96-002418CON Suncoast Nursing Home, Ltd. vs. Agency For Health Care Administration Status: Closed Recommended Order on Wednesday, June 4, 1997.

Summary: Applicant for Certificate of Need (CON) to construct nursing home failed to demonstrate long-term financial feasibility. Application denied.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

SUNCOAST NURSING HOME, LTD., )

)

Petitioner, )

)

vs. ) CASE NO. 96-2418

)

AGENCY FOR HEALTH CARE )

ADMINISTRATION, )

)

Respondent, )

)

and )

)

HEALTH CARE AND RETIREMENT )

CORPORATION OF AMERICA, )

)

Intervenor. )

______________________________)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative

Hearings, by its duly designated Administrative Law Judge,

William J. Kendrick, held a formal hearing in the above-styled

case on March 11 and 12, 1997, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Jonathan S. Grout, Esquire

Peter Lewis, Esquire

Goldsmith & Grout, P.A.

307 West Park Avenue

Post Office Box 1017

Tallahassee, Florida 32302-1017

For Respondent: Mark Thomas, Esquire

Agency for Health Care Administration

Fort Knox Building 3, Suite 3431

2727 Mahan Drive

Tallahassee, Florida 32308-5403

For Intervenor: Alfred W. Clark, Esquire

117 South Gadsden Street, Suite 201

Post Office Box 623

Tallahassee, Florida 32302

STATEMENT OF THE ISSUES

At issue is whether petitioner's application for a

certificate of need to construct a 97-bed replacement nursing

home in Pinellas County, Florida, should be approved.

PRELIMINARY STATEMENT

On or about April 24, 1996, Suncoast Nursing Home, Ltd.

(petitioner) filed a petition for formal administrative hearing

with the Agency for Health Care Administration (AHCA or Agency)

contesting the denial of its application for a certificate of

need (CON Action Number 8301) to construct a 97-bed replacement

nursing home in Pinellas County, Florida (AHCA District 5,

Subdistrict 2). Thereafter, on May 23, 1996, AHCA referred the

matter to the Division of Administrative Hearings to conduct a

formal hearing pursuant to Sections 120.569 and 120.57(1),

Florida Statutes (1995 Supp.), and Health Care and Retirement

Corporation of America, the owner and operator of an existing

nursing home in Pinellas County, requested and was granted leave

to intervene in opposing the application, subject to proof, at

hearing, demonstrating standing.

At hearing, petitioner called, as witnesses: Ashok Dalal;

Earle Stanley Barnwell; Robert W. Bell, Sr.; Robert J. Schwartz,

accepted as an expert in health care accounting; and Lynne M.

Mulder, accepted as an expert in health planning, and

certificate of need rules and regulations. Petitioner's

exhibits 1A, 1B, and 2 through 5, were received into evidence.

AHCA called Mark Boehmer as a witness, but offered no exhibits.

Intervenor called as witness: Milo Bishop, accepted as an expert

in health planning; Pamela J. Osborne, accepted as an expert in

nursing home administration; and Joseph D. Mitchell, accepted as

an expert in health care accounting and Medicaid reimbursement.

Intervenor's exhibits 1 through 3, 5 through 12, and 14 were

received into evidence. 1

The transcript of the hearing was filed April 4, 1997, and

the parties were accorded, at their request, until April 30,

1997, to file proposed recommended orders. The parties elected

to file such proposals, and they have been duly considered in

the preparation of this recommended order.

FINDINGS OF FACT

The Suncoast proposal

1. Suncoast Nursing Home, Ltd. (Suncoast) has filed an

application for a certificate of need (CON) to construct a 97-

bed nursing home to replace two older nursing homes in Pinellas

County (AHCA District 5, Subdistrict 2), Florida. When

completed, the proposed facility would also include a 23-bed

assisted living facility component for a total complement of 120

beds.

2. The nursing homes to be replaced are Suncoast Nursing

Home (SNH), a 59-bed facility, and Victoria Martin Nursing Home

(Victoria Martin), a 38-bed facility. Both facilities are

located in south St. Petersburg, Pinellas County, Florida, and

Suncoast is the current licensee for both facilities.

3. SNH, at 40 years of age, is one of the oldest nursing

homes in the area and has problems associated with an aged

facility. It has one private room, one semi-private room and

fourteen 4-bed wards, none of which comply with current resident

space requirements and offer limited space for residents' needs

and privacy. As built, the nursing station is not strategically

placed to observe and supervise residents, the shower rooms open

directly into the hallway, and many residents have no toilet

facilities in their room. Due to space limitations, the

activity area doubles as the dining room, and resident therapy

rooms, lounge areas and visitation areas cannot be accommodated.

Open space is likewise limited, and consists of an asphalt area

along one side of the building, without trees or other

landscaping.

4. In addition to the limited amenities available at the

SNH facility dictated by its size and age, the character of the

neighborhood around the facility has suffered a significant

decline over the past few years. Currently, street crimes,

including theft and drug sales, are prevalent in the area. As a

result, an 8 foot chain link fence now surrounds the facility;

however, thefts still occur on the property and the environment

severely limits residents' outdoor access.

5. Victoria Martin, located about two miles west of SNH,

is in a better neighborhood than SNH. Although also one of the

oldest facilities in the area, Victoria Martin has more adequate

space, except for activities and dining, kitchen facilities and

private areas for residents and staff. Moreover, its two

private rooms, eight semi-private rooms and five 4-bed wards are

of adequate size. However, as with SNH, Victoria Martin's site

is small and outdoor recreational opportunities for residents

are limited. 2

6. Although SNH and Victoria Martin are older facilities,

both have a history of superior licensure ratings; however,

SNH's most recent survey resulted in the facility receiving a

standard license. Moreover, the parties have stipulated that

Suncoast provides quality care for its residents and that its

qualifications in this regard are not at issue in this

proceeding.

