10-004215 Sunrise Community, Inc. vs. Agency For Health Care Administration Status: Closed Recommended Order on Thursday, June 2, 2011.

Summary: AHCA's audit of ICF/DD's aircraft expenses failed to meet minimum standards, so exam report failed to prove overpayment, but AHCA proved overpayment of burial and state overhead.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

SUNRISE COMMUNITY, INC., )

) Case Nos. 10 - 4204

Petitioner, ) 10 - 4210

) 10 - 4211

vs. ) 10 - 4212

) 10 - 4213

AGENCY FOR HEALTH CARE ) 10 - 4214

ADMINISTRATION, ) 10 - 4215

) 10 - 4216

Respondent. ) 10 - 4217

) 10 - 4218

RECOMMENDED ORDER

Robert E. Meale, Administrative Law Judge of the Division

of Administrative Hearings, conduct ed the final hearing in

Tallahassee, Florida, on January 31 and February 1, 2011.

APPEARANCES

For Petitioner: Steven M. Weinger

Helena M. Tetzeli

Kurzban, Kurzban, Weinger & Tetzeli, P.A.

2650 Southwest 27th Avenue

Second Floor

Miami, Florida 33133

For Respondent: Daniel M. Lake

Assistant General Counsel

Agency for Health Care Administration

2727 Mahan Drive, Building MS #3

Tallahassee, Florida 32308

STATEMENT OF THE ISSUE

The issue is whether , for the 2001 - 02 cost - reporting year,

Respondent is entitled to recoupment of Medicaid reimbursements

that it paid to Petitioner , in connection with its operation of

numerous intermediate care facilities for the d evelopmentally

disabled (ICF/ DD) and, if so, what is the amount of the

overpayment s .

PRELIMINARY STATEMENT

By letter dated May 13, 2010, Respondent advised Petitioner

that it had completed its audit of Petitioner's cost reports for

ten of its ICF/DDs and support faci lities for the cost - reporting

year ending June 30, 2002 . Accompanying the May 13 l etter were

ten examination report s showing overpayments , by facility, that

Respondent was seeking to recoup . Petitioner timely requested a

hearing.

The parties settled m any of the disputes , leaving the

factual issues that have been addressed below . M edicaid

reimbursement of ICF/ DDs requires the establishment of an

historic per diem reimbursement rate for prospective

application . However, t he disputes in these cases invo lve only

whether specific cost are allowable. The parties have left to

Respondent the task of calculating the appropriate per diem

rate, taking into account any adjustments contained in the Final

Order resultin g from this Recommen ded Order. For the same

reason, t his Recommended Order does not undertake these per diem

calculations either.

At the hearing, Petitioner called three witnesse s and

offered into evidence Petitioner E xhibits 1, 4, 7, 11 - 24, 26 - 36,

and 39 . Respondent called one witness and offer ed into evidence

Respondent E xhibits 1 - 5 . All e xhibits were admitted except

Petitioner Exhibits 11 and 17, which were proffered .

The court reporter filed the transcript on February 17,

2011 . The parties filed Proposed Recommended Order s on

February 28, 2011.

FINDINGS OF FACT

I. The Audit

1. For over 40 years, Petitioner has operated as a not -

for - profit provider of ICF/ DD services. These cases involve a

compliance audit of ten of Petitioner's 2001 - 02 cost reports .

2. During 2001 - 02, Pe titioner oper ated over 300 ICF/DDs --

both owned and leased -- in eight states and earned an annual

revenue of over $90 million. A typical facility is a group home

serving 24 developmentally disabled residents, although some of

Petitioner's facilities serve much larger nu mbers of residents.

3. Respondent outsourced the compliance audit of

Petitioner's 2001 - 02 cost report s , as well as a similar audit of

Petitioner's 2002 - 03 cost reports , whi ch are not involved in

the s e case s. Prior to completing the audit, t he outside auditor

withdrew from the engagement because it had concluded that it

would be required to issue a disclaimer of opinion -- a n auditing

nonopinion, as described below .

4. In late 2005, two and one - half years after the outside

auditor had commenced its wo rk, Respondent's staff auditors

assumed responsibility for the compliance audit. A fter

examining the outside auditor's workpapers, Respondent's staff

auditors found it necessary to re - perform at least some of the

field work. By letter dated January 3, 20 06, Respondent advised

Petitioner of this development and, among other things,

requested information about 16 identified motor vehicles and

a statement concerning the 1981 Piper

airplane noted in the May 29, 2002 Insurance

sub - committee minutes. What was the plane

used for and in what cost centers and

accounts are the costs recorded? Possible

costs would include fuel, insurance,

depreciation, maintenance, and any salaries.

5. Petitioner responded by a letter dated March 3, 2006,

but this letter is not part of the record . Evidently, not much

audit activity took place for the next couple of years . By

letter dated January 25, 2008, Respondent advised Petitioner of

several potential audit adjustments and noted that Petitioner

had not provided the "detail general ledger" and information on

aircraft and vehicles that Respondent had sought in its

January 3, 2006 letter .

6. In March 2008, Respondent's staff auditor visited

Petitioner's main office in Miami and audited Petitioner's

records for three days. He confirmed the existence of a 1981

Piper aircraft and a second aircraft, which he was unable to

identify. Respondent's staff auditor determined that he still

lacked information necessary to determine if Petitioner's

aircraft expen ses were reasonable whe n compar ed to common -

carrier expenses.

7. By letter dated May 12, 2008, Respondent informed

Petitioner that, after the March 2008 onsite visit, several

issues remained. Among the issues listed were the costs of two

private aircraft, for which Respondent requested access to all

flight and maintenance logs and detailed documentation of

business purpose of trips, identification of aircraft bearing

two cited tail numbers, the names of pilots on Petitioner's

payroll, and any other cost information justifying the cost of

the aircraft compared to common - carrier costs.

8. By letter dated June 13, 2008, Petitione r responded to

the May 12, 2008 letter. T his letter states that the 1981 Piper

was sold at an undisclosed time, and the maintenance logs had

been del ivered with the plane. The letter supplies registration

documentation for the two tail numbers, a personnel file

checklist for the pilot, and justification for the cost of

operating an aircraft compared to the cost of using common

carriers.

9. On Decemb er 4, 2008, Respondent's staff auditor

conducted a n exit conference by telephone with Petitioner's

principals and its independent auditor. Respondent's staff

auditor proposed audit adjustments of various cost items that

the auditor had guessed involved th e aircraft. Petitioner did

not agree with these proposed audit adjustments or various

others that Respondent's staff auditor proposed.

10. For the next 17 months , neither side contacted the

other , until, on May 12, 2010, Respondent issued examination

report s for the 2001 - 02 co st - reporting period. It had taken

Respondent over seven years to issue examination reports b ased

on cost report s that Petitioner had filed on February 3, 2003 ,

for a cost - reporting year that had ended almost two years

earlier .

II. Cost Items in Dispute

11. On January 28, 2011, Respondent filed a Notice of

Filing of a spreadsheet that lists all of the adjustments that

have been in dispute. During the hearing, the parties announced

the settlement of other cost items. As noted by the

Administrative Law Judge, these adjustments are shown on the

judge's copy of this filing, which is marked as Administrative

Law Judge Exhibit 1 among the original exhibits.

12. Most of the items in dispute are Home Office costs,

which are allocat ed to each of Petitioner's audited facilities.

