Shoop, Agency Clerk Agency for Health Care Administration Fort Knox Building, Mail Station 3 2727 Mahan Drive Tallahassee, Florida 32308
Findings Of Fact THE PROPOSAL PROCESS Prior to 1986, all HMOs had to be federally qualified to do business with the State of Florida. That requirement was subsequently changed by the Secretary of Administration who decided that any state licensed HMO could enroll state employees. As a result, the number of HMOs participating in state enrollment jumped from 21 to 64 and there was no one in DOA to oversee this increase. It became obvious that some limitation had to be imposed on the number of HMOs with whom state enrolled employees could do business. As a result, in 1987, the Department of Administration proposed to the Florida Legislature that the method for choosing health care providers for state employees be changed. At the time, approximately 115,000 state employees were enrolled in the State Health Plan. Of that number, approximately 27,000 were enrolled in HMO's leaving 98,000 in indemnity plans. Many of these latter employees had no option to select HMO coverage since in 40 counties in the state, no HMO option was available. DOA proposed to the Legislature to go to a competitive bid process for this service with the goal in mind of reducing the overall cost of health care both to the State and to the employee. The competitive bid, by reducing the number of HMOs providing the service, would help achieve that goal. Another long-term goal was to get all health care programs, including the indemnity plans, into a managed system. This would not, however, include a preferred provider program (PPO). The Legislature enacted Chapter 87-156, Laws of Florida, effective October 1, 1987, which amended Section 110.123(3)(d), Florida Statutes, to add: "2. Effective January 1, 1988, the Department of Administration shall, by rule, contract with health maintenance organizations to participate in the state group health insurance plan through the competitive bid process based on cost, service area, plan benefits, and accessibility. Effective January 1, 1988, all employees participating in the state group health insurance plan, irrespective of whether or not the member participates in a health maintenance organization, shall be subject to the same total premium, regardless of the state or employee's share." DOA thereafter contracted with the Frank B. Hall Co., a consultant firm, which produced the first draft of the Request for Proposal, (RFP), in July, 1987. The Department staff thereafter changed and added to the draft, and after consulting with and securing input from some HMOs, otherwise unidentified, came up with a final draft which was approved by the Secretary. Consistent therewith, on July 31, 1987, DOA issued "Bid No. 88-05", a Request For Proposals For Health Maintenance Organization Coverage. The RFP indicated a pre-submission conference would be held on August 12, 1987, and proposals must be received no later than August 28, 1987. The contemplated date of award was September 14, 1987, and the contract was anticipated to be effective January 1, 1988. Objectives of the procurement, as seen by DOA, generally to meet the benefit objections of the department and to provide high quality benefits and services to state employees, were specifically indicated in Section II of the RFP as: "A proactive approach to cost containment, including an emphasis on aggressive claims management, utilization review and superior statistical reporting. Quality medical care which encourages health promotion, disease prevention, early diagnosis and treatment. Stability in the financial structure of offered health plans. Professional, high quality service in all administrative areas, including claims processing, enrollment, membership services, grievances, and communications. Competitive premium rates which take into account the demographics and, if appropriate, the claims experience of State employees. as well as to: Have each county or contiguous group of counties be considered one service area. Award no more than two contracts per service area; however, the awards will be based on the HMO's ability to respond to the needs of employees and on accessibility by employees. Have reciprocal agreements between locations if an HMO has multiple service areas. For example, an employee covered dependent living in Gainesville, should be provided similar services. Enter into a two year, non-experience rated contract. A provision will be included tying renewal action at each of the two renewals to the Consumer Price Index (CPI) for medical care services. This will become part of the contract." A proposer was defined as "qualified" under Section III if it was licensed by the Department of Insurance pursuant to Part II of Chapter 641, Florida Statutes. Under subsection C, each proposer was required to submit: Form PUR 7033, properly completed and signed. The completed Questionnaires Requirement Section (with questions answered in the same order as appearing on the form). The completed cost proposal forms. The completed Statement of Compliance on P47. Documentation in support of the above." In subsection N, the department provided: "Proposals are to be submitted only on the forms and formats provided in this RFP. All exhibits requested must be submitted with your proposal along with answers to all questions contained in this RFP. In Section IV of the RFP, the department provided the award would be in the form of a 24 month contract to be effective January 1, 1988 and the department reserved the right to renew the contract subject to the same terms and conditions of the original contract for two additional one year periods. Evaluation criteria were outlined in Section IX of the RFP and included: Premium cost. Extensiveness of Service Areas - by county and/or contiguous counties. NOTE: The State's objective is to award no more than two contracts per services area; however, the awards will be based on the HMO's ability to respond to the needs of employees and on accessibility by employees. Plan Benefits as follows: Covered services Limitations and exclusions Co-payments, deductible and coinsurance features Range of providers including specialists and number of hospitals Out of service area coverage Grievance procedures Accessibility as follows: Reciprocal agreements - Provider locations Number of primary care physicians and specialists, in relation to membership. Completeness