7. The replacement facility proposed by Suncoast will be

constructed on a 4.856 acre parcel owned by the applicant and

located approximately 5 miles north of the current nursing

homes, just east of the intersection of I-275 and 54th Avenue

North, Pinellas County, Florida. Total cost for the 120-bed

facility will be approximately $5 million, with $4 million

allocated to the nursing portion. The site for the project,

acquired at a cost of approximately $500,000, is unencumbered.

8. The proposed building, a one story fire resistant

precast concrete and masonry structure of approximately 47,934

square feet, will include the 97-bed skilled nursing home at

issue in this proceeding, as well as 23 beds for assisted

living. The nursing home portion consists of five private

rooms, with 196 net square feet and full baths, and forty-six

semi-private rooms, with 276 square feet and half baths. The

facility includes physical, recreational and occupational

therapy areas; adequate ancillary support areas and services,

including dining, kitchen and laundry; and resident areas and

services, including a barber/beauty shop, card room, and

activity and lounge areas.

Intervenor Health Care and Retirement

Corporation of America

9. Intervenor, Health Care and Retirement Corporation of

America (HCR), is the operator of Rosedale Manor (Rosedale), a

189-bed nursing home located about or slightly less than one

mile west of the proposed facility, at 3479 54th Avenue North,

St. Petersburg, Pinellas County, Florida. The Rosedale facility

is 31 years old, includes 4-bed wards, and currently holds a

superior license.

10. To demonstrate that Rosedale would suffer an adverse

impact through the siting of the proposed project, HCR offered

the testimony of Pamela J. Osborne, the administrator of

Rosedale. Essentially, Ms. Osborne was of the opinion that

prospective nursing home residents, and possibly some of

Rosedale's current residents, would be attracted to a new

facility with modern amenities, as opposed to the 31-year old

Rosedale facility, for many of the same reasons that Suncoast

proposed a new replacement facility, and that such attraction

would result in reduced revenues for Rosedale.

11. To demonstrate the impact a new facility would have on

Rosedale, Ms. Osborne testified that she has observed a

reduction in admissions over the last two years, with the

creation of some hospital based skilled nursing unit (SNU) beds

and the opening of the Arbor Nursing Home, a 120-bed facility

licensed October 10, 1995. According to Ms. Osborne, Rosedale

averaged 180 admissions during calendar year 1994, 151

admissions in 1995, and "most recently" (apparently meaning

1996) 148 admissions. That drop in census, Ms. Osborne opined,

translated to a 22 percent decline in revenues. Currently,

however, Rosedale has apparently reversed that trend, since it

presently averages 13 to 15 admissions per month.

12. Based on such experience, Ms. Osborne's opinion as to

the impact the proposed facility would have on Rosedale's

admissions was as follows:

I would think it would be dramatic, not

only reducing at least by 50 percent what I

myself am able to admit during a 30-day

period, but I would also be fearful for the

residents that reside there. To relocate

them within a mile would not disturb their

family's patterns as far as visiting or

anything else.

Everything else being equal, the physical

plant comparison of a brand-new facility

compared to my 30-year-old building would be

dramatic. [Tr., at page 266].

On the impact such loss of admissions would have on revenues,

Ms. Osborne stated:

On the presumption that I lost half of my

new admits during the month and on the same

assumption that they would be Medicaid . . .

[and not higher paying sources such as

Medicare or private pay] it would impact

probably 16 to $17,000 a month.

Ms. Osborne further observed that she didn't "believe" she could

reduce expenses at Rosedale to address the reduction in

revenues.

13. That Rosedale experienced a decline in admissions and

revenues the last two years is supported by its occupancy rates.

For the period of January 1995 through June 1995 Rosedale's

occupancy rate was 93.96 percent; during the period of July 1995

through December 1995 its occupancy rate was 86.64 percent; and

during the period of January 1996 through June 1996 its

occupancy rate was 87.93 percent. However, it is doubtful that

the decline in occupancy was attributable to the Arbor facility

opening. In reaching such conclusion it is observed that Arbor

was licensed in October 1995 and, with less than one year of

operation, reported an 84 percent occupancy rate for the period

of January 1996 through June 1996. During the same period,

Rosedale reported an increase in occupancy rate; hardly direct

proof of serious impact. As for any impact resulting from the

hospital based SNU beds, the proof was simply not insightful or

compelling. Notably, the location of the hospitals was not

noted, the number of SNU beds was not noted, and there was no

proof that the SNU beds offered services similar to Rosedale.

14. While it is possible that the Arbor opening, as well

as the creation of hospital based SNU beds, may have had some

impact on Rosedale, the proof offered in this regard was not

compelling. Rather, the more likely explanation for Rosedale's

declining census is the declining utilization experienced by

nursing homes in the service area between 1993 and 1996. In

this regard, the proof demonstrates that in 1993 there were

542,000 patient days in the service area, but by 1996 the number

had fallen to 519,000 patient days. This calculates a net loss

or reduction in use equivalent to 126 beds, and is consistent

with a net loss of the elderly population in the service area.

15. Notwithstanding the conclusion that the proof failed

to support the conclusion advanced by Ms. Osborne regarding the

impact of Arbor or the hospital based SNU beds, the opening of

the proposed facility in such close proximity to Rosedale will

certainly have some impact on its admissions. Ms. Osborne's

estimate of a loss of half her admissions was not, however,

shown to have any rational support and is rejected. Notably, on

opening the new facility Suncoast proposes to transfer its

existing residents from the old facilities, and reasonably

expects an initial census of 88 residents. At fill-up,

calculated at a 94.85 occupancy rate, Suncoast anticipates 92

residents, or the admission of 4 new net admissions during its

first year of operation. While its residents will certainly

change over time, there should be no dramatic impact to other

facilities upon its opening.

