96-003593RX Consulting Management And Education, Inc., D/B/A Gulf Coast Nursing And Rehabilitation Center vs. Agency For Health Care Administration Status: Closed DOAH Final Order on Wednesday, February 5, 1997.

Summary: Rule applying fair rental value system of medicaid reimbursement to nursing home lessees is valid.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CONSULTING MANAGEMENT AND )

EDUCATION, INC., d/b/a GULF COAST )

NURSING AND REHABILITATION CENTER, )

)

Petitioner, )

)

vs. ) CASE NO. 96-3593RX

)

AGENCY FOR HEALTH CARE )

ADMINISTRATION )

)

Respondent. )

___________________________________)

FINAL ORDER

On August 30, 1996, a formal administrative hearing was

held in this case in Tallahassee, Florida, before Richard

Hixson, Administrative Law Judge, Division of Administrative

Hearings.

APPEARANCES

For Petitioner: Alfred W. Clark, Esquire

Post Office Box 623

Tallahassee, Florida 32302

For Respondent: Wayne Mitchell, Esquire

Kim A. Kellum, Esquire

Agency for Health Care Administration

2727 Mahan Drive, Suite 3400

Tallahassee, Florida 32308

STATEMENT OF THE ISSUE

The issue for determination in this case is whether certain

provisions of the Florida Title XIX Long-Term Care Reimbursement

Plan, as adopted in Rule 59G-6.010, Florida Administrative Code ,

which are relied upon by the AGENCY FOR HEALTH CARE

ADMINISTRATION to apply a fair rental value system of property

reimbursement to Petitioner are invalid under Section 120.56,

Florida Statutes (1995). Petitioner also asserts a state and

federal constitutional equal protection challenge to the

existing rule provisions. (Petitioner’s constitutional issues

are preserved, but are not determined in this proceeding.)

PRELIMINARY STATEMENT

On December 14, 1995, Petitioner, CONSULTING MANAGEMENT AND

EDUCATION, INC., d/b/a GULF COAST NURSING AND REHABILITATION

CENTER (CME), in Case No. 95-6042, filed a Petition for Formal

Administrative Proceeding pursuant to Section 120.57(1), Florida

Statutes , disputing the proposed action of Respondent, AGENCY

FOR HEALTH CARE ADMINISTRATION (AHCA), to calculate the property

component of CME's Medicaid reimbursement under the fair rental

value system (FRVS), instead of the "cost" method. On January

11, 1996, the parties filed an agreed motion for abeyance, and

Case No. 95-6042 was placed in abeyance until March 31, 1996.

On March 29, 1996, CME filed a motion to schedule final hearing,

and Case No. 95-6042 was scheduled for final hearing on August

30, 1996.

On August 2, 1996, CME filed in the above-styled Case No.

96-3593RX, a Petition for the Administrative Determination of

the Invalidity of a Rule under Section 120.56, Florida Statutes .

Pursuant to the agreed motion of the parties, Cases Nos. 95-6042

and 96-3596RX were consolidated for hearing.

On August 22, 1996, AHCA filed a motion for partial summary

order or for dismissal of the state and federal constitutional

claims alleged in Paragraph 26 of the Petition. As indicated

above, those issues are preserved, but not determined in this

proceeding. See Department of Environmental Regulation v. Leon

County , 344 So.2d 297 (Fla. 1st DCA 1977).

On August 28, 1996, the parties filed a Prehearing

Stipulation. Pertinent stipulated facts and conclusions are

incorporated herein.

At hearing on August 30, 1996, Petitioner presented the

testimony of two witnesses, Paul Parker and Joseph D. Mitchell,

qualified as an expert in health care finance, and Medicaid and

Medicare reimbursement. Joint Exhibit 1, the Florida Title XIX

Long-Term Care Reimbursement Plan, (Florida Medicaid Plan) was

received in evidence. Petitioner also presented five exhibits

which were received in evidence.

Respondent presented the testimony of two witnesses, John

Owens, qualified as an expert in Medicaid rate reimbursement,

and Frank B. Hughes, qualified as an expert in Medicaid cost

reimbursement for application of the Florida Medicaid Plan.

