The Issue The issue in this case is whether Petitioner's application for a certificate of need was complete.
Findings Of Fact Petitioner and Intervenor each filed applications in the same batching cycle for certificates of need to establish Medicaid-certified home health agencies in Collier County, District 8. By letter dated October 6, 1994, Respondent advised Petitioner that its application omitted certain elements. The letter requests, among other things, an "audited financial statement," including a balance sheet and profit-and-loss statement for the previous two years' operation. Petitioner's application contained an unaudited financial statement for the part of the year that it had been operation. Incorporated in 1994, Petitioner had been receiving patients only since September or October 1994. Petitioner's agent contacted a representative of Respondent and discussed the omissions letter. A misunderstanding ensued in which Petitioner's agent thought that Respondent's representative said that Petitioner would not be required to submit an audited financial statement because Petitioner had not been in operation for a full fiscal year. In fact, Respondent's representative did not say that. Respondent's policy is to permit applicants to file audited financial statements for a partial year, if that is how long they have been in business. For example, Intervenor included with its application an audited financial statement covering the six-week period that it had been in existence. In this case, it would have been possible for Petitioner to obtain an audited financial statement for a period of time including at least its first month of operation.
Recommendation It is hereby RECOMMENDED that the Agency for Health Care Administration enter a final order dismissing Petitioner's challenge to the administrative withdrawal of the subject application for a certificate of need. ENTERED on April 24, 1995, in Tallahassee, Florida. ROBERT E. MEALE Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings on April 24, 1995. APPENDIX Rulings on Petitioner's Proposed Findings 1-6: rejected as subordinate. 7-8: rejected as unsupported by the appropriate weight of the evidence. 9: adopted or adopted in substance. 10-11: rejected as not finding of fact. 12-14: rejected as recitation of evidence. 15: rejected as unsupported by the appropriate weight of the evidence. Rulings on Proposed Findings of Respondent and Intervenor All are adopted or adopted in substance. COPIES FURNISHED: Harold D. Lewis, General Counsel Agency for Health Care Administration The Atrium, Suite 301 325 John Knox Road Tallahassee, FL 32303 Sam Power, Agency Clerk Agency for Health Care Administration The Atrium, Suite 301 325 John Knox Road Tallahassee, FL 32303 Attorney Robert E. Senton P.O. Box 963 Tallahassee, FL 32302 Richard A. Patterson Assistant General Counsel Agency for Health Care Administration 325 John Knox Road Suite 301--The Atrium Tallahassee, FL 32303 Attorney Alfred W. Clark 117 South Gadsden Street Suite 201 Tallahassee, FL 32301
The Issue Whether the Respondent committed the violations alleged in the Administrative Complaint dated February 5, 1999, and, if so, what penalty should be imposed. The Respondent maintains that the instant action is barred by laches and violates Section 455.225, Florida Statutes.
Findings Of Fact Petitioner is the state agency charged with the responsibility of regulating the practice of certified public accountants licensed within the state. At all times material to the allegations of this case, the Respondent, Robert Jarkow, has been licensed in Florida as a certified public accountant, license number AC0010963. On or about December 1996, the Respondent orally agreed to provide accounting services for an individual named Kasman who was doing business as Traditions Workshop, Inc. (Traditions). Traditions manufactured uniforms and listed the federal government among its clients. Revenues to the company from the sale of uniforms were presumably posted in accordance with written contracts. Although the Respondent participated in the monthly completion of financial records for the company, the exact description of his responsibilities for the company and the individual are not known. It is undisputed that Ms. Kasman asked the Respondent to provide a financial statement for the company as part of an effort to secure a line of credit from a bank in New York. It is also undisputed that Ms. Kasman refused to pay for the statement. According to the Respondent, based upon that refusal, he declined to prepare the instrument. Nevertheless, a document entitled "Financial Statements" was generated with a notation "MANAGEMENT USE ONLY-NOT FOR DISTRIBUTION." The Respondent maintains that the document was not prepared as a financial report and that if generated using his data disk it was done without any intention on his part for the product being used to secure a line of credit. The document did not comply with provisions of accounting practice. The Respondent admitted that when his relationship with the party deteriorated, and payment for services was not rendered, he did not release information to a succeeding accountant. Ms. Kasman needed the information, depreciation schedules, in order to accurately complete tax records for Traditions. The Respondent attempted to locate Ms. Kasman and her bookkeeper for hearing but was unable to do so. Ms. Kasman filed a complaint with the Petitioner against the Respondent that was not investigated until several months after it was filed. The Respondent obtained a civil judgment against Traditions for unpaid accounting fees. The Administrative Complaint filed in this case was submitted over a year after the consumer complaint. Neither party presented testimony from the complainant, her bookkeeper, or her succeeding accountant.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Business and Professional Regulation enter a final order finding the Respondent violated Rule 61H1-23.002, Florida Administrative Code, as set forth in Count II of the Administrative Code; imposing an administrative fine in the amount of $1000; and placing the Respondent on probation for one year subject to terms as may be specified by the Board of Accountancy. DONE AND ENTERED this 4th day of December, 2001, in Tallahassee, Leon County, Florida. ___________________________________ J. D. PARRISH Administrative Law Judge Division of Administrative Hearings 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 this 4th day of December, 2001. COPIES FURNISHED: Charles F. Tunnicliff, Esquire Department of Business and Professional Regulation 1940 North Monroe Street, Suite 60 Tallahassee, Florida 32399-2202 Victor K. Rones, Esquire Law Offices of Rones & Navarro 16105 Northeast 18th Avenue North Miami Beach, Florida 33162 Martha Willis, Division Director Division of Certified Public Accounting Department of Business and Professional Regulation 240 Northwest 76 Drive, Suite A Gainesville, Florida 32607 Hardy L. Roberts, III, General Counsel Department of Business and Professional Regulation 1940 North Monroe Street Tallahassee, Florida 32399-2202
The Issue Whether Commercial Carrier Corporation (Petitioner), has the financial strength necessary to ensure the timely payment of all current and future workers' compensation claims in the State of Florida; Whether Petitioner has maintained a net worth of at least $1 million during the period 1999 to 2004; and Whether Petitioner shall post an additional qualifying security deposit to remain qualified to self-insure and the amount of the additional security deposit to be posted.
