The Issue Whether the agency's audit adjustment of an interim rate should be sustained.
Findings Of Fact The Petitioner is a licensed nursing home located in Chipley, Washington County, Florida. The Petitioner is located in a rural county in Florida's panhandle with high numbers of Medicaid- eligible patients. The Petitioner participates in the Florida Medicaid Program and has agreed to provide skilled or intermediate nursing care services for Medicaid patients. The Respondent is the state agency responsible for administering the Florida Medicaid Program. The parties have entered into an agreement that governs the provision of Medicaid services and the reimbursement to the provider (Petitioner). Such plan authorizes reimbursement based upon rates agreed between the parties and limited by rules and regulations applicable to the Medicaid Program. In this regard, Medicaid reimbursements are made in accordance with the Florida Title XIX Long-Term Care Reimbursement Plan (the Plan). The Plan was adopted and incorporated by reference in Rule Chapter 59G, Florida Administrative Code. To set a reimbursement rate, cost reports are reviewed by AHCA to determine the actual Medicaid allowable costs incurred by the provider. The allowable costs are used to set a prospective rate for the provider. Payments to the provider in subsequent periods are then based upon the rate adjusted for inflation. There are limits on costs and reimbursements. If a provider incurs an expense above the allowed level, it will not be reimbursed. In this regard the approved rate for the provider may not compensate the provider for expenses that were more than anticipated. Medicaid is not intended to pay for luxury care. The Medicaid Program covers rates for providers that are efficiently operated. The providers are not compensated for luxury services, excessive charges, or operating costs that exceed what a prudent, efficiently operated facility would incur. Once the reimbursement rate is set it continues until the next rate-setting period. If circumstances change such that the rate unfairly impacts the provider's ability to provide care, an interim rate adjustment may be requested. An increased interim rate could assist the provider until the regular rate is re-calculated. Nursing homes are subject to inspections or surveys that are performed by AHCA to assure compliance with all applicable standards of operation. The standards are to assure that patients receive a quality of care at or above minimum levels. Pertinent to this case was a survey that found Petitioner deficient due to inadequate staffing levels. Inadequate staffing directly impacts the quality of care a facility is able to provide. Given its rural location and the wages it was offering, the Petitioner could not offer competitive opportunities in order to recruit and retain qualified staff. For entry level employees the Petitioner found itself competing against even McDonald's restaurant for employees. As a result, when a survey found the facility deficient, the Petitioner sought financial relief through a request for an interim rate increase. The provider faced a financial loss if the deficiency were corrected without a corresponding increase in its rate as it would not be able to cover the additional costs within its reimbursement rate. To correct the deficiencies Petitioner sought six additional Certified Nursing Assistants and wage enhancements. As a result, it sought an interim rate increase of $3.56 per day in patient care and $.12 per day in operating cost. The interim reimbursement rate was approved by AHCA in 1996. The reimbursements to this provider then continued based upon the new rate. It then became the facility's objective to follow the plan of correction to assure that the deficiency was, in fact, alleviated. In November of 1997, new rates were established for the Petitioner which became the settled rate. Based upon the cost reports filed with AHCA, the Petitioner's rate was settled with increases of $3.91 per day in patient care and $1.62 in the operating category. The instant case resulted from an audit conducted at the facility. The audit was to verify that the expenses reported were correct and allowable. An audit should also confirm that the statistical information reported by the provider was correct. The auditors used $3.56 instead of $3.91 as the starting point for the cost report figures. The Petitioner had relied on the higher number as the cost- settled figure for the audit. More important, the Petitioner relied on the same accounting methodology it had relied on for the interim rate request. The auditors, an independent accounting firm, did not accept the prior methodology. Subsequent to the audit, the Respondent issued a letter to the Petitioner claiming it was owed $364,621.12 for Medicaid over-payments. The Respondent maintains it is entitled to recoup the over-payments as part of the future reimbursements to the provider. The Petitioner argues that such action will adversely impact the provider's ability to provide the quality of care expected by AHCA. All of the costs reported by this Petitioner are allowable under the Medicaid guidelines. The crux of the issue in the case results from the settled interim rate not being accepted and carried forward by the independent auditors. Because some amounts exceeded the "budgeted" estimates, the auditors disallowed the additional expenses. The amounts, all within the category of wage or salary enhancements, were not deemed proper because they exceeded or altered the granted 50- cent-an-hour pay raise within the original request. Although allowable, the expenditures fell outside the parameters of the budget that support the interim rate increase. Bonuses and wage enhancements paid by the Petitioner during the audited period were not one-time expenses but are on-going programs to encourage and support the retention of qualified employees. This was within the parameter of curing the deficiency that the interim rate sought to address. None of the expenses fell outside of operation and patient care costs. It is anticipated that the reduction in Petitioner's rate will result in reduced staffing. Otherwise, the facility will not be a financially feasible operation. The reimbursement rate for this provider is not higher than other rates for the other providers serving the geographical region served by the Petitioner. When a provider goes through the cost settlement process, AHCA is authorized to and may seek additional information to clarify any form submitted by a Medicaid provider. In this case, the rate was cost- settled without additional information being sought by AHCA. The allowable expenses incurred by the Petitioner support the reimbursement rate paid to this provider.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Agency for Health Administration enter a Final Order reinstating the provider's Medicaid rate to include the interim rate as previously settled and accepted by the Respondent. AHCA should affirm the interim rate established and committed by the cost report allowing $3.91 for patient care and $1.62 for operating costs. DONE AND ENTERED this 30th day of July, 2001, in Tallahassee, Leon County, Florida. _____________________________ J. D. Parrish 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 30th day of July, 2001. COPIES FURNISHED: Theodore E. Mack, Esquire Powell and Mack 803 North Calhoun Street Tallahassee, Florida 32303 Steven A. Grigas, Esquire Agency for Health Care Administration 2727 Mahan Drive Building 3 Tallahassee, Florida 32308 Ruben J. King-Shaw, Jr., Director Agency for Health Care Administration 2727 Mahan Drive Fort Knox Building, Suite 3116 Tallahassee, Florida 32308 Julie Gallagher, General Counsel 2727 Mahan Drive Fort Knox Building Three, Suite 3431 Tallahassee, Florida 32308
The Issue The issues in this case are whether Respondent applied the proper reimbursement principles to Petitioners' initial Medicaid rate setting, and whether elements of detrimental reliance exist so as to require Respondent to establish a particular initial rate for Petitioners' facilities.
