90-001492RU Health Care And Retirement Corporation Of America, Community Convalescent Center, Rosedale Manor, Kensington Manor, Jacaranda Manor, Wakulla Manor, Pasadena Manor, And Heartland Of St. Petersburg vs. Department Of Health And Rehabilitative Services Status: Closed DOAH Final Order on Tuesday, July 24, 1990.

Summary: Agency policy and document related to Medicaid reimbursement declared to be invalid rules.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

HEALTH CARE AND RETIREMENT )

CORPORATION OF AMERICA, COMMUNITY)

CONVALESCENT CENTER, ROSEDALE )

MANOR, KENSINGTON MANOR, )

JACARANDA MANOR, WAKULLA MANOR, )

PASADENA MANOR and HEARTLAND OF )

ST. PETERSBURG, )

)

Petitioner, )

)

vs. ) CASE NO. 90-1492RU

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

_________________________________)

FINAL ORDER

Pursuant to notice, the above matter was heard before the Division of

Administrative Hearings by its duly designated Hearing Officer, Donald R.

Alexander, on April 9, 1990 in Tallahassee, Florida.

APPEARANCES

For Petitioners: Alfred W. Clark, Esquire

P. O. Box 623

Tallahassee, Florida 32302

For Respondent: Harold D. Lewis, Esquire

Peter A. Lewis, Legal Intern

Building One, Room 407

1323 Winewood Boulevard

Tallahassee, Florida 32399-0700

STATEMENT OF THE ISSUES

The issues are (1) whether certain written statements contained in an HRS

document entitled "Instructions to Cost Report for Nursing Homes Participating

in the Florida Medicaid Program Adopted April 1, 1983" are a rule, and if so,

whether they have been adopted in accordance with all procedural and substantive

requirements of Chapter 120, Florida Statutes (1989), (2) if properly adopted,

whether the instructions are arbitrary, vague, and vest unbridled discretion in

the agency and thus are an invalid exercise of delegated legislative authority,

and (3) whether HRS has utilized an unpromulgated rule (policy) in permanently

classifying indirect home office property costs as operating costs.

PRELIMINARY STATEMENT

This matter began on February 27, 1990, when petitioners, Health Care and

Retirement Corporation of America, Community Convalescent Center, Rosedale

Manor, Kensington Manor, Jacaranda Manor, Wakulla Manor, Pasadena Manor and

Heartland of St. Petersburg, filed a "petition for the administrative

determination of the invalidity of rule or non-rule policy" wherein they alleged

that respondent, Department of Health and Rehabilitative Services, had required

all nursing homes filing Medicaid cost reports to utilize certain written

instructions in preparing such reports, and that certain portions of the

instructions constituted an illicit rule. After being reviewed for facial

compliance with Section 120.56, Florida Statutes (1989), the petition was

assigned to Hearing Officer Daniel S. Manry, Jr. on March 7, 1990. It was

later transferred to the undersigned and consolidated with Case Nos. 89-2590

through 89- 2596. Those cases are Medicaid audit cases Involving the same

petitioners who were required to use the questioned instructions in preparing

their respective Medicaid cost reports. By agreement of the parties, all

matters were set for final hearing on April 9, 1990, in Tallahassee, Florida.

The parties have also agreed that the record in Case Nos. 89-2590 - 89-2596

could be used in Case NO. 90-1492RU as well. However, a separate recommended

order is being issued in the Medicaid audit cases.

The transcript of hearing was filed on May 31, 1990. By agreement of the

parties, the time for filing proposed findings of fact and conclusions of law

was extended to June 22, 1990, and the same were timely filed on that date. A

ruling on each proposed finding is made in the Appendix attached to this Final

Order.

FINDINGS OF FACT

Based upon all of the evidence, the following findings of fact are

determined:

A. Background

1. Petitioners, Community Convalescent Center, Rosedale Manor, Kensington

Manor, Jacaranda Manor, Wakulla Manor, Pasadena Manor and Heartland of St.

Petersburg (petitioners, providers or nursing homes), are nursing homes

operating in the State of Florida and licensed by respondent, Department of

Health and Rehabilitative Services (HRS). They are owned and operated by the

parent corporation, Health Care and Retirement Corporation of America (HCRC),

which is also a petitioner in this cause. As the parent corporation, HCRC is

commonly known in regulatory parlance as both a home office and a related party

to all nursing homes in the chain organization. The parties have stipulated

that HCRC provides various functions for the individual nursing homes and incurs

property costs at the home office'.