Findings Of Fact Upon careful consideration, it is found and determined as follows: Petitioner, Commercial Carrier Corporation, is a privately-owned trucking company headquartered in Auburndale, Florida, which has been in business for over 50 years. Petitioner is one of five operating subsidiaries of Comcar Industries, Inc. (Comcar), whose primary business is truckload transportation of general and specialized commodities in the continental United States. Comcar routinely prepares consolidated financial statements reflecting the operations of all five subsidiary companies. Although Petitioner is the nominal Petitioner, Comcar is the de facto Petitioner in this proceeding. All of Comcar’s subsidiaries operate as self- insured in Florida. Petitioner has been self-insured for workers’ compensation in Florida since January 1, 1973. Pursuant to Florida law, Respondent has jurisdiction over Petitioner as a self-insured employer for purposes of workers’ compensation. Under Florida law, the general requirement is that employers must obtain and maintain workers’ compensation insurance coverage. The exception of this general requirement is found in Subsection 440.38(1)(b), Florida Statutes (2004), whereby an employer can seek to qualify to self-insure by "furnishing satisfactory proof to the Florida Self-Insurers Guaranty Association, Inc., . . . that it has the financial strength necessary to ensure the timely payment of all current and future claims[.]" FSIGA is a not-for-profit corporation established by Section 440.385, Florida Statutes (2004), to guarantee payment of the covered workers’ compensation claims by employees of self-insurers that become insolvent. Other than governmental entities and public utilities, all self-insurers, including Petitioner, must be members of FSIGA. FSIGA pays the covered claims of current and former insolvent self-insurer members to the extent an insolvent self-insurer’s security deposit is insufficient. An insolvency fund is established and managed by FSIGA for the purpose of meeting the obligations of insolvent members after exhaustion of any security deposit. The insolvency fund is funded by assessments from members of FSIGA. Accordingly, FSIGA and all of its members share an interest in ensuring adherence to the legislative standard that only financially strong employers are granted the privilege to self- insure. To maintain self-insurer status, an employer must submit annual financial statements no later than four months following the end of the self-insured’s fiscal year and furnish satisfactory proof to FSIGA that it has the financial strength necessary to ensure timely payment of all current and future claims. The financial statements that must be submitted to FSIGA for financial analysis must be prepared in accordance with the United States Generally Accepted Accounting Principles (GAAP). GAAP-prepared financial statements must show, at all times, a net worth of $1 million. The requirements of furnishing proof of the requisite financial strength and maintaining a net worth of at least $1 million, as shown on the employer’s financial statements, are continuing annual requirements to become and remain qualified to self-insure, and those requirements are applied equally to applicants and current members. FSIGA is required to review the financial strength of its current members. It makes recommendations to Respondent regarding the members’ continuing qualification to self-insure and the amount of security deposit that should be required of each member. If FSIGA determines that a current member does not have the financial strength necessary to ensure the timely payment of all current and estimated future claims, it may recommend that Respondent require an increase in the member’s security deposit. FSIGA operates under a statutorily-approved plan of operations. FSIGA’s plan of operation provides that its executive director has the responsibility to make FSIGA’s recommendations to Respondent. FSIGA’s recommendations are based upon a review of the financial information collected from member employers. It may include recommendations regarding the appropriate security deposit amount necessary for a self-insured employer to demonstrate that it has the financial strength to ensure timely payment of all current and future claims. Respondent is required to accept FSIGA’s recommendations unless it finds, by clear and convincing evidence, that the recommendations are erroneous. 2002 Financial Review of Petitioner Petitioner is currently a member of FSIGA and has posted a qualifying security deposit of $2,500,000.00. On October 2, 2002, Brian D. Gee, C.P.A., who is now FSIGA’s executive director, completed a review of Petitioner’s audited financial statements for 1999, 2000, and 2001. Gee was FSIGA's financial analyst, responsible for conducting financial reviews and developing information for FSIGA's executive director, to determine the financial strength of self-insured members and make recommendations to Respondent. Gee’s review of Petitioner’s financial statement consisted of an assessment of Petitioner’s liquidity, profitability, degree of leverage, liabilities compared to net worth, and cash flow generated by operations. He also reviewed the financial statements to determine if Petitioner was maintaining a net worth of at least $1 million. Gee concluded that Petitioner did not have the financial strength necessary to ensure the timely payment of current and estimated future workers’ compensation claims. On October 8, 2002, FSIGA's executive director forwarded a letter to the Division of Workers’ Compensation, Department of Insurance (now Respondent). He recommended to Respondent that Petitioner be ordered to increase its security deposit to 150 percent of actuarially determined loss reserves. FSIGA’s recommendations were reviewed by Cynthia Shaw, assistant general counsel for the Division of Workers’ Compensation. Shaw drafted a letter for signature by Mark Casteel, General Counsel for Respondent, which adopted FSIGA's recommendations. Casteel signed that letter dated October 28, 2002, without revision or discussion. Shaw, an attorney, has no financial background or expertise. Shaw did not perform any additional financial analysis. Additionally, since Respondent did not have a CPA firm under contract, FSIGA’s recommendation was not reviewed by anyone with financial background before being transmitted to Petitioner. Petitioner responded to the October 28, 2002, directive from Respondent by filing a petition requesting a formal administrative hearing. Petitioner failed to file financial statements with FSIGA within four months following the end of its 2000 and 2001 fiscal years. Petitioner’s failure to timely file financial reports for 2000 and 2001 was due to the fact that it was in default on certain loan covenants and was engaged in negotiations with its lenders. In 1999 and 2000, Petitioner incurred additional long-term debt to finance the purchase of a new fleet of trucks. Petitioner’s creditors had exercised their right for accelerated payment of the outstanding loan balances, which by the end of 2001, was approximately $205 million. In 2001 and 2002, Petitioner entered into negotiations with its creditors to amend and restate its loan agreements. In 2002, Petitioner implemented a business plan calling for the sale of non-core assets, reduction of long-term debt, and transition from purchasing to leasing truck tractors. In July 2002, Petitioner entered into amended and restated loan agreements with its creditors. In order to secure the amended and restated loan agreements, Petitioner was required to pay increased interest, pledge substantially all of its property to secure the loans, pay the lenders $3.3 million, provide certain lenders with warrants to acquire an equity interest in Petitioner under certain conditions and agree to restrictions on how it could use cash generated by its operations and asset sales. Petitioner timely made all principal and interest payments due pursuant to the restated credit agreement and maintained compliance with all required financial ratios and standards. Furthermore, Petitioner continued to timely pay all claims for current and estimated future claims under its workers’ compensation system. Following execution of the amended and restated loan agreements, Petitioner’s auditors prepared the financial statements of 2001, which Petitioner then filed with FSIGA. Separate audited financial statements for 2000 were never filed with FSIGA, although prior-year financial results were shown (without footnotes) on the audited 2001 financial statements. With respect to liquidity, Petitioner’s financial statements showed a current ratio (current assets divided by current liabilities) of 1.41 at December 28, 2001. It did not disclose that Petitioner had any available funds under its revolving credit line as of December 28, 2001. Although Petitioner’s current ratio was acceptable, further analysis raised serious concern regarding Petitioner’s financial strength. With respect to Petitioner’s capital structure, the financial statement review showed that Petitioner’s total liabilities-to-book-equity ratio deteriorated from 4.91 at December 1999 to 30.46 at December 28, 2001. This deterioration reasonably raised concern because Petitioner became much more heavily leveraged from 1999 to 2001, relying much more heavily on debt to fund its operations. FSIGA concluded, Petitioner’s financial statement showed a "very weak capital structure." The impact of the increasing reliance on debt was marked by the end of 2001, when the financial statements showed that Petitioner was in default of its debt covenants at December 28, 2001. To address its defaults, Petitioner entered into an agreement to restructure its debt by which the creditors waived the defaults in return for imposing additional restrictions on Petitioner as described in paragraph 20 above. Although Petitioner maintained a net worth of $11.1 million at the end of 2001, Petitioner’s net worth at the end of 2001 was significantly lower than its net worth of $74.8 million at the end of 2000. In addition, the financial statement review showed that Petitioner had incurred net losses of $24.2 million, $39.5 million, and $5.7 million for the years 2001, 2000, and 1999, respectively. These losses were substantial and raised significant concerns about Petitioner’s financial strength. The 2002 financial review of Petitioner also showed a substantial decline in Petitioner’s cash flow from operations, from positive $32.6 million for 1999 to negative $2.1 million for 2001. This meant that in 2001, Petitioner was spending more cash in its operating activities than it was collecting. At the time FSIGA made its recommendation to Respondent, neither FSIGA nor Respondent had current information from Petitioner