The Issue The issue for determination is whether Petitioners’ Interim Rate Request (IRR) for an increase should be granted.
Findings Of Fact AHCA is the agency of state government responsible for the implementation and administration of the Medicaid Program in the State of Florida. AHCA is authorized to audit Medicaid Cost Reports submitted by Medicaid Providers participating in the Medicaid Program. Avante at Jacksonville and Avante at St. Cloud are licensed nursing homes in Florida that participate in the Medicaid Program as institutional Medicaid Providers. On May 23, 2007, Avante at Jacksonville entered into a settlement agreement with the representative of the estate of one of its former residents, D. P. The settlement agreement provided, among other things, that Avante at Jacksonville would pay $350,000.00 as settlement for all claims. Avante at Jacksonville paid the personal representative the sum of $350,000.00. By letter dated July 16, 2007, Avante at Jacksonville requested an IRR effective August 1, 2007, pursuant to the Plan Section IV J.2., for additional costs incurred from self-insured losses as a result of paying the $350,000.00 to settle the lawsuit. Avante at Jacksonville submitted supporting documentation, including a copy of the settlement agreement, and indicated, among other things, that the costs exceeded $5,000.00 and that the increase in cost was projected at $2.77/day, exceeding one percent of the current Medicaid per diem rate. At all times pertinent hereto, the policy held by Avante at Jacksonville was a commercial general and professional liability insurance policy. The policy had $10,000.00 per occurrence and $50,627.00 general aggregate liability limits. The policy was a typical insurance policy representative of what other facilities in the nursing home industry purchased in Florida. The policy limits were typical limits in the nursing home industry in Florida. By letter dated July 18, 2007, AHCA denied the IRR on the basis that the IRR failed to satisfy the requirements of Section IV J. of the Plan, necessary and proper for granting the request. Avante at Jacksonville contested the denial and timely requested a hearing. Subsequently, Avante at Jacksonville became concerned that, perhaps, the incorrect provision of the Plan had been cited in its IRR. As a result, a second IRR was submitted for the same costs. By letter dated October 22, 2007, Avante at Jacksonville made a second request for an IRR, this time pursuant to the Plan Section IV J.3., for the same additional costs incurred from the self-insured losses as a result of paying the $350,000.00 settlement. The same supporting documentation was included. Avante at Jacksonville was of the opinion that the Plan Section IV J.3. specifically dealt with the costs of general and professional liability insurance. By letter dated October 30, 2007, AHCA denied the second request for an IRR, indicating that the first request was denied based on “all sub-sections of Section IV J of the Plan”; that the second request failed to satisfy the requirements of the Plan Section IV J.3. and all sections and sub-sections of the Plan “necessary and proper for granting [the] request.” Avante at Jacksonville contested the denial and timely requested a hearing. On October 19, 2007, Avante at St. Cloud entered a settlement agreement with the personal representative of the estate of one of its former residents, G. M. The settlement agreement provided, among other things, that Avante at St. Cloud would pay $90,000.00 as settlement for all claims. Avante at St. Cloud paid the personal representative the sum of $90,000.00. By letter dated December 10, 2007, Avante at St. Cloud requested an IRR effective November 1, 2007, pursuant to the Plan Section IV J, for additional costs incurred as a result of paying the $90,000.00 to settle the lawsuit. Avante at St. Cloud submitted supporting documentation, including a copy of the settlement agreement, and indicated, among other things, that the increase in cost was projected at $2.02/day, exceeding one percent of the current Medicaid per diem rate. At all times pertinent hereto, the policy held by Avante at St. Cloud was a commercial general and professional liability insurance policy. The policy had $10,000.00 per occurrence and $50,000.00 general aggregate liability limits. The policy was a typical insurance policy representative of what other facilities in the nursing home industry purchased in Florida. The policy limits were typical limits in the nursing home industry in Florida. By letter dated December 12, 2007, AHCA denied the IRR on the basis that the IRR failed to satisfy the requirements of “Section IV J of the Plan necessary and proper for granting [the] request.” Avante at St. Cloud contested the denial and timely requested a hearing. Insurance Policies and the Nursing Home Industry in Florida Typically, nursing homes in Florida carry low limit general and professional liability insurance policies. The premiums of the policies exceed the policy limits. For example, the premium for a policy of Avante at Jacksonville to cover the $350,000.00 settlement would have been approximately $425,000.00 and for a policy of Avante at St. Cloud to cover the $90,000.00 settlement would have been approximately $200,000.00. Also, the policies have a funded reserve feature wherein, if the reserve is depleted through the payment of a claim, the nursing home is required to recapitalize the reserve or purchase a new policy. That is, if a policy paid a settlement up to the policy limits, the nursing home would have to recapitalize the policy for the amount of the claim paid under the policy and would have to fund the loss, which is the amount in excess of the policy limits, out-of-pocket. Florida’s Medicaid Reimbursement Plan for Nursing Homes The applicable version of the Plan is Version XXXI. AHCA has incorporated the Plan in Florida Administrative Code Rule 59G-6.010. AHCA uses the Plan in conjunction with the Provider Reimbursement Manual (CMS-PUB.15-1)3 to calculate reimbursement rates of nursing homes and long-term care facilities. The calculation of reimbursement rates uses a cost- based, prospective methodology, using the prior year’s costs to establish the current period per diem rates. Inflation factors, target ceilings, and limitations are applied to reach a per patient, per day per diem rate that is specific to each nursing home. Reimbursement rates for nursing homes and long-term care facilities are typically set semi-annually, effective on January 1 and July 1 of each year. The most recent Medicaid cost report is used to calculate a facility’s reimbursement rate and consists of various components, including operating costs, the direct patient care costs, the indirect patient care costs, and property costs. The Plan allows for the immediate inclusion of costs in the per diem rate to Medicaid Providers under very limited circumstances through the IRR process. The interim rate’s purpose is to compensate for the shortfalls of a prospective reimbursement system and to allow a Medicaid Provider to increase its rate for sudden, unforeseen, dramatic costs beyond the Provider’s control that are of an on-going nature. Importantly, the interim rate change adjusts the Medicaid Provider’s individual target rate ceiling to allow those costs to flow ultimately through to the per diem paid, which increases the amount of the Provider’s overall reimbursement. In order for a cost to qualify under an interim rate request, the cost must be an allowable cost and meet the criteria of Section IV J of the Plan. The Plan provides in pertinent part: IV. Standards * * * J. The following provisions apply to interim changes in component reimbursement rates, other than through the routine semi- annual rate setting process. * * * Interim rate