With the reason for disallowance , as indicated in the

examination report s , as well as the Schedule of Proposed

Auditing Adjustment (SOPAA) number, t he Home Office costs in

dispute are:

1. Other consultants. "To disallow out of

period costs." $7 , 000. SOPAA #19.

2. Professional fees -- other. "To disallow

out of period costs." $1 , 500. SOPAA #20.

3. Administrative Travel. "To disallow out

of period costs." $1 , 038. SOPAA #21.

ansportation -- re pair s. "To remove

airplane costs not documented as being

reasonably patient care related ." $36,496.

SOPAA #22.

ansportation -- fuel and oil. "To

remove airplane costs not documented as

being reasonably patient care related ."

$78,336. SOPAA #22.

6. Insurance. "To remove airplane costs

not documented as being reasonably patient

care related ." $24,000. SOPAA #22.

ansportation -- Depreciation. "To

remove airpl an e costs not documented as

being reasonably patient care related."

$106,079. SOPAA #22.

ansportatio n -- Interest. "To remove

airplan e costs not documented as being

reasonably patient care related." $57,714.

SOPAA #22.

9 . Staff Development Supplies. "To remove

unreasonable cash awards." SOPAA #26.

13. At the conclusio n of th e hearing, the Administrative

Law Judge encouraged the parties to try to settle as many of the

issues as they could and, as to the aircraft issues, consider

entering into a post - hearing stipulation due to the lack of

facts in the record concerning t his important issue. The

parties produced no post - hearing stipulation and have not

advised the Administrative Law Judge of any settled issues .

14. The Administrative Law Judge has identified the

remaining issues based on the issues addressed in the pa rti es'

Proposed Recommended Order s . With two exceptions, the remaining

issues are all addressed in each Proposed Recommended Order .

One exception is the Country Meadows return - on - equity issue,

which neither party addressed. There is a small discrepancy

between the amount of this adjustment on Administrative Law

Judge Exhibit 1 and elsewhere in the record, so this issue may

have been settled. If so, Respondent may ignore the portions of

the Recommended Order addressing it. Also, Respondent failed to

add ress the $123,848 in transpor tation salaries and benefits.

B ased on the services corresponding to these expenses and the

motivation of Responden t's staff auditor in citing these

reimbursements as overpayments, as discussed below, the decision

of Responden t's counsel not to mention these items is

understandable .

15. The remaining issues are thus:

10. Burial costs of $4 , 535 at the Ambrose

Center.

11. Return on equity adjustment of $3 , 418

at the Country Meadows facility .

12. Legal fees of $4 , 225 for the Bayshore

Cluster as out - of - period costs .

13. Inclusion of state overhead of $9 , 529

at Mahan Cluster, $9 , 529 at Dorchester

Cluster, and $9 , 529 at Bayshore Cluster.

ansportation Salaries and Benefits of

$123,848 at Main Office.

III. Indiv idual Cost Items

A. Burial Costs

16. After the death of an indigent resident at

Petitioner's Ambrose Center, the family contacted Petitioner and

informed it that they desired a burial, not a cremation, but

could not afford to pay for any service s .

17. Petitioner's staff contacted several vendors about the

cost of a simple burial service and, after negotiating a

discount due to the unfortunate circumstances, selected a

vendor. The vendor duly performed the burial service, which was

attended by surv ivors of the deceased's group home, and

Petitioner paid the vendor $4 , 535 for the service. For a burial

service, the amount paid was reasonable.

18. Petitioner's staff determined that the burial would

have therapeutic value to the surviving resident s of the

deceased's group home. T he quality of life of the residents is

enhanced to the extent that they identify with each other as

family. Petitioner's staff justifiably determined that a burial

service would help sustain these familial relationships by

br inging to the survivors a sense of closure, rather than

subjecting them to the jarring experience of an unmarked

departure of their fellow resident from their lives. However,

routine counseling or therapy could have achieved the same

results at less cost than a burial service.

B. Out - of - Period Costs

19. The so - called out - of - period costs are $1 , 038 of

rental - car fees, $1 , 500 of computer consultation fees, $4 , 225 of

legal fees , and $7 , 000 of "duplicated" insurance broker

services . "Out - of - period" means that the expenses were

incurred , and should properly be reported, outside of the cost -

reporting year ending June 30, 2002.

20. G enerally accepted auditing standards (GAAS) and

generally accepted accounting principles (GAAP) incorporate the

principle of m ateriality. At least for the purpose of

determining the cost - reporting year in which to account for an

expense, the materiality threshold for Petitioner is tens of

thousands of dollars.

21. The out - of - period issue, which involves the integrity

of the cost - reporting year, is different from the other issues,

which involve the allowability of specific costs. The cost

items under the out - of - period issue are all allowable; the

question is in which cost - reporting year they should be

included. The test of m ateriality is thus whether the movement

of these cost items from one cost - reporting year to an adjoining

cost - reporting year will distort the results and, thus,

Petitioner's Medicaid reimbursements. Given Petitioner's

revenues, distortion would clearly no t result from the movement

of the subject cost items, even if considered cumulatively.

22. In theory, Petitioner could be required to amend the

cost report for the year in which any of these expenses were

incurred, if they were not incurred in the subj ect cost -

reporting year. Unfortunately, b y the time Respondent had

generated the SOPAAs , the time for amending the cost reports for

the adjoining cost - reporting years had long since passed , so a

solution of amending another cost report means the loss of t he

otherwise - allowable cost. This result has little appeal due to

Respondent's role in not performing the audit in a timely,

efficient manner, but each out - of - period cost is allowable for

different reasons.

23. The car - rental expense arises out of an em ployee 's

rental of a car for business purposes in June 2001. The

submittal and approval of the travel voucher, which are parts of

the internal - control process, did not take place until after

June 30, 2001. Although Pe titioner's liability to the

rental - ca r company probably attached at the time of the rental,

the contingency of reimbursement for an improper rental was not

removed until the internal - control process was completed, so it

is likely that this is not an out - of - period expense.

24. The legal expe nses included services provided over the

three months preceding the start of the subject cost - reporting

year. The attorney submitted the invoice to Petitioner's

insurer. After determining that Petitioner had not satisfied

its ap plicable deductible , after June 30, 2001, the insurer

forwarded the bill to Petitioner for payment. Absent evidence

of the retainer agreement, it is not possible to determine if

Petitioner were liable to the law firm prior to the insurer's

determination that the payment was less t han the deductible , so

it is unclear whether this is an out - of - period expense .

25. The computer - consulting work occurred about three

months before the end of the preceding cost - reporting year, but

the vendor did not bill Petitioner until one year later . This

is an out - of - period expense.

26. To the extent that these t hree items may have been

out - of - period expenses, it is not reasonable to expect

Petitioner to estimate these liabilities and include them in the

preceding cost - reporting year. This is pa rtly due to the lack

of mat eriality explained above. F or the car - rental and computer

expenses, it is also unreasonable to assume that Petitioner's

employees responsible for the preparation of the cost reports

would have any knowledge of these two liabilit ies or to require

them to implement procedures to assure timely disclosure of

liabilities as modest as these .

27 . The last cost item is $7 , 000 for insurance broker

services. This is not an out - of - period expense. In its audit,

Respondent determined th at this amount represents a sum that was

essentially a duplicate payment for services over the same

period of time to two different insurance brokers. This is a

payment for services over the same period of time to two

different insurance brokers for nondu plicated services

reasonably required by Petitioner.