regarding the amount of Petitioner’s net outstanding liability for workers’ compensation claims in Florida. This is because Petitioner failed to file the Form SI-20 report that had been due on August 31, 2002. From October 2002 until December 14, 2004, FSIGA and Respondent did not have accurate information in regard to the amount of Petitioner’s outstanding liability for workers’ compensation claims in Florida, because Petitioner did not file its required Forms SI-17 and SI-20 reports or provide an actuarial study. At the final hearing, Petitioner did not present evidence disputing the reasonableness of FSIGA’s 2002 assessment of Petitioner’s financial statements or of FSIGA’s conclusions based thereon regarding Petitioner’s lack of financial strength in 2002. Based on FSIGA’s analysis of Petitioner’s 2001 financial statements and the financial statements for the two preceding years, FSIGA reasonably concluded that Petitioner had not demonstrated that it had the financial strength to ensure payment of current and future workers’ compensation claims. Based on the information then available to it, FSIGA made the correct recommendation to Respondent. There was no clear and convincing evidence available to Respondent that demonstrates FSIGA's recommendation was erroneous, instead, the available evidence supports FSIGA’s recommendation. Accordingly, Respondent’s direction to Petitioner to provide an actuarial report and post additional security was reasonable and appropriate. Continuing Financial Review of Petitioner After 2002. In November 2002, Petitioner challenged Respondent’s determination and requested a formal administrative hearing. Petitioner requested that Respondent hold the petition in abeyance. The request was granted, and the petition was not filed with DOAH until July 9, 2004. During this period, Respondent re-examined Petitioner’s financial strength. Following its business plan, on January 16, 2004, Petitioner refinanced its debt. While there was conflicting testimony regarding whether the actual interest on the refinanced debt was lower than on the debt it replaced, it was undisputed that $30 million of the refinanced debt was carrying an interest rate of 19 percent. This is a higher rate than the nine-percent and 11-percent interest applicable to the earlier debt. It is undisputed that substantially all of Petitioner’s property is pledged to secure the 2004 refinanced indebtedness, and there continues to be restrictions on Petitioner’s use of cash generated by its operations. However, the 19-percent interest on a portion of the January 2004 refinancing has now caused Petitioner to go into the lending market to attempt to refinance its debt once again. Nevertheless, the refinancing of its long-term debt has reduced its financing costs. Since Respondent’s 2002 request that Petitioner provide an actuarial report and post an additional security deposit, FSIGA has reviewed Petitioner’s audited financial statements for the years ended December 27, 2002, and December 26, 2003, as well as Petitioner’s unaudited financial statements for the year ended December 31, 2004. The financial information received from Petitioner since the 2002 review has not resulted in FSIGA changing its 2002 recommendations. Petitioner’s 2002, 2003, and 2004 financial statements revealed that Petitioner’s net worth had fallen below the required $1 million in each of those three years. The 2002 and 2003 financial statements also show that Petitioner continued to experience net losses. Petitioner sustained a net loss of $12.1 million for the year ended December 27, 2002, and a net loss of $9.9 million for the year ended December 26, 2003. Petitioner’s cash flow statement shows a $4.8 million decrease in cash in 2002 and a $2 million decrease in cash in 2003. Petitioner’s 2004 unaudited financial statements indicate net income of $4.1 million for 2004. However, because the 2004 financial statements are unaudited, whether adjustments may be necessary following the audit are unknown at this time. Financial statements prepared without footnotes are not prepared in accordance with GAAP. Even if the unaudited results are confirmed in audited financial statements, 2004 would be the first year that Petitioner has recognized net income since 1998, following a five-year string of annual losses totaling $90 million. Petitioner’s Financial Status Evidenced at Final Hearing At the final hearing, to demonstrate that it had the financial strength necessary to ensure the timely payment of current and future workers’ compensation claims, Petitioner presented testimony of its expert witness, Lawrence Hirsh, C.P.A. He posited that Petitioner's financial strength should be measured by determining its ability to generate cash flow through a calculation of its earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA is a measure commonly used by financial institutions to evaluate the ability of a company to generate cash flows and in determining whether to extend credit or to make investments. Petitioner’s lenders evaluated its EBITDA before deciding to refinance its credit facility in 2002 and to refinance its long-term debt in 2004. However, EBITDA is not a calculation provided for under GAAP. GAAP provides a method for determining cash flows and that method is used in preparing the portion of a GAAP- compliant financial statement called the "Statement of Cash Flows." Evidence presented by Respondent demonstrated that EBITDA has many limitations and is not a good proxy for cash flow. Application of EBITDA to Petitioner’s known financial performance in the past consistently overstates Petitioner’s ability to generate cash flow from operations. In every year from 1999 through 2003, Petitioner’s cash flow from operations, as shown on Petitioner’s cash flow statement that was prepared in accordance with GAAP, was significantly lower than the amount calculated for EBITDA by Hirsh: Year Petitioner's Cash Flow From Operations as Shown on GAAP-Compliant Cash Flow Statement EBITDA 1999 $32.6 million $61.1 million 2000 $344,000 $21.2 million 2001 ($2.1 million) $40.3 million 2002 $11.9 million $54.8 million 2003 $12.3 million $42.3 million Petitioner's unaudited 2004 cash flow statement showed $18.1 million in cash flow from operations. This is significantly lower than the $52.9 million in EBITDA calculated for 2004. Similarly, each year from 1999 to 2003, Hirsh's EBITDA's calculation grossly exceeds Petitioner's net loss as shown on its financial statements that were prepared in accordance with GAAP: Petitioner's Cash Flow From Operations as Year Shown on GAAP-Compliant Cash Flow Statement EBITDA 1999 (5.7 million) $61.1 million 2000 ($39.5 million) $21.2 million 2001 ($24.2 million) $40.3 million 2002 ($12.1 million) $54.8 million 2003 ($9.9 million) $42.3 million EBITDA is also misleading because it includes gain from the sale of assets. To the extent that Petitioner is selling its operating assets, such as trucks, Petitioner will have to expend cash to replace the assets, either by lease or purchase. To the extent that Petitioner is selling non-core assets, such as its unused real property, Petitioner cannot continue this practice indefinitely. Petitioner will soon run out of assets to sell. Therefore, cash generated from the sale of operating assets and non-core assets should not be considered in determining Petitioner's ability to generate cash from operating activities. Petitioner sought to bolster its evidence of its financial strength through testimony that it had received a credit rating in November 2003 from Standard & Poor's of B-plus. However, a B-rating is not an investment grade rating. It means that while a company currently has the capacity to meet its debt obligations, adverse business, financial, or economic conditions likely will impair the obligor's capacity or willingness to meet its financial commitment on the obligations in the future. In addition, Petitioner received a lower credit rating of B-3 from Moody's Investment Services. A B-3 rating from Moody's Investment Services is equivalent to a B minus rating from Standard & Poor's. The Standard & Poor's and Moody's credit ratings do not effectively demonstrate that Petitioner has the financial strength necessary to ensure the payment of current and future workers' compensation claims. Respondent's expert witness, Dr. Sondhi, disputed Petitioner's calculation of its EBITDA interest coverage ratio because Petitioner's calculation was based on interest paid as opposed to interest expense, and it failed to adjust for non-recurring items. Petitioner's interest expense is greater than the interest paid partly because Petitioner's loan agreement provides that a portion of the interest payments will accrue monthly with payments deferred until the final prepayment date or other principal payment milestone dates. Petitioner's calculation of the EBITDA interest coverage ratio was not performed in accordance with Standard & Poor's formula for determining the EBITDA interest coverage ratio. Even if the calculation of EBITDA interest coverage ratio was an appropriate measure of Petitioner's financial strength, the formula used by Petitioner to calculate the ratio overstates the results and shows greater financial strength than would be shown if the Standard & Poor's formula had been used. For the reasons noted above, Petitioner's EBITDA calculations are rejected as an inappropriate, overstated method to assess whether a company has the financial strength necessary to ensure the payment of current and future workers' compensation claims. Petitioner also argued that it had the required financial strength because it has paid all workers' compensation claims to-date and because, at the end of 2004, it had a cash balance of $26.6 million in the bank. The ability to currently pay workers' compensation claims does not demonstrate the financial strength to ensure the payment of workers' compensation claims in the future. Current capacity to pay is only part of the statutory standard, which is a risk-based standard requiring a company to ensure payment into the future because of the long period of time that workers' compensation claim payments continue. Likewise, having cash in the bank in the amount of $26.6 million at the end of 2004, does not demonstrate the required financial strength. Current cash balance is not an indicator, by itself, of financial strength to ensure payment in the future. Given Petitioner's extensive operating expenses, $26.6 million represents a very small amount of operating expenses. Petitioner’s consolidated balance sheets list its assets at historical or book cost, the cost at which those assets were purchased, and not at their current fair market value. Petitioner argues that adjusting the book values of assets to current market value would provide the most accurate