06-003828 Sa-Pg-Orlando, Llc, D/B/A Palm Garden Of Orlando vs. Agency For Health Care Administration Status: Closed Recommended Order on Friday, October 24, 2008.

Summary: Under the unique factual circumstances, Petitioners were justified in taking an accrual of expenses for contingent liability under the category of general and professional liability, pursuant to generally accepted accounting principles.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

SA-PG-SUN CITY, LLC, d/b/a PALM )

)

)

Petitioners, )

)

vs. ) Case Nos. 06-3824

) through

AGENCY FOR HEALTH CARE ADMINISTRATION, ) 06-3837

)

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a final hearing was conducted in this

case on April 14 and 15, 2008, in Tallahassee, Florida, before

Lawrence P. Stevenson, a duly-designated Administrative Law

Judge of the Division of Administrative Hearings ("DOAH").

APPEARANCES

For Petitioners: Peter A. Lewis, Esquire

Goldsmith, Grout & Lewis, P.A.

307 West Park Avenue, Suite 200

Tallahassee, Florida 32308

For Respondent: Brevin Brown, Esquire

Daniel M. Lake, Esquire

Agency for Health Care Administration

Fort Knox Building III

2727 Mahan Drive

Tallahassee, Florida 32308

STATEMENT OF THE ISSUE

The issue in these consolidated cases is whether the Agency

for Health Care Administration ("AHCA") properly disallowed

Petitioners' expense for liability insurance and accrued

contingent liability costs contained in AHCA's audit of

Petitioners' Medicaid cost reports.

PRELIMINARY STATEMENT

These cases involve AHCA's Medicaid audits of 14 SA-PG

("Palm Gardens") facilities' cost reports for the period of

July 29, 2002, through February 28, 2003 (the "audit period").

Each of the audits contained numerous adjustments to the Palm

Gardens cost reports, and Palm Gardens filed Petitions for

Formal Administrative Hearing (Petitions) contesting the

adjustments. Those Petitions were consolidated and form the

basis of this proceeding. The parties submitted a Pre-hearing

Stipulation that resolved all but two of the adjustments.

The first remaining adjustment at issue is AHCA's

disallowance of Palm Gardens' accrual of expenses for contingent

liability, listed in the cost reports under the category of

general and professional liability ("GL/PL") insurance, where

Palm Gardens did not document that it had purchased GL/PL

insurance. The second adjustment at issue is ACHA's

disallowance of a portion of a premium paid by Palm Gardens for

a GL/PL insurance policy issued by Mature Care Insurance Company

("Mature Care policies"). The amounts still in dispute under

these two adjustments are as follows, by location of the Palm

Gardens facility:

Sun City (DOAH Case No. 06-3824): $126,672.00

Port St. Lucie (DOAH Case No. 06-3825): $126,672.00

Winter Haven (DOAH Case No. 06-3826): $126,672.00

West Palm Beach (DOAH Case No. 06-3827): $200,589.00

Orlando (DOAH Case No. 06-3828): $126,672.00

Pinellas (DOAH Case No. 06-3829): $126,672.00

Clearwater (DOAH Case No. 06-3830): $126,672.00

Ocala (DOAH Case No. 06-3831): $199,342.00

North Miami (DOAH Case No. 06-3832): $126,672.00

Largo (DOAH Case No. 06-3833): $152,818.00

Jacksonville (DOAH Case No. 06-3834): $126,672.00

Gainesville (DOAH Case No. 06-3835): $126,672.00

Vero Beach (DOAH Case No. 06-3836): $199,342.00

Tampa (DOAH Case No. 06-3837): $126,672.00

Total amount in dispute: $ 2,018,811.00

The AHCA audits were issued between September 28, 2006, and

October 4, 2006. Palm Gardens timely filed its Petitions, which

AHCA forwarded to DOAH on October 5, 2006. The cases were

assigned to the undersigned and consolidated for hearing.

Several continuances were granted, and the case was placed in

abeyance for a period of approximately two months, in order to

allow the parties to conduct settlement negotiations and narrow

the issues presented at the formal hearing. The formal hearing

was held on April 14-15, 2008.

At the hearing, Palm Gardens presented the testimony of

Stanley W. Swindling, Jr., an expert in health care accounting

and Medicare/Medicaid reimbursement principles; Keith B.

Parnell, an expert in insurance for the long-term care industry;

and John A. Owens, an expert in health care accounting and

Medicare/Medicaid reimbursement. Mr. Parnell also provided

rebuttal testimony. Petitioners' Exhibits 1 through 8 were

admitted into evidence. AHCA presented the testimony of Lisa D.

Milton, AHCA's administrator of audit services and an expert in

certified internal auditing; Patrick M. Wester, agent relations

administrator for Florida Surplus Lines Service; Steve Diaczyk,

an audit evaluation and review analyst for AHCA and an expert in

accounting, auditing, and Medicaid policy; and Janette Smiley,

an expert in accounting and Medicaid auditing. AHCA's Exhibits

1 through 13, 20 through 22, 25, relevant portions of 26, 27

through 31, 33, 35, 41, 44, and 45 were admitted into evidence.

Joint Composite Exhibit 1 (Palm Gardens' cost reports) and Joint

Composite Exhibit 2 (AHCA's final audit reports) were admitted

into evidence.

The three-volume Transcript of the hearing was filed at

DOAH on May 1, 2008. The parties filed their proposed

recommended orders on May 12, 2008. Both proposed recommended

orders have been carefully considered during the preparation of

this Recommended Order.

FINDINGS OF FACT

Based upon the oral and documentary evidence presented at

the final hearing, and on the entire record of this proceeding,

the following findings of fact are made:

1. Petitioners operate licensed nursing homes that

participate in the Florida Medicaid program as institutional

providers. The 14 Palm Gardens facilities are limited liability

companies operating as subsidiaries of New Rochelle

Administrators, LLC, which also provides the facilities with

management services under a management contract.

2. AHCA is the single state agency responsible for

administering the Florida Medicaid program. One of AHCA's

duties is to audit Medicaid cost reports submitted by providers

participating in the Medicaid program.

3. During the audit period, Petitioners provided services

to Medicaid beneficiaries pursuant to Institutional Medicaid

Provider Agreements that they entered into with AHCA. The

Provider Agreements contained the following relevant provision:

(3) Compliance . The provider agrees to

comply with local, state, and federal laws,

as well as rules, regulations, and

statements of policy applicable to the

Medicaid program, including Medicaid

Provider Handbooks issued by AHCA.

4. Section 409.908, Florida Statutes (2002) 1 , provided in

relevant part:

Reimbursement of Medicaid providers.--

Subject to specific appropriations, the

agency shall reimburse Medicaid providers,

in accordance with state and federal law,

according to methodologies set forth in the

rules of the agency and in policy manuals

and handbooks incorporated by reference

therein. These methodologies may include

fee schedules, reimbursement methods based

on cost reporting, negotiated fees,

competitive bidding pursuant to s. 287.057,

and other mechanisms the agency considers

efficient and effective for purchasing

services or goods on behalf of

recipients. . . .

* * *

(2)(a)1. Reimbursement to nursing homes

licensed under part II of chapter 400 . . .

must be made prospectively. . . .

* * *

(b) Subject to any limitations or

directions provided for in the General

Appropriations Act, the agency shall

establish and implement a Florida Title XIX

Long-Term Care Reimbursement Plan (Medicaid)

for nursing home care in order to provide

care and services in conformance with the

applicable state and federal laws, rules,

regulations, and quality and safety

standards and to ensure that individuals

eligible for medical assistance have

reasonable geographic access to such

care. . . .

5. AHCA has adopted the Title XIX Long-Term Care

Reimbursement Plan (the "Plan") by reference in Florida

Administrative Code Rule 59G-6.010. The Plan incorporates the

Centers for Medicare and Medicaid Services ("CMS") Publication

15-1, also called the Provider Reimbursement Manual (the

"Manual" or "PRM"), which provides "guidelines and policies to

implement Medicare regulations which set forth principles for

determining the reasonable cost of provider services furnished

under the Health Insurance for the Aged Act of l965, as

amended." CMS Pub. 15-1, Foreword, p. I.

6. The audit period in these cases spans two versions of

the Plan: version XXIII, effective July 1, 2002, and version

XXIV, effective January 1, 2003. It is unnecessary to

distinguish between the two versions of the Plan because their

language is identical as to the provisions relevant to these

cases.

7. Section I of the Plan, "Cost Finding and Cost

Reporting," provides as follows, in relevant part:

C. The cost report shall be prepared by a

Certified Public Accountant in accordance

with chapter 409.908, Florida Statutes, on

the form prescribed in section I.A. [AHCA

form 5100-000, Rev. 7-1-90], and on the

accrual basis of accounting in accordance

with generally accepted accounting

principles as established by the American

Institute of Certified Public Accountants

(AICPA) as incorporated by reference in Rule

61H1-20.007, F.A.C., the methods of

reimbursement in accordance with Medicare

(Title XVIII) Principles of Reimbursement,

the Provider Reimbursement Manual (CMS-PUB.

15-1)(1993) incorporated herein by reference

except as modified by the Florida Title XIX

Long Term Care Reimbursement Plan and State

of Florida Administrative Rules. . . .

8. Section III of the Plan, "Allowable Costs," provides as

follows, in relevant part:

C. Implicit in any definition of allowable

costs is that those costs shall not exceed

what a prudent and cost-conscious buyer pays

for a given service or item. If costs are

determined by AHCA, utilizing the Title

XVIII Principles of Reimbursement, CMS-PUB.

15-1 (1993) and this plan, to exceed the

level that a prudent buyer would incur, then

the excess costs shall not be reimbursable

under the plan.