28 . Given the size and the nature of its operations,

Petitioner has relatively large risk exposures that are managed

through general liability, automobile liability, director and

officer liability, pro perty, and workers' compensation

insurance. Paying premiums of $4 - 5 million annually for the s e

coverage s , which exclude health insurance, Petitioner retains

insurance brokers to negotiate the best deals in terms of

premiums, collateral postings, and other matters .

29 . Petitioner experienced considerable difficulty in

securing the necessary insurance in mid - 2001. At this time,

Petitioner was transitioning its insurance broker services from

Palmer and Kay to Gallagher Bassett . D ifficulties in securing

wo rkers' compensation insurance necessitated an extension of the

existing policy to July 15, 2001 -- evidently from its original

termination date of June 30, 2001. Due to these market

conditions, Petitioner had to pay broker fees to Palmer and Kay

after June 30 , 2001, even though, starting July 1, 2001,

Petitioner began to pay broker fees to Gallagher Bassett . There

was no overlap in insurance coverages , and each broker earned

its fee, even for the short period in which both brokers earned

fees.

C. Employ ee Cash Awards

30 . Petitioner paid $8 , 500 in employee cash awards in the

2001 - 02 cost - reporting year as part of a new policy to p rovide

relatively modest cash awards to employees with relatively long

terms of service. For employees with at least 20 year s of

service, Petitioner paid $100 per year of service. The

leg itimate business purpose of these longevity awards wa s to

provide an incentive for employees to remain with Petitioner, as

longer - tenured employees are valuable employees due to their

experien ce and lack of need for expensive training , among other

things .

31 . The disallowance arose from the application of a

nonrule policy that has developed among Respondent's staff

auditors : employee compensation is not an allowable cost unless

it is includi ble in the employee's gross income . The evident

purpose of the nonrule policy is to exclude from allowable costs

payments to employees who, due to their prominence in the ranks

of the provider, are able to cause the provider to structure the

payments so a s to avoid their inclusion in the recipi ent's gross

income (and possibly deprive a for - profit provider of an

offsetting deduction for the payments).

32 . For the 2001 - 02 cost - reporting year, only three

employees qualified for these payments. Two had 30 y ears of

service, so each of them received $3 , 000, and one had 25 years

of service, so he or she received $2 , 500. The total of the

payments at issue is thus $8 , 500. The record contains ample

support for the finding that the addition of $3 , 000 to the

annua l compensation paid to any of Petitioner's employees would

not result in excessive compensation.

D. Return on Equity

33 . During the cost - reporting year, Petitioner maintained

$128,000 in a bank account dedicated for the use of the Country

Meadows facil ity . This sum represented about three months'

working capital for Country Meadows . At the time, Respondent

encouraged providers to maintain cash reserves of at least two

months' working capital, so this sum was responsive to

Respondent's preferred workin g capital levels. Consistent with

its purpose as working capital, funds in this account were

regularly withdrawn as needed to pay for the operation of

Country Meadows.

34 . The record does not indicate whether the bank paid

interest on this account. Als o, the concept of return on equity

does not apply to a not - for - profit corporation such as

Petitioner, which, lacking shareholders, lacks equity on which a

return might be calculated or anticipated.

E. State Overhead at Three Clusters

35 . This item in volves three ICF/DD clusters that , at the

time, were owned by, and licensed to, the State of Florida.

Petitioner operated the facilities during the cost - reporting

year pursuant to a lease and operating agreement.

36 . As in prior cost - reporting years , Respondent did not

disallow the depreci ation included in the subject cost reports

for these three clusters. The record does not reveal whether

Petitioner or the State of Florida bore the economic loss of

these capital assets over time. But the treatment of

depreciation costs is not determinative of the treatment of

operating or direct care costs.

37 . During the subject cost - reporting year, for these

three clusters, the State of Florida retained various

operational responsibilities, including admission s. However,

the costs at issue arise from the expenditures of the State of

Florida , not the provider. The costs include the compensation

paid to several, state - employed Qualified Mental Retardation

Professionals, who performed various operational oversi ght

duties at the three clusters, and possibly other state employees

performing services beneficial to these three clusters .

Petitioner never reimbursed the State of Florida for these

costs. There is no dispute concerning the reasonableness of the

compen sation paid these employees by the State of Florida , nor

the necessity of these services. The issue here is whether

Petitioner is entitled to "reimbursement" for these costs, which

amount to $5 , 139 per cluster, when the costs were incurred by

the State of Florida , not Petitioner.

F. Disallowed Transportation Costs and Airplane Costs

38 . T he $123,848 in disallowed Main Office Transportation

salary and benefits represents the salary and benefits of eight

Main Office van drivers , who earn about $15,000 per year in pay

and benefits . At least 40 residents of the Main Office are not

ambulatory, but, like all of the other residents, need to be

transported for medical, recreational, and other purposes.

There probably remains no dispute concerning these expe nses.

They are reasonable and necessary.

39 . T he explanation for why these costs were disallowed

starts with the inability of Respondent's staff auditor to find

the aircraft expenses in the financial records of Petitioner .

It is not possible to deter mine why the audit failed to identify

these expenses prior to the issuance of the examination report.

On this record, the only plausible scenario is that Respondent's

outside auditor was off - the - mark on a number of items while

conducting the audit, Petiti oner's representatives lost patience

and became defensive, and, when the outside auditor withdrew

from the engagement, Respondent's staff auditors, already fully

engaged in other work , may not have had the time to add this

substantial responsibility to the ir workload. It is clear,

though, that, after the departure of Respondent's outside

auditor, the audit failed due to a combination of the lack of

Petitioner's cooperation and Respondent's lack of diligence.

40 . Unable to identify the aircraft expenses a fter years

of auditing left Respondent with options. It could have

continue d the audit pro cess with renewed diligence until it

found the aircraft expenses. Or it could have declare d as

noncompliant the cost report, the underlying financial records,

or Pe titioner itself. Instead, Respondent converted the

examination report from what it is supposed to be -- the product

of an informed analysis of Petitioner's financial records -- to a

demand to pay up or identify these expenses and, if related to

aircraft, just ify them.

41 . The problem with Respondent's choice is that, as noted

in the Conclusions of Law, an audit requires Respondent to

proceed, on an informed basis, to identify the expenses, analyze

them, and , if appropriate, determine that they are not

allo wable -- before including them as overpayments in an

examination report. Proceeding instead to cite overpayments on

the basis of educated guesses, Respondent entirely

mischaracterized the $123,848 in transportation salaries and

benefits , which did not invol ve any aircraft expenses .

42 . Respondent's educated guesses were much better as to

the remaining items , which are $36,496 in transportation

repairs, $78,336 in transportation fuel and oil, $24,000 in

insurance, $106,079 in transportation depreciation, an d $57,714

in transportation interest. But the process still seems

hit - or - miss. Thinking that he had found the pilot's salary in

the item for the van drivers' salaries, Respondent's staff

auditor missed the pilot's salary, which was $30,000 to $40,000,

as it was contained in an account containing $1.3 million of

administrative salaries. Respondent's staff auditor also missed

the hanger expense, which Petitioner's independent auditor could

not find either.

43 . On the other hand, Respondent's staff audi tor hit the

mark with the $78,336 of fuel and oil , $106,079 of depreciation ,

and $36,496 in repairs -- all of which were exclusively for

Petitioner's aircraft. Respondent's staff auditor was pretty

close with the transportation interest, which was actually

$60,168. It is difficult to assess the effort of Respondent's

staff auditor on insurance; he picked a rounded number from a

larger liability insurance account, which includes aircraft

insurance, but other types of insurance, as well.