assessment of Petitioner's net worth. To demonstrate that it has maintained a net worth of $1 million, Petitioner presented testimony that when determining net worth, the fair market value of its assets should be considered in place of the book value of its assets that is reflected on its balance sheet. However, GAAP does not permit the value of assets to be shown at fair market value and instead, requires that assets be shown at book value. Even if GAAP permitted the use of fair market value of assets to be used on a balance sheet, Petitioner did not offer any admissible evidence to prove the current fair market value of its assets for 2002, 2003, and 2004. Consequently, it cannot be determined whether the use of the current fair market value of assets would result in Petitioner's financial statements showing a net worth at all times of at least $1 million. Respondent has interpreted the term "net worth," as it is used in Florida Administrative Code Rule 69L-5.106, to mean the total assets of a company as reflected on the balance sheet, minus the total liabilities of the company as reflected on the balance sheet. Respondent's interpretation of the term "net worth" is a reasonable interpretation, consistent with the interpretation given to the term by accountants and financial analysts. The more credible expert testimony is that net worth appears on the balance sheet as stockholders' or shareholders' equity. Based on the above interpretation of Florida Administrative Code Rule 69L-5.106, for each year from 2002 through 2004, Petitioner has failed to maintain a net worth of at least $1 million. The preponderance of evidence demonstrates Petitioner's net worth was negative $976,000, and negative $10.8 million for the years ended December 27, 2002, and December 26, 2003, respectively. In addition, Petitioner's unaudited financial statements for 2004 show that Petitioner maintained a negative net worth of $6.7 million as of December 31, 2004. Although Petitioner's financial condition has strengthened significantly from year end 2001 to year end 2004, based on the evidence, Petitioner does not now have the financial strength necessary to ensure payment of current and future workers' compensation claims, nor has Petitioner maintained a net worth of at least $1 million. Therefore, an additional security deposit is required for Petitioner to remain qualified as a self-insurer. In May 2002, Thomas Lowe was employed by Petitioner as its vice-president in charge of Risk Management. Lowe instituted a number of risk management practices which have significantly reduced the number and costs of Petitioner's workers' compensation claims. In 2001, Petitioner's workers' compensation claims were adjusted by three separate third-party administrators (TPAs), resulting in three overlapping data bases of claims information. Petitioner was unable to reconcile this overlapping claims information and, consequently, was unable to accurately determine the amount of its workers' compensation reserves for 2001. As a result of its inability to determine its workers' compensation reserves in 2001, Petitioner did not submit the required SI-17 and SI-20 forms to FSIGA in 2002 and 2003. Petitioner informed FSIGA of the difficulty it was having in reconciling its claims data for 2001 and paid the required penalties for its inability to timely submit Forms SI-17 and SI-20 in 2002 and 2003. Failure to submit these forms did not affect Petitioner's ability to make timely payments of all current and estimated future workers' compensation claims. In 2004, Petitioner submitted Forms SI-17 to FSIGA reflecting incurred workers' compensation losses for calendar years 2002 and 2003. On December 14, 2004, Petitioner submitted Form SI-20 to FSIGA, reflecting that the present value of its estimated loss reserves was $6,894,776.00. Anthony Gripps, Sr., an independent actuary who is a member of the American Academy of Actuaries, reviewed Petitioner's workers' compensation claims data pursuant to Respondent's October 28, 2002, directive. Grippa issued two reports, one dated December 1, 2004, and the other dated December 15, 2004. Grippa concluded that the present value of Petitioner's workers' compensation loss reserves as of September 30, 2004, was $6,831,175.00. The parties stipulated to Grippa's finding that the amount of Petitioner's workers' compensation loss reserves as of September 20, 2004, was $6,831,175.00. Petitioner's financial statements for 2004 had not been audited as of the final hearing, but were received into evidence in unaudited form. There was no evidence presented that Petitioner's 2004 financial statements do not accurately represent its financial performance in 2004 and its financial condition as of December 31, 2004. Florida Administrative Code Rule 69L-5.101(4) does not require Petitioner to submit audited financial statements as it has been self-insured since prior to January 1, 1997. Petitioner timely supplied Respondent with unaudited financial statements at least annually as required by Florida Administrative Code Rule 69L-5.101(4). Petitioner currently has a qualified security deposit of $2,500,000.00 deposited with FSIGA. In 2002, FSIGA recommended that in light of Petitioner's "significant net losses and very weak capital structure," Petitioner's security deposit should be increased to 150 percent of the actuarially determined loss reserves. Upon consideration of all of Petitioner's financial statements from 1999 through 2004, FSIGA's recommendation should be followed. Petitioner's actuarially determined loss reserves for all current and estimated future workers' compensation claims are $6,831,175.00. One hundred and fifty percent of the actuarially determined loss reserves of $6,831,175 equals $10,246,762.50. Petitioner presented no evidence of a different amount of security deposit increase that would be sufficient assuming one were to find that Petitioner lacks the financial strength to ensure payment of future workers' compensation claims or that Petitioner has failed to maintain a net worth of at least $1 million.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law, it is RECOMMENDED that The chief financial officer issue a final order determining that: (i) Petitioner does not have the financial strength to ensure the timely payment of all current and future workers' compensation claims; and (ii) Petitioner has failed to maintain a net worth of at least $1 million; and Because Petitioner has failed to meet the requirements to continue self-insuring, the final order should require Petitioner to post an additional security deposit in the amount of $7,746,762.50. DONE AND ENTERED this 1st day of June, 2005, in Tallahassee, Leon County, Florida. S DANIEL M. KILBRIDE 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 1st day of June, 2005.
Findings Of Fact The Petitioner is University General Hospital, Inc. (hereinafter "UGHI"), the present license holder of University General Hospital (hereinafter "University Hospital"), a 140-bed general acute-care hospital located in Seminole, Florida. During calendar years 1989 and 1990 and until July 30, 1991, University Hospital operated as a division of Community Health Investment Corporation f/k/a/ CHS Management Corporation (hereinafter "CHIC"). On July 30, 1991, UGHI was incorporated as a wholly-owned subsidiary of CHIC and became the license holder of University Hospital. University Hospital's change in licensure on that date did not change its ownership, control, management, reporting, or operation. On or about December 2, 1991, UGHI timely filed Certificate of Need (hereinafter "CON") Application No. 6851 to convert 12 general acute-care beds to hospital-based skilled nursing beds. As of the date of filing its CON application, UGHI was the license holder of University Hospital and complied with the definition of "Applicant" set forth in Rule 10-5.002(3), Florida Administrative Code. Prior to submission of CON Application No. 6851, UGHI retained John Gilroy of the law firm Haben, Culpepper, Dunbar & French to serve as legal counsel for the CON project. In his initial dealings with UGHI regarding compliance with the requirements of Section 381.707(3), Florida Statutes, Gilroy learned that audited financial statements previously prepared for University Hospital while it was a division of CHIC could be reissued for UGHI. Gilroy then contacted Elizabeth Dudek, Director of the Department of Health and Rehabilitative Services (hereinafter "HRS") Office of Community Health Services and Facilities, to inquire whether the proposed audited financial statements (i.e., the reissued statements) would comply with the applicable statutory requirements. Dudek suggested that Gilroy direct his inquiry to Roger Bell, an Audit Evaluation and Review Analyst with the HRS Office of Community Health Services and Facilities. In conducting her responsibilities, Dudek relies upon the opinions of experts, and Bell is the most qualified person in the HRS Office of Community Health Services and Facilities to render an opinion regarding hospital audited financial statements. Among Bell's responsibilities is advising Dudek whether CON applicants' financial statements should be accepted or rejected. At that time or soon thereafter, Gilroy had at least one telephone conversation with Bell wherein he informed Bell that UGHI had been in existence for less than one year and inquired whether the proposed reissued audited financial statements would be acceptable to HRS. Bell's response to Gilroy was that he was not aware that audited financial statements could be reissued in the manner proposed by UGHI, but if Arthur Andersen & Co. could prepare such a document, he expected that it would be acceptable. Additionally, Bell indicated to Gilroy that a balance sheet audit would not give HRS sufficient financial information and that it would be beneficial if he could look at reissued audited financial statements to conduct a more in-depth analysis. Bell did not inform Gilroy of any HRS policy regarding the types of audited financial statements HRS would accept from applicants in existence for less than one year. Following his discussion with Bell, Gilroy sent a letter to his client dated November 20, 1991, indicating that Bell agreed that the reissued statements would be acceptable and that Arthur Andersen & Co. should prepare such statements prior to January 17, 1992. In a letter dated December 12, 1991, Gilroy asked Bell to confirm HRS' position regarding reissued audited financial statements in writing, consistent with their prior conversation. In a letter dated December 16, 1991, Bell reiterated to Gilroy that "if Arthur Andersen is assuming the liability for this assertion, then it is probably in order," and also stated that "[u]nless a concern appears in the auditor's reports or notes, I do not