9. The Plan is a cost based prospective reimbursement

plan. The Plan uses historical data from cost reports to

establish provider reimbursement rates. The "prospective"

feature is an upward adjustment to historical costs to establish

reimbursement rates for subsequent rate semesters. 2 The Plan

establishes limits on reimbursement of costs, including

reimbursement ceilings and targets.

10. AHCA establishes reimbursement ceilings for nursing

homes based on the size and location of the facilities. The

ceilings are determined prospectively, on a semiannual basis.

"Targets" limit the inflationary increase in reimbursement rates

from one semester to the next and limit a provider's allowable

costs for reimbursement purposes. If a provider's costs exceed

the target, then those costs are not factored into the

reimbursement rate and must be absorbed by the provider.

11. A nursing home is required to file cost reports. The

costs identified in the cost reports are converted into per diem

rates in four components: the operating component; the direct

care component; the indirect care component; and the property

component. GL/PL insurance costs fall under the operating

component. Once the per diem rate is established for each

component, the nursing home's reimbursement rate is set at the

lowest of four limitations: the facility's costs; the facility's

target; the statewide cost ceiling based on the size of the

facility and its region; or the statewide target, also based on

the size and location of the facility.

12. The facility's target is based on the initial cost

report submitted by that facility. The initial per diem

established pursuant to the initial cost report becomes the

"base rate." Once the base rate is established, AHCA sets the

target by inflating the base rate forward to subsequent six-

month rate semesters according to a pre-established inflation

factor. Reimbursement for cost increases experienced in

subsequent rate semesters is limited by the target drawn from

the base rate. Thus, the facility's reimbursement for costs in

future rate semesters is affected by the target limits

established in the initial period cost report. Expenses that

are disallowed during the establishment of the base rate cannot

be reclaimed in later reimbursement periods.

13. Petitioners entered the Medicaid program on

June 29, 2002. They filed cost reports for the nine-

month period from their entry into the program through

February 28, 2003. These reports included all costs claimed by

Petitioners under the accrual basis of accounting in rendering

services to eligible Medicaid beneficiaries.

14. In preparing their cost reports, Petitioners used the

standard Medicaid Cost Report "Chart of Accounts and

Description," which contains the account numbers to be used for

each ledger entry, and explains the meaning of each account

number. Under the general category of "Administration" are set

forth several subcategories of account numbers, including

"Insurance Expense." Insurance Expense is broken into five

account numbers, including number 730810, "General and

Professional Liability -- Third Party," which is described as

"[c]osts of insurance purchased from a commercial carrier or a

non-profit service corporation." 3 Petitioners' cost report

stated the following expenses under account number 730810:

Facility Amount

Palm Garden of Clearwater $145,042.00

Palm Garden of Gainesville $145,042.00

Palm Garden of Jacksonville $145,042.00

Palm Garden of Largo $171,188.00

Palm Garden of North Miami $145,042.00

Palm Garden of Ocala $217,712.00

Palm Garden of Orlando $145,042.00

Palm Garden of Pinellas $145,042.00

Palm Garden of Port St. Lucie $145,042.00

Palm Garden of Sun City $145,042.00

Palm Garden of Tampa $145,042.00

Palm Garden of Vero Beach $217,712.00

Palm Garden of West Palm Beach $231,151.00

Palm Garden of Winter Haven $145,042.00

15. AHCA requires that the cost reports of first-year

providers undergo an audit. AHCA's contract auditing firm,

Smiley & Smiley, conducted an examination 4 of the cost reports of

the 14 Palm Gardens nursing homes to determine whether the

included costs were allowable.

16. The American Institute of Certified Public Accountants

("AICPA") has promulgated a series of "attestation standards" to

provide guidance and establish a framework for the attestation

services provided by the accounting profession in various

contexts. Attestation Standards 101 and 601 set out the

standard an accountant relies upon in examining for governmental

compliance. Smiley & Smiley examined the Palm Gardens cost

reports pursuant to these standards.

17. During the course of the audit, Smiley & Smiley made

numerous requests for documentation and other information

pursuant to the Medicaid provider agreement and the Plan.

Petitioners provided the auditors with their general ledger,

invoices, audited financial statements, bank statements, and

other documentation in support of their cost reports.

18. The examinations were finalized during the period

between September 28, 2006, and October 4, 2006. The audit

report issued by AHCA contained more than 2,000 individual

adjustments to Petitioners' costs, which the parties to these

consolidated proceedings have negotiated and narrowed to two

adjustments per Palm Gardens facility. 5

19. As noted in the Preliminary Statement above, the first

adjustment at issue is AHCA's disallowance of Palm Gardens'

accrual of expenses for contingent liability under the category

of GL/PL insurance, where Palm Gardens could not document that

it had purchased GL/PL insurance. The second adjustment at

issue is ACHA's disallowance of a portion of the premium paid by

Palm Gardens for the Mature Care Policies.

20. The total amount of the adjustment at issue for each

facility is set forth in the Preliminary Statement above. Of

that total for each facility, $18,849.00 constituted the

disallowance for the Mature Care Policies. The remainder

constituted the disallowance for the accrual of GL/PL related

contingent liabilities.

21. Janette Smiley, senior partner at Smiley & Smiley and

expert in Medicaid auditing, testified that Petitioners provided

no documentation other than the Mature Care Policies to support

the GL/PL entry in the cost reports. Ms. Smiley testified that,

during much of the examination process, she understood

Petitioners to be self-insured.

22. Ms. Smiley's understanding was based in part on

statements contained in Petitioners' audited financial

statements. In the audited financial statement covering the

period from June 28, 2002, through December 31, 2002, Note six

explains Petitioners' operating leases and states as follows, in

relevant part:

The lease agreement requires that the

Company maintain general and professional

liability in specified minimum amounts. As

an alternative to maintaining these levels

of insurance, the lease agreement allows the

Company to fund a self-insurance reserve at

a per bed minimum amount. The Company chose

to self-insure, and has recorded litigation

reserves of approximately $1,735,000 that

are included in other accrued expenses (see

Note 9). As of December 31, 2002, these

reserves have not been funded by the

Company. . . .

23. The referenced Note nine, titled "Commitments and

Contingencies," provides as follows in relevant part:

Due to the current legal environment,

providers of long-term care services are

experiencing significant increases in

liability insurance premiums or

cancellations of liability insurance

coverage. Most, if not all, insurance

carriers in Florida have ceased offering

liability coverage altogether. The

Company's Florida facilities have minimal

levels of insurance coverage and are

essentially self-insured. The Company has

established reserves (see Note 6) that

estimate its exposure to uninsured claims.

Management is not currently aware of any

claims that could exceed these reserves.

However, the ultimate outcome of these

uninsured claims cannot be determined with

certainty, and could therefore have a

material adverse impact on the financial

position of the Company.

24. The relevant notes in Petitioner's audited financial

statement for the year ending December 31, 2003, are identical

to those quoted above, except that the recorded litigation

reserves were increased to $4 million. The notes provide that,

as of December 31, 2003, these reserves had not been funded by

Petitioners.

25. Ms. Smiley observed that the quoted notes, while

referencing "self-insurance" and the recording of litigation

reserves, stated that the litigation reserves had not been

funded.

26. By e-mail dated April 21, 2005, Ms. Smiley

corresponded with Stanley Swindling, the shareholder in the

accounting firm Moore Stephens Lovelace, P.A., who had primary

responsibility for preparing Petitioners' cost reports.

Ms. Smiley noted that Petitioners' audited financial statements

stated that the company "chose to self-insure" and "recorded

litigation reserves," then wrote (verbatim):

By definition from PRM CMS Pub 15-1 Sections

2162.5 and 2162.7 the Company does in fact

have self-insurance as there is no shifting

of risk. You will have to support your

positioning a letter addressing the regs for

self-insurance. As clearly the financial

statement auditors believe this is self-

insurance and have disclosed such to the

financial statement users. If you cannot

support the funding as required by the regs,

the provider will have to support expense as

"pay as you go" in accordance with [2162.6]

for PL/GL.

* * *

Please review 2161 and 2162 and provide

support based on the required compliance.

If support is not complete within the

regulations, amounts for IBNR [incurred but

not reported] will be disallowed and we will

need to have the claims paid reports from

the TPA [third party administrator]

(assuming there is a TPA handling the claims

processing), in order to allow any expense.

27. Section 2160 of the Manual establishes the basic

insurance requirement:

A. General .-- A provider participating in

the Medicare program is expected to follow

sound and prudent management practices,

including the maintenance of an adequate

insurance program to protect itself against

likely losses, particularly losses so great

that the provider's financial stability

would be threatened. Where a provider

chooses not to maintain adequate insurance

protection against such losses, through the

purchase of insurance, the maintenance of a

self-insurance program described in §2161B,

or other alternative programs described in

§2162, it cannot expect the Medicare

program to indemnify it for its failure to

do so. . . .

. . . If a provider is unable to obtain

malpractice coverage, it must select one of

the self-insurance alternatives in §2162 to

protect itself against such risks. If one

of these alternatives is not selected and

the provider incurs losses, the cost of such

losses and related expenses are not

allowable.

28. Section 2161.A of the Manual sets forth the general

rule as to the reimbursement of insurance costs. It provides

that the reasonable costs of insurance purchased from a

commercial carrier or nonprofit service corporation are

allowable to the extent they are "consistent with sound

management practice." Reimbursement for insurance premiums is

limited to the "amount of aggregate coverage offered in the

insurance policy."