44 . Respondent co rrectly notes in its Proposed Recommended

Order th at the auditi ng of aircraft expenses requires , in order ,

the ir identifi cation, analysis , and characterization as

allowable or nonallowable. As Respondent argues, the analysis

must compare the aircraft expe nses to other means of

transportation or communication to determine the reasonableness

of the aircraft expenses. As Respondent notes elsewhere in its

Proposed Recommended Order , the anal ysi s also must ensure that a

multijurisdictional provider, such as Pe titioner, has fairly

allocated its allowable costs among the jurisdictions in which

it operates.

45 . Although Respondent's staff auditor found a number of

aircraft expenses, he did not try to compare these expenses with

other means of travel or communica tion, so as to determine the

reasonablen ess of these aircraft expenses, or determine if

Petitioner had allocated these costs, as between Florida and

other jurisdictions , in an appropriate manner. The failure of

the examination report, in its treatment of the expenses covered

in this section, starts with the failure to secure the necessary

information to identify the expenses themselves, but continues

through the absence of any informed analysis of these expenses.

46 . Respondent's staff auditor used the e xamination

report's treatment of the items covered in this section as a

means to force Petitioner both to identify and explain these

costs. The fact that Respondent's staff auditor guessed right

on many of the aircraft expenses does not mean that he had a n

informed basis for these guesses. At one point during his

testimony, Respondent's staff auditor seemed pleasantly

surprised that he had been as accurate as he was in finding

the se expenses. But, regardless of the basis that he had for

the identificatio n of these expenses, Respondent's staff auditor

never made any effort to analyze the expenses that he had chosen

to include in the examination report as aircraft expenses.

47 . Nor is the record insufficient to permit such analysis

now . Among the missing data is the number of planes that

Petitioner owned at one time during the subject cost - reporting

year. It is now clear that, for awhile, the number was two,

probably at the end of the cost - reporting year, but this was

unknown at the time of the issu ance of the examination report.

It is unclear, even now, for how long Petitioner owned two

planes, or whether it operated both planes during the same

timeframe. Cost comparisons are impossible without the

knowledge that the cost - comparison exercise is for one or two

private aircraft.

48 . Likewise, Respondent lacked basic information about

the aircraft, such as the planes' capacities and costs of

operation, per hour or per passenger mile. Again, this

information remains unknown, so it is still impossible t o

establish a framework for comparison to the costs of common

carriers.

49 . T he record includes a three - page log provided during

the audit process by Petitioner to Respondent, which appears

never to have analyzed it, probably due to its determination

t hat it had not identified the aircraft expenses adequately.

The log shows 118 trips for purposes other than maintenance or

engineering during the subject cost - reporting year. The log

shows the cities visited and a very brief descript ion of the

purpose of the trip. Not the detailed description requested by

Respondent, the proffered des cription is often not more than the

mention of a facility or meeting. The log does not show the

duration of the trip, but often notes the number of persons on

the plane.

50 . If the aircraft costs identified above, including the

unassessed pilot salary, are divided by the number of trips, the

per trip cost is about $2 , 600. Some trips list several persons,

as many as seven. Some trips list only one or two persons.

Some trips list "staff," so it is impossible to tell how many

persons traveled. And some trips provide no information about

the number of travelers. It is a close question, but these

findings alone do not establish that the use of the aircraft was

unreasonabl e when compared to common carriers.

51 . Also, Respondent lacked any information about the

purpose of the trips, so as to be able to determine if they were

necessary or whether they could have been accomplished by

videoconference or telephone. And the he aring did not provide

this information.

52 . Respondent's staff auditor also never considered

allocation methods, which is understandable because this

analysis would necessarily have follow ed the identification

pro cess, in which he justifiably lacked conf idence, and the

cost - comparison analysis, which he had never undertaken. At the

hearing, Respondent's staff auditor briefly mentioned other

allocation methods, but never criticized the approved allocation

method used by Petitioner. Although an approved a llocation

method might not offset disproportionate travel expenses to West

Virginia and Connecticut, the record is insufficient to

determine that the chosen allocation method was inappropriate or

transferred excessive expenses to Florida for Medicaid

reimb ursement.

CONCLUSIONS OF LAW

I. General

53 . The Division of Administrative Hearings has

jurisdiction over the subject matter. §§ 120.569 and 120.57(1),

Fla. Stat.

54 . C ongress provides a grant to each state that adopts a

plan meeting various req uirements under federal law for medical

assistance programs (Medicaid) . 42 U.S.C. § 1396 (2002) .

(E xcept as otherwise indicated, all authority is that which was

in effect in 2002 . ) The federal Medicaid requirements are in

Title XIX, Social Security Act, 42 U.S.C. §§ 1396 et seq.

Pursuant to 42 U.S.C. § 1396a(a)(30)(A), each state medical

assistance plan must:

. . . assure that payments are consistent

with efficiency, economy, and quality of

care and are sufficient to enlist enough

providers so that care a nd services are

available under the plan at least to the

extent that such care and services are

available to the general population in the

geographic area[.]

55 . As part o f the Florida Medicaid program , the Florida

legislature has designated Respondent as the state agency to

make payments to qualified providers for medical assistance and

related services under Title XIX, Social Security Act, subject

to applicable federal and state law. § 409.902, Fl a . Stat.

P roviders of covered services t o eligible per sons residing in

licensed ICF/DDs may receive Medicaid reimbursements, subject to

the availability of funds . § 409.904(3), Fla. Stat.

56 . Subject to specific authorizations, Respondent is

required to reimburse Medicaid providers, in accordance with

fe deral and state law, "according to the methodologies set forth

in the rules of the agency and in policy manuals and handbooks

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

Medicaid "is the payor of last resort for medically necessary

goods an d services furnished to Medicaid recipients."

§ 409.910(1), Fla. Stat.

57 . The details of Florida's Medicaid program are found in

Respondent's rules -- specifically, Florida Administrative Code

Chapter 59 - G -- and the materials incorporated by reference by the

rules . (All references to rules of the Florida Administrative

Code are to the 2010 rules. Neither party provided the 2002

rules to the Administrative Law Judge, who was unable otherwise

to obtain the rules in effect in 2002.) Florida Administrative

Code Rule 59G - 1.001 states these rules " must be read in

conjunction with the statutes, federal regulations, and all

other rules and regulations pertaining to the Medicaid program ."

58 . Florida Administrative Code Rule 59G - 6.045 provides

that reimbursemen t to privately owned Intermediate Care

Facilities for the Mentally Retarded and Developmentally

Disabled (ICF -- MR/DD) shall be in accord with the Florida Title

XIX ICF/MR - DD Reimbursement Plan (Plan).

59 . The Plan is divided into several sections. The first

section de scribes " Cost Finding and Cost Reporting" a n d

describes how a provider is to account for and report its costs.

The Plan requires that each provider submit a cost report within

three months after the close of the cost - reporting year. Plan

§ I.A. Provide r s must detail all of their costs for the entire

reporting period, making appropriate adjustments, as required by

the Plan, for the determination of "allowable costs." Plan

§ I.C . Continuing to address methodology, Plan § I.C . requires

p r oviders to use the accrual method of accounting, in accordance

with GAAP ; the Medicare (Title X VIII) Principles of

Reimburseme nt; the Provider Reimbursement Manual HCFA Pub. 15 - 1

(1993) (now known as CMS Pub. 15 - 1), which is incorporated by

reference by Fl orida Administrative Code Rule 59G - 6.010; and

applicable rules in the Florida Administrative Code.