of proposals. No information was provided in the RFP as to the relative importance of price and other evaluation criteria, as required by Section 287.012(11), Florida Statutes." Section VI of the RFP listed the minimum benefits that must be provided, and also required a complete list of all other services intended to be provided for each service area. Section X posed forty-nine questions including such items as the proposer's license status, corporate structure, reserving practices, reinsurance contracts, service area, employee membership and staff, hospital affiliations and other care facilities, physician lists, management information, and statistical information. There was also a request for the submittal of audited financial statements for the two prior fiscal years and the 1st quarter of 1987. By an undated addendum to the RFP, a fiftieth question requested brochure comparison information on specified proposed services and copayments or deductibles to be used by the various HMOs. Cost proposals submitted in a specific format were called for in Section XI. At the pre-bid conference for representatives of the various proposer HMOs, held on August 12, 1987, Mr. Nye informed them that the two criteria of cost and benefits would be weighed on an equal basis. However, Mr. Nye and his staff changed the weights for several categories thereafter. He instructed the proposers to quote a specific rate for the first year of the multi-year conract, as described above, and a percentage of increase or decrease for each of the succeeding years, but noted that the state would evaluate cost solely on the basis of the first year premium. Mr. Nye also indicated an award would be made to two HMOs per service area, based on the receipt of the highest number of points awarded on the bid evaluation. In response to a specific inquiry, Mr. Nye clearly stated benefits and costs would be weighted higher than other factors. At that point in time, no decision had been made as to how to award actual points for each category, however. THE PROPOSERS Eleven proposals were submitted prior to the August 28, 1987 deadline. Proposers included Tampa Bay, Petitioner herein; Humana, Health Alliance, Pru- Care, and Health Options, all intervenors herein; and Florida 1st Health Plan, Physician's Health Plan of Florida, AV-MED Health Plan, Cigna Health Plan of Florida, Healthwin, Inc., and MetLife Healthcare Network, all of whom either failed to take part herein or withdrew after filing. Tampa Bay is a state licensed and federally qualified HMO which was purchased by Equicor in December, 1986. Equicor is a joint venture between Equitable Life Assurance and Hospital Corporation of America. Its service area includes Hillsborough, Pinellas, Pasco, and Hernando counties in which it claims 47,229 members, of whom 2,175 are state employees, retirees or dependents. Health Options, which submitted two proposals, is a for-profit subsidiary of Blue Cross/Blue Shield of Florida, operating as an HMO since 1984. Its service area includes Hillsborough, Pinellas, and Pasco counties in which it claims 6,734 members, of whom 335 are state employees. It is an IPA model HMO which contracts with individual physicians on a pre- negotiated fee schedule. The member's designated primary care physician directs the patient's care and refers to specialists when necessary. Humana Health Plan is a subsidiary of Humana, Inc., which got its Florida and federal licenses on June 1, 1987. Its service area includes Hillsborough, Pinellas, and Pasco counties in which it claims 21,564 members, of whom 286 are state employees. It is an IPA model HMO similar to Health Options. Pru-Care being involved herein for the limited purpose of protesting the award and not in support of its own candidacy, particulars pertinent to its makeup, service area, and membership are not now relevant. THE EVALUATION PROCESS According to the procedure drawn up by Mr. Nye and his staff, a team of three evaluators would evaluate each proposal for a service area and submit his or her evaluation forms to Mr. Nye who would enter the data into the computer. While the law requires each proposal be evaluated by three separate evaluators, it does not say how the evaluation is to be done. Some evaluators used in this case were Donna Yates, a personnel technician III, Kathy Gilbert, a personnel aide, and Nancy M. Rabess, who participated in the second evaluation. The others were not mentioned. Mr. Nye, assisted by Ms. Marie Walker, an HMO administrator in Mr. Nye's office, trained all the evaluators for the seven service areas in a seminar designed to instruct them on how they would assess points. They were advised to assign a raw point score to each section of every response and to make notes as to why they were assigning points as they did. After the evaluation, Mr. Nye could not and did not overrule the evaluations. He only recorded scores assigned by the evaluators and corrected math errors prior to entering the results in the computer along with the weights to be given each factor. These weights were not discussed with either the secretary or Mr. Hall. Mr. Nye, who decided upon the weights, discussed them only with his staff. He was familiar with the program and was comfortable with it. He believes it resulted in a good weighting analysis. The first evaluation and its resultant computer rankings was completed by September 11, 1987, and the results were sent by memo to the department's counsel that day for legal review. At this point, with the analysis done and the rankings reached, the contract could have been let upon the approval of the Secretary, prior to September 14, 1987. However, for reasons unknown to Mr. Nye, no action was taken until late in September, 1987. In the interim, Mr. Nye advised the secretary several times that the award was late. When all the evaluation was done, the weights assigned, and the computer applications run, the rankings of the Proposers for the Tampa Bay Area were: #1 - Health Options Plan 5 - 67.015 pts. #2 - Tampa Bay Health Plan - 65.49 pts. #3 - Pru-Care - 62.23 pts. #4 - Health Options Plan 4 - 59.08 pts. #5 - Av-Med - 59.04 pts. #6 - Humana Hillsborough - 55.945 pts. #7 - Humana Pinellas - 55.915 pts. #8 - Cigna Low - 54.25 pts. #9 - Humana Pasco - 54.235 pts. These scores are, according to Nye, close, when compared with evaluations done in the other service areas. Errors, then, become more critical the closer the scores are. Finally, at