29. Section 2162 of the Manual provides as follows, in

relevant part:

PROVIDER COSTS FOR MALPRACTICE AND

COMPREHENSIVE GENERAL LIABILITY PROTECTION,

UNEMPLOYMENT COMPENSATION, WORKERS'

COMPENSATION, AND EMPLOYEE HEALTH CARE

INSURANCE

A. General .-- Where provider costs incurred

for protection against malpractice and

comprehensive general liability . . . do not

meet the requirements of §2161.A, costs

incurred for that protection under other

arrangements will be allowable under the

conditions stated below. . . .

* * *

The following illustrates alternatives to

full insurance coverage from commercial

sources which providers, acting individually

or as part of a group or a pool, can adopt

to obtain malpractice, and comprehensive

general liability, unemployment

compensation, workers' compensation, and

employee health care insurance protection:

1. Insurance purchased from a commercial

insurance company which provides coverage

after a deductible or coinsurance provision

has been met;

2. Insurance purchased from a limited

purpose insurance company (captive);

3. Total self-insurance; or

4. A combination of purchased insurance and

self-insurance. . . .

30. Section 2162.3 of the Manual provides:

Self-Insurance .-- You may believe that it is

more prudent to maintain a total self-

insurance program (i.e., the assumption by

you of the risk of loss) independently or as

part of a group or pool rather than to

obtain protection through purchased

insurance coverage. If such a program meets

the conditions specified in §2162.7,

payments into such funds are allowable

costs.

31. Section 2162.7 of the Manual provides, in relevant

part:

Conditions Applicable to Self-Insurance .--

A. Definition of Self-Insurance .-- Self-

insurance is a means whereby a provider(s),

whether proprietary or nonproprietary,

undertakes the risk to protect itself

against anticipated liabilities by providing

funds in an amount equivalent to liquidate

those liabilities. . . .

* * *

B. Self-Insurance Fund .-- The provider or

pool establishes a fund with a recognized

independent fiduciary such as a bank, a

trust company, or a private benefit

administrator. In the case of a State or

local governmental provider or pool, the

State in which the provider or pool is

located may act as a fiduciary. The

provider or pool and fiduciary must enter

into a written agreement which includes all

of the following elements:

1. General Legal Responsibility .-- The

fiduciary agreement must include the

appropriate legal responsibilities and

obligations required by State laws.

2. Control of Fund .-- The fiduciary must

have legal title to the fund and be

responsible for proper administration and

control. The fiduciary cannot be related to

the provider either through ownership or

control as defined in Chapter 10, except

where a State acts as a fiduciary for a

State or local governmental provider or

pool. Thus, the home office of a chain

organization or a religious order of which

the provider is an affiliate cannot be the

fiduciary. In addition, investments which

may be made by the fiduciary from the fund

are limited to those approved under State

law governing the use of such fund;

notwithstanding this, loans by the fiduciary

from the fund to the provider or persons

related to the provider are not permitted.

Where the State acts as fiduciary for

itself or local governments, the fund

cannot make loans to the State or local

governments. . . .

32. The quoted Manual provisions clarify that Ms. Smiley's

message to Mr. Swindling was that Petitioners had yet to submit

documentation to bring their "self-insurance" expenses within

the reimbursable ambit of Sections 2161 and 2162 of the Manual.

There was no indication that Petitioners had established a fund

in an amount sufficient to liquidate its anticipated

liabilities, or that any such funds had been placed under the

control of a fiduciary. Petitioners had simply booked the

reserved expenses without setting aside any cash to cover the

expenses.

33. AHCA provided extensive testimony regarding the

correspondence that continued among Ms. Smiley, Mr. Swindling,

and AHCA employees regarding this "self-insurance" issue. It is

not necessary to set forth detailed findings as to these

matters, because Petitioners ultimately conceded to Ms. Smiley

that, aside from the Mutual Care policies, they did not purchase

commercial insurance as described in Section 2161.A, nor did

they avail themselves of the alternatives to commercial

insurance described in Section 2162.A. Petitioners did not

purchase commercial insurance with a deductible, did not self-

insure, did not purchase insurance from a limited purpose or

"captive" insurance company, or employ a combination of

purchased insurance and self-insurance.

34. Ms. Smiley eventually concluded that Petitioners had

no coverage for general and professional liability losses in

excess of the $25,000 value of the Mutual Care Policies. Under

the cited provisions of the Manual, Petitioners' unfunded self-

insurance expense was not considered allowable under the

principles of reimbursement. Petitioners were uninsured, which

led Ms. Smiley to further conclude that Section 2162.13 of the

Manual would apply:

Absence of Coverage .-- Where a provider,

other than a governmental (Federal, State,

or local) provider, has no insurance

protection against malpractice or

comprehensive general liability in

conjunction with malpractice, either in the

form of a limited purpose or commercial

insurance policy or a self-insurance fund as

described in §2162.7, any losses and related

expenses incurred are not allowable.

35. In response to this disallowance pursuant to the

strict terms of the Manual, Petitioners contend that AHCA should

not have limited its examination of the claimed costs to the

availability of documentation that would support those costs as

allowable under the Manual. Under the unique circumstances

presented by their situation, Petitioners assert that AHCA

should have examined the state of the nursing home industry in

Florida, particularly the market for GL/PL liability insurance

during the audit period, and further examined whether

Petitioners had the ability to meet the insurance requirements

set forth in the Manual. Petitioners assert that, in light of

such an examination, AHCA should have concluded that generally

accepted accounting principles ("GAAP") may properly be invoked

to render the accrued contingent liabilities an allowable

expense.

36. Keith Parnell is an expert in insurance for the long-

term care industry. He is a licensed insurance broker working

for Hamilton Insurance Agency, which provides insurance and risk

management services to about 40 percent of the Florida nursing

home market. Mr. Parnell testified that during the audit

period, it was impossible for nursing homes to obtain insurance

in Florida. In his opinion, Petitioners could not have

purchased commercial insurance during the audit period.

37. To support this testimony, Petitioners offered a study

conducted by the Florida Department of Insurance ("DOI") in 2000

that attempted to determine the status of the Florida long-term

care liability insurance market for nursing homes, assisted

living facilities, and continuing care retirement communities.

Of the 79 companies that responded to DOI's data call,

23 reported that they had provided GL/PL coverage during the

previous three years but were no longer writing policies, and

only 17 reported that they were currently writing GL/PL

policies. Six of the 17 reported writing no policies in 2000,

and five of the 17 reported writing only one policy. The

responding insurers reported writing a total of 43 policies for

the year 2000, though there were approximately 677 skilled

nursing facilities in Florida.

38. On March 1, 2004, the Florida Legislature's Joint

Select Committee on Nursing Homes issued a report on its study

of "issues regarding the continuing liability insurance and

lawsuit crisis facing Florida's long-term care facilities and to

assess the impact of the reforms contained in CS/CS/CS/SB 1202

(2001)." 6 The study employed data compiled from 1999 through

2003. Among the Joint Select Committee's findings was the

following:

In order to find out about current

availability of long-term care liability

insurance in Florida, the Committee

solicited information from [the Office of

Insurance Regulation, or] OIR within the

Department of Financial Services, which is

responsible for regulating insurance in

Florida. At the Committee's request, OIR

re-evaluated the liability insurance market

and reported that there has been no

appreciable change in the availability of

private liability insurance over the past

year. Twenty-one admitted insurance

entities that once offered, or now offer,

professional liability coverage for nursing

homes were surveyed by OIR. Six of those

entities currently offer coverage. Nine

surplus lines carriers have provided 54

professional liability policies in the past

year. Representatives of insurance carriers

that stopped providing coverage in Florida

told OIR that they are waiting until there

are more reliable indicators of risk

nationwide to re-enter the market.

39. Among the Joint Select Committee's conclusions was the

following:

In the testimony the Committee received,

there was general agreement that the quality

of care in Florida nursing homes is

improving, in large part due to the minimum

staffing standards the Legislature adopted

in SB 1202 during the 2001 Session. There

was not, however, general agreement about

whether or not lawsuits are abating due to

the tort system changes contained in

SB 1202. There was general agreement that

the long-term care liability insurance

market has not yet improved.

After hearing the testimony, there is

general agreement among the members of the

Joint Select Committee that:

* * *

General and professional liability

insurance, with actual transfer-of-risk, is

virtually unavailable in Florida. "Bare-

bones" policies designed to provide minimal

compliance with the statutory insurance

requirement are available; however, the cost

often exceeds the face value of the coverage

offered in the policy. This situation is a

crisis which threatens the continued

existence of long-term care facilities in

Florida.

40. To further support Mr. Parnell's testimony,

Petitioners offered actuarial analyses of general and

professional liability in long-term care performed by AON Risk

Consultants, Inc. (AON) on behalf of the American Health Care

Association. The AON studies analyzed nationwide trends in

GL/PL for long-term care, and also examined state-specific

issues for eight states identified as leading the trends in

claim activity, including Florida. They provided an historical

perspective of GL/PL claims in Florida during the audit period.

41. The 2002 AON study for Florida was based on

participation by entities representing 52 percent of all Florida

nursing home beds. The study provided a "Loss Cost per Occupied

Bed" showing GL/PL liability claims losses on a per bed basis.

The 2002 study placed the loss cost for nursing homes in Florida

at $10,800 per bed for the year 2001. The 2003 AON study, based

on participation by entities representing 54 percent of Florida

nursing home beds, placed the loss cost for nursing homes in

Florida at $11,810 per bed for the year 2002.

42. The studies showed that the cost per bed of GL/PL

losses is materially higher in Florida than the rest of the

United States. The nationwide loss per bed was $2,360 for the

year 2001 and $2,880 for the year 2002. The GL/PL loss costs

for Texas were the second-highest in the country, yet were far

lower than the per bed loss for Florida ($5,460 for the year

2001 and $6,310 for the year 2002).