2. The nursing homes are participants in the Medicaid program administered

by HRS. As such, each nursing home annually files with HRS a Medicaid cost

report for itself and its home office. For regulatory purposes, the cost

reports are identified as HRS Form 1542 and are revised from time to time by the

agency. In conjunction with those reports, HRS has prepared a twenty-nine page

document entitled "Instructions to Cost Report for Nursing Homes Participating

in the Florida Medicaid Program Adopted April 1, 1983" (the instructions). The

instructions have been distributed to all nursing homes in the State that

participate in the Medicaid program, including petitioners. A copy of the

instructions has been received in evidence as respondent's exhibit 3. Use of

the instructions in the preparation of a provider's cost report is mandatory,

and if not followed by the provider, may result in the rejection of the

provider's cost report. This is evidenced by language in the cover letter sent

with the instructions to each provider and which reads in pertinent part as

follows:

Please review these cost reports carefully,

including the general instructions and basic

classification of accounts, before attempting

to complete these forms. Failure to use the

current official forms or to abide by the

current instructions will result in rejection

of your cost report.

Even so, in those instances where a provider ignores the instructions and

records a cost in a manner different from that prescribed in the instructions,

HRS does not summarily reject the report. However, during the audit process,

the cost will be reclassified by HRS so that conformity with the instructions is

achieved. Thus, at least as to the manner in which costs are treated for

reimbursement purposes, the instruction form is the substantive standard for

allocating such costs in all instances. In this regard, HRS agrees the

instructions are enforced as if they were a rule.

3. This controversy involves an allegation by petitioners that a portion

of the instructions which requires nursing homes to classify and allocate

certain indirect home office property costs as operating costs is a rule, not

duly promulgated by the agency, and is therefore invalid. In the alternative,

they contend that the instructions, if properly promulgated, are nonetheless an

invalid exercise of delegated legislative authority because they are arbitrary,

vague and vest unbridled discretion in the agency. Finally, they contend that

HRS has utilized a policy, not adopted as a rule, which has the effect of

permanently classifying indirect home office property costs as operating costs

for reimbursement purposes. In this case, petitioners filed their cost reports,

and after the audit process was concluded, suffered a reduction in their

Medicaid reimbursement because of the challenged instructions and use of the

policy. Accordingly, they have standing to initiate this action.

B. Have the instructions been adopted as a rule?

4. The parties are in disagreement as to whether the instructions have

been adopted as a rule. To resolve this issue, the following facts have been

established. To implement the Medicaid program, HRS has adopted a seventy-nine

page plan known as the Florida Title XIX long Term Care Reimbursement Plan (the

plan), which establishes a reimbursement by for nursing homes. The plan, which

has been amended from time to time, has been adopted and incorporated by

reference in Rule 10C-7.0482, Florida Administrative Code (1989). The relevant

portion of that rule reads as follows:

Reimbursement to participating nursing homes

for services provided shall be in accord with

the Florida Title XIX long-Term Care

Reimbursement Plan as revised July 1, 1986

and incorporated herein by reference.

(Emphasis supplied)

Each time the plan has been revised, the rule has likewise been amended and a

copy of the plan filed with the Department of State.

5. The above rule does not make reference to the instructions. Moreover,

the plan does not use the words "incorporated by reference" when it refers to

the instructions. However, the following advice to its users is found in

paragraph A of section I of the plan:

Each provider participating in the Florida

Medicaid nursing home program shall submit a

uniform cost report and related documents

required by this Plan using Department of

Health and Rehabilitative Serviced (HRS) form

HRS 1542, April 1983, as revised and prepared

in accordance with the related instructions.

(Emphasis supplied)

6. Until June 1986 HRS did not file the instructions with the Department

of State nor did it refer to the instructions in the plan. At that time HRS was

in the process of amending rule 10C-7.0482 to incorporate by reference the

latest version of the plan and was advised by the Joint Administrative

Procedures Committee, which reviews all agency rules, to reference the cost

report (Form 1542) and related instructions in the plan and to file a copy of

both documents with the committee Pursuant to that suggestion, HRS amended its

plan by adding the above underscored language and thereafter filed a copy of

both documents with the Department of State and the committee when the rule

amendment was adopted. Thus, the instructions and the form are an integral part

of the plan, and the users of the plan have been placed on notice that the cost

report must be "prepared in accordance with the related instructions", a copy of

which is on file for public scrutiny with the Department of State. C. A general

overview of the reimbursement process

7. Petitioners have alleged that a portion of paragraph E of the

instructions which directs providers to record indirect home office costs as

operating costs on Form 1542 vests unbridled discretion in the agency and is

arbitrary and vague. The paragraph which underlies this controversy is found on

page 6 of the instructions and reads in relevant part as follows:

Inclusion in Provider Costs. Home office

costs not directly allocated to the providers

should be included in each

account in the provider's trial balance and

then through the provider's cost-finding

process. . . Home office costs which are not

directly allocated to the provider but are

allocated on a functional or pooled basis

should be included in the provider's cost

report as part of the provider's general and

administrative costs. (Emphasis supplied)

To resolve this technical issue, it is necessary to briefly review the manner in

which costs are recorded and allocated in the Medicaid reimbursement process as

well as the pertinent guidelines used by HRS in performing that task.