a meeting held in late September, 1987, the Secretary advised Mr. Nye that the initial evaluations were too subjective and needed to be corrected to make them more objective. Advice to this effect may have come from the Assistant General Counsel who indicated that in the first evaluation there were no guidelines as to how many points would be awarded for any one area and the individual evaluators had all come up with different point totals. In addition, the Secretary was concerned about the financial soundness of some HMO proposers and whether they could continue to provide appropriate service throughout the contract term. As a result, each HMO which submitted a proposal was furnished with the process and format for approval of its rates by the Department of Insurance. Mr. Nye also checked with the Department of Insurance to determine the financial soundness of the proposers and had their rates evaluated for soundness by an actuary there. Results indicated that most providers have shown net operational losses for the last few years, but this appears to be symptomatic of conditions in the HMO field in Florida during the period. All of the rates were certified by the actuary at the Department of Insurance. Mr. Nye was instructed by the Secretary to have second evaluations conducted, which was done. At this point, Mr. Nye made a unilateral decision to increase the weight factor on costs from 2.5 (which it had been in the first evaluation) to 3.5, while leaving the weight factor on benefits at 2.5. This decision was not communicated to any of the proposers or to the Secretary prior to the second evaluation and analysis. However, the Secretary was made aware of the change after she was presented with the analysis of the second evaluation and prior to her making her decision on the award. This was sometime after September 23, 1987. The training given to the evaluators for the second evaluation was also scanty. Several of the original evaluators were replaced because of unavailability. They were told to look at what was proposed and establish, if possible, what information was factual. Points were to be awarded only on those items which were factually established. Though this may appear nebulous, Mr. Nye is convinced it did away with any dispute. Points were also awarded for completeness. If the question was answered, it received full points. No evaluation was made of the detail of the answer. When the second evaluation was completed, Mr. Nye again checked the math, ran the information through the computer for rankings, and forwarded the results to the Secretary on October 6, 1987. The package was reviewed by the General Counsel, his assistant, and the Secretary, all of whom indicated they felt the evaluation was fair. Even after this, however, there were several meetings and discussions regarding the reasons for and legal ramifications of Mr. Nye's recommendations, and the Secretary made her decision based on the information presented by Nye. This did not include any new or additional facts relative to proposers. The Secretary's selection was made on November 9, 1987. Mr. Nye emphasizes that the second evaluations were made of the original submissions without supplementation, and that no additional information was requested of or submitted by the proposers. Any discussions he had with the Secretary or her staff regarding the procurement dealt with the number of HMOs which could be awarded a contract, not with who the selectee should be. When the results of the second evaluation were scrutinized, it appeared that several errors had been made in the process as regards the submission of Health Options, Pru-Care, and Humana. Health Options did not receive the correct number of points for the hospital deductible, receiving 10 points instead of the appropriate 8. Humana received 5 more points than it should have because of its outpatient deductible, and Pru-Care was penalized 2 points because the wrong information was picked up in one area. When these errors were corrected the scores were changed as follows: Humana (combined) went from 69.315 pts. to 69.214 pts. Health Options went from 67.015 pts. to 66.952 pts. Pru-Care went from 62.23 pts. to 62.30 pts. Tampa Bay's points remained constant at 65.49. The first points cited as to each proposer refer to its original points on the second evaluation, not the first. In light of the above, even after the correction, the change was slight and had no effect on the rankings of the HMOs in question. Mr. Nye contends, supported by Ms. Walker, that the individuals selected to do the evaluations were fully qualified to do so and were trained sufficiently to do the job. He asserts they had ample time to carefully do the job, and while it was a priority project, no deadline was set for completion. No one expressed to them any feelings of being rushed. The testimony of some evaluators reflects a somewhat different story, however. Ms. Donna Yates, a Personnel Technician III for DOA, was contacted for the first time in August, 1987 to attend a meeting of selected evaluators, others of whom she recognized to be personnel technicians as well. At this meeting, they were given copies of the evaluation form, instructed to carefully examine it, and told to utilize one form for each bidder. Ms. Yates was assigned to the Tampa Bay Area. Ms. Yates had no prior experience in HMO evaluation though she had one prior experience in bid evaluation, and did not feel qualified to do the job even after the minimal instructions she received. However, after reviewing the first proposal, she felt more comfortable with the process. Nonetheless, her unfamiliarity with the process and the subject matter is apparent from her discussion of the term, "additional benefits", an area of evaluation. She indicated she would have awarded an additional 10 points for each service provided beyond the list of required services, as opposed to a total of 10 points for any additional service. She did not, however, have the list of required benefits available to her at the time of the evaluation, so her award of points in that area must be suspect. In addition, she does not know what the statutory requirements were for exclusion of and limitations on organ transplants and cannot recall if she was even told what they were. She also cannot recall what, if anything, she was told about the completeness of the proposals, nor does she recall any discussions about it. During the first