16. In sum, it must be concluded that the record lacks any

compelling or persuasive proof that would allow one to quantify,

with any sense of confidence, an impact to Rosedale from the

opening of the proposed facility. Moreover, and perhaps most

fundamental, Rosedale failed to demonstrate that any loss of

revenue it might suffer would substantially adversely affect any

of its existing programs. 3

Review criteria

17. Pertinent to this case, Section 408.035, Florida

Statutes, and Rules 59C-1.030 and 59C-1.036, Florida

Administrative Code, establish the criteria which must be

considered in evaluating an application for a certificate of

need to construct a new, albeit a replacement, nursing home.

Commonly, however, there is no dispute regarding the applicant's

satisfaction of, or ability to satisfy, most statutory or rule

criteria. Such is the circumstance of the instant case.

18. Here, the parties agree the following statutory

criteria are not at issue or are not relevant to the proposed

project: subsections 408.035(1)(c), (e), (f), (g), (h) [Except,

Rosedale contests whether the applicant has the available funds

for capital and operating expenditures, and for project

accomplishment and operation.], (j), (k), (m), (n), and (o), and

subsection 408.035(2)(e). Moreover, except to the extent the

issue may be intertwined with the criteria established by

subsections 408.035(1)(a), (b), the portion of (h) heretofore

noted, and (i), and subsections 408.305(2)(a)-(d), the opponents

have not contested, through question or contrary proof, the

applicant's satisfaction of, or the lack of relevance of, the

criteria established by subsection 408.035(1)(d) and (l), or

Rules 59C-1.030 and 59C-1.036, Florida Administrative Code.

Consequently, since the applicant's proof, including its

application and omissions response, persuasively demonstrates

that it satisfies or has the ability to satisfy such criteria,

or they are not relevant to its proposal, it is unnecessary, as

no useful purpose would be served, to indulge in further fact

finding regarding those statutory or rule criteria. The matters

placed in issue by the parties are, however, addressed in the

following pages.

Consistency with the district plan and state

plan. Section 408.035(1)(a), Florida Statutes

19. The District 5 local plan provides the following

considerations.:

1. Preference should be given to

applicants for new or additional beds who

commit to the provision of service to

Medicaid patients. These numbers should

approximate both the percentage of persons

below 125 [percent] of the Federal Poverty

Level and the average number of Medicaid

residents in existing nursing homes in the

county.

2. Preference should be given to

applicants who propose specialized services

(e.g. adult day care) to meet identified

unmet needs.

3. Preference should be given to

applicants who demonstrate a past practice

and future intent to serve HIV infected

persons.

20. The subject application is consistent with, and

furthers the needs identified in the district plan. First, the

applicant has agreed to a condition of 55.31 percent Medicaid

utilization on its nursing beds. Such is consistent with the

Medicaid utilization rate in the district, and the applicant's

history of service to Medicaid residents renders it most likely

that such rate will be achieved or exceeded. Second, the

applicant has historically provided services to HIV/AIDS

patients at its existing facility, and will continue to do so at

the new facility. Finally, inpatient hospice services and

respite care, although no adult day care, will also be provided.

21. The state health plan provides the following

preferences relating to nursing home services:

1. Preference shall be given to an

applicant proposing to locate a nursing home

in areas within the subdistrict with

occupancy rates exceeding 90 percent.

2. Preference shall be given to an

applicant who proposes to serve some

Medicaid residents in proportion to the

average subdistrict-wide percentage of the

nursing homes in the same subdistrict.

Exceptions shall be considered for

applicants who propose to exclusively serve

persons with similar ethnic and cultural

backgrounds, or propose the development of

multi-level care systems.

3. Preference shall be given to an

applicant proposing to provide specialized

services to special care residents including

AIDS residents, Alzheimer's residents, and

the mentally ill.

4. Preference shall be given to an

applicant proposing to provide a continuum

of services to community residents

including, but not limited to, respite care

and adult day care.

5. Preference shall be given to an

applicant proposing to construct facilities

which provide maximum resident comfort and

quality of care. These special features may

include, but are not limited to, larger

rooms, individual room temperature controls,

visitors' rooms, recreation rooms, outside

landscaped recreation areas, physical

therapy rooms and equipment, and staff

lounges.

6. Preference shall be given to

applicants proposing to provide innovative

therapeutic programs which have been proven

effective in enhancing the residents'

physical and mental functional level and

emphasize restorative care.

7. Preference shall be given to an

applicant proposing charges which do not

exceed the highest Medicaid per diem rate in

the subdistrict. Exceptions shall be

considered for facilities proposing to serve

upper income residents.

8. Preference shall be given to an

applicant with a record of providing

superior resident care programs in existing

facilities in Florida or other states as

determined by the department. The

evaluation of existing facilities shall

consider, but not be limited to, current

ratings of licensure facilities located in

Florida.

9. Preference shall be given to an

applicant proposing staffing levels which

exceed the minimum staffing standards

contained in licensure administrative rules.

Applicants proposing higher ratios of RN and

LPNs to residents than other applicants

shall be given preference.

10. Preference shall be given to an

applicant who will use professionals from a

variety of disciplines to meet the resident

needs for social services, specialized

therapies, nutrition, recreation activities,

and spiritual guidance. These professionals

shall include physical therapists, mental

health nurses, and social workers.