Respondent presented four exhibits which were received in

evidence.

On October 14, 1996, a transcript of the proceedings was

filed. Pursuant to the parties’ request for extension of time,

the parties filed proposed recommended and final orders on

January 3, 1997.

FINDINGS OF FACT

1. Petitioner, CONSULTING MANAGEMENT AND EDUCATION, INC.,

d/b/a GULF COAST NURSING AND REHABILITATION CENTER (CME), is the

licensed operator of a 103-bed nursing home in Clearwater,

Florida, which is presently known as GULF COAST NURSING AND

REHABILITATION CENTER (GULF COAST). CME participates in the

Florida Medicaid Program as an enrolled provider.

2. Respondent, AGENCY FOR HEALTH CARE ADMINISTRATION

(AHCA), is the agency of the State of Florida authorized to

implement and administer the Florida Medicaid Program, and is

the successor agency to the former Department of Health and

Rehabilitative Services, pursuant to Chapter 93-129, Laws of

Florida .

Stipulated Facts

3. Prior to 1993, the GULF COAST nursing home facility was

known as COUNTRY PLACE OF CLEARWATER (COUNTRY PLACE), and was

owned and operated by the Clearwater Limited Partnership, a

limited partnership which is not related to CME.

4. In 1993 CME agreed t o purchase, and did in fact

purchase, COUNTRY PLACE from the Clearwater Limited Partnership.

5. Simultaneous with the purchase of COUNTRY PLACE, CME

entered into a Sale/Leaseback Agreement with LTC Properties,

Inc., a Maryland real estate investment trust which engages in

the financing of nursing homes. The Purchase and Sale Agreement

between Clearwater Limited Partnership and CME was contingent

upon the Sale/Leaseback Agreement and the proposed Lease between

CME and LTC Properties, Inc.

6. On Septembe r 1, 1993, CME simultaneously as a part of

the same transaction purchased COUNTRY PLACE, conveyed the

facility to LTC Properties, Inc., and leased the facility back

from LTC Properties, Inc.

7. As required, CME had notified AHCA of the proposed

transaction. AHCA determined that the transaction included a

change of ownership and, by lease, a change of provider. CME

complied with AHCA's requirements and became the licensed

operator and Medicaid provider for COUNTRY PLACE. Thereafter,

CME changed the name of the facility to GULF COAST.

8. After CME acquired the facility and became the licensed

operator and Medicaid provider, AHCA continued to reimburse CME

the same per diem reimbursement which had been paid to the

previous provider (plus certain inflation factors) until CME

filed its initial cost report, as required for new rate setting.

9. In the normal course of business, CME in 1995 filed its

initial Medicaid cost report after an initial period of actual

operation by CME. Upon review of the cost report, AHCA

contended that the cost report was inaccurate and engaged in

certain "cost settlement" adjustments. During this review, AHCA

took the position that CME's property reimbursement should be

based on FRVS methodologies rather than "cost" due to the lease.

10. In November of 1995, CME received from AHCA various

documents which recalculated all components of Petitioner's

Medicaid reimbursement rates for all periods subsequent to CME's

acquisition of the facility. In effect, AHCA placed CME on FRVS

property reimbursement. The practical effect of AHCA's action

was to reduce CME's property reimbursement both retroactively

and prospectively. The retroactive application would result in

a liability of CME to AHCA, due to a claimed overpayment by

AHCA. The prospective application would (and has) resulted in a

reduction of revenues.

11. CME is substantially affected by AHCA's proposed

action and by Sections I.B., III.G.2.d.(1), V.E.1.h., and V.E.4.

of the Florida Medicaid Plan.

Additional Findings of Fact

12. The Florida Medicaid Plan establishes methodologies

for reimbursement of a nursing home's operating costs and

patient care costs, as well as property costs. The dispute in

this matter relates only to reimbursement of property costs.

13. CME as t he operator of the GULF COAST nursing home

facility is entitled to reimbursement of property costs in

accordance with the Florida Medicaid Plan.

14. CME as the operator of the GULF COAST facility entered

into a Florida Medicaid Program Provider Agreement, agreeing to

abide by the provisions of the Florida Medicaid Plan.

