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SC Administrative Law Court Decisions

New Ellenton Geriatric Center vs. SCDHHS

South Carolina Department of Health and Human Services

New Ellenton Geriatric Center

South Carolina Department of Health and Human Services

David Summer, Esq. for Petitioner

Richard Hepfer, Esq. for Respondent




This case arises on appeal from an Administrative Decision by Kimberly B. Burrell, a South Carolina Department of Health and Human Services ("Department") hearing officer ("hearing officer"), dated August 18, 1995. The issues at the contested case hearing involved Medicaid reimbursement disputes between New Ellenton Geriatric Center ("nursing home" or "Appellant") and the Department. The hearing officer determined that the adjustments of the Department were proper. Appellant now raises six issues on appeal.

Oral arguments were heard at the Administrative Law Judge Division ("Division") offices, Columbia, South Carolina on March 5, 1996. The decision of the hearing officer is affirmed in part and reversed in part.


The Appellant entered into annual contracts with the Department agreeing to provide nursing home care. The three contract periods which are the subject of the reimbursement disputes are July 1, 1988 through June 30, 1989, July 1, 1989 through June 30, 1990 and July 1, 1990 through June 30, 1991.

The Office of the State Auditor ("Auditor"), as agent for the Department, performed audits of Appellant's records for the three years at issue. The audit reports were forwarded to Appellant outlining the adjustments made by the Auditor. Appellant disagreed with many of the Auditor's disallowances. After issuance by the hearing officer of its decision affirming the disallowances of certain costs, Appellant appeals.


In appeals involving the South Carolina Department of Health and Human Services, the Division "may affirm the decision of the agency or remand the case for further proceedings," or "may reverse or modify the decision if substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions or decisions are:

(e) clearly erroneous in view of the probative and substantial evidence of the whole record; or
(f) arbitrary and capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion."

S.C. Code Ann. §1-23-380 (Supp. 1995). "Substantial evidence" is not a mere scintilla of evidence nor the evidence viewed blindly from one side of the case, but is evidence which, considering the record as a whole, would allow reasonable minds to reach the conclusion that the administrative agency reached or must have reached in order to justify its action. McGuffin v. Schlumberger-Sangamo, et al., 307 S.C. 184, 414 S.E.2d 162 (1992); Lark v. Bi-Lo, Inc., 276 S.C. 130, 276 S.E.2d 304 (1981). Abuse of discretion exists where the "ruling of the trial court was without reasonable factual support, resulted in prejudice to the rights of the appellant, and therefore, in the circumstances, amounted to an error of law." Bridges v. Wyandotte Worsted Co., 239 S.C. 37, 121 S.E.2d 300 (1961).


Appellant raises six issues on appeal:

1. Did the hearing officer err in failing to require the Department to seek any recoupment from Joe Dunkin and his company, GenCare, Inc., pursuant to the management agreement GenCare, Inc. signed with Appellant?

2. Did the hearing officer err in disallowing Appellant's costs incurred in providing health insurance premiums as a fringe benefit for the three years at issue to its owners, Dr. Gilmore Eaves ("Dr. Eaves") and Mrs. Jean Smith ("Mrs. Smith")?

3. Did the hearing officer err in disallowing portions of salaries and payroll taxes paid on behalf of Dr. Eaves and Mrs. Smith for those three years?

4. Did the hearing officer err in disallowing certain health insurance premiums paid on behalf of Dr. Eaves and Mrs. Smith, finding that the Employee Personnel Policy Manual ("policy manual") prohibited such payments for them since they were part-time employees?

5. Did the hearing officer err in disallowing various health insurance premiums paid on behalf of Dr. Eaves and Mrs. Smith because the costs adjustments made by the State Auditor in actuality disallowed more than the actual premiums paid on their behalf?

6. Did the hearing officer err in disallowing the salary payments to Joe Dunkin since they were made pursuant to a management agreement?

1. Requirement of the Department to seek recoupment from GenCare, Inc. Generally, a contract binds no one but the parties thereto, and it cannot impose any contractual obligation or liability on one not a party to it. 17A C. J. S. Contracts §520 (1963). A party has the right to determine who will be his obligor according to the terms of the contract and it is not permissible to thrust such on another party without his consent.