8. In the most basic terms, there are two separate and distinct steps in

the Medicaid reimbursement process: (1) the completion and filing of a cost

report by the provider, and (2) the audit process to confirm whether the

reported expense classifications in the report have been made in accordance with

reimbursement principles. As to the first step, a Medicaid provider must

annually file a cost report with HRS setting forth both its own and its parent's

costs incurred in providing services to Medicaid patients during a specified

accounting period. To this end, HRS has prescribed a cost report form, basic

classification of accounts and related instructions for use by the provider.

The classification of accounts assists providers in classifying costs into the

proper cost centers when reporting their expenditures to HRS while the

instructions provide directions to the nursing home for completion of the cost

report. After the reports are filed, through a series of allocations and other

steps the unaudited information in the report is used to calculate prospective

reimbursement rates for the provider for each of four cost components used by

HRS in the reimbursement process: patient care costs, property costs, operating

costs, and return on equity. It is noted here that for the operating component,

HRS has established a "cap" on the amount of reimbursement which may not be

exceeded even if a provider's costs exceed that limitation. For that reason, a

provider might wish to shift a cost from the operating component to the property

component in the event the ceiling had already been reached. Finally, in some

cases, the cost reports are later subjected to an audit which may result in the

rate being revised in a manner consistent with the audit results. Indeed, it

was after petitioners' cost reports were audited that this proceeding ensued.

9. As noted earlier, HRS has adopted by reference in rule 10C-7.0482 the

Florida Title XIX long Term Care Reimbursement Plan which establishes the

methodology for reimbursement of nursing home Medicaid providers. It is fair to

say that, whenever a cost issue arises, the plan is controlling except where the

plan does not address the issue. In that case, HRS looks to the federal

Medicare principles of reimbursement for guidance. These principles are

contained in Health Insurance Manual No. 15 (HIM 15), a compendium of federal

regulations pertaining to Medicare which have been adopted for use by the plan.

If the issue is not addressed in HIM 15, generally accepted accounting

principles (GAAP) control the resolution of the problem. Therefore, except

where modified by the plan or administrative rule, HRS utilizes the same cost

finding principles as Medicare.

10. As noted in finding of fact 8, paragraph E of the instructions directs

a provider to record indirect home office costs on its cost report in the

following manner:

Home office costs which are not directly

allocated to the provider but are allocated

on a functional or pooled basic should be

included in the provider's cost report as

part of the provider's general and

administrative costs.

Although the plan itself makes no distinction between direct and indirect costs,

the instructions distinguish between direct, functional and pooled home office

costs. Relying on the above language, HRS considers all home office functional

and pooled costs to be indirect in nature, and requires that they be recorded

and then allocated as G & A (operating) costs irrespective of their original

character. 1/ Once the home office property costs are recorded in the cost

report pursuant to the instructions, HRS utilizes a policy of treating the

classification as permanent, that is the cost item cannot be reclassified to

another component or reimbursed other than as an operating cost. This policy

has all of the attributes of a rule, is given the force and effect of a rule in

the reimbursement process but has never been formally promulgated as a rule

under chapter 120. The agency has given a number of reasons to justify its

actions, including the use of an asset's function as a means of determining

whether the asset is directly or indirectly related to the home office or

provider, its view that the home office provides nothing more than general and

administrative services to the chain members, and its laudable goal of not

allowing providers to abuse the Medicaid process by shifting costs from one cost

center to another to avoid a capped component. However, as will be shown

hereinafter, and within the context of the issues framed in the petition, the

justification for such actions is not pertinent to a resolution of this

controversy.

D. Differences between the instructions and the plan

11. Petitioners point to a number of provisions in the plan which provide

for a different treatment of home office property costs in the reimbursement

process and which are at odds with HRS's policy of prohibiting a

reclassification of such costs once they are recorded in the cost report. To

begin with, home office costs are not referred to by name in the plan. Rather,

the plan provides that home office costs be reimbursed in accordance with

principles applicable to related organizations. According to paragraph F of

section III of the plan:

Costs applicable to services, facilities, and

supplies furnished to a provider by

organizations related to a provider by common

ownership or control shall be governed by 42

CFR 405.427, Medicare (Title XVIII)

Principles of Reimbursement, and Chapter 10,

HIM 15.