foresee any problem." The letter did not refer to any HRS policy regarding the types of audited financial statements HRS would or would not accept from corporations in existence for less than one year. After receipt and review of Bell's December 16 letter, Gilroy remained under the impression that reissued audited financial statements would be acceptable to HRS provided they were properly executed and signed and had appropriate notes. In a letter dated December 19, 1991, HRS identified certain items of information omitted from UGHI's initial application (commonly referred to as an "Omissions Letter"), including, among other items, audited financial statements of the applicant. On that same date, HRS also sent an Omissions Letter to Edward White Hospital, Inc., an applicant in the same application review batch as UGHI. The Omissions Letter sent to Edward White Hospital, Inc., included a section as follows: If an applicant, due to non-existence as an entity, has not completed a fiscal year of operation, the applicant will submit an audited financial statement in which the balance sheet date falls within the period which begins on the first day of its existence as a legal entity and ends on the date of the applicant's choosing, provided the audited financial statement is available and included with the application during or before the end of the omissions process. Had a similar statement been contained in the UGHI Omissions Letter, Gilroy would have approached HRS to determine whether UGHI's proposed audited financial statements were acceptable notwithstanding this policy. After his review of the UGHI Omissions Letter, Gilroy remained under the impression that reissued statements would be acceptable to HRS if prepared in accordance with accounting and auditing standards. According to Dudek, HRS did not reveal its policy regarding entities in existence for less than one year in the UGHI Omissions Letter because HRS had not been provided with information prior to the issuance of the letter that UGHI was an entity that had been in existence for less than one year. Prior to the Omissions Letter, HRS was, however, informed both orally and in writing that UGHI had been in existence for less than one year. On or about January 15, 1992, UGHI timely filed its response to the Omissions Letter and included a document entitled "UNIVERSITY GENERAL HOSPITAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF COMMUNITY HEALTH INVESTMENT CORPORATION) FINANCIAL STATEMENTS AS OF DECEMBER 31, 1990 AND 1989 TOGETHER WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS." In a letter dated January 28, 1992, HRS notified UGHI that its CON application was being administratively withdrawn from consideration for the sole reason that it did not contain audited financial statements of the applicant, University General Hospital, Inc. The purpose of audited financial statements from the standpoint of HRS' review of CON applications is that they provide HRS with a basis to determine the overall financial strength and financial position of the applicant and the applicant's ability to carry out the project being proposed. HRS requires that the financial statements be "of the applicant" because it looks to the source of funding and financial strength of the entity responsible for funding the project--the party submitting the CON application. The audited financial statements submitted by UGHI reflect the resources available to it for the CON project proposed in CON Application No. 6851 and are appropriate to demonstrate the financial strength of UGHI. The audited financial statements filed by UGHI contain financial documentation for years ending December 31, 1990 and 1989, as well as information through November 13, 1991. The issuance of audited financial statements for an entity incorporating a period of time before that entity's corporate existence (known as "reissuance") is a common practice in the accounting profession and, subject to the entity's ability to satisfy the specified prerequisites, is consistent with pronouncements and standards under generally accepted auditing standards (hereinafter "GAAS") and generally accepted accounting principles (hereinafter "GAAP"). The prerequisites for reissuance of an audited financial statement are adequate disclosure made in the notes of the financial statement and continuance of common ownership, control, management, reporting, and operation of the entity's activities. Prior to issuance of the audited financial statements for UGHI, Arthur Andersen & Co. conducted an extensive post-audit review of UGHI and concluded that the financial statements previously issued to University Hospital could be reissued as audited financial statements of UGHI. Had Arthur Andersen & Co. found that the previously-issued audited financial statements were misleading or that the requirements set forth in GAAS and GAAP were not satisfied, it would not have reissued the audited financial statements on behalf of UGHI. The audited financial statements submitted by UGHI to HRS constitute a valid document prepared in accordance with the pronouncements and standards under GAAS and GAAP. It is the policy of HRS that, if an entity has been in existence for less than one year, HRS will accept only a balance sheet audit as of the date of incorporation, or a short period audit from the date of incorporation through an undefined period of time. HRS' policy is not reflected in any of the statutes, rules, or HRS Manual provisions regarding audited financial statements, and HRS is not in the process of promulgating a rule regarding this policy. HRS' policy applies to all entities submitting CON applications that have been in existence for less than one year. Balance sheet and short period audits are not appropriate documents to assess an entity's financial condition. In many cases, HRS would prefer a reissued audited financial statement to a balance sheet audit in analyzing a CON application. In determining whether an applicant complies with Section 381.707(3), Florida Statutes, HRS will, with certain exceptions, look at whether the definition of "Audited Financial Statement" set forth in Rule 10-5.002(5), Florida Administrative Code, is met. HRS does not apply the definition of "Audited Financial Statement" set forth in Section 10-5.002(5), Florida Administrative Code, to applicants in existence for less than one year. The definition it applies to these entities is not set forth in any rule, statute, or HRS Manual provision. A balance sheet audit does not comply with the definition of "Audited Financial Statement" set forth in Rule 10-5.002(5), Florida Administrative Code. The audited financial statements filed by UGHI comply with the definition of "Audited Financial Statement" set forth in Rule 10-5.002(5), Florida Administrative Code. Rule 10-5.008(5)(g), Florida Administrative Code, identifies those audited financial statements satisfying the rule definition of "Audited Financial Statement" that HRS will not accept. HRS explains the exceptions set forth within Rule 10-5.008(5)(g), Florida Administrative Code, on the basis that these audited financial statements reflect financial documentation of an affiliate entity. The audited financial statements submitted by UGHI are not a combined audit, a consolidated audit, or an audit of a division, as prohibited under Rule 10-5.008(5)(g). From an accounting standpoint, the audited financial statements submitted by UGHI are those of UGHI. An accounting firm typically identifies the entity being audited on the title page of the audited financial statements and in the audit report and financial statements contained therein. The title page of, and audit report and financial statements in, the audited financial statements prepared by Arthur Andersen & Co. for UGHI all reflect that the entity being audited is UGHI. An accounting firm faces significant liability if the audited financial statements it prepares are found to be inaccurate or misleading. HRS does not dispute, and in fact agrees, that the audited financial statements prepared by Arthur Andersen & Co. for UGHI were correctly issued and are consistent with GAAS and GAAP.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is recommended that a Final Order be entered accepting Certificate of Need Application No. 6851 filed by University General Hospital, Inc. for review in the nursing home batching cycle in which it was filed. RECOMMENDED this 20th day of July, 1992, at Tallahassee, Leon County, Florida. LINDA M. RIGOT Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 SC 278-9675 Filed with the Clerk of the Division of Administrative Hearings this day of July, 1992. APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-1838 Petitioner's proposed findings of fact numbered 1-54 have been adopted either verbatim or in substance in this Recommended Order. Respondent's proposed findings of fact numbered 1-3 have been adopted either verbatim or in substance in this Recommended Order. Respondent's proposed findings of fact numbered 4-6 have been rejected as not being supported by the weight of the competent evidence in this cause. COPIES FURNISHED: Gerald M. Cohen, Esquire Steel Hector & Davis 4000 Southeast Financial Center Miami, Florida 33131-2398 Richard Patterson Assistant General Counsel Department of Health and Rehabilitative Services 2727 Mahan Drive Tallahassee, Florida 32308 Sam Power, Clerk Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32399-0700 John Slye, General Counsel Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32399-0700
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent be found guilty of violating Chapter 473 and rules promulgated thereunder as set forth in the Conclusions of Law portion of this Order. His license should be suspended for one year with probation thereafter for a period of two years. He should also be required to take such additional continuing education courses as the Board deems appropriate. DONE and ORDERED this 15th day of April, 1986, in Tallahassee, Florida. DONALD R. ALEXANDER, Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 15th day of April, 1986.
The Issue The issues are as follows: (a) whether Respondent Department of Corrections (the Department) properly determined that there were no responsive proposals to the Request for Proposals entitled Mental Healthcare Services in Region IV, RFP #08-DC-8048 (the RFP); (b) whether the Department's intended award of a contract to provide mental healthcare services to inmates in Region IV to Intervenor Correctional Medical Services, Inc. (CMS), pursuant to Section 287.057(6), Florida Statutes (2008), is unlawful; and (c) whether Petitioner MHM Correctional Services, Inc. (MHM), has standing to challenge the Department's intended award of a contract to CMS pursuant to Section 287.057(6), Florida Statutes (2008).
