11-1800-9485-2

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE MINNESOTA DEPARTMENT OF HUMAN SERVICES

In the Matter of the Rate Appeal of

Norhaven, Inc.

ORDER DENYING MOTION FOR

SUMMARY DISPOSITION

The above-captioned matter is pending before Administrative Law Judge Barbara L. Neilson pursuant to a Notice of and Order for Hearing and Prehearing Conference issued by the Deputy Commissioner of the Minnesota Department of Human Services on February 21, 1995, and the Department’s motion for summary disposition. By letter dated October 13, 1995, the Administrative Law Judge permitted the Respondent until October 23, 1995, to provide specific information in support of its previously-filed memorandum in opposition to the Department’s motion. The Respondent filed an Amended Memorandum in Opposition to the Department’s motion on October 23, 1995. After receiving two extensions of time to which the Respondent did not object, the Department filed its final Reply Memorandum on November 21, 1995, at which time the record regarding the motion closed.

Catherine Margaret Meek and Peter B. Hofrenning, Assistant Attorneys General, 445 Minnesota Street, Suite 900, St. Paul, Minnesota 55101-2127, appeared on behalf of the Department of Human Services (“the Department”). Louis M. Furlong, Jr., Attorney at Law, One Griggs Midway, 1821 University Avenue, St. Paul, Minnesota 55104, appeared on behalf of Norhaven, Inc.

Based upon all of the files, records, and proceedings herein, and for the reasons set forth in the Memorandum attached hereto,

IT IS HEREBY ORDERED as follows:

(1) The Department’s Motion for Summary Disposition is DENIED.

(2) A conference call to discuss whether additional discovery is necessary and to set a hearing date will be held on Thursday, January 4, 1996, at 2:30 p.m. The Administrative Law Judge will initiate the call.

Dated this _____ day of December, 1995.

__________________________________

BARBARA L. NEILSON

Administrative Law Judge

MEMORANDUM

Individuals operating intermediate care facilities for the mentally retarded (ICF/MRs) in Minnesota receive reimbursement from the Department for allowable costs incurred in providing care to residents under the federal Medicaid Act, 42 U.S.C. § 1396, and the state’s Medical Assistance Program, Minn. Stat. Ch. 256B. The reimbursement rates generally are set on an annual basis and are based upon costs incurred in the prior year. A tentative rate is set by the Department each year based upon a desk audit conducted in the Department’s offices of the annual cost reports filed by the ICFs/MR. The Department may also periodically conduct on-site field audits of each facility’s books and records, and propose adjustments to the facility’s rate based upon the findings of the field audit.

The Department conducted a field audit of the cost reports submitted by Norhaven for the rate years 1991 and 1992. As a result of the field audit, the Department disallowed certain costs that it determined were not adequately documented. The Department established new rates for the rate year beginning October 1, 1993. Norhaven appealed the final field audit findings on July 27, 1993. The Department issued a determination regarding the appeal on August 26, 1994, which Norhaven also appealed. This contested case proceeding followed.

The Department has filed a motion for summary disposition in this matter. Summary disposition is the administrative equivalent to summary judgment. Minn. Rules pt. 1400.5500(K). Summary judgment is appropriate where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Sauter v. Sauter, 70 N.W.2d 351, 353 (Minn. 1955); Louwagie v. Witco Chemical Corp., 378 N.W.2d 63, 66 (Minn. App. 1985); Minn. R. Civ. P. 56.03. The Office of Administrative Hearings has generally followed the summary judgment standards developed in judicial courts in considering motions for summary disposition regarding contested cases. See Minn. Rules pt. 1400.6600.

