97-002931 Adventist Health Systems/Sunbelt, Inc., D/B/A Florida Hospital East vs. Agency For Health Care Administration Status: Closed Recommended Order on Wednesday, June 30, 1999.

Summary: Agency cannot rely on unpromulgated policy to deny provider medical reimbursement for loss on sale of capital assets arising out of sale of facility.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ADVENTIST HEALTH SYSTEMS/ )

SUNBELT, INC., d/b/a FLORIDA )

HOSPITAL, EAST, )

)

Petitioner, )

)

vs. ) Case No. 97-2931

)

AGENCY FOR HEALTH CARE )

ADMINISTRATION, )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

A hearing was held in this case in Tallahassee, Florida, on

April 13, 1999, before Arnold H. Pollock, an Administrative Law

Judge with the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Joanne B. Erde, Esquire

Broad and Cassel

Miami Center

Suite 3000

201 South Biscayne Boulevard

Miami, Florida 33131

Jonathan E. Sjostrom, Esquire

Steel, Hector & Davis, LLP

215 South Monroe Stre et

Suite 601

Tallahassee, Florida 32301-1804

For Respondent: Mark S. Thomas, Esquire

Madeline McGuckin, Esquire

Agency for Health Care

Administration

2727 Mahan Drive

Fort Knox Building 3, Suite 3431

Tallahassee, Florida 32308

STATEMENT OF THE ISSUE

The issue for consideration in this case is whether the

Agency for Health Care Administration is required by law and rule

of the Agency to include the gain or loss on the sale of

depreciable assets as the result of a sale or disposal, in the

calculation of Medicaid allowable costs.

PRELIMINARY MATTERS

By Petition for Administrative Hearing filed June 10, 1997,

Petitioner challenged the Agency's determination of Medicaid

reimbursement per diem rates and reimbursement for the period

October 24, 1984 through December 31, 1990. The matter was

forwarded to the Division of Administrative Hearings for formal

hearing on June 23, 1997, but on July 8, 1997, after the issuance

of the Division's Initial Order, the parties filed two Joint

Motions for Extension of Time to Respond to Initial Order, citing

their efforts at settlement of this matter without formal

hearing.

By Notice of Hearing dated September 26, 1997,

Administrative Law Judge Mary Clark set the matter for hearing on

March 2 and 3, 1998 in Tallahassee but, based on several motions

for abeyance and continuance from the parties, the hearing was

delayed repeatedly until, on December 30, 1998, Judge Clark

denied Petitioner's request to enforce an alleged settlement of

the issues, and set the matter for hearing in Tallahassee on

March 2, 1999. Thereafter, on the basis of a telephone

conference hearing held on February 23, 1999, at the request of

Petitioner, the matter was reset for April 13 and 14, 1999, at

which time the hearing was held as scheduled.

At the hearing, Petitioner presented the testimony of

William G. Nutt, director of reimbursement for Petitioner,

Adventist Health System; Roy Rydell Samuel, the Medicaid cost

reimbursement planning administrator for the Agency for Health

Care Administration; and John A. Owens, regulatory analyst

supervisor for the Agency. Petitioner also introduced

Petitioner's Exhibits 2, 4, 6 and 7. Respondent also presented

the testimony of John A. Owens, a Certified Public Accountant, as

its own witness; and presented the testimony of Carey Franklin

Britt, a branch audit supervisor with First Coast Service

Operations, a wholly-owned subsidiary of Blue Cross-Blue Shield

of Florida, responsible for the auditing of the Medicare and

Medicaid cost reports submitted for reimbursement. Respondent

also introduced Respondent's Exhibits A and B. The parties also

introduced Joint Composite Exhibit 1.

A Transcript of the proceedings was provided and subsequent

to the receipt thereof, both counsel submitted post-hearing

matters which were carefully considered in the preparation of

this Recommended Order.

FINDINGS OF FACT

1. Prior to the hearing, the parties submitted a Joint

Stipulation which is incorporated in part herein as follows:

a. Petitioner purchased Orlando General

Hospital ("OGH"), Medicaid provider number

120065, on December 31, 1990.

b. Upon its sale, OGH merged into and

became part of Adventist Health

System/Sunbelt, Inc., wherein after it was

known as Adventist Health System/Sunbelt,

Inc., d/b/a Florida Hospital East ("Florida

Hospital East").

c. Adventist Health System/Sunbelt,

Inc., d/b/a Florida Hospital East is a wholly

owned subsidiary of Adventist Health System

Sunbelt Healthcare Corporation.

d. Florida Hospital East assumed all of

the assets and liabilities of OGH.

e. OGH filed a terminating cost report

for the fiscal period ending December 31,

1990.

f. On December 31, 1990, the date of

sale of OGH to Petitioner, OGH incurred a

loss on the sale of the hospital, a

depreciable asset.

g. The loss on the sale of OGH was

included on both OGH's Medicaid and Medicare

terminating cost reports.

h. A loss on the sale of a depreciable

asset is the amount that the net book value

of the asset sold exceeds the purchase price.

i. A gain or loss on the sale of a

depreciable asset is a capital cost.

j. Due to the mechanism of the cost

report, a loss on the sale of a depreciable

asset is divided into "periods" based upon

the time period to which the loss relates.