evaluation, each evaluator worked independent of the others, arriving at his or her own point assessment, and no opportunity was given to compare results. Ms. Yates felt somewhat rushed. When completed, each evaluator's forms were taken to the supervisor's office and turned in. During the second evaluation, for which she was again called, the three evaluators worked together, discussing the proposal answers, and arriving at a resolution of questions by joint re- reference to the proposal. She received no instructions from anyone that the three evaluators in a service area should arrive at the same answers. In the group in which she worked, any disagreements were usually resolved through discussion and unanimous agreement reached. The second evaluations were on new forms which made no reference to the first evaluation. She did not go back and check her work for errors before turning the forms in to Mr. Nye though she completed the evaluation forms for the three service areas to which she was assigned, (Tampa Bay, Orlando, and Pensacola), in one day. By her own admission, though she did not feel rushed in the second evaluation, Ms. Yates, by this time, was sick of the process and completed it as quickly as possible. Ms. Gilbert and Ms. Rabess confirm Ms. Yates' testimony. Ms. Gilbert participated in only the first evaluation and Ms. Rabess in only the second. Ms. Gilbert received some instructions prior to her evaluation, but not much. She did, however, feel qualified to do the job and did not feel rushed. Ms. Rabess relates she received a considerable amount of instruction from Mr. Nye at an hour-long meeting before her evaluations but cannot remember what it included. Having never done a bid evaluation before, she nonetheless felt qualified to do it this time and was comforted by the fact she could ask Ms. Yates or Ms. Gilbert, with whom she was working as a team, if she had any questions. When asked at the hearing how an HMO works, however, she could not say nor could she describe the main benefits of such an organization. It is obvious that this witness, who served as an evaluator, was totally unable to understand the RFP or what she was doing. She could not do the calculations of premium costs nor could she remember, less than four months later, what she or the others did, and can state little more than that they all worked together. From the above, it becomes clear that while the method of evaluation may have been well thought out, it's implementation through the use of totally unqualified and untrained personnel was faulty and could not help but result in a flawed evaluation both times it was done. The form used in the second evaluation was designed to evaluate the four basic categories required by law to be considered. The first is premium cost and the evaluator was to insert this figure from the cost sheet provided by each HMO in its response to the RFP which provided that the family rate could not exceed 2.5 times the individual rate. The evaluator was to perform the calculation to insure that requirement was met. The evaluator next assigned a point score to the proposal in that area. The Department provided the evaluator with a mean value which was assigned a point score of 5. Rates above or below the mean were assigned points from 0 to 10 depending on how far above or below the mean the rate was. If below the mean, the proposer got a higher point assignment and vice-versa. Retiree rates, affected somewhat by Medicare, were also considered with DOA providing the mean cost. The second section of the form dealt with service area and called for the HMO to get 1 point for each full county served. In the third section, plan benefits were examined. Sub- section (a), dealt with minimum coverage and the evaluator was referred to page 12, paragraph 2 of the RFP which listed the required services and asked the proposer to list any additional services offered. Sub-Section (b) referred to limitations and exclusions, one of which related to organ transplants. Here the evaluator was referred to that portion of the proposal/RFP where the HMO was to state its position on organ transplants. The evaluator was to award 10 points if organ transplants were done and to deduct 2 points for each limitation or exclusion. As to co-payments and coinsurance, the latter is usually expressed in a percentage of total cost of a service or group of services. A deductible requires a patient to pay a certain amount before any charges are paid by the carrier. A co-payment is the amount the patient pays each time he or she sees a doctor. Coinsurance is usually capped by a stop-loss; a deductible is automatic; and a co-payment can be capped several ways, such as percent of premium, set figure, or the like. In this procurement, the HMOs were to provide a list of deductibles and co-payments and the evaluator was to look at the co- payment for physician visit and ER visit and add or subtract points to or from the 5 point mean of $25.00 co-payment. As to hospital co- payments, the evaluator was to initially award 10 points and subtract 2 points for each $100.00 of co-payment. In the case of Health Options, for example, the providers had a $100.00 per day co-payment not to exceed $500.00. This limit, in Nye's opinion, was the same as a $100.00 co- payment and the provider should have lost only 2 points. In evaluating the co-payment for prescription drugs of $3.00 per prescription, even if 4 prescriptions were filled the same day, the evaluator should have treated that as being one co-payment deduction. The evaluators were also to look at the hospitals provided by the HMO and identify them as either "full service" or "other". As to skilled nursing benefits, either they were offered or they were not. If offered, the proposer was awarded 10 points. If not, it received none. The proposer was also to receive one point for each type of physician provided. Out of area coverage is self-explanatory. If the patient would be covered outside his or her own service area in an emergency, the evaluator was instructed to determine how quickly the service charge would be reimbursed either to the patient or the provider. Accessibility, the ability of the employee to receive service, was considered. Evaluators looked at regional agreements to see if the patient could be covered outside his service area in other than emergencies. Provider locations were examined to see if the provider had a site in each county in its