The contracts in this case were between Appellant and the Department. Each of the applicable contracts was signed by an authorized agent of the Appellant (normally its administrator) and a representative of the Department. No contractual relationship was ever established between GenCare, Inc., Joe Dunkin's company, and the Department. Accordingly, the hearing officer correctly determined that there was no privity of contract between the Department and GenCare, Inc. Since no legal obligations were established between the Department and GenCare, Inc., nor were any legal interests vested between them, no action could be brought by either of them against the other to enforce any legal rights. Professional Bankers Corporation v. Drayton B. Floyd, 285 S.C. 607, 331 S.E.2d 362 (Ct. App. 1985).

Further, it is noted that a court cannot place on either party to a contract greater obligations or burdens than the contract itself does. 17A C. J. S. Contracts §296 (1963). The hearing officer's conclusion and ruling that the Department cannot be expected or required to seek recoupment from GenCare, Inc. is affirmed.

2. Disallowance of health insurance premiums made on behalf of Dr. Eaves and Mrs. Smith.

The Auditor disallowed premiums for health insurance paid by Appellant on behalf of Dr. Eaves and Mrs. Smith for the three years at issue. This disallowance was adopted by the hearing officer in her order.

The State Medicaid Plan, Attachment 4.19-D, paragraph IV-J, provides that "other benefits such as pensions, group life insurance, and health insurance can be recognized if these benefits are available to all employees in a consistent and proportionate manner." HIM-15 (also called the Provider Reimbursement Manual), §2144 states that the "cost of health and life insurance premiums paid or incurred by the provider" are allowable "if the benefits of the policy inure to the employee or his/her beneficiary" and if the costs are reasonable and related to patient care as defined in §§2102.1 and 2102.2 of the manual. The term "reasonable" is defined in the manual as relating to the expectation that the provider's actual costs do not exceed what a prudent and cost-conscious buyer would pay for a given service.

It is the intent of the program, however, that providers be reimbursed the actual costs of providing high quality care, regardless of how widely they may vary from provider to provider. Costs that are "related to patient care" are defined in the manual as "all necessary and proper costs which are appropriate and helpful in developing and maintaining the operation of the facility, and those which "are common and accepted occurrences in the field of the provider's activity," specifically including personnel costs, administrative costs, costs of employee pension plans, and other costs.

In disallowing these health insurance premium payments, the hearing officer found that Appellant's policy manual, which was discovered during the audit, was controlling and limited these premium payments as a fringe benefit only for full-time employees. Appellant, however, argued that the policy manual was not effective and not binding. Dr. Eaves testified that he did not know of any written employee manual (Tr. at 27), and Mrs. Smith testified that she never recalled seeing a personnel manual (Tr. at 66).

The evidence shows that Dr. Eaves and Mrs. Smith's late husband purchased the nursing home in 1966 and that Appellant made health insurance premium payments for Dr. Eaves, the late Dr. Smith, and, subsequent to Dr. Smith's death, for Mrs. Smith up to the date the company was sold. Since there was no evidence in the record that the policy manual was adopted by either the Appellant's Board of Directors or stockholders, or was ever distributed to any employee, the Auditor and the hearing officer were in error to consider it as a binding policy or contract. Further, no evidence was introduced establishing that the policy manual was ever made a part of any employment contract when an employee was hired or at any subsequent time. Since Appellant failed to adopt the policy manual, to incorporate it into any employee contract, or adhere to its terms, neither the Appellant nor its employees had any reasonable expectation to this fringe benefit, and thus, did not have a cause of action for breach of contract for any failure by Appellant to comply with its provisions. 30 C. J. S. Employer-Employee § 30 (1992).

Since the policy manual was never adopted, and thus, could not be enforceable, it was not binding on Appellant. As a consequence, the issue of whether premium payments should be disallowed must be determined without consideration of any policy manual mandates, but by application of the provisions of the Federal Manual and the State Plan.

