The Issue The issue is whether proposed rule 25-14.031 of the Public Service Commission constitutes an invalid exercise of delegated legislative authority.
Findings Of Fact Background The Public Service Commission (Commission) proposed rule 25-14.102, Florida Administrative Code, governing accounting for other postretirement benefits (OPEBs), by publication in the Florida Administrative Weekly. The Citizens of the State of Florida (Citizens) filed a timely challenge to that proposed rule, and they have standing to bring the challenge. The proposed rule applies to utilities regulated by the Commission under Chapters 364, 366 and 367, Florida Statutes (1991), which include telecommunications companies, investor-owned electric and gas utilities, and water and wastewater utilities. No specific statute requires that a regulated utility use the accrual accounting method for OPEBs. Section (1) of the proposed rule defines postretirement benefits other than pensions, and prescribes the sole acceptable method for measuring and recognizing the employer's accumulated postretirement benefit obligation.1 Under Section (2), utilities must account for the cost of such benefits in the manner required by Statement of Financial Accounting Standards No. 106, entitled "Employers' Accounting For Postretirement Benefits Other Than Pensions" published by the Financial Accounting Standards Board in December 1990, and they are prohibited from using deferral accounting under Statement of Financial Accounting Standards No. 71 (Accounting for the Effects of Certain Types of Regulation) for these benefits unless the utility obtains prior approval from the Commission. Section (3) specifies that unfunded accumulated postretirement benefit obligations will be treated as a reduction to rate base in Commission rate proceedings. This means a utility is not entitled to earn a return on an amount equal to the accumulated postretirement benefit obligation recognized on its financial statement which the utility has not actually funded. This can be done by treating the unfunded obligation as a reduction to the utility's working capital by adding it to current liabilities. Section (3) also makes explicit that if the Commission disallows a specific OPEB expense, the cost of that disallowed expense does not reduce the utility's rate base. The Board and its Standards The Financial Accounting Standards Board is the authoritative body which promulgates standards of financial accounting for the accounting profession. It was organized in 1972 as the successor to the Accounting Principles Board. The Board derives its authority through Rule 203 of the Code of Professional Ethics of the American Institute of Certified Public Accountants. Its pronouncements are an important source of what are known as "generally accepted accounting principles." These principles are concerned with both measurement and disclosure. Measurement principles determine the timing and amounts of items which enter the accounting cycle and have an impact on financial statements. They are quantitative standards which require numerically precise answers to problems and activities which may be subject to substantial uncertainty. Disclosure principles deal with factors which may not be numerical. They compliment measurement standards by explaining the standards and giving other information on accounting policies, contingencies and uncertainties which are essential ingredients in the analytical process of accounting. Generally accepted accounting principles thus include the measurement of economic activity, the time when such measurements are made and recorded, disclosures surrounding these activities, and the preparation and presentation of summarized economic activities found in financial statements. Complicated business activities often give rise to complex accounting principles. The Board has issued 110 Statements on Financial Accounting Standards to date, issued Interpretations and Technical Bulletins, and devoted substantial time and resources to development of a Conceptual Framework for Financial Accounting. Once adopted by the Financial Accounting Standards Board, the text of numbered financial accounting standards are not amended. If, for some reason, the Board wished to change the accounting treatment required by a Financial Accounting Standard, a new standard bearing a new number would be adopted. Under current practice of the Financial Accounting Standard Board, the Commission's adoption of FAS 106 is not an attempt to currently adopt future changes to FAS 106, for there will be none. Moreover, the language of section (1) of the proposed rule adopts the Standard as promulgated in December 1990. Standard 106, which the proposed rule would adopt, is not solely applicable to utilities, but is part of generally accepted accounting principles applicable to all business enterprises. Standard 106 sets measurement and disclosure standards for the manner in which postretirement benefits other than pensions are treated in external financial statements. Standard 106 itself consists of 38 pages of black letter text, and is supplemented with appendices which include a comparison of accounting for other postemployment benefits with accounting for pensions; illustrations; background information concerning considerations which were the basis for the conclusions reached in Standard 106 which are an integral part of the Standard; and a glossary (Commission composite Exhibit 1, at tab 2). The Standard treats OPEBs as a form of deferred compensation and requires accrual accounting. Expected postretirement costs are to be attributed to the period when an employee renders services. The Standard prescribes a uniform methodology for measuring and recognizing the employer's accumulated postretirement benefit obligation. The Standard applies to all postretirement benefits, and benefits payable to disabled workers. The benefits encompassed include tuition assistance, legal services, day care, housing subsidies, and other benefits. The most significant one is postretirement health care. Benefits most often depend on a formula established by the employer, using factors such as years of service, or compensation before retirement. These benefits may be available to current employees, former employees, beneficiaries such as spouses and to persons dependent on the retiree. The Standard focuses on the substantive benefit plan--the one employees understand based on past practice or by the employer's communication of intended plan changes. This is usually the same as the employer's current benefit plan, but if the written plan and practice differ, practice controls. Using the substantive benefit plan, the Standard attempts to account for the exchange between employers who provide OPEBs and employees whose services are provided at least in part to obtain these OPEBs. Standard 106 requires that the employer's liability be fully accrued when the employee is fully eligible for all expected benefits, even if the employee continues to work, since the employee has already provided the service which has earned the benefits. The costs are attributed in equal amounts (unless the plan text loads a disproportionate share of benefits in early years of employment) over the period from initial employment until the employee attains full eligibility for all benefits. The basic tenet of FAS 106 is that while it requires the use of some variables that are difficult to measure, recognition and measurement of the overall liability of the employer to provide OPEBs is best done through accrual accounting. The use of estimates is superior to implying, by failure to accrue, that no cost or obligation exists prior to the actual cash payment of benefits to retirees. The Financial Accounting Standards Board began work on accounting for OPEBs in 1979, as part of an ongoing project on accounting for pensions. By 1984, the Board decided to separate out accounting for OPEBs as a separate project. In April 1987 the Board issued, as an interim measure, its Technical Bulletin No. 87-1, Accounting For A Change In Method Of Accounting For Certain Postretirement Benefits. Standard 106 amends another, older source of generally accepted accounting principles, Opinion 12 of the Accounting Principles Board of the American Institute of Certified Public Accountants, a predecessor to the Financial Accounting Standards Board. The amendment is effective for fiscal years beginning after March 15, 1991. Portions of Standard 106, which are wholly new and not an amendment to APB 12, are effective for fiscal years beginning after December 15, 1992. Standard 106 shares with other accounting standards a salient characteristic of pension accounting--delayed recognition. Changes are not made immediately, but are recognized in a gradual and systematic way. This is why there is a transition obligation in Standard 106. The employer's accumulated postretirement benefit obligation for benefits attributable to the period before Standard 106 became effective is recognized on a delayed basis. The recognition period used must result in recognition of the accumulated obligation at least as rapidly as it would be recognized on a "pay- as-you-go" or cash basis. Until a utility actually recognizes a portion of its accumulated postretirement benefit obligation, that portion of the obligation plays no part in setting the utility's rates. The Standard requires the use of some assumptions, i.e., the estimates about the occurrence of future events, such as plan continuity. Continuity of the substantive plan for OPEBs is presumed in the absence of evidence to the contrary. Actuarial assumptions are also required, such as retirement age, salary progression in pay-related benefit plans, the probability of payment based on employee turnover, mortality and dependency status. When discount rates are used in present value calculations required by the Standard, they are to be based on current interest rates, as of the measurement date, for high quality fixed income investments with similar face amounts and maturities at which the postretirement benefit obligations could be settled. Present value factors for health care benefits require consideration of cost trend rates, medicare reimbursement rates and per capita claims cost by age. Standard 106 requires companies to recognize and account for the cost of OPEBs during the time period in which employees earn those benefits. Companies have generally recognized the expense of OPEBs on their financial statements only as those benefits were paid out to retired employees rather than accruing a liability for those future payments as they were earned by employees (the "accrual method"). The pay-as-you-go method was acceptable when OPEB expenses were small, but those expenses are now so significant that the Financial Accounting Standards Board has determined that the pay-as-you-go method of accounting distorts financial statements and is inappropriate. The utility rate payers pay the cost of OPEBs and other expenses in their utility rates. Recognition of OPEB expenses under the pay-as-you-go method causes current utility rate payers to fund benefits paid to retired utility employees. After the transition period, the implementation of accrual accounting for OPEBs will match employees' OPEB expenses solely with the group of rate payers who actually benefit from service from those employees. The accrual accounting method also contributes to containment of health care costs, since utilities must currently measure the value of the benefits promised in the future and also book a liability for those future health care costs attributable to all employees, not just retired employees. Other accrual requirements of the Commission The Commission already requires utilities to use accrual accounting for other significant expenses. Utilities accrue depreciation expenses after their initial cash outlay for plant so that the cost of construction is paid over the useful life of the plant by rate payers who receive service from that plant, rather than from rate payers who happened to be using the system during the period in which the plant was constructed and the construction cost incurred. These expenses do not represent actual cash outlays. As is typical of depreciation, these non-cash expenses are not matched with deposits in internal or external accounts to provide a fund out of which to build new plants as current plants are retired. Rather, depreciation expenses recovered in utility rates become an additional source of cash, which is matched by a corresponding decrease in the value of plant on which a utility earns a rate of return. Utilities accrue nuclear decommissioning expenses before those expenses actually become current cash outlays. Through this method, rate payers who have received the benefit of power produced at a nuclear plant pay an estimated portion of the eventual dismantlement cost of the plant in each of the years during which the plant is actually in service. Unlike depreciation, the Commission requires that these expenses be funded currently, because the cost of closure of nuclear plants will be large--perhaps hundreds of millions of dollars in a one-year period. It could be difficult or impossible for a utility to raise such amounts in the capital markets at the time they are needed. Requiring accrual accounting treatment for OPEB expenses is consistent with existing Commission policy for the treatment of these other large expenses. Commission policy development Before this rule was proposed, the Commission was developing a policy on proper accounting for OPEB expenses in utility rate hearings conducted under Section 120.57, Florida Statutes. In rate cases for Centel and Gulf Power Corporation, the Commission required the use of accrual accounting for OPEBs. In the latest rate case for Florida Power Corporation, Final Order PSC-92-1197- FOF-EI entered October 22, 1992, the Commission ordered the utility to adopt accrual accounting for OPEB expenses under FAS 106 (Commission Exhibit 2 at 67, paragraph Z). In the latest rate case for United Telephone Company of Florida, Final Order PSC-92-0708-FOF-TL, the Commission also ordered that utility to adopt accrual accounting for OPEBs under FAS 106 (Commission Exhibit 3 at 34, paragraph VII.C.1.) In none of these cases did the Commission take the position that the use of accrual accounting under FAS 106 automatically required Commission approval of all expenses shown by the utilities as OPEB expenses in their rate filings with the Commission. The proposed rule instructs utilities how to prepare their accounting information for Commission review. The rule's text does not require the Commission to allow recovery of all costs presented for review in each rate case. A utility recovers accrued OPEB expenses through rates only when the Commission takes action to change rates, and that action always takes place in the context of a rate case which is subject to a Section 120.57(1) evidentiary hearing. In a rate case, the Commission will review the utility's accrual for OPEB expenses, and has the authority to disallow any expense which the Commission finds imprudently incurred, unreasonable in amount, or not related to providing utility service. Adoption of FAS 106 does not limit the Commission's ability to adjust expenses claimed by utilities. The Commission has recognized in the Economic Impact Statement for the proposed rule that intervenors can challenge a utility's actuarial assumptions, discount rates, benefit levels, cost containment efforts, or other accruals in rate hearings (Commission Composite Exhibit 1, tab 3, EIS at page 5). The proposed rule represents a policy decision made by the Commission, which is consistent with the conclusion reached by the Financial Accounting Standards Board, that accrual accounting under FAS 106 is the most appropriate method to account for OPEB expenses. Impermissible Assumptions? Citizens object that the rule provides vague guidance to utilities about what should be included in the calculation of OPEB expenses, but sets no specific formula for expense calculations so that two companies would apply a formula and arrive at the same result if they were providing similar benefits. Under FAS 106 the utilities must make estimates and assumptions, and the manner in which they are used can affect the final benefit cost used in rate setting. Under the proposed rule, the utilities are not required to fund the accumulated postretirement benefit obligation, which is an expense, with an internal or external account. Just as depreciation expenses result in a write- down of the value of the depreciated asset, so that the utility earns a rate of return only on the depreciated asset value, any unfunded accumulated postretirement benefit expense allowed by the Commission reduces the utility's rate base so no return is earned on that amount. This can be done as a reduction to the utility's working capital, by treating any portion of the accumulated postretirement benefit obligation which has been allowed but not actually funded by the utility as a current liability. For some utilities, such as water and sewer utilities, the regulatory accounting derives working capital in an unusual way--i.e., by computing one eighth of the operation and maintenance expense rather than subtracting current liabilities from current assets (Tr. 118). For these utilities, the reduction to rate base will have to be accomplished in some other way. If a specific OPEB expense for retirees is disallowed by the Commission (e.g., dental coverage for retirees) the utility does not recover that expense in its rate base. Concomitantly the disallowed expense does not become a reduction to rate base [Tr. 151, proposed rule section (3)]. 