43. Finally, Petitioners point to the Mature Care Policies

as evidence of the crisis in GL/PL insurance availability. The

aforementioned SB 1202 instituted a requirement that nursing

homes maintain liability insurance coverage as a condition of

licensure. See Section 22, Chapter 2001-45, Laws of Florida,

codified at Subsection 400.141(20), Florida Statutes. To

satisfy this requirement, Petitioners entered the commercial

insurance market and purchased insurance policies for each of

the 14 Palm Gardens facilities from a carrier named Mature Care

Insurance Company. The policies carried a $25,000 policy limit,

with a policy premium of $34,000. These were the kind of "bare

bones" policies referenced by the Joint Select Committee's 2004

report.

44. The fact that the policies cost more than they could

ever pay out led Mr. Swindling, Petitioners' health care

accounting and Medicaid reimbursement expert, to opine that a

prudent nursing home operator in Florida at that time would not

have purchased insurance, but for the statutory requirement. 7

45. The Mature Care Policies were "bare bones" policies

designed to provide minimal compliance with the statutory

liability insurance coverage requirement. The policies cost

Petitioners more than $37,000 in premium payments, taxes, and

fees, in exchange for policy limits of $25,000. In its

examination, AHCA disallowed the difference between the cost of

the policy and the policy limits, then prorated the allowable

costs because the audit period was nine months long and the

premium paid for the Mature Care Policies was for 12 months.

46. AHCA based its disallowance on Section 2161.A of the

Manual, particularly the language which states: "Insurance

premiums reimbursement is limited to the amount of aggregate

coverage offered in the insurance policy." Petitioners

responded that they did not enter the market and voluntarily pay

a premium in excess of the policy limits. They were statutorily

required to purchase this minimal amount of insurance; they were

required to purchase a 12-month policy; they paid the market

price 8 ; and they should not be penalized for complying with the

statute. Petitioners contend they should be reimbursed the full

amount of the premiums for the Mature Care Policies, as their

cost of statutory compliance.

47. Returning to the issue of the contingent liabilities,

Petitioners contend that, in light of the state of the market

for GL/PL liability insurance during the audit period, AHCA

should have gone beyond the strictures of the Manual to conclude

that GAAP principles render the accrued contingent liabilities

an allowable expense.

48. Under GAAP, a contingent loss is a loss that is

probable and can be reasonably estimated. An estimated loss

from a loss contingency may be accrued by a charge to income.

Statement of Financial Accounting Standards No. 5 ("FAS No. 5"),

Accounting for Contingencies, provides several examples of loss

contingencies, including "pending or threatened litigation" and

"actual or possible claims and assessments."

49. Petitioners assert that the contingent losses reported

in their cost reports were actual costs incurred by Petitioners.

The AICPA Audit and Accounting Guide for Health Care

Organizations, Section 8.05, provides:

The ultimate costs of malpractice claims,

which include costs associated with

litigating or settling claims, are accrued

when the incidents that give rise to the

claims occur. Estimated losses from

asserted and unasserted claims are accrued

either individually or on a group basis,

based on the best estimates of the ultimate

costs of the claims and the relationship of

past reported incidents to eventual claims

payments. All relevant information,

including industry experience, the entity's

own historical experience, the entity's

existing asserted claims, and reported

incidents, is used in estimating the

expected amount of claims. The accrual

includes an estimate of the losses that will

result from unreported incidents, which are

probable of having occurred before the end

of the reporting period.

50. Section 8.10 of AICPA Guide provides:

Accrued unpaid claims and expenses that are

expected to be paid during the normal

operating cycle (generally within one year

of the date of the financial statements) are

classified as current liabilities. All

other accrued unpaid claims and expenses are

classified as non-current liabilities.

51. As noted above, Petitioners' audited financial

statements for the fiscal years ending December 31, 2002, and

December 31, 2003, showed that the accrual was incurred and

recorded by Petitioners during the audit period. Mr. Swindling

prepared Petitioners' cost reports, based on information

provided by Petitioners, including trial balances reflecting

their costs, statistics on patient days, cost data related to

square footage, and revenue information.

52. Mr. Swindling advised Petitioners to include the

accrued losses. He believed that the loss contingency was

probable and could be reasonably estimated. The losses were

probable because it was "a given in the state of Florida at that

time period that nursing homes are going to get sued."

53. Mr. Swindling testified that the accrual reflected a

per bed loss amount of $1,750, which he believed to be a

reasonable estimate of the contingent liabilities faced by

Petitioners during the audit period. This amount was much less

than the per bed loss indicated by the AON studies for Florida.

54. Mr. Swindling used the criteria set forth in Section

8.05 of the AICPA Guide to establish the estimate. He

determined that the lesser amount was adequate based on his

discussions with Petitioners' management, who indicated that

they had a substantial risk management program. Management also

disclosed to Mr. Swindling that Petitioners' leases required

$1,750 per bed in liability coverage. See Finding of Fact 22,

supra .

55. Mr. Swindling believed that the estimated loss per bed

was reasonable based on the AON studies and his knowledge and

experience of the state of the industry in Florida during the

audit period, as further reflected in the DOI and Joint

Committee on Nursing Homes materials discussed above.

56. Mr. Swindling's opinion was that the provisions of the

Manual relating to GL/PL insurance costs do not apply under

these circumstances. The costs at issue in this proceeding are

not general and professional liability insurance costs subject

to CMS Pub. 15-1; rather, they are loss contingencies related to

general and professional liability, including defense costs,

litigation costs, and settlement costs. Mr. Swindling placed

the loss contingency under number 730810, "General and

Professional Liability -- Third Party" because, in the finite

chart of accounts provided by Medicaid, that was the most

appropriate place to record the cost. 9 Despite the initial

confusion it caused the agency's auditors, the placement of the

loss contingency under number 730810 was not intended to deceive

the auditors.

57. Mr. Swindling opined that, under these circumstances,

Sections 2160 through 2162 are in conflict with other provisions

in the Manual relating to the "prudent buyer" concept, and

further conflict with the Plan to the extent that the cited

regulations "relate to a retrospective system as opposed to

prospective target rate-based system."

58. Mr. Swindling agreed that the application of Sections

2160 through 2162 to the situation presented by Petitioners

would result in the disallowance of the loss contingencies.

Mr. Swindling observed, however, that Sections 2160 through 2162

are Medicare regulations. Mr. Swindling testified that Medicare

reimbursements are made on a retrospective basis. 10 Were this

situation to occur in Medicare -- in which the provider did not

obtain commercial insurance, self-insurance, or establish a

captive insurer -- the provider would be deemed to be operating

on a pay-as-you-go basis. Though its costs might be disallowed

in the current period, the provider would receive reimbursements

in subsequent periods when it could prove actual payment for its

losses.

59. Mr. Swindling found a conflict in attempting to apply

these Medicare rules to the prospective payment system employed

by Florida Medicaid, at least under the circumstances presented

by Petitioners' case. Under the prospective system, once the

contingent loss is disallowed for the base period, there is no

way for Petitioners ever to recover that loss in a subsequent

period, even when the contingency is liquidated.

60. During his cross-examination, Mr. Swindling explained

his position as follows:

. . . Medicare allows for that payment in a

subsequent period. Medicaid rules would not

allow that payment in the subsequent period;

therefore you have conflict in the rules.

When you have conflict in the rules, you

revert to generally accepted accounting

principles. Generally accepted accounting

principles are what we did.

Q. Where did you find that if there's a

conflict in the rules, which I disagree

with, but if there is a conflict in the

rules, that you follow GAAP? Where did you

get that from? I mean, we've talked about

it and it's clear on the record that if

there is no provision that GAAP applies, but

where did you get that if there's a

conflict? Just point it out, that would be

the easiest way to do it.

A. The hierarchy, if you will, requires

providers to file costs on the accrual basis

of accounting in accordance with generally

accepted accounting principles. If there's

no rules, in absence of rules -- and I

forget what the other terms were, we read it

into the record before, against public

policy, those kind of things -- or in my

professional opinion, if there is a conflict

within the rules where the provider can't

follow two separate rules at the same time,

they're in conflict, then [GAAP] rules what

should be recorded and what should be

reimbursed.

* * *

Q. [T]he company accrued a liability of

$2 million for the cost reporting period of

2002-2003, is that correct?

A. Yes.

* * *

Q. Do you have any documentation supporting claims

paid, actually paid, in 2002-2003 beyond the mature

care policy for which that $2 million reserve was set

up?

A. No.

Q. So what did Medicaid pay for?

A. Medicaid paid the cost of contingent

liabilities that were incurred by the

providers and were estimated at $1,750 per

bed. Generally accepted accounting

principles will adjust that going forward

every cost reporting period. If that

liability in total goes up or down, the

differential under [GAAP] goes through the

income statement, and expenses either go up

or they go down. It's self-correcting,

which is similar to what Medicare is doing,

only they're doing it on a cash basis.

61. Mr. Swindling explained the "hierarchy" by which

allowable costs are determined. The highest governing law is

the Federal statutory law, Title XIX of the Social Security Act,

42 U.S.C. Subsection. 1396-1396v. Below the statute come the

federal regulations for implementing Title XIX, 42 C.F.R. parts

400-426. Then follow in order Florida statutory law, the

relevant Florida Administrative Code provisions, the Plan, the

Manual, and, at the bottom of the hierarchy, GAAP.

62. Mr. Swindling testified that in reality, a cost report

is not prepared from the top of the hierarchy down; rather, GAAP

is the starting point for the preparation of any cost report.

The statutes, rules, the Plan and the Manual are then consulted

to exclude specific cost items otherwise allowable under GAAP.