Thus, the plan requires that home office (related organization) costs be

reimbursed in accordance with federal Medicare reimbursement principles and HIM

15. In this vein, it is noted that Chapter 10 of HIM 15, which governs the

Medicaid reimbursement principles applicable to home office costs, is facially

at variance in several respects with the treatment of home office costs required

by the instructions. More specifically, section 1005 provides that:

The related organization's costs include all

reasonable costs, direct and indirect,

incurred in the furnishing of services,

facilities and supplies to the provider. The

intent is to treat the costs incurred by the

supplier as if they were incurred by, the

provider itself. (Emphasis supplied)

This means that if a home office incurs property costs, they should be treated

as if they were incurred by the facility itself. Next, section 2150.3, which

pertains to the allocation of home office costs to components in the chain,

requires that the following identification and classification of home office

costs be made:

Starting with its total costs, including

those costs on behalf of providers, the home

office must delete all costs which are not

allowable in accordance with program

instructions. The remaining costs (total

allowable costs) will then be identified as

capital-related costs and noncapital-related

costs and allocated as stated below to all

the components . . . in the chain which

received services from the home office.

In other words, inn the reimbursement process, after the elimination of

nonallowable costs all remaining costs must be segregated into capital and

noncapital classifications and allocated on that basis. It should be noted here

that for purposes of both Medicare and Medicaid reimbursement principles, a

capital-related cost is a property cost. Finally, section 1310 of HIM 15

establishes the following general prohibition regarding the character of home

office costs:

Where the provider is including in the cost

report costs incurred by related

organizations, the nature of the costs (i.

e., capital-related or operating costs) do

not change. The provider must treat capital-

related costs incurred by a related

organization as capital-related costs of the

provider. (Emphasis supplied)

Put another way, the foregoing regulation provides that the character of a cost

should not be changed simply because it was incurred by a related party.

Accordingly, under the literal language of the regulation, if the home office

incurs a capital- related cost, it should be treated in the same fashion by the

provider for reimbursement purposes. This principle is further supported by

section 1311 of HIM 15 which allows a G & A cost to be reclassified to a

property cost in order to satisfy the requirements of section 1310. Therefore,

as to the above principles enunciated in the plan, the challenged instructions

are facially at variance and leave the user in doubt as to which allocation and

reimbursement scheme will be used by the agency.

12. In addition to the foregoing Medicare principles, petitioners rely on

two other definitions and an allocation principle within the plan which support

their position. First, the plan defines "nursing home property costs" as:

Those costs related to the ownership or

leasing of a nursing home. Such costs may

include property taxes, insurance, interest

and depreciation or rent.

It also defines "nursing home operating costs" as:

Those costs not directly related to patient

care or property costs, such as

administrative, plant operation, laundry and

housekeeping costs. Return on equity or use

allowance costs are not included in operating

costs.

Finally, paragraph B.4. of section V of tee plan provides that, in calculating

the reimbursement rates for a provider, HRS must:

. . . determine allowable Medicaid property

costs, operating costs, patient care costs,

and return on equity or use allowance.

Patient care costs include those costs

directly attributable to nursing services,

dietary costs, activity costs, social

services costs, and all medically ordered

therapies. All other costs, exclusive of

property costs and return on equity or use

allowance costs, are considered operating

costs.

These definitions, if taken literally, would lead a user of the plan to believe

that if a cost had the characteristics of a property cost, it would be so

classified and allocated on that basis.

13. Finally, petitioners cite to provisions within the chart of accounts

which define property and operating costs in a manner similar to those in the

preceding paragraph. These provisions can also be reasonably construed to mean

that a cost will be classified and allocated in a manner consistent with those

definitions.

14. Of particular significance is the fact that HRS has failed to include

language in either the plan or instructions which advises the user which choice

is controlling where facial differences between the plan and instructions exist.

CONCLUSIONS OF LAW

15. The Division of Administrative Hearings has jurisdiction of the

subject matter and the parties thereto pursuant to Section 120.56, Florida

Statutes (1989).

16. The petition for the administrative determination of the invalidity of

rule or nonrule policy filed in this cause is an all-purpose rule challenge that

raises three different types of issues. First, petitioner; contend that the

instructions, which have the force and effect of a rule, are invalid because the

agency has materially failed to follow the applicable rule making procedures set

forth in Section 120.54, Florida Statutes (1989). Secondly, they assert that

the instructions, if properly adopted as a rule, are nonetheless invalid because

they are vague, Vest unbridled discretion in the agency and are arbitrary within

the meaning of Subsections 120.54(8)(d) and (e), Florida Statutes (1989).