1. The Substantive Benefit Plan. 25. The first assumption a utility must make concerns the substantive content of the future benefit plan. Standard 106 requires a utility to assume that its current written benefit plan will be the plan in effect throughout the time used to calculate benefits for employees who will retire in the future. The utility may deviate from this written plan if it has communicated to its employees that their postretirement benefits will be something other than what is found in its current plan. Standard 106 requires the utility to decide whether it has communicated something other than its current plan to its employees and if so, what that plan is. The substantive plan must be disclosed in the utility's filings with the Commission [Standard 106, paragraph 74(a)]. The witness for the Citizens has reviewed benefit plans for nine utilities, and found that although they are quite detailed, all contain language which permits the utility to modify, amend, withdraw, or terminate benefits. This does not invalidate the proposed rule. Assumptions must necessarily be made today about benefits payable in the future. The Commission retains the authority to review the explicit assumptions the utility makes about the future content of its benefit plans when evaluating a utility's current OPEB expense. The disclosure requirement will draw attention to the utility's choices, which the Commission can review. Significant matters which must be disclosed include any changes in cost-sharing provisions between the utility and retirees in the form of co- payments or deductibles, changes in monetary benefits, changes in employees covered or types of benefits provided, or the utility's funding policy for its allowed OPEB expenses. 2. Transition obligation and amortization period. 26. Standard 106 also permits utilities to make assumptions and requires disclosures about their transition obligation and amortization period. The transition obligation is one of six cost components that a utility may include in the calculation of postemployment benefits under FAS 106. The transition obligation attempts to quantify and recognize the employer's liability for benefits that employees accrued or earned before accruals for OPEB expenses became mandatory. It attempts to recognize prior period costs, and to include those costs on the utilities' financial statements. The amortization period for the transition obligation is not a set number of years, FAS 106 allows the utilities a range of choices. Prior period costs can be immediately recognized in the first year FAS 106 is effective, or amortized over the average service life of employees, or over some set number of years. The amortization period may be anywhere from one to twenty years for a particular utility, but cannot be slower than the recognition of the obligation on a pay-as-you-go or cash basis. The shorter the amortization period, the higher the annual cost that will be recognized currently. Rate payers in those years covered by the amortization period will pay for a portion of the prior period costs in each of those years. Thus, if a ten-year period is used, the rate payers for the next ten years will be charged currently for benefits to be paid in the future to employees, which benefits were earned before the accrual method of accounting for OPEBs was required by FAS 106, in addition to accruals for current employees. Standard 106, paragraph 74 (b) includes required disclosures about amortization of unrecognized transition obligations. 3. Attribution period. 27. The Standard also requires the utilities to compute an attribution period, which measures the timing of an employee's eligibility for benefits, and attributes the benefit earned by the employee to that period. For example, if the utility's substantive plan promises employees that they will receive OPEB benefits once they reach the age of 55 if they also have five years of service with the utility, then the utility must accrue the full liability associated with the total cost of that employee's OPEBs by the time the employee reaches age 55 and has five years of service, even though the employee may continue to work beyond that time. Standard 106 does not require the utility's substantive plan to contain any specific attribution period. This permits utilities with otherwise similar circumstances but different substantive plans to have an attribution period of "55 years old with ten years of service" while another may select a period of "55 years old and five years of service." Because the second utility promises the employees benefits in a shorter period of time, the annual cost, which is recovered from the rate payers, will be greater under FAS 106 for the second utility than for the first. The terms of the substantive plan control because it is the best evidence of the exchange transaction between employer and employee. 4. Marital and Dependent Status. 28. The Standard also directs the utility to develop an explicit assumption about its employees' marital status and number of covered dependents on retirement. This is important because substantive plan provisions which entitle a spouse or dependents to health care or other welfare benefits substantially increase the employer's cost and obligation for postretirement benefits. Utilities historically have used differing assumptions about these matters. These factors can be determined based on the actual experience of each utility, and may vary from utility to utility. 5. Discount Rate. 29. A discount rate is applied to a company's calculated future postretirement benefit liability in order to discount that amount back to a present value. The liability for OPEB expenses for the period prior to the adoption of FAS 106 is amortized. In other words, the discount rate is used to calculate a present value of the utility's transition obligation. The selection of a discount rate is initially left to the utility. The discount rates used by business enterprises have varied. Since a difference in the discount rate selected could result in approximately a ten percent difference in the utilities' annual expense for OPEBs, two different utilities, in similar circumstances and with similar customer bases in geographic proximity to one another could use different discount rates, and generate different expenses for similar OPEBs. Discount rates are, however, to be chosen based on the interest rates paid, as of the measurement date, on high grade investment securities that have cash flows matching the timing and amount of benefit payments due to employees. The variability should be minor from utility to utility if the measurement dates involved are similar and the timing and amounts of benefits due are similar. The weighted-average of assumed discount rates used to measure the accumulated postretirement benefit obligation must be disclosed. Standard 106, paragraph 74(e). 6. Future Medical Expenses. Standard 106 requires utilities to measure expected postretirement benefit obligations for health care benefits by making explicit assumptions about the timing and amount of these benefits payable to plan participants in the future. Recent medical claims costs in the geographic area are useful in making estimates of assumed per capita claims cost by age from the earliest date benefits could be due to a participant through the longest life expectancy of participants. Utilities must also calculate their best estimate of the projected medical inflation trend far into the future. The FAS 106 does not require or even suggest a specific time frame that the utilities' estimated trend rate is to encompass. There are a number of indices currently used to evaluate medical inflation which could be used, such as the National Hospital Input Price Index, or a utility could develop a Florida hospital input price index. Some indices show medical inflation trend rates as high as 21 percent, others are as low as 13 percent. The effect of a one percent change in the medical inflation trend can result in a change of 15 to 19 percent in the utilities' current expense level, to be charged to current rate payers. Over time it should be possible to use claims cost data specific to each utility, based on 1) current medical care utilization and delivery patterns, 2) evidence of the health status of covered employees, and 3) the location of employees, to project costs specifically for the Florida markets where retirees reside. More art than science is inherent in factoring in assumptions about changes in health care utilization patterns based on technological advances. This is the stock-in-trade of consulting actuaries, and such estimates can be made. These estimates are more easily evaluated because a sensitivity analysis of the effect of a 1% increase in assumed health care cost trend rates on the accumulated postretirement benefit obligation for health benefits, and on the aggregate of the service and interest cost components of net periodic postretirement health care benefit costs are required to be presented by the utility. Standard 106, paragraph 74(f). The short answer to the problem of variability arising from the use of permissible assumptions under FAS 106, is that the rule is not invalid because acceptable choices are not etched in stone. All choices available under FAS 106 are subject to review by the Commission. Important ones must be highlighted by disclosures and, in some cases, sensitivity analyses. Unreasonable assumptions could be rejected by the Commission, even though the rule does not state this in haec verba as to each of the estimates or assumptions available to utilities under the proposed rule. The simplest example would be the utilities' selection of a discount rate. The Commission has modified the discount rate selected by a utility in the past. If the rate selected is unreasonable, based on the market interest rate being paid on high quality fixed income investments as of the measurement date, the Commission could disallow the utilities' assumption, and use instead another rate which the Commission determined from evidence more closely reflected the market rate for analogous investment vehicles providing necessary cash flows for expected benefit payouts. The text of FAS 106 requires the utility to use the assumption that "individually represents the best estimate of a particular future event, to measure the expected postretirement benefit obligation." FAS 106, paragraph 29. The utility is not free to make whatever assumption it believes will result in the highest charge to its customers. The test is whether the assumption made reflects the utility's "best estimate of the plan's future experience solely with respect to that assumption" (FAS 106, Glossary, definition of Explicit Assumptions, at page 197, Commission Composite Exhibit 1, tab 2 [emphasis added]). The Commission retains authority to question whether an assumption is the best estimate of future experience, which is a fact specific inquiry into the circumstances of each utility, its employee cohort and its substantive plan. The Commission has authority in the text of FAS 106 to make a searching inquiry into each explicit assumption to insure that the best estimate, given the utility's unique circumstances, has been used. If not the Commission can disallow the expense the assumption generates.
The Issue The issue in this proceeding is whether the intended action of Respondent, Agency for Health Care Administration, to award a contract to Intervenor, eQHealthSolutions, Inc., is contrary to the agency's governing statutes, the agency's rules or policies, or the solicitation specifications. The standard of proof for this proceeding is whether the proposed agency action is clearly erroneous, contrary to competition, arbitrary, or capricious.
Findings Of Fact AHCA and the Invitation to Negotiate AHCA is the state agency responsible for administering the Medicaid Program in Florida. Medicaid is the state and federal partnership that provides health coverage for selected categories of people with low incomes. Florida's Medicaid recipient population is over 2.8 million individuals. Over one third of this population receives services on a fee-for-services basis. Florida Medicaid spending in Fiscal Year 2008-2009 was approximately $18.8 billion. AHCA’s Division of Medicaid Services is responsible for serving the Medicaid population. AHCA seeks, through the Invitation to Negotiate (ITN) that is the subject of this case, to enter into a new contract with a federally designated Quality Improvement Organization (QIO) for the development and implementation of a statewide comprehensive utilization management program. Utilization management is the process of determining the medical necessity of particular health care procedures and treatments, and their appropriateness under Medicaid or other relevant insurance plans. Prior authorization is a major part of utilization management. Prior authorization, as the name implies, requires a provider or beneficiary to propose the service to be provided, identify the reasons for it, and obtain authorization before providing the service in order to receive payment from Medicaid. It requires determinations of whether the service is covered by Medicaid, whether the service is medically appropriate in the circumstances, and whether it is the most cost effective service in the situation. KePro currently provides AHCA prior authorization services under a contract. Lakia Daniels, Government Operations Consultant for AHCA, manages the current KePro contract with AHCA. Florida law establishes three competitive procurement processes for state agencies. They are Invitation to Bid, Request for Proposal, and Invitation to Negotiate. Agencies use an Invitation to Bid when they can specifically define the scope of work for a service or establish precise specifications defining the commodity sought. Agencies may use the Request for Proposal when the purposes and uses for a service or commodity can be specifically defined and the agency can identify necessary deliverables. Agencies may use the ITN process when they need to determine the best method for achieving a specific goal or solving a particular problem. An agency uses the ITN process to identify one or more responsive vendors with which it may negotiate in order to obtain the best value for the state. The ITN process is the most flexible and least restrictive competitive procurement process. On May 19, 2010, AHCA issued ITN No. 1007, which is the subject of this proceeding. AHCA’s ITN sought vendors to provide a Comprehensive Utilization Management Program for Inpatient Medical and Surgical, Home Health, Prescribed Pediatric Extended Care (PPEC), and Therapy Services. The ITN included Attachments A through L. AHCA amended the ITN on June 25, 2010. References to ITN in this Recommended Order are to the ITN as amended. None of the parties challenged the ITN or the amendment. The contract and the utilization management to be provided under it are critical to Florida's system for controlling Medicaid costs and reducing Medicaid fraud. The ITN contained "Evaluation Criteria." It specified that the criteria were for use in the initial evaluation of vendor replies to the ITN. The ITN also said that vendors whose replies did not comply with the mandatory criteria would not be considered for evaluation. The ITN provided vendors the opportunity to develop methodologies and systems for achieving the purposes of the contract. It repeatedly stated that requirements were minimum requirements, leaving vendors free to propose better or more comprehensive services or means of providing services. The ITN stated that "[t]he use of 'shall,' 'must,' or 'will' (except to indicate futurity) . . . indicates a requirement or condition from which a material deviation may not be waived by the State." It defined a material deviation as one in which "the deficient response is not in substantial accord with the solicitation requirements, provides an advantage to one respondent over another, or has a potentially significant effect on the quality of the response or on the cost to the State." The ITN included a process for vendor questions. The process provided that AHCA's responses to the vendor questions would be posted as an addendum to the ITN. Vendor questions and AHCA answers were included in the June 25, 2010, amendment to the ITN. AHCA is using the ITN procurement process to select a vendor to undertake the substantial task of providing comprehensive utilization management for inpatient medical and surgical, home health, and prescribed pediatric extended care (PPEC), and therapy services for Florida's Medicaid population. The ITN also described providing a Neonatal Intensive Care Unit (NICU) care and home health monitoring program and retrospective medical record reviews as services under the contract. The contract will be a fixed price, also described as fixed fee, contract. The ITN schedules refer to the fee or price as cost. This and the varying use in the ITN, the responses, and the testimony of "fee", "price", and "cost" foster confusion. This Recommended Order uses "cost" to refer to the amount that vendors proposed to charge AHCA either in the aggregate for the services, or as they allocate the amount charged to various components of the services provided including specific staff, training, web site maintenance and the like. The implementation and execution period for the contract for all services, except therapy services, ends June 30, 2011. For therapy services the implementation and execution period is to end March 31, 2011. For all services the contract is to run for three years ending June 30 2014. It may be renewed for up to three years. The ITN provided vendors the anticipated annual review volume in Attachment M-1, a form vendors were required to complete. The anticipated volumes were: Prior Authorization Inpatient Services - 510,000 Prior Authorization Home Health Visits - 55,000 Prior Authorization for Private Duty Nursing, PC, and PPEC 140,000 Prior Authorization Therapy Services - 140,000 Claims Analysis, Respiratory Therapy - 1 Retrospective Medical Record Reviews - 2,000 NICU Care Monitoring Program 700 Home Health Comprehensive Care Monitoring Program - 4,000 Special Studies/Quality Improvement Projects - 1. Although the contract will be for three years, the service volumes do not vary year to year. Florida's Medicaid program has not previously required prior authorization for therapy services. Attachment M-1 sought detailed cost information about various services and components of the project from replying vendors. Effectively, it asked the vendors to allocate their proposed total costs among the various services and components used to provide the services. They include, but are not limited to, items such as prior authorization review for inpatient services, prior authorization review for home health visits, prior authorization for therapy service, NICU care monitoring, customer service, development and Maintenance of a web-based system, database development, salaries, benefits, temporary personnel, postage, rent, office equipment, advertising, telecommunicating equipment, computer equipment, overhead, and profit. The ITN described the Medicaid program and services. It described the purpose of the intended contract, giving the goals of the contract and describing general services the vendor would provide. The ITN left to the vendors the challenge and opportunity of proposing the best method for achieving the purposes of the contract and providing the services needed. The ITN also emphasized the importance of "timely, efficient, productive, consistent, courteous, and professional" performance of services. The technical specifications of the ITN included a wealth of factors and required information. Among them were: limitations on the use of subcontractors, descriptions of how beneficiary information would be protected, lobbying disclosures, client references, information about the vendor's experience and qualifications, information about management and key personnel qualifications, detailed staffing information, a draft contract implementation plan, training plans, computer hardware requirements, computer software requirements, and disaster recovery plans. A 52 page attachment to the ITN described the scope of services the successful vendor would provide. The ITN required that the vendor maintain the ability to manage the volume of work 24 hours per day, seven days a week. It required at least one Florida location where the vendor would perform its contractual responsibilities. The ITN required vendors to develop electronic review instruments for the contract services. It mandated that the instruments allow data input by reviewing professionals. It permitted vendors to provide up to 30 percent of inpatient reviews through a rules-based or criteria-driven algorithm. It permitted vendors to apply recognized medical necessity standards, so long as they met the minimum of InterQual Level of Care criteria and fulfilled all state and federal Medicaid requirements. The ITN advised that the contract would include rigorous review completion timeframes for the contract services. Examples of the timeframes follow. First level review of prior authorization reviews for elective pre-admission, admission, and continued stay inpatient services must be completed within four hours from receipt of a completed request. If a service request is referred to a physician, the ITN required physician review of the requests within one business day of when the request is complete. First level review of home health skilled nursing or nurse's aide visits must be completed with one business day of the request. Physician review must be completed within two days of the request. First level review of requests for therapy services must be completed within one business day of completion of the request. Physician review must be completed within three business days. By repeated references to subcontracting and limitations upon the practice, AHCA manifested both the importance of subcontracting and caution about the issues that could accompany subcontracting. For instance, the ITN prohibited subcontracting, assigning, or transferring any work to any party, except for subcontractors identified in the response, without AHCA's prior written consent. Prior written consent required AHCA’S review and written approval of the terms of the subcontract. The ITN also required detailed information about proposed subcontractors' Medicaid experience and other information, just as it did for key employees and Management Information Systems (MIS) employees of the vendors. The ITN required vendors to describe how they would coordinate with subcontractors and communicate with them. It emphasized that the vendor remained fully responsible for fulfilling all contractual requirements to AHCA. These are just some of the references to subcontracting and requirements for it imposed by the ITN. The tasks described by the ITN rely upon computer and internet technology for communication, analysis, efficiency, and speed. Among other things, the ITN sought a vendor that would provide a web portal for communication, for providers to submit requests for authorization, and for providers to submit information and documents necessary to support the request. The ITN made the importance of a vendor's MIS abilities, experience, and personnel to successfully accomplishing the task clear. The ITN required a detailed description of the vendor's "approach for designing, developing, and maintaining a web-based prior authorization system, which is available to authorized users and providers, as described in the ITN." AHCA identified some required characteristics and tasks that must be performed. Similarly, the ITN identified minimum requirements for system generated reports, but it did not limit the frequency or content of the reports. It left to the vendors the task of developing and maintaining the system that would perform the tasks, have the needed characteristics, and generate the reports required. The ITN required that: The Vendor shall have in-house Management Information Systems (MIS) capability. The Agency will not approve a subcontractor for this function. The Vendor shall maintain a sufficient number of qualified MIS and technical staff to continue operation of the Vendors systems, provide prompt, on-going system support and accurate data access to the Agency and its authorized service providers. It did not specifically identify this requirement as a mandatory criterion. The ITN also required vendors to provide résumés for "MIS staff." This is the only area of expertise where the requirement for résumés went beyond identified key staff positions. The vendor's staff is essential to achieving the goals of the ITN's proposed contract. Staff is key to making judgments about what services should be authorized and obtaining more information about the reasons that the service has been requested. Staff is also critical to meeting the short review timeframes. The ITN emphasized the importance of staff. It cautioned vendors that AHCA reserved the right to determine that staff was insufficient and to require the vendor to cure the insufficiency. It also required detailed information about staff including résumés, staffing charts, and minimum requirements for key staff. Protection of beneficiary privacy is another subject emphasized by the ITN. Several portions required compliance with state and federal privacy requirements, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Also, the ITN required vendors to explain in detail how they would protect patient privacy. Evaluation and Negotiation Process AHCA established a two-step process for selecting a vendor with which to contract. Stage one was evaluation of the prospective vendors' responses to the ITN. Stage two was the negotiation phase. In the evaluation phase, each vendor submitted a reply to the ITN. The replies contained the vendor's technical proposal, cost proposal, and staffing proposal for providing services identified in the ITN. It also provided information requested by the ITN and any other information that the vendor chose to include. During the evaluation stage, the vendor replies were to be evaluated, scored, and ranked based on the requirements of the ITN. The purpose of the evaluation and scoring was to determine which vendor or vendors would move to the negotiation phase. It was not to determine which vendor would be awarded the contract. The negotiation phase was to determine with which vendor AHCA would contract. In the negotiation phase, AHCA would gather more information about the vendors, their abilities, and their proposals. The negotiation phase was an opportunity for AHCA to critique vendor proposals and question vendors. It also was an opportunity for each vendor to respond to those critiques and questions as it determined best. July 14, 2010, was the deadline for submitting replies to the ITN. KePro, EQ, and Alliant ASO ("Alliant") timely submitted replies to the ITN. KePro and EQ are parties to this proceeding. Alliant is not. No vendor protested the terms, conditions, or specifications of the ITN. AHCA’s procurement office reviewed the replies for compliance with mandatory minimum requirements. All met the requirements. The Deputy Secretary for Medicaid for AHCA, Roberta Bradford, appointed seven AHCA employees to the evaluation team. They were Claire Anthony-Davis, Lakia Daniels, Princilla Jefferson, Kathleen Core, John Loar, Ryan Fitch and Scott Ward. Ms. Bradford selected these individual because of their experience and subject matter expertise in areas involved in the ITN. For example, Claire Anthony-Davis was AHCA’s Home Health Policy Analyst. She had experience in utilization management and prior authorization of home health services, as well as experience monitoring AHCA’s contracted peer review organization (PRO). Kathleen Core, AHCA’s Medical Health Care Program Analyst, managed the Pediatric Extended Care (PPEC) Services program. She had experience in Medicaid policy and prior authorization. The other evaluation team members had similarly relevant experience. The members of the evaluation team were sufficiently skilled and experienced to evaluate the ITN replies in accordance with the ITN and in compliance with Florida law. The members of the evaluation team independently evaluated the vendor replies. Each employed his or her personal skills and experience in the course of the evaluations. The evaluators had and considered written evaluation instructions, Conflict of Interest Questionnaires, the ITN, all addenda including the vendors' written questions and AHCA's answers, all the vendors' ITN replies, and the evaluation tool. The evaluation process took place over several days. Each team member completed his or her own individual, detailed score sheets for each vendor. Each of the evaluators carefully and thoughtfully scored the ITN replies to the best of their ability and in good faith in accordance with the ITN requirements. Only Ryan Fitch reviewed the financial information and scored the financial stability of the responding vendors. He rated KePro higher for financial stability than the other two vendors. He gave KePro a perfect score. This was the only time in more than two dozen reviews that Mr. Fitch has assigned a perfect score to a company. Scott Ward, AHCA's Information Technology officer, was the only evaluator to review the information technology components of the ITN responses. Mr. Ward did not review any other aspects of the proposals. Mr. Ward assigned a score of 56 to KePro's information technology response and a score of 47 to EQ's. Mr. Ward focused on responsiveness of the replies to specific and limited information technology requirements of the ITN. Those were primarily minimum technical requirements necessary for compatibility with the Agency hardware and software and compliance with AHCA information technology standards. He also checked to verify that the vendors had provided the descriptions of their information technology systems required by the ITN and descriptions of their experience with the systems. He did not and could not evaluate whether those descriptions were accurate. He did not evaluate or score the ability of the systems described to perform the tasks required. Mr. Ward also was not aware of misrepresentations by KePro in the information technology section of its response. This Recommended Order addresses those misrepresentations later. After the evaluators completed scoring, AHCA's procurement office tabulated the vendors' original cost proposals and recorded the scores in the scoring sheets. The individual evaluators ranked the vendors. Two evaluators scored EQ the highest. Two evaluators scored Alliant the highest. One evaluator scored KePro the highest. The average of all scores for each vendor was the same. AHCA invited all three vendors to participate in the negotiation phase. The letter advising the vendors that they had been selected to proceed to negotiations stated: "The negotiation and selection process will consider each company's ability to meet or exceed the requirements of the ITN." Ms. Bradford appointed an eight-person negotiation team. The team members were Darcy Abbott, Shevaun Harris, Lakia Daniels, Claire Anthony-Davis, Kathleen Core, Scott Ward, Barbara Vaughan and Anne Frost. As with the evaluation team, Ms. Bradford selected the negotiation team members because of their experience