Findings Of Fact The RFP Process The Department issued the RFP on February 5, 2009. Two addendums were issued to the RFP, the first on February 6, 2009, and the second on March 11, 2009. The Department did not receive any protest of the RFP or addendums from MHM or any other proposer within the statutorily set time limit of 72 hours from the issuance of the RFP. At the time of issuance of the RFP, MHM was the incumbent provider of mental health services to inmates in Region IV. At that time, MHM was providing the services at a rate of $77.62 per month/per inmate. MHM's contract to provide mental health services in Region IV was the result of a prior vendor being financially unable to perform the contract at its agreed rate. The RFP sought proposals from vendors to provide comprehensive mental healthcare services for inmates located at 14 correctional institutions located in the southern part of the State beginning on July 1, 2009. The Department’s contract with MHM for those services was set to expire on June 30, 2009. The Department had previously attempted another procurement for replacement of those services in late 2008. Proposals to the RFP were received and opened in a public meeting on March 23, 2009, from CMS, MHM, the University of Miami's Department of Psychiatry and Behavioral Sciences (the University of Miami), and Wexford Health Sources, Inc. (Wexford). The Department’s Bureau of Procurement and Supply (BPS) was responsible for overseeing the RFP. The Procurement Manager for the RFP was Ana Ploch. Ms. Ploch’s duties included drafting the proposal with the assistance of the Office of Health Services, managing the procurement process by coordinating release of documents, conducting related meetings (such as proposers’ conferences, proposal opening, and price opening), conducting site visits, supervising the evaluation process, and keeping records of the process through completion of a summary report of the procurement. Once the Department received the proposals, it began the eight-phased review and evaluation process as set forth in Section 6 of the RFP. Phase 1 of the review and evaluation process began with the public opening of the proposals that took place on March 23, 2009. Phase 1 also included the review of the proposals to determine if they met mandatory responsiveness requirements. Determination of meeting mandatory responsiveness requirements was made by BPS staff. Mandatory Responsiveness Criteria or “fatal criteria” is described in Section 5.1 of the RFP as requirements that must be met by a proposer for the proposal to be considered responsive. A failure to meet any one of the three following criteria would result in an immediate finding of non- responsiveness and the rejection of the proposal: (a) the subject proposal must be received by the Department by the date and time specified in the RFP; (b) the proposal must include a signed and notarized Certification Attestation Page for Mandatory Statements; and (c) the price proposal must be received by the Department by the date and time specified in the RFP and must be in a separate envelope or package in the same box or container as the project proposal. There is no dispute that all four proposals met these mandatory responsiveness/fatal criteria. In addition to the fatal criteria, a proposal could be found to be non-responsive for failing to conform to the solicitation requirements in all material respects. The RFP, Section 1.20, clearly set forth the definition of a “material deviation” and the basis for rejecting a proposal as follows: 1.20 Material Deviations: The Department has established certain requirements with respect to proposals to be submitted by vendors. The use of shall, must or will (except to indicate simple futurity) in this RFP indicates a requirement or condition which may not be waived by the Department except where any deviation therefrom is not material. A deviation is material if, in the Department’s sole discretion, the deficient proposal is not in substantial accord with this RFP’s requirements, provides an advantage to one proposer over other proposers, or has a potentially significant effect on the quantity or quality of items or services proposed, or on the cost to the Department. Material deviations cannot be waived and shall be the basis for rejection of a proposal. (Emphasis in original.) A Responsive Proposal is defined in the RFP Section 1.29 as “[a] proposal, submitted by a responsive and responsible vendor that conforms in all material respects to the solicitation.” A minor irregularity is defined in Section 1.26 of the RFP as: 1.26 Minor Irregularity: A variation from the RFP terms and conditions which does not affect the price proposed or gives the proposer an advantage or benefit not enjoyed by the other proposers or does not adversely impact the interests of the Department. Phase 2 consisted of a review of the business/corporate qualifications and technical proposal/service delivery narratives contained in the proposals. This phase was completed individually by evaluation team members. The evaluation team, which consisted of 5 employees from the Department’s Office of Health Services, met with Ms. Ploch on March 24, 2009, for instruction on how to proceed with the evaluation. The team members were given the evaluation materials on that date. Evaluation and scoring of the proposals was done separately by each individual without discussion among the members. At the March 31, 2009, bid tabulation meeting, which occurred after the team members scored the proposals, Ms. Ploch told the team members that MHM and the University of Miami were non-responsive to the RFP. Then the scores for the different categories were recorded as announced by each member of the evaluation team. All four proposals were scored for the three categories listed in RFP Section 5.3 (business/corporate experience), Section 5.5 (project staff) and Section 5.6 (technical proposal and service delivery narrative). There is no allegation that the scores assigned to the proposals were done in error or that they were not in compliance with Department rules or procedures. Phase 3 of the review and evaluation process was completed at the same time as Phase 2 and 4, by Ms. Ploch and the BPS staff. That review of the proposals included a determination as to whether the proposers were in compliance with Section 5.3 “Business/Corporate Qualifications.” At that point in the review process, BPS determined that the University of Miami’s proposal was non-responsive in that the proposer did not have the necessary business experience. This finding has not been disputed by any party. An independent Certified Public Accountant (CPA) completed Phase 4 of the review and evaluation process. The Department hired the CPA to review the financial requirements of Section 5.4 of the RFP. The CPA, Richard Law, was given all the proposals, including the financial documentation, on March 24, 2009. He conducted his review separately from the Department's reviews in Phases 2 and 3. Mr. Law has been a licensed CPA for over 30 years. His major practice area is conducting audits for state governments, as well as private businesses. With more than 10 years of experience reviewing financial documentation for the Department and assisting on the setting of financial benchmarks for numerous procurements, he is highly qualified to perform the evaluation and assessment of these basic financial criteria. The financial requirements and the financial documentation and information that the proposers had to submit are set out in Section 5.4 of the RFP. That section is entitled “Financial Documentation,” and provides as follows in pertinent part: Tab 4-Financial Documentation The Proposer shall provide financial documentation that is sufficient to demonstrate its financial viability to perform the Contract resulting from this RFP. Three of the following five minimum acceptable standards shall be met, one of which must be either item d, or item e, below. The Proposer shall insert the required information under Tab 4 of the Proposal. Current ratio: = .9:1 or (.9) Computation: Total current assets ÷ total current liabilities Debt to tangible net worth: = 5:1 Computation: Total liabilities ÷ net worth Dun and Bradstreet credit worthiness (credit score): = 3 (on a scale of 1-5) Minimum existing sales: = $50 million Total equity: = $5 million NOTE: The Department acknowledges that privately held corporations and other business entities are not required by law to have audited financial statements. In the event the Proposer is a privately held corporation or other business entity whose financial statements ARE audited, such audited statements shall be provided. If the privately held corporation or other business entity does not have audited financial statements, then unaudited statements or other financial documentation sufficient to provide the same information as is generally contained in an audited statement, and as required below, shall be provided. The Department also acknowledges that a Proposer may be a wholly-owned subsidiary of another corporation or exist in other business relationships where financial data is consolidated. Financial documentation is requested to assist the Department in determining whether the Proposer has the financial capability of performing the contract to be issued pursuant to this RFP. The Proposer MUST provide financial documentation sufficient to demonstrate such capability including wherever possible, financial information specific to the Proposer itself. All documentation provided will be reviewed by an independent CPA and should, therefore, be of the type and detail regularly relied upon by the certified public accounting industry in making a determination or statement of financial capability. To determine the above ratios, the most recent available and applicable financial documentation for the Proposer shall be provided. This financial documentation shall include: The most recently issued audited financial statement (or if unaudited, reviewed in accordance with standards issued by the American Institute of Certified Public Accountant). All statements shall include the following for the most recently audited (immediate