The portion of the loss related to the fiscal

year in which the asset is sold is referred

to as a "current period" loss. The portion

of the loss that relates to all fiscal years

prior to the year in which the asset is sold

is referred to as a "prior period" loss.

k. Gains and losses related to the

current period are included on Worksheet A of

the Medicare and Medicaid cost report.

l. Current period capital costs flow to

Worksheet B-II Part and B Part III [sic] of

the Medicaid cost report.

m. Gains and losses related to the

prior period are included on Worksheet E of

the Medicare and Medicaid cost reports.

n. OGH's current period is the fiscal

year ending 12/31/90.

o. OGH's prior periods in which it

participated in the Medicaid Program are

10/24/84 through 12/31/89.

p. OGH's audited Medicaid cost report

included in allowable Medicaid costs a loss

on the sale of OGH related to the current

period.

q. OGH's audited Medicaid cost report

did not include in allowable Medicaid costs a

loss on the sale of OGH related to the prior

periods.

r. The loss on the sale of OGH related

to the current period was included in

Worksheet A of OGH's audited Medicaid cost

report. These costs, including the loss on

the sale of OGH, flowed to Worksheet B Part

II.

s. OGH's audited Medicare cost report

included as allowable Medicare costs the loss

on the sale of OGH related to both the

current and prior periods in the amount of

$9,874,047.

t. The loss from the sale of OGH

related to the current period was included on

Worksheet A of OGH's audited Medicare cost

report.

u. The costs from Worksheet A of OGH's

audited Medicare cost report flowed to

Worksheet B Part II of OGH's audited Medicare

cost report.

v. The loss related to the prior period

was included on Worksheet E Part B of OGH's

audited Medicaid cost report.

w. The Agency utilizes costs included

on Worksheet A of the Medicaid cost report to

calculate Medicaid allowable costs.

x. The Agency utilizes the capital

costs included on Worksheet B Part II and/or

B Part III to calculate allowable Medicaid

fixed costs.

y. The Agency does not utilize costs

included on Worksheet E Part III to calculate

Medicaid allowable costs.

z. The Agency reimburses providers

based upon Medicaid allowable costs.

aa. The Agency did not include the

portion of the loss on the sale of OGH

related to the prior periods in the

calculation of the OGH's Medicaid allowable

costs.

bb. Blue Cross and Blue Shield of

Florida, Inc. (Intermediary), contracted with

the Agency to perform all audits of Medicaid

cost reports.

2. Agency reimbursement to Medicaid providers is governed

by Florida's Title XIX Inpatient Hospital Reimbursement Plan

(Plan), which has been incorporated in Rule 59G-6.020, Florida

Administrative Code. The Plan provides that Medicaid

reimbursement for inpatient services shall be based upon a

prospectively determined per diem. The payment is based upon the

facility's allowable Medicaid costs which include both variable

costs and fixed costs. Fixed costs include capital costs and

allowable depreciation costs.

3. The per diem payment is calculated by the Agency based

upon each facility's allowable Medicaid costs which must be taken

by the agency from the facility's cost report. Capital costs,

such as depreciation, are found on Worksheet B, Part II and Part

III.

4. The Plan requires all facilities participating in the

Medicaid program to submit an annual cost report to the Agency.

The report is to be in detail, listing their "costs for their

entire reporting year making appropriate adjustment as required

by the plan for the determination of allowable costs." The cost

report must be prepared in accordance with the Medicare method of

reimbursement and cost finding, except as modified by the Plan.

5. The cost reports relied upon by the Agency to set rates

are audited by Blue Cross/Blue Shield of Florida, Inc. which has

been directed by the Agency to follow Medicare principles of

reimbursement in its audit of cost reports.

6. Prior to January 11, 1995, the Plan did not expressly

state whether capital gains or losses relating to a change of

facility ownership were allowable costs. The 1995 amendment to

the Plan contained language expressly providing "[f]or the

purposes of this plan, gains or losses resulting from a change of

ownership will not be included in the determination of allowable

cost for Medicaid reimbursement." No change was made by the

amendment to the Medicare principles of reimbursement regarding

the treatment of gains and losses on the sale of depreciable

assets.