Finally, they contend that the agency has consistently and with the force and

effect of a rule utilized a policy of not allowing home office property costs to

be reclassified and reimbursed as property costs after being recorded on the

cost report as G A expenses, and that such a policy has not bean adopted as a

rule. Accordingly, as to these contentions, petitioners bear the burden of

proving them by the preponderance of the evidence. See, e.g. Agrico Chemical

Company v. State, Department of Environmental Regulation, 365 So.2d 759, 763

(Fla. 1st DCA 1978)

17. Because both parties agree, and the record shows, that the

instructions have the attributes of a rule and have been consistently enforced

in that manner, the first issue turns on the narrow question of whether the

instructions have been properly promulgated in accordance with all substantive

and procedural requirements embodied in Section 120.54, Florida Statutes (1989).

Pertinent to this inquiry is Subsection 120.54(8), Florida Statutes (1989) which

provides in part as follows:

(8) . . . Pursuant to rule of the Department

of State, a rule may incorporate material by

reference but only as such material exists on

the date the rule is adopted. For purposes

of such rule, changes in such material shall

have no effect with respect to the rule

unless the rule is amended to incorporate

such material as changed. No rule shall be

amended by reference only.

Under the authority of the foregoing statute, the Department of State has

adopted Rule 15-1.005, Florida Administrative Code (1989) which reads as

follows:

1S-1.005. Publication by Reference.

(1) Any ordinance, standard, specification

or similar material may be published by

reference in a rule subject to the following

conditions:

(a) The material shall be generally

available to affected persons.

(b) The material shall be published by a

governmental agency or a generally recognized

professional organization.

(2) The agency publishing material by

reference shall file with the Department of

State a correct and complete copy of the

referenced material with an attached

certification page which shall state a

description of the referenced material and

specify the rule to which the referenced

material relates.

* * *

18. Petitioners argue that the instructions have not been incorporated by

reference in rule 10C-7.0482 and thus constitute an illicit rule. However, the

instructions (a) are clearly an integral part of the Medicaid reimbursement plan

which has been incorporated by reference in that rule, (b) are generally

available to affected persons, (c) are published by a governmental agency, and

(d) have been filed with the Department of State. This being so, it is

concluded that the instructions have been properly incorporated by reference

within the meaning of subsection 120.54(8) and rule 1S-1.005, and thus the

applicable rule making procedures have been followed in all material respects.

19. Petitioners next contend that a portion of paragraph E of the

instructions is invalid under subsection 120.54(8)(d) in that it is vague and

vests unbridled discretion with the agency to choose from "one of two opposing

and directly inconsistent approaches to reimbursement of home office costs."

They also argue that the same portion of the instructions is arbitrary within

the meaning of subsection 120.54(8)(e) because the treatment of home office

property costs in the instructions is at odds with other portions of the plan

and HIM 15. In this regard, it is noted that a rule vests unbridled discretion

in an agency when it fails to establish adequate standards and reserves to the

agency the arbitrary power to determine private rights. Barrow v. Holland, 125

So.2d 749 (Fla. 1960). Further, a rule is vague or fails to establish adequate

standards for agency decisions when its terms are so vague that persons of

common intelligence must necessarily guess at its meaning and differ as to its

application. State v. Cummings, 365 So.2d 153 (Fla. 1978). Finally, an

arbitrary action is decided in Agrico Chemical Co. v. State, Department of

Environmental Regulation, supra at 763, as follows:

An arbitrary decision is one not supported by

facts or logic, or despotic.

20. By a preponderance of the evidence petitioners have shown that the

challenged portion of the instructions is vague in that persons of common

intelligence must necessarily guess as to the meaning of the instructions and

their application given the facially conflicting provisions within the plan.

Likewise, the agency is given the right to choose between classifying indirect

home office property costs in the manner set forth in the instructions and the

manner suggested by other portions of the plan. This is especially true since

neither the instructions nor the plan warn the user which competing choice will

be followed where facially conflicting provisions exist. Thus, the challenged

language in Paragraph E of the instructions is vague and vests unbridled

discretion in the agency within the meaning of subsection 120.54(8)d).

Notwithstanding the foregoing shortcomings, the pertinent instructions cannot be

said to be so illogical, despotic or without support in fact as to render them

arbitrary. Accordingly, petitioners' contention that the instructions violate

subsection 120.54(8)(e) must necessarily fail.

21. Finally, petitioners contend that the agency's interpretation of the

instructions which has the effect of permanently classifying indirect home

office costs as G & A costs for both reporting and reimbursement purposes is in

actuality a rule, not properly promulgated by the agency, and thus is invalid.

The preponderance of the evidence shows that the policy has been consistently

applied to all providers and has the force and effect of a rule. Moreover, the

agency has placed upon the challenged language an interpretation that is not

readily apparent from a literal reading of the instructions. In view of this,

and because the policy has not been adopted as a rule under chapter 120, it

necessarily constitutes an invalid exercise of delegated legislative authority.