service area, and the HMO got 2 points for each specialty offered in each county and one point for each doctor in each county. When the scores had been awarded as to each question, those not on the 10 point basis were converted to it by use of a formula which developed a matrix for measuring the difference between points awarded in a particular area (cost, benefits, accessibility, etc.). This conversion was not done by the evaluators, however, but by Mr. Nye. No doubt Mr. Nye knew what he was doing and so did Ms. Walker, the HMO administrator in DOA. In this award process she initially reviewed the proposals and commented on them in some cases, and she participated as an evaluator in the second evaluation. She was, as well, deeply involved in writing the recommendations submitted to the Secretary upon completion of the evaluations. In her opinion, the difference between the first and second evaluations was one of methodology. Whereas the first left room for evaluator discretion, the second, while still requiring judgement on the part of the evaluator, was more objective. She felt the evaluators used were equipped to use that judgement, and some may have been. However, it is clear those who testified at this hearing were not sufficiently familiar with the subject matter to appropriately apply even objective standards. Ms. Walker also established that changes in the second evaluation had a substantial effect on the way the proposers were looked at. For example, benefits and accessibility were now grouped together and viewed against costs, and co-payments were considered an important benefit. In the Tampa Bay Service Area, Humana received the greatest number of points (69.13) on its combined bid for Pasco, Pinellas, and Hillsborough Counties derived from the aforementioned matrix and the score sheets of the evaluators. In his memo of October 6, 1987 to the Secretary, Mr. Nye recommended that four HMOs, (Tampa Bay Health Plan, Health Alliance, Health Options and Humana) be awarded contracts because he included Polk and Hernando Counties to be in this service area. Tampa Bay Health Plan was included because it was the only HMO to propose to provide service in Hernando County, and Health Alliance agreed to provide service in Polk County. Neither Health Options nor Humana proposed service in those two counties. However, a decision was made to award contracts to Humana and Health Options for the three county service area previously described and to enter separate negotiations with the other two for Polk and Hernando Counties.
Recommendation Based on the Findings of Fact and Conclusions of Law, it is, therefore: RECOMMENDED that the Department of Administration issue a Final Order rejecting all proposals submitted to provide HMO service for the Tampa Bay service area and readvertise for new proposals, if appropriate. Recommended this 26th day of April, 1988, in Tallahassee, Florida. ARNOLD H. POLLOCK 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 26th day of April, 1988. APPENDIX TO RECOMMENDED ORDER, CASE NO. 87-5524BID The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties in this case: By the Petitioner: Tampa Bay Health Plan A - Accepted. B - Accepted. C - Accepted. D - Accepted. E - Accepted and incorporated herein. A - Accepted and incorporated herein. B - Accepted and incorporated herein. C - Accepted. - Accepted and incorporated herein. - Rejected as contra to the weight of the evidence. F - Rejected as contra to the weight of the evidence. G - Rejected as unproven. Rejected. Accepted and incorporated herein. Rejected as unidentified and unsupported. Accepted. By the Respondent: DHRS 1 - 3. Accepted and incorporated herein. 4 - 15. Accepted and incorporated herein. 16 - 19. Accepted and incorporated herein. 20 - 22. Accepted and incorporated herein. Accepted except for finding that second evaluation method "make it much simpler for evaluators to score the proposals. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. 27 - 28. Accepted and incorporated herein. 29. Accepted. (25) Accepted. (26) Accepted except for second sub-paragraph. (30) Accepted except for second sub-paragraph. (28) Accepted except for second sub-paragraph. (29) Accepted except for second sub-paragraph. (38) Accepted except for second sub-paragraph. For Intervenor: Health Options 1 - 6. Accepted and incorporated herein. 7 - 9. Accepted and incorporated herein. Accepted. Accepted and incorporated herein. 12 - 19. Accepted and incorporated herein. Rejected as a restatement of evidence and conclusion in last two sentences, is not supported. Rejected. Unused. Accepted and incorporated herein. Accepted. Accepted. 26 - 27. Accepted and incorporated herein. Accepted. Accepted. For Intervenor: Humana 1. Accepted in that several errors were made. Accepted in that alternative methods of evaluating were available and used. Balance is rejected. For Intervenor: Pru-Care Health Plan 1 - 7. Accepted and incorporated herein. 8. Rejected as contra to the evidence (sentence two). 9 - 11. Accepted. 12. Accepted. 13 - 14. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. Accepted except for last sentence which is not a Finding of Fact. 20. Rejected as not being a Finding of Fact. 21. Accepted and incorporated herein. 22. Accepted and incorporated herein. 23 - 24. Accepted and incorporated herein. 25. Accepted and incorporated herein. 26 - 27. Accepted and incorporated herein. 28. Accepted and incorporated herein. 29 - 30. Accepted and incorporated herein. 31 - 34. Accepted and incorporated herein. 35. Accepted and incorporated herein. 36. Accepted. 37 - 38. Accepted and incorporated herein. 39. Accepted. COPIES FURNISHED: Robert C. Bissell, Esquire Director of Legal Affairs Tampa Bay Health Plan/Equicor 888 Executive Center Drive West Suite 200 St. Petersburg, Florida 33702 Augustus D. Aikens, Jr., Esquire General Counsel Department of Administration 435 Carlton Building Tallahassee, Florida 32399-1550 Jann Johnson, Esquire and Robert N. Clark, Jr., Esquire Ausley, McMullen, McGee, Carothers & Proctor Post Office Box 391 Tallahassee, Florida 32302 John R. Marks, III, Esquire Katz, Kutter, Haigler, Alderman, Eaton & Davis 315 South Calhoun Street 800 Barnett Bank Building Tallahassee, Florida 32301 Rhoda Smith Kibler, Esquire and J. Stanley Chapman, Esquire Ervin, Varn, Jacobs; Odom & Kitchen 305 South Gadsden Street Tallahassee, Florida 32301 John Buchanan, Esquire Buchanan, Henry, Mick & English 117 South Gadsden Street Tallahassee, Florida 32301 Adis Vila, Secretary Department of Administration 435 Carlton Building Tallahassee, Florida 32399-1550