Benefits were paid to or on behalf of all employees in a consistent and proportionate fashion. The hearing officer found that Appellant made co-payments for employees who were full-time but did not make the $10.00 co-payment for single employees as required by the policy manual, and thus, these payments were in violation of the requirement that these benefits be provided in a consistent and proportionate manner. As neither "consistent" nor "proportionate" is defined in the Federal Manual or the State Manual, other sources were consulted for definitions of these terms.

"Consistent" is defined in the third edition of The American Heritage College dictionary as "in agreement, compatible, coherent and uniform." "Proportionate" is defined as "being in due proportion" or parts or things within a whole being agreeable and in balance. Although the evidence shows that Appellant made co-payments for some employees and not for others, no evidence was placed in the record showing how or why these payments were made, or how or why they were inconsistent or disproportionate toward any employee or group of employees. Since there was no clear indication of any inconsistent or disproportionate treatment of an employee or group of employees, the hearing officer's ruling to disallow the premiums for health insurance paid by Appellant on behalf of Dr. Eaves and Mrs. Smith for the three years at issue was a determination unsupported by the substantial evidence in the record.

Since the hearing officer's disallowance of premium payments for key employees is found to be improper, and is not supported by the substantial evidence in the record, the request for recoupment or reimbursement by the Department is inappropriate and is denied. Accordingly, there is no need to address Appellant's exception on the totality of these disallowances and recoupment requests.

3. Disallowance of portions of salaries and payroll taxes paid on behalf of Dr. Eaves and Mrs. Smith.

On November 1, 1987, Dr. Eaves signed a contract agreeing to serve as the Medical Director of the nursing home. The agreement defined his responsibilities, which included the provision of medical assistance, preventive care, and medical histories and physicals. Dr. Eaves' responsibilities also consisted of establishing medical policies and procedures for the staff to follow; dealing with the general hygiene of the patients, conducting negotiations with nearby hospitals for care of the patients, conducting in-service classes for employees on handling emergencies, and performing medical procedures for a patient upon his or her admission to the nursing home. The agreement further provided that he was responsible for billing all personal medical services rendered and that he could retain those payments. The evidence indicates that he billed the patients separately for all independent medical care provided.

Dr. Eaves, at the time he purchased the nursing home, began receiving a monthly salary as the Medical Director of $520.00; however, for the three years under audit, he received a salary of $600.00 per month. He testified that he worked an average of ten hours per week as the Medical Director (Tr. at 29). While serving in this capacity, Dr. Eaves also maintained his private practice as a physician. No records were maintained by the nursing home or Dr. Eaves allocating his time between his responsibilities as Medical Director and as a private physician; however, Appellant's payroll records reflect that he worked fewer hours as the Medical Director than his testimony indicated.

During the period of the contracts, the state plan authorized payment of up to $28,619.00 for a full-time medical director at a nursing home this size (1-50 beds). Dr. Eaves received, for services rendered as the medical director, a salary of $6293.00 for the year ending in 1989, $6339.00 for the year ending in 1990, and $6109.00 for the year ending in 1991. The amounts disallowed therefrom were $3271.00 for 1989, $3116.00 for 1990 and, $241.00 for 1991.

As is noted above, Dr. Eaves was also gainfully employed as a private physician. One must assume that he logged many hours per week in that capacity. As a result, even if it were established that he provided ten hours of service per week as the medical director, his weekly compensation from Appellant based upon the monthly allowable amount ($28,619.00/52) of $550.37 would approximate, based upon a forty hour work week, to a weekly salary ($550.37/4) of $139.59. The amount disallowed by the Department, and affirmed by the hearing officer, was generous. Based upon the substantial evidence in the record, the hearing officer properly disallowed portions of Dr. Eaves' salary and payroll contributions. Therefore, the hearing officer's ruling pertaining to the overpayment of Dr. Eaves' salary by Petitioner for the three years at issue is affirmed.

Mrs. Smith performed services as a social worker at the nursing home. She averaged 30-35 hours of work per week (Tr. at 51). Her duties included the development of a social and health plan on each patient, providing quarterly updates on each patient, working with patients' families, handling roommate issues, planning activities, and counseling patients individually and in groups.