15. The Sale/Leaseback Agreement entered into by CME and

LTC Properties Inc. (LTC) specifically provides for a distinct

sale of the nursing home facility to LTC. LTC holds record fee

title to GULF COAST.

16. LTC, a Maryland corporation, is not related to CME, a

Colorado corporation.

17. The Florida Medicaid Plan is intended to provide

reimbursement for reasonable costs incurred by economically and

efficiently operated facilities. The Florida Medicaid Plan pays

a single per diem rate for all levels of nursing care.

18. After a nursing home facility's first year of

operation, a cost settling process is conducted with AHCA which

results in a final cost report. The final cost report serves as

a baseline for reimbursement over the following years.

Subsequent to the first year of operation, a facility files its

cost report annually. AHCA normally adjusts a facility's

reimbursement rate twice a year based upon the factors provided

for in the Florida Medicaid Plan. The rate-setting process

takes a provider through Section II of the Plan relating to cost

finding and audits resulting in cost adjustments. CME submitted

the appropriate cost reports after its first year of operation

of the GULF COAST facility.

19. Section III of the Florida Medicaid Plan specifies the

areas of allowable costs.

20. Under the Allowable Costs Section III.G.2.d.(1) in the

Florida Title XIX Plan, a facility with a lease executed on or

after October 1, 1985, shall be reimbursed for lease costs and

other property costs under the Fair Rental Value System (FRVS).

AHCA has treated all leases the same under FRVS since that time.

AHCA does not distinguish between types of leases under the FRVS

method. The method for the FRVS calculation is provided in

Section V.E.1.a-g of the Florida Medicaid Plan.

21. A “hold harmless” exception to application of the FRVS

method is provided for at Section V.E.1.h of the Florida

Medicaid Plan, and Section V.E.4 of the Plan provides that new

owners shall receive the prior owner’s cost-based method when

the prior owner was not on FRVS under the hold harmless

provision.

22. As a lessee and not the holder of record fee title to

the facility, neither of those provisions apply to CME.

23. At the time CME acquired the facility, there was an

indication that the Sale/Leaseback transaction with LTC was

between related parties, so that until the 1995 cost settlement,

CME was receiving the prior owner’s cost-based property method

of reimbursement.

24. When AHCA determined that the Sale/Leaseback

transaction between CME and LTC was not between related parties,

AHCA set CME’s property reimbursement component under FRVS as a

lessee.

25. Property reimbursement based on the FRVS methodology

does not depend on actual period property costs. Under the FRVS

methodology, all leases after October 1985 are treated the same.

For purposes of reimbursement, AHCA does not recognize any

distinction between various types of leases.

26. For accounting r eporting purposes, the Sale/Leaseback

transaction between CME and LTD is treated as a capital lease,

or “virtual purchase” of the facility. This accounting

treatment, however, is limited to a reporting function, with the

underlying theory being merely that of providing a financing

mechanism. Record fee ownership remains with LTC. CME, as the

lease holder, may not encumber title to the facility. The

Florida Medicaid Plan does not distinguish between a

sale/leaseback transaction and other types of lease

arrangements.

27. Sections IV.D., V.E.1.h., and V.E.4., the “hold

harmless” and “change of ownership” provisions which allow a new

owner to receive the prior owner’s method of reimbursement if

FRVS would produce a loss for the new owner, are limited within

the Plan’s organizational context, and within the context of the

Plan, to owner/operators of facilities, and grandfathered

lessee/operators. These provisions do not apply to leases

executed after October 1, 1985.

28. Capital leases are an accounting c onstruct for

reporting purposes, which is inapplicable when the Florida

Medicaid Plan specifically addresses this issue.

29. The Florida Medicaid Plan specifically addresses the

treatment of leases entered into after October 1985 and provides

that reimbursement will be made pursuant to the FRVS method.

30. The Florida Medicaid Plan is the result of lengthy

workshops and negotiations between the agency and the nursing

home industry. The Florida Medicaid Plan complies with federal

regulations.

CONCLUSIONS OF LAW

31. The Division of Administrative Hearings has

jurisdiction over the subject matter of, and the parties to,

this proceeding. Section 120.56, Florida Statutes .