11. Preference shall be given to an

applicant who provides documentation how

they will ensure residents' rights, and

residents' privacy, use resident councils,

and implement a well designed quality

assurance and discharge planning program.

12. Preference shall be given to an

applicant proposing lower administrative

costs and higher resident care costs

compared to the average nursing home in the

district.

22. The subject application is also consistent with, and

furthers the needs identified in the state health plan. In this

regard, the proof demonstrates that Preference One is met

because the existing nursing homes within the service area of

the proposed facility reported a 6 month occupancy rate (January

through June 1995) exceeding 90 percent. Preference Two is met

since the applicant has committed to 55.31 percent Medicaid

utilization on its nursing beds, which is consistent with the

Medicaid occupancy for the subdistrict. Preference Three is met

since the applicant will provide specialized services, including

services to HIV/Aids residents and services to hospice

patients. Preference Four is satisfied since the applicant will

be able to afford a continuum of care with the available

assisted living beds. Moreover, the applicant will provide

respite, although not adult day care. Preference Five is met

since, as heretofore noted, the proposed facility is designed to

maximize resident comfort and quality of care. Special features

include large semi-private and private rooms,

activity/recreation rooms, visitors' rooms, space for therapy

services, and outside recreation areas. Moreover, the features

proposed for the new facility are far superior to those

presently available in the nursing homes to be replaced.

Preference Six is satisfied through the applicant's staff

programs dealing with combative residents, social intervention,

drug intervention and violent behavior, as well as its

acceptance and care for the behaviorally compromised.

23. The proposed project also meets the standard

established by Preference Seven. As of January 1, 1996, the

highest Medicaid rate in District 5 was $109.04. Inflating that

figure at five percent per year results in Medicaid rates of

$120.22 for the period ending December 31, 1998, and $126.23 for

the period ending December 31, 1999. These rates are higher

than the applicant's proposed rates of $92.08 and $109.95 for

the same time periods. 4 Preference Eight is met since SNH and

Victoria Martin have a history of superior licenses, although

SNH's most recent survey resulted in a standard license

effective February 1, 1996. Preference Nine is met since the

facility staffing will exceed minimum standards contained in

licensure administrative rules. Preference Ten is met since the

applicant proposes a variety of disciplines, through resident

staff and contract, to address the residents' therapeutic,

nutritional, recreational and spiritual needs, Preference

Eleven is met through the applicant's provision of a detailed

resident rights and privacy policy, resident council, quality

assurance program and discharge planning. Finally, Preference

Twelve is met in that, at year two of operations, its resident

care costs per resident per day are projected to be $70.56,

compared to the district average of $68.49, and its

administrative costs will be below the projected average for the

district.

The availability, quality of care, efficiency, appropriateness,

accessibility, extent of utilization, and adequacy of like and

existing health care services in the service district.

Section 408.035(1)(b), Florida Statutes .

24. As a touchstone for assessing need within a service

district, the agency has established a bed-need methodology that

must normally be satisfied before a favorable need determination

will be found. That need methodology is codified at Rule 59C-

1.036, Florida Administrative Code.

25. Here, the applicant is currently filling part of the

need in the subdistrict, and does not seek any beds in excess of

those currently authorized. Consequently, there being no net

change in the licensed bed capacity of the subdistrict and,

given the applicant's vested right to operate its existing beds,

numeric need as calculated by the Agency's rule methodology is

not a relevant consideration in assessing the merits of the

pending application. Rather, the pertinent inquiry is whether

the replacement of the aged facilities currently operated by the

applicant with a new facility, as proposed, will have a positive

impact on availability, quality of care, efficiency,

appropriateness, accessibility, extent of utilization and

adequacy of nursing beds in the subdistrict.

26. In addressing these considerations, the applicant

offered proof, which is credited, that the age, physical

limitations and location of the current facilities, as

heretofore noted, detract from the desirability or demand for

those beds and, consequently, negatively impact the

considerations contemplated by this criterion. The replacement

of the aged facilities, with a new facility meeting current

licensure requirements, would have a positive influence on the

provision of health care services. Moreover, the combined

facility would offer certain efficiencies in scale, which would

permit savings in supervisory staff, heating and cooling costs,

and duplicative kitchen and laundry functions. 5 Finally, by

meeting current licensure requirements, the new facility, with

its modern resident rooms, dining rooms, recreation areas,

therapy areas, outdoor areas, and kitchen and laundry

facilities, could only serve to increase the quality of life or

appropriateness of resident care.

27. Contrasted with the proof offered by the applicant,

HCR offered proof through its health planner that, based on

census experience and projected population changes in the

service area (defined by a five mile radius around the proposed

site) there was no need for a new facility or, apparently, the

beds provided by the applicant's existing nursing homes, and

that the existing facilities in the service area have sufficient

capacity to address resident needs.

28. In this regard, HCR's proof demonstrated that from

1993 through 1996, patient days in the area decreased from

542,000 to 519,000. This calculated a net loss or reduction in

use equivalent to 126 beds, and is consistent with decreasing

occupancy rates, which for calendar year 1995 were 87.54 percent

in the service area. Moreover, the census data within the area

for 1995 through 2000, projects a loss of 1,655 people age 65

through 74, and 390 people over age 75, and, therefore, a

reasonable expectation of decreased utilization or need in the

future.

29. According to HCR's planner, the retirement area for

the elderly is shifting to north Pinellas County, and the five

mile service area of the proposed facility is undergoing a

transition from an elderly population to a younger population.

Therefore, he concludes that the northern area would be better

suited demographically for the proposed beds and that if located

there, apparently, they would benefit availability, access,

adequacy and utilization of nursing home beds in the

subdistrict.