60 . Other provisions of section I of the Plan address the

cost - reporting process. P roviders' cost reports must be

"current, accurate, and in sufficient detail to support costs

set forth in the report." Plan § I.F. This requirement extends

to all ledgers, books, records, original evidence of cost, and

other records in accordance with CMS Pub. 15 - 1, "which pertain

to the determination of allowable costs, and must be capable of

being audited . . .." Plan § I.F.

61 . S ection II of the Plan covers audits. A ll audits must

be based on "generally accepted auditing standards of the

[American Institute of Certified Public Accountants] , as

incorporated by refere nce by Rule 61H1 - 20.008, F.A.C.

(10 - 19 - 94)." Plan § II.A.2. The cited rule provides:

auditing standards generally accepted in the

United States of America in effect as of

June 30, 2002, including, but not limited

to, general, field work and reporting

sta ndards approved and adopted by the

membership of the American Institute of

Certified Public Accountants (AICPA), as

amended by the AICPA Auditing Standard Board

(ASB) and standards promulgated by the ASB

in the form of Statements on Auditing

Standards (ent itled Codification of

Statements on Auditing Standards, (including

Statements on Standards for Attestation

Engagements) Numbers 1 to 93, dated 2001,

available from the AICPAÓs Resource Online

at www.cpa2biz.com or call 1(888)777 - 7077).

62 . Inconvenientl y, the website provides only an

opportunity to purchase the GAAS. However, GAAS is detailed in

Newby v. Enron Corp. ( In re Enron Corp. Secs., Derivative &

ERISA Litig. ), 2010 U.S. Dist. LEXIS 130386, 165 - 170 (S.D. Tex.

Dec. 8, 2010) :

GAAS . . . refers to ten quite specific

standards: three General Standards, three

Standards of Field Work, and four Standards

of Reporting. These standards have remained

virtually untouched since their adoption by

the AICPA in 1947. . . . GAAS is composed

of[:]

General St andards

1. The auditor must have adequate technical

training and proficiency to perform the

audit.

2. The auditor must maintain independence

in mental attitude in all matters relating

to the audit.

3. The auditor must exercise due

professional care in the performance of the

audit and the preparation of the report.

Standards of Field Work

1. The auditor must adequately plan the

work and must properly supervise any

assistants.

2. The auditor must obtain a sufficient

understanding of the entity and its

environment, including its internal control,

to assess the risk of material misstatement

of the financial statements whether due to

error or fraud, and to design the nature,

timing, and extent of further audit

procedures.

3. The auditor must obtain suffi cient

appropriate audit evidence by performing

audit procedures to afford a reasonable

basis for an opinion regarding the financial

statements under audit.

Standards of Reporting

1. The auditor must state in the auditor's

report whether the financial st atements are

presented in accordance with generally

accepted accounting principles (GAAP).

2. The auditor must identify in the

auditor's report those circumstances in

which such principles have not been

consistently observed in the current period

in relat ion to the preceding period.

3. When the auditor determines that

informative disclosures are not reasonably

adequate, the auditor must so state in the

auditor's report.

4. The auditor must either express an

opinion regarding the financial statements,

tak en as a whole, or state that an opinion

cannot be expressed, in the auditor's

report. When the auditor cannot express an

overall opinion, the auditor should state

the reasons therefor in the auditor's

report. In all cases where an auditor's

name is assoc iated with financial

statements, the auditor should clearly

indicate the character of the auditor's

work, if any, and the degree of

responsibility the auditor is taking, in the

audi tor's report. Id. at n. 43.

63 . Enlarging on the auditor's responsibili ties, the Enron

court cites Jay M. Feinman, "Liability of Accountants for

Negligent Auditing: Doctrine, Policy, and Ideology," 31 Fla.

St. U. L. Rev. 17, 21 - 22 (Fall 2003):

An audit is a systematic, objective

examination of a company's financial

stateme nts. As accountants frequently point

out in debates about liability, the company,

not the accountant, prepares the financial

statements. The purpose of an audit is to

determine if the statements fairly present

the financial condition of the company by

de termining that they have been prepared in

accordance with Generally Accepted

Accounting Principles (GAAP), applied on a

consistent basis . . . . GAAS and the

interpretive Statements o n Auditing

Standards (SAS) . . . govern the conduct of

audits.

After con cluding the audit, the auditor

issues its report. The report expresses the

auditor's independent, professional opinion

about the fairness of the financial

statement s and, depending on the result of

the audit, may be one of several kinds:

An unqualified opinion states that the

accountant followed GAAS and that the

financial statements fairly present the

financial condition of the company in

accordance with GAAP. An unqualified

opinion may sometimes contain explanatory

language, as when the company has c hanged

its accounting practice or when there is an

unresolved uncertainty, such as significant

pending litigation. As a practical matter,

an unqualified opinion is almost a necessary

result of an audit of large, publicly held

companies, and of smaller com panies when an

audit is needed to satisfy lenders or

investors. If the auditor discovers

discrepancies that may require a qualified

report, the auditor often will discuss,

negotiate, and attempt to remedy the

difficulties.

A qualified opinion states exce ptions to the

observance of GAAS, where the scope of the

audit is limited or the auditor is unable to

obtain necessary information, or to the

fairness of the statements in accordance

with GAAP, when the principles have not been

observed or when not all nec essary

disclosures have been made.

An adverse opinion states that the financial

statements are not fair ly stated in

conformity with GAAP.

A disclaimer of opinion is not an opinion at

all; rather the accountant states that the

scope of the audit was not s ufficient to

enable it to render an opinion.

Enron Corp. , 2010 U.S. Dist. LE XIS 130386 at 168 - 70.

64 . The Plan requires the auditor to issue a report that

meets GAAS. Plan § II.A.3. Specifically, the auditor "must

express an opinion as to whether, in all material respects, the

financial and statistical report complies with all federal and

state regulations pertaining to the reimbursement program for

long - term care facilities." Id. Providers may request an

administrative hearing, pursuant to chapte r 120, Florida

Statutes. Plan § II.A.4.

65 . Section III of the Plan defines "allowable costs."

This section is divided generally into six parts:

1. All expense items that a provider must

"incur" to meet the definition of ICF

contained in 42 CFR § 44 0.150 (1997); the

standards prescribed for ICFs in 42 CFR Part

442, Subpart C (1997); the requirements

established by the state agency responsible

for establishing and maintaining health

standards; and any other requirements for

licensing under Florida law applicable to

long - term care facility services.

2. All therapy required by Medicare or

Medicaid certification standards and

prescribed by the physician of record "shall

be considered as covered services and all

costs, direct or indirect, shall be includ ed

in the cost report."

3. Allowable costs may not exceed what a

"prudent and cost - conscious buyer pays for a

given service or item."

4. "All items of expense which providers

incur in the provision of routine services,

such as the regular room, dietary and

nursing services, medical supplies, and the

use of equipment and facilities, are

allowable[,] although services covered by

other Florida Medicaid programs are not

allowable under the Plan. Relevant

limitations are in the Florida Medicaid

ICF/MR - DD Se rvices Coverage and Limitations

Handbook and rule 59G - 4.170.

5. Bad debts are not included in allowable

costs, subject to several exceptions.

6. Miscellaneous provisions address the

compensation of key employees, the

limitations on rent, methods of c alculating

depreciation on capital assets, limitations

on interest, limitations on return on

equity, and limitations on property - related

costs allowed for reimbursement.

