11-1800-9690-2

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE MINNESOTA DEPARTMENT OF HUMAN SERVICES

 

In the Matter of the Rate Appeal of EWL Enterprises, Inc., d/b/a Golden Oaks Nursing Home

RECOMMENDED ORDER GRANTING DEPARTMENT’S MOTION FOR SUMMARY DISPOSITION AND DENYING FACILITY’S MOTION FOR SUMMARY DISPOSITION

 

            The above matter is pending before the undersigned Administrative Law Judge pursuant to cross-motions for summary disposition.  Paul M. Landskroener, Assistant Attorney General, Public and Human Resources Section, 445 Minnesota Street, St. Paul, Minnesota 55101-2127, appeared on behalf of the Department of Human Services.  John M. Broeker, Attorney at Law, Popham, Haik, Schnobrich & Kaufman, Ltd., 222 South Ninth Street, Suite 3300, Minneapolis, Minnesota 55402-3336, appeared on behalf of EWL Enterprises, Inc.  Oral argument regarding the motions was heard on May 6, 1996, and the record with respect to the motions closed on May 10, 1996, when the Facility’s reply brief was received.

            Based upon all of the files, proceedings, and arguments herein, and as discussed in the Memorandum below, IT IS HEREBY RESPECTFULLY RECOMMENDED that the Department issue an Order granting the Department’s Motion for Summary Disposition and denying the Facility’s Motion for Summary Disposition.

Dated this _____ day of June, 1996

                                                                      __________________________________

                                                                       BARBARA L. NEILSON

                                                                       Administrative Law Judge

NOTICE

            This Report is a recommendation, not a final decision.  The Commissioner of Human Services will make the final decision after a review of the record.  The Commissioner may adopt, reject or modify the Findings of Fact, Conclusions, and Recommendations.  Under Minn. Stat. § 14.61, the final decision of the Commissioner shall not be made until this Report has been made available to the parties to the proceeding for at least ten days.  An opportunity must be afforded to each party adversely affected by this Report to file exceptions and present argument to the Commissioner.  Parties should contact Maria R. Gomez, Commissioner, Minnesota Department of Human Services, Second Floor Human Services Building, 444 Lafayette Road, St. Paul, Minnesota 55155,  to ascertain the procedure for filing exceptions or presenting argument.  Pursuant to Minn. Stat. § 14.62, subd. 1, the Agency is required to serve its final decision upon each party and the Administrative Law Judge by first class mail or as otherwise provided by law.

MEMORANDUM

EWL Enterprises d/b/a Golden Oaks Nursing Home (“Golden Oaks” or “the Facility”) operates a nursing home in Minnesota and receives reimbursement from the Department for allowable costs incurred in providing care to residents under the federal Medicaid Act, 42 U.S.C. § 1396a, and the State’s Medical Assistance Program, Minn. Stat. Ch. 256B.  The reimbursement rates at issue in this proceeding were set under Minn. Stat. § 256B.41-256B.50 and Minn. Rules 9549.0010-.0080 (“Rule 50”).  To receive medical assistance payments, nursing homes submit annual cost reports showing costs incurred during the reporting year, which generally runs from October 1 through the following September 30.  Minn. R. 9549.0041, subp. 1.  During desk audits, DHS auditors review the cost reports and supporting documentation.  Minn. R. 9549.0020, subp. 19 and 9549.0041.  The auditors allow, disallow, or reclassify costs reported on the provider’s cost report and, based upon adjusted allowable costs, calculate a prospective per diem rate for a rate year running from July 1 through the following June 30.  Minn. R. 9549.0041, subp. 11, 13.  Providers may appeal specific audit adjustments after they receive the final rate notice.  Minn. Stat. § 256B.50, subd. 1b.  If the appeal is not resolved informally, the provider may demand a contested case hearing.  Minn. Stat. § 256B.50, subd. 1h.

The Department conducted a field audit of the cost reports submitted by Golden Oaks for the rate periods years 1987 through 1991.  As a result of the field audit, the Department disallowed certain payments that were made to Edward Lehmann, Jr. for the October 1, 1988-September 30, 1989, October 1, 1989-September 30, 1990, and October 1, 1990-September 30, 1991, reporting years.  See Audit Report dated November 4, 1993, appended to Department’s May 7, 1996, letter to the Administrative Law Judge.  The Department established new rates for the rate year beginning October 1, 1993.  The Facility appealed the final field audit findings by letter dated December 29, 1993.  The Department issued a determination regarding the appeal on December 15, 1994, which the Facility also appealed.  See Exs. 1, 3, and 4 appended to the Notice of and Order for Hearing.  This contested case proceeding followed.