In the absence of an applicable rule, or in a situation in which

there is a conflict between rules in the hierarchy such that the

provider is unable to comply with both rules, the provider

should fall back on GAAP principles as to recording of costs and

reimbursement.

63. John A. Owens, currently a consultant in health care

finance specializing in Medicaid, worked for AHCA for several

years up to 2002, in positions including administrator of the

audit services section and bureau chief of the Office of

Medicaid Program Analysis. Mr. Owens is a CPA and expert in

health care accounting and Medicare/Medicaid reimbursement.

64. Mr. Owens agreed with Mr. Swindling that AHCA's

disallowance of the accrued costs for GL/PL liability was

improper. Mr. Owens noted that Section 2160 of the Manual

requires providers to purchase commercial insurance. If

commercial insurance is unavailable, then the Manual gives the

provider two choices: self-insure, or establish a captive

program.

65. Mr. Owens testified that insurers were fleeing the

state during the period in question, and providers were

operating without insurance coverage. Based on the state of the

market, Petitioners' only options would have been to self-insure

or establish a captive.

66. As to self-insurance, Petitioners' problem was that

they had taken over the leases on their facilities from a

bankrupt predecessor, Integrated Health Services ("IHS").

Petitioners were not in privity with their predecessor.

Petitioners had no access to the facilities' loss histories,

without which they could not perform an actuarial study or

engage a fiduciary to set up a self-insurance plan. 11

67. Similarly, setting up a captive would require finding

an administrator and understanding the risk exposure. Mr. Owens

testified that a provider would not be allowed to set up a

captive without determining actuarial soundness, which was not

possible at the time Petitioners took over the 14 IHS

facilities.

68. Thus, Petitioners were simply unable to meet the

standards established by the Manual. The options provided by

the Manual did not contemplate the unique market situation

existing in Florida during the audit period, and certainly did

not contemplate that situation compounded by the problems faced

by a new provider taking over 14 nursing homes from a bankrupt

predecessor.

69. Mr. Owens agreed with Mr. Swindling that, under these

circumstances, where the requirements of the Manual could not be

met, Petitioners were entitled to seek relief under GAAP, FAS

No. 5 in particular. In situations where a loss is probable and

can be measured, then an accounting entry may be performed to

accrue and report that cost. Mr. Owens concluded that

Petitioners' accrual was an allowable cost for Medicaid

purposes, and explained his rationale as follows:

My opinion is, in essence, that since they

could not meet -- technically, they just

could not meet those requirements laid out

by [the Manual], they had to look somewhere

to determine some rational basis for

developing a cost to put into the cost

report, because if they had chosen to do

nothing and just moved forward, those rates

would be set and there would be nothing in

their base year which then establishes their

target moving forward.

So by at least looking at a rational

methodology to accrue the cost, they were

able to build something into their base year

and have it worked into their target system

as they move forward.

70. Steve Diaczyk, an audit evaluation and review analyst

for AHCA, testified for the agency as an expert in accounting,

auditing, and Medicaid policy. Mr. Diaczyk was the AHCA auditor

who reviewed the work of Smiley & Smiley for compliance with

Medicaid rules and regulations, and to verify the accuracy of

the independent CPA's determinations.

71. Mr. Diaczyk agreed with Mr. Swindling's description of

the "hierarchy" by which allowable costs are determined.

Mr. Diaczyk affirmed that Petitioners employed GAAP rather than

Medicaid regulations in preparing their cost reports.

72. Mr. Diaczyk testified regarding the Notes to

Petitioners' audited financial statements, set forth at Findings

of Fact 22-24, supra , which left AHCA's auditors with the

understanding that Petitioners were self-insuring. Mr. Diaczyk

pointed out that Section 2162.7 of the Manual requires a self-

insurer to contract with an independent fiduciary to maintain a

self-insurance fund, and that the fund must contain monies

sufficient to cover anticipated losses. The fiduciary takes

title to the funds, the amount of which is determined

actuarially.

73. Mr. Diaczyk explained that, in reimbursing a provider

for self-insurance, Medicaid wants to make sure that the

provider has actually put money into the fund, and has not just

set up a fund on its books and called it "self-insurance" for

reimbursement purposes. AHCA's position is that it would be a

windfall for a provider to obtain reimbursement for an accrued

liability when it has not actually set the money aside and

funded the risk. Medicaid wants the risk transferred off of the

provider's books and on to the self-insurance fund.

74. Mr. Diaczyk testified as to the differing objectives

of Medicaid and GAAP. Medicaid is concerned with reimbursing

costs, and is therefore especially sensitive regarding the

overstatement of costs. Medicaid wants to reimburse a provider

for only those costs that have actually been paid. GAAP, on the

other hand, is about report presentation for a business entity

and is concerned chiefly with avoiding the understatement of

expenses and overstatement of revenue. Under GAAP, an entity

may accrue a cost and not pay it for years. In the case of a

contingent liability, the entity may book the cost and never

actually pay it.

75. Mr. Diaczyk described the self-insurance and

liquidation provisions of 42 C.F.R. Section 413.100, "Special

treatment of certain accrued costs." The federal rule

essentially allows accrued costs to be claimed for

reimbursement, but only if they are "liquidated timely."

Subsection (c)(2)(viii) of the rule provides that accrued

liability related to contributions to a self-insurance program

must be liquidated within 75 days after the close of the cost

reporting period. To obtain reimbursement, Petitioners would

have had to liquidate their accrued liability for GL/PL

insurance within 75 days of the end of the audit period.

76. Mr. Diaczyk also noted that, even if the 75-day

requirement were not applicable, the general requirement of

Section 2305.2 of the Manual would apply. Section 2305.2

requires that all short-term liabilities must be liquidated

within one year after the end of the cost reporting period in

which the liability is incurred, with some exceptions not

applicable in this case. Petitioners' accrued liability for

general and professional liability insurance was not funded or

liquidated for more than one year after the cost reporting

period. It was a contingent liability that might never be paid.

Therefore, Mr. Diaczyk stated, reimbursement was not in keeping

with Medicaid's goal to reimburse providers for actual paid

costs, not for potential costs that may never be paid.

77. Petitioners responded that their accrued liabilities

constituted non-current liabilities, items that under normal

circumstances will not be liquidated within one year.

Mr. Parnell testified that there is great variation in how long

it takes for a general and professional liability claim against

a nursing home to mature to the point of payment to the

claimant. He testified that a "short" timeline would be from

two to four years, and that some claims may take from eight to

eleven years to mature. From these facts, Petitioners urge that

42 C.F.R. Section 413.100 and Section 2305.2 of the Manual are

inapplicable to their situation.

78. As to Section 2305.2 in particular, Petitioners point

to Section 2305.A, the general liquidation of liabilities

provision to which Section 2305.2 provides the exceptions

discussed above. The last sentence of Section 2305.A provides

that, where the liability is not liquidated within one year, or

does not qualify under the exceptions set forth in Sections

2305.1 and 2305.2, then "the cost incurred for the related goods

and services is not allowable in the cost reporting period when

the liability is incurred, but is allowable in the cost

reporting period when the liquidation of the liability occurs ."

(Emphasis added.)

79. Petitioners argue that the underscored language

supports the Medicare/Medicaid distinction urged by

Mr. Swindling. In its usual Medicare retroactive reimbursement

context, Section 2305.2 would operate merely to postpone

reimbursement until the cost period in which the liability is

liquidated. Applied to this Medicaid prospective reimbursement

situation, Section 2305.2 would unfairly deny Petitioners any

reimbursement at all by excluding the liability from the base

rate.

80. Mr. Diaczyk explained that, where the Medicaid rules

address a category of costs, the allowable costs in a provider's

cost report are limited to those defined as allowable by the

applicable rules. He stated that if there is a policy in the

Manual that addresses an item of cost, the provider must use the

Manual provision; the provider cannot use GAAP to determine that

cost item. In this case, Mr. Diaczyk agreed with Ms. Smiley as

to the applicable rules and the disallowance of Petitioners'

contingent liability costs.

81. According to Mr. Diaczyk, GAAP may be used only if no

provisions farther up the chain of the "hierarchy" are

applicable. In this case, the Medicaid rules specifically

addressed the categories of cost in question, meaning that GAAP

did not apply.

82. Under cross-examination, Mr. Diaczyk testified that

the accrual made by Petitioners in their cost reports would be

considered actual costs under GAAP, "[a]ssuming that they had an

actuarial study done to come up with the $1.7 million that they

accrued." Mr. Diaczyk acknowledged that AICPA Audit and

Accounting Guide for Health Care Organizations, Section 8.05,

does not limit the provider to an actuarial study in estimating

losses from asserted and unasserted claims. See Finding of Fact

49, supra , for text of Section 8.05. Mr. Diaczyk pointed out

that the problem in this case was that Petitioners gave AHCA no

documentation to support their estimate of the accrual, despite

the auditor's request that Petitioners provide documentation to

support their costs.

83. Mr. Diaczyk's testimony raised a parallel issue to

Mr. Swindling's concern that Medicaid's prospective targeting

system permanently excludes any item of cost not included in the

base rate. Mr. Swindling solved the apparent contradiction in

employing Medicare rules in the Medicaid scenario by applying

GAAP principles. Responding to the criticism that GAAP could

provide a windfall to Petitioners by reimbursing them for

accrued costs that might never actually result in payment,

Mr. Swindling responded that GAAP principles would adjust the

cost for contingent liabilities going forward, "truing up" the

financial statements in subsequent reporting periods. This

truing up process would have the added advantage of obviating

the agency's requirement for firm documentation of the initial

accrual.