30. The proof offered on behalf of both the applicant and

HCR was insightful; however, given the circumstances of this

case, that offered by the applicant was most compelling. In so

concluding, it must not be overlooked that among the beds

currently existing in the service area are those presently

operated by the applicant at two aged nursing homes. Clearly,

their replacement with a modern facility would have a positive

impact on availability, quality of care, efficiency,

appropriateness, accessibility, utilization and adequacy, when

measured against the present inventory in the service area.

Moreover, the demographics relied on by HRC's expert did not

consider the special needs of those under age 65 in the

subdistrict and which are served by SNH and Victoria Martin.

According to the proof, approximately one-third of their current

residents are under age 65. Finally, it is observed that the

criterion provides for an assessment of "[t]he availability,

quality of care, efficiency, appropriateness, accessibility,

extent of utilization, and adequacy of like and existing health

care services and hospices in the service district of the

applicant," not a service area. [Emphasis added.] Section

408.035(1)(b), Florida Statutes . Here, the "district" is

District 5 (Pasco and Pinellas Counties) and, for purposes of

determining need, the "subdistrict" is Subdistrict 2 (Pinellas

County). Section 408.032(5), Florida Statutes , and Rule 59C-

2.200, Florida Administrative Code . Consequently, the

discussion regarding service area may not be wholly relevant to

this proposal. Notwithstanding, a positive impact in the more

narrowly defined service area has been demonstrated, as well as

a positive benefit to the inventory of the subdistrict, as

contemplated by the statute and the rule.

The availability of funds for capital and operating

expenditures, for project accomplishment and operation,

and the immediate and long-term financial feasibility of

the proposal. Section 408.035(1)(h) and(i), Florida Statutes .

31. The applicant, Suncoast Nursing Home, Ltd., is a

wholly owned subsidiary of NewCare Health Corporation. NewCare

currently operates ten nursing homes, one assisted living

facility, and one retirement complex in the states of Georgia

and Florida.

32. NewCare has committed to fund the equity contribution

necessary to secure FHA financing for the proposed project,

which is estimated at $500,000 to $700,000. To date, NewCare

has already advanced Suncoast over $600,000, which was used to

purchase the 4.856 acre project site and to pay off a Medicaid

recapture debt with AHCA for prior periods. Moreover, NewCare

has on hand and unencumbered approximately $400,000 in

additional funds for equity contribution.

33. Health Properties Capital Group, LLC, has committed to

provide the construction and permanent financing for the

project. The total would be approximately $5 million for the

120-bed project, with approximately $4 million for the nursing

home segment, with permanent financing at 8 to 8 1/4 percent for

40 years. Health Properties has also committed to advance

startup expenses, as necessary.

34. Here, assuming positive cash flow, 6 the proof

demonstrates that Suncoast has the available resources for

capital and operating expenditures, as well as for project

accomplishment and operation. The only significant issue raised

is the long term financial feasibility of the project.

35. To assess the financial feasibility of the project,

the applicant assumes that it will achieve 33,400 patient days

in its first year of operation and 33,580 patient days in its

second year of operation, with a patient mix as follows: private

pay-private (.49 percent), private pay-semiprivate (4.51

percent), Medicaid (81 percent), Medicare (12.00 percent), and

hospice (2.00 percent). Such assumptions are reasonable.

36. For the first year of operation, the applicant

projects routine revenues, based on charge rates discussed

infra , and ancillary revenues for the nursing home to generate

$3,998,550 which, reduced by nursing home costs of $4,212,940,

would generate a net loss of $214,390. For the second year of

operation, the applicant projects gross revenues for the nursing

home to generate $4,582,580 which, reduced by nursing home costs

of $4,424,910, would generate a net income of $157,670.

37. The routine revenue for the nursing home included in

its gross revenue is based on the projected patient days in

proportion to the patient mix. The daily charge rates used to

calculate that revenue for year one are as follows: private pay

at $104.76, semi-private pay at $84.83, Medicaid at $92.08,

Medicare at $323.88, and hospice at $92.05. For year two, the

daily charge rates were as follows: private pay at $107.89,

semi-private at $88.08, Medicaid at $109.95, Medicare at

$338.43, and hospice at $110.00.

38. Here, as previously noted, the applicant's assumed

patient mix and patient days were found reasonable and, but for

its Medicaid rate, there is either no dispute or no persuasive

dispute regarding its projected revenues and expenses. With

regard to the applicant's proposed Medicaid reimbursement rate

(charge rate), HCR contends it was erroneously calculated and

therefore impermissibly high. Properly calculated, and applied

to the projected Medicaid census 7 would, according to HCR,

substantially reduce projected revenues and demonstrate that the

project is not financially feasible.

39. Medicaid reimbursement rates are calculated under the

Title XIX Long Term Care Reimbursement Plan (Plan), which

provides significant distinctions between "new providers" and

"existing providers." The Plan is silent, or does not

specifically address, the treatment of facilities, such as the

proposed project, where two existing providers are replaced by a

new facility.

40. The reimbursement rate for an "existing provider," an

existing nursing home with a cost history, are typically set on

a perspective basis which, simply stated, means the rate is

based on the prior year cost (as reflected in the cost report

filed with the Medicaid agency) compounded by an inflation

factor. The new rate is, however, subject to what is known as a

"target limitation," which restricts the amount of increase in

reimbursement from one period to the next. The limitation

typically ranges from one to two percent on a semiannual basis.

41. Conversely, a "new provider,” one who has no cost

history, is initially reimbursed based upon budgets (a budgeted

rate) submitted for the new facility, and the initial period

(rate) is ultimately settled (adjusted) based on the actual cost

incurred for the initial period. Because they have no

reimbursement history, "new providers" are not subject to the

"target limitation," but are subject to "new provider ceilings,"

which limit the maximum reimbursement a "new provider" can

receive at the outset of its operations.