Findings Of Fact There are nine Petitioners in this case. Each of them is a long-term health care facility (nursing home) operated under independent and separate legal entities, but, generally, under the umbrella of a single owner, Tzvi "Steve" Bogomilsky. The issues in this case are essentially the same for all nine Petitioners, but the specific monetary impact on each Petitioner may differ. For purposes of addressing the issues at final hearing, only one of the Petitioners, Madison Pointe Rehabilitation and Health Center (Madison Pointe), was discussed, but the pertinent facts are relevant to each of the other Petitioners as well. Each of the Petitioners has standing in this case. The Amended Petition for Formal Administrative Hearing filed by each Petitioner was timely and satisfied minimum requirements. In September 2008, Bogomilsky caused to be filed with AHCA a Change of Licensed Operator ("CHOP") application for Madison Pointe.1 The purpose of that application was to allow a new entity owned by Bogomilsky to become the authorized licensee of that facility. Part and parcel of the CHOP application was a Form 1332, PFA. The PFA sets forth projected revenues, expenses, costs and charges anticipated for the facility in its first year of operation by the new operator. The PFA also contained projected (or budgeted) balance sheets and a projected Medicaid cost report for the facility. AHCA is the state agency responsible for licensing nursing homes in this state. AHCA also is responsible for managing the federal Medicaid program within this state. Further, AHCA monitors nursing homes within the state for compliance with state and federal regulations, both operating and financial in nature. The AHCA Division of Health Quality Assurance, Bureau of Long-Term Care Services, Long-Term Care Unit ("Long-Term Care Unit") is responsible for reviewing and approving CHOP applications and issuance of an operating license to the new licensee. The AHCA Division of Health Quality Assurance, Bureau of Health Facility Regulation, Financial Analysis Unit ("Financial Analysis Unit") is responsible for reviewing the PFA contained in the CHOP application and determining an applicant's financial ability to operate a facility in accordance with the applicable statutes and rules. Neither the Long-Term Care Unit nor the Financial Analysis Unit is a part of the Florida Medicaid Program. Madison Pointe also chose to submit a Medicaid provider application to the Medicaid program fiscal agent to enroll as a Medicaid provider and to be eligible for Medicaid reimbursement. (Participation by nursing homes in the Medicaid program is voluntary.) The Medicaid provider application was reviewed by the Medicaid Program Analysis Office (MPA) which, pursuant to its normal practices, reviewed the application and set an interim per diem rate for reimbursement. Interim rate-setting is dependent upon legislative direction provided in the General Appropriations Act and also in the Title XIX Long-Term Care Reimbursement Plan (the Plan). The Plan is created by the federal Centers for Medicare and Medicaid Services (CMS). CMS (formerly known as the Health Care Financing Administration) is a federal agency within the Department of Health and Human Services. CMS is responsible for administering the Medicare and Medicaid programs, utilizing state agencies for assistance when appropriate. In its PFA filed with the Financial Analysis Unit, Madison Pointe proposed an interim Medicaid rate of $203.50 per patient day (ppd) as part of its budgeted revenues. The projected interim rate was based on Madison Pointe's expected occupancy rate, projected expenses, and allowable costs. The projected rate was higher than the previous owner's actual rate in large part based on Madison Pointe's anticipation of pending legislative action concerning Medicaid reimbursement issues. That is, Madison Pointe projected higher spending and allowable costs based on expected increases proposed in the upcoming legislative session. Legislative Changes to the Medicaid Reimbursement System During the 2007 Florida Legislative Session, the Legislature addressed the status of Medicaid reimbursement for long-term care facilities. During that session, the Legislature enacted the 2007 Appropriations Act, Chapter 2007-72, Laws of Florida. The industry proposed, and the Legislature seemed to accept, that it was necessary to rebase nursing homes in the Medicaid program. Rebasing is a method employed by the Agency periodically to calibrate the target rate system and adjust Medicaid rates (pursuant to the amount of funds allowed by the Legislature) to reflect more realistic allowable expenditures by providers. Rebasing had previously occurred in 1992 and 2002. The rebasing would result in a "step-up" in the Medicaid rate for providers. In response to a stated need for rebasing, the 2007 Legislature earmarked funds to address Medicaid reimbursement. The Legislature passed Senate Bill 2800, which included provisions for modifying the Plan as follows: To establish a target rate class ceiling floor equal to 90 percent of the cost- based class ceiling. To establish an individual provider- specific target floor equal to 75 percent of the cost-based class ceiling. To modify the inflation multiplier to equal 2.0 times inflation for the individual provider-specific target. (The inflation multiplier for the target rate class ceiling shall remain at 1.4 times inflation.) To modify the calculation of the change of ownership target to equal the previous provider's operating and indirect patient care cost per diem (excluding incentives), plus 50 percent of the difference between the previous providers' per diem (excluding incentives) and the effect class ceiling and use an inflation multiplier of 2.0 times inflation. The Plan was modified in accordance with this legislation with an effective date of July 1, 2007. Four relevant sentences from the modified Plan are relevant to this proceeding, to wit: For a new provider with no cost history resulting from a change of ownership or operator, where the previous provider participated in the Medicaid program, the interim operating and patient care per diems shall be the lesser of: the class reimbursement ceiling based on Section V of this Plan, the budgeted per diems approved by AHCA based on Section III of this Plan, or the previous providers' operating and patient care cost per diem (excluding incentives), plus 50% of the difference between the previous providers' per diem (excluding incentives) and the class ceiling. The above new provider ceilings, based on the district average per diem or the previous providers' per diem, shall apply to all new providers with a Medicaid certification effective on or after July 1, 1991. The new provider reimbursement limitation above, based on the district average per diem or the previous providers' per diem, which affects providers already in the Medicaid program, shall not apply to these same providers beginning with the rate semester in which the target reimbursement provision in Section V.B.16. of this plan does not apply. This new provider reimbursement limitation shall apply to new providers entering the Medicaid program, even if the new provider enters the program during a rate semester in which Section V.B.16 of this plan does not apply. [The above cited sentences will be referred to herein as Plan Sentence 1, Plan Sentence 2, etc.] Madison Pointe's Projected Medicaid Rate Relying on the proposed legislation, including the proposed rebasing and step-up in rate, Madison Pointe projected an interim Medicaid rate of $203.50 ppd for its initial year of operation. Madison Pointe's new projected rate assumed a rebasing by the Legislature to eliminate existing targets, thereby, allowing more reimbursable costs. Although no legislation had been passed at that time, Madison Pointe's consultants made calculations and projections as to how the rebasing would likely affect Petitioners. Those projections were the basis for the $203.50 ppd interim rate. The projected rate with limitations applied (i.e., if Madison Pointe did not anticipate rebasing or believe the Plan revisions applied) would have been $194.26. The PFA portion of Madison Pointe's CHOP application was submitted to AHCA containing the $203.50 ppd interim rate. The Financial Analysis Unit, as stated, is responsible for, inter alia, reviewing PFAs submitted as part of a CHOP application. In the present case, Ryan Fitch was the person within the Financial Analysis Unit assigned responsibility for reviewing Madison Pointe's PFA. Fitch testified that the purpose of his review was to determine whether the applicant had projected sufficient monetary resources to successfully operate the facility. This would include a contingency fund (equal to one month's anticipated expenses) available to the applicant and reasonable projections of cost and expenses versus anticipated revenues.2 Upon his initial review of the Madison Pointe PFA, Fitch determined that the projected Medicaid interim rate was considerably higher than the previous operator's actual rate. This raised a red flag and prompted Fitch to question the propriety of the proposed rate. In his omissions letter to the applicant, Fitch wrote (as the fourth bullet point of the letter), "The projected Medicaid rate appears to be high relative to the current per diem rate and the rate realized in 2006 cost reports (which includes ancillaries and is net of contractual adjustments). Please explain or revise the projections." In response to the omissions letter, Laura Wilson, a health care accountant working for Madison Pointe, sent Fitch an email on June 27, 2008. The subject line of the email says, "FW: Omissions Letter for 11 CHOW applications."3 Then the email addressed several items from the omissions letter, including a response to the fourth bullet point which says: Item #4 - Effective July 1, 