84. Mr. Swindling's "truing up" scenario under GAAP would

undoubtedly correct Petitioners' financial statements. However,

Mr. Swindling did not explain how the truing up of the financial

statements would translate into a correction of Petitioners'

reimbursement rate. 12 If costs excluded from the base rate

cannot be added to future rate adjustments, then costs

incorrectly included in the base rate would also presumably

remain in the facility's rate going forward. 13 Thus,

Mr. Swindling's point regarding the self-correcting nature of

the GAAP reporting procedures did not really respond to AHCA's

concerns about Petitioners' receiving a windfall in their base

rate by including the accrual for contingent liabilities.

85. On April 19, 2005, Petitioners entered into a captive

insurance program. Petitioners' captive is a claims-made GL/PL

policy with limits of $1 million per occurrence and $3 million

in the aggregate. Under the terms of the policy, "claims-made"

refers to a claim made by Petitioners to the insurance company,

not a claim made by a nursing home resident alleging damages.

The effective date of the policy is from April 21, 2005, through

April 21, 2006, with a retroactive feature that covers any

claims for incidents back to June 29, 2002, a date that

corresponds to Petitioners' first day of operation and

participation in the Medicaid program. The Petitioners' paid

$3,376,906 for this policy on April 22, 2005.

86. Mr. Parnell testified that April 2005 was the earliest

time that the 14 Palm Gardens facilities could have established

this form of insurance program.

87. In summary, the evidence presented at the hearing

regarding the contingent liabilities established that

Petitioners took over the 14 Palm Gardens facilities after the

bankruptcy of the previous owner. Petitioners were faced with

the virtual certainty of substantial GL/PL expenses in operating

the facilities, and also faced with a Florida nursing home

environment market in which commercial professional liability

insurance was virtually unavailable. Lacking loss history

information from their bankrupt predecessor, Petitioners were

unable to self-insure or establish a captive program until 2005.

88. Petitioners understood that if they did not include

their GL/PL expenses in their initial cost report, those

expenses would be excluded from the base rate and could never be

recovered. Petitioners' leases for the facilities required them

to fund a self-insurance reserve at a per bed minimum amount of

$1,750. Based on the AON studies and the general state of the

industry at the time, Petitioners' accountant concluded that,

under GAAP principles, $1,750 per bed was a reasonable,

conservative estimate of Petitioners' GL/PL loss contingency

exposure for the audit period. 14 Based on all the evidence, it

is found that Petitioners' cost estimate was reasonable and

should be accepted by the agency.

89. Petitioners included their GL/PL loss contingency

expenses in their initial Medicaid cost report, placing those

expenses under a heading indicating the purchase of insurance

from a third party. The notes to Petitioners' audited financial

statements stated that the facilities were "essentially self-

insured." These factors led AHCA to request documentation of

Petitioners' self-insurance. Petitioners conceded that they

were not self-insured and carried no liability insurance aside

from the Mature Care policies.

90. The parties had little dispute as to the facts

summarized above. The parties also agreed as to the

applicability of the "hierarchy" by which allowable costs are

determined. Their disagreement rests solely on the manner in

which the principles of the hierarchy should be applied to the

unique situation presented by Petitioners in these cases.

CONCLUSIONS OF LAW

91. The DOAH has jurisdiction over the parties to and the

subject matter of this proceeding pursuant to Section 120.569

and Subsection 120.57(1), Florida Statutes.

92. In Courts v. Agency for Health Care Administration ,

965 So. 2d 154, 155-156 (Fla. 1st DCA 2007), the court drew on

various sources to provide a concise, useful description of the

Medicaid program:

"The Medicaid Act, Title XIX of the Social

Security Act, 42 U.S.C. § 1396, is a

cooperative federal-state program designed

to allow states to receive matching funds

from the federal government to finance

necessary services to qualified low-income

individuals." Esteban v. Cook , 77 F. Supp.

2d 1256, 1259 (S.D. Fla. 1999); see also

Russell v. Agency for Persons with

Disabilities , 929 So. 2d 601, 602 (Fla. 1st

DCA 2006); Harris v. McRae , 448 U.S. 297,

308-09, 100 S. Ct. 2671, 65 L. Ed. 2d 784

(1980). "[T]he purpose of Congress in

enacting Title XIX was to provide federal

assistance for all legitimate state

expenditures under an approved Medicaid

plan." Harris , 448 U.S. at 308-09

(citations omitted). The guidelines for the

Medicaid program are set forth in the

federal statutes and regulations and are

adopted into specific state laws and rules

in each state. 42 U.S.C. § 1302. In each

state, a "single state agency" is

responsible for administering the Medicaid

program. 42 C.F.R. § 431.10. In Florida,

AHCA is designated as the Florida state

agency authorized to make payments to

qualified providers for medical assistance

and related services on behalf of eligible

individuals. See § 409.902, Fla. Stat.

(2005); see generally, Russell , 929 So. 2d

at 602-03.

93. AHCA is charged by statute with the responsibility to

"reimburse Medicaid providers, in accordance with state and

federal law, according to methodologies set forth in the rules

of the agency and in policy manuals and handbooks incorporated

by reference therein." § 409.908, Fla. Stat.

94. Subsection 409.908(2)(a)1., Florida Statutes,

provides:

Reimbursement to nursing homes licensed

under part II of chapter 400 and state-

owned-and-operated intermediate care

facilities for the developmentally disabled

licensed under part VIII of chapter 400 must

be made prospectively.

95. Subsection 409.908(2)(b), Florida Statutes, provides,

in relevant part:

Subject to any limitations or directions

provided for in the General Appropriations

Act, the agency shall establish and

implement a Florida Title XIX Long-Term Care

Reimbursement Plan (Medicaid) for nursing

home care in order to provide care and

services in conformance with the applicable

state and federal laws, rules, regulations,

and quality and safety standards. . . .

96. An agency's interpretation of its own rule is entitled

to deference, unless the interpretation is clearly erroneous.

Pan American World Airways, Inc. v. Florida Public Services

Commission , 427 So. 2d 716, 719 (Fla. 1983); Miles v. Florida

A&M University , 813 So. 2d 242, 245 (Fla. 1st DCA 2002). More

specifically, the court in Pan American , 427 So. 2d at 719,

stated:

We have long recognized that the

administrative construction of a statute by

an agency or body responsible for the

statute's administration is entitled to

great weight and should not be overturned

unless clearly erroneous. The same

deference has been accorded to rules which

have been in effect over an extended period

and to the meaning assigned to them by

officials charged with their administration.

(Citations omitted.)

97. AHCA asserts that Petitioners failed to comply with

the Plan's and the Manual's provisions regarding insurance, and

that this failure should result in the disallowance of

Petitioners' accrued expenses for GL/PL liability. Petitioners

assert that their situation was not contemplated by the Plan and

the Manual, which assume the availability of commercial

insurance, self-insurance, and/or captive insurance programs,

and therefore presume that a provider's failure to obtain

coverage under one or more of these three options must be

voluntary . Petitioners argue that the provisions relied upon by

AHCA to disallow their accrued expenses do not contemplate a

situation where insurance of any kind is simply unavailable.

98. The underlying facts in these consolidated cases were

largely undisputed. At issue is the parties' disagreement as to

the manner in which the established state and federal law

hierarchy applies to the unique circumstances presented by those

facts. In Brookwood-Walton County Convalescent Center v. Agency

for Health Care Administration , 845 So. 2d 223, 225 (Fla. 1st

DCA 2003), the court set forth the hierarchy in the following

language:

In determining allowable reimbursable costs,

AHCA utilizes the Florida Title XIX Long-

Term Care Reimbursement Plan (Plan), the

Federal Medicare Program's Health Insurance

Manual (HIM-15)[now CMS Pub. 15-1], and

generally accepted accounting principles

(GAAP). The Plan has been adopted and

incorporated by reference in Rule 59G-

6.040, Florida Administrative Code. Through

incorporation, AHCA has adopted the HIM-15

as a rule. See Rules 59G-1.010(102) and

-6.010, Fla. Admin. Code. In assessing what

is an allowable cost, AHCA looks, first, to

the Plan; second, to the HIM-15; and third,

to GAAP.

99. As set forth in the above excerpts from Section

409.908, Florida Statutes, state law requires AHCA to develop

and implement a reimbursement plan. AHCA has developed the

Plan, which is incorporated by reference in Florida

Administrative Code Rule 59G-6.010. As required by statute, the

Plan provides for prospective payment and calls for

participating nursing homes to provide care and services in

conformance with applicable state and federal laws, rules,

regulations, and quality and safety standards.

100. CMS Pub. 15-1, or the Manual, was designed to

determine allowable costs for the retrospective payment system

of the federal Medicare program.

101. The experts testifying for both parties agreed that

reimbursement and cost findings may be determined using GAAP if

no provisions farther up the chain of the hierarchy are

"applicable." As to the accrual for GL/PL related contingent

liability costs, the parties disagree as to the "applicability"

of the Manual provisions establishing reimbursement requirements

relating to insurance.

102. AHCA's analysis begins with Section I.F. of the Plan,

which requires that the cost information submitted by a provider

must be "current, accurate, and in sufficient detail to support

costs set forth in the report." Section 2304 of the Manual

provides:

Cost information as developed by the

provider must be current, accurate, and in

sufficient detail to support payments made

for services rendered to beneficiaries.

This includes all ledgers, books, records

and original evidences of cost (purchase

requisitions, purchase orders, vouchers,

requisitions for materials, inventories,

labor time cards, payrolls, bases for

apportioning costs, etc.), which pertain to

the determination of reasonable cost,

capable of being audited.