changes reflecting increased costs occurring as a result of patient or operating changes shall be considered only if such changes were made to comply with existing State or Federal rules, laws, or standards, and if the change in cost to the provider is at least $5000 and would cause a change of 1 percent or more in the provider’s current total per diem rate. If new State or Federal laws, rules, regulations, licensure and certification requirements, or new interpretations of existing laws, rules, regulations, or licensure and certification requirements require providers to make changes that result in increased or decreased patient care, operating, or capital costs, requests for component interim rates shall be considered for each provider based on the budget submitted by the provider. All providers’ budgets submitted shall be reviewed by the Agency [AHCA] and shall be the basis for establishing reasonable cost parameters. In cases where new State or Federal requirements are imposed that affect all providers, appropriate adjustments shall be made to the class ceilings to account for changes in costs caused by the new requirements effective as of the date of the new requirements or implementation of the new requirements, whichever is later. Interim rate adjustments shall be granted to reflect increases in the cost of general or professional liability insurance for nursing homes if the change in cost to the provider is at least $5000 and would cause change of 1 percent or more in the provider’s current total per diem. CMS-PUB.15-1 provides in pertinent part: 2160. Losses Arising From Other Than Sale of Assets 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. Where a provider chooses not to file a claim for losses covered by insurance, the costs incurred by the provider as a result of such losses may not be included in allowable costs. * * * 2160.2 Liability Losses.—Liability damages paid by the provider, either imposed by law or assumed by contract, which should reasonably have been covered by liability insurance, are not allowable. Insurance against a provider’s liability for such payments to others would include, for example, automobile liability insurance; professional liability (malpractice, negligence, etc.); owners, landlord and tenants liability; and workers’ compensation. Any settlement negotiated by the provider or award resulting from a court or jury decision of damages paid by the provider in excess of the limits of the provider’s policy, as well as the reasonable cost of any legal assistance connected with the settlement or award are includable in allowable costs, provided the provider submits evidence to the satisfaction of the intermediary that the insurance coverage carried by the provider at the time of the loss reflected the decision of prudent management. Also, the reasonable cost of insurance protection, as well as any losses incurred because of the application of the customary deductible feature of the policy, are includable in allowable costs. As to whether a cost is allowable, the authority to which AHCA would look is first to the Plan, then to CMS-PUB.15- 1, and then to generally accepted accounting principles (GAAP). As to reimbursement issues, AHCA would look to the same sources in the same order for the answer. The insurance liability limit levels maintained by Avante at Jacksonville and Avante at St. Cloud reflect sound and prudent management practices. Claims that resulted in the settlements of Avante at Jacksonville and Avante at St. Cloud, i.e., wrongful death and/or negligence, are the type of claims covered under the general and professional liability policies carried by Avante at Jacksonville and Avante at St. Cloud. Avante at Jacksonville and Avante at St. Cloud both had a general and professional liability insurance policy in full force and effect at the time the wrongful death and/or negligence claims were made that resulted in the settlement agreements. Neither Avante at Jacksonville nor Avante at St. Cloud filed a claim with their insurance carrier, even though they could have, for the liability losses incurred as a result of the settlements. Avante at Jacksonville and Avante at St. Cloud both chose not to file a claim with their respective insurance carrier for the liability losses incurred as a result of the settlements. AHCA did not look beyond the Plan in making its determination that neither Avante at Jacksonville nor Avante at St. Cloud should be granted an IRR. Wesley Hagler, AHCA’s Regulatory Analyst Supervisor, testified as an expert in Medicaid cost reimbursement. He testified that settlement agreements are a one time cost and are not considered on-going operating costs for purposes of Section IV J.2. of the Plan. Mr. Hagler’s testimony is found to be credible. Mr. Hagler testified that settlement agreements and defense costs are not considered general and professional liability insurance for purposes of Section IV J.3. of the Plan. To the contrary, Stanley William Swindling, Jr., an expert in health care accounting and Medicare and Medicaid reimbursement, testified that general and professional liability insurance costs include premiums, settlements, losses, co-insurance, deductibles, and defense costs. Mr. Swindling’s testimony is found to be more credible than Mr. Hagler’s testimony, and, therefore, a finding of fact is made that general and professional liability insurance costs include premiums, settlements, losses, co-insurance, deductibles, and defense costs.4 Neither Avante at Jacksonville nor Avante at St. Cloud submitted any documentation with their IRRs to indicate a specific law, statute, or rule, either state or federal, with which they were required to comply, resulted in an increase in costs. Neither Avante at Jacksonville nor Avante at St. Cloud experienced an increase in the premiums for the general and professional liability insurance policies. Neither Avante at Jacksonville nor Avante at St. Cloud submitted documentation with its IRRs to indicate that the premiums of its general and professional liability insurance increased. Avante at Jacksonville and Avante at St. Cloud could only meet the $5,000.00 threshold and the one percent increase in total per diem under the Plan, Sections IV J.2. or J.3. by basing its calculations on the settlement costs. Looking to the Plan in conjunction with CMS-PUB.15-1 to determine reimbursement costs, CMS-PUB.15-1 at Section 2160A provides generally that, when a provider chooses not to file a claim for losses covered by insurance, the costs incurred by the provider, as a result of such losses, are not allowable costs; however, Section 2160.2 specifically includes settlement dollars in excess of the limits of the policy as allowable costs, provided the evidence submitted by the provider to the intermediary (AHCA) shows to the satisfaction of the intermediary that the insurance coverage at the time of the loss reflected the decision of prudent management. The policy coverage for Avante at Jacksonville and Avante at St. Cloud set the policy limits for each facility at $10,000.00 for each occurrence. Applying the specific section addressing settlement negotiations, the loss covered by insurance would have been $10,000.00 for each facility and the losses in excess of the policy limits--$340,000.00 for Avante at Jacksonville and $80,000.00 for Avante at St. Cloud—would have been allowable costs.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Agency for Health Care Administration enter a final order denying the interim rate requests for an increase for Avante at Jacksonville and Avante at St. Cloud. DONE AND ENTERED this 18th day of September 2008, in Tallahassee, Leon County, Florida. ERROL H. POWELL 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 18th day of September, 2008. 1/ The corrected case-style.