Plan § III.A. - G .

66 . Concerning the first of these six parts, an ICF/DD

operator mu st " provide or arrange for active treatment services

by an interdisciplinary team to maximize individual independence

or prevent regression or loss of functional status."

§ 400.962(4), Fla. Stat.

67 . Florida Administrative Code Rule 59G - 4.170(7) provide s

for reimbursements as follows:

(a) The Medicaid payment is an all

inclusive payment designed to reimburse a

facility for expenses incurred in providing

daily care to Medicaid recipients.

(b) Items of necessary expense incurred by

the ICF/MR provider in providing resident

care shall be included a s allowable costs in

the ICF/MR' s cost report and shall not be

charged to the recipient. These allowable

costs are defined as items of expense that

the provider is required to incur in

furnishing intermediate ca re services or any

expenses incurred in complying with state

licensure or federal certification

requirements.

(c) The Medicaid payment includes, but is

not limited to, reimbursement for the

following services:

1. Room and board including all of the

it ems necessary to furnish the individualÓs

room;

2. Direct care and nursing services as

required for each resident at his particular

level of care;

* * *

4. Training and assistance as required

for the activities of daily living,

including, but not limited to, toileting,

bathing, personal hygiene, eating and

ambulation as appropriate;

5. Walkers, wheelchairs, dental

services, eyeglasses, hearing aids and other

prosthetic or adaptive equipment as needed.

The amount allow ed in the Medicaid cost

report is limited to the AHCA fee schedule

as applicable. If any of these services are

reimbursable under a separate Medicaid

program, the cost will be disallowed in the

cost report;

6. Therapies, including speech,

recreational , physical, and occupational, as

prescribed by the residentÓs individual

habilitation plan;

7. Transportation services, including

vehicles with lifts or adaptive equipment,

as needed.

(d) The Medicaid payment does not provide

reimbursement for the fol lowing:

1. Legend drugs provided to the

recipient through the prescribed drug

program. The facility handles prescribed

drugs for the resident by supplying the

Medicaid identification card to the

pharmacy.

2. Personal laundry services, unless

part of a training program, may be charged

to the resident by the facility.

* * *

(f) All ICF/MR providers enrolled in the

Medicaid program must be in compliance with

the provisions of the Medicaid Provider

Handbook for Interm ediate Care Facility for

the Mentally Retarded Services, as updated

December 1, 1992, which is incorporated by

reference into this rule and available from

the fiscal agent contractor.

68 . The se allowable costs are largely reiterated in the

ICF/DD Cover age and Limitations Handbook, Chapter 2. The

Coverage and Limitations Handbook adds detail to these costs and

identifies other specific costs that are allowable. Allowable

costs are for recreational and leisure services that modify,

ameliorate or reinfor ce specific physical or social behaviors,

transportation suited to the needs of the residents, and certain

other medical services. Id. The intent is for the per diem

rate to include "all services and items necessary to ensure

appropriate care." Coverage and Limitations Handbook, p. 3 - 2.

69 . Other provisions of authoritative materials addressing

allowable costs pertain to specific cost items, so they will be

addressed in the sections below covering the cost items to which

they pertain.

70 . The burden of proof is on Respondent to show an

overpayment of Medicaid reimbursements. S outhpointe Pharmacy v.

Dep't of Health & Rehab. Services , 596 So. 2d 106, 109 (Fla. 1st

DCA 1992); S. Medical Services v. Agency for Health Care Admin. ,

653 So. 2d 440, 441 (Fla . 3d DCA 1995) (per curiam). See also

§ 409.913(20), Fla. Stat. (" In meeting its burden of proof in

any administrative or court proceeding, the agency may introduce

the results of such statistical methods as evidence of

overpayment.") (Emphasis supplied.)

71 . In Golfcrest Nursing Home v. Agency for Health Care

Admin . , 662 So. 2d 1330, 1334 (Fla. 1st DCA 1995), court imposed

the burden of proof on the Medicaid provider that was seeking an

interim rate increase. The court explained that the provider

was a ssertin g the affirmative of the issue. This case is

distinguishable because the affirmative of the issue here is

Respondent's entitlement to recovery of overpayments.

72 . T he standard of proof is a preponderance of the

evidence. § 120.57(1)(j), Fla. St at.; Southpointe Pharmacy ,

596 So. 2d at 109.

73 . The hearing is de novo. § 120.57(1)(k), Fla. Stat.

In the context of the present case, a de novo hearing means that

the provider may introduce evidence that it did not present

during the audit . Wistedt v. Dep't of Health & Rehab. Services ,

551 So. 2d 1236 (Fla. 1st DCA 1989); HBA Corp. v. Dep't of

Health & Rehab. Services , 482 So. 2d 461, 468 (Fla. 1st DCA

1986) (dictum).

74 . In an overpayment case, Respondent satisfies its

burden of proof by making a prima facie case . Section

409.913(22) provides: " The audit report, supported by agency

work papers, showing an overpayment to a provider constitutes

evidence of the overpayment."

75 . However, t he audit report -- or, as it is sometime s

called, the exa mination report -- establishes a prima facie case

only if Respondent satisfies all applicable requirements

concerning the audit. Most importantly, s ecti on 409.913(20)

requires: " In making a determination of overpayment to a

provider, the agency must use ac cepted and valid auditing,

accounting, analytical, statistical, or peer - review methods, or

combinations thereof ." On its face, this statute requires

Respondent to identify and analyze the cost reports before

issuing an examination report.

76 . Making a p rima facie case requires a showing of

compliance with all applicable conditions precedent. See , e.g. ,

Berg v. Bridle Path Homeowners' Ass'n , 809 So. 2d 32, 34 (Fla.

4th DCA 2002) (homeowners' association must prove compliance

with all applicable provision s of covenants).

II. Burial Costs

77 . The cost of the burial service is reasonable, but the

question remains whether it is allowable. The cost must be

examined from two perspectives: the perspective of the deceased

and the perspective of the survi ving residents who shared the

group home with the deceased at the time of his or her death.

78 . F rom the perspective of the deceased and the need for

final disposition of the remains , the payor of last resort for

burial expenses is not Medicaid . Florida has a fairly elaborate

statutory framework for allocating the costs of the disposition

of the bodies of persons whose estates are insufficient to pay

final expenses. Unless a surviving family member objects, any

person coming into a possession of an unclaime d dead body,

unless it has been crushed, severely decomposed, autopsied, or

ravaged by contagious disease, must contact the state Anatomical

Board at the University of Florida Health Center and, if

requested, deliver the body to the state Anatomical Board for

medical education and research. § 406.50, Fla. Stat. The state

Anatomical Board assumes the financial responsibility for the

disposition of the remains, once it is through with them.

§ 470.002(11), Fla. Stat. If the state Anatomical Board

determine s that it has too many bodies or a particular body is

unfit for anatomical purposes, it may contact the county

commission er s of the county in which the person died and require

them to dispo se of the body at their expense. § 406.52, Fla.

Stat. Thus, from the perspective of the deceased, the burial

costs are not allowable because other entities are available to

pay this expense.

79 . Petitioner claims that the burial services had a

therapeutic effect on the other residents of the group home.

The record is not particularly well - developed on this point, but

the idea of guided closure for residents who may have a very

imperfect understanding of death is not difficult to accept.