2007, it is anticipated that AHCA will be rebasing Medicaid rates (the money made available through elimination of some of Medicaid's participation in covering Medicare Part A bad debts). Based on discussions with AHCA and the two Associations (FHCA & FAHSA), there is absolute confidence that this rebasing will occur. The rebasing is expected to increase the Medicaid rates at all of the facilities based on the current operator's spending levels. As there is no definitive methodology yet developed, the rebased rates in the projections have been calculated based on the historical methodologies that were used in the 2 most recent rebasings (1992 and 2002). The rates also include the reestablishment of the 50% step-up that is also anticipated to begin again. The rebasing will serve to increase reimbursement and cover costs which were previously limited by ceilings. As noted in Note 6 of the financials, if something occurs which prevents the rebasing, Management will be reducing expenditures to align them with the available reimbursement. It is clear Madison Pointe's projected Medicaid rate was based upon proposed legislative actions which would result in changes to the Plan. It is also clear that should those changes not occur, Madison Pointe was going to be able to address the shortfall by way of reduced expenditures. Each of those facts was relevant to the financial viability of Madison Pointe's proposed operations. Madison Pointe's financial condition was approved by Fitch based upon his review of the PFA and the responses to his questions. Madison Pointe became the new licensed operator of the facility. That is, the Long-Term Care Unit deemed the application to have met all requirements, including financial ability to operate, and issued a license to the applicant. Subsequently, MPA provided to Madison Pointe its interim Medicaid rate. MPA advised Madison Pointe that its rate would be $194.55 ppd, some $8.95 ppd less than Madison Pointe had projected in its PFA (but slightly more than Madison Pointe would have projected with the 50 percent limitation from Plan Sentence 1 in effect, i.e., $194.26). The PFA projected 25,135 annual Medicaid patient days, which multiplied by $8.95, would equate to a reduction in revenues of approximately $225,000 for the first year of operation.4 MPA assigned Madison Pointe's interim Medicaid rate by applying the provisions of the Plan as it existed as of the date Madison Pointe's new operating license was issued, i.e., September 1, 2007. Specifically, MPA limited Madison Pointe's per diem to 50 percent of the difference between the previous provider's per diem and the applicable ceilings, as dictated by the changes to the Plan. (See Plan Sentence 1 set forth above.) Madison Pointe's projected Medicaid rate in the PFA had not taken any such limitations into account because of Madison Pointe's interpretation of the Plan provisions. Specifically, that Plan Sentence 3 applies to Madison Pointe and, therefore, exempts Madison Pointe from the new provider limitation set forth in Plan Sentences 1 and 2. However, Madison Pointe was not "already in the Medicaid program" as of July 1, 2007, as called for in Plan Sentence 3. Rather, Madison Pointe's commencement date in the Medicaid program was September 1, 2007. Plan Sentence 1 is applicable to a "new provider with no cost history resulting from a change of ownership or operator, where the previous operator participated in the Medicaid program." Madison Pointe falls within that definition. Thus, Madison Pointe's interim operating and patient care per diems would be the lesser of: (1) The class reimbursement ceiling based on Section V of the Plan; (2) The budgeted per diems approved by AHCA based on Section III of the Plan; or (3) The previous provider's operating and patient care cost per diem (excluding incentives), plus 50 percent of the difference between the previous provider's per diem and the class ceiling. Based upon the language of Plan Sentence 1, MPA approved an interim operating and patient care per diem of $194.55 for Madison Pointe. Plan Sentence 2 is applicable to Madison Pointe, because it applies to all new providers with a Medicaid certification effective after July 1, 1991. Madison Pointe's certification was effective September 1, 2007. Plan Sentence 3 is the primary point of contention between the parties. AHCA correctly contends that Plan Sentence 3 is not applicable to Petitioner, because it addresses rebasing that occurred on July 1, 2007, i.e., prior to Madison Pointe coming into the Medicaid system. The language of Plan Sentence 3 is clear and unambiguous that it applies to "providers already in the Medicaid program." Plan Sentence 4 is applicable to Madison Pointe, which entered the system during a rate semester, in which no other provider had a new provider limitation because of the rebasing. Again, the language is unambiguous that "[t]his new provider reimbursement limitation shall apply to new providers entering the Medicaid program. . . ." Madison Pointe is a new provider entering the program. Detrimental Reliance and Estoppel Madison Pointe submitted its CHOP application to the Long-Term Care Unit of AHCA for approval. That office has the clear responsibility for reviewing and approving (or denying) CHOP applications for nursing homes. The Long-Term Care Unit requires, as part of the CHOP application, submission of the PFA which sets forth certain financial information used to determine whether the applicant has the financial resources to operate the nursing home for which it is applying. The Long-Term Care Unit has another office within AHCA, the Financial Analysis Unit, to review the PFA. The Financial Analysis Unit is found within the Bureau of Health Facility Regulation. That Bureau is responsible for certificates of need and other issues, but has no authority concerning the issuance, or not, of a nursing home license. Nor does the Financial Analysis Unit have any authority to set an interim Medicaid rate. Rather, the Financial Analysis Unit employs certain individuals who have the skills and training necessary to review financial documents and determine an applicant's financial ability to operate. A nursing home licensee must obtain Medicaid certification if it wishes to participate in the program. Madison Pointe applied for Medicaid certification, filing its application with a Medicaid intermediary which works for CMS. The issuance of a Medicaid certification is separate and distinct from the issuance of a license to operate. When Madison Pointe submitted its PFA for review, it was aware that an office other than the Long-Term Care Unit would be reviewing the PFA. Madison Pointe believed the two offices within AHCA would communicate with one another, however. But even if the offices communicated with one another, there is no evidence that the Financial Analysis Unit has authority to approve or disapprove a CHOP application. That unit's sole purpose is to review the PFA and make a finding regarding financial ability to operate. Likewise, MPA--which determines the interim Medicaid rate for a newly licensed operator--operates independently of the Long-Term Care Unit or the Financial Analysis Unit. While contained within the umbrella of AHCA, each office has separate and distinct duties and responsibilities. There is no competent evidence that an applicant for a nursing home license can rely upon its budgeted interim rate--as proposed by the applicant and approved as reasonable by MPA--as the ultimate interim rate set by the Medicaid Program Analysis Office. At no point in time did Fitch tell Madison Pointe that a rate of $203.50 ppd would be assigned. Rather, he said that the rate seemed high; Madison Pointe responded that it could "eliminate expenditures to align them with the available reimbursement." The interim rate proposed by the applicant is an estimate made upon its own determination of possible facts and anticipated operating experience. The interim rate assigned by MPA is calculated based on the applicant's projections as affected by provisions in the Plan. Furthermore, it is clear that Madison Pointe was on notice that its proposed interim rate seemed excessive. In response to that notice, Madison Pointe did not reduce the projected rate, but agreed that spending would be curtailed if a lower interim rate was assigned. There was, in short, no reliance by Madison Pointe on Fitch's approval of the PFA as a de facto approval of the proposed interim rate. MPA never made a representation to Madison Pointe as to the interim rate it would receive until after the license was approved. There was, therefore, no subsequent representation made to Madison Pointe that was contrary to a previous statement. The Financial Analysis Unit's approval of the PFA was done with a clear and unequivocal concern about the propriety of the rate as stated. The approval was finalized only after a representation by Madison Pointe that it would reduce expenditures if a lower rate was imposed. Thus, Madison Pointe did not change its position based on any representation made by AHCA.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered by Respondent, Agency for Health Care Administration, approving the Medicaid interim per diem rates established by AHCA and dismissing each of the Amended Petitions for Formal Administrative Hearing. DONE AND ENTERED this 23rd day of February, 2009, in Tallahassee, Leon County, Florida. R. BRUCE MCKIBBEN 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 23rd day of February, 2009.