See, e.q., St. Francis Hospital, Inc. v. DHRS, 553 So.2d 1351, 1354 (Fla. 1st

DCA 1989).

Whether the nonrule policy can pass muster in a section 120.57(1) proceeding is

not an issue in this cause and will be addressed in the companion audit cases.

22. In reaching the above conclusions, the undersigned has given

thoughtful consideration to respondent's contention that, based upon its own

experts' testimony and construction of the regulations, the instructions and

plan are compatible with one another and consistent with all reimbursement

principles. To be sure, the subject matter of this controversy is a highly

technical one that is best left to those who deal with GAAP, HIM and other

acronyms peculiar to the accounting profession. Even so, the test under

subsection 120.54(8)(d) is simply whether "men of common intelligence" must

guess as to how a rule will be applied, whether reasonable persons can differ as

to its application, and whether a rule, at least facially, offers the agency two

competing choices. Using this measure, and concluding that all components are

answered in the affirmative, the cited portion of the instructions must be found

to be in violation of the law.

Based on the foregoing findings of fact and conclusions of law, it is

ORDERED that the petition of Health Care and Retirement Corporation of

America, Community Convalescent Center, Rosedale Manor, Kensington Manor,

Jacaranda Manor, Wakulla Manor, Pasadena Manor, and Heartland of St. Petersburg

is GRANTED in part and the following sentence in Paragraph E on page 6 of the

document known as "Instructions to Cost Report for nursing Homes Participating

in the Florida Medicaid Program Adopted April 1, 1983" is declared to be an

invalid exercise of delegated legislative authority:

Home office costs which are not directly

allocated to the provider but are allocated

on a functional or pooled basis should be

included in the provider's cost report as

part of the provider's general and

administrative cost.

It is further

ORDERED that the agency's policy of interpreting the same sentence of the

instructions as requiring all indirect home office property costs to be

permanently classified and reimbursed as general and administrative costs is an

unpromulgated rule and thus constitutes an invalid exercise of delegated

legislative authority.

DONE AND ENTERED this 24th day of July, 1990 in Tallahassee, Leon County,

Florida.

__________________________

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

[phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 24th day of July, 1990.

ENDNOTE

1/ Under this scheme, home office costs not directly allocated to a provider are

assigned to each chain member based upon the functions supported by that cost

or, if not allocable on a "functional" basis, then by a patient-day ratio for

"pooled" costs.

APPENDIX

Case NO. 90-1492RU Petitioners:

1. Partially adopted in finding of fact 2.

2. Partially adopted in finding of fact 1.

3. Partially adopted in finding of fact 5.

4. Partially adopted in finding of fact 9.

5-7. Partially adopted in finding of fact 13.

8. Partially adopted in findings of fact 9 and 14.

9. Partially adopted in finding of fact 12.

10. Partially adopted in finding of fact 6.

11. Partially adopted in finding of fact 7.

12-13. Partially adopted in finding of fact 10

14-18. Partially adopted in finding of fact 11.

19. Rejected as being unnecessary.

20-24. Partially adopted in finding of fact 12.

25-27. Rejected as being unnecessary.

28. Partially adopted in finding of fact 11.

29. Rejected as being unnecessary.

30. Partially adopted in finding of fact 3.

Respondent:

1. Partially adopted in findings of fact 2 and 5.

2. Rejected as being unnecessary.

3-4. Partially adopted in finding of fact 7.

Note - Where findings of fact have been partially used, the remainder has been

rejected as being cumulative, unnecessary, subordinate, irrelevant or not

supported by the more credible and persuasive evidence.

COPIES FURNISHED:

Harold D. Lewis, Esquire

Peter A. Lewis, Legal Intern

1323 Winewood Boulevard

Building One, Room 407

Tallahassee, FL 32399-0700

Alfred W. Clark, Jr., Esquire

P.O. Box 623

Tallahassee, FL 32302

[phone]

V. Carroll Webb, Executive Director

Joint Administrative Procedures Committee

Room 120, Holland Building

Tallahassee, FL 32399-1300

Liz Cloud, Chief

Bureau of Laws and Administrative Code

Room 1802, The Capitol

Tallahassee, FL 32399-0250

NOTICE OF RIGHT TO JUDICIAL REVIEW

A PARTY WHO IS ADVERSELY AFFECTED BY THIS FINAL ORDER IS ENTITLED TO JUDICIAL

REVIEW PURSUANT To SECTION 120.68, FLORIDA STATUTES. REVIEW PROCEEDINGS ARE

GOVERNED BY THE FLORIDA RULES OF APPELLATE PROCEDURE. SUCH PROCEEDINGS ARE

COMMENCED BY FILING ONE COPY OF A NOTICE OF APPEAL WITH THE AGENCY CLERK OF THE

DIVISION OF ADMINISTRATIVE HEARINGS AND A SECOND COPY, ACCOMPANIED BY FILING

FEES PRESCRIBED BY LAW, WITH THE DISTRICT COURT OF APPEAL, FIRST DISTRICT, OR

WITH THE DISTRICT COURT OF APPEAL IN THE APPELLATE DISTRICT WHRRE THE PARTY

RESIDES. THE NOTICE OF APPEAL MUST BE FILED WIThIN THIRTY (30) DAYS OF

RENDITION OF THE ORDER TO BE REVIEWED.