            The Department and the Facility have filed cross motions 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 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).  In this contested case proceeding, Golden Oaks bears the burden of demonstrating by a preponderance of the evidence that the Department’s determination is incorrect.  Minn. Stat. § 256B.50, subd. 1c (1994); see also REM-Canby, Inc. v. Minnesota Department of Human Services, 494 N.W.2d 71, 74 (Minn. App. 1992).  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.

There appear to be no genuine issues of material fact in dispute regarding the payments that were made by the Facility to Edward Lehmann, Jr.  Both parties agree that the propriety of the Department’s reliance on Minn. Rules 9549.0035, subd. 4.B. as a basis for the disallowance is appropriate for summary disposition.[1]  The disagreement between the parties regarding this question turns on the legal issue of what will satisfy the rule requirement of a “written compensation plan” and on the application of the legal standard to the undisputed facts.  These matters are discussed below.

Based upon the memoranda, affidavits, depositions, and other materials filed by the parties, and construing the facts in a light most favorable to Golden Oaks, it appears that the relevant facts in this case are as follows.  Golden Oaks is owned by EWL Enterprises.  Edward Lehmann, Jr., is the corporation’s sole stockholder and director and also serves as its President, Vice-President, Secretary, Treasurer, and Financial Manager.  Deposition of Edward Lehmann, Jr., at 5, 11-12, 59.  During the field audit period, Mr. Lehmann worked approximately fifty percent of his time at Golden Oaks and approximately fifty percent of his time at Wedgewood Health Care Center, a nursing home owned by his father, Edward Lehmann, Sr.  Id. at 8-9. 

For his work at Golden Oaks, Mr. Lehmann was paid a base salary on a bi-weekly basis.  This base salary ranged from $20,800 to $21,780 during the years involved in the appeal and was based on an hourly rate of approximately $20 per hour. Id. at 44-45, 47.  In December of 1989, 1990, and 1991, Golden Oaks made payments totaling $114,000 to Mr. Lehmann in addition to his base salary.  These end-of-the-year salary adjustments consisted of a $50,000 payment made to Mr. Lehmann in December of 1989; a $20,000 payment made in December of 1990; and a $44,000 payment made in December of 1991.  Thus, Mr. Lehmann’s total compensation was $70,800 for the 1988-89 reporting year; $40,800 for the 1989-90 reporting year; and $66,000 for the 1990-91 reporting year.  Audit Step 0-8-1 (R. 325); Deposition of Gordon Vetsch at 15-20.  The adjustments were paid after the close of the reporting year, but Golden Oaks’ accountants adjusted journal entries to show that the costs were posted retroactively to the prior reporting year.  Golden Oaks combined these payments with Mr. Lehmann’s base salary and reported them as “administrator salary” on its cost reports.  Id. at 17-20, 24.

At the time of the field audit, the Department disallowed these three payments to Mr. Lehmann.  Audit Step 0-8-1 (R. 325); November 4, 1993 Audit Report (appended to Department’s May 7, 1996, letter to the Administrative Law Judge); December 15, 1994, Determination of Long Term Care Rate Appeal (appended as Ex. 1 to Notice of and Order for Hearing).  All three of these Departmental documents indicated that the disallowance was made because the Facility did not have a written policy for the payment of “bonuses”[2] in accordance with Minn. R. 9549.0035, subp. 4.B.  Minn. R. 9549.0035, subp. 4, provides in pertinent part as follows:

Subp. 4.       Compensation for personal services.  Compensation for personal services includes all the remuneration paid currently, accrued or deferred, for services rendered by the nursing facility’s owners or employees.  Only compensation costs for the current reporting period are allowable subject to the requirements of parts 9549.0010 to 9549.0080.

            A.     Compensation includes:

                     (1)    salaries, wages, bonuses, vested vacations, vested sick leave, and fringe benefits paid for managerial, administrative, professional, and other services;

                     (2)    amounts paid by the nursing facility for the personal benefit of the owners or employees;

* * *

            B.  The nursing facility must have a written policy for payment of compensation for personal services.  The policy must relate the individual’s compensation to the performance of specified duties and to the number of hours worked.

Despite the Facility’s initial arguments to the contrary, this rule was adopted in 1985 and was, in fact, in effect during the time period relevant to this appeal.  See 9 State Reg. 2659, 2661-62 (June 10, 1985). 