and subject matter expertise in matters related to the services addressed in the ITN. Five of the negotiators, Darcy Abbott, Shevaun Harris, Lakia Daniels, Claire Anthony-Davis and Kathleen Core, worked in the bureau of Medicaid services with direct responsibility for the current and contemplated contracts. Scott Ward was the director of AHCA Information Technology. Barbara Vaughan and Anne Frost were procurement office representatives. Scott Ward and Anne Frost also were Certified Project Management Professionals. Claire Anthony-Davis, Lakia Daniels, Kathleen Core and Scott Ward, had served on the evaluation team. Ms. Daniels is the AHCA contract manager for the current utilization management contract. Ms. Abbott is the Administrator of all Medicaid sections under the current contract. The members of the negotiation team were sufficiently skilled and experienced to conduct the ITN negotiations. Shevaun Harris facilitated the negotiation sessions. A court reporter transcribed all sessions. Shevaun Harris was the team lead and is direct managing supervisor of the project and the contract that will result from the ITN. AHCA negotiators met with KePro representatives on August 10, 2010. They met with EQ’s and Alliant’s representatives on August 12, 2010. AHCA gave each vendor the same opportunity to appear at the negotiation sessions, by telephone and in person. AHCA gave each vendor the same opportunity to answer questions from the negotiation team. The day before the first negotiation session, AHCA informed all vendors that they would not be permitted to make presentations as part of their negotiation session. This included PowerPoint and web-based presentations. AHCA did this because the negotiation team wanted to spend the time learning about the ITN replies and asking questions instead of basically listening to a sales pitch. The restriction applied equally to all the vendors. Nothing in the ITN or AHCA's letter scheduling the negotiation sessions advised the vendors that they would be permitted to use internet, PowerPoint, or any other assistive devices during negotiations. After the first round of negotiations, the AHCA negotiation team discussed the replies and negotiations. It preliminarily ranked the vendors. EQ ranked highest, but the team was concerned about EQ's costs. They were substantially greater than the costs of the other two vendors. The team consulted with AHCA senior management to ensure that the members understood the budgeted amount available for the contract and any other financial constraints on the decision. AHCA conducted a second negotiation session with EQ on August 18, 2010. It focused on costs. AHCA scheduled the negotiation to obtain more information from EQ about the basis for its costs. AHCA obtained clarification and determined that EQ was willing to reduce its costs. After the negotiation sessions, AHCA asked all of the vendors to submit their best and final offers (BAFOs). The team also concluded that EQ was the preferred vendor if it reduced its costs sufficiently. All three vendors timely submitted their BAFOs to AHCA. The request to EQ for a BAFO stated: Your proposed implementation costs exceed the Agency's budget for Fiscal Year 2010-2011. Please provide a revised cost proposal as follows: One time Implementation Costs for Therapy Services reduced by at least 70-80%. One time Implementation Costs for all other services (Inpatient, Home Health, and PPEC) reduced by at least 65-75%. In addition to the revised cost proposal, please provide the following: A detailed staffing plan to reflect the changes in the reduced Implementation costs. Best and Final Cost Proposal for Implementation Costs, Operations Year 1, Operations Year 2, and Operations 3, eliminating the costs for analysis of respiratory therapy in Year 2 and Year 3. AHCA's request to KePro for a BAFO asked KePro to: Provide a detailed staffing plan with a breakdown- of FTE's for each aspect of the ITN's scope of services which includes the number of staff, when each staff member will start, whether the staff member will be on- going and if so, when they will be phased out. Provide the number of on-site face-to- face assessments for Private Duty Nursing (PON), Prescribed Pediatric Extended Care (PPEC), and Therapy services. Provide Best and Final Cost Proposal for Implementation Costs, Operations Year 1, Operations Year 2, and Operations 3, eliminating the costs for analysis of respiratory therapy in Year 2 and Year 3. All three vendors submitted the requested BAFOs. KePro and EQ both reduced their costs. The negotiation team unanimously agreed that AHCA should contract with EQ. It did not determine a "second place" vendor. A memorandum dated September 27, 2010, (Award Memo) states the team's recommendation. It summarizes the history of the ITN issuance and reply review. The Award Memo concludes with these two paragraphs: Overall, EQ Health Solutions prevailed as the most favorable vendor. Their [sic] proposal demonstrated that they [sic] can provide qualified and experienced professionals to meet the requirements of this multi-faceted program. Out of the three respondents, their [sic] proposed approach will provide the most comprehensive quality model for utilization management. Per the recommendation of the negotiation team, and as Deputy Secretary for Medicaid, my signature below indicates my decision to award a contract for the comprehensive utilization management of Inpatient Medical and Surgical, Home Health, Prescribed Pediatric Extended Care (PPEC) and Therapy Services to EQ Health Solutions. Deputy Secretary Roberta Bradford is the AHCA official with the authority to sign off on the contract. She signed the Award Memo, but the negotiation team prepared the memorandum. Ms. Bradford deferred to the team's recommendation. Neither Ms. Bradford nor other senior management officials of AHCA reviewed any information or documents other than the Award Memo to decide upon the proposed award. The Award Memo does not explain how the EQ proposal provides the best value to the state. The Award Memo does not provide AHCA senior management with any analysis of the respective cost proposals submitted by the vendors. The AHCA files and records and records for the ITN do not contain a document that analyzes the cost differential between the vendors or that articulates how contracting with EQ would provide the best value for the state. They also do not contain a short plain statement that explains the basis for the selection of the vendor and that sets forth the vendor's deliverables and price pursuant to the contract, along with an explanation of how these deliverables and price provide the best value to the state. AHCA's practice before awarding a contract is to maintain a "solicitation file" that contains documents relating to the solicitation process. After awarding a contract AHCA creates a "contract file." Ms. Bradford did not receive or review a cost comparison of the BAFOs. She was not aware of the cost difference between the KePro and EQ proposals. She did not receive or review a written or oral presentation of the relative merits of the vendor proposals or the reasons for choosing EQ, other than the Award Memo. Ms. Bradford relied entirely upon the recommendation of the negotiation team. On September 28, 2010, AHCA posted Notice of its intent to contract with EQ on the Agency procurement website. AHCA did not post an explanation or basis for its proposed decision. Reply and Negotiation Overview As a whole, the reply of EQ and its responses in the negotiation sessions demonstrated a more thorough analysis of the tasks presented by the ITN and the challenges they presented. EQ presented more detail in descriptions of its systems and web portal than KePro did. This is true both in the narrative and the screen shots provided. EQ's reply demonstrated research and understanding of legal requirements involved in the process, such as the work needed to prepare for fair hearings. KePro did not display the same level of research and understanding. For example, KePro proposed a Facebook page for Medicaid beneficiaries, but it had not considered the legal and personal privacy issues that may arise or how to address them. Another example, addressed in detail later, is the analysis of the needs for newly established prior authorization review of therapy services. EQ identified factors and difficulties that newly imposed therapy reviews would create. It determined that therapy reviews could be more difficult and time consuming than inpatient service reviews. EQ crafted its proposal to address those factors and difficulties. KePro did not demonstrate even consideration of the differences between therapy reviews and inpatient service reviews. EQ provided a link to a demonstration site for its information technology system. There is, however, no evidence that any AHCA employee used the link. In its reply and in negotiations, KePro repeatedly referred to its experience as an AHCA contractor and specific individuals' knowledge of KePro. AHCA concluded that EQ's reply and the information EQ presented in negotiations demonstrated a greater understanding of what was needed to successfully administer the prior authorization program and how to do it. The evidence supports that conclusion. Costs and Staffing The three vendors proposed significantly different costs, i.e. fees, to AHCA for the contract. KePro proposed $38,900,064 for the life of the contract. EQ proposed $51,084,928. The third vendor, Alliant, which is not a party to this proceeding, proposed $46,325,552. EQ's proposed costs, the amount that the State will pay over the contract term, are $12,184,864 more than those of KePro. AHCA intends to contract with EQ instead of KePro, despite the twelve million dollar cost differential. This is in part because the replies and the negotiation sessions caused AHCA to conclude that KePro was "lowballing" its costs and/or unrealistic in establishing them. That conclusion is not clearly erroneous, arbitrary, or capricious. Direct personnel costs account for $5,247,861 of the twelve million dollar difference. This is due to the differences in proposed staffing. EQ proposed 136.95 FTEs for the contract. KePro proposed 85 FTEs. EQ's average compensation cost per FTE is 95,521,518. This amount is $3,358.70 than KePro's average of $92,162.482. But the compensation difference only accounts for $460,021 of the $12,184,864 difference over the contract period. The number of FTEs is what causes the difference. The difference between EQ's and KePro's plans for the Home Health Comprehensive Care Monitoring program contributed to the difference in FTEs in the vendor proposals. EQ's costs are $2,081,669 more than KePro's costs. The Home Health Monitoring program calls for visits to the homes of home health care recipients in Miami-Dade County. The visits serve several purposes. One is to verify that the patients are receiving appropriate services. Another is to determine if the patients are actually receiving services. This purpose arises from the fact that 85 percent of the Medicaid funds expended on home health services in the nation are expended in Miami-Dade County. Consequently AHCA surmises that fraud may be an issue in that county. This second purpose is part of AHCA's effort to reduce Medicaid fraud. EQ staffed these visits with two people. KePro staffed them with one. AHCA determined that two people was a better staffing proposal due to the fraud detection facet of the visits and bad experiences of individuals making similar visits in the past. AHCA's preference for the more costly EQ staffing proposal has not been proven clearly erroneous, arbitrary, or capricious. Realistic consideration of the completion timeframe requirements are one reason. Even with the use of rules driven or criteria based algorithms that will trigger some automatic approvals, people perform critical functions in the review process. The role includes nurse or other professional review of requests that do not trigger automatic approval, doctor review of all denials, communication with providers and patients, provider education, assistance preparing for fair hearings, participation in fair hearings, and training for staff and providers. EQ's greater staffing level will likely result in more satisfactory performance of these functions. The contract will include short timeframes for many tasks. Meeting the time requirements is important to prompt provision of needed medical services. EQ's staffing makes EQ more likely to meet or better the timeframe requirements. Inadequate staffing can cause delays, possible medical complications, increased costs, dissatisfied providers, dissatisfied patients, AHCA handling customer inquiries and complaints that the contractor should be handling, and friction between the State and its contractor. The ability to require more staff or impose penalties, likely to involve delay or even legal proceedings, is a poor substitute for adequate staffing from the beginning. In other areas, EQ's more costly proposals are more plausible than KePro's cheaper proposals. This too makes AHCA's decision that the KePro costs were unrealistically low not clearly erroneous, arbitrary, or capricious. The "other direct" cost category includes the following components: software, hardware, equipment purchase and rental, professional services, advertising, training, licensing, recruiting, legal, taxes, and miscellaneous. KePro proposed no costs for these components. EQ proposed costs of $1,443,691 for the same components. While the record does not reveal the basis for EQ's costs, it is more credible that there will be costs of some amount over a three year period than that there will be none. Similarly EQ's rent costs are more plausible than KePro's. This is another reason AHCA's conclusion that KePro's costs were not realistic has not been proven clearly erroneous, arbitrary, or capricious. For the implementation period, KePro allocates no rent cost. This is plausible since KePro is currently providing services and would be as it shifted from its existing contract to the new contract. It is plausible that KePro could handle the implementation work from the offices where it currently provides services. For each full year of the contract, KePro represents rent costs of around $26,000 per year or an average for the three year period of $2,177.42 per month. EQ proposes rent costs of $1,073,267. That includes implementation period rent of $43,139 and first year rent of $330,000, apparently increased by four percent per year to a third-year rent cost of $356,928. EQ's average monthly rent costs for the three full years of the contract are $28,614.67. Nothing indicates AHCA arbitrarily or capriciously accepted these costs instead of EQ's. EQ and KePro differed $242,773 in their postage, shipping, and fulfillment costs. EQ's costs were $349,137 and KePro's costs were $106,364. For the 716,000 annual authorization reviews this correlates to EQ having 48.7 cents postage, shipping, and fulfillment costs per review and KePro having 14.8 cents costs per review. The record does not establish that accepting EQ's costs was clearly erroneous, arbitrary, or capricious or even that KePro's costs of less than one postage stamp per review were reasonable. The difference between EQ's proposed cost for therapy services review and KePro's is $8,015,250. For AHCA to choose EQ as the vendor, despite the difference in proposed costs, it necessarily must have determined the EQ's costs for therapy services were more reasonable than KePro's. In contrast to the magnitude of the differences between the vendors' costs for therapy services, the costs for inpatient reviews are similar. EQ's cost for 510,000 reviews per year of inpatient services exceeds KePro's by $1,307,187 for the contract period. For each full year of the contract, differences between the vendors' inpatient review costs are relatively small. Year one KePro exceeds EQ by $8,832. Year two EQ exceeds KePro by $129,455. Year three EQ exceeds KePro by $350,287. The cost differences each year for providing 140,000 therapy service reviews are, on the other hand, dramatic. In year one EQ costs for therapy reviews exceed KePro's by $2,481,073. In year two the difference is $2,558,825. For year three the difference is $2,673,456. Year one, EQ's costs for therapy reviews are $4,788,242. This is more than EQ costs for 510,000 inpatient service