7. The Medicare principles of reimbursement provides that

gains and losses from the disposition of depreciable assets are

includable in computing allowable costs. The Provider

Reimbursement Manual (HIM-15)(PRM), identifies the methods of

disposal for assets that are recognized. They include a bona

fide sale of depreciable assets, but do not mention a change of

ownership. PRM Section 132 treats a loss on a sale of a

depreciable asset as an adjustment to depreciation for both the

current and periods.

8. Depreciable assets with an expected life of more than

two years may not be expensed in the year in which they are put

into service. They must be capitalized and a proportionate share

of the cost expensed as depreciation over the life of the

property. To do so, the provider must estimate the useful life

of the property based upon the guidelines of the American

Hospital Association, and divide the cost by the number of years

of estimated life. It is this yearly depreciation figure which

is claimed on the cost report and which is reimbursed.

9. When a depreciable asset is sold for less than book

value (net undepreciated value), the provider suffers a loss.

Petitioner claims that Medicare holds that in such a case it must

be concluded that the estimated depreciation was erroneous and

the provider did not receive adequate reimbursement during the

years the asset was in service. Medicare accounting procedures

do not distinguish between the treatment of a loss on the sale of

depreciable assets as related to current and prior periods. PIM

Section 132 requires that Medicare recognize the entire loss as

an allowable cost for both the current and prior periods, and

Medicare treated Petitioner's loss from the sale of its facility

as an allowable cost for Medicare reimbursement under both

current and prior periods.

10. With the adoption of the January 1995 amendment,

however, the wording of the state plan was changed to

specifically prohibit gains or losses from a change of ownership

from being included in allowable costs for Medicaid

reimbursement. This was the first time the state plan addressed

gains and losses on the disposal of depreciable assets resulting

from a change of ownership. The Agency contends, however, that

it has never reimbursed for losses on disposal of property due to

a change of ownership, and that the inclusion of the new language

was to clarify a pre-existing policy which was being followed at

the time of the 1995 amendment, and which goes back to the late

1970s. It would appear, however, that the policy was never

written down; was never conveyed to Blue Cross/Blue shield; was

never formally conveyed to Medicaid providers; and was never

conveyed to the community at large. When pressed, the Agency

could not identify any specific case where the policy was

followed by the Agency.

11. While admitting that it is Agency practice not to treat

losses from the sale of depreciable assets in prior periods as an

allowable cost, Petitioner contends that it has been the Agency's

practice to treat the loss on the sale of depreciable assets

relating to the current period as an allowable cost, and cited

several instances where this appears to have been done. The

Agency contends that any current period losses paid were paid

without knowledge of the Agency, in error, and in violation of

the plan.

12. On October 25, 1996, the Agency entered a Final Order

in a case involving Florida Hospital/Waterman, Inc., as

Petitioner, and the Agency as Respondent. This case was filed by

the Petitioner to challenge the Agency's treatment of the loss on

the sale of Waterman Medical Center, Inc., another of Adventist

Health Systems/Sunbelt Healthcare Corporation, and the Final

Order in issue incorporated a stipulation into which the parties

had entered and which addressed the issue in question here. The

stipulation included certain position statements including:

a. A loss on the sale of depreciable assets

is an allowable cost under the Medicare

Principles of Reimbursement.

b. The State Plan does not specify that the

loss on the sale of a depreciable asset is to

be treated in a manner different than under

the Medicare Principles of Reimbursement.

Thus the loss on the sale of a depreciable

asset is an allowable cost under the State

Plan.

c. The Agency agrees, in accordance with the

Medicare Principles of Reimbursement, that

under the terms of the State Plan, prior

period losses for Waterman will be allocated

to prior periods and included in the

calculation of the per diem and per visit

rates.

According to William G. Nutt, Petitioner's director of

reimbursement, the only difference between the facts of the

Waterman case and the instant case is that they relate to the

sale of different facilities.

13. The treatment of loss on the sale of depreciable assets

as outlined in the Waterman stipulation is in conflict with the

amended Plan and with the unwritten and unuttered Agency policy

as urged by the Agency in this case. The Agency agreed in one

case to a treatment of loss which it now rejects in the instant

case.