Conclusions THIS CAUSE came on for consideration before the Agency for Health Care Administration (“the Agency”), which finds and concludes as follows: L The Agency issued to Hollywood Pavilion, LLC, the attached Administrative Complaint (Ex. 1), and to Larkin Community Hospital, Inc. d/b/a Larkin Community Hospital, the attached Notice of Intent to Deny Application and Withdrawn From Further Review letter (Ex. 2). The parties entered into the attached Settlement Agreement (Ex. 3), which is adopted and incorporated by reference. 2. The parties shall comply with the terms of the Settlement Agreement. 3. The Administrative Complaint is withdrawn. 4. The Notice of Intent is withdrawn and the Agency shall resume the processing of the change of ownership application. Nothing in this Agreement shall prohibit the Agency from denying the change of ownership application based upon any licensure statute or rule not set forth in the Notice of Filed November 14, 2014 2:23 PM Division of Administrative Hearings Intent. Should the Agency again deny the change of ownership application, the Applicant will be afforded all legal rights under Florida law to contest any subsequent denial. ORDERED in Tallahassee, Florida, on this _(@ dayof _ Get» ber- , 2014. ‘. mK Elizab ras a Agency for He are Administration
Other Judicial Opinions A party that is adversely affected by this Final Order is entitled to seek judicial review which shal! be instituted by filing one copy of a notice of appeal with the agency clerk of AHCA, and a second copy, along with filing fee as prescribed by law, with the District Court of Appeal in the appellate district where the agency maintains its headquarters or where a party resides. Review of proceedings shall be conducted in accordance with the Florida appellate rules. The notice of appeal must be filed within 30 days of rendition of the order to be reviewed. CERTIFICATE OF SERVICE 1 HEREBY CERTIFY that a true and correct copy pipes Final Oceanis below- named persons/entities by the method designated on this {3 ay of , 2014. Agency for Health Care Administration 2727 Mahan Drive, MS 3 Tallahassee, Florida 32308 Telephone (850) 412-3630 Jon H. Steinmeyer Bradford C. Herter Court Appointed Receiver Assistant General Counsel Hollywood Pavilion, LLC Office of the General Counsel 1201 North 37" Avenue Agency for Health Care Administration Hollywood, Florida 33012 (Interoffice Mail) (U.S. Mail) Jack Plagge, Unit Manager Hospital and Outpatient Services Unit (Interoffice Mail) Jack J. Michel, MD Chairman Larkin Community Hospital 7031 SW 62"! Avenue South Miami, Florida 33143 (U.S. Mail) Jorge Isaac, Esq. Isaac & Salgado Grondin, P.L. 267 Minorca Avenue, Suite 100 Coral Gables, Florida 33134 (U.S. Mail) Gary C. Matzner, Esq. Kopelowitz Ostrow, P.A. 2525 Ponce de Leon Boulevard Coral Gables, Florida 33134 (U.S. Mail) [Jan Mills Facilities Intake Unit Agency for Health Care Administration (Interoffice Mail)
The Issue These consolidated cases involve three issues: (1) whether the Department of Revenue's ("the Department") assessment against Bayfront HMA Medical Center, LLC ("Bayfront"), for sales tax on commercial rent payments is erroneous; (2) whether Bayfront is entitled to a refund for overpayment of sales tax on commercial rent payments from August 1, 2014, to July 31, 2017; and (3) whether Bayfront is entitled to a refund for overpayment of sales tax on commercial rent payments from August 1, 2017, to May 31, 2018.
Findings Of Fact The Department is the state agency responsible for administering Florida's sales and use tax laws pursuant to chapter 212, Florida Statutes. Bayfront, a for-profit LLC, is a 480-bed facility that is housed in a large six-floor building with adjacent smaller buildings comprising the hospital campus in downtown St. Petersburg. The Department issued Bayfront's sales tax registration in August 2013. The petitions in DOAH Case Nos. 19-1881 and 19-1882 contest the Department's tax assessment and refund application denial for the period of August 1, 2014, to July 31, 2017. The petition in DOAH Case No. 19-1880 contests the Department's refund application denial for the period of August 1, 2017, to May 31, 2018. While the Department audited all of Bayfront's Florida sales and use tax liabilities, in this proceeding, Bayfront only challenges the Department's determination that Bayfront owes sales and use tax on its base rent and additional rent payments for space it leases at Johns Hopkins All Children's Hospital ("All Children's Hospital"). Bayfront Baby Place On November 30, 2007, All Children's Hospital (as the landlord), and Bayfront (as the tenant) entered into a lease agreement for a term of 23 years wherein Bayfront leases 91,195 square feet, or 12.57 percent, of All Children's Hospital to provide obstetric services. Bayfront refers to this space as Bayfront Baby Place (although for purposes of this Recommended Order, it may also be referred to as "Bayfront"). Together with All Children's Hospital, Bayfront Baby Place is a regional perinatal intensive care center licensed under sections 383.15 through 383.19, Florida Statutes. A regional perinatal intensive care center is a specialized unit within a hospital specifically designed to provide a full range of health services to women with high-risk pregnancies and intensive care services for newborns. Bayfront Baby Place provides these services to low and high-risk mothers and normal newborns. Both outpatients and inpatients are treated at this facility. Approximately 50 to 60 percent of Bayfront Baby Place's monthly patient visits are for outpatient treatment. Bayfront Baby Place is a secure facility, requiring identification for patients and others entering the facility. The 94,195 square feet of leased space is allocated as follows: The first floor has 3,532 square feet of leased space and consists of the entrance with a security station, gift shop, lobby area, and conference room. Patients and family members enter at the first-floor entrance. The conference room is used by Bayfront Baby Place's staff and to hold classes for the public. Other than the entrance, inpatients do not usually use the first floor. The second floor has 264 square feet and is not accessible to Bayfront's inpatients or outpatients. The third floor has 86,824 square