            As a threshold matter, Golden Oaks argues that this rule provision is superseded by Minn. Stat. § 256B.50, subd. 3 (1994).  That statutory provision provides as follows:

The commissioner [of Human Services] shall settle unresolved appeals by a nursing facility of disallowances or adjustments of compensation costs for rate years beginning prior to June 30, 1994, by recognizing the compensation costs reported by the nursing facility when the appealed disallowances or adjustments were based on a determination of inadequate documentation of time and attendance or equivalent records to support payroll costs.  The recognition of costs provided in this subdivision pertains only to appeals of disallowances and adjustments based solely on disputed time and attendance or equivalent records.  Appeals of disallowances and adjustments of compensation costs based on other grounds, including misrepresentation of costs or failure to meet the general cost criteria under Minnesota Rules, parts 9549.0010 to 9549.0080, are not governed by this subdivision.

It is evident that this statute does not apply to Golden Oaks’ appeals.  The Department did not disallow the payments made to Mr. Lehmann due to a determination that time and attendance or equivalent records were lacking; rather, the Department disallowed the payments based, inter alia,[3] upon its determination that the Facility did not have a written policy for payment of this compensation.  Minn. Stat. § 256B.50, subd. 3, expressly does not apply to appeals of disallowances and adjustments of compensation costs based on an grounds other than inadequate documentation of time and attendance or equivalent records.  A compensation policy setting forth when and to whom end-of-the-year salary adjustments would be made is not a record that is “equivalent” to a time and attendance record for purposes of the statute.

            When Mr. Lehmann was asked during the field audit whether Golden Oaks had a written policy on bonuses, Mr. Lehmann provided the following written response to the auditors:  “No, only to owner, if and when is [sic] possible or will help rates.  Some years none is given.  Last to be paid.”  Lehmann Dep. at 73-74 and Dep. Ex. 4.  During his deposition, Mr. Lehmann stated that he did not believe that Golden Oaks had any written policies regarding end-of-the-year compensation adjustments.  Id. at 53, 76.  Gordon Vetsch, Golden Oaks’ accountant, also testified during his deposition that he knew of no written compensation plan relating specifically to end-of-the-year salary adjustments.  Vetsch Dep. at 24. During his deposition, Mr. Lehmann testified that Golden Oaks had a general, unwritten policy to consult with its accountants each year and determine what year-end adjustment it could make.  Lehmann Dep. at 104.  Mr. Lehmann indicated that he made the decision to give himself the salary adjustments in his capacity as owner or financial manager and not in his capacity as a board member.  Lehmann Dep. at 53.  He testified that the payments were made based upon a consideration of how far the facility was from approaching the general and administrative expense limits imposed by Rule 50 and “the cash abilities of the facility at that point in time” (i.e., the amount of money in the bank at the end of the year), that the majority of his salary was “deferred” to or “adjusted” at the end of the year, that the amount of the adjustment was not determined until the end of the year, and that the adjustment was made in order to “adjust [his] salary to something that would be more reasonable and that, over the years, would average out to something reasonable and somewhat adequate for the responsibilities [he had].”  Id. at 43-44, 45-46, 47-48, 63, 67, 75.  Mr. Lehmann testified that he did not do anything differently in terms of his job performance in the years that he received the salary adjustments.  Id. at 52.

            In response to the Department’s Request for Admissions and in its submissions with respect to the cross motions for summary disposition, the Facility has identified a set of documents as its written policy for payment of compensation for personal services pursuant to Minn. R. 9549.0035, subp. 4.B.  These documents consist of minutes of meetings of the Board of Directors of EWL Enterprises, excerpts from the corporate articles and by-laws, and (apparently) excerpts from Golden Oaks’ general personnel policies.  See R. 12, 15-31.  These documents indicate that (1)  Mr. Lehmann was the sole member of the Board of Directors during the years relevant to this proceeding (R. 16 and 18-21); (2)  while directors generally were not to receive any stated salary for their services as directors or committee members, directors were not precluded “from serving the corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor” (R. 23); (3)  the President of the corporation has the power to “appoint and discharge employees and agents of the corporation . . . and fix their compensation” (R. 25); and (5)  hours of work were assigned by the employee’s department head, time cards were required to be completed, and employees were to be paid every two weeks (R. 28-30).  The Facility did not provide any Board of Directors’ resolution approving end-of-the-year salary adjustments either in general or specifically with respect to Mr. Lehmann.  In addition, the Facility did not provide any written policy describing performance standards or any other basis upon which salary adjustments would be made. 