14. Petitioner urges that subsequent to the settlement of

the Waterman case, but before the instant case was set for

hearing, the parties engaged in settlement negotiations during

which, according to counsel for the Agency, they made

"significant" progress toward applying the settlement in the

Waterman case to the current case. In a motion filed to delay

the setting of this case for hearing, counsel for the Agency

indicated the parties were "finalizing" settlement to resolve the

case without resorting to a final hearing, and in a follow-up

agreed motion for continuance, advised that the "parties [had]

finalized a settlement document [which they were] in the process

of executing. The settlement agreement reached by the parties

was signed by a representative of the Petitioner and then

forwarded to the Agency for signature. The document was not

signed by the Agency, and when Petitioner sought enforcement of

the "settlement" by an Administrative Law Judge of the Division

of Administrative Hearings, the request was denied as being

outside the jurisdiction of the judge, and the matter was set for

hearing.

CONCLUSIONS OF LAW

15. The Division of Administrative Hearings has

jurisdiction over the parties and the subject matter in this

case. Section 120.57(1), Florida Statutes.

16. The Plan is incorporated into law by the Agency's Rule

59G-6.020, Florida Administrative Code, and requires the Agency

to reimburse inpatient providers through a per diem that is based

upon allowable Medicaid costs. These allowable Medicaid costs

shall be determined in accordance with Medicare Principles of

Reimbursement.

17. The evidence presented by the Agency witnesses suggests

it was not Agency intent to reimburse providers for capital

losses due to the sale of a facility. The parties agree that the

provider is to be reimbursed for capital losses pursuant to

Medicare reimbursement principles. The issue for determination

here is whether the Agency's determination that reimbursement is

not authorized when the loss is due to the disposition of assets

due to sale of a facility is correct.

18. The Plan in effect at the time of Petitioner's purchase

of Orlando General Hospital in 1990 provided for the treatment of

reimbursement of losses on depreciable assets consistent with the

Medicare Principles of Reimbursement. The Plan in effect at that

time did not contain any modification of those principles when

applied to Medicaid reimbursement. The amendment of the Plan in

January 1995 to specifically exclude reimbursement for losses on

the sale of depreciable assets due to transfer of ownership of

the facility was the first publication of this Agency position.

Any pre-existing Agency policy consistent with this amendment

iteration in the Plan had not been reduced to writing or

disseminated to the public before that time.

19. Notwithstanding the Agency is not bound in this case by

its treatment of similar issues in the Waterman case, the final

order entered therein gives an insight into Agency thinking at

the time. Though the facts of the Waterman case were not

introduced into evidence here, the stipulation entered into in

that case contains very definite indications of the Agency's

acceptance of the dictates of the Medicare Principles of

Reimbursement as called for in PRM Section 132. Nothing has been

shown to contradict this except the testimony of Agency

representatives that the 1995 amendment was no more than a

codification of the Agency's pre-existing policy. It is

significant that that "policy" was not shown to have ever been

formalized or applied by the Agency in word or deed.

20. Careful examination of the evidence in this case,

disregarding the consistent provisions of the "settlement

negotiations" conducted herein, leads to the inescapable

conclusion that the Agency is attempting to impose a standard for

reimbursement which, at the time in issue, was inconsistent with

its own rules. While Agencies are given wide latitude in the

interpretation of their own rules, such interpretation must be

reasonable. If not, or if it is clearly erroneous, it cannot

stand. Legal Environmental Assistance Foundation v. Board of

County Commissioners , 642 So. 2d 1081 (Fla. 1994).

21. The controversy here is not a challenge to the Agency's

rule, nor is it a challenge to attempted rulemaking. The issue

here is whether the Agency is properly applying its own standard

for reimbursement, and, clearly, it is not.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is recommended that the Agency for Health Care

Administration enter a Final Order including the loss on the sale

of Orlando General Hospital as an allowable cost for determining

Petitioner's entitlement to Medicaid reimbursement for both

current and prior years.

DONE AND ENTERED this 30th day of June, 1999, in

Tallahassee, Leon County, Florida.

___________________________________

ARNOLD H. POLLOCK

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 30th day of June, 1999.

COPIES FURNISHED:

Joanne B. Erde, Esquire

Broad and Cassel

Miami Center

Suite 3000

201 South Biscayne Boulevard

Miami, Florida 33131

Jonathan E. Sjostrom, Esquire

Steel Hector & Davis LLP

215 South Monroe Street

Suite 601

Tallahassee, Florida 32301-1804

Mark S. Thomas, Esquire

Madeline McGuckin, Esquire

Agency for Health Care

Administration

2727 Mahan Drive

Fort Knox Building 3, Suite 3431

Tallahassee, Florida 32308

Sam Power, Agency Clerk

Agency for Health Care

Administration

2727 Mahan Drive

Fort Knox Building 3, Suite 3431

Tallahassee, Florida 32308

Julie Gallagher

General Counsel

Agency for Health Care

Administration

2727 Mahan Drive

Building 3

Tallahassee, Florida 32308

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.