42. Here, the proof demonstrated that Suncoast projected

its Medicaid reimbursement rate for its first year of operation

as if it were an "existing provider," based on the prior cost of

the 59-bed SNH, and applied the "target limitation." For the

second year of operation, Suncoast calculated a reimbursement

rate based on the actual operation of the 97-bed facility, and

applied the "new provider ceiling," essentially treating the

combined facility as a "new facility."

43. As to the proper treatment of Suncoast (as a "new

provider," "existing provider," or some combination thereof)

under the Plan, the proof is somewhat conflicting. Mr.

Schwartz, the applicant's health care accountant, related a

conversation he had with John Owens, administrator of the

reimbursement section of AHCA at the time, who Mr. Schwartz

testified suggested the approach he adopted in projecting the

proposed reimbursement rates. Due to the lack of clear guidance

in the Plan, Mr. Schwartz accepted the approach, as reasonable.

Mr. Hughes, currently administrator of AHCA's reimbursement

section, testified by deposition that by bringing two providers

together, Suncoast would not be considered a "new provider"

under the Plan and would continue to be reimbursed as an

"existing provider."

44. Considering the proof, it is most likely that Suncoast

would be treated as an "existing provider" and subject to the

"target limitations" of the Plan. It is simply not logical to

treat it as an "existing provider" for its first year of

operation, subject to the "target limitations," and as a "new

provider" its second year of operation, subject to the "new

provider ceiling" and not the "target limitations." In sum,

Suncoast is either an "existing provider" or a "new provider" at

its inception.

45. While it has been concluded that Suncoast's Medicaid

reimbursement rate should be calculated as an existing provider,

it does not, for reasons discussed infra , affect the ultimate

conclusions drawn regarding the financial feasibility of the

project.

46. To address the impact on financial feasibility,

occasioned by treatment as an existing provider, the applicant

recalculated its Medicaid reimbursement rates based on a

weighted average of the target limitation from SNH and Victoria

Martin. Suncoast then compared the new rates with the rates

used in the application to access any change the recalculation

would have on revenues. As calculated by Suncoast, the new

rates would increase income for year one by $199,082, and

decrease income for year two by $88,988. 8

47. While the methodology employed by Suncoast to compute

the target limitations is sound, the actual rate that would be

paid would be the lower of the target limitation or the inflated

per diem rate indicated in the application. Here, that would be

the target limitation, and had the correct limitation been

applied revenues for the second year of operation would have

been reduced by $176,000, resulting in a net loss for the

nursing home operation of $18,330. For the complete facility,

including the 23-bed ALF, such revenue loss would reduce the

projected net income of $182,320 to a net income of $6,320.

48. The Reimbursement Plan also contains a "usual and

customary charge limitation" (UCC limitation) which provides

that Medicaid will not pay a per diem reimbursement rate which

would exceed the per diem revenues for non-Medicaid and non-

Medicare patients. This limitation applies to new and existing

providers, although the methodology for computing the limitation

is different for the two.

49. It is evident from a review of the projected calendar

year 1998 and calendar year 1999 revenues contained on Schedule

7 of the Suncoast response to admissions [Petitioner's exhibit

1B), that Suncoast's projected Medicaid per diem rate exceeds

the per diem received from non-Medicaid and non-Medicare

sources. If calculated for calendar year 1998, the UCC

limitation would be $89.85, while the projected Medicaid per

diem is $92.08. For calendar year 1999, the UCC limitation

would be $106.39, while the projected Medicaid per diem is

$109.95. 9

50. Inflating the UCC limitation calculated for calendar

year 1998, as a limitation on the Medicaid reimbursement rate

for calendar year 1999, would result in a decrease in Medicaid

revenues of $424,366. Such reduction in Medicaid revenues for

year two would result in a net loss of $266,696 for nursing home

operations, as opposed to the net income of $157,670 stated in

the application. For the project as a whole, the net loss would

be $242,046, as opposed to the net income of $182,320 stated in

the application. 10

51. Notwithstanding that Suncoast projected its revenues

and expenses in its pro formas based on a calendar year, it

contended at hearing that, if it is to be considered an

"existing provider," any calculation of a UCC limitation must

take into account the fact that its Medicaid cost report, upon

which reimbursement is based, is not filed on a calendar year

basis, but on a basis with a fiscal year ending August 31.

However, Suncoast offered no calculation or projection, and did

not explain or demonstrate how the use of a 12-month period from

September 1997 through August 1998 would cause a substantial

difference in the UCC limitation, compared to the use of the 12-

month period from January through December 1998, such that a

positive income would be expected for the second year of

operation. Indeed, considering the assumptions on which the

non-Medicare and non-Medicaid rates are based in the Suncoast

pro forma (current rates inflated to January 1, 1998) it is

likely (since the non-Medicare and non-Medicaid rates would be

lower in the last four months of 1997) that a UCC limitation

calculated as suggested by Suncoast would result in a greater

loss than that calculated on a UCC limitation for calendar year

1998, as heretofore discussed. 11

52. Since the UCC limitation, as opposed to the target

limitation, results in the lower Medicaid reimbursement rate, it

would be the primary limitation imposed in this case.

Consequently, the proof demonstrates that, as proposed, the 97-

bed nursing portion of the proposed facility would have, at a

minimum, a net loss of $266,696 for its second year of

operation, and that the complete facility would, at a minimum,

have a net loss of $242,046.

Consideration of subsection 408.035(2)(a)-(d) criteria

for projects involving a capital expenditure for the

provision of new health services to inpatients.