80 . In its Proposed Recommended Order , Petitioner contends

that the applicable rate plan was prepared so that the costs of

the provider would be allowed up to the maximum limits of the

rate plan, absent a specific exclusion covering the cost item in

question. Thus, Petitioner argues, a funeral expense is

allowable because it is not specif ically excluded. Petitioner's

Proposed Recommended Order , para. 10. Respondent contends in

its Proposed Recommended Order that an authoritative source must

specifically cover a cost item for it to be allowable.

Respondent's Proposed Recommended O rder , para. 23.

81 . As rules of interpretation, these two approaches

should assist, rather than displace, the basic exercise of

determining whether the burial expense is an allowable cost.

This exercise starts with the acknowledgement that the coverag e

provisions of the Plan are very broad. Plan, III.A;

§ 400.962(4), Fla. Stat.: an ICF/DD operator must " provide or

arrange for active treatment services by an interdisciplinary

team to maximize individual independence or prevent regression

or loss of fu nctional status." Section III.C of the Plan limits

allowable costs to reasonable costs in terms of a prudent buyer.

Here, the death of a resident may necessitate counseling and

therapy for the survivors , but a nything more violates the

reasonableness stan dard.

82 . Thus, the reimbursement of $4 , 535 for burial costs is

an overpayment subject to recoupment by Respondent.

III. Out - of - Period Costs

83 . Although there may be some question as to the status

of the other costs in this section, the $7 , 000 o f duplicated

insurance broker services is clearly not an out - of - period cost.

In a difficult insurance market, Petitioner had to expend funds

for two insurance brokers. These costs were reasonable and

incurred for services pe rformed during the subject

cos t - reporting year.

84 . T he Plan, CMS Pub. 15 - 1, and GAAP require Petitioner

to use t he accrual method of acc ounting. T he Department of the

Treasury offers a brief explanation of this method of accounting

for income and expense items:

(ii) Accrual meth od. (A) Generally, under

an accrual method, income is to be included

for the taxable year when all the events

have occurred that fix the right to receive

the income and the amount of the income can

be determined with reasonable accuracy.

Under such a meth od, a liability is

incurred, and generally is taken into

account for Federal income tax purposes, in

the taxable year in which all the events

have occurred that establish the fact of the

liability, the amount of the liability can

be determined with reasona ble accuracy, and

economic performance has occurred with

respect to the liability.

26 C.F.R. § 1.446 - 1 (c)(1)(ii).

85 . All but one of the cost items at issue here raise the

question of the integrity of the cost - reporting year for an

accrual - basis provid er. For the reasons noted in the Findings

of Fact, none of these cost items is not large enough to affect

in any meaningful way the determination of Petitioner's per diem

rate for the subject cost - reporting year or an adjoining cost -

reporting year.

86 . Another issue is fairness or estoppel. Timely

compliance auditing might have allowed Petitioner to restate

these items in the cost - reporting year in which they accrued, if

different from the subject cost - reporting year.

87 . Even if materiality and f airness did not preclude a

finding of overpayment of these costs, accounting and auditing

principles permit their allowance in the subject cost - reporting

year. A rule of reason applies to GAAP and tax accounting. CMS

Pub. 15 - 1 alludes to this rule of rea son in its treatment of

discounts, allowances, refunds, and rebates that are provided

after the cost - reporting year of the transaction to which the

adjustment pertains. CMS Pub. 15 - 1, § 804 provides in part:

Discounts, allowances, refunds, and rebates

are not to be considered a form of income.

Rather, they should be used to reduce the

specific costs to which they apply in the

accounting period in which the purchase

occurs.

Where the purchase occurs in one accounting

period and the related allowance or ref und

is not received until the subsequent period,

where possible, an accrual in the initial

period should be made of the amount if it is

significant, and cost correspondingly

reduced. However, if this cannot be readily

accomplished, such amounts may be use d to

reduce comparable expenses in the period in

which they are received.

Rebates in the form of cash payments on the

total value of purchases in one accounting

period are not generally received until the

subsequent accounting period. Where the

amount of the rebate can be determined, it

should be accrued in the initial period and

costs for that period correspondingly

reduced. A reasonable effort should be made

to accrue accurate amounts for allowances

and rebates which will be received after the

books ha ve been closed. The difference

between the accrual and the actual amount

received may then be entered in the period

in which it is actually received. Where a

number of cost centers have received

numerous charges from purchases, a rebate in

recognition of the total of such purchases

should be credited to these cost centers

based on an equitable method of allocation.

88 . The message here is that, when dealing with a material

item, an accrual - basis provider must make a reasonable effort to

accrue accurate estimates of costs in the cost - reporting year in

which they were incurred, even if these costs cannot be

identified with precision.

89 . The $1 , 038 of rental - car fees is probably not

out - of - period. Under the "all - events test" described in the

Treasur y regulation quoted above, liability for this June 2001

expenditure likely did not attach until internal controls

demonstrated that this was a legitimate business expense, not a

rogue employee on a lark. Even if out - of - period, though, this

expense is clea rly not material, and it is unreasonable to

require Petitioner to estimate this expense in time to include

it in the 2001 - 02 cost - reporting year.

90 . The $1 , 500 of computer consulting fees is out of

period, but clearly not material. Invoiced a year afte r the

performance of the service, it appears that the vendor forgot

about the service, so it is unreasonable to expect Petitioner to

have knowledge of the claim and take the time to estimate this

minor expense for the 2001 - 02 cost - reporting year.

91 . The $4 , 225 of legal fees is possibly not out of

period, depending on the reasonableness of Petitioner's

expectation that its insurance deductible may not apply, so as

to spare it the expense. Compared to the car - rental and

computer expense, more may be reaso nably expected of

Petitioner' s contemporaneous knowledge of this item, not due to

the size of the legal bill, but due to the exposure involved in

what appeared to be a defense of a tort claim. Under any set of

circumstances , the expense itself fails the m ateriality test.

Whether included in one cost - reporting year or the next simply

does not matter.

92 . Thus, the reimburse ments of these so - called

out - of - period costs are not overpayments.

IV. Employee Cash Awards

93 . It is difficult to understand the problem that

Respondent has with this item. Even with these longevity

bonuses, nothing in the record suggests excessive compensat ion

for these three employees. If Petitioner had paid a bonus to

the three employees involved in this issue, and the bonus ha d

been included in their gross income for federal income tax

purposes, Respondent would not have disputed this compensation

as an allowable cost. The is sue arises here due to Respondent's

application of its nonrule policy that compensation is an

allowable cost only to the extent that it is included in the

gross income of the recipient.

94 . This policy needs some work. T he longevity payments

may have been designed in response to sections 74(c)(1) and

274(j), Internal Revenue Code, as amended. If so, the

longevity - award program is not permitted to discriminate in

favor of highly compensated employees , and all sums in excess of

$1 , 600 per year will be included in the recipient's gross

income. So, even if Respondent's nonrule policy applied here,

it would not disallow all of the payments.

95 . In fact, though, no ground exists to disal low any part

of these payments because they are part of the fair compensation

paid to Petitioner's employees for covered services . Thus, the

reimbursement s of thes e payments to employees are not

o verpayments.

V. Return on Equity

96 . The money in the bank account for Country Meadows is

working capital. It is not disallowable as some sort of

inv ested fund.

97 . CMS Pub. 15 - 1, § 1218.2 provides :

Invested Funds . -- Investe d funds are funds

diverted to income producing activities

which are not related to patient care. Any

portion of the provider's general funds or

operating funds invested in such activities

for more than 6 consecutive months is not

includable in the provide r's equity capital.