It is well established that, it order to successfully resist a motion for summary judgment, the non-moving party (here, Norhaven) must show that specific facts are in dispute which have a bearing on the outcome of the case. Hunt v. IBM Mid America Employees Federal Credit Union, 384 N.W.2d 853, 855 (Minn. 1986). The existence of a genuine issue of material fact must be established by the non-moving party by substantial evidence; general averments are not enough to meet the non-moving party’s burden under Minn. R. Civ. P. 56.05. Id.; Murphy v. Country House, Inc., 307 Minn. 344, 351-52, 240 N.W. 2d 507, 512 (1976); Carlisle v. City of Minneapolis, 437 N.W.2d 712, 715 (Minn. App. 1988). Summary judgment may be entered against the party who has the burden of proof at the hearing if that party fails to make a sufficient showing of the existence of an essential element of its case after adequate time to complete discovery. Id. To meet this burden, the party must offer “significant probative evidence” tending to support its claims. A mere showing that there is some “metaphysical doubt” as to material facts does not meet this burden. Id.

Based upon the memoranda and affidavits filed by the parties, and construing the facts in a light most favorable to Norhaven, it appears that the relevant facts in this case are as follows. Timothy Deprey performed contract work for Norhaven between 1981 and 1986 and became employed by Norhaven in September of 1986. Supplemental Affidavit of Peter J. Sajevic, Jr., ¶ 7; Exs. B-1, B-2 attached to Supplemental Sajevic Affidavit. Mr. Deprey served as Norhaven’s Director of Creative Arts Therapy until he resigned in March of 1992. His wages were reimbursed by the Department of Human Services from 1986 to 1990. Supplemental Sajevic Affidavit, ¶ 8. W-2 Wage and Tax Statements issued to Mr. Deprey for the years 1989 through 1992 show that Norhaven was Mr. Deprey’s employer. Supplemental Sajevic Affidavit, ¶ 5; Exs. A-1 through A-4 attached to Supplemental Sajevic Affidavit.

In 1990, Mr. Deprey wanted to start a non-profit corporation called Arts, Etc., Inc., in order to perform art therapy services for disabled persons. He needed financial references to be able to approach different agencies about negotiating contracts for services and getting grants. Supplemental Sajevic Affidavit, ¶ 10. Norhaven gave Mr. Deprey permission to continue as an employee of Norhaven while he worked in his free time for Arts, Etc. He was permitted to seek work for Arts, Etc., as long as it did not interfere with his performing services for Norhaven residents. Mr. Sajevic, the owner of Norhaven, agreed with Mr. Deprey in 1990 and 1991 that, if he desired a track record of having sold services in order to apply for grants and secure contracts, he could return the wages paid to him by Norhaven and rebill Norhaven for services. This agreement was terminable at will. Norhaven never relinquished control over Mr. Deprey as an employee and had the option of terminating his services at any time. Id., ¶¶ 11, 14. Norhaven was not involved in the operation or management of Arts, Etc. Id., ¶ 12.

The agreement reached by Mssrs. Sajevic and Deprey is summarized in a document drafted by Mr. Sajevic which was provided to the Department’s auditors and included among their audit work papers. Affidavit of Gary L. Johnson, Exhibit A-10; Sajevic Affidavit, ¶ 7. According to this statement, Norhaven had for many years had a fine arts program available to residents of the ICF/MR. Arrangements were made with poets, artists, musicians, and others to assist residents in developing skills and appreciation for the arts. It was decided to move the fine arts opportunity outside Norhaven but continue the active involvement of Norhaven residents. Mr. Deprey incorporated Arts, Etc., Inc., as a not-for-profit corporation in January 1990. He arranged to hold the arts sessions at outside sites. Norhaven residents enrolled in these classes. An arrangement was made between Norhaven and Arts, Etc., that:

1. Norhaven would continue to pay Tim Deprey’s salary and benefits;

2. Tim was the only employee of Arts, Etc., other artists would be contracted and paid by Arts, Etc. All other expenses of Arts, Etc. would be paid by Arts, Etc.;

3. As funds became available to Arts, Etc., it would reimburse Norhaven to the extent possible for Deprey’s salary and benefits;

4. Norhaven would agree to this arrangement - the exchange of Deprey’s gross salary costs for tuition payments on behalf of participating Norhaven residents;

5. Arts, Etc. would attempt to recruit scholarships from charitable organizations and grants for ongoing operation.

Johnson Affidavit, Ex. A-10. Due to limited resources, Mr. Deprey, who was the only employee of Arts, Etc., was not able to establish a sufficient financial or resource base. Norhaven contended that “[t]he end result . . . for Norhaven is that--residents continued to receive services that they had previously at a net lower cost to Norhaven since Arts, Etc. was able to pay back some funds to offset his salary as well as picking up other costs of operation.” Id.

