Health Services Management Group, LLC

Cleveland, Tennessee
Home Office Cost Reports
January 1, 2016, Through December 31, 2016
January 1, 2017, Through December 31, 2017
DEBORAH V. LOVELESS, CPA, CGFM, CGMA
Director

JULIE ROGERS, CPA, CISA

Assistant Director

REGINA DOBBINS, CPA, CFE, CGFM

Audit Manager

Alla Cox, CFE

In-Charge Auditor

Greg Burr
Aaron Oakley
Katie Yarborough
Staff Auditors

Amy Brack
Editor

Amanda Adams
Assistant Editor

Comptroller of the Treasury, Division of State Audit

Cordell Hull Building
425 Fifth Avenue North
Nashville, TN 37243
(615) 401-7897

Reports are available at

comptroller.tn.gov/office-functions/state-audit.html

Mission Statement
The mission of the Comptroller’s Office is to
make government work better.

Comptroller Website
comptroller.tn.gov
 March 24, 2020

The Honorable Bill Lee, Governor

and
Members of the General Assembly
State Capitol
Nashville, Tennessee 37243
and
Mr. Stephen Smith, Deputy Commissioner
Division of TennCare
Department of Finance and Administration
310 Great Circle Road, 4W
Nashville, Tennessee 37243

Ladies and Gentlemen:

Pursuant to Section 71-5-130, Tennessee Code Annotated, and a cooperative agreement between
the Comptroller of the Treasury and the Department of Finance and Administration, the Division
of State Audit performs examinations of nursing facilities and agencies providing home- and
community-based waiver services participating in the Tennessee Medical Assistance Program
under Title XIX of the Social Security Act (Medicaid).

Submitted herewith is the report of the examination of the home office operations of Health
Services Management Group, LLC, in Cleveland, Tennessee, for the period January 1, 2016,
through December 31, 2017.

Sincerely,

Deborah V. Loveless, CPA, Director

Division of State Audit

DVL/pn
19/027
 State of Tennessee

Audit Highlights
Comptroller of the Treasury Division of State Audit

TennCare Report
Health Services Management Group, LLC
Cleveland, Tennessee
Home Office Cost Reports for the Periods
January 1, 2016, Through December 31, 2016, and
January 1, 2017, Through December 31, 2017

FINDING RECOMMENDING MONETARY REFUND

Nonallowable Expenses Included on the travel, a traffic violation ticket, a retirement

Home Office Cost Reports
Health Services Management Group, LLC,
improperly allocated a total of $1,060,146.27
of home office expenses to the health care
facilities operated by the home office for the
fiscal years ended December 31, 2016, and
December 31, 2017. The nonallowable
amounts consisted of late fees, marketing,
expenses not incurred by Health Services
Management Group, unsupported expenses,
unpaid expenses, expenses not related to
Tennessee facilities, employee personal
expenses, duplicate expenses, penalties,
alcohol, parties’ expenses, unsupported
vacation package, flowers, prior-year
expenses, trips abroad, excess depreciation
expense, and unsupported interest expense.
Of the total improperly allocated expenses,
$392,058.77 will be allocated to the 11
nursing facilities that operated in the State of
Tennessee during the year ended December
31, 2016. The improperly allocated expenses
for the year ended December 31, 2017, will
not have an effect on the Tennessee facilities’
Medicaid reimbursement rates since it was a
non-rebase year (page 5).
 Health Services Management Group, LLC
Cleveland, Tennessee
Home Office Cost Reports for the Periods
January 1, 2016, Through December 31, 2016, and
January 1, 2017, Through December 31, 2017

TABLE OF CONTENTS

Page

INTRODUCTION 1

Purpose and Authority of the Examination 1

Background 1

Prior Examination Findings 2

Scope of the Examination 2

INDEPENDENT ACCOUNTANT’S REPORT 3

FINDING AND RECOMMENDATION 5

 Nonallowable Expenses Included on the Home Office Cost Reports 5

 Health Services Management Group, LLC
Cleveland, Tennessee
Home Office Cost Reports for the Periods
January 1, 2016, Through December 31, 2016, and
January 1, 2017, Through December 31, 2017

INTRODUCTION

PURPOSE AND AUTHORITY OF THE EXAMINATION

The terms of contract between the Tennessee Department of Finance and Administration
and the Tennessee Comptroller’s Office authorize the Comptroller of the Treasury to perform
examinations of nursing facilities that participate in the Tennessee Medicaid Nursing Facility
Program.

Under their agreements with the state and as stated on cost reports submitted to the state,
participating nursing facilities have asserted that they are in compliance with the applicable state
and federal regulations covering services provided to Medicaid-eligible recipients. The purpose
of our examination is to render an opinion on the nursing facilities’ assertions that they are in
compliance with such requirements.