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.
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 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 Whether the Department of Management Services properly denied medical insurance reimbursement to Petitioner, a covered dependent of a state employee insured by the State Employees' Preferred Provider Organization health plan, for Genotropin recombinant growth hormone prescribed for the treatment of long- term growth failure associated with idiopathic short stature.
Findings Of Fact Based on the oral and documentary evidence adduced at the final hearing, and the entire record in this proceeding, the following findings of fact are made: The state group insurance program is a package of insurance plans offered to, among others, state employees and their dependents. § 110.123(2)(k), Fla. Stat.1/ Petitioner Arturo Puerto is insured as a dependent of a state employee, and is a participant in the state's group self- insured plan, known as the State Employees' Preferred Provider Organization health plan ("PPO plan" or "state plan"). The state plan includes a state employees' prescription drug program. § 110.12315, Fla. Stat. Pursuant to Section 110.123(3)(c), Florida Statutes, the Department is responsible for contract management and day- to-day management of the state employee health insurance program. Section 110.123(5)(c), Florida Statutes, authorizes the Department to contract with an insurance carrier or professional administrator to administer the state plan. The current contract provider of the state plan's pharmacy program is CareMark Inc. ("CareMark"). However, the Department makes all final decisions concerning the existence of coverage or covered benefits under the state plan. The Department's authority in this regard may not be delegated to a contract provider. § 110.123(5), Fla. Stat. Petitioner was born on February 12, 1992. On or about February 3, 2009, Petitioner's physician prescribed Genotropin, a recombinant growth hormone ("GH")2/ approved by the United States Food and Drug Administration ("FDA") as therapy for short stature, including idiopathic short stature ("ISS"). ISS is short stature that does not have a diagnostic explanation, in an otherwise healthy child. ISS is also called "non-GH-deficient short stature." The Group Health Insurance Plan Booklet and Benefits Document, effective January 1, 2007, as modified on January 1, 2009, includes the terms and conditions of participation in the PPO plan and the benefits provided by the PPO plan. The booklet and benefits document contains a section describing the prescription drug program. Participants in the PPO plan are automatically enrolled in the prescription drug program, which features a network of retail pharmacies and a mail order program. The participant makes a co-payment for covered prescriptions. The booklet and benefits document sets forth a list of drugs that are covered, and a list of drugs that are not covered under the prescription drug program. Under the heading "Important Information about the Prescription Drug Program," the document states the following concerning specialty medications:3/ 5. Certain medications, including most biotech drugs, are only available through Caremark Specialty Pharmacy Services. Generally, these drugs are for chronic or genetic disorders including, but not limited to, multiple sclerosis, growth deficiency and rheumatoid arthritis and may require special delivery options, (i.e. temperature control). Caremark Specialty Pharmacy provides 24/7 access and can be contacted at 1-800-237-2767. * * * 12. As part of the Caremark Specialty Services, Caremark will administer the Advanced Guideline Management program for the State Employees' PPO Plan. Advanced Guideline Management is intended to optimize outcomes and promote the safe, clinically appropriate and cost-effective use of specialty medications supported by evidence based medical guidelines. Failure to meet the criteria for Advanced Guideline Management during the respective use review will result in denial of medication coverage for the Plan participant and discontinuation of medication coverage for the Plan participant in the case of concurrent use review. The Advanced Guideline Management Program is a process by which authorization for a specialty medication is obtained based on the application of currently acceptable medical guidelines and consensus statements for appropriate use of the medication in a specific disease state. Therapies reviewed under the Specialty Guideline Management Program include, but are not limited to, the following: multiple sclerosis, oncology, allergic asthma, human growth hormone, hepatitis C, psoriasis, rheumatoid arthritis, and respiratory syncytial virus. Additional therapies may be added from time to time.... CareMark's current guideline covering Genotropin and similar GH medications is set forth in a 2008 CareMark document titled, "Specialty Pharmacy Program for Growth Hormone and Endocrine-Metabolic Disorders." The document contains flow charts describing the criteria employed by CareMark to determine coverage for specific conditions. Among the criteria set forth in the flow chart for prescribing GH to children with ISS is the following question: "Does pre-treatment growth velocity and height meet the AACE (American Association of Clinical Endocrinologists) criteria for short stature?" (See Appendix N). If the answer to the question is "no," then the criteria direct that coverage for the prescription of GH should be denied. Appendix N sets forth the following "AACE criteria for short stature": < -2.25 standard deviations below the mean for age and sex based on patient's growth rate, adult height prediction of less than 5'3" for boys and less than 4'11" for girls. Appendix N is based on the AACE's "Medical Guidelines for Clinical Practice for Growth Hormone Use in Adults and Children-- 2003 Update" and a December 2003 AACE Position Statement on growth hormone usage in short children.4/ The CareMark document is not explicit as to whether the quoted elements of the AACE criteria for short stature are to be considered in the disjunctive. However, the AACE Position Statement expressly states that GH use is indicated for ISS only for children whose height is "< - 2.25 standard deviations below the mean and have an adult height prediction of less than 5'3" for boys and less than 4'11" for girls." (Emphasis added.) The height standard deviation criterion used by CareMark to determine the appropriateness of Genotropin therapy as a treatment for ISS was shown to be consistent with FDA criteria and the specifications established by Pfizer, the manufacturer of Genotropin. The medical records submitted on behalf of Petitioner show that at the time Genotropin therapy was prescribed in February 2009, Petitioner's height was 162.5 cm (5'4"). This was 1.66 standard deviations below the mean for his age and sex. Untreated, his predicted final height was 164 cm (5'4 1/2"). At the time Genotropin therapy was prescribed, Petitioner did not meet the height standard deviation requirement. His height standard deviation was 1.66 standard deviations below the mean. The deviation required by the CareMark criteria was greater than 2.25 standard deviations below the mean. At the time Genotropin therapy was prescribed, Petitioner did not meet the adult height prediction requirement. Petitioner was already 5'4" tall and was projected to reach a height of 5'4 1/2" without treatment. The CareMark criteria required a projected adult height without treatment of 5'3" or below. The PPO plan denied payment for the Genotropin therapy because Petitioner did not meet criteria established by CareMark through its Specialty Pharmacy Program guidelines. The booklet and benefits document makes no provision for exceptions to strict conformity to the CareMark criteria. At the hearing, Petitioner's representative acknowledged that Petitioner does not meet the criteria for Genotropin therapy, but requested that the Department order such coverage as an exception to the criteria.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law set forth herein, it is RECOMMENDED: That the Department of Management Services, Division of State Group Insurance enter a final order denying coverage for Petitioner's prescription for Genotropin therapy. DONE AND ENTERED this 10th day of March, 2010, 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 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 10th day of March, 2010.