reviews the same year. Year two, EQ's costs for the inpatient service reviews are only $152,490 more than its costs for 140,000 therapy reviews. Year three, EQ's inpatient service review costs exceed the therapy review costs by just $219,207. This is true even though the number of therapy reviews anticipated is 27.5 percent of the anticipated inpatient reviews. EQ justified the therapy costs in its second negotiation session. The review for therapy services is likely to consume a disproportionate amount of staff time for several reasons. Florida does not currently require prior authorization for therapy services. The change will be disruptive and time consuming. Providers, patients, patient families, and patient advocates will have to learn the system. They will have to learn how to request services. And they will have to learn how to support the service requests. As importantly, they will have to learn to accept the fact that prior authorization is now required. All these facts may reasonably be expected to cause difficulties for the vendor and AHCA. Therapy review is likely to result in a higher incidence of requests for additional information and more time spent communicating reasons for decisions than inpatient reviews. Therapy review is also likely to engender a disproportionate number of requests for reconsideration and fair hearings. This is partly due to the human reaction of people being told "no" for the first time in a system. Normal difficulties adjusting to new requirements and to a new system will also contribute. Support in the fair hearing process, which will be mandated by the contract, requires staff time. So too will the multiple communications and re-reviews that inevitably will be required as providers and patients alike learn and accept a new process. The nature of therapy services is also likely to result in more fair hearing requests. Authorization of less service than requested will be a denial of services subject to fair hearing review. In the inpatient setting, this is not always so. Often, services such as a hospital stay can be extended if review at the end of the authorized stay indicates further time in the hospital is needed. Because of these differences between prior authorization of therapy services and prior authorization of inpatient services, AHCA's decision to accept EQ's costs for therapy services has not been shown to be clearly erroneous, arbitrary, or capricious. Information Management Systems AHCA determined that EQ's proposal presented a better, fully developed and previously used information technology (IT) system than KePro. The IT systems and IT staffing proposed by the vendors were important aspects of the utilization management services to be provided under the contract. The ITN made it clear that a significant portion of the prior authorization and other systems in the utilization management services were to be facilitated through the vendors' IT systems. EQ developed its IT system. EQ has operated its system in a state Medicaid environment in Mississippi for approximately thirteen years and in Illinois for eight years. EQ’s in-house IT staff, the same staff that developed the system, will support it. KePro did not develop its proposed IT system, MedManager. Another company, Preferred Physicians Health Alliance (PPHA) developed MedManager. KePro had never used the system or managed prior authorization reviews with it. KePro was attempting to acquire PPHA's MedManager system through a purchase of PPHA’s assets in the summer of 2010. But when KePro submitted its ITN reply on July 14, 2010, KePro had not completed the asset purchase. There was no signed purchase agreement between KePro and PPHA, and no money had been exchanged. KePro did not disclose these facts in its reply. KePro represented in its ITN reply that: Our corporate system, MedManager, is wholly owned by KePro outright, including the design, software source code, and database schema. That enables us to control software changes and be responsive to change requests. We will make all system changes using our in- house, MIS staff. This statement was not accurate. KePro did not own MedManager outright and did not have an enforceable agreement to purchase it. KePro did not acquire the assets of PPHA, including MedManager until July 16, 2010. During the entire period of the ITN process from reply submission to negotiations and BAFOs, KePro and its management had never used MedManager in any setting, commercial or Medicaid. KePro’s Chief Executive Officer, Joseph Dougher, testified that KePro had hired PPHA's personnel and would rely upon them to maintain and refine MedManager. The ITN required vendors to provide résumés for the MIS personnel. KePro’s reply did not provide the résumés of any of the PPHA employees now employed by KePro. It provided only the résumé of Wayne Bolton, a KePro employee of some 20 years. Mr. Bolton had no part in developing MedManager and has not overseen use of MedManager for any prior authorization program. During KePro's negotiations with AHCA on August 10, 2010, Shevaun Harris of AHCA asked KePro Chief Executive Joseph Dougher directly if MedManager was a new system launching for the first time. Mr. Dougher stated that KePro had been using MedManager "on the commercial side of our business for about ten years." This statement was not accurate. KePro had never used MedManager. In addition, the MedManager system KePro proposed had never been used before by KePro or PPHA in a state Medicaid environment. The MedManager system was also not complete at the time of KePro's ITN reply. KePro did not disclose this to AHCA until the negotiation session. The provider portal portion of the MedManager system was not complete. The ITN made clear that the provider portal was a critical part of the system AHCA was seeking. At the time of the final hearing, KePro had not completed the provider portal. And KePro had not yet implemented it for any of its other Medicaid customers. AHCA would have been the first KePro customer to use the MedManager provider portal in a Medicaid environment. The AHCA negotiation team preferred EQ's IT system because it was fully developed and had been used in Medicaid environments for several years. Conversely team members were concerned that the KePro system was still under development. The content of the replies and communications during the negotiations provided a basis for these concerns even without the information revealed during discovery for this proceeding that KePro did not own MedManger when it submitted its reply and had not used MedManager before. AHCA's preference for the existing and tested system used by EQ is not clearly erroneous, arbitrary, or capricious. EQ's proposed disaster recovery plan is superior to KePro's. KePro proposed a tape back-up system. EQ proposed a network-based back-up system. KePro's tape back-up system saves or backs up information and data once a day at 5:00 p.m. Under this system, if the system crashes any time before the daily back-up, all the day's data could be lost. In addition, the back-up tapes would have to be transferred to another site. This will delay recovery. EQ's network-based back-up system backs up data and information continuously throughout the day. If the system crashes, all the day's data entered before the crash would be saved. A network-based back-up system also provides continuous access to the backed-up data on the network in real time rather than having tapes that would have to be delivered from another site. The network-based back-up system is superior. AHCA's preference for the EQ disaster recovery plan is not clearly erroneous, arbitrary, or capricious. Additional ITN Considerations EQ’s proposal recognized the importance of employee training to success. It provided for more training and more extensive training than KePro. AHCA determined that the training provisions added value to EQ's proposal. EQ committed to having its reviewing physicians attempt to contact the physician ordering a service before denying the service. This practice has the potential to reduce incorrect denials and therefore mitigate the costs and disruption of fair hearing disputes. KePro did not make a similar proposal. AHCA determined that this, too, added value to EQ's proposal. EQ proposed to handle all functions of the contract in-house without subcontractors. KePro proposed subcontractors. Although subcontractors were permitted, the AHCA team preferred the EQ proposal without subcontractors. This preference was based upon experience with delays and disputes arising with subcontractors under other contracts. The ITN's many subcontractor provisions issues that can arise with subcontractors made it plain that use of subcontractors was a criterion for consideration. AHCA's preference for the EQ in- house proposal was not clearly erroneous, arbitrary, or capricious. The ITN asked vendors to identify five hospitals that would be part of the NICU Care Monitoring Program. KePro identified five hospitals. EQ did not. AHCA asked EQ about this failure. EQ representatives advised AHCA of the geographic area for the hospitals and represented that they could identify them if requested. This response did not comply with the requirement to identify the five hospitals. However, identification of the five hospitals was not specified as a requirement of the ITN that could not be waived. It also has not been shown to provide EQ an advantage over KePro or to have a potentially significant effect on the quality of EQ's response or on the cost of the services to the State. The 2009 Request for Information AHCA first sought a vendor to provide the services involved here in 2009. At that time, AHCA issued a Request for Information inviting possible vendors to provide information about ways to provide the prior authorization services. KePro and EQ's predecessor, Louisiana Health Care Review, were among those providing information. AHCA reviewed their information and met with representatives of each of them. During that process one or more of the 2010 negotiation team viewed a demonstration of EQ's system. AHCA decided that it was not required to use competitive procurement to contract for the services. It selected EQ as the provider and moved toward executing a contract. In the process, Ms. Core received a more detailed explanation and demonstration of the EQ system. KePro challenged the decision and requested an administrative hearing. AHCA denied the request. KePro appealed. During the appeal, the First District Court of Appeal stayed AHCA from contracting with EQ. The court subsequently issued an opinion holding that KePro was entitled to an administrative hearing to challenge the decision to contract with EQ. Keystone Peer Review Organization, Inc. v. AHCA, 26 So. 2d 652 (Fla. 1st DCA). AHCA decided not to proceed with the hearing. Instead it began the ITN process resulting in this proceeding. Neither Ms. Core nor other AHCA negotiation team members considered the EQ system information they received during the aborted 2009 contracting efforts in deciding to contract with EQ after the ITN negotiations. If they had, it would not have mattered. EQ's ITN reply thoroughly describes and documents its MIS system. The reply also provided a link to a demonstration of EQ's system. Consequently, any information the team members may have recalled from the 2009 efforts was provided in the 2010 ITN process.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is Recommended that Agency for Health Care Administration enter a final order dismissing the formal written protest of Keystone Peer Review Organization, Inc. and awarding the contract to eQHealth Solutions, Inc. DONE AND ENTERED this 12th day of January, 2011, in Tallahassee, Leon County, Florida. S JOHN D. C. NEWTON, II 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 12th day of January, 2011. COPIES FURNISHED: Daniel Lake, Esquire Agency for Health Care Administration 2727 Mahan Drive, Suite 3431 Tallahassee, Florida 32308 J. Stephen Menton, Esquire Martin P. McDonnell, Esquire Rutledge, Ecenia, & Purnell, P.A. 119 South Monroe Street, Suite 202 Post Office Box 551 Tallahassee, Florida 32302 Robert H. Hosay, Esquire John A. Tucker, Esquire Foley & Lardner LLP 106 E. College Avenue, Suite 900 Tallahassee, Florida 32311 Richard J. Shoop, Agency Clerk Agency for Health Care Administration 2727 Mahan Drive, Mail Stop 3 Tallahassee, Florida 32308 Elizabeth Dudek, Interim Secretary Agency for Health Care Administration 2727 Mahan Drive, Mail Stop 3 Tallahassee, Florida 32308 Justin Senior, General Counsel Agency for Health Care Administration 2727 Mahan Drive, Mail Stop 3 Tallahassee, Florida 32308
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Petitioner's 1978 medicaid Cost report be modified in accordance with the foregoing adjustments. DONE and ENTERED this 10th day of November, 1982, in Tallahassee, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 10th day of November, 1982.
Findings Of Fact Background Petitioner 1/ owns and operates a licensed nursing facility certified to participate in the Florida Medicaid Program. The facility, which is located at 490 South Old Wire Road, Wildwood, Florida, first became a Medicaid provider on January 27, 1987. Expanded from 120 beds to 180 beds prior to March, 1988, the average occupancy of WeCare is 175-176 residents. The Medicaid patient census is usually over 140 residents. Petitioner operates the only nursing facility in Sumter County providing skilled nursing services. By letter dated December 13, 1990, Petitioner requested an interim rate increase. The letter covers the 12-month period commencing October 1, 1990, which is the effective date of the federal Omnibus Budget Reconciliation Act of 1987 (OBRA). Petitioner requested an interim rate hike of $2.53 per patient day based on a total increase in expenses, due largely to OBRA requirements, of $161,815.32. By letter dated February 15, 1991, Respondent denied the request. The letter fails to address $114,415.32 in anticipated costs, mostly in the areas of nursing and new- resident assessment. These items were inadvertently omitted from Petitioner's December 13 letter. The February 15 response divides projected expenses into two categories: patient care costs and operating costs. The letter treats as patient care costs projected expenditures for food and employee wages to expand evening programs for residents, added consultant expenses for pharmaceutical advice, added consultant expenses for assistance with overall OBRA compliance and preparation for the state survey, new costs due to quality assurance committee meetings with department heads and outside consultants, and additional wages resulting from an increase in the federal minimum-wage standard. The February 15 letter treats as operating costs projected expenditures for the disposal of hazardous waste and maintenance requested by WeCare's resident council. Florida's Hedicaid Reimbursement Plan The Florida Title XIX Long-Term Care Reimbursement Plan , Version III, dated December 17, 1990 (Plan) 2/ is intended to provide reimbursement for reasonable costs incurred by economically and efficiently operated facilities. The Medicaid program pays a single per diem rate for all levels of nursing care. After a facility's first year of operation, a cost- settling process results in a final cost report, which serves as a baseline for the following years. Following the first year's operation, facilities file cost reports annually. In the absence of a special rate freeze, Respondent adjusts a facility's reimbursement rate twice annually based upon the factors discussed below. There are four components of a facility's total per diem rate for Medicaid patients. These cost components make up the total Medicaid patient per diem cost. The return on equity component 3/ is not involved in this case. The property cost component plays a minor role in this case. In a facility such as WeCare, which is owned rather than leased, property costs include depreciation, mortgage interest, equipment rent, ad valorem taxes, and property insurance. The two key reimbursement components in this case are "operating costs" and "patient care costs." The Plan defines these terms as follows: Patient care costs include those costs directly attributable to nursing services, dietary costs, activity costs, social service costs, and all medically ordered therapies. All other