103. AHCA accurately states that Petitioners failed to

provide any invoice supporting GL/PL insurance in excess of the

Mature Care policies. AHCA asserts that "Petitioners claimed

over 2 million dollars of professional and general liability

insurance for which no documentary support was provided." The

facts of the case do not entirely support AHCA's assertion.

Petitioners did record their accrual for GL/PL contingent

liability under an "insurance" heading on their cost report, but

Petitioners informed Ms. Smiley at the time of the audit that

they had purchased no form of commercial insurance, were not

self-insured, and had not established a captive program during

the audit period. 15

104. AHCA found this lack of insurance coverage to be

dispositive. Section 2162 of the Manual requires self-insurance

to be funded within 75 days of the end of the cost reporting

period. Section 2305 of the Manual provides that only those

expenses paid within one year of the cost reporting period may

be included in the report. Petitioners did not meet the

requirements of either section.

105. AHCA notes that Petitioners did not meet the criteria

for self-insurance set forth in 42 C.F.R. Subsection

413.100(c)(2), which allows accrued costs to be claimed for

reimbursement only if they are liquidated timely. Under

Subsection (c)(2)(viii), such timely liquidation of accrued

liability for contributions to a self-insurance program must

occur within 75 days after the close of the cost reporting

period. Petitioners did not meet the requirements of this

section.

106. AHCA notes that Section 2162.A of the Manual, see

Finding of Fact 29, supra , provides for four alternatives to

full insurance coverage from commercial sources: commercial

insurance with deductible or coinsurance provisions; insurance

from a captive company; total self-insurance; or a combination

of purchased insurance and self-insurance. Petitioners did not

meet the requirements of this section.

107. Section 2162.7 of the Manual requires, as a condition

of self-insurance, that a provider establish a fund with an

independent fiduciary who must have control of the fund.

Petitioners did not meet this requirement.

108. Section 2162.2 of the Manual sets forth the standards

for captive insurance programs. Petitioners did not establish a

captive program during the audit period.

109. Finally, Section 2162.13 of the Manual, see Finding

of Fact 34, supra , states that a provider's losses are not

allowable if the provider has no insurance protection against

malpractice or comprehensive general liability in conjunction

with malpractice, either in the form of commercial insurance,

captive insurance, or self-insurance. AHCA accurately states

that Petitioners did not meet any of these requirements.

Petitioners are therefore to be considered "uninsured" for

purposes of Section 2162.13 and their accrued costs for GL/PL

contingent liability costs should be disallowed.

110. In response, Petitioners return to Subsection

409.908(2)(b), Florida Statutes, and the Plan, both of which

reference applicable state and federal laws, rules and

regulations. The Manual provisions cited by AHCA in disallowing

the contingent expenses are not applicable.

111. Petitioners argue that the Manual provisions create a

standard for reimbursement of these costs that was impossible

for Petitioners to meet under all the circumstances presented.

The evidence established that Florida nursing homes faced a

liability insurance crisis during the audit period. Commercial

insurance was virtually nonexistent in any form that made

economic sense. Petitioners purchased the "bare bones" Mature

Care policies to meet the statutory insurance requirement, but

at a premium well in excess of the policy limits.

112. From all of the evidence, it is reasonable to infer

that any larger GL/PL policy that Petitioners might have

purchased during the audit period would have carried terms

similar to those of the Mature Care policies. From this

inference, Petitioners argue that the cost of such insurance

would not have been reimbursable because Section 2161 of the

Manual limits reimbursement to the amount of aggregate coverage

offered in the insurance policy. The cost of such insurance

would also violate the "prudent buyer" provisions of Section

2103 of the Manual, see Finding of Fact 44 and accompanying

Endnote seven, supra , and violate the definition of "allowable

costs" set forth in Section III.C. of the Plan, see Finding of

Fact eight, supra .

113. Petitioners thus contend that the insurance crisis

created a conflict within the Manual between the requirements to

obtain insurance and the prudent buyer principles, and that this

conflict requires the application of GAAP with respect to

Petitioners' accrued GL/PL liability.

114. It could also be reasonably argued that the

commercial insurance requirements of the Manual were simply

inapplicable during the Florida nursing home insurance crisis,

because the products then available on the market did not

constitute "insurance" as that term is contemplated in the

Manual or in any rational course of business. A contract which

calls for a premium payment far in excess of the policy limits

does not include any transfer of risk and therefore is not what

a prudent buyer would call "insurance" at all.

115. Petitioners further point to the disadvantage under

which they operated during the audit period. Petitioners

entered the Medicaid program having taken over the operations of

IHS, a bankrupt predecessor. Petitioners had no contractual

privity with IHS, and commenced operations without any loss or

claims history available. Mr. Owens' testimony credibly

established that there was no way Petitioners could have

established either a captive insurer or funded a self-insurance

program that would have met the requirements of Section 2162.7

of the Manual without access to these histories.

116. Thus, Petitioners were in a position in which

commercial insurance was unavailable (except, perhaps, at a

premium in excess of the coverage offered), self-insurance was

unavailable, and a captive program could not be established

during the audit period. Petitioners' situation is not

contemplated by the Manual. Section 2160 of the Manual provides

in relevant part:

A. General .-- A provider participating in

the Medicare program is expected to follow

sound and prudent management practices,

including the maintenance of an adequate

insurance program to protect itself against

likely losses, particularly losses so great

that the provider's financial stability

would be threatened. Where a provider

chooses not to maintain adequate insurance

protection against such losses, through the

purchase of insurance, the maintenance of a

self-insurance program described in §2161B,

or other alternative programs described in

§2162, it cannot expect the Medicare

program to indemnify it for its failure to

do so. . . .

. . . If a provider is unable to obtain

malpractice coverage, it must select one of

the self-insurance alternatives in §2162 to

protect itself against such risks. If one

of these alternatives is not selected and

the provider incurs losses, the cost of such

losses and related expenses are not

allowable. (Emphasis added.)

117. The underscored language is couched in terms of the

provider "choosing" not to maintain adequate insurance

protection, and failing to "select" an option from the menu

supplied by Section 2162. In requiring the purchase of

commercial insurance or the "selection" of one of the listed

alternatives, the Manual presumes that one of those options

would be available to cover the GL/PL losses incurred by a

provider.

118. However, during the audit period, Petitioners were

unable to "select" any of the offered alternatives. The

evidence at hearing established that Petitioners entered a

captive insurance program on April 19, 2005. Mr. Parnell, who

developed the program for Petitioners, credibly testified that

this was earliest date on which such a program could have been

established.

119. Petitioners reasonably conclude that the Manual

simply does not address situations in which none of the listed

alternatives is available to a provider. Because neither the

Plan nor the Manual addresses these situations, Petitioners

assert that the principle of the hierarchy dictates that

allowable costs in this case should be determined by GAAP.

120. Petitioners also argue that AHCA's reliance on the

Manual does not take into account the statutory requirement for

a prospective payment system or the Plan's targeted rate

structure. The initial cost reporting period establishes the

provider's base rate. The target limitations established by the

Plan limit the growth of a provider's reimbursement rate from

one rate semester to the next, regardless of the provider's

actual costs after the base period. Petitioners claim they

would suffer irreparable harm if their accrued contingent

liabilities are disallowed under AHCA's interpretation of the

Manual, because Petitioners would in all likelihood never

recover those costs even after they are eventually liquidated.

121. The evidence established that the costs at issue were

non-current liabilities, meaning that they will not under usual

circumstances be liquidated within one year. One of the reasons

AHCA gave for disallowing these costs was a lack of

documentation to establish that Petitioners liquidated the

liability within one year as required by Section 2305 of the

Manual, or within 75 days of the close of the cost reporting

period for self-insurance payments as required by Section 2162.9

of the Manual.

122. AHCA's reasoning is inconsistent with the established

fact that these accrued costs are not capable of being

liquidated within the timeframes set forth in the cited Manual

provisions. Section 2305 of the Manual deals only with short

term liabilities; the Manual is apparently silent as to the

liquidation of non-current liabilities. Petitioners reasonably

argue that the absence of a Manual provision dealing with these

costs leads to the conclusion that these costs should be

governed by GAAP.

123. Petitioners note that the last sentence of Section

2305.A provides:

Where the liability (1) is not liquidated

within the 1-year time limit, or (2) does

not qualify under the exceptions specified

in §§2305.1 and 2305.2, the cost incurred

for the related goods and services is not

allowable in the cost reporting period when

the liability is incurred, but is allowable

in the cost reporting period when the

liquidation of the liability occurs .

(Emphasis added.)

124. Petitioners also point to Section 2162.9, which

provides in relevant part:

Accruals of payments to be made into the

fund are allowable costs in the year of

accrual if paid within 75 days after the end

of a provider's cost reporting period.

Payments made after the 75th day will be

deemed allowable in the reporting period

paid , provided the total contributions made

in that period do not exceed the amount

prescribed by the actuary as necessary for

the adequacy of the fund. (Emphasis added.)

125. Petitioners argue that the underscored language

provides further support for their argument that the Manual

provisions should not be applied to their situation. AHCA

employs those provisions to disallow Petitioners' accrued

contingency costs for the audit period. Under the Medicare

system, Petitioners could still anticipate payment in subsequent

reporting periods. However, the prospective Florida Medicaid

system would deny Petitioners the opportunity to use the

underscored language to obtain payment in subsequent reporting

periods.

126. At the hearing and in its proposed recommended order,

AHCA attempted to support its position with formal opinions from

the federal Department of Health and Human Services ("HHS") and

the Health Care Financing Administration ("HCFA", now CMS). 16

Petitioners argue that AHCA fails to note the chief

distinguishing factor: all of the cited authorities were

Medicare reimbursement cases. The Medicare program as it

existed when those opinions were issued was a retrospective

payment system, in which each year's cost report stands alone

and providers are reimbursed for actual costs incurred from

period to period. Under the retrospective system, costs

incurred but not allowed in one period may be allowable in

future periods.