The Issue Whether the charges contained in the Administrative Complaint, which is the subject of Case Number 01-2295, reflect statements of agency policy which should have been adopted as rules pursuant to Chapter 120, Florida Statutes.
Findings Of Fact The Parties United is a foreign insurer, domiciled in the State of Wisconsin holding a certificate of authority from the Department to transact the business of insurance in this state. It is a wholly-owned subsidiary of American Medical Securities Group, Inc. The Department, through its agency head, the Treasurer and Insurance Commissioner, has regulatory jurisdiction over United in connection with certain matters set forth in the Complaint. The regulatory scheme for out-of-state health insurance companies Health insurance companies operating pursuant to in-state regulatory schemes are subject to oversight regulation of the corporate entity including financial solvency and market conduct. Rates are required to be filed and approved prior to being used in the state. The review process involves a review of the rates to determine if they are reasonable in relation to the benefits provided. In regard to this, the Department has rules which it has adopted pursuant to Chapter 120, Florida Statutes, which it uses to determine the standards and formulae for making that determination. Certain out-of-state health insurers, such as United, are not subject to such stringent regulation. No review of premium rates is conducted by the Department in the case of these insurers, but it would be incorrect to state that they are not subject to regulation by the Department at all. Approximately 40 percent of the health insurance market in Florida is written through out-of-state group arrangements that do not provide policyholders consumer protections afforded to policyholders holding in-state policies regulated by the Department. United is required by Florida law to provide certain types of coverage. United must also ensure that certificates of coverage provided to residents of Florida contain the following language: The benefits of the policy providing your coverage are governed primarily by the law of a state other than Florida. Indent Background At all times pertinent, American Medical Security, Inc. (AMS), was a Florida-licensed administrator authorized to market and administer United's out-of-state group health insurance plans in Florida. AMS, like United, is a wholly-owned subsidiary of American Medical Securities Group, Inc. In May 1993, United, through AMS, filed for approval with the Department pursuant to Section 627.5515(2), Florida Statutes (1993), as an out-of-state group health insurer who would provide policies to be offered through an Alabama entity called the Prescription For Good Health Trust, which was formed primarily for the purpose of providing group insurance. The Department approved this filing. On March 2, 1995, the Department participated by conference call in a Regulatory Task Force of the National Association of Insurance Commissioners. The mission of the task force was to attempt to address a number of problems facing the insurance market. One of the problems discussed was rate protection for consumers when faced with "tier rating" or "tier blocking." The two terms are synonymous and mean, as to group health insurance, reclassifying insureds subsequent to having been initially placed in a class. This practice will be discussed in more detail below. In 1996, United made a filing for the Prescription For Good Health Trust which proposed tier rating. Sometime during 1996, after the Department objected to the filing, United withdrew it. The Department had never seen such a filing previously. United is the only health insurer to assert before the Department that reclassification by movement between classes would be permissible under the Florida Insurance Code. Section 627.6515(1), Florida Statutes, provides that a group health insurance policy issued or delivered outside this state under which a resident of Florida is provided coverage, shall comply with the provisions of Part VII, of Chapter 627, Florida Statutes, in the same manner as health policies issued within the state. Part VII of Chapter 627, Florida Statutes, provides for a comprehensive regulatory scheme for group health insurance. Section 627.6515(2), Florida Statutes, however, sets forth a number of exemptions. Section 627.6515(2), Florida Statutes, provides an exemption for an insurer like United, which provides health insurance through an association formed for a purpose other than that of offering insurance, which provides the language referred to in paragraph 5, supra, on the face of the certificate, and which offers the bundle of coverages provided in Subsection (c). This exemption applied to the Prescription For Good Health Trust. The Department concedes that it has no authority to set premium rates for out-of-state insurers like United. In November 1996, United through AMS, filed with the Department, pursuant to Section 627.6515(2), Florida Statutes, a request for approval of an out-of-state group health insurance policy termed the "MedOne Choice" plan. This plan was to be offered through an Ohio association called the Taxpayers' Network, Inc. (TNI). The association was formed primarily for purposes other than providing insurance. In January, 1997, the filing was accepted by the Department as meeting the requirements of Section 627.6515(2), Florida Statutes. Chapter 96-223, Laws of Florida, created Section 627.6425, Florida Statutes, effective May 25, 1996. When created, the section only addressed the renewability of individual coverage. Chapter 97-179, Laws of Florida, substantially amended Section 627.6425, Florida Statutes, effective May 30, 1997. Subsequent to the amendment, the section addressed certificates of coverage offered to individuals in the state as part of a group policy. This statute, along with Sections 627.6571 and 627.6487, Florida Statutes, implemented the federal Health Insurance Portability and Accountability Act (HIPAA). The basic theory of the HIPAA legislation is that an insurance company cannot simply cancel a health insurance policy without providing other options. On or about September 25, 1998, United, through AMS, notified all Prescription For Good Health Trust certificate holders that the policy forms through which their coverage had been provided were being discontinued, effective as of each certificate holder's 1999 renewal date. Upon discontinuance of the Prescription For Good Health Trust Plans, the only United health insurance plans available in Florida were the MedOne Choice plans offered through TNI. Membership in TNI was available to anyone upon submitting an application form and paying the membership fee. Membership in TNI was a prerequisite to continuance of a persons' health insurance coverage under United's MedOne Choice plan. United guaranteed each certificate holder, upon joining TNI, that upon request, they would be issued coverage under the Classic Benefit Plan (one of the TNI MedOne Choice plans) without regard to their health status. However, there was no guarantee that premiums would not rise. Certificate holders were also advised that if they desired coverage under a MedOne Choice plan other than the guaranteed issue Classic Benefit plan, they could apply for any of the other TNI plans. Only if the applicant met the underwriting guidelines for the plan for which they applied, would they be issued coverage under another MedOne Choice plan. Between October 1998 and early January 1999, United responded to questions and concerns raised by the Department about the decision to discontinue the Prescription For Good Health Trust plan, and whether the plan of discontinuance was in compliance with Section 627.6425, Florida Statutes. Specifically, discussions were had concerning the movement of insureds from the class in which they were originally assigned to another class at the time of renewal. United entered an agreement with the Department on January 14, 1999, whereby United would offer to certificate holders an additional guaranteed