Findings Of Fact In 1975 the Florida Legislature passed the Medical Malpractice Reform Act, Chapter 75-9, Laws of Florida, now codified in Chapter 768, Florida Statutes. Part of this legislative package included the creation of the Fund. This legislation was passed in response to a medical malpractice insurance crisis which arose when the primary underwriter for the Florida Medical Association sought to stop issuing medical malpractice policies in Florida, thus making it difficult, if not impossible, for physicians or hospitals to obtain medical malpractice insurance coverage at reasonable rates. As a result of this problem, many physicians began to practice defensive medicine, curtail or abandon their practices or practice without coverage of any kind. The Fund is a private not-for-profit organization, participation in which is totally voluntary for its member health care providers. Insofar as Petitioners are concerned, membership in the Fund is but one of several options available to provide legally required evidence of financial responsibility in order to obtain licensure as a hospital facility in Florida. In fact, of the approximately 260 hospitals in Florida, only 125 satisfy their financial responsibility requirement via membership in the Fund. Physicians, hospitals, health maintenance organizations and ambulatory surgical centers who become members of the Fund must maintain at least $100,000 in primary professional liability insurance. Membership in the Fund grants to each participant a limitation of liability above the $100,000 in primary coverage. To the extent that any settlement or judgment exceeds the primary coverage of the participant, it is paid by the Fund without limitation. The Fund is operated subject to the supervision and approval of a board of governors whose membership is required by law to consist of representatives of the insurance industry, the legal and medical professions, physicians' insurers, hospitals, hospitals' insurers and the general public. The Department is charged by statute with certain regulatory functions concerning the Fund. The base fee for Fund membership is set by statute at $500 for physicians, after an initial $1,000 enrollment fee for the first year of participation, and at $300 per bed for hospital members. The statute requires the Department to set additional fees based upon the classifications of health care providers contained in the statute. In the event that base fees are insufficient to pay all claims asserted against the Fund for a given Fund year, the Department is empowered, upon request of the Board of Governors of the Fund, to order additional assessments against Fund participants to meet any such deficiency. Under the original legislation, all classes of health care providers could be assessed unlimited amounts to make up any deficiencies. As a result of legislative amendments in 1976, however, the amount which participants, other than hospitals, could be assessed was limited to the amount each Fund member had paid to join the Fund for that particular coverage year. 1976 legislative amendments also required that each fiscal year of the Fund be operated independently of preceding fiscal years, and further required that occurrences giving rise to claims in a particular Fund year be paid only from fees or investment income on these fees collected for that particular year. Thus, it is entirely possible for the Fund to experience deficits in a given year, and yet hold surplus funds for other years. The dispute in these consolidated proceedings arises from assessments for deficits incurred for the Fund years 1977-1978 and 1978-1979. Each of the hospitals named as Petitioners in the Petition for Administrative Proceedings in Case No. 82-776 were members of the Fund during the Fund year 1977-1978. Each of the hospitals named in the style and listed on Exhibit "A" to the Amendment to Petition for Administrative Proceedings in Case Nos. 82-530 and 82-571 were members of the Fund during the Fund year 1978-1979. On October 31, 1981, the Fund certified to the Department a deficiency in the amount of $1,350,672 for the Fund year 1977-1978. On January 18, 1982, the Fund certified to the Department an additional deficiency for the Fund year 1977-1978 in the amount of $1,759,591. On January 18, 1982, the Fund certified to the Department a deficiency of $13,935,927 for the Fund year 1978-1979. On January 13, 1982, the Department issued an "order" assessing various classes of health care providers the deficiency originally certified by the Fund for the Fund year 1977-1978. The "order" of January 13, 1982, was amended by the "order" of February 1, 1982, for the Fund year 1977-1973. The amended order contained the same dollar amount of assessments, but altered the amount charged to various classes of Fund members. On February 17, 1982, the Department issued its "order" granting the second assessment for the Fund year 1977-1978. On January 22, 1982, the Department issued its "order" granting the assessment for the 1978-1979 Fund year. The Department has not promulgated any rules pursuant to Chapter 120, Florida Statutes, pertaining to its regulation of or duties in conjunction with the Fund under Section 768.54, Florida Statutes. As members of the Fund, each of the Petitioners' interests are substantially affected by the Orders of January 13, 1982; January 22, 1982; February 1, 1982; and February 17, 1982. For the Fund year 1977-1978 the total assessment ordered by the Department is $3,110,263. The total assessment for the Fund year 1978-1979 is $13,935,972. For the Fund year 1977-1978, physicians and professional association members are proposed to be assessed $1,730,207. During the Fund year 1977-1978, hospital members paid into the Fund, exclusive of interest earned on the fees, the amount of $5,292,498. For the Fund year 1977-1978, physicians and professional association members paid into the Fund the sum of $2,326,541. For the Fund year 1978-1979, hospital members paid into the Fund, exclusive of interest earned on their fees, the sum of $5,627,553. Interest earned through December 31, 1981, on these fees is $1,725,845. For the Fund year 1978-1979, physicians and professional association members paid into the Fund, exclusive of interest earned on their fees, the sum of $2,411,205. Interest earned through December 31, 1981, on the fees contributed by physicians and professional associations is $739,463. For the Fund year 1977-1978, the proposed assessments against hospital members of the Fund is $1,374,827. For the Fund year 1978-1979, the Fund retained the services of an independent actuarial firm to study and recommend appropriate additional fees to charge its members. The following table reflects the statutory base fees, the fees recommended by the actuary, the fees sought by the Fund and the fees ordered by the Department of Insurance for the 1977-1978 Fund year. Base Fees Actuary's Additional Additional Paid Recommended Fees Fees Pursuant Additional Requested Ordered to Stat. Fees by FPCF By DOI Class I Physicians $ $ $ $ Dade/Broward Co. 500.00 2,233.00 2,233.00 -0- Rest of State 500.00 l,749.00 1,749.00 -0- Class II Physicians Dade/Broward Co. 500.00 4,420.00 4,420.00 -0- Rest of State 500.00 3,549.00 3,549.00 -0- Class III Physicians Dade/Broward Co. 500.00 12,619.00 12,619.00 -0- Rest of State 500.00 10,297.00 10,297.00 -0- Hospitals (per occupied bed) 300.00 222.00 222.00 -0- Ambiatory Surgical Centers -0- 22.00 22.00 -0- (per 100 patients) Health Maintenance Organizations -0- 150.00 150.00 -0- (per 100 subscribers) Professional -0- 20 percent of additional (SAME) -0- fee to be paid by each individual member For the Fund year 1978-1979, the Department made no independent actuarial study of the recommended fees proposed by the independent actuary employed by the Fund, and no member of the Casualty Actuarial Society evaluated the Fund's recommendations on behalf of the Department. The independent actuary employed by the Fund was the only actuary who presented any evidence at the hearing conducted by the Department on the Fund's fee increase request for the Fund year 1978-1979. Each year since the Fund year 1977-1979 the Fund has employed the services of an actuary who, among other things, projected the expected losses above the claims previously paid and reserves established for known claims. These expected losses are reported as IBNR ("incurred but not reported") for each Fund year. The IBNR projected by the actuary employed by the Fund in the most recent report (October 1981) for the Fund year 1977-1978 is $6,306,036, and for the Fund year 1978-1979 is $15,965,324. The Department computed the portion of the assessment to be paid by the different classes of health care providers for the Fund year 1977-1978 based upon an approach known as the "indicated rate method." It is concluded from the record that this method is the most feasible of all suggested alternatives under existing law for reflecting the statutory classifications and, at the same time, providing immediate funds necessary to meet all claims against the Fund. This method is represented by the following formula: The Department started with rates which should have been charged each class in 1981-1982. This is called the "indicated rate by class." (The indicated rates were taken from the October, 1980 report by the Fund actuary.) The Department then applied the following formula for each class: Indicated Rate by Class x Number of Members in the Class = Total indicated fees by Class Total Indicated Fees by Class - Total Indicated Fees for ALL Classes Percentage of Indicated Fees by Class. Percentage of Indicated Fee by Class x Total Expected Loss for ALL Classes Expected Loss by Class. (Expected loss is all losses for the fund year included claims previously paid, reserves established on claims asserted and IBNR (incurred but not reported) Expected Loss by Class - Actual Fees paid by Class = Potential Loss Assessment by Class. Potential Loss Assessment by Class - Potential Loss Assessment for ALL Classes Percentage of Potential Loss Assessment by Class. Percentage of Potential Loss Assessment by Class x Total Assessment to be Ordered by the DOI = Amount of Assessment by Class. The following chart shows the amount each class would