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DISTRICT COURT OPINION AND MANDATE

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IN THE DISTRICT COURT OF APPEAL

FIRST DISTRICT, STATE OF FLORIDA

STATE OF FLORIDA, DEPARTMENT : NOT FINAL UNTIL TIME EXPIRES TO

OF HEALTH AND REHABILITATIVE FILE MOTION FOR REHEARING AND

SERVICES, : DISPOSITION THEREOF IF FILED.

Appellant, : CASE NO.: 90-2506

DOAH CASE NO. 90-1492RU

v. :

HEALTH CARE AND RETIREMENT :

CORPORATION OF AMERICA,

COMMUNITY CONVALESCENT :

CENTER, ROSEDALE MANOR,

KENSINGTON MANOR, JACARANDA :

MANOR, WAKULLA MANOR,

PASADENA MANOR, and :

HEARTLAND OF ST. PETERSBURG,

Appellees. :

Opinion filed January 17, 1992.

An appeal from an order of the Division of Administrative Hearings; Donald

Alexander, DOAH Hearing Officer.

Peter A. Lewis, Assistant General Counsel, Department of Health and

Rehabilitative Services, Tallahassee, for Appellant.

Alfred W. Clark, Tallahassee, for Appellees.

SMITH, J.

This is an appeal and a cross-appeal of a final order of the Division of

Administrative hearings concerning Medicaid reimbursement to nursing home

facilities. We affirm the appeal as well as the cross-appeal.

Health Care and Retirement Corporation of America, Inc., (HCR) owns and

operates seven nursing homes in Florida which accept Medicaid patients.

Accordingly, HCR periodically files with HRS a cost report (HRS 1542), regarding

each facility and the home office, seeking expense reimbursements from Medicaid.

HRS caused certain cost reports filed by HCR to be audited by an independent

accounting firm, which proposed that certain claimed costs be disallowed.

Thereafter, HCR and the seven nursing homes filed a petition seeking an

administrative determination of the validity of the rule or non-rule policy upon

which some of the claimed costs were disallowed. More particularly, HCR and its

Florida facilities took issue with HRS' practice of requiring costs, described

as indirect home office costs, to be reimbursed as general and administrative

costs rather than property

costs. 1/

The rule challenge under section 120.56, Florida Statutes (1989), was

consolidated with seven section 120.57 proceedings brought by HCR and its seven

Florida facilities. The question presented in the 120.56 proceeding was whether

the instructions prepared by HRS for use in completing a cost report constituted

a rule which was not duly promulgated. In the alternative, HCR argued that if

the instructions were found to be a validly promulgated rule, the instructions

are nevertheless invalid as vague. HCR also challenged the HRS policy, not

embodied in a rule, of not allowing indirect home office property to be

reclassified for reimbursement.

Following a hearing, the DOAH hearing officer issued a final order in which

he found that the instructions, which have the force and effect of a rule, were

not invalid as promulgated. The hearing officer found that the instructions

constitute an integral part of the Florida Title XIX long Term Care

Reimbursement Plan, which in turn were incorporated by reference in Rule 10C-

7.0482, Florida Administrative Code The hearing officer noted that users of the

Plan have been placed on notice that the cost report must be prepared in

accordance with the instructions, a copy of which is on file with the Department

of State. Thus, the hearing officer concluded as a matter of law that the

applicable rule-making procedures had been followed in all material respects.

However, the hearing officer also concluded as a matter of law that a part

of the instructions, Paragraph E, is vague because persons of common

intelligence must necessarily guess at the meaning of Paragraph E, given the

fact that it facially conflicts with certain portions of the Plan and with the

federal regulations compiled in Health Insurance Manual No. 15 (HIM-15). The

hearing officer observed that neither the instructions nor the Plan advise a

Medicaid provider which document would control in the event of conflicting

provisions. The hearing officer nevertheless concluded that while the

instructions were vague, and that HRS was vested with unbridled discretion over

the matter, the instructions were not so illogical, despotic or lacking in

factual support as to be arbitrary. See, Agrico Chemical Co. v. State,

Department of Environmental Regu1ation, 365 So.2d 759, 763 (Fla. 1st DCA 1978).