costs, exclusive of property cost and return on equity or use allowance costs are considered operating costs. Plan, pages 40-41. In general, the reimbursement program sets rates prospectively followed by a cost-settling process. In other words, a rate is set for the coming period in the manner described below. At the end of the period, a cost-settlement takes place. There are limited exceptions to the prospective orientation of the rate-setting process: the prospectively determined individual nursing home's rate will be adjusted. retroactively to the effective date of the affected rate under the following circumstances: an error was made by [Respondent] in the calculation of the provider's rate. A provider submits an amended cost report used to determine the rate in effect. An adjustment due to the submission of an amended cost report shall not be granted unless the increase in documented costs shall cause a change of 1 percent in the reimbursement rate. The amended cost report shall be filed by the filing date of the subsequent cost report or the date of the first field audit exit conference for the period being amended or the date a desk audit letter is received by the provider for the period being amended, whichever is earlier. Further desk or on-site audits of cost reports disclose a change in allowable costs in those reports. Plan, pages 31-33. In this case, Petitioner seeks "interim changes in [its] component reimbursement rates, other than through the routine semi-annual rate setting process." Plan, page 33. Like normal reimbursement rates, interim rates are set prospectively and then cost-settled at the end of the interim rate period. Plan, page 2. Accounting for property costs under the Fair Rental Value System (FRVS), Petitioner is ineligible for an interim change in Medicaid reimbursement rate under the Plan. Petitioner's sole means to obtain rate relief for property costs is to file for a rate adjustment as of January 1 and July 1 of any year. Plan, page 33-34. On January 1 and July 1, Petitioner may obtain an adjustment to the FRVS rate if "expenditures for capital additions and improvements totalling, $100 per licensed bed accrue in the 6-month periods ending April 15 or October 15 prior to rate semesters beginning July 1 and January 1, respectively." Plan, page 72. Because Petitioner has 180 beds, the threshold for the FRVS property cost adjustment is thus $18,000. The Plan does not require that the acquired property for which the rate adjustment is sought be purchased to comply with a new legal requirement. The reimbursement process is quite different for patient care and operating costs. Addressing interim rate hikes for these components of the reimbursement rate, the Plan provides: Interim rate changes reflecting increased costs occurring as a result of patient care or operating changes shall be considered only if such changes were made to comply with existing State or Federal rules, laws, or standards, and if the change in cost to the provider is at least $5000 and would cause a change of 1 percent or more in the providers current total per diem rate. If new State or Federal laws, rules, regulations, licensure and certification requirements, or new interpretations of existing laws, rules, regulations, or licensure and certification requirements require providers to make changes that result in increased or decreased patient care, operating, or capital costs, requests for component interim rates shall be considered for each provider based on the budget submitted by the provider. All providers' budgets submitted shall be reviewed by [Respondent] and shall be the basis for establishing reasonable cost parameters. In cases where new State or Federal requirements are imposed that affect all providers, appropriate adjustments s1hall be made to the class ceilings to account for changes in costs caused by new requirements effective as of the date of the new requirements or implementation of the new requirements, whichever is later. Interim rate requests resulting from 1. [devoted to property component interim rate hikes sought by non-FRVS providers] and 2. above must be submitted within 60 days after the costs are incurred, and shall be accompanied by a 12-month budget which reflects changes in services and costs. . . . An interim reimbursement rate, if approved, shall be established for estimated additional costs retroactive to the time of the change in services or the time the costs are incurred, but not to exceed 60 days before the date [Respondent] receives the interim rate request. The interim per diem rate shall reflect only the estimated additional costs, and the total reimbursement rate paid to the provider shall be the sum of the previously established prospective rates plus the interim rate. . . Interim Rate Settlement. Overpayment as a result of the difference between the approved budgeted interim rate and actual costs of the budgeted item shall be refunded to [Respondent]. Underpayment as a result of the difference between the budgeted interim rate and actual costs shall be paid to the provider. Interim rates shall not be granted for fiscal periods that have ended. The determination of interim reimbursement rates is best illustrated by following the Plan through the typical rate-calculation process. A facility must first "calculate per diems for each of these four cost components [patient care, operating, property, and return on equity] by dividing the components' costs by the total number of Medicaid patient days from the latest cost report." Plan, page 41. The facility adjusts its "operating and patient care per diem costs that resulted from [the calculation set forth in the preceding paragraph] for the effects of inflation . Plan, page 41. This is done by "multiplying both of these per diem costs" by the rate of increase of the Florida Nursing Home Cost Inflation Index at the midpoint of the cost reporting period. Plan, page 41. This step takes the facility's per diem rates then in effect for the patient care cost and operating cost components and increases them by the applicable inflation rate. The facility calculates the adjustment for a low occupancy factor. In all cases, the operating, patient care, and return on equity components are calculated separately. Otherwise, this step is irrelevant to the present case. Plan, pages 41 et seq. The next step is to calculate the statewide ceilings for, among other components,, the patient care cost and operating cost. These ceilings are determined separately, as evidenced by the use of different standard deviations in the calculation of the respective ceilings. Plan, page 47. These ceilings are otherwise irrelevant to the present cases The Plan next requires the facility to "[e] stablish the target reimbursement for operating and patient care cost per diems for each provided." The target per diems limit the respective per diem rates of these two components even if the applicable ceilings and inflation adjustments otherwise warrant a rate increase. In other words, a facility's per diem rate for patient care may be below the ceiling and warrant an increase for inflation; however, the increased rate may not exceed the target rate. The "target" more frequently than the "ceiling" serves to limit rate increases for the operating cost per diem rate and patient care cost per diem rate. For each of the two per diem rates, the target limits the increase of the provider's then-current per diem rate, without regard to incentives, to the rate of increase of the Florida Nursing Home Cost Inflation Index multiplied by 1.786. Plan, pages 48 -49. The Plan requires each facility to calculate separately its operating cost per diem and patient care cost per diem. For each component, the Plan "requires that the facility receive the lowest of the rates--then-current plus inflation, target, or ceiling. Plan, pages 49-50. Thus, for instance, the patient care component could be limited by its target but the operating component could receive a full inflation increase. The importance of interim rate changes is that they increase the reimbursement rate against which the targets are calculated for operating and patient care cost per diem rates. In this manner, the interim rate hike raises the applicable targets. As noted above, if the new federal or state requirements affect all providers, the ceilings can also be raised, although this issue has not been addressed in this case. Cost Reports Three of Petitioner's cost reports were admitted into evidence. Two cover one-year periods ending June 30, 1989, and June 30, 1990. One covers a six-month period ending December 31, 1990. The most recent cost report includes a request by Petitioner to obtain a FRVS property cost rate adjustment for computer and software hardware purchased in the last six months of 1990. The report classifies these items as property for cost reimbursement purposes. The cost report is relevant as evidence of the proper classification of computer hardware and software and the proper means by which an FRVS provider may obtain an adjustment for additional property costs. 4/ The parties disagree as to which of the two earlier cost reports should be used to supply the threshold for Petitioner's request for an interim rate hike with respect to operating and patient care costs. Respondent insists that the source of Petitioner's "current total per diem rate," against which the 1% threshold is applied to determine eligibility for the interim rate hike, is the cost report for the year ending June 30, 1989. However, on or about October 30, 1990, Petitioner filed a cost report for the year ending June 30, 1990 (1990 cost report). This was about six weeks before applying for an interim change in the reimbursement rate. Respondent ignores the later cost report because it was filed late. However, there is no authority prohibiting the use of the more current cost report simply because it is filed late, at least when, as here, it is filed before the interim rate request is filed. 5/ For calculating the thresholds in this case, there is no difference in which cost report is used. Both parties used $38,000 as the threshold, which is sufficiently accurate under the facts of this case. The possible thresholds are $36,071 under the 1990 cost report 6/, which is hereby adopted, and $34,350 under the cost report for the prior year. 7/ New Cost Items Although the original request for an interim rate hike identifies more than $160,000 of new expenses necessitated by changes in the law, Petitioner refined its earlier estimate based on actual experience prior to the hearing. The new figure is $126,598.32, as identified at the hearing and in Petitioner Exhibit 42. 8/ Petitioner claims that changes in the law necessitated the following costs, which are stated, where applicable, as increases in expenses preexisting changes in the relevant law: PATIENT CARE PLANNING/RESTRAINT FREE ENVIRONMENT--SALARY NURSING 30,027.52 NURSING ASSISTANTS 19,762.73 DIETARY 4,073.23 TOTAL WAGES 53,863.48 TOTAL BENEFITS 10,234.06 TOTAL WAGES AND BENEFITS 64,097.54 ADMINISTRATIVE NURSING WARD CLERK 3,500.00 DATA ENTRY 513.00 IN-SERVICE EDUCATION 6,403.21 TOTAL WAGES 10,416.21 TOTAL BENEFITS 1,979.08 TOTAL WAGES AND BENEFITS 12,395.29 CONSULTANTS TO ASSURE COMPLIANCE WITH OBRA PHARMACY 440.00 SOCIAL SERVICE 250.00 DIETARY 1,093.75 TOTAL 1,783.75 AUTOMATION OF MDS AND RESIDENT TRUST FUND ACCOUNTING OUTSIDE DATA PROCESSING SERVICE 3,033.75 COMPUTER SOFTWARE 2,495.00 COMPUTER HARDWARE 1,540.00 TOTAL 7,068.75 MISCELLANEOUS OBRA MATTERS PRINT RESIDENTS' RIGHTS MATERIALS 401.05 B. GERIATRICS SURVEY AND TRAINING 500.00 C. ABUSE REGISTRY 285.00 D. WAGE AND HOUR FOR MAINTENANCE 11,178.00 E. MAINTENANCE BENEFITS 2,123.81 TOTAL 14,487.86 VI. OTHER REGULATORY CHANGES A. MINIMUM WAGE 13,827.84 B. MINIMUM WAGE BENEFITS 2,627.29 C. CHANGES IN OBRA/NFPA 9/ STANDARD 7,412.99 D. REMOVAL OF INFECTIOUS WASTES 2897.01 10/ TOTAL 26,765.13 GRAND TOTAL $126,598.32 Classification of New Cost Items Cost items IV.B, IV.C, and VI.C. are property costs representing $2495 and $1540 for computer software and hardware and $7412.99 for privacy curtains around residents' beds. Petitioner has failed to prove that these items, whose costs appear suitable for depreciation or cost-recovery, constitute patient care costs or operating costs. As property costs, Cost Items IV.B, IV.C, and VI.C are ineligible for an interim rate adjustment. Even if Petitioner had requested a FRVS property cost adjustment and thus raised the issue in this case, these items total only $11,447.99, which is below the $18,000 threshold for FRVS property cost rate adjustments. Because of the failure of these items to satisfy the threshold, as well as the fact that changing legal requirements are irrelevant to an adjustment in the property cost reimbursement rate, the remainder of the recommended order does not address Cost Items IV.B, IV.C, and VI.C. Cost Item VI.D, which is $2897.01 for infectious- waste removal, is an operating cost that is not a patient care cost. Cost Items VI.A and B, which are for $16,455.13 in wages and benefits due to an increase in the minimum-wage law, are operating costs that are partly patient care costs. Based partly on the testimony of Petitioner's accountant, one-half of the minimum wage and benefits, such as in the laundry and housekeeping departments, is an operating cost that is not a patient care cost. The remainder of the minimum wage and benefits is a patient care cost. Thus, $8227.57 of Cost Items VI.A and B is an operating cost that is not a patient care cost, and $8227.56 of Cost Items VI.A and B is a patient care cost. Cost Items V.D and E, which are for $13,301.81 in maintenance wages and benefits, are also operating costs that are partly patient care costs. These items represent an incremental increase over typical maintenance costs previously incurred by the facility. Petitioner has proved that two-thirds of the additional maintenance costs are patient care costs expended to address better the needs of the residents, such as by providing immediate repairs to wheelchairs or making their rooms more homelike by, for example, hanging bulletin boards in the rooms, installing personal television sets, and installing locks on cabinet drawers. Thus, $8867.88 of Cost Items V.D and E are patient care costs. The evidence as to the remaining $4433.93 of Cost Items V.D and E is sufficient to establish these expenditures as operating costs, but insufficiently descriptive to prove that these maintenance expenses are properly classified as patient care costs. Cost Item VI.D, one-half of Cost Items VI.A and B, and one-third of Cost Items V.D and E total $15,558.51 in operating costs that are not patient care costs. This is below the $34,350 threshold required for an interim rate hike for operating costs. Due to the possibility that Respondent may reject the Conclusion of Law that the patient care costs and operating costs must separately satisfy the threshold, the remainder of the recommended order discusses Cost Item VI.D. Description of Cost Items Background Prior to making any changes at the WeCare nursing facility following the effective date of OBRA, Petitioner was in full compliance with all applicable law and had earned and maintained a superior rating. None of the cost items was expended to eliminate pre-OBRA substandard conditions. In addition, patient needs were generally unchanged during the year preceding the effective date of OBRA and the following year. In other words, there were no significant changes in patient mix with respect to activity, levels of admissions and discharges, or other matters affecting costs. The largest portion of Petitioner's claim is Cost Item I, which comprises $64,097.54 in wages and benefits for nurses, nurse assistants, and dietary services. The nursing item is for 1.43 fulltime equivalents, the nursing assistant item is for 1.9 fulltime equivalents, and the dietary item is for 0.35 fulltime equivalents. Following the implementation of OBRA, WeCare changed its resident assessment forms. Previously, the facility had used primarily a standard admission record and nursing history and assessment to assess initially the new resident. These forms required about one-half hour per patient to complete. The new standardized assessment form has become known as the Minimum Data Set (MDS). The 11-page MDS is a highly sophisticated instrument that requires comprehensive data