32. The Florida Medicaid Program is a cooperative federal

and state program by which financial assistance is provided to

the state so that medical care may be furnished to needy

individuals. 42 U.S.C. 1396 . Participation in the program is

voluntary. Participating states must comply with certain

requirements imposed by the Medicaid Act and regulations

promulgated by the Secretary of Health and Human Services. To

qualify for federal assistance, the state must submit and have

approved a plan for medical assistance 42 U.S.C. 1396(a) that

contains a comprehensive statement describing the nature and

scope of the State Medicaid Program. 42 C.F.R. 430.10 . The

state plan is required to establish, among other things, a fair

method for reimbursing health care providers for the medical

services provided to needy individuals. The Boren Amendment to

the Act further requires that reimbursement rates are reasonable

and adequate to meet the costs which must be incurred by

efficiently and economically operated facilities. Wilder v.

Virginia Hospital Association , 496 U.S. 498 110 S.Ct. 2510, 110

L.Ed.2 455 (U.S. 1990).

33. The Florida Medicaid Plan, Title XIX Long-Term Care

Reimbursement, which provides the methodology for property cost

reimbursement has been promulgated under Rule 59G-6.010, Florida

Administrative Code (formerly Rule 10C-7.0482, Florida

Administrative Code ).

34. In general, the Florida Medicaid Plan sets

reimbursement rates for providers, such as Gulf Coast, after

receipt of cost reports, on a prospective basis with an

inflation factor added, and certain incentive variables

included. The relevant criteria are set forth in the Plan.

35. Petitioner seeking to invalidate an existing rule has

the burden of showing that the agency has acted in excess of

authority or that the rule is otherwise an invalid exercise of

legislative authority. Cortes v. State Board of Regents , 655

So.2d. 132 (Fla. 1 st DCA 1995).

36. Specifically at issue in this case are the following

provisions of the Florida Medicaid Plan:

Section III G.2.d.(1) of the Plan, which provides:

Facilities leased on or after October 1,

1985 shall be reimbursed for lease costs and

other property costs based on the FRVS per

Section V.E.1.a.-g. of this plan. Allowable

ownership costs shall be documented to HRS

for purposes of computing the fair rental

value. Facilities not reimbursed based on

the FRVS per Section V.E.1.a.-g. of this

plan shall not be reimbursed based on the

FRVS per Section V.E.1.a.-g. of this plan,

solely due to the execution of a lease

agreement between related organizations

under Section III.F. of this plan.

* * *

Section V.E.1.h., which provides:

A “hold harmless” provision shall be

implemented to ensure that facilities

existing and enrolled in the Medicaid

Program at October 1, 1985, do not receive

reimbursement for property and return and

equity or use allowance under the FRVS

method less than the property cost

reimbursement plus return on equity or use

allowance given at September 30, 1985. If,

after calculation of the FRVS rate, that

reimbursement would be lower than

depreciation plus interest costs under

III.G.3.-5. of this plan, a facility shall

continue to be reimbursed depreciation plus

interest according to III.G.3.-5. of this

plan until such time as the net difference

in total payments between III.g.3.-5. and

FRVS is -0-.

* * *

Section V.E.4., which provides:

a. Facilities that undergo a change of

ownership on or after October 1, 1985, shall

be reimbursed for property based upon the

provisions contained in this section. It is

the Department’s intent that, to the extent

possible, the new provider shall receive

essentially the same reimbursement for

property costs as the previous provider.

Therefore, unless stated otherwise in b.

through f. below, the new provider’s

reimbursement shall be based on 1.-3. above

[the FRVS formula].

b. If the previous owner of a facility was

being paid depreciation plus interest under

the hold harmless provision of 1.h. above,

the new owner shall also receive

depreciation plus interest per Section

III.G. unless he requests the Department, in

writing, to begin FRVS payments instead.

The FRVS depreciable basis shall remain the

same as that of the previous owner; however,

the new owner’s mortgage interest rate shall

be used to calculate the interest expense

allowed, subject to the limitations in 1.f.

above.

* * *

Section I.B., which provides:

For new providers who enter the program

operating a facility that had been

previously operated by a Medicaid provider,

the property reimbursement rate shall be

established per Section V.E.4. of this plan.