have paid under the "indicated rate method" for the Fund year 1977-1978, and the amount actually proposed to be assessed in the "orders" of the Indicated Rate Assessment Department: Actual Assessment a) Class I Physicians $ 146,487.00 $ 138,000.00 b) Class II Physicians 213,502.00 438,297.00 c) Class III Physicians 2,195,383.00 813,048.00 d) Hospitals 521,560.00 1,374,827.00 e) HMO 614.00 Surgical Centers 1,381.00 79,953.00 Professional Associations 28,336.00 Based upon the "indicated rate method" and based upon the application of Section 768.54, Florida Statutes, employed by the Department, assessments for the Fund year 1977-1978 which would otherwise be attributable to physician members of the Fund in the approximate amount of $1,500,000 were not charged to any class of physician. Based upon the "indicated rate method" and based upon the application of Section 768.54, Florida Statutes, employed by the Department, assessments for the Fund year 1978-1979 otherwise attributable to physician members of the Fund in the approximate amount of $9,000,000 were not charged to any class of physicians. The assessments described in the "orders" of the Department for the Fund year 1977-1978 which could not be applied to physician members, based upon the Department's interpretation of Section 768.54, Florida Statutes, were spread among the other classes of health care providers based upon their percentage of "expected losses." The Petitioners in this case, each of whom are members of the Fund, consist of 30 government hospitals, 43 private, nonprofit hospitals, and seven private, for-profit hospitals. During the Fund years 1977-1978 and 1978-1979, the Fund consisted of the following classes and numbers of members: 1977-1978 1978-1979 a) Class I Physicians 1392 1516 b) Class II Physicians 814 971 c) Class III Physicians 1584 1690 d) Hospitals 120 130 e) HMO 2 3 f) Surgical Centers 11 14 g) Professional Associations 572 855 The "orders" of the Department dated January 13, 1982; January 22, 1982; February 1, 1982; and February 17, 1982, were the first time any member of the Fund has been assessed under Section 768.54, Florida Statutes. The fees paid into the Fund; the investment income earned through December 31, 1981, on such fees; the expenses incurred through December 31, 1981; the amounts paid on claims through December 31, 1981; reserves established through and the IBNR for each Fund year for 1975-1976 through 1980-1981 are reflected on the table on page 10a. (IBNR figures are projections of future losses prepared by the Fund's actuary in October 1981.) The rates applicable to physicians and hospital members of the Fund for the years 1977-1978 and 1978-1979 were the base fees provided in Section 768.54, Florida Statutes. No additional fees were set for those Fund years. The rate order for the 1978-1979 year entered by the Department on June 9, 1978, was not appealed. The Fund in fact experienced deficits in both Fund years in controversy in this proceeding. The Fund certified to the Department the amount of its projected deficit for the years in question. The amount of money ultimately certified by the Fund to the Department accurately reflects the amounts derived from the following formula: FUND YEAR: 1975-1976 1976-1977 1977-1978 FEES PAID $2,928,672 $6,303,257 $7,467,605 INTEREST EARNED 1,475,41 3,000,118 2,592,179 ADMINISTRATIVE EXPENSES (54,846) (95,002) (148,113) NET FUNDS AVAILABLE 4,349,227 9,208,373 9,911,671 TO PAY LOSSES LOSSES PAID TO DATE (3,004,273) (6,869,395) (8,271,696) INDEMNITY EXPENSES (300,334) (343,433) (391,858) RESERVED LOSSES (971,733) (4,249,604) (3,663,348) RESERVED EXPENSES (57,584) (111,466) (172,869) PRESENT SURPLUS/DEFICIT (14,697) (2,365,525) (2,588,100) LOSSES INCURRED NOT YET REPORTED (IBNR) (AS OF 6/30/81) (1,189,136) (3,878,887) (7,970,235) FUND YEAR: 1978-1979 1979-1980 1980-1981 FEES PAID $8,060,374 $9,836,157 $11,225,275 INTEREST EARNED 2,543,698 2,589,547 1,882,319 ADMINISTRATIVE EXPENSES (128,556) (279,838) (406,641) NET FUNDS AVAILABLE 10,475,506 12,145,866 12,700,953 TO PAY LOSSES LOSSES PAID TO DATE (9,760,650) (3,410,358) (37,500) INDEMNITY EXPENSES (532,197) (206,616) (32,619) RESERVED LOSSES (13,782,271) (6,445,000) (3,750,000) RESERVED EXPENSES (267,932) (342,787) (114,417) PRESENT SURPLUS/DEFICIT (13,867,544) (1,741,105) (8,766,417) LOSSES INCURRED NOT YET (14,979,237) (28,295,428) (51,500,564) REPORTED (IBNR) (AS OF 6/30/81) FUND YEAR: TOTALS FEES PAID $45,821,340 INTEREST EARNED 14,083,262 ADMINISTRATIVE EXPENSES (1,113,006) NET FUNDS AVAILABLE 58,791,596 TO PAY LOSSES LOSSES PAID TO DATE (31,353,872) INDEMNITY EXPENSES (1,837,057) RESERVED LOSSES (32,861,956) RESERVED EXPENSES (1,067,055) PRESENT SURPLUS/DEFICIT (8,328,344) LOSSES INCURRED NOT YET (107,813,487) REPORTED (IBNR) (AS OF 6/30/81) Total fees paid during the Fund Year + Investment Income attributable to the Fund Year Expenses allocated to that Fund Year Amount paid on claims for that Fund Year Amount reserved for all known claims for that Fund Year. The Department entered orders levying the assessments on January 13, 1982; January 22, 1982; February 1, 1982; and February 17, 1982. The parties to this proceeding stipulated that the assessments entered by the Department for 1977-1978 and 1978-1979 are to be considered to be proposed agency action as to such parties. The Department limited the amount assessed against any physician member to an amount equal to the annual membership fee paid by the physician for the year giving use to the assessment. According to the "orders" of the Department for the Fund year 1977- 1978, Class III physicians' share of the assessment, based upon the assessment formula utilized, was in excess of the amount of membership fees paid by that group, and the balance was spread over the rest of the classes of health care providers. According to the "orders" of the Department for the Fund year 1978- 1979, Class I, II, and III physicians' share of the assessment, based upon the assessment formula utilized, was in excess of the amount of membership fees paid by those groups, and the balance was spread among those health care providers described in Section 768.54(1)(b)l.,5.,6., and 7., Florida Statutes. The Department, by order dated June 9, 1978, denied the Fund's request for additional fees for the year 1978-1979. In April 1981, at the request of the Department, the Fund filed a "Retrospective Rating Plan." This plan provided that at such time as the Fund dropped below 25 percent of the original fees paid in any fund year an assessment would be triggered. The plan further provided for the assessment to be based upon all settlements or final judgments entered but unpaid at the time of the assessment, and all reserves established by the Fund at the time of the assessment. This "Retrospective Rating Plan" was approved by the Department, but not adopted pursuant to Chapter 120, Florida Statutes. Although the Fund sought to amend the plan both before and after the assessments now at issue, the original plan remained in effect at all times material to this cause. Although Petitioners have not disputed the amount of the reserves set by the Fund, such reserves constitute a substantial portion of the assessment amounts requested by the Fund. The Department has not made any evaluation of the accuracy of the case reserves, nor has the Department made any analysis of the method employed by the Fund in setting case reserves. There was some evidence that the cash shortages experienced by the Fund for the Fund years 1977-1978 and 1978-1979 may have been caused in part by the manner in which the Fund has paid claims. In 1976 the Florida Legislature limited the amount which the Fund could payout on claims to $100,000 per person, per year. In addition, the law provides that reasonable attorneys' fees and costs shall be paid to a successful claimant within the first 90 days following a judgment or settlement. In most instances, the Fund does not inquire into the fee arrangement between plaintiffs and their attorneys. Moreover, no claim for attorneys' fees is required to be submitted to the Fund or the trial court to set a reasonable percent fee for such services. The Fund has indicated that for claims paid for the Fund years 1977-1978 and 1978-1979, the Fund simply assumed that attorneys' fees and costs equalled 40 percent of the amount of the settlement or judgment. In most cases, the Fund does not consider any portion of the attorneys' fees as having been paid by the primary insurance carrier. In some instances, it appears that payments made by the Fund may have disregarded the $100,000 per person, per year payout limitation, and in other instances the Fund has been ordered to pay amounts in excess of the statutory limit and has not pursued an appeal of such orders. In still other instances the Fund has purchased annuities to fund settlements or judgments, the cost of which annuities exceeded the $100,000 payout limitation. The Fund does not consider such payments to be subject to the payout limitation although no rights of ownership in the annuities are retained by the Fund. It is possible that the cumulative effect of these practices has been significant. Petitioners adduced evidence estimating "excess payments" by the Fund for 1977-1978 over the statutory limit could be as high as $2,684,737. For the Fund year 1978-1979 these "excess payments" could be as high as $4,827,690. Under the Department's application of Section 768.54, Florida Statutes, no physician member will again be assessed for the Fund years 1977- 1978 and 1978-1979. Yet, based upon the latest estimates by the Fund's consulting actuary, additional claims for those two years which have not yet been reported could reach as high as $22,949,472. Under the Department's construction of the statute, hospital members will have to pay all of these additional losses, if the actuary's projections prove correct.