collection far more elaborate than that previously undertaken. These data must be obtained from the resident and, in many cases, other sources. The MDS also contains an intricate analytic section. In general, the MDS standardizes the resident- assessment process by which nursing staff collect and analyze data, form conclusions, and recommend interventions. The MDS is also a major step toward assembling a national database on the burgeoning population of nursing-facility residents. Even without regard to the analytic features of the MDS, the old resident assessment forms are different by kind, not degree, from the MDS. The new form requires that the facility's personnel invest considerably greater time and effort assessing each resident's functional abilities. The MDS elicits a richly detailed description of an individual and his needs and abilities, and many questions in the MDS require careful and thoughtful observation of the resident. For instance, the first page of the MDS requires important information concerning the resident's legal status. The array of options include legal guardian, durable power of attorney/health care proxy, health care surrogate, and family member. The same page also demands that the facility personnel determine if the resident has effectuated a living will, do-not- resuscitate code, organ donation, feeding or medication restriction, or autopsy request. Encouraging the resident's involvement with the outside community, the first page concludes by asking if the resident is registered to vote. The second page deals with cognitive patterns. This section also places demands on facility personnel considerably greater than those required by the old resident assessment forms. Personnel must check the resident's short- term and long-term memory and his ability to recall the current season, location of his own room, faces of staff, and his presence in a nursing facility. Personnel must assess the resident's ability to make decisions; the four options range from independent to severely impaired. Personnel must also assess the resident's tendency toward disordered thinking or delirium with five optional specific descriptions, such as "cognitive ability varies over course of day." Twenty-five options are contained in the section of the MDS covering the resident's ability to communicate. These data range from whether he wears a hearing aid or uses another receptive communicative technique such as lip reading to very detailed descriptions of the extent to which he can make himself understood and, in a separate set of questions, understand others. The level of detail is intense throughout the MDS. Other areas covered include physical functioning and structural problems (with 12 options to describe the resident's body control problems ranging from loss of balance to loss of limbs); continence; psychosocial wellbeing (including his level of identification with past roles and life status); mood and behavior patterns; activity pursuit patterns; disease diagnoses (32 options); health conditions (22 options); oral/nutritional status; skin condition; medication,' use; and special treatment and procedures. The analytic aspect of the MDS is contained in the Resident Assessment Protocol (RAP). The RAP references by letter and number nearly all of the answers," supplied on the MDS. The RAP legend supplies a matrix by which these answers are analyzed to determine if they require (trigger) an identified intervention. The RAP even quantifies the extent to which an intervention is likely necessary. These triggers are very detailed and quantify a decision-making process that gas subjective and necessarily more variable prior to the introduction of the MDS. The MDS takes at least one hour more to complete per resident than did the old forms. Petitioner's personnel have tried to avoid duplication. However, Respondent cited Petitioner for a deficiency involving their elimination of one of the pre- OBRA forms in WeCare's first audit following implementation of OBRA. Moreover, quarterly updates of the MDS take additional time, although only selected information is required at such times. Recognizing the increased importance of the initial resident assessment, Petitioner assigned the primary responsibility for the task to the three nurses who serve as coordinators of the three 60-bed units at WeCare. While working on the MDS forms, the unit coordinators' responsibilities are assumed by licensed nurses. The additional work presented by the MDS over the old form requires 1.43 licensed nurse fulltime equivalents. The cost of this is reflected in Cost Item I.A, which is $30,027.52, exclusive of benefits. Benefits were calculated in Petitioner Exhibit 8 at 19% of wages, so the benefits attributable to Cost Item I.A equal $5705.23. Petitioner has failed to establish that the nursing assistants, reflected as cost Item I.B, were required by to complete the new MDS form or any-other new OBRA requirement. The substance of Petitioner's evidence in this regard amounts to proving that: a) no other variables (e.g., change in patient mix or number) could account for the increased hours and b) nursing assistant hours increased after OBRA became effective. Without specific proof of the activities performed by the nursing assistants, it is impossible to determine if their efforts were necessitated by OBRA, such as in the MDS-assessment process, or were merely associated with nonrecurring activities by which facilities such as WeCare digested OBRA and tried to determine the extent to which they had to change prior practices. It is doubtful that Petitioner could have established the requisite relationship between the nursing assistant work and the MDS duties. Cost Item I.A is a reasonable allowance for the new work required of nurses by the MDS forms. Exclusive of benefits, $30,027.52 represents 1.43 fulltime nursing equivalents or about 2980 hours annually of nursing service. There is no evidence in the record linking the expenditure of additional nursing hours to the preparation of the MDS forms, even after consideration of the more limited quarterly reassessments. Petitioner likewise failed to establish that any new OBRA requirement, including the preparation of the MDS, was associated with the dietary cost of $4073.23, which is Cost Item I.C. Petitioner proved that Cost Items II.A and B, totalling $4013 of wages and $762.47 of benefits, were associated with the processing of the data collected in the process of preparing the MDS. The data-processing duties of these individuals are a necessary part of processing the RAPs and triggers in the MDS and determining if an intervention is indicated or required. The ward clerk and data entry person relieved the Director of Nursing of data-processing duties that, unlike the data-collection part of the MDS, do not require nursing expertise to perform. The processing of the RAPs and triggers, although important and time-consuming, is largely mechanical task. Petitioner proved that Cost Item IV.A, which is $3033.75 for outside data processing services, was also associated with the processing of the data collected in the process of preparing the MDS. These services ran from October, 1990, through April, 1991, when the ward clerk and data entry person assumed these duties. The outside data processing, as well as the ward clerk and data entry person, also included trust fund and asset accounting on behalf of residents. Petitioner failed to establish that the services of the in-service coordinator, as reflected in Cost Item II.C, were required by OBRA. Prior to OBRA, the Director of Nursing performed nearly all of the in-service activities. When OBRA was implemented, the Director of Nursing, could not perform these tasks because she was, at first, intensely involved with all aspects of ensuring that WeCare attained or maintained compliance with the new law. A nursing facility and its personnel must remain familiar with federal and state laws governing nursing facilities and their professions. However, nothing in OBRA required new levels of in-service education of nursing facility staff. By contrast, Petitioner proved that the promotion of residents' rights and welfare necessitated Cost Item V.B, which is $500 for a geriatrics survey and training. Petitioner showed that the services of Myra Carpenter, which are Cost Item V.B, were narrowly focused to assist Petitioner's personnel in promoting the rights and welfare of geriatric residents. Cost Items I.A and V.B are sufficient to allow for whatever training was necessary of the unit coordinators in charge of completing the MDS forms and general facility personnel as to the promotion of the rights of residents, especially geriatric residents. Petitioner failed to prove that Cost Items III.A, and C, which are $440 for pharmacy and $1093.7.5 for dietary consultants, were associated with army new OBRA requirement. As discussed in the Conclusions of Law, prior state requirements in these areas were rigorous. For the same reason, Petitioner failed to prove that OBRA necessitated Cost Item V.A, which is $401.05 for printing residents' rights manuals. Petitioner proved that the promotion of residents' rights and welfare was directly responsible for Cost Item III.B, which is $250 for a social service consultant. He increased his hours after OBRA to meet the demands of the residents and the residents' council for operational and structural changes at WeCare. Petitioner proved that the promotion of residents' rights and welfare was also associated with the two-thirds of Cost Items V.D and E previously determined to constitute patient care costs. 11/ The portion of these maintenance wages and benefits assigned to patient care costs constitute part of Petitioner's effort to promote the rights and welfare of the residents. Many of WeCare's residents are young persons who, often afflicted with multiple sclerosis, still possess considerable mental acuity. Adjustment to the environment of a nursing facility can be difficult for such persons, as well as for other residents. Empowering the residents to demand and obtain changes in their living environment is one useful means of promoting the residents' rights and, especially, welfare. The evidence was unconvincing that all of Cost Items V.D and E were devoted to the type of patient-care maintenance described in the preceding paragraph. Petitioner thus failed to establish the nature of the remaining one-third of Cost Items V.D and E. In the absence of proof to the contrary, these expenditures are characterized merely as operating expenses unassociated with any aspect of OBRA. Respondent has emphasized OBRA's promotion of residents' rights and welfare in seminars devoted to OBRA and post-OBRA facility surveys. As to the latter, the surveys of WeCare prior to OBRA typically took a couple of hours. Following OBRA, the surveys take four hours with much of the additional time devoted to resident interviews to ensure that the facility is promoting residents' rights and, especially, welfare. The OBRA mandates, as properly construed by Respondent, increasingly emphasize results or outcome's, not merely processes or procedures. Although OBRA largely leaves to the nursing facility the decision of how specifically to promote residents' rights and welfare, the new requirements of OBRA, as discussed in the Conclusions of Law, remain clear, ambitious, and enforceable. Cost Items III.B, V.B, and two-thirds of V.D and E, although not explicitly dictated by OBRA, were reasonably expended by Petitioner to promote residents' rights and, especially, welfare. Petitioner has proved that Cost Item VC, which is $285 for checking the names of employees on the abuse registry, was associated with a new OBRA requirement. The minimum-wage hike and benefits, which are Cost Item VI.A and B totalling $16,455.13, were mandated by a change in law and exclude any "ripple-effect" in other wages Petitioner proved that one-half of the minimum.-wage hike and benefits or $8227.56, are patient care costs. The remaining $8227.57 of minimum-wage hike and benefits, which obviously were also mandated by law, are operating costs that are not patient care costs. The only other operating cost that is not a patient care cost is Cost Item VI.D, which is $2897.01 for the removal of infectious wastes. Petitioner has proved that the additional costs in connection with the disposal of infectious wastes were associated with a change in state law. Based on the foregoing, Petitioner has proved that $61,672.41 of its expenditures are patient care costs associated with new OBRA requirements and a change in the minimum-wage laws. Petitioner failed to prove that the remaining $37,919.41 of its patient-care costs were associated with any change in law. Petitioner has proved that $11,124.58 of its expenditures are operating costs, other than patient care costs, that were associated with new infectious waste regulations and minimum-wage laws. Petitioner failed to prove that tie remaining $4433.93 of operating costs, which are one-third of the maintenance wages and benefits, were,' associated with any change in law. The remaining $11,447.99 of Petitioner's expenditures are property costs. For the reasons set forth above, the necessity of these costs is irrelevant to this proceeding.
Recommendation Based on the foregoing, it is hereby RECOMMENDED that the Department of Health and Rehabilitative Services enter a final order determining that Petitioner is entitled to an interim rate adjustment of $0.96 per diem. ENTERED this 20 day of March, 1992, in Tallahassee, Florida. ROBERT E. MEALE Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 20 day of March, 1992.
Findings Of Fact The Petition named Dr. Decker as the physician providing obstetric services at Jeovani’s birth on January 18, 2008. Attached to the Motion for Summary Final Order is an affidavit of NICA's custodian of records, Tim Daughtry, attesting to the following, which has not been refuted: One of my official duties as Custodian of Records is to maintain NICA’s official records relative to the status of physicians as participating physicians in the Florida Birth-Related Neurological Compensation Plan who have timely paid the Five Thousand Dollar ($5,000.00) assessment prescribed in Section 766.314(4)(c), Florida Statutes, and the status of physicians who may be exempt from payment of the Five Thousand Dollar ($5,000.00) assessment pursuant to Section 766.314(4)(c), Florida Statutes. Further, I maintain NICA's official records with respect to the payment of the Two Hundred Fifty Dollar ($250.00) assessment required by Section 766.314(4)(b)1., Florida Statutes, by all non-participating, non-exempt physicians. * * * As payments of the requisite assessments are received, NICA compiles data in the “NICA CARES” database for each physician. The “NICA CARES physician payment history/report” attached hereto for Dr. Lawrence Decker, indicates that in the year 2008, the year in which Dr. Decker participated in the delivery of Jeovani Morataya, as indicated in the Petitioner’s Petition for Benefits, Dr. Decker did not pay the Five Thousand Dollar ($5,000) assessment required for participation in the Florida Birth-Related Neurological Injury Compensation Plan. Further, it is NICA’s policy that if a physician falls within the exemption from payment of the Five Thousand Dollar ($5,000) assessment due to their status as a resident physician, assistant resident physician or intern as provided in Section 766.314(4)(c), Florida Statutes, annual documentation as to such exempt status is required to be provided to NICA. NICA has no records with respect to Dr. Decker in relation to an exempt status for the year 2008. To the contrary, the attached "NICA CARES physician payment history/report shows that in 2008, Dr. Decker paid the Two Hundred and Fifty Dollar ($250) assessment required by Section 766.314(4)(b)1., Florida Statutes, for non- participating, non-exempt licensed physicians. The physician payment history/report for Dr. Decker supports Mr. Daughtry’s affidavit. Petitioners have not offered any exhibits, affidavits or any other evidence refuting the affidavit of Mr. Daughtry, which shows that Dr. Decker had not paid his $5,000 assessment for 2008. At the time of the birth of Jeovani, Dr. Decker was not a participating physician in the Plan. The Petition was filed on August 11, 2015, which is more than five years after Jeovani’s birth.