feet and is used to provide obstetric medical services to inpatients and outpatients. On this floor there are eight triage rooms used solely for outpatient care; 14 antepartum rooms for both outpatient and inpatient treatment; four operating rooms; eight post-anesthesia recovery bays; 13 labor and delivery rooms; a nursery for newborns; and 40 mother-baby inpatient rooms. The fourth floor has 575 square feet and is not accessible to Bayfront's inpatients or outpatients. Under its lease, Bayfront is responsible for paying sales tax on base rent and additional rent payments. The lease specifies that utility services (electricity, water, sewer, heating, air conditioning, plumbing, medical gas, etc.) are charged to the tenant as additional rent. All Children's Hospital provides Bayfront with an itemized invoice each month detailing base rent, Florida sales tax, environmental services, routine maintenance, dietary services, utilities, medical gases, and central energy plant. Bayfront Baby Place's inpatient room charge exceeds $2,000 per day.1 The room fee includes nursing care, medical supplies, dietary services, and general overhead charges. 1 Bayfront characterizes the room charge as "rent." However, Bayfront's invoices label the charge as "Private Room OB." Patients receiving outpatient treatment are not considered inpatients and are not charged an inpatient room charge. Bayfront's witnesses, Charles Tyson, Jane DeMauro, and David Stephens, all acknowledge the leased space is used exclusively to provide medical services. It is not a hotel, a nursing home, a psychiatric facility, or a substance abuse facility. The Audit On August 30, 2017, the Department initiated a sales and use tax audit of Bayfront for the period of August 1, 2014, to July 31, 2017. The audit was conducted by Glenn Morrison, an auditor at the Department's Largo Service Center, and the scope of the audit was all of Bayfront's sales and use tax liabilities imposed under Florida law. Bayfront's representative for the audit was Camille Henry, Director of Finance. The Department's initial assessment was issued on April 16, 2018, and assessed an amount due of $1,002,761.97 of tax and accrued interest. The assessment contained seven audit exhibits. Bayfront is only contesting audit assessment exhibit B03-Commercial Rent for All Children's Hospital, in which the Department determined Bayfront failed to pay sales and use tax owed on utilities, maintenance, and other services that are components of its rent payments. On May 8, 2018, tax consultant James Malone informed the Department of FM Cost Containment's representation of Bayfront for the audit. From May 17, 2018, to about May 31, 2018, FM Cost Containment supplied additional taxpayer records to the Department. After review of the newly-supplied records, the auditor, Mr. Morrison, determined the additional records supported substantial reductions to most of the audit assessment exhibits. However, the Department rejected Bayfront's challenge to audit exhibit B03 and made no change to B03 in the assessment revisions. The Department's Largo Service Center held a telephone conference with James Malone on June 7, 2018, and reviewed all issues. On June 8, 2018, the Largo Service Center issued its revised Notice of Intent to Make Audit Changes. Mr. Malone did not request a second audit conference, and instead asked the Largo Service Center to close his file and forward it to Tallahassee for further processing. On June 21, 2018, the Department's Compliance Standards Process office in Tallahassee issued to Bayfront a Notice of Proposed Assessment having a balance due of $124,395.34 tax and $24,412.02 accrued interest. On June 29, 2018, Bayfront, through FM Cost Containment, filed a timely informal protest with the Department, challenging audit exhibit B03. In its protest, Mr. Malone cites sections 212.08(7) and 212.031(1)(a)2., Florida Statutes; Florida Administrative Code Rule 12A-1.001; and Beverly Enterprises-Florida, Inc. v. Department of Revenue, No. 94-2259-CA-16-L (Fla. 18th Cir. Ct. Apr. 30, 1996) to support the claim that "the lease, rental, and license to use rooms exclusively as dwelling units by patients in hospitals and other qualifying healthcare facilities are … exempt from tax." On October 4, 2018, the Department issued a Notice of Decision sustaining the assessment and, due to accruing interest, Bayfront's tax liability increased to $151,588.36. This decision was prepared by TADR tax conferee Clay Brower, who retired from the Department in the fall of 2018. In its Notice of Decision, the Department rejected Bayfront's argument that its leased space is used exclusively as dwelling units and explained that only patients and inmates are exempt from paying sales tax under section 212.08(7)(i), a sales tax exemption that is not available to Bayfront, which is a Florida for-profit business entity and not a patient or inmate. On November 30, 2018, Bayfront filed a petition challenging the Department's Notice of Decision. Refund I (Case No. 19-1881) On May 29, 2018, Bayfront filed an application with the Department seeking a refund of $546,068.49 for the period of November 1, 2014, to July 31, 2017 ("Refund I"). Because the Department's service center was still involved with the audit, this refund application was sent to auditor Glenn Morrison in Largo for processing. As Bayfront's landlord, All Children's Hospital is the taxpayer responsible for remitting commercial rent tax to the state. § 212.031(3), Fla. Stat. In order to have standing for a refund claim, Bayfront needed to obtain an assignment of rights from its landlord. § 215.26(1), Fla. Stat. Along with its refund application, Bayfront provided the Department with All Children's Hospital's executed assignment dated May 24, 2018, for the refund period. Bayfront's reason set forth in its refund application was: "NT Rental Tax-Patients Rooms- Sec. 212.08(7), F.S.; Sec. 212.031(1)(a)2., F.S.; Rule 12A- 1.001 indicate that the lease, rental and license to use rooms exclusively as dwelling units by patients in hospitals and other qualifying healthcare facilities are also exempt from tax." On June 25, 2018, the Department issued its Notice of Intent to Make Tax Refund Claim Changes, denying Bayfront's application. On June 29, 2018, Bayfront timely filed an informal protest with the Department challenging the denial of its refund application. In its protest, Bayfront repeated the same argument from its