37. Petitioner contends that under the circumstances of

this case, those provisions which do not distinguish between

various types of leases are vague, intentionally inconsistent,

fail to establish adequate standards, are arbitrary, and

therefore constitute an invalid exercise of delegated

legislative authority. Section 120.52(8), Florida Statutes ,

provides:

(8) “Invalid exercise of delegated

legislative authority” means action which

goes beyond the powers, functions, and

duties delegated by the Legislature. A

proposed or existing rule is an invalid

exercise of delegated authority if any one

or more of the following apply:

(a) The agency has materially failed to

follow the applicable rulemaking procedures

set forth in s. 120.54;

(b) The agency has exceeded its grant of

rulemaking authority, citation to which is

required by s. 120.54(7);

(c) The rule enlarges, modifies, or

contravenes the specific provisions of law

implemented, citation to which is required

by s. 120.54(7);

(d) The rule is vague, fails to establish

adequate standards for agency decision, or

vests unbridled discretion in the agency; or

(e) The rule is arbitrary or capricious.

38. Under Section III.G.2.d.(1) in the Plan, a facility

with a lease executed with a new provider after October 1, 1985,

shall be reimbursed for lease costs and other property costs

under the Fair Rental Value System (FRVS). Under the FRVS

methodology, all leases are treated the same under the rule, and

the agency has no arbitrary discretion to treat providers

disparately. The evidence establishes that those provisions

represent the result of negotiated rulemaking with industry

associations, and the challenged rule provisions were validly

adopted under the law, and are fair and equally applicable to

all affected providers.

39. Petitioner did not meet its burden of proof to show

that the FRVS method was improperly applied to its reimbursement

rate following a simultaneous series of sale/leaseback

transactions which culminated with CME holding a leasehold

interest in the facility. Moreover, the evidence does not

support the conclusion that the provisions of the Plan which

distinguish between record fee title holders and lessees are

arbitrary or capricious.

40. The promulgation and implementation of Rule 59G-6.010

is provided for under Section 409.919, Florida Statutes . The

Plan further complies with federal regulations. The adoption of

the Plan by rule did not exceed delegated legislative authority

on the part of the agency. There is clearly a rational basis

which underlies the negotiated formulation and adoption of FRVS

under the Plan.

ORDER

Based on the foregoing Findings of Fact and Conclusions of

Law, the Petition to Determine Provisions of the Florida

Medicaid Plan invalid as promulgated under Rule 59G-6.010,

Florida Administrative Code , is DENIED.

DONE and ORDERED this 5th day of February, 1997, in

Tallahassee, Florida.

___________________________________

RICHARD HIXSON

Administrative Law Judge

Division of Administr ative Hearings

DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 5th day of February, 1997.

COPIES FURNISHED:

Alfred W. Clark, Esquire

Post Office Box 623

Tallahassee, Florida 32302

Wayne Mitchell, Esquire

Kim A. Kellum, Esquire

Agency for Health Care Administration

2727 Mahan Drive, Suite 3400

Tallahassee, Florida 32308

Carroll Webb, Executive Director

Administrative Procedures Committee

Holland Building, Room 120

Tallahassee, Florida 32399-1300

Liz Cloud, Chief

Bureau of Administrative Code

The Elliot Building

Tallahassee, Florida 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 where the party resides. The

Notice of Appeal must be filed within 30 days of rendition of

the order to be reviewed.

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DISTRICT COURT ORDER

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=

Tallahassee, Florida 32399-1850

Telephone [phone]

November 10, 1997

CASE NO: 97-00777 97-01589

L.T. CASE NO. 96-3593RX

Consulting Management v. Agency for Health Care

and Education, Inc. Administration

Appellant(s), Appellee(s).

BY ORDER OF THIS COURT:

Appeal dismissed pursuant to Rule 9.350(b), Fla. R. App. P.

I HEREBY CERTIFY that the foregoing is (a true copy of) the

original court order.

John S. Wheeler, Clerk

By: __________________ (SEAL)

Anne Moore

Deputy Clerk

Copies:

Alfred W. Clark Kim Kellum

Ann Cole, Clerk