Due to Norhaven’s agreement with Mr. Deprey, Norhaven did not immediately show Mr. Deprey’s wages as an expense on its cost report. Instead, Norhaven kept track of Mr. Deprey’s wages as a receivable rather than as a wage account. Mr. Deprey eventually paid back some wages, and Norhaven reflected that in the receivables account. Id., ¶¶ 16, 17. When it became apparent that Arts, Etc., was not going to generate sufficient cash flow to continue operating, Norhaven canceled the agreement and sought reimbursement for wages paid to Mr. Deprey. Id. ¶ 18.

The Department conducted a field audit of the cost reports submitted by Norhaven for the rate years 1991 and 1992. During the audit, Gary Johnson, the primary field auditor, reviewed general ledger accounts and noticed the transaction involving Norhaven and Arts, Etc. Johnson Affidavit, ¶ 3. Based on conversations with Mr. Sajevic and Peter LeNeau, Norhaven’s Controller, Mr. Johnson learned that Norhaven had agreed to keep Mr. Deprey on its payroll during 1990 and 1991 with the understanding that Mr. Deprey would repay Norhaven when Arts, Etc., made a profit. He thus concluded that Norhaven had made a loan to Arts, Etc., with the expectation that the loan would be paid back. Id., ¶ 4.[1] In November and December of 1991, Norhaven wrote off the unreimbursed salary of Mr. Deprey for 1990 and 1991 in an account that eventually reached Norhaven’s December 31, 1991, cost report. The total amount written off by Norhaven was the net cost of $39,235 (which reflected the gross amount paid minus reimbursement received). Norhaven did not break down the cost according to specific services provided by Arts, Etc. Id., ¶ 7. Norhaven also did not produce any invoices for art therapy services which had been provided by Arts, Etc., to Norhaven residents and paid for by Norhaven. Id., ¶ 8. Mr. Johnson disallowed the amount of $39,235 because, “on its face, it is the unreimbursed salary of an employee of an unrelated corporation. There were no invoices documenting that Norhaven paid for services provided by Arts, Etc. Thus, I was unable to determine the cost (if any) of the services provided by Arts, Etc., to Norhaven.” Id., ¶ 9. The Department’s audit findings, which were issued on June 2, 1993, thus indicated that the amount of $39,235 had been disallowed due to inadequate documentation. Johnson Affidavit, ¶ 2.

In its memorandum in support of the motion for summary disposition, the Department does not dispute that the art therapy services would be allowable if adequate documentation were provided to support the costs. The Department contends, however, that Norhaven never provided adequate documentation and that, as a result, the Department cannot determine whether the services were actually provided and, if so, in what amount. The Department is generally authorized in the administration of the Medical Assistance rate system to “require any reports, information, and audits of medical vendors which the commissioner deems necessary.” Minn. Stat. § 256B.27, subd. 1 (1994). In conducting the audit of Norhaven and determining allowable costs, the Department applied the provisions of “Rule 53,” which is effective for payment rates established on or after January 1, 1986, and is set forth in Minn. R. 9553.0010-.0080 (1993).

Rule 53 specifies that “only costs determined to be allowable under parts 9553.0010 to 9553.0080 may be used to compute the total payment rate for facilities participating in the medical assistance program.” Minn. R. 9553.0035, subp. 1 (1993). Part 9553.0035, subp. 5, specifies in pertinent part as follows:

Subp. 5. Adequate documentation. A facility shall keep adequate documentation.

A. In order to be considered adequate, documentation

must:

(1) be maintained in orderly, well-organized files;

* * *

(3) include a paid invoice or copy of a paid invoice with date or purchase, vendor name and address, purchaser name and delivery address, listing of items or services purchased, cost of items purchased, account number to which the cost is posted, and a break-down of any allocation of costs between accounts or facilities. If any of the information to be listed on the invoice is not available, the providers shall document their good faith attempt to obtain the information;

* * *

(5) if a cost or revenue item is not documented under subitem (3) . . ., the facility must document the amount, source, and purpose of the item in its books and ledgers following generally accepted accounting principles and in a manner providing an audit trail; and

(6) be retained by the facility to support the five most recent annual cost reports submitted to the commissioner. . . .