issue TNI plan and would cap the rate for the guaranteed issue plans at no more than twice the premium then currently being paid for the discontinued Prescription For Good Health Trust plan. In accordance with this agreement, United notified certificate holders of the additional guaranteed issue option available to them. Later in 1999, United discontinued the trust plan in accordance with their agreement with the Department. During the process of discontinuance, no certificate holder requested conversion coverage under Section 627.6675, Florida Statutes. Section 627.6675, Florida Statutes, provides that an insured may assert his or her right to a "converted policy," which provides for certain health insurance continuation rights. The Department determined that United's rate for the conversion policy, pursuant to the agreement, was within 200 percent of the standard risk rate and that the notice of the conversion privilege was contained in the certificate of coverage issued to Florida residents. Thus, the Department concluded that United was in compliance with the agreement of January 14, 1999. On May 19, 1999, a Department letter informed a consumer that the discontinuance of her coverage by United did not mean she was being discriminated against because the policy had been terminated for all members. The letter further recited that the Department did not have the ability to regulate United because it was not domiciled in Florida and her insurance was being provided to a group, referring to TNI, that was not registered in Florida. On July 27, 1999, a Department letter informed a consumer that United had an obligation to offer a replacement policy but that United had the right to underwrite the policy and charge additional premium. This statement also referred to TNI. Section 627.6425(1), Florida Statutes, provides that "except as otherwise provided in this section, an insurer that provides individual health insurance coverage to an individual shall renew or continue in force such coverage at the option of the individual." For the purpose of the aforementioned Section, the term "individual health insurance" means health insurance coverage, as described in Section 627.6561(5)(a)2, Florida Statutes, offered to an individual in the state, "including certificates of coverage offered to individuals in the state as part of a group policy issued to an association outside this state. " As noted earlier, Section 627.6425, Florida Statutes, is one of the statutes enacted in Florida which implemented HIPAA. HIPAA provides for continuation of health insurance of an insureds health policy but does not limit the premiums which an insurer can charge for coverage. Although Section 627.6425, Florida Statutes, does not have the words "guaranteed renewable" contained within the statute, the gist of the statute is that if a person has a health policy, the person has the right to continued coverage. The Department contends that the statute also means that there can be no reclassification or movement between classes at the time of renewal. On March 30, 2000, the Department notified United that it believed the discontinuance of Prescription For Good Health Trust plan, in accordance with the January 1999 agreement, may have violated Section 627.6425, Florida Statutes. A Department publication dated January 4, 2001, entitled, "The Florida Health Insurance Market, Issues and Possible Market Reform Measures," noted that there are "an increasing number of carriers attempting to establish HIPAA eligible individuals as a separate rating class with premium charges ranging from 300 to 500 percent of standard rates. While the Department has found such a rating practice to be in violation of the Florida Insurance Code, many carriers have continued to protest this interpretation. Carriers contend the surcharge practice is both actuarially sound and interpreted as a HIPAA permissible practice by other states." In the 2001 legislative session, the Department sought additional regulatory authority concerning out-of-state group insurers, such as United, along with numerous other changes to the Florida Insurance Code which are unrelated to the issues addressed in this Order. The Florida Legislature failed to approve the requested legislation. Tier rating When a group health policy is underwritten, the members of the group may be divided into classes. The classes are based on risk, which is a function of the probability of claims and the cost of claims. Classes may be denominated, for example, as preferred, manual, and substandard. Very healthy persons are put in the preferred class and pay lower premiums relative to other classes. Average persons are put in the manual class because the likelihood and cost of claims may be average. Persons who for actuarial reasons are determined to have an above-average likelihood of claims and whose claims are apt to be costly, are placed in the substandard class. It, perhaps, goes without saying that the individuals in the substandard class must pay higher premiums for the same coverage as others in the group. If the group health policy is guaranteed renewable, certificate holders may continue their coverage. However, premiums within a class can be increased. It is general industry practice to increase the premiums by class when the time for renewal occurs, if the loss experience is such that there is a requirement to increase premiums. As earlier noted, the Department asserts that only by raising premiums for an entire class may premiums be raised. The Department insists that this requirement is part of the definition of "guaranteed renewable." It became United's practice to move insureds between classes. Therefore, for instance, if a person in the group who had been a member of the preferred class experienced the need for costly medical services, then that person might be moved to the manual or substandard class. This would inevitably result in that person paying an increased premium. On the other hand, a person in the substandard class, who was subsequently determined to be a good risk, might be moved to the preferred or manual class and experience reduced premiums as a result. When a substandard class becomes populated with persons who cause the payment of costly claims, premiums increase within that class. Premiums may increase to the point where persons egress the plan, which leaves the class with fewer and sicker members. Eventually, under such a plan, there will be no members, because the premiums will inflate to the point that the benefits, in relation to the amount of the premium, will render the plan uneconomical. This sequence of events is often referred to as the health insurance "death spiral." One of the asserted evils which the Department seeks to combat in the Complaint is the "death spiral." HIPAA eligibles In 1996, when HIPAA became law and Florida enacted laws to implement it, a practice sometimes referred to as "rating up" occurred among some carriers in the industry. As noted earlier, HIPAA and the state statutes implementing it, guarantee that an individual, who through no fault of his own, loses his or her group health insurance coverage has the opportunity to obtain substitute health insurance. A person in this category is referred to as HIPAA eligible. Companies providing insurance under these laws are cognizant of the fact that persons in good health generally decline to purchase this type of insurance but that persons who are in bad health, and who will, therefore, likely have costly claims, will purchase it if they can afford it. This results in a desire on the part of insurers, to charge higher premiums for HIPAA eligible persons than they might charge persons in a comparable, non-HIPAA plan. It is a permissible underwriting practice to take into consideration age, health, and a myriad of other actuarial considerations when developing premium rates for HIPAA eligibles. If an insurer factors in the knowledge that unhealthy persons are more likely than healthy persons to obtain a policy based on HIPAA and charge higher premiums as a result, then "rating up" occurs. The