            All of the documents provided by Golden Oaks are silent with respect to the subject of salary or end-of-the-year salary adjustments for Mr. Lehmann or any other Golden Oaks employee.  These documents are not sufficient to satisfy Minn. R. 9549.0035, subp. 4.B. because they do not “relate [Mr. Lehmann’s] compensation to the performance of specified duties and to the number of hours worked.”  In the absence of such documentation, there is no independent or objective basis on which the Department may determine that the payments made to Mr. Lehmann were, in fact, compensation for services rendered rather than the taking by the owner of profits.

            The Facility contends in its motion papers that Patrick Betz, the Field Audit Supervisor for the Department, was not aware that the disallowance was made because of a lack of a written compensation plan and was more concerned with whether or not Mr. Lehmann rendered services to justify his compensation irrespective of the existence of a written compensation plan.  The Facility thus contends that the written compensation policy assertion is a “red herring” in this case.  However, as set forth above, it is evident that the Department’s audit findings and appeal determination have consistently referred to a violation of Minn. R. 9549.0035, subd. 4.B., stemming from the Facility’s failure to have a written compensation policy.  Moreover, Mr. Betz indicated that the issue of a lack of a written compensation plan was first raised during the course of the audit when the auditors were questioning the providers and asking them what services were rendered for the amounts paid, and further testified that it would have been “very difficult for [the Department] to make the disallowance” had Golden Oaks produced a written compensation plan “show[ing] the services that were rendered for the amounts that were disbursed at the end of the year, or that that’s the way that the individuals were going to paid for certain times of services.”  Betz Dep. at 112, 113.  The Facility has received adequate and consistent notice of the Department’s reliance on this ground as a basis for the disallowance.

The Facility further asserts that Mr. Betz admitted during his deposition that a written job description and time and attendance records would suffice as a “written policy for payment of compensation” under Minn. R. 9549.0035, subp. 4.B., and that Mr. Betz acknowledged that such records were supplied and accepted during the Golden Oaks field audit.  Betz Dep. at 113-15.  Mr. Betz clarified later in his deposition, however, that such records would be sufficient to constitute a written compensation policy supporting the base salary, but would not be sufficient to support the bonus or end-of-the-year payment.  Id. at 116.  He further explained that the Department was looking for a plan such as that utilized by Beverly Enterprises, which apparently specifies that certain employees are to be given a bonus if their QAR team finds no deficiencies.  Id. at 132.  Mr. Betz admitted that the Department did not question whether Mr. Lehmann did what he said he did at the Facility and that the Department generally accepts job descriptions and time and attendance records at face value.  Accordingly, the Department did not disallow any portion of Mr. Lehmann’s base salary. Mr. Betz explained that the large payments to Mr. Lehmann at the end of the year outside of the normal payroll distributions raised a question for the Department and caused them to examine whether there was a written compensation policy supporting such payments.  Id. at 115-126.  Mr. Betz’s deposition testimony does not undermine the legitimacy of the Department’s argument that the end-of-the-year payments should be disallowed.

The requirement in the rule that compensation be supported by a written compensation policy serves significant and legitimate public policy interests.  At the time Minn. R. 9549.0035, subp. 4.B., was promulgated, the Department indicated in its Statement of Need and Reasonableness that the provision was necessary to “assure that the payment rate reflects actual time spent and services provided” and prevent duplicate payments to owners or managers.”  R. 383.  Judge Lunde, who presided at the rulemaking hearing, determined that the rule was a necessary and reasonable method of implementing the Department’s goal of ensuring that services are actually performed for the salaries paid.  R. 380.  Rule 50 permits a nursing home provider to keep any difference between the rate it is paid and the costs it incurs or reinvest such amounts in the business.  Rule 50 does not, however, treat such “profit” as an allowable cost.  Allowable costs in a reporting year serve as the basis for the rate paid during the following year.  Enforcement of the written compensation policy requirement set forth in Minn. R. 9549.0035, subp. 4.B., serves to prevent the artificial inflation of the rates paid to facilities that would otherwise arise if facilities were able to distribute “profits” to owners and claim (without documentation) that such amounts are part of the overall compensation package provided to that owner.  The Department has disallowed a bonus paid to an employee of another facility in the past based upon the facility’s failure to have a written compensation policy, and there is no persuasive evidence that it previously has allowed compensation costs that have not been documented on either payroll records or a written compensation policy.  See Department’s Response to Appellant’s Request for Admissions (attached as Ex. 1 to the Department’s Reply Memorandum in Support of its Motion for Summary Disposition).

There is no genuine issue as to any material fact and the Department has shown that it is entitled to judgment as a matter of law.  Accordingly, the Administrative Law Judge recommends that the Department’s Motion for Summary Disposition be granted, and that the Facility’s Motion for Summary Disposition be denied.

B.L.N.