* * *

C. Payroll records must be maintained by a facility and must show the amount of compensation paid to each employee and the days and hours worked. Complete and orderly cost allocation records must be maintained for cost allocations made among cost categories or facilities as specified in part 9553.0030.

* * *

Part 9553.0035, subp. 15, sets forth general costs principles to guide the Commissioner’s determination of allowable costs. That portion of the rules provides in relevant part as follows::

Subp. 15. General cost principles. The commissioner shall use the cost principles in this subpart to determine allowable costs:

A. the cost is ordinary, necessary, and related to resident care;

B. the cost is what a prudent and cost conscious business person would pay for the specific good or service in the open market in an arm’s length transaction;

C. the cost is for goods or services actually provided to the facility and the cost is actually paid for by the facility within 180 days after the close of the reporting year except as provided in subpart 6, item D . . . .

The Department argues that the only method to adequately document purchases from vendors is to provide paid invoices that conform to the requirements of subpart 5(A)(3), and asserts that the practice allowed by subpart 5(A)(5) of the rule is only for costs reported on the facility’s general ledger that cannot be supported by a receipt or an invoice. The Department thus contends that the disallowance of the costs in this case because of inadequate documentation is required by the plain meaning of Minn. R. 9553.0035, subp. 5(A)(3) and Norhaven’s failure to produce invoices from Arts, Etc. The Department further argues that the cost is not allowable under the general cost principles set forth in Minn. R. 9553.0035, subp. 15, because adequate documentation is lacking under subpart 5(A) and there is no convincing evidence that the cost was “for goods actually provided to the facility and paid for by the facility” as required by Minn. R. 9553.0035, subp. 15(C).

Norhaven supplied affidavits of Mr. Sajevic denying that Norhaven made a loan to Mr. Deprey or Arts, Etc., and denying that Mr. Deprey agreed to provide art therapy classes to residents of Norhaven free of charge. Mr. Sajevic further asserts that Mr. Deprey was an employee of both Norhaven and Arts, Etc., during the time period in question. Although Mr. Deprey was permitted to work for Arts, Etc., during his free time, “Norhaven, Inc., never relinquished control over Mr. Deprey as an employee.” Sajevic Supplemental Affidavit, ¶ 14. Mr. Sajevic indicates that Mr. Deprey received the $39,234 in wages for performing art therapy services for Norhaven residents at its Jackson location. Norhaven contends that adequate documentation for the costs exists in the form of client records, payroll records, activity schedules, and other records. Sajevic Affidavit, ¶ 6. Norhaven supplied payroll records in conjunction with its Amended Memorandum. The facility argues that the fact that Norhaven and Mr. Deprey paid payroll taxes and reported Mr. Deprey’s wages to the IRS and the Minnesota Department of Revenue supports Norhaven’s argument that the amount paid to Mr. Deprey was “wage expenses” and not a “loan” or other expenses to Arts, Etc. Norhaven emphasizes that payroll records are considered adequate documentation under Minn. R. 9553.0035, subp. 5 (1993).

In response, the Department points out that Norhaven identified the expenses as non-wage expenses on its cost report and in subsequent correspondence related to the appeal. The Department alleges that Norhaven did not make an argument that it should be reimbursed because the $39,235 was for wages paid to an employee until it filed its amended memorandum and affidavit, and urges the Administrative Law Judge to find that it is too late for Norhaven to take this approach. The Department indicates that it would have focused upon this issue during discovery had it known that the facility was going to rely on payroll records. The Department also argues that Norhaven should not be allowed to make this new argument because it is too late to amend Norhaven’s cost report under Minn. R. 9553.0041, subp. 14(B), and that Norhaven failed to comply with Minn. R. 9553.0080, subd. 2(B) (which requires that the facility filing an appeal specify each disputed item, the reason for the dispute, and the authority on which the provider is relying) by failing to raise its contention that Mr. Deprey was a Norhaven employee in its appeal letter and failing to cite the rule provision permitting wages of employees to be allowed.