For example, funds deposited in a savings

account or invested in securities or loans

are considered "invested fundsÑ. Further,

if the time period covered by such fund

investment is interrupted by a number of

withdrawals and redeposits so that the

effect of such transactions is that funds

are invested for more than 6 consecutive

months, these invested funds are not

included in equity capital.

98 . Under this definition, the money earmarked for Country

Meadows is not an invested fund b ecause it did not remain,

undisturbed, for more than six months.

99 . However, any reimbursement to Petitioner for return on

equity raises another problem. Return on equity is "limited to

those providers who are organized and operated with the

expectatio n of earning a profit for the owners, as distinguished

from providers organized and operated on a non - profit basis."

Plan, § III.H. Petitioner is a not - for - profit, so it has no

owners or, thus, equity .

100 . Thus, the reimbursement of $3 , 418 for return on

equity is an overpayment subject to recoupment by Respondent.

VI. State Overhead at Three Clusters

101 . This is an expense involving therapy that, if

incurred by Petitioner, is clearly an allowable cost. The

problem here is that the expense was in curred by the State of

Florida , not Petitioner. S tate - employed therapists provi ding

medically necess ary therapy to some of Petitioner's residents

did so at no charge, direct or indirect, to Petitioner.

102 . Petitioner argues that its per diem rate shoul d

include this imputed cost. Imputed costs may be allowable , even

when they bear no resemblance to economic reality . For

instance, during inflationary periods in real property,

depreciation or amortization of a building may generate an

allowable cost tha t has no correspondence to the market value of

the capital item, although recapture will -- in a later, perhaps

much later, cost - reporting year -- somewhat offset this economic

anomaly . In this vein, Respondent allowed Petitioner a

depreciation cost for these three clusters, even though

Petitioner bore little, if any, of the economic loss over time

of these capital assets.

103 . But a llowing an imputed cost of therapy is another

matter . Nothing in the Plan authorizes imputing therapy costs,

except in one cas e, involving employees who are unpaid by the

charitable organization that employs them. CMS Pub. 15 - 1,

§ § 700, et seq. Th ese detailed provisions allow a provider to

report the value of free labor costs, provided the free employee

is unpaid by the charita ble organization that pays him. Such

detailed treatment of unpaid labor in one exceptional case

underscores the requirement that normally an expenditure is a

precondition to reimbursement.

104 . At one point, Petitioner argued that it is a related

orga nization with the State of Florida , so that it could take

the state's costs for these employees. But the related -

organization provisions do not work this way. CMS Pub. 15 - 1,

§ 10 00 states:

Costs applicable to services, facilities,

and supplies furnished to the provider by

organizations related to the provider by

common ownership or control are includable

in the allowable cost of the provider at the

cost to the related organization. However,

such cost must not exceed the price of

comparable services, faci lities, or supplies

that could be purchased elsewhere. The

purpose of this principle is two - fold: (1)

to avoid the payment of a profit factor to

the provider through the related

organization (whether related by common

ownership or control), and (2) to avo id

payment of artificially inflated costs which

may be generated from less than arm's - length

bargaining.

105 . The sole purpose of this provision is to prevent a

provider from using a related - organization transaction to

inflate the provider's costs. This provision does not allow a

provider receiving free labor from borrowing the labor costs of

the organization employ ing the employee and using the

organization's costs to build the provider's per diem cost base.

As noted above, the sole provision allo wing for an imputed cost

for free labor involves employees who themselves are unpaid.

106 . In the face of the dubious authority cited by

Petitioner is the recurrent theme of the Plan, which is fo r the

reimbursement of covered e xpenses actually incurred by the

provider .

107 . Thus, the reimbursement of $15,417 ($5 , 139 per

cluster times 3 clusters) is an overpayment subject to

recoupment by Respondent.

VII. Disallowed Transportation Costs and Airplane Costs

108 . For the reasons noted in the Findin gs of Fact, the

$123,848 in transportation salaries and benefits is allowable.

It has nothing to do with the aircraft expenses that Respondent

was trying to disallow.

109 . The remaining expenses under this section raise an

issue concerning the requireme nts and effect of a prima facie

case. All of the findings and conclusions concerning all of the

cost items in these cases, except for the remaining aircraft

expenses, would be the same, regardless of which party bore the

burden of proof. The remaining ai rcraft expenses, alone, are or

are not allowable, depending on which party bears the risk of

nonpersuasion. The reason for this is the undeveloped state of

the record concerning these expenses, as noted in the Findings

of Fact.

110 . The benefit of a pri ma facie case is the reward for a

lawful audit. The auditing agency may not simply write down

numbers on an examination report and claim this benefit, which

transfers the burden of going forward with the evidence from the

party with the affirmative of the issue (Respondent) to the

defending party (Petitioner). GAAS requires the auditor "to

obtain sufficient appropriate audit evidence . . . to afford a

reasonable basis for an opinion . . .." If the "informative

disclosures are not reasonably adequate," GA AS requires the

auditor to disclose this fact. Section 409.913(20) underscores

the requirements of identification and ana lysis that must

support an audit report.

111 . When these critical requirements are met, the

examination report becomes a marker of s ufficient reliability to

shift the burden of going forward with the evidence from the

party with the affirmative of the issue to the provider. Here,

Respondent's examination report failed to earn this measure of

deference, at least in terms of its treatme nt of the aircraft

expenses. Whether correct or not in his guesswork, Respondent's

staff auditor does not discharge his responsibility by

identifying aircraft expenses on an uninformed basis.

Regardless of the characterization of the identification effor t,

the analysis of these expenses was nonexistent. Confronted with

noncompliance, Respondent may issue an examination report

documenting the noncompliance and pursue other remedies, such as

the suspension of the provider from the Medicaid program. Cf.

42 CFR § 413.20 (Medicare). But Respondent may not transform

the examination report into an unexamined set of mere

allegations, at least without losing the benefit of the prima

facie case that attaches to a duly prepared examination report.

112 . Unable to secure the benefit of the prima facie case,

as to the remaining aircraft expenses, the record is

insufficiently developed to determine that these expenses were

not allowable.

113 . Thus, the reimbursement s of these transportation and

aircraft expenses ar e not overpayments.

RECOMMENDATION

Based on the foregoing, it is

RECOMMENDED that the Agency for Health Care Administration

enter a Final Order determining that , for the 2001 - 02 cost -

reporting year, Petitioner has been overpaid $ 23,370 ( inclu ding

$3 , 41 8 for return on equity , if not already settled ) , for which

recoupment and a re calculation of Petitioner's per - diem

reimbursement rate are required.

DONE AND ENTERED this 25th day of April, 2011, in

Tallahassee, Leon County, Florida.

S

___________________________________

ROBERT E. MEALE

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 25th day of April, 2011.

COPIES FURNISHED:

Daniel Lake, Esquire

A gency for Health Care Administration

2727 Mahan Drive, Suite 3431

Tallahassee, Florida 32308

Steven M. Weinger, Esquire

Kurzban Kurzban Weinger Tetzeli & Pratt, P.A.

2650 Soutwest 27th Avenue

Miami, Florida 33133

Richard J. Shoop, Agency Clerk

Agency f or Health Care Administration

2727 Mahan Drive, Suite 3431

Tallahassee, Florida 32308

Justin Senior, General Counsel

Agency for Health Care Administration

2727 Mahan Drive, Suite 3431

Tallahassee, Florida 32308

Elizabeth Dudek, Secretary

Agency for Hea lth Care Administration

2727 Mahan Drive, Suite 3431

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.