53. Subsection 408.035(2)(a) requires a consideration

"[t]hat less costly, more efficient, or more appropriate

alternatives to such inpatient services are not available and

the development of such alternatives has been studied and found

not practicable," and subsection 408.035(2)(c) requires "[i]n

the case of new construction, that alternatives to new

construction, for example, modernization or sharing

arrangements, have been considered and have been implemented to

the maximum extent practicable."

54. In large measure, the requirements of these criteria

have been previously addressed, and the Suncoast proposal found

to be consistent with such requirements. In sum, however, it

may be observed that neither the SNH nor Victoria Martin site is

conducive to expansion, and the Suncoast site is, because of

current demographics, not appropriate for a nursing home.

Moreover, the aged facilities do not meet current construction

and life safety code requirements for new skilled nursing

facilities and, if remodeling were started, the facilities would

require extensive and costly renovation. The alternative, to

delicense both facilities, is not in the applicant's best

interest or the population it serves. Both SNH and Victoria

Martin have resident populations which are not readily accepted

by other nursing homes. Over one-third of Suncoast's residents

are behaviorally compromised. At any time, approximately five

residents are HIV/Aids infected. To delicense the facilities

would displace these residents. The only practicable

alternative is to build a new facility within the service area

which would provide adequate food preparation and laundry areas,

adequate room size and storage, appropriate recreation and

therapy areas, and the myriad of other amenities that may be

accommodated in a modern facility, with sufficient area, to meet

the needs of the residents.

55. Subsection 408.035(2)(b), requires a consideration or

conclusion "[t]hat existing impatient facilities providing

inpatient services similar to those proposed are being used in

an appropriate and efficient manner." Utilization has been

previously addressed, and the applicant has been found, on

balance, to satisfy this criterion.

56. Finally, subsection 408.035(2)(d) requires a

consideration or observation "[t]hat patients will experience

serious problems in obtaining inpatient care of the type

proposed, in the absence of the proposed new services."

Considering the nature of the residents served by Suncoast, it

satisfies this criterion.

The criteria on balance

57. In evaluating the application at issue in this

proceeding, none of the criteria established by Section 408.035,

Florida Statutes, and Rules 59C-1.030 and 59C-1.036, Florida

Administrative Code, have been overlooked. However, given the

facts and circumstances of this case it must be concluded that

Suncoast's failure to demonstrate the long-term financial

feasibility of its project is dispositive of its application,

and such failure is not outweighed by any other, or combination

of any other, criterion. 12

CONCLUSIONS OF LAW

58. The Division of Administrative Hearings has

jurisdiction over the parties to, and the subject matter of

these proceedings. Section 408.039(5), Florida Statutes .

59. At issue in this proceeding is whether the application

of Suncoast to construct a replacement 97-bed nursing facility

in Pinellas County, Florida, should be approved. As the

applicant, Suncoast has the burden of demonstrating its

entitlement to a certificate of need. Boca Raton Artificial

Kidney Center, Inc. v. Department of Health and Rehabilitative

Services , 475 So.2d 260 (Fla. 1st DCA 1985), and Florida

Department of Transportation v. J.W.C. Co. , 396 So.2d 788 (Fla.

1st DCA 1981). Preliminarily, however, Suncoast has challenged

the standing of Intervenor HCR to oppose its application.

Accordingly, a threshold issue in these proceedings is whether

HCR has demonstrated standing to oppose Suncoast's application.

60. Pertinent to the issue of standing, Section

408.039(5)(b), Florida Statutes, provides:

. . . In administrative proceedings

challenging the issuance or denial of a

certificate of need, only applicants

considered by the department in the same

batching cycle are entitled to a comparative

hearing on their applications. Existing

health care facilities may initiate or

intervene in such administrative hearing

upon a showing that an established program

will be substantially affected by the

issuance of a certificate of need to a

competing proposed facility or program

within the same district. . . .

61. Here, for the reasons set forth in the findings of

fact, HCR failed to demonstrate that "an existing program will

be substantially affected" by approval of Suncoast's

application. Consequently, HCR has failed to demonstrate its

standing to intervene in these proceedings.

62. Pertinent to an evaluation of Suncoast's application,

Section 408.035, Florida Statutes, and Rules 59C-1.030 and 59C-

1.036, Florida Administrative Code, establish the criteria which

must be considered in evaluating an application for a

certificate of need. Balsam v. Department of Health and

Rehabilitative Services , 486 So.2d 1341 (Fla. 1st DCA 1986), and

Department of Health and Rehabilitative Services v. Johnson and

Johnson Home Health Care, Inc. , 447 So.2d 361 (Fla. 1st DCA

1984). The weight to be accorded each criterion and the

consequent balancing of the criteria will vary, however,

depending on the facts and circumstances of each case. Collier

Medical Center, Inc. v. Department of Health and Rehabilitative

Services , 462 So.2d 83 (Fla. 1st DCA 1985). See, also, Graham

v. Estuary Properties, Inc. , 399 So.2d 1374 (Fla. 1981). Under

the facts and circumstances of this case, as heretofore found,

Suncoast has failed to demonstrate its entitlement to a

certificate of need.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that a final order be rendered which:

1. Dismisses the petition for leave to intervene filed by

Health Care and Retirement Corporation of America; and

2. Denies the application of Suncoast Nursing Home, Ltd.,

for a certificate of Need, CON Number 8301, to construct a

replacement community nursing home facility of 97 beds through

the combination of Suncoast Nursing Home, with 59 beds, and

Victoria Martin Nursing Home, with 38 beds.

DONE AND ENTERED this 4th day of June, 1997, in

Tallahassee, Leon County, Florida.