Department contends in its Complaint that "rating up" is discriminatory and, therefore, forbidden by the Unfair Insurance Trade Practices Act (UITPA), Section 626.951, et seq., Florida Statutes. United allegedly arrives at rates for HIPAA eligibles solely based on the fact that the individuals are HIPAA eligible which if true, would be "rating up." Immediately prior to April 30, 1998, the Department received a memorandum from the federal Health Care Financing Administration addressing three general problems with insurance practices regarding HIPAA eligibles. One of the three problems addressed in the memorandum was the practice of "rating up." In response, the Department issued Informational Memorandum 98-103M on April 30, 1998, addressing the three problems. The Department announced that it had concerns similar to that of the Health Care Financing Administration, and would address them in administrative rules implementing HIPAA and Chapter 97-179, Laws of Florida. However, no rules addressing these concerns have been adopted. Insurance carriers disagree with the Department as to whether "rating up" is unfairly discriminatory and therefore a violation of the UITPA. The Department is addressing these differences on a case-by-case basis in the course of market conduct examinations. The evidence adduced at the hearing did not elucidate exactly what "addressing these differences on a case-by-case basis in the course of market conduct examinations" means. Count Three in the Complaint represents the first time an administrative action has been brought against an insurer addressing this practice. The definition of guaranteed renewable Chapter 4-149, Florida Administrative Code, is entitled "Filing of Forms and Rates for Life and Health Insurance." Rule 4-149.006(4)(o)3, Florida Administrative Code, provides for a definition of "guaranteed renewable." However, Chapter 4-149, Florida Administrative Code, does not address out-of-state group health insurers, such as United, because the Department has no authority to require the filing of forms and rates in the case of out-of-state health insurers like United. A life and health insurance treatise written by Black and Skipper states that the definitions of the categories of renewable health insurance policies are not uniform among the states. It is the Department's position that Section 627.6425, Florida Statutes, applies to out-of-state trusts, such as United's Prescription For Good Health Trust, even though the word "trust" is not used in the statute. It is apparent that if there is no limit on the amount of premium a health insurer can charge at the time of renewal, a guarantee of renewal can be meaningless. This fact is ameliorated by rate-setting in the case of highly regulated health insurers such as domestic insurers. In the context of this case, it is not the renewability of a policy that is the gist of the problem. Rather, it is whether rates can be increased on persons through the movement of insureds from one class to another. The allegations of the Complaint In order to determine which statements are alleged to be unadopted rules, it is necessary to refer to Counts Two through Seven of the Complaint. These counts will be summarized, in seriatim. Count Two alleges that persons who continued their participation in TNI were unlawfully and unfairly discriminated against because some members were reclassified based on their health status present at that time (1999), rather than being retained in the class in which they resided when the policy was initially issued. The Petition alleges, inter alia, that this practice violated Section 626.9541(1)(g)2., Florida Statutes, which is a section in the UITPA. This statement is alleged in the Petition to be a statement of general applicability. Count Three alleges that all of those individuals formerly covered through the Prescription For Good Health Trust who were at the time of their discontinuance HIPAA eligible, were, arbitrarily and without regard to health status, assigned a premium rate of either three or five times the base rate for TNI as a whole. Count Three alleges that this assignment unfairly discriminated against the HIPAA eligible individuals who were of the same actuarially supportable class and essentially the same hazard. Count Three further alleges, inter alia, that this violated Section 626.9541(1)(g)2., Florida Statutes. This statement is alleged in the Petition to be a statement of general applicability. Count Four alleges that the enactment of Section 627.6425, Florida Statutes, in 1996, as amended in 1997, statutorily determined that the Prescription For Good Health Trust plan was "guaranteed renewable" as that term is used and understood in the insurance industry. It further alleged that the term "guaranteed renewable” means that once an insurer classifies an individual as a member of an actuarially supportable class for rate and premium applicable to the specified coverage, that individual may not thereafter be charged a premium which is different from any other member of the same class and cannot be moved to another class. The complaint states that United unlawfully moved insureds from one class to another. Count Four additionally alleged that when United discontinued the Prescription For Good Health Trust, the prerequisite for individuals to obtain renewed health insurance coverage was reclassification of some of those individuals to different actuarially supportable classes based on their health status then pertinent to those individuals. It was further alleged that higher premiums were charged to approximately 70 percent of those who renewed or continued, and that premium increases of 200 percent to 300 percent were experienced. Count Four asserted that Section 627.6425(3), Florida Statutes, prohibits such reclassification. Count Four also alleges, inter alia, that this violated Section 626.9541(1)(g)2., Florida Statutes, because such reclassification was discriminatory. This statement is alleged in the Petition to be a statement of general applicability. Count Five alleges that on the one year anniversary of renewal with TNI, United unlawfully reclassified additional individuals which resulted in a premium increases of up to 60 percent. Count Five alleges, inter alia, that this violated Section 626.9541(1)(g)2., Florida Statutes, because this action was discriminatory. This statement is alleged in the Petition to be a statement of general applicability. Count Six alleges that within the tier blocks described in Count Two, United unlawfully established numerous sub- classifications based on health related factors pertinent to each individual within that class. It is alleged in the Complaint that these sub-classifications resulted in individuals within the same class being charged a different premium than are other members of the class. Count Six alleges, inter alia, that this violated Section 626.9541(1)(g)2., Florida Statutes, because this action was discriminatory. This statement is alleged in the Petition to be a statement of general applicability. Count Seven alleges that United used a point debit system where an arithmetic number of points are assigned to a corresponding health hazard. The higher the cumulative debit score, the higher the premium. United will decline to insure at all if the cumulative debit score gets sufficiently high. Count Seven alleges that the assignment of points with no criteria for decision-making results in arbitrary and discriminatory point scores. Count Seven alleges, inter alia, that this violated Section 626.9541(1)(g)2., Florida Statutes. This statement is alleged in the Petition to be a statement of general applicability. In summary, the three statements alleged to be rules are: Practicing tier rating is discriminatory and violates the UITPA. Placing HIPAA-eligible individuals in a premium classification solely on the basis of their HIPAA eligible status is discriminatory and violates the UITPA. The term "guaranteed renewable" prohibits the classification of individuals in a health insurance group at a time other than at the inception of coverage.