Findings Of Fact In late 1988, the Respondent, Department of General Services (DGS), invited bids on a building construction project entitled "Orange County Regional Service Center Phase II, DGS-86126000" (the Project). The invitation to bid included a project manual, Volumes I and II, which contained instructions to bidders and proposed contract terms and conditions. The project manual is referred to colloquially as "the specifications." The specifications incorporated by reference A1A Document A201, General Conditions of the Contract for Construction, 1976 Edition. On October 20, 1988, the State of Florida Department of Insurance issued a notice of public hearing to the National Council on Compensation Insurance at its New York and Florida addresses and all whom it may concern. It gave notice of a public hearing to be held on November 4, 1988, for the purpose of considering a proposal filed by the council on October 17 and placed on file for public inspection on October 20, proposing an overall average increase of 47.7 percent in annual workers' compensation insurance premium rates to take effect January 1, 1989.. On October 28, 1988, there was published in the Florida Administrative Weekly a notice of hearing by the Department of Insurance, which notice advised that the council's proposal called for revised rates effective January 1, 1989, to new and renewal policies. The public hearing was held on November 4, 1988, and on November 9, 1988, the insurance commissioner rendered an "Order On Rate Filing" which called for the council to file amendments to its original filing no later than 30 days after November 9, 1988. It provided that no rate change would be implemented until the amendments were properly filed and final approval was issued by the Department of Insurance. Petitioner, Brasfield and Gorrie General Contractor, Inc., a general contracting firm, submitted a bid on the Project. Petitioner signed its bid on November 22, 1988, submitted it the same day, and bids were opened that day. The amount of the contractor's base bid was $23,487,000. Petitioner was notified that it was the low bidder on November 22, 1988. The bid submitted by Petitioner included a bid bond, named in favor of DGS, which would have been forfeited if Petitioner were the low bidder and failed to execute the contract with DGS. On December 1, 1988, the Council, in response to the November 1, 1988, order, modified its filing of October 17, 1988, and in the modified filing established a premium level increase of 28.8 percent together with certain additional rate modifications to be effective January 1, 1989. On December 7, 1988, the Department of Insurance once rendered an order approving the "filing" made by the Council. Petitioner was the successful bidder, and the parties executed the building contract on December 21, 1988. On January 18, 1989, DGS issued to the Petitioner a notice to mobilize on site and to proceed with construction which established the date for commencement of construction as January 23, 1989, and the date for completion as of July 25, 1990. The premium rate increase did not affect the contractor until July 1, 1989, its insurance policy anniversary. The approximate dollar amount of increase in premiums throughout this project was $83,434. The exact amount of the premium increase is to be determined by an audit by the contractor's insurance company after the project is completed. Petitioner included in the amount of its bid an estimated amount that it expected to pay for Workers' Compensation insurance premiums through the completion of the project. Petitioner knew that the premium rates are established by the National Council on Compensation Insurance. Petitioner's standard procedure in calculating a bid included obtaining the current rates established by the Council. Petitioner failed to inquire regarding the anticipated increases that would be in effect during most of the time while construction would be in progress. The bid amount included an anticipated increase in the amount of premiums over the then current rates. In the realm of preparation of an estimate for a 20 million job, the anticipated increase was not a significant figure. While preparing its bid, the Petitioner knew that payment of Workers' Compensation insurance premiums on a building construction project is the responsibility of the general contractor. John Mills, the contractor's vice-president and division manager, had overall responsibility for estimating the job. During bid preparation, he knew that a rate increase was pending. Mr. Mills knew during bid preparation that he could obtain from his insurance agent information on proposed rate increases. Most of the premiums to be paid on this project are attributable to concrete labor. Petitioner learned of the December 7, 1988, rate increase approval after it signed the contract on December 21, 1988. The contractor knew that in a competitively bid public contract it is obligated to perform the contract at the bid price in spite of increases in its costs of work. In calculating the estimated increase in premiums (the amount of its claim), the contractor simply subtracted the estimated amount of premiums that would be charged at the 1988 rate from the estimated amount that would be charged at the new rate. The resulting figure does not give DGS credit for the amount that the contractor included in its bid based on its estimate of three percent rate increase. The amount so included in the bid was approximately three percent of the labor cost for the entire project (estimated at $1,389,518) rather than three percent of the labor cost (estimated at $891,387) to be incurred after July 1 when the rate increase applied to the contractor. Section G-1 of the Supplementary General Conditions to the contract provides that: During the course of the Contractor's performance of the work necessary to complete the subject Project, certain events may occur which have the effect of changing the conditions under which the work is to be performed as specified and described in the Bidding Documents and/or the nature and extent of the work as specified and described in the Bidding Documents. The occurrence of such events may cause the Contractor to incur greater or lesser cost and expense to perform the work required to complete the subject Project than planned to be incurred in the Contractor's successful bid, in which event the Contractor or the Owner shall respectively be entitled to either an increase or decrease in the Contract Sum, whichever is the case, to the extent such greater or lesser cost and expense results . . DGS drafted the contract and the supplementary general conditions to the contract. Brasfield & Gorrie did not participate in the drafting of the contract or the supplementary general conditions. Brasfield & Gorrie made a claim for an increase in the contract price pursuant to Article 8.4.3 of the contract as a result of the Workers' Compensation premium base rate increase. DGS denied this claim. Brasfield & Gorrie requested an administrative hearing pursuant to the terms of the contract. Petitioner has not asked for an increase in the contract price for anything but Workers' Compensation insurance premiums. Since 1970, the Division of Building Construction has been involved in a large number of building projects that were competitively bid and took two or three years to build. The instant petition is the only claim that has been filed by a contractor on such projects for an increase in contract price based on an increase in Workers' Compensation rates. During that time, the Division never approved a contract-price increase based on an increase in the price of building materials. The "work" and the cost of the work are two distinct, separate things. There may be a change in the cost of the work without a change in the work. A change in premiums is not a change in the work.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Petition for claim filed by Petitioner be DENIED. DONE AND ENTERED this 18th day of January, 1990, in Tallahassee, Leon County, Florida. DANIEL M. KILBRIDE 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 18th day of January, 1990. COPIES FURNISHED: Susan B. Kirkland, Esquire General Counsel Sylvan Strickland, Esquire Staff Attorney Department of General Services Koger Executive Center 2737 Centerview Drive Knight Building, Suite 110 Tallahassee, FL 32399-0950 Leslie King O'Neal, Esquire Markel, McDonough and O'Neal Post Office Drawer 1991 Orlando, FL 32802 Ronald W. Thomas Executive Director Department of General Services Knight Building, Koger Executive Center 2737 Centerview Drive Tallahassee, FL 32399-0950 APPENDIX The following constitute my specific rulings, in accordance with section 120.59, Florida Statutes, on findings of fact submitted by the parties. Findings of Fact submitted by Petitioner: Accepted in substance, except that the estimated increase in the insurance premium is determined to be $83,434. Findings of Fact submitted by Respondent: Accepted in substance. =================================================================
The Issue Whether the Office of Insurance Regulation (the Office) correctly calculated the New Business Rate in accordance with statutory authority provided by Section 627.9407(7)(c), Florida Statutes, with regard to National States Insurance Company’s (National States or Company or Insurer) request for a rate increase.
Findings Of Fact National States is an insurance company licensed in the State of Florida to engage in the sale of health insurance. National States has been in business since 1964, and currently sells life and health insurance products in 33 states. National States currently has four HHC policy forms in force in Florida: HNF-1, HNF-3, HHC-1 and HNC-1 (collectively referred to as the AHome Health@ policies). The Home Health policies pay benefits for home nursing care on an expense incurred basis up to the daily maximum specified for periods of 12, 24 or 36 months for the HNF-1 and HNF-3 policies; 12,24,36,48 or 60 months for the HHC-1; and 12 or 24 months for the HNC-1 policy. All policies under HNF-1, HNF-3 and HNC-1 policy forms are in renewal only. The Home Health policies are guaranteed renewable and cannot be canceled due to poor financial performance of the product. Rates can, however, be increased with the approval of the Office. The Home Health policies are known as "stand alone home health care policies" because they provide benefits for care in the policyholder's home as opposed to care provided in an institution such as a nursing home. The policy forms identified in the rate filing are not currently sold by National States, and are defined as a “closed block” of business, meaning that no new policies are being issued. Under the policy forms in issue in this proceeding, each time a renewal premium is received, another contract term begins which precludes any impairment of a prior contract, per the following language: This policy may be renewed for another term by the payment, . . . of the renewal premium for such term at the rate in effect at the time of such renewal. We reserve only the right to change the table of premiums for this policy and all the policies in this state. No change in the premium or in this policy may be made solely by us because of a change in your health or job, nor solely because of claims under this policy. On August 16, 2006 National States submitted a rate filing