Findings Of Fact Background Petitioner, United Health, Inc. (United), is the owner and operator of approximately one hundred and twenty-three nursing homes in thirteen states. In the State of Florida, it owns and operates sixteen nursing homes and one intermediate care facility for the mentally retarded that are licensed by respondent, Department of Health and Rehabilitative Services (HRS). At issue in this proceeding are the cost reports and supplemental schedules filed by thirteen nursing home facilities.1 In accordance with Medicaid guidelines, petitioner was required to annually submit cost reports to HRS reflecting its allowable costs in providing Medicaid services to its patients. HRS is designated as the state agency responsible for the administration of Medicaid funds under Title XIX of the Social Security Act. In order to be reimbursed for said costs, the facility was required to show that the costs were in conformity with Federal and State Medicaid reimbursement principles. Those principles are embodied in the Long Term Care Reimbursement Plan (Plan) adopted by the State.2 This document contains the reimbursement methodology to be used for nursing homes who provide Medicaid services. In addition, providers must comply with Health Insurance Manual 15 (HIM-15), a compendium of federal cost reimbursement guidelines utilized by HRS, and generally accepted accounting principles. By letter dated September 9, 1985 petitioner requested that HRS adjust its July 1, 1985 reimbursement rates for the thirteen facilities to reflect certain annualized costs incurred during the preceding fiscal year ending December 31, 1984. According to the letter, the adjustment was appropriate under Section V.B.I.b. of the September 1, 1984 Plan. On October 21, 1985, an HRS Medicaid cost reimbursement analyst issued a letter denying the request on the following grounds: Our review of the information submitted with the fiscal year end 12/31/84 cost reports revealed that the annualized operating and patient care costs were not documented to be new and expanded services or related to licensure and certification requirements. The annualized property cost appeared to be 1 2 various purchases, repairs and maintenance and was not documented to be capital improvements. The denial prompted the instant proceeding. B. Reimbursement Principles In General Under the Medicaid reimbursement plan adopted for use in Florida, nursing homes are reimbursed by HRS on a prospective basis for their allowable costs incurred in providing Medicaid services. This method is commonly referred to as the prospective plan, and has been in use since 1977. Under this concept, a nursing home files with HRS, within ninety days after the close of its fiscal year, a cost report reflecting its actual costs for the immediate preceding fiscal year. Within the next ninety days, the nursing home is given a per diem reimbursement rate (or ceiling) to be used during the following twelve months.3 For example, if a provider's fiscal year ended December 31, 1984, its cost report would be due by March 31, 1985. HRS would then provide estimated reimbursement rates to be used during the period from July 1, 1985 through June 30, 1986. As can be seen, there is a time lag between the end of a cost reporting year and the provider's receiving the new rate. The new reimbursement rate is based upon the provider's actual costs in the preceding fiscal year (reporting period) adjusted upward by an inflation factor that is intended to compensate the provider for cost increases caused by inflation. The prospective plan enables a provider to know in advance what rates it will be paid for Medicaid services during that year rather than being repaid on a retroactive basis. If a provider operates efficiently at a level below the ceiling, it is "rewarded" being allowed to keep a portion of the difference. Conversely, if it exceeds the caps, it is penalized to the extent that it receives only the rates previously authorized by HRS, and must absorb the shortfall. At the same time, it should be noted that the reimbursement rate is not intended to cover all costs incurred by a provider, but only those that are reasonable and necessary in an efficiently operated facility. These unreimbursed costs are covered through other provider resources, or by a future cut in services. When the events herein occurred, there were two types of adjustments allowed under the prospective plan. The first adjustment is the inflation factor, and as noted above, it 3 authorizes the provider to adjust certain reported costs by the projected rate of inflation to offset anticipated cost increases due to inflation. However, because the prospective plan (and the inflation factor) ignores other cost increases that occur during the given year, HRS devised a second type of adjustment for providers to use. This adjustment is known as the gross-up provision, and allows the annualization of certain costs incurred by a provider during a portion of the reporting period. The concept itself .s embodied in subparagraph B.1.b. of Part V of the September 1, 1984 Plan. Its use may be illustrated with the following example. A provider constructs an addition to its facility with an in-service date at the end of the sixth month of the reporting period. By reflecting only the depreciation associated with the addition during the last six months of the reporting period, the facility understates its actual costs, and is reimbursed for only one-half of the facility's depreciation during the following year. Under the gross-up provision the provider grosses up, or annualizes, the reported cost to give it a full year's effect, thereby ensuring that the next year's rates will be more realistic. Although the provision has application to this proceeding, over objection by the nursing home industry it was eliminated from the Plan on October 1, 1985 and is no longer available to providers. At hearing HRS contended the provision should have been eliminated in 1984, but through oversight remained in effect until 1985. However this contention is rejected as not being credible, and is contrary to the greater weight of evidence. Finally, neither party could recall if a request under this provision had ever been filed. They do acknowledge that HRS has never approved such a request during the more than two years when the provision was operative. In addition to the gross-up and inflation provisions, there exists an alternative means for additional rate reimbursement through what is known as the interim rate provision. Under this provision, a provider can request an interim rate increase from HRS during the period when its prospective rates are in effect to cover major unexpected costs. Assuming a request is valid and substantiated, a provider is eligible for immediate cash relief dating back to the date of the actual expense. However, because of HRS' concern that this provision was being "abused", only those costs which exceed $5,000 and cause a change of 1% or more in the total prospective per diem rate are now eligible for reimbursement. These monetary thresholds on interim rate requests became effective September 1, 1984. When these higher thresholds were imposed, HRS made representations to the nursing home industry that a provider could still utilize the gross-up provision to cover other unexpected costs. Finally, it is noted that unlike the prospective rate, an interim rate is cost settled. This means the provider's cost reports are later audited, and excess reimbursements must be repaid to HRS. This differs from the prospective plan where any "overpayments" are not subject to recoupment by HRS. Even so, a provider is limited by the reasonableness and prudent buyer concepts which serve as a check on potential abuse by a provider. The Gross-Up Feature In its relevant form, the gross-up provision was first adopted for use by HRS in its April 1, 1983 Plan.4 It required HRS to: Review and adjust each provider's cost report referred to in A. (1.) as follows: * * * b. to compensate for new and expanded or discontinued services, licensure and certification requirements, and capital improvements which occurred during the reporting year but were not included or totally accounted for in the cost report. This language was incorporated with only minor changes into the September 1, 1984 Plan and is applicable to the cost reports in issue. In its 1984 form, the provision required HRS to review and adjust each provider's cost report as follows: b. To compensate for new and expanded or discontinued services, licensure and certification requirements, and capital improvements not included or totally accounted for in the reporting year. For additional costs to be provided, the provider must furnish adequate supporting documentation. 4 Accordingly, if a cost fits within one of the three categories, HRS is required to adjust a provider's report to compensate it for the expenditure. The April 1, 1983 Plan was negotiated by the nursing home industry and HRS representatives at a meeting in Gainesville, Florida. For this reason, it is commonly referred to as the Gainesville Plan. Through testimony of negotiators who participated at the meeting, it was established that the Plan had three objectives: to give proper payment to nursing homes; to meet state and federal regulations; and to help upgrade care in the nursing homes. At the same time, the negotiators recognized that a prospective plan based on inFla.ion alone overlooked other cost increases that occurred during a given year. Therefore, the gross-up provision was added to the Plan to ensure that providers could estimate (and recoup) their future costs in as accurate a manner as possible, and to bring the plan into compliance with federal guidelines. It was also designed to ensure that a provider did not have to wait an extraordinarily long time for expenses to be recognized. In addition, HRS was hopeful that the gross-up provision would minimize the providers' reliance upon the interim rate feature (which was intended to cover only major items) thereby reducing the agency's overall workload. Indeed, the interim and gross-up features were intended to complement each other, in that one provided immediate relief on major unexpected items while the other provided a means to adjust partial year costs incurred during the reporting period. The implementation of thresholds on the interim rate provision in September, 1984 increased the importance of the gross-up provision to handle smaller items. Therefore, HRS' contention that the interim and gross-up provisions are in conflict is hereby rejected. In order for a cost to be eligible for annualization, it must fall within one of three categories: new or expanded service, a capital improvement, or a cost to meet HRS' licensure and certification requirements. The parties have stipulated that HRS' denial of United's request was based solely upon HRS' perception that the costs did not fall within any of the three categories. The three types of costs within the feature are not defined in the Plan. Testimony from the Plan's negotiators established that the language in the gross-up feature was meant to be construed broadly and to encompass many costs. For this reason, no limitations were written into the Plan. Even so, the provision was not intended to give carte blanche authority to the providers to annualize every partial cost. There is conflicting testimony regarding the meaning of the term "capital improvement" and what expenditures are included within this category. However, Sections 108.1 and 108.2 of HIM-15, of which the undersigned has taken official notice, define a capital item as follows: If a depreciable asset has, at the time of its acquisition, an estimated useful life of at least 2 years and a historical cost of at least $500, its cost must be capitalized, and written off ratably over the estimated useful life of the asset. . . * * * Betterments and improvements extend the life or increase the productivity of an asset as opposed to repairs and maintenance which either restore the asset to, or maintain it at, its normal or expected service life. Repairs and maintenance costs are always allowed in the current accounting period. With respect to the costs of betterments and improvements, the guidelines established in Section 108.1 must be followed, i.e., if the cost of a betterment or improvement to an asset is $500 or more and the estimated useful life of the asset is extended beyond its original estimated life by at least 2 years, or if the productivity of the asset is increased significantly over its original productivity, then the cost must be capitalized. The above guidelines are more credible and persuasive than the limited definition of capital item enunciated at final hearing by HRS personnel. Therefore, it is found that the HIM-15 definition is applicable to the gross-up feature and will be used to determine the validity of petitioner's claim to gross up certain expenditures. There is also conflicting testimony as to what the term "new and expanded or discontinued services" includes. Petitioner construes this item to include any costs that increase the volume of services to a resident. Therefore, petitioner posits that an increase in staffing which likewise increases services to residents is subject to annualization. Conversely, HRS construes the term to cover any costs for new or expanded services that enable a facility to provide patients with services not previously provided or to expand an existing service to more patients in the facility. The latter definition is more credible and persuasive and will be used by the undersigned in evaluating petitioner's request. Finally, petitioner interprets the term "licensure and certification requirements" to cover any costs incurred to meet staffing requirements that are required by HRS rules. According to petitioner, the category would include expenditures that are made for so-called preventive maintenance purposes and to avoid HRS sanctions. On the other hand, HRS construes the language to cover costs incurred by a provider to either meet a new licensure and certification requirement, or to correct a cited deficiency. It also points out that salary increases were intended to be covered by the inflation factor rather than through this feature of the plan. This construction of the term is more reasonable, and is hereby accepted as being the more credible and persuasive. Petitioner's Request Petitioner's fiscal year ends on December 31. According to HRS requirements its cost reports must be filed by the following March 31. In accordance with that requirement petitioner timely filed its December 31, 1984 cost reports for the thirteen facilities on or before March 31, 1985. The reports have been received into evidence as petitioner's composite exhibit 3. Attached to the reports were schedules supporting a request for gross-up of certain capital items, additions and deletions of various personnel, and union salary increases that exceeded the inflation rate. The parties have not identified the actual dollar value of the items since only the concepts are in issue. In preparing the supporting schedules, United's assistant director of research reviewed all so-called capital items purchased by the thirteen facilities during the fiscal year, and determined which were purchased after the beginning of the year.5 He then calculated the depreciation on those 5 expenditures made after the beginning of the year and has included those amounts on the supporting schedules to be annualized. Consistent with the definition contained in Sections 108.1 and 108.2 of HIM-15, those items that are in excess of $500 (after annualization), that extend the useful life of the asset for two years or more, or that increase or extend the productivity of the asset are subject to annualization. It should be noted that repairs and maintenance items, as defined in Sections 108.1 and 108.2, are excluded from this category. Petitioner next seeks to adjust its rates by grossing up the net increase in costs associated with additions and deletions of various staff during the reporting period. Any net staffing additions that provide patients with services not previously provided or that expand an existing service to more patients in a given facility are properly subject to the gross- up provision. All others should be denied. Petitioner also contends that these costs should be considered as a licensure and certification requirement since they satisfy staffing requirements under HRS rules. To the extent the filling of old positions occurred, such expenditures are appropriately covered by the gross-up provision. The remainder do not fall within the purview of the provision. Finally, petitioner seeks to adjust its rates to cover all salary increases over and above the inflation factor that were awarded to union employees pursuant to its union contract. Under petitioner's theory, if such costs were not paid, United stood to lose staff through a strike which in turn could result in licensure and certification problems. But these concerns are speculative in nature, and such an interpretation would result in automatic approval of any salary increase called for by a union contract, no matter how unreasonable it might be. Since the expenditures do not meet the previously cited criteria, they must be denied.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That petitioner's request to have its July 1, 1985 reimbursement rates adjusted for thirteen facilities to reflect annualized costs as submitted on supplemental schedules with its 1984 cost reports be approved in part, as set forth in the conclusions of law portion of this order. The remaining part of its request should be DENIED. DONE AND ORDERED this 31st day of October, 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 31st day of October, 1986.