protest of the assessment. See ¶17. On October 4, 2018, the Department issued a Notice of Decision of Refund Denial sustaining the denial of the refund application on the same basis as its Notice of Decision. On November 30, 2018, Bayfront filed a petition challenging the Department's Notice of Decision of Refund Denial. Refund II (Case No. 19-1880) On July 10, 2018, Bayfront filed a second refund application with the Department. This refund claim sought $117,586.85 for the period of August 1, 2017, to May 31, 2018 ("Refund II"). Bayfront's reason in this application was: "Tax paid on NT Rental Tax - Patients Rooms pursuant to Sec. 212.08(7), F.S.; Sec 212.031(1)(a)2." Refund II was sent to Tallahassee for processing and was assigned to refund tax auditor Chris Anderson. By Notice of Proposed Refund Denial issued on September 4, 2018, the Department denied Bayfront's application determining that the lease was taxable and the leased space was not transient rental accommodations under rule 12A-1.061. When Mr. Anderson issued the denial of the refund claim he did not know of the earlier audit or the first refund application denial. His analysis and conclusion were based solely on issues raised by Bayfront in Refund II. On September 7, 2018, Bayfront timely filed an informal protest with the Department challenging the denial of Refund II. In this protest, Bayfront repeated the same argument it made in its protest of the initial assessment and Refund I. See ¶17. On October 4, 2018, the Department issued a Notice of Decision of Refund Denial sustaining the denial of Refund II on the same basis as its Notice of Decision sustaining the assessment and the Notice of Decision of Refund Denial in Refund I. On November 30, 2018, Bayfront filed a petition challenging the Department's Notice of Decision of Refund Denial of Refund II. Bayfront's Position Bayfront's three petitions are essentially the same, with the only difference being the specific facts relevant to the audit assessment and each refund application. In the Joint Pre-hearing Stipulation, Bayfront claims it is exempt and excluded from sales and use tax on its commercial rent payments because: (1) patient rooms and space used principally by patients are dwelling units excluded from tax under section 212.031(1)(a)2.; and (2) Bayfront's re-lease of space to its patients is excluded from tax as a sale for resale pursuant to rule 12A-1.039(1)(b). In its Proposed Recommended Order, Bayfront also argues that the Department's criteria for distinguishing a space used exclusively as a dwelling unit from a space used for medical care constitutes an unadopted rule. The Capstan Report In support of its arguments that patient-accessible areas of Bayfront are used exclusively as dwelling units, or should be considered a lease for re-lease, and thus excluded from tax, Bayfront retained the services of Capstan, a separate consulting firm, to prepare a space-use report. The report, prepared by David Stephens, provides a facility use analysis of Bayfront Baby Place based on the square footage of the public space and private space. To prepare the report, Mr. Stephens, conducted an on-site inspection on September 21, 2018, and subsequently prepared the September 24, 2018, Capstan report after viewing each floor of the leased space with Bayfront staff. Mr. Stephens, who is not an engineer, testified as a lay witness, rather than an expert. For purposes of the Capstan report, spaces determined to be accessible to patients and, therefore, "public," included patient rooms, patient suites, operating rooms, the nursery, hallways, bathrooms, lobbies, conference rooms, and the front portion of nurses' stations. Spaces determined to be administrative and, therefore, "private," included employee rooms, employee break rooms, areas behind the nursing stations, offices, labs, laundry rooms, storage spaces, hazardous waste rooms, and janitorial closets. Based on the floor plans and information from the visit, Mr. Stephens used satellite imagery to determine the square footage accessible to patients and the square footage accessible to only Bayfront staff. The parties dispute what portion of the third floor is public versus private. At final hearing, Mr. Stephens testified that the public (patient- accessible) portion of the entire leased space is 85 percent (77,483 divided by 91,195), if the first and third floors are considered. If only the public square feet from the third floor are considered, the total public square feet for the entire leased space equals 81 percent (73,951 divided by 91,195). Mr. Stephens also did a separate calculation for only the patient rooms, patient suites, and hallways, and determined the total public square feet for those areas to be 52 percent of the leased space. The Capstan report is of limited value. Other than visiting Bayfront Baby Place on one occasion, Mr. Stephens testified that he was unfamiliar with the taxpayer, he engaged in no independent research, and the classification of leased space as "public" versus "private" was supplied by FM Cost Containment, the entity hired by Bayfront to respond to the audit. The report fails to distinguish between the portions of the facility used exclusively by inpatients, from that used for outpatient medical treatment.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter final orders in these consolidated cases sustaining the assessment and denying Bayfront HMA Medical Center, LLC's, refund applications. DONE AND ENTERED this 7th day of February, 2020, in Tallahassee, Leon County, Florida. S MARY LI CREASY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 7th day of February, 2020. COPIES FURNISHED: Mark S. Hamilton, General Counsel Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668 (eServed) Joseph C. Moffa, Esquire Moffa, Sutton & Donnini, P.A. Trade Center South, Suite 930 100 West Cypress Creek Road Fort Lauderdale, Florida 33309 (eServed) Randi Ellen Dincher, Esquire Office of the Attorney General Revenue Litigation Bureau The Capitol, Plaza Level 01 Tallahassee, Florida 32399 (eServed) Rex D. Ware, Esquire Moffa, Sutton & Donnini, P.A. 3500 Financial Plaza, Suite 330 Tallahassee, Florida 32312 (eServed) Jonathan W. Taylor, Esquire Moffa, Sutton & Donnini, P.A. Trade Center South, Suite 930 100 West Cypress Creek Road Fort Lauderdale, Florida 33309 (eServed) James A. Zingale, Executive Director Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668 (eServed)