requesting a rate revision for its Home Health policies. The requested rate increase in the 2006 filing was 48.1 percent. The Office denied the requested 48.1 percent increase by National States by a notice of intent to disapprove ("NOI") issued September 19, 2006. Section 627.9407(7)(c), Florida Statutes, was enacted on June 20, 2006, and applies to all long term care policies issued or renewed on or after July 1, 2006. The National States’ rate filing in this case, FLR 06- 10794, is subject to Section 627.9407(7)(c), Florida Statutes. The policy forms at issue in this case were issued prior to the enactment of that statute. A guaranteed renewable form cannot be canceled by the insurer and must be renewed by the insurer as long as the policy holder continues to pay the requested premium. National States does, however, have the option under Section 627.6425, Florida Statutes, to request that the State of Florida close its entire block of business if its solvency is in jeopardy. Florida Administrative Code Rule 69O-157.108 was enacted in 2003, when the Florida Legislature adopted the NAIC (National Association of Insurance Commissioners) Model Rule of 2000 which states: An insurer shall provide the information listed in this subsection for approval pursuant to Section 627.410, Florida Statutes, prior to making a long- term care insurance form available for sale. * * * (c) An actuarial certification consisting of at least the following: A statement that the initial premium rate schedule is sufficient to cover anticipated costs under moderately adverse experience and that the premium rate schedule is reasonably expected to be sustainable over the life of the form with no future premium increases anticipated; A statement that the policy design and coverage provided have been reviewed and taken into consideration; A statement that the underwriting and claims adjudication processes have been reviewed and taken into consideration; A complete description of the basis for contract reserves that are anticipated to be held under the form, to include: Sufficient detail or sample calculations provided so as to have a complete depiction of the reserve amounts to be held; A statement that the assumptions used for reserves contains reasonable margins for adverse experience; A statement that the net valuation premium for renewal years does not increase; and A statement that the difference between the gross premium and the net valuation premium for renewal years is sufficient to cover expected renewal expenses; or if such a statement cannot be made, a complete description of the situations where this does not occur; Section 627.9407(7)(c), Florida Statutes, applies universally to all carriers selling long term care insurance in the state of Florida. For carriers currently issuing coverage (i.e. “open blocks” of business), the new business rate is determined by that insurer's book of business so that the premium charged to existing insureds will not exceed the premium charged for a newly issued insurance policy except to reflect benefit differences. For insurers not currently issuing new coverage (i.e. “closed blocks” of business), the new business rate shall be as published by the Office at a rate representing the new business rate of insurers representing 80 percent of the carriers currently issuing policies with similar coverage as determined by the prior calendar year earned premium. § 627.9407(7)(c), Fla. Stat. Dan Keating, acting Chief Actuary for the Office, authored the NOI at issue in this proceeding. He is a Fellow of the Society of Actuaries with over 36 years of experience and has reviewed between 250 to 300 rate filings in the state of Florida. His testimony establishes that market share is a percentage that represents how much a particular carrier’s sales are represented in the market. Each carrier’s percentage of the market is based on earned premium of the total volume of that particular share of the market. Market share theory should be used to determine which carriers represented 80 percent of the market share. Any other type of average would give too much weight to one company who might only sell one percent of the policies in the market. Florida premiums should be used to determine which companies represent the 80 percent market share. The Office instigated a data call to all carriers doing business in Florida to respond with confirmation that they were selling long term care business and to provide their premium information. The request was separated according to the definition for similar benefits which was identified as “facility-only,” “non-facility- only,” and “comprehensive.” Upon receipt, company data was verified and compared to the annual reports filed through the NAIC. The steps of the data call commenced with the publishing of the new business rate on September 29, 2006. Delays in publishing the new business rate were caused by the time allotted from enactment (June 20, 2006) to effective date (July 1, 2006), the type and amount of data requested, difficulty in getting companies to respond, review of the data once received, and the action of calculating the market share. Calculation to determine which companies represent the 80 percent market share, a necessity pursuant to compliance with Section 627.9407(7)(c), Florida Statutes, also required a review in this case of each companies’ first-year earned premium by personnel of the Office. Such a review of first-year earned premium is the proper basis to begin the calculation. Three companies were used to comprise the 80 percent market share: Banker’s Life & Casualty, Penn Treaty and Colonial American were chosen. Banker’s Life & Casualty, however, alone comprised 80 percent of the market share and would have been sufficient used alone. Nevertheless, in the interest of diversity and variance, and so that the new business rate would not rely solely on one company’s rate book, Penn Treaty and Colonial American rates were added to the market share. By adding the two additional companies, the new business rate was increased to some degree because both of the other companies were charging more. Banker's Life remained the major shareholder. A weighted average was then applied to the rates of each company to calculate a new business rate. Banker’s Life originally submitted data for the size of their premium (not the premium rates) that were based on its nationwide numbers. This error was not discovered until January 2007, after the new business rates were already published and affected the percentage of weight each company's rates were given. When the error was corrected, Banker’s Life remained above 80 percent of the market share as required by the statutory language of Section 627.9407(7)(c), Florida Statutes. The Office recalculated the new business rate based on the corrected Florida data which increased the new business rate minimally, but not significant enough to warrant a change to the published rates. The Office disapproved National States’ rate filing because approving the filing would have resulted in a premium charged that would have exceeded the new business rate allowed in accordance with Section 627.9407(7)(c), Florida Statutes. Although the percentages differ from one issue age to another, National States current rates without the increase, in the best case scenario, are at least 106 percent above the new business rate, and in general are on average two and one half times the new business rate. Each rate is above 100 percent of the new business rate, indicating that in every situation, for every issue age on all four policy forms, National States’ current rates, before any increase, are already above the new business rate. The Bankers Life and Casualty nationwide data was used to calculate the weighted average because it was the data provided to the Office in response to the data call. Experts for both parties concede that access to this data could only be had via submission by the carriers, as there is no central depository where this type of data is maintained. The market share calculation itself was accurate. A conscious decision was made by personnel of the Office to normalize the new business rate to reflect a 90-day elimination period because that policy form is the most commonly sold by the carriers. Banker’s Life does not have a corresponding rate for a 90-day elimination period; however, normalizing to Banker’s 42-day elimination period produced a higher new business rate because a shorter elimination period raises the cost of the policy since the policy holder can claim benefits sooner. As with the elimination period, there was a conscious decision to normalize the new business rate to a tax-qualified plan because it was the most commonly sold plan. Normalizing the benefits to calculate the new business rate was done by the use of factors gathered from the carriers making up the 80 percent market share and then weighted as required. The factors were available at the time the office received the data from each company, and prior to the disapproval of National States’ rate filing. National States' personnel were aware of the new statute prior to submitting the rate filing to the Office. Additionally, checks of the Office's website were made in July and again in August of 2006, in order to identify the new business rate applicable to this filing. New business rates were not published on the Office website at that time. National States' actuary concedes that he did not make any attempt to contact the Office to determine if the new business rate for stand alone home health care was available prior to submitting the rate filing to the office, although doing so would have been relatively easy. National States' actuary offered testimony that Florida home health care policies have been performing poorly not just for National States, but for the industry as a whole. This poor performance occurs when the actual claims experience that had emerged is much worse than had been expected when initially pricing the product. He described the pricing process in terms of the durational loss ratio curve, and how that curve impacts subsequent filings under Florida law. National States did not anticipate increasing the premiums at the time the policies were sold. National States' strategy as outlined by its actuary is at variance with requirements of Florida Administrative Code Rule, 69O-149.006(3)(b)23b(IV). Under that Rule's provision, the actuary is required to project the experience that he actually expects to occur. For a plan that was developed more than 15 years ago, it is highly unlikely that expectations today would match those in the original pricing product. 