Findings Of Fact Respondent, Mark Alan Gable, is currently eligible for licensure and is licensed in Florida as a life and health insurance agent and was so licensed at all times relevant to these proceedings. Respondent at all times relevant to these proceedings was licensed in this state to solicit health insurance on behalf of National States Insurance Company (herein National). On or about September 28, 1988, Respondent visited the home of Mabel Bowmaster of Sarasota, Florida, for the purpose of soliciting health insurance. At the time, Ms. Bowmaster was insured under the provisions of a protective life medicare supplement insurance policy. Ms. Bowmaster was interested in purchasing a policy that offered custodial nursing care benefits as her protective life policy did not offer such coverage. Respondent was not a stranger to Ms. Bowmaster as he had sold her a medicare supplement policy in 1987 and had processed claims for Ms. Bowmaster during 1987, although she did not remember him. Although Ms. Bowmaster was interested in purchasing custodial care, when Respondent explained to her the cost of the coverage versus the benefits that she could receive, she was convinced that the premiums for a custodial care policy was too expensive and she declined to purchase the coverage. In fact, Respondent tendered a certification to Ms. Bowmaster which acknowledged that she had been explained the benefits, that she understood them and there is, in that medicare supplement policy, a specific exclusion of custodial care. (Respondent's Exhibit 18 and 3.) During August 1989, Ms. Bowmaster was visited by another insurance agent, a Chris Morrison, who was also soliciting insurance. At agent Morrison's urging, Ms. Bowmaster cancelled the medicare supplement policy that Respondent had sold her after he showed her a copy of a St. Petersburg Times article which was critical of Respondent and after Morrison suggested that Respondent was in trouble with the Petitioner. When Ms. Bowmaster cancelled her insurance policy that she purchased from Respondent, she wrote a letter to National States Insurance Company asking them not to honor the bank draft authorization that she had signed for the year 1989. Notwithstanding the letter Ms. Bowmaster sent to National, the bank draft was honored. As a result, Ms. Bowmaster filed an insurance consumer service complaint with Petitioner stating the reason for cancelling the policy was that she had duplicative coverage as a result of her purchase of the same coverage from Mr. Morrison and she therefore requested a refund of the National policy in light of her request that the bank draft be terminated. In none of Bowmaster's correspondence to National during August and November 1989, was there any reference of any misrepresentation of coverage by Respondent for custodial care coverage. On or about February 11, 1988, Respondent visited the home of Alice V. Bowling of Bradenton for the purpose of soliciting health insurance. Ms. Bowling is an 82 year-old widow whose primary source of income is social security. At the time, Ms. Bowling was insured under the provisions of a Prudential Insurance AARP (American's Association of Retired Persons) medicare supplement insurance policy and an Old Southern medicare supplement insurance policy. Respondent discussed with Ms. Bowling her existing insurance coverages. Ms. Bowling was interested in obtaining an insurance policy that would pay benefits for hearing aids, eyeglasses and dental care. Neither of her existing policies offered such benefits. Respondent's purpose in visiting Ms. Bowling during February of 1988 was to follow-up on a lapse of a National States Medical/Surgical policy. During the interview with Ms. Bowling, she informed Respondent that she had in effect a policy with AARP and the National policy that was soon to lapse. She did not tell him that she had a policy with Old Southern. While Ms. Bowling testified that she showed Respondent a copy of the Old Southern policy, the evidence adduced at hearing indicates otherwise. It was noted that when Respondent purchased the National States policy during 1987, she did not tell that agent about the existence of the Old Southern policy. (Respondent's Exhibit 7.) Additionally, when Ms. Bowling signed the notice to applicant regarding replacement of accident and sickness insurance form, she indicated that she was replacing a Prudential policy. The application for insurance also indicates her replacement for the Prudential policy. After Respondent reviewed with Ms. Bowling her AARP policy and the National States policy, he advised her that he could process some claims for her under the lapsed National States policy. As a result, Respondent submitted claims for Ms. Bowling and she was reimbursed for medical bills for which she had not previously sought payment. (Respondent's Composite Exhibit 8.) Respondent and Ms. Bowling discussed eyeglass and hearing aid coverage to determine if she should purchase it. However, based on Ms. Bowling's desire to hold the cost of insurance down, and after Respondent explained to her that under the eyeglass-hearing aid rider, it would cost her approximately $340 in premiums to get $500 in coverage, she declined such coverage. By way of example, Respondent explained that the premium for the rider was $125, deductible of $75 pays 80% with a maximum coverage of $500; so on a $700 bill, it would pay $500, indicating that the insurance payment of $340 was for $500 worth of benefits. Evidence of Ms. Bowling's rejection was noted in the outline of coverage which specifically excludes eye glasses and hearing aids. (Respondent's Exhibit 10.) Ms. Bowling acknowledged that the benefits of the policy was clearly explained to her. After Respondent's initial visit, Ms. Bowling decided to cancel the policy. Upon receiving notice of cancellation, Respondent called upon Ms. Bowling to determine her reason for cancelling the policy. Respondent again explained the coverage to Ms. Bowling in the presence of her son. Ms. Bowling acknowledges that Respondent explained to her at the second visit that eye glasses, dentures and hearing aids were not covered by the policy, that the rider would be required to provide that coverage; and she then again elected not to purchase the rider coverage but kept the policy in force. Evidence of this continuation of coverage is in Ms. Bowling's handwriting which reflects "After talking to my agent Mark Gable, I have decided to keep the UMS 1060437 in force." Thereafter, Ms. Bowling again decided to cancel the policy and in correspondence with National States, she related that after reviewing the policy with others, she concluded that she could not afford the coverage. Ms. Bowling, at the time, made no complaint about Respondent having misrepresented the existence of eyeglass or similar coverage, but simply requested a refund. After the company failed to forward a refund to Ms. Bowling, she filed a complaint with Petitioner