___________________________________

WILLIAM J. KENDRICK

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32301-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 4th day of June, 1997.

ENDNOTES

1/ Intervenor's exhibit 4 was withdrawn. Petitioner objected to

the admission into evidence of intervenor's exhibit 13 (the

deposition of Frank Hughes) on the grounds of hearsay, and its

admission was taken under advisement. Upon reflection,

intervenor's exhibit 13 is received into evidence consistent with

the provisions of Section 120.57(1)(c), Florida Statutes , and

Rule 1.330(a), Florida Rules of Civil Procedure .

2/ If the Suncoast application is approved, Victoria Martin will

most likely be renovated and used as an assisted living facility.

3/ In reaching such conclusion, Rosedale's contention that

because Suncoast proposes to pay higher salaries than Rosedale,

Rosedale would experience additional difficulty recruiting staff

or would have to raise its salaries, thus increasing its expenses

of operation, has not been overlooked. Such additional cost was

not, however, quantified and was not shown, either singularly or

in combination with any other factor, to substantially adversely

affect any of Rosedale's existing programs.

4/ Obviously, the same conclusion would be drawn if the

applicant's rates were reduced, as discussed, infra .

5/ By concluding that certain efficiencies will be gained does

not suggest that, through the costs associated with new

construction, certain patient care and operational costs of the

new facility will not increase.

6/ Health Properties' commitment to finance the project is based

on cash flow and whether the project can support the debt. It is

not particularly concerned with whether the project shows a net

income and, therefore, the project's failure to demonstrate a

positive net income would most likely not affect its commitment.

[Tr., page 28.] However, absent positive cash flow, Health

Properties' commitment is doubtful, as well as the immediate

financial feasibility of the project.

7/ The projected Medicaid census is 27,055 patient days in the

first year of operation, and 27,201 patient days in the second

year of operation.

8/ The recalculated rates include incentives which were not

included in the calculations used in Suncoast's application. If

those incentives were removed from the rate calculation, the

income Suncoast calculated for year one would be reduced and the

income for year two would be further decreased.

9/ The UCC limitation of $89.95 for calendar year 1998, as well

as the limitation of $106.39 for calendar year 1999, were the

applicant's expert's calculations. [Tr., pages 155-157.] HCR's

expert calculated a weighted average UCC rate for calendar year

1988 of $88.30, and for calendar year 1999 of $95.73. [HRC

exhibit 12.] If HCR's estimate is accurate, the net loss

calculated in paragraph 50 would be significantly greater. AHCA

and HCR have, however, apparently accepted the applicant's

figures. See, AHCA's and HCR's Joint Recommended Order at

paragraph 26. Consequently, for purposes of this order, the

applicant's figures have been accepted, without resolving which

calculation is the more accurate, and present a best case

scenario.

10/ The methodology employed to derive the decrease in Medicaid

revenues was the same as that employed by HCR's expert, Mr.

Mitchell, which is credited. See, HCR exhibit 12.

11/ HCR's expert provided a computation for the UCC limitation

using the fiscal year ending August 31. To derive that

calculation, he used data contained on schedule 7, page 1, for

the construction period to derive a weighed average UCC rate for

September 1, 1997, through December 31, 1997, (4 months) and data

from schedule 7, page 2, to derive a weighed average UCC rate for

January 1, 1998, through August 31, 1998. [HCR exhibit 12.] Use

of that methodology calculated a reduction of revenues of

$273,650 for the second year of operation, and a net loss for

nursing home operations of $115,980 and for the facility as a

whole of $91,330. The data contained on schedule 7, page 1, for

the construction period is, however, flawed, and the results

based on that data to reflect the results of any UCC limitation

on revenues are unreliable. In this regard, it is observed that

the non-Medicare and non-Medicaid rates on the construction

schedule bear no reasonable relationship to the rates projected

for years one and two, or the assumptions on which those rates

are based. Indeed, by using the rates for the construction

period resulted in an inflated UCC limitation and therefore

underestimated the loss of Medicaid revenues.

Suncoast sought to diminish the impact of the UCC limitation by

suggesting that any such problem could be "fixed" by simply

raising its private pay rates. There being no showing that the

market would bear such an increase or, stated differently, that

any such increase would be reasonable, Suncoast's suggestion and

proof is rejected as unpersuasive.

12/ For example, while it has been found that, when evaluated in

isolation, the Suncoast proposal is consistent with the district

plan and the state plan, as well as the provisions of subsection

408.035(1)(b) (availability, efficiency, appropriateness,

accessibility, extent of utilization), such conclusion cannot

persist when long term financial feasibility has not been

demonstrated or, stated differently, there is no sense of

confidence the facility could survive to provide the proposed

services.

COPIES FURNISHED:

Mark Thomas, Esquire

Agency for Health Care Administration

Fort Knox Building 3, Suite 3431

2727 Mahan Drive

Tallahassee, Florida 32308-5403

Jonathan S. Grout, Esquire

Goldsmith & Grout, P.A.

Post Office Box 1017

Tallahassee, Florida 32302-1017

Alfred W. Clark, Esquire

Post Office Box 623

117 South Gadsden, Suite 201

Tallahassee, Florida 32302

Sam Power, Agency Clerk

Agency for Health Care Administration

Fort Knox Building 3, Suite 3431

2727 Mahan Drive

Tallahassee, Florida 32308-5403

Jerome W. Hoffman, General Counsel

Agency for Health Care Administration

2727 Mahan Drive

Tallahassee, Florida 32308-5403

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15

days from the date of this recommended order. Any exceptions to

this recommended order should be filed with the agency that will

issue the final order in this case.