127. Another distinction between the opinions cited by

AHCA and the instant cases is that in the former, the parties

could have complied with the provisions of the Manual but failed

to do so. In the instant cases, the evidence established that

Petitioners could not have complied with the conditions imposed

by the Manual provisions. Because the Manual offered only

futile options, Petitioners believed that the Manual provisions

should not apply. Petitioners concluded that they were required

to rely on GAAP, because GAAP was the only step in the

regulatory hierarchy that specifically addressed their costs.

128. Based on all the evidence and argument presented in

this proceeding, the undersigned concludes that Petitioners'

position is correct as to the accrued contingent liability

costs. Under the unique factual circumstances presented by

these consolidated cases, it is clearly erroneous for AHCA to

insist on a strict application of Manual provisions with which

Petitioners could not have complied during the audit period.

The Manual does not anticipate a situation in which insurance is

simply not available. Subsection 409.908(2)(b), Florida

Statutes, and the Plan require compliance with applicable state

and federal laws, rules and regulations. It would be

fundamentally unfair to apply the insurance provisions of the

Manual to Petitioners when their circumstances did not permit

them to comply with those provisions during the audit period,

and where they did comply by establishing a captive program at

the first available opportunity.

129. The remaining question as to allowing the contingent

liability costs under GAAP is the windfall issue raised by AHCA.

Petitioners accrued the liability but did not fund it, and there

was uncertainty whether including those accrued costs in the

base rate might unjustly enrich Petitioners should those

contingent liabilities never be liquidated. Mr. Swindling's

"truing up" explanation established that under GAAP the

financial statements would be self-correcting, but did not

satisfactorily establish that the correction necessarily would

be reflected in Petitioners' future Medicaid reimbursements.

130. The evidence demonstrated that, by all rational

expectations, it was a certainty that these accrued liabilities

would be liquidated in some amount, i.e., that there would be

general and professional liability claims against these fourteen

nursing homes for events occurring during the audit period.

Thus, any question of a windfall had to do with the amount of

the subsequent liquidated claims, not whether there would be

claims at all.

131. As to the amount of the accrual, the evidence

established that Petitioners employed a reasonable, conservative

estimate of their GL/PL loss contingency exposure for the audit

period, an estimate that was supported to some extent by the

amount of the premium Petitioners ultimately paid when they

established their captive program in April 2005. Petitioners

would receive no windfall through the allowance of the accrued

loss contingency.

132. As to the Mature Care policies, AHCA correctly

disallowed the amounts in excess of the policy limits, prorated

for a nine-month period. On this issue, there was a Manual

provision that directly applied to Petitioners' situation.

Section 2161.A provides the following, in relevant part:

Purchased Commercial Insurance .-- The

reasonable costs of insurance purchased from

a commercial carrier or a nonprofit service

corporation and not from a limited purpose

insurer (see §2162.2) are allowable if the

type, extent, and cost of coverage are

consistent with sound management practice.

Insurance premiums reimbursement is limited

to the amount of aggregate coverage offered

in the insurance policy.

133. The evidence clearly established that Petitioners

purchased these "bare bones" policies purely in order to comply

with Subsection 400.141(20), Florida Statutes, and that the

state of the insurance market for Florida nursing homes was such

that Petitioners were forced to pay premiums in excess of the

amount of aggregate coverage offered in the policies.

Nonetheless, Section 2161.A expressly states that reimbursement

for insurance purchased from a commercial carrier is limited to

the aggregate coverage. The regulatory hierarchy requires that

a Manual provision be employed where applicable. Though it

seems unfair, there is no question that Section 2161.A is

applicable to the Mature Care policies and that this provision

supports the agency's disallowance of the amounts in excess of

the policy limits.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that AHCA enter a final order that allows

Petitioners' accrual of expenses for contingent liability under

the category of general and professional liability ("GL/PL")

insurance, and that disallows the Mature Care policy premium

amounts in excess of the policy limits, prorated for a nine-

month period.

DONE AND ENTERED this 24th day of October, 2008, in

Tallahassee, Leon County, Florida.

S

LAWRENCE P. STEVENSON

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 24th day of October, 2008.

ENDNOTES

1/ The quoted language was unchanged in the 2003 edition of the

Florida Statutes.

2/ In contrast, a "retrospective" system reimburses the

provider's costs for the reporting period. It is a simple

reimbursement system, and payments made for one reporting period

have no effect on the next period.

3/ Another Insurance Expense account number is 730820, "General

and Professional Liability -- Self-Insured," which is described

as "[n]ecessary contributions to a Self-Insured Fund (as

described in PRM-1 2162.7) based on actuarial determination of

anticipated losses and allowable administrative costs."

4/ Janette Smiley, the lead auditor for Smiley & Smiley,

testified that this was an attestation engagement that qualifies

as an "examination," not a GAAP "audit." With this

understanding, the parties employed the term "audit" for

convenience during the hearing. See Florida Administrative Code

Rule 59G-1.010(22)(a), which defines "audit" as "an examination

of 'records for audit' supporting amount reported in the annual

cost report or in order to determine the correctness and

propriety of the report."

5/ Petitioners prefer to call it a single adjustment for each

facility, each of which contains two distinct disallowances.

For accounting purposes, Petitioners' view is probably more

accurate, because both disallowances were derived from

Petitioners' entry for account number 730810, "General and

Professional Liability" insurance coverage. For purposes of

conceptual clarity in this recommended order, the undersigned

has chosen to treat the disallowances as separate adjustments.

6/ Chapter 2001-45, Laws of Florida.

7/ Mr. Swindling specifically mentioned Section 2103 of the

Manual, the "Prudent Buyer" rule, which states, "The prudent and

cost conscious buyer not only refuses to pay more than the going

price for an item or service, he/she also seeks to economize

by minimizing cost. . . ." Petitioners also point to Section

III.C. of the Plan, which states that an "implicit" criterion of

any definition of allowable costs is "that those costs shall not

exceed what a prudent and cost-conscious buyer pays for a given

service or item." Any costs in excess of those that a prudent

buyer would incur are not reimbursable under the Plan.

8/ Petitioners offered no direct evidence regarding any

comparative shopping they undertook prior to purchasing the

policies. They rely on the reasonable inference that they would

not have paid more than the value of the policies if there were

other options available on the market.

9/ Mr. Swindling testified that the provider had initially

recorded some of these costs under a heading for property

insurance. He believed that the GL/PL entry was more

appropriate, and reclassified the cost to account number 730810.

10/ Some evidence indicated that Medicare reimbursement is no

longer made on a retrospective basis. However, AHCA did not

dispute that the regulations in question were adopted at a time

when the Medicare program operated as described by

Mr. Swindling.

11/ Mr. Parnell, who wrote Petitioners' current captive policy

and who was the insurance agent for HIS from 1990 to 2000,

testified that there was no loss history available in 2002-2003.

Mr. Parnell stated that the loss history is unavailable to this

day, and that he employed a team of five people to re-create the

history in order to write Petitioners' captive policy in 2005.

He agreed with Mr. Owens that Petitioners could not have self-

insured or established a captive during the audit period.

12/ In Shalala v. Guernsey Memorial Hospital , 514 U.S. 87, 93-94

(1995), the United States Supreme Court emphasized the

"distinction between recordkeeping practices and systems on one

hand and principles of reimbursement on the other" that

underlies the regulations in 42 C.F.R. part 413.

13/ Neither party suggested that the base rate was subject to

downward correction in future rate semesters. Both parties

appeared to agree that that the only adjustment made to the base

rate in subsequent rate semesters is the application of the pre-

established inflation factor. The undersigned is aware that

Section IV.J. of the Plan makes provision for interim rate

adjustments. Neither party made reference to Section IV.J. at

the hearing or in their post-hearing submissions.

14/ Petitioners did not attempt directly to tie their 2005

captive insurance program to their estimate of GL/PL expenses

for the audit period. However, it is found that the roughly

$3.4 million premium for the captive policy is not out of line

with Petitioners' estimate of GL/PL expenses for the audit

period.

15/ When directly questioned, AHCA's witnesses disclaimed any

inference that Petitioners had intentionally misled the auditors

as to their lack of insurance coverage. However, the tone of

the agency's presentation at the hearing left the impression

that AHCA believed Petitioners had been less than forthcoming

during the audit.

16/ Mt. Diablo Medical Center v. Blue Cross and Blue Shield

Association/Blue Cross of California , HHS Provider Reimbursement

Review Board Decision 90-1202 (July 1, 1996); Los Medanos

Community Hospital v. Blue Cross and Blue Shield

Association/Blue Cross of California , HCFA Admin. Decision

(August 3, 1992).

COPIES FURNISHED:

Peter A. Lewis, Esquire

Goldsmith, Grout & Lewis, P.A.

307 West Park Avenue, Suite 200

Tallahassee, Florida 32308

Brevin Brown, Esquire

Daniel M. Lake, Esquire

Agency for Health Care Administration

Fort Knox Building III

2727 Mahan Drive

Tallahassee, Florida 32308

Holly Benson, Secretary

Agency for Health Care Administration

Fort Knox Building, Suite 3116

2727 Mahan Drive

Tallahassee, Florida 32308

Craig H. Smith, General Counsel

Agency for Health Care Administration

Fort Knox Building, Suite 3116

2727 Mahan Drive

Tallahassee, Florida 32308

Richard J. Shoop, Clerk

Agency for Health Care Administration

Fort Knox Building, Suite 3116

2727 Mahan Drive

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.