past) year. auditors’ reports for financial statements; balance sheet; statement of income; statement of retained earnings; statement of cash flows; notes to financial statements; any written management letter issued by the auditor to the Proposer’s management, its board of directors or the audit committee, or, if no management letter was written, a letter from the auditor, stating that no management letter was issued and that there were no material weaknesses in internal control or other reportable conditions; and a copy of the Dun & Bradstreet creditworthiness report dated on or after February 5, 2009. (Emphasis in original) The RFP provided as follows in Section 5.4.2: If the year end of the most recent completed audit (or review) is earlier than nine (9) months prior to the issuance date of this RFP, then the most recent unaudited financial statement (consisting of items b, c, d and e above) shall also be provided by the Proposer in addition to the audited statement required in Section 5.4.1. The unaudited financial data will be averaged with the most recent fiscal year audited (or reviewed) financial statement to arrive at the given ratios. Throughout Section 5.4 of the RFP, the emphasis is on the need for audited financial statements. The use of unaudited financial statements alone does not apply to MHM pursuant to the terms of the RFP, but they did apply to other proposers. Both audited and unaudited financial statements were averaged to determine ratios for CMS and Wexford, where their audited financial statements were older than 9 months. This was clearly permissible under Section 5.4.2. MHM’s proposal included audited financial statements dated September 30, 2008, and also additional information, including unaudited financial statements and a financial narrative in which it admitted that its current ratio as of September 30, 2008, was 0.82 and that it had a negative equity of $24.8 million dollars. MHM was fully aware that it could have difficulty meeting the financial ratios before the Department issued the RFP. As early as January 2008, MHM was considering a stock repurchase. MHM knew its existing contract would come up for rebid. MHM also knew that the Department sometimes used financial criteria and financial ratios as pass/fail ratios. MHM was concerned that the stock repurchase would trigger one of those ratios, causing them to lose the contract. In January 2008, Susan Ritchey, MHM's Chief Financial Officer, and Steve Wheeler, MHM's President and Chief Operating Officer, contacted Mr. Law. Ms. Ritchey and Mr. Wheeler wanted to discuss their concerns regarding financial ratios that the Department might require in the future. During the hearing, Mr. Wheeler denied that the contact with Mr. Law had anything to do with the instant RFP. There is no persuasive evidence that Mr. Law gave Ms. Ritchey and Mr. Wheeler inappropriate advice. The independent review by Mr. Law of MHM’s financial documentation resulted in the finding that MHM only met two of the minimum acceptable standards required by Section 5.4 of the RFP. Mr. Law set out his conclusions on a Department form entitled “Phase IV, Financial Documentation Review to Be Completed by Independent CPA.” That sheet reflected that MHM had failed the current ratio with a score of .819, when a ratio of = 9:1 or (.9) was required (item a). Likewise, MHM failed the “Debt to tangible net worth” and the “total equity” criteria (items b and e, respectively), since MHM had a negative equity of $22 million dollars. MHM passed the two remaining criteria. First, it met the minimum existing sales (item d) with sales at $217 million (greater than or equal to $50 million). Second, it met the requirement of the Dun & Bradstreet creditworthiness score (item c), which needed to be less than or equal to 3, with a score of The Dun & Bradstreet score was not noted on the Department review form because MHM had already failed three of the financial minimum acceptable financial standards. MHM disputes the finding that it failed the “Debt to tangible net worth” requirement (item b) which was a ratio of = 5:1 or “less than or equal to 5 to 1, a whole number.” Net worth is the same as equity. Following proper accounting practices and a commonsense reading of this mathematical phrase required that both numbers be whole numbers, neither could be a negative. Put simply, a proposer could only have a maximum of five dollars in debt for every one dollar in net worth to pass this minimum acceptable standard. So, for purposes of evaluating this ratio, once it was determined that MHM had a negative equity of $22 million dollars, there was no way for MHM to pass this critical requirement. The “Debt to tangible net worth” criteria, was meant to be “Debt to net worth.” The computation set out below the criteria reflects the proper calculation needed to find debt to net worth, not debt to tangible net worth. Mr. Law performed the computation for debt to net worth as set out in the description of the computation, which was more advantageous to proposers than debt to “tangible net worth,” and resulted in a more favorable ratio. The ratio of “-1.77,” reflected on MHM's financial documentation review sheet is a mistake because Mr. Law used the number he reached averaging the audited and unaudited financial statements. The correct number is “-2.16,” which is based only on MHM's audited financial statement of September 30, 2008. That is, it was a greater negative number, but still negative. Either way, MHM fails this criteria. MHM had no dollars in net worth as of the issuance date of the RFP. Instead, MHM had a negative net worth of $24,785,000.00 as of the end of its fiscal year on September 30, 2008, as reflected in its audited financial statement. As to item “a”, “Current ratio,” a finding of .819 was reached by taking the total current assets ($23,493) and dividing into that number the total current liabilities ($28,692), both reflected on the MHM’s audited financial statement of September 30, 2008. These numbers taken from MHM’s audited financial statements for total current liabilities; total current assets and total equity represent millions, rounded for accounting purposes. MHM reached a similar finding of .82 using its September 30, 2008, audited financial statements. On the date the RFP was issued, February 5, 2009, MHM’s audited financial statement of September 30, 2009, was indisputably less than 9 months old and was the only financial statement under Section 5.4.2 of the RFP that could be used to compute the ratios in Section 5.4.2. Even if the unaudited financial statement submitted by MHM were averaged with the most recent audited financial statement, as demonstrated by Mr. Law’s attempts to do so, MHM would still not have met the current ratio. Nowhere in the RFP does it allow for the use of unaudited financial statements alone when there are existing audited financial statements. Mr. Law’s completed Phase 4 review of the financial documentation. He returned it to the Department on March 30, 2009. The Department conducted Phase 5 of the review and evaluation process, the Public Opening of the price proposals, on April 2, 2009, in a properly noticed meeting. At that time, the Department knew that there were only two responsive proposals (CMS and Wexford). No public announcement regarding the status of the other proposals had been made at that time. The RFP contained a price cap of $70.00 per inmate per month as reflected in Section 5.11.2 of the RFP and the Price Information Sheet. The intent of the price cap of $70 per month was to achieve a price savings for the Department over what it was then paying for mental healthcare services in Region IV, which was nearly $78.00. The goal of $70 was considered to be possibly unrealistic, but the true intent was to keep from exceeding the current rate of $78.00. At the price opening, the following prices were announced: (a) MHM’s price was $70.00 per inmate per month; (b) the University of Miami’s price was $69.49 per inmate per month; (c) CMS’s price was $74.49 per inmate per month; and (d) Wexford’s price was $95.00 per inmate per month. It was later determined that CMS had also submitted an alternative price sheet. However, the alternative price sheet did not affect the responsiveness of CMS's proposal or the Department's subsequent decision. Based on the fact that CMS’s and Wexford’s proposed prices exceeded the amount set by the RFP, their proposals were deemed non-responsive to the RFP. Consequently, as of April 2, 2009, there were no responsive proposers to the RFP. BPS staff prepared a final score and ranking sheet as required by Section 6.2.7 of the RFP. The scoring and ranking included just the two proposals, CMS and Wexford, that were responsive going into the Phase 5 Price Opening. BPS staff did not perform further scoring and ranking of the two proposals that were non-responsive prior to the Price Opening. Department of Corrections’ Procedure 205.002, entitled “Formal Service Contracts,” addresses the Department’s procedures, terms, and conditions for soliciting competitive offers for certain types of services. The Procedure has separate sections for Invitations to Bid, Requests for Proposals, Invitations to Negotiate and general sections that address all three. There is no requirement in the procedure that addresses the specific situation facing the Department in the mental healthcare procurement. The section of Procedure 205.002 that Petitioner points to, Section (5)(r)3., applies only to instances when the Department is seeking to single source a procurement or negotiate with a single responsive bidder. The section reads as follows in pertinent part: (r) Receipt of One or Fewer Responsive Bids, Proposals or Responses: * * * 3. If the department determines that services are available only from a single source or that conditions and circumstances warrant negotiation with the single responsive bidder, proposer, or respondent on the best terms and conditions, the department’s intended decision will be posted in accordance with section 120.57(3), F.S., before it may proceed with procurement. This section of the procedure is clearly inapplicable in the instant case since there were no responsive