The state plan allowed an annual salary for a social worker of $14,067.00 for the years at issue. For her services, she was paid the sum of $10,083.00 for 1989, $7727.00 for 1990 and, $5320.00 for 1991. From these amounts, there was disallowed for 1989 the sum of $1,925.00, for 1990 the sum of $5422.00, and for 1991 the sum of $315.00. For some unexplained reason, the number of hours worked weekly by Mrs. Smith, effective April 3, 1989, was drastically reduced on the payroll records from that which was listed and reported to Respondent in previous years. Notwithstanding the payroll records, in view of the testimony of Mrs. Smith that this was her sole employment, the substantial evidence in the record is that the salaries as testified to and paid to her were reasonable and necessary for the services she performed and for the benefit of the facility. As a result, the ruling of the hearing officer pertaining to recoupments from Mrs. Smith for overpayments for the years at issue is reversed.

4. Compensation/Salary paid to Joe Dunkin.

Mr. Pace Hungerford and Joe W. Dunkin collectively provided management services for Appellant. On October 10, 1987, Mr. Dunkin entered into an agreement with Appellant to "manage and operate" the nursing home, "furnish all monies for operations" and "assume all liabilities incurred by them for operations." Although Mr. Dunkin was not a licensed nursing home administrator, he was a certified public accountant and had assisted the owners of Appellant prior to the execution of the agreement. For these services, Mr. Dunkin was to receive a monthly sum of $1200.00 and fifty (50) percent of Appellant's net profit annually. Although the agreement was signed in his individual capacity, it provided that the monthly management fee and the fifty (50) percent share of net profit were to be paid to GenCare, Inc. For 1989 and 1990, Mr. Dunkin received an annual salary of approximately $10,000.00. During this same period, Mr. Hungerford served as the licensed administrator for the nursing home, receiving a salary of $10,000.00 annually.

During the years at issue, State Medicaid Plan Attachment 4.19-D, IV. F.1. provided that a nursing home in the 26 to 50 patient category was entitled to pay up to $18,559.00 as salary for an administrator. The hearing officer determined that since Mr. Dunkin reported his employment status as a co-administrator (and not as an independent contractor pursuant to a contract) and took a salary, the payments made to him were not proper or allowable costs under the State Plan.

An independent contractor is generally defined as one who, in rendering services, exercises an independent employment and represents the will of his employer only as to the results of his work and not as to the means whereby it is accomplished. 30 C.J. S. Employer-Employee §13 (1992). The intent of the parties is one of the factors in distinguishing an employee from an independent contractor. An employee is one who works under his employer's direction and control, whereas an independent contractor is engaged to do certain work, but then exercises his own discretion in the manner of doing it. The testimony clearly demonstrates that Joe Dunkin was placed in control to provide management services to Appellant. Neither Dr. Eaves nor Mrs. Smith participated in the management of the nursing home. Mr. Hungerford was hired as the administrator because he was licensed by the State of South Carolina.

Since the evidence is overwhelming that both Mr. Dunkin and Mr. Hungerford provided administrative services to and for Appellant during the years at issue, and since administrative costs are allowed for a salary to an administrator up to $18,559.00, only those disallowances for compensation, salary, and payroll withholdings paid to Mr. Dunkin and Mr. Hungerford in excess of $18,559.00 are subject to recoupment by the Department.

Whether Mr. Dunkin and Mr. Hungerford are identified as independent contractors or as employees of Appellant is unimportant. It is significant, however, that they furnished services, authorized as administrative costs by the State Plan, necessary for the continued operation of the nursing home. The hearing officer's ruling, where inconsistent with this conclusion, is vacated.


IT IS HEREBY ORDERED that the decision of the hearing officer is affirmed as modified herein, and

IT IS FURTHER ORDERED that the Department may seek reimbursements or recoupments pursuant to the decision of the hearing officer as modified by this Order.




Columbia, South Carolina

May 30, 1996

Brown Bldg.






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