However, the hearing officer also concluded that the interpretation accorded

Paragraph E of the instructions 3/ by HRS is not readily apparent from a literal

reading, and that the interpretation has been applied with the force and effect

of a rule without being duly promulgated. Therefore, the hearing officer

concluded that HRS' interpretation of Paragraph E constituted an invalid

exercise of legislative authority.

In its appeal, HRS challenges the hearing officer's finding that Paragraph

E is vague. HRS bolsters its argument by noting the fact that six of HCR's

seven nursing homes correctly followed Paragraph E when completing their

respective cost reports. We find no basis in this argument for overturning the

final order. The hearing officer did not use his finding of vagueness to strike

down Paragraph E or any other Medicaid-related provisions. Thus, any

disagreement we might have with the hearing officer's finding would not require

a reversal of the final order. Moreover, the test for vagueness, vel non, of an

administrative provision or a statute, is not whether a party has interpreted

the provision in the manner favored by the relevant agency. Rather, the test

for vagueness was set forth in State v. Cumming, 365 So.2d 153 (Fla. 1978), and

State v. Rodriguez, 365 So.2d 157 (Fla. 1978): "whether men of common

understanding and intelligence must guess at [the provision's] meaning."

Turning to the second issue raised by HRS, we are not persuaded that the

hearing officer erred in finding a conflict between the instructions, on the one

hand, and the Plan and HIM- I5 on the other. Specifically, HRS argues that the

part of HIM- 15 relied upon by the hearing officer in finding a conflict,

Chapter 10 of HIM-I5, was the wrong provision.

As support for its assertion that Chapter 10 is inapplicable, HRS cites to

section 1000 as proof of the intent of Chapter 10. When section 1000 is read in

full, it is clear that the statement of intent quoted by HRS refers only to the

rule established in section 1000 and is plainly not intended as a statement of

the intent behind the entire chapter.

HRS also argues no conflict can exist with regards to Chapter 10 because

the term "home office costs" is not utilized. Instead, the term "costs to

related organizations" is employed. However, the first section in Chapter 10,

section 413.17 makes it obvious that home office costs are included within the

purview of the chapter, to wit: "[c]osts applicable to services, facilities,

and supplies furnished to the provider by organizations related to the provider

by common ownership or control are includable. . . ." (emphasis added). In

sum, we find HRS' arguments on this point unavailing.

Finally, we find no merit in HRS' argument that the hearing Officer erred

in finding that HRS placed an interpretation upon Paragraph E of the

instructions which is not readily apparent from the language of the provision.

It is clear that the instructions pertain to the completion of a cost report.

HRS has not challenged the hearing officer's finding that the completion of the

cost report is a function separate band apart from the audit process which leads

to reimbursement. Likewise, HRS has not challenged the hearing officer's

finding that there is a mechanism in the Plan and HIM-I5 for reclassifying

certain costs. Given these findings and the plain meaning of Paragraph E, we

find no basis for concluding that the hearing officer erred on this point. In

sum, we find no basis for reversal in HRS' appeal of the final order.

Nor do we find merit in HCR's cross-appeal in which it asserted- that the

hearing officer erred in concluding the "double incorporation" of the

instructions in the Plan which is incorporated in the Rules was not erroneous.

The hearing officer did not find a double incorporation had occurred. Instead,

he found simply that the instructions were so integral to the Plan as to be a

part of it. Our review of the record supports that finding.

Having found no basis to disturb the hearing officer's final order in the

rule challenge proceeding, the order appealed is AFFIRMED.

JOANOS, C.J. and BARFIELD, JJ., CONCUR.

MANDATE

From

DISTRICT COURT OF APPEAL OF FLORIDA

FIRST DISTRICT

To the Honorable, Donald R. Alexander, Hearing Officer

Division of Administrative Hearings

WHEREAS, in that certain cause filed in this Court styled:

HEALTH CARE AND RETIREMENT CORPORATION

OF AMERICA, COMMUNITY CONVALESCENT

CENTER, ROSEDALE MANOR, KENSINGTON

MANOR, JACARANDA MANOR, WAKULLA

MANOR, PASADENA MANOR and

HEARTLAND OF ST. PETERSBURG

Case No. 9O-2506

vs. Your Case No. 90-1492RU

DEPARTMENT OF HEALTH AND

REHABILITATIVE SERVICES

The attached opinion was rendered on January 17, 1992

YOU ARE HEREBY COMMANDED that further proceedings be had in accordance with said

opinion, the rules of this Court and the laws of the State of Florida.

WITNESS the Honorable James D. Joanos

Chief Judge of the District Court of Appeal of Florida,

First District and the Seal of said

court at Tallahassee, the Capitol, on this

19th day of February, 1992

Clerk, District Court of Appeal of Florida,

First District