In its July 22, 1993, appeal letter (attached to the Department’s motion as RA 1), Norhaven stated that it “paid the wages and related payroll costs of Tim Deprey in 1990 and 1991” and cited the reasonable cost principles of Minn. R. 9553.0035, subp. 15, to support its disagreement with the disallowance. This was sufficient to put the Department on notice that the facility was contending that it paid wages to Mr. Deprey and was likely to rely on payroll records to justify the cost. In addition, Mr. Sajevic attested in his initial affidavit filed in opposition to the summary disposition motion that “adequate documentation [for the expenditure] existed in the form of . . . payroll records . . . .” Sajevic Affidavit, ¶ 6. Although Norhaven did not clearly articulate its reliance on an argument that Mr. Deprey was a Norhaven employee prior to its supplemental filing in response to the motion, it does not appear that the facility is making an entirely new argument at this stage of the proceeding.

Norhaven obviously could have sought reimbursement for Mr. Deprey’s wages in a cost category on its cost reports that specifically encompassed employee wages. It apparently did not do so and it is obvious that it may no longer timely amend its cost report to reflect such an approach. See Minn. R. 9553.0041, subp. 14(B). However, given the evidence provided by Norhaven regarding the nature of the agreement between Norhaven and Mr. Deprey, the Administrative Law Judge is not persuaded that it would be improper for the facility to report this cost in a non-wage cost category or that the facility would be precluded from offering wage records to support its cost in that other cost category if Norhaven’s view of the arrangement proves to be accurate. Pursuant to the rules adopted by the Department, the substance of a transaction must prevail over its form. See Minn. R. 9553.0036, subp. 15(D). Although Minn. R. 9553.0035, subp. 5(A)(3), indicates a preference for the retention of invoices to justify vendor costs, Norhaven has provided evidence raising a genuine issue of material fact regarding whether Mr. Deprey was in fact acting as an employee of Norhaven and not as a vendor. Moreover, Minn. R. 9553.0035, subp. 5(A)(5) provides that costs not documented under 5(A)(3) may be documented in the facility’s books and ledgers following generally accepted accounting principles and in a manner providing an audit trail,[2] and subpart 5(C) recognizes that payroll records provide adequate documentation under Rule 53 regarding the amount of compensation paid to employees.

It is evident that genuine issues of material fact remain for hearing regarding whether Mr. Deprey actually provided art therapy services to Norhaven residents, whether Mr. Deprey was acting as an employee of Norhaven, whether the $39,325 was a loan to Mr. Deprey or Arts, Etc., whether Mr. Deprey agreed to provide services free of charge to Norhaven residents, and what days and hours were actually worked by Mr. Deprey. These facts are disputed and their determination will affect the outcome of this case. The Administrative Law Judge concludes that the wage records and affidavit evidence provided by Norhaven thus far is sufficient to withstand the Department’s motion for summary disposition. The Department indicated that it would have sought admissions during discovery regarding the nature of Mr. Deprey’s employment relationship with Norhaven if it had been aware that Norhaven was asserting an argument that the $39,325 was for wages paid to a Norhaven employee. For that reason, a conference call has been scheduled to discuss whether the parties believe additional discovery is necessary prior to bringing this matter on for hearing.

B.L.N.

STATE OF MINNESOTA)
)	ss
COUNTY OF HENNEPIN)

AFFIDAVIT OF SERVICE BY U.S. MAIL

[1] Mr. Johnson alleges in his affidavit that Mr. Sajevic and Peter LeNeau, Norhaven’s Controller, told him that, in addition to repaying the loan, Arts, Etc. agreed to provide art therapy services to residents of Norhaven free of charge. Residents of other ICFs/MR paid tuition to Arts, Etc. for classes. Id., ¶ 5. Mr. Sajevic disagrees with this characterization of the agreement between the parties. Sajevic Amended Affidavit, ¶ 19.

[2] The plain language of this rule provision does not support the overy restrictive interpretation urged by the Department.