34. Rule 69O-149.006(3)(b)23b(IV) reads: (IV) The projected values shall represent the experience that the actuary fully expects to occur. In order for the proposed premium schedule or rate change to be reasonable, the underlying experience used as the basis of a projection must be reflective of the experience anticipated over the rating period. The Office will consider how the following items are considered in evaluating the reasonableness of the projections and ultimate rates. In order to expedite the review process, the actuary is encouraged to provide information on how each of the following have or have not been addressed in the experience period data used as the basis for determining projected values, or otherwise addressed in the ratemaking process. Large nonrecurring claims; Seasonality of claims; Prior rate changes not fully realized; Rate limits, rate guarantees, and other rates not charged at the full manual rate level; Experience rating, if any; Reinsurance costs and recoveries for excess claims subject to non-proportional reinsurance; Coordination of benefits and subrogation; Benefit changes during the experience period or anticipated for the rating period; Operational changes during the experience period or anticipated for the rating period that will affect claim costs; Punitive damages, lobbying, or other costs that are not policy benefits; Claim costs paid which exceed contract terms or provisions; Benefit payments triggered by the death of an insured, such as waiver of premium or spousal benefits; Risk charges for excess group conversion costs or other similar costs for transferring risk; The extent and justification of any claim administration expenses included in claim costs; and Other actuarial considerations that affect the determination of projected values. Testimony of National States' actuary is not credited.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered denying National States' requested rate increase. DONE AND ENTERED this 15th day of June, 2007, in Tallahassee, Leon County, Florida. S DON W. DAVIS 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 15th day of June, 2007. COPIES FURNISHED: Cynthia S. Tunnicliff, Esquire Brian A. Newman, Esquire Pennington, Moore, Wilkinson, Bell and Dunbar, P.A. 215 South Monroe Street, Second Floor Post Office Box 10095 Tallahassee, Florida 32302-2095 Charlyne Khai Patterson, Esquire Assistant General Counsel Office of Insurance Regulation 200 East Gaines Street 612 Larson Building Tallahassee, Florida 32399-4206 Kevin M. McCarty, Commissioner Office of Insurance Regulation 200 East Gaines Street Tallahassee, Florida 32399-0305 Steve Parton, General Counsel Office of Insurance Regulation 200 East Gaines Street Tallahassee, Florida 32399-0305
Findings Of Fact Based upon the testimony of the witnesses and the documentary evidence received at the hearing, the following findings of fact are made: Florida Brethren Homes, Inc. is a not for profit corporation doing business as the Palms. The Palms is a nursing home facility certified to participate in the Medicaid program. The Department is the state agency charged with the responsibility of reviewing costs claimed by facilities participating in the Medicaid program. The Palms filed a cost report for Medicaid reimbursement for the fiscal period ending December 31, 1987. The cost report reviews the past payment rate and sets the prospective rate. The Department reviewed Petitioner's report and disallowed interest costs in the amount of $298,500 which were included by the Palms. The Palms timely challenged that disallowance. In 1984, the Palms participated in a revenue bond issuance in order to finance the construction of certain improvements to its health care facilities. That bond issue in the amount of $13,970,000 bore a tax exempt interest rate of approximately 12.89 %. For the period ending December 31, 1987, the interest which was due on that bond debt was $298,500. On April 5, 1988, the Palms filed a Chapter 11 action in the Bankruptcy Court for the Southern District of Florida. The Palms did not pay the accrued interest prior to filing its petition in bankruptcy. In fact, the Palms was in default on the interest at the time of the bankruptcy petition. The Medicaid rate which had been established prior to that time had presumed an allowable interest cost for the period and had included that interest payment in the calculation of the rates then available to the Palms. In filing bankruptcy, the Palms sought to restructure its debt. As a result, the Palms executed an Amended And Restated Indenture of Trust which included the accrued but unpaid interest which had accumulated under the 1984 revenue bond issue. The plan called for a bond issuance and for deferred interest certificates to cover the unpaid interest. The deferred interest certificates had not been issued as of the date of the final hearing. The accrued but unpaid interest provided in the deferred interest certificate has a maturity date of December 1, 2016. The unpaid interest is subject to a mandatory prepayment from available net cash flow after December 1, 1992. The restructure of Petitioner's debt has allowed it to remain in business. The plan of reorganization was entered into as a good faith, arm's length transaction. The plan of reorganization was confirmed by the Bankruptcy Court and the proceedings before that tribunal have concluded. In its audit of the Palms, the Department determined that the deferred interest obligation does not mature and become due and payable until December 1, 2016, and that, therefore, the interest expense is not a reimbursable cost for the period that ended December 31, 1987. The Palms' claims that for cost reimbursement purposes the accrued interest was paid by the refinancing of the debt and that the amount should remain an allowable cost to be included for that period.
Recommendation Based upon the foregoing, it is RECOMMENDED: That the Department audit disallowing interest claimed for the period that ended December 31, 1987, be confirmed. DONE and ENTERED this 14th day of June, 1991, in Tallahassee, Leon County, Florida. Joyous D. Parrish Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32301 (904)488-9675 Filed with the Clerk of the Division of Administrative Hearings this 14th day of June, 1991. APPENDIX TO CASE NO. 90-1770 Rulings on the proposed findings of fact submitted by the Petitioner: Paragraphs 1 through 3 are accepted. Paragraphs 4 and 5 are not findings of fact but restate the stipulation reached by the parties at the outset of the hearing. Paragraphs 6 through 11 are accepted. Paragraph 12 is rejected as it is not a finding of fact but, if accurate, would be a conclusion of law. Such conclusion has not been reached in this case. Paragraph 13 is rejected as irrelevant. Paragraph 14 is accepted. With regard to paragraph 15, it is accepted that the repayment of the accrued interest is not a short term liability. Otherwise, the paragraph is rejected as irrelevant. Paragraph 16 is rejected as a restatement of the issue or fact not supported by the weight of the evidence. Paragraph 17 is rejected as irrelevant. Paragraph 18 is accepted. Paragraph 19 is rejected as irrelevant. Paragraphs 20 and 21 are rejected as irrelevant or a conclusion of law. Paragraph 22 is accepted. Paragraph 23 is rejected as irrelevant. Paragraph 24 is rejected as a conclusion of law not supported by the record in this case. Paragraph 25 is rejected to the extent that the term "refinancing" is used to suggest a payment of allowable interest; it is accepted that restructuring the Palms' debt was required to allow it to continue in business. Paragraph 26 is rejected as irrelevant. Rulings on the proposed findings of fact submitted by the Department: 1. Paragraphs 1 through 14 are accepted. COPIES FURNISHED: Scott D. LaRue Assistant General Counsel Department of Health and Rehabilitative Services 1323 Winewood Boulevard Building One, Room 407 Tallahassee, Florida 32399-0700 Karen L. Goldsmith Goldsmith and Grout, P.A. P.O. Box 2011 Winter Park, Florida 32790-2011 Sam Power, Agency Clerk Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32399-0700 Linda K. Harris Acting General Counsel Department of Health and Rehabilitative Services 1323 Winewood Boulevard Tallahassee, Florida 32399-0700
The Issue The issue for determination in this case is whether the agency's interpretation of its Title XIX, ICF/MR Reimbursement Plan is a rule, and if so, whether it is an invalid rule.
Findings Of Fact Friendly Village of Brevard, Inc. d/b/a Washington Square (herein, Washington Square) is an intermediate care facility for the mentally retarded (ICF/MR), located at 2055 North U.S. 1, in Titusville, Florida. Friendly Village of Orange, Inc., d/b/a Lake View Court (herein, Lake View Court), is also an ICF/MR located at 920 W. Kennedy Boulevard, in Eatonville, Florida. Both facilities are operated by Developmental Services, Inc. Both are certified ICF/MR's participating in the Florida Medicaid Program. The Department of Health and Rehabilitative Services (HRS) is the state agency responsible for overseeing the ICF/MR Medicaid Program. Representatives of HRS and Florida's ICF/MR industry began negotiations on a new state Medicaid reimbursement plan in 1982 and 1983. The participants in the negotiations sought to remove certain cost limitations and to insure that individual facilities would receive fair reimbursement of their allowable costs. The negotiations resulted in the Title XIX ICF/MR Reimbursement Plan dated July 1, 1984 (the 1984 Plan). The 1984 Plan provides, in part, for the establishment of reimbursement rates for new ICF/MR's entering the Florida Medicaid program after January 1, 1983. Under the plan, a provider is required, prior to beginning operations, to prepare a budgeted costs report projecting what it expects to spend in allowable costs during the next year for care to its residents. HRS reviews these budgets and establishes a per diem rate, using the budgeted costs and the number of patients, arriving at a per patient, per day rate. Each month, as services are provided, the ICF/MR bills the state Medicaid program for the number of patient days times the per diem. During the period in question, cost settlement occurred at the conclusion of the budgeted period. The provider filed his cost report detailing what was actually spent in allowable costs, HRS compared that amount with the amount budgeted and settled with the provider. Washington Square entered the Florida Medicaid program on January 19, 1983; Lake View Court entered the program in February 1983. Both facilities filed cost reports for periods ending on February 29, 1984. Sometimes cost settlements occur quickly through a desk review. Other times, as here, audits are performed and settlement may occur much later. The audits of Washington Square and Lake View Court were conducted in 1985 for their initial cost reports ending February 1984. The audits were issued in April and May 1988. Those audits state that prior to July 1, 1984, the Florida Medicaid Program recognized only those interim rate settlements resulting in an overpayment. This is an interpretation of the 1984 Plan which Petitioners dispute and which, in this case, Petitioners contend is an invalid rule. ICF/MR Reimbursement plans prior to July 1, 1984, had one-way cost settlement, which meant that if the provider as overpaid, the funds had to be returned to HRS; if the facility as underpaid, it did not receive additional reimbursement. The 1984 ICF/MR Plan was changed to allow two-way cost settlement, thus allowing an underpaid provider to recover its approved costs. Petitioners claim that a proper interpretation of the 1984 Plan, especially when read with the 1985 Plan, is that two-way cost settlement is retroactive to January 1983, for new providers entering the program after January 1, 1983. HRS disagrees with that interpretation and this issue is the subject of the consolidated case, #88-2938. HRS' interpretation means that Petitioners will not be reimbursed for underpayments received during their first reporting period. The 1984 Plan was adopted as a rule by incorporation, in Rule 10C- 7.49(4)(a)2. Florida Administrative Code.