proposals. Section 287.057(6), Florida Statutes (2008) Faced with no responsive proposers, the Department considered its options. The Department then decided to negotiate for a contract on best terms and conditions pursuant to Section 287.057(6), Florida Statutes (2008), in lieu of going through a third competitive solicitation. The Department’s decision to negotiate was ultimately made by the Assistant Secretary for Health Services in the Department's Office of Health Services. The BPS staff and legal counsel advised Assistant Secretary Dr. Sandeep Rahangdale about the options available to the Department. Dr. Rahangdale had the following three options: (1) to reject all proposals and begin what would be the third competitive procurement for mental healthcare services in less than 8 months; (2) to negotiate a contract on best terms and conditions under Section 287.057(6), Florida Statutes (2008), since there were less than two responsive proposals to the RFP; or (3) to use the statutory exemption for health services under Section 287.057(5)(f), Florida Statutes (2008), and enter into a contract with any vendor the Department selected. Option 1, to begin a new procurement was time-barred because the Department needed a new contract in place by July 1, 2009. Dr. Rahangdale’s primary concern was to insure that the Department provided constitutionally mandated health care, including mental healthcare to all inmates in its custody. In making the decision to negotiate, Dr. Rahangdale reasonably chose to begin negotiations with CMS. He made this decision because, of the two proposers who were responsive except for exceeding the price cap, CMS’s price was closest to the $70.00 per inmate per month goal. Wexford, the other proposer that was responsive except for price, had submitted a price of $95.00 per inmate per month. Thus, the Department had a reasonable belief there was a better chance of reaching its $70 goal through negotiations with CMS. Additionally, CMS was the highest scored technical proposal of the only two responsive proposals prior to the Price Opening. Thus, CMS was a better choice for the Department from a delivery of services standpoint. The Department made a reasoned decision to not abandon all the criteria of the RFP that had to do with qualifications, such as business experience (failed by University of Miami) or financial viability (failed by MHM). Dr. Rahangdale considered and determined that the nature of MHM’s and the University of Miami’s failure to be responsive could not be changed or cured in the negotiation process unless the Department lowered its expectations regarding performance and corporate viability. Negotiations were conducted between April 7, 2009, and April 9, 2009, by Jimmie Smith of the Office of Health Services. Dr. Rahangdale instructed Mr. Smith to undertake negotiations with CMS on best terms and conditions, and to strive to get as close as possible to a price of $70.00 per inmate per month in the negotiations. Mr. Smith is a Registered Nurse working in the Department’s Office of Health Services. His working job title is Assistant Program Administrator/Contracting. He has the responsibility to contact potential vendors for health-related services and commodities and to ensure that formal contracts or purchase orders are issued for the required health-related services and commodities. Mr. Smith typically is charged with making initial contact with vendors, handling negotiations for exempt health service contracts, and coordinating the procurement of the services with BPS. He is also a contract manager for healthcare services and advises other contract managers. Mr. Smith was eminently well qualified to negotiate this contract for mental healthcare services on behalf of the Department. Prior to beginning his negotiations, Mr. Smith obtained a complete copy of CMS’s proposal, including the price proposal. He contacted CMS'S Senior Director of Business Development, Frank Fletcher, by telephone to conduct the negotiations. Emails dated April 9, 2009, between the Department and CMS’s representative reflect an offer by CMS to perform the scope of work described in the RFP at a capitated rate of $70.00 for the first year of service, with a $2.50 escalator per year for a five-year non-renewal contract term. CMS also proposed adding a 30-day period for correction of performance measures, prior to the imposition of liquidated damages. The Department counter-offered with a requirement that any failure to correct the performance measure violation within the 30-day period would result in retroactive imposition of liquidated damages to the day of the violation. These terms and conditions were presented to Dr. Rahangdale who approved them. Dr. Rahangdale considered the $2.50 escalator, but decided he was satisfied with the initial year price of $70, a 10% savings for the Department over its current contract and a savings of three million over the life of the contract. On April 10, 2009, Mr. Smith confirmed the tentative agreement to Mr. Fletcher by email. CMS understood that the agreement was tentative until the Department posted a notice of agency decision. The BPS staff prepared an Agency Action Memo, the Summary Report, and the Notice of Intent to Award. The Agency Action Memo contained a recommendation for award and an option of non-award. The Agency Action Memo stated as follows in part: The Department made the determination that it was in the best interest of the State to proceed with negotiations as authorized by Section 287.057(6), Florida Statutes. The Department negotiated with the highest- ranked Proposer on the best terms and conditions for the resulting Contract. Based upon the results of the negotiation conducted, it is recommended that the Department awards a Contract to Correctional Medical Services, Inc. A Summary Report was attached to the Agency Action Memo. The report explained the RFP process in detail. It explained the reasons for finding MHM and the University of Miami non-responsive. It explained that CMS and Wexford were non-responsive because they exceeded the price cap. 55.. The report charted the results of the Phase 5--Public Opening of Price Proposals as follows in abbreviated form: PROPOSER UNIT PRICE ANNUAL COST FINANCIAL EXPERIENCE CMS $74.59 $16,536,780 Passed Passed Wexford $95.00 $21,090,000 Passed Passed U. of M. $69.49 $15,426,780 Passed Failed MHM $70.00 $15,540,000 Failed Passed The report set forth the Department's reasons for negotiating on best terms and conditions pursuant to Section 287.057(6), Florida Statutes (2008), in pertinent part as follows: Phase 8--Notice of Agency Decision The procurement of Mental Healthcare Services in Region IV was under competitive solicitation for over eight (8) months, via two (2) different solicitations (ITN and RFP). The companies that submitted proposals in response to this RFP also submitted responses to the previous ITN. Pursuant to Section 287.057(6), Florida Statutes, the Department negotiated with the highest-ranking proposer on the best terms and condition and in the best interest of the state, in lieu of resoliciting competitive proposals for a third time. The last page of the report charted the Final Score and Ranking for CMS and Wexford. The first chart showed the actual points received by the proposers, the highest points received by any proposal, and the awarded points. The second chart showed the proposed unit price, the lowest verified price, and the awarded points. The third chart showed the total response points, with CMS having 500 and Wexford having 454.64. MHM and the University of Miami were non-responsive as to RFP requirements that the Department, in its sole discretion, determined were non-negotiable. Therefore, the Department properly determined that CMS was the highest-ranking proposer after the Price Opening. As Bureau Chief, Mr. Staney was ultimately responsible for verifying that the four proposals were non-responsive. He and Dr. Rahangdale signed the Agency Action Memo, recommending an award to CMS. On April 15, 2009, Mr. Staney sent the documents to his supervisor, Director of Administration Millie J. Seay. The BPS staff briefed Ms. Seay regarding the Agency Action Memo. Ms. Seay questioned whether the Department should negotiate with Wexford. The BPS staff explained that Dr. Rahangdale had considered negotiating with Wexford but that he was satisfied with the negotiated rate and the higher technically-scored proposal from CMS. On Monday, April 20, 2009, Ms. Seay signed the Agency Action Memo. The next day the Department posted its intent to award a contract to CMS. The Department's Notice of Agency Decision announced the intent to award a contract for Mental Healthcare Services in Region IV to CMS as follows: DEPARTMENT OF CORRECTIONS NOTICE OF AGENCY DECISION RFP #08-DC-8048 MENTAL HEALTHCARE SERVICES IN REGION IV Pursuant to the provisions of Chapter 287.057(6), Florida Statutes, the Department of Corrections announces its intent to award a contract for MENTAL HEALTHCARE SERVICES IN REGION IV to the following vendor: Correctional Medical Services, Inc. This announcement gave all interested parties notice that the Department was taking some action with regard to the referenced RFP. The Notice also contained the statutorily required language giving all interested parties a point of entry to challenge the Department’s intent to award. Accordingly, no proposers were denied an opportunity to inquire into the details of the process that led to an award under the referenced statute, including the evaluation of the proposals and the Department’s decision to wait until it had completed Section 287.057(6), Florida Statutes (2008), negotiations to post the intended agency decision. 63 MHM timely filed its Formal Bid Protest Petition with the Department on May 4, 2009.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is Recommended: That the Department enter a final order awarding the contract for Mental Healthcare Services in Region IV to CMS and dismissing the protest of MHM. DONE AND ENTERED this 27th day of July, 2009, in Tallahassee, Leon County, Florida. S SUZANNE F. HOOD 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 27th day of July, 2009.