asserting that she was entitled to a refund, but she made no reference to any claim of misrepresentation of coverage. At hearing, Ms. Bowling acknowledged that she cancelled the policy because the coverage was too expensive. Ms. Bowling made no mention of any misrepresentation by Respondent for coverage for eye glasses, dentures or hearing aids until the interviews by Petitioner's investigators. On or about July 19, 1990, Respondent visited the home of Fred V. Lively of Englewood for the purpose of discussing health insurance. At the time, Mr. Lively had recently purchased an American Traveler's Long-Term care insurance policy effective as of July 13, 1990, and offered custodial nursing care insurance benefits. It is alleged that Respondent sold a nursing home policy to Mr. Lively representing that the policy provided coverage for custodial care and he failed to advise Mr. Lively that the policy called for a three (3) day confinement in a hospital as a condition precedent to the payment of benefits. The policy that Respondent sold to Mr. Lively did not require such a waiting period as it included a rider eliminating the waiting period. This fact was confirmed by William J. O'Connor, the manager of policy services for National States. During July of 1990, Mr. Lively was running a lapse notice on the National States policy previously sold to him by Steve Daggett, a former employee of National States. Initially, Respondent showed the Livelys a Penn States policy and a Transport Life policy for nursing home care, both of which included custodial care. The premiums on both policies approached $5,000 a year and the Livelys determined that they were too expensive. As a result, they were rejected. Thereafter, Respondent explained the National States nursing care policy which provided skilled and intermediate care and the Livelys elected to purchase the nursing care policy. Prior to the Livelys purchase, Respondent reviewed the coverage provided and an outline of coverage was left with the Livelys as well as an outline prepared by Respondent. In addition, based on the pendency of administrative charges in this matter, Respondent had the Livelys acknowledge, in their own handwriting, that "all of the benefits of this outline has been explained to me in full and a signed copy of this outline has been left with me, by my agent, Agent is Mark Gable," followed by the signature of Fred Lively. (Respondent's Exhibits 15 and 16.) Additionally, the Livelys signed two further certifications and a customer survey report prepared by Respondent. This was done in an attempt by Respondent to avert claims generated by other agents by having new clients under certification to indicate that the coverage was explained. Shortly after the Respondent sold the insurance to the Livelys, Steve Daggett, the agent who had sold the Livelys their American Traveler's policy, arrived at the Livelys' home and convinced Mr. Lively that his policy was to have included custodial care; cited that Respondent had failed to reveal that and he (Daggett) related that Respondent had failed to reveal that he (Lively) suffered from diabetes for the purpose of suggesting that Respondent had "clean sheeted" the application which would thereafter result in a denial of coverage if a claim was made. A review of Respondent's application filed with the Lively deposition showed that Respondent revealed the existence of Mr. Lively's diabetes. Sometimes after August 21, 1990, Respondent again visited the Livelys and requested that they reconsider their decision to cancel the policy. Following Respondent's review of the policy and the coverages, Mr. Lively signed a letter which was submitted to National States requesting that the policy be kept in force. National States received the letter and the cancellation of the Lively policies was rescinded. On or about October 6, 1988, Respondent visited the home of Martha Roche for the purpose of soliciting health insurance. As a result of their discussion, Ms. Roche purchased two National States insurance policies. Although Ms. Roche testified that Respondent represented himself as an insurance adjuster for the purposes of gaining entry into her home, the testimony does not comport with the documentary evidence or her practice with respect to letting insurance agents into her home. At times, Ms. Roche has had as many as three insurance agents in her home at one time. Respondent was following up on a lapse notice with respect to prior National States policies which Ms. Roche had purchased from Respondent. At her front door, Respondent showed Ms. Roche his insurance license and she granted him entrance. On November 3, 1988, or less than thirty (30) days after the policy was originally written by Respondent, Respondent returned to Ms. Roche's home after receiving a notice of cancellation with respect to the policy in question. After discussing the matter with her, she decided to save the policy and wrote a handwritten note asking that the coverage be continued. During the November 3, 1988 meeting with Ms. Roche, which was well after the bank draft authorization had been submitted to National States, Ms. Roche indicated that she did not wish to stay on the draft plan in the following year. Respondent explained to Ms. Roche that she should write a letter to National States and to the bank to terminate the bank plan. In addition to this advice, Respondent was aware that National States would advise Ms. Roche of her right to terminate the bank plan and the procedure for termination as the bank plan is a contract between the insured and the bank. Respondent was without authority to terminate the bank plan that Ms. Roche authorized. Ms. Roche requested cancellation of the bank draft as Respondent instructed her, although the bank continued payment until she filed a complaint with Petitioner, complaining that National States insurance had failed to cancel her bank draft plan. Ms. Roche fails to allege in her complaint to Petitioner or otherwise suggest that Respondent used any false pretense to gain entry to her home. Ms. Roche's complaint was that National States did not refund her money after she wrote requesting a refund. Subsequently, a refund was given to Ms. Roche.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that: Petitioner enter a Final Order dismissing the Second Amended Administrative Complaint filed herein in its entirety. DONE and ENTERED this 28th day of February, 1991, in Tallahassee, Leon County, Florida. JAMES E. BRADWELL 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 February, 1991. COPIES FURNISHED: James A. Bossart, Esquire Division of Legal Services 412 Larson Building Tallahassee, Florida 32399-0300 Martin Errol Rice, Esquire 696 First Avenue North Post Office Box 205 St. Petersburg, Florida 33731 Honorable Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Bill O'Neil, Esquire General Counsel Department of Insurance The Capitol, Plaza Level Tallahassee, Florida 32399-0300