BACKGROUND

To receive services under the Medicaid Nursing Facility Program, a recipient must meet
Medicaid eligibility requirements under one of the coverage groups included in the State Plan for
Medical Assistance. The need for nursing care is not in itself sufficient to establish eligibility.
Additionally, a physician must certify that recipients need nursing facility care before they can
be admitted to a facility. Once a recipient is admitted, a physician must certify periodically that
continued nursing care is required. The number of days of coverage available to recipients in a
nursing facility is not limited.

The Medicaid Nursing Facility Program provides for nursing services on two levels of
care. Level I Nursing Facility (NF-1) services are provided to recipients who do not require an
intensive degree of care. Level II Nursing Facility (NF-2) services, which must be under the
direct supervision of licensed nursing personnel and under the general direction of a physician,
represent a higher degree of care.

Health Services Management Group, LLC, in Cleveland, Tennessee, operated and

provided home office services for 15 nursing facilities in 4 states, including Tennessee, and 2
home health services for the years ended December 31, 2016, and December 31, 2017.

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 Thomas D. Johnson Revocable Trust U/A Dated October 11, 2011, owns 99.99% and
Judith L. Johnson Revocable Trust U/A Dated October 11, 2011, owns 00.01% of Health
Services Management Group, LLC.

During the examination period, the Health Services Management Group, LLC, reported
total operating expenses of $4,751,771, of which $3,870,834 was reported as Medicaid allowable
costs for the fiscal year ended December 31, 2016. For the fiscal year ended December 31,
2017, it reported operating expenses of $5,402,454, of which $4,502,122 was reported as
Medicaid allowable costs.

PRIOR EXAMINATION FINDINGS

The home office has not had an examination within the past five years.

SCOPE OF THE EXAMINATION

Our examination covers certain financial-related requirements of the Medicaid Nursing

Facility Program. The requirements covered are referred to under management’s assertions
specified later in the Independent Accountant’s Report. Our examination does not cover quality
of care or clinical or medical provisions.

2
 Independent Accountant’s Report

December 6, 2018

The Honorable Bill Haslam, Governor

and
Members of the General Assembly
State Capitol
Nashville, Tennessee 37243
and
Dr. Wendy Long, Deputy Commissioner
Division of TennCare
Department of Finance and Administration
310 Great Circle Road, 4W
Nashville, Tennessee 37243

Ladies and Gentlemen:

We have examined management’s assertions, included in its representation letter dated

December 6, 2018, that Health Services Management Group, LLC, complied with the following
requirement during the cost reporting periods January 1, 2016, through December 31, 2016; and
January 1, 2017, through December 31, 2017:

 Expenses reported on the home office cost report are reasonable, allowable, and in
accordance with state and federal rules, regulations, and reimbursement principles.

As discussed in management’s representation letter, management is responsible for

ensuring compliance with this requirement. Our responsibility is to express an opinion on
management’s assertions about the facility’s compliance based on our examination.

Our examination was conducted in accordance with attestation standards established by

the American Institute of Certified Public Accountants. Those standards require that we plan
and perform the examination to obtain reasonable assurance about whether management’s
assertions are fairly stated, in all material respects. An examination involves performing
procedures to obtain evidence about management’s assertions. The nature, timing, and extent of
the procedures selected depend on our judgment, including an assessment of the risks of material
misstatement of management’s assertion, whether due to fraud or error. We believe that the
evidence we obtained is sufficient and appropriate to provide a reasonable basis for our opinion.
Our examination does not provide a legal determination on the entity’s compliance with
specified requirements.
3
Page Two
December 6, 2018

Our examination disclosed the following instance of material noncompliance applicable

to state and federal regulations:

 Nonallowable expenses included on the home office cost reports

In our opinion, except for the instance of material noncompliance described above,
management’s assertions that Health Services Management Group, LLC, complied with the
aforementioned requirements for the periods January 1, 2016, through December 31, 2016; and
January 1, 2017, through December 31, 2017, are fairly stated in all material respects.

This report is intended solely for the information and use of the Tennessee General
Assembly and the Tennessee Department of Finance and Administration and is not intended to
be and should not be used by anyone other than these specified parties. However, this report is a
matter of public record, and its distribution is not limited.

Sincerely,

Deborah V. Loveless, CPA, Director

Division of State Audit
DVL/pn

4
 FINDING AND RECOMMENDATION

Nonallowable Expenses Included on the Home Office Cost Reports

Finding

Health Services Management Group, LLC, included a total of $1,060,146.27 in

nonallowable expenses on the home office cost reports for the fiscal years ended December 31,
2016, and December 31, 2017.

The home office improperly allocated $511,184.09 of home office expenses to its
subsidiary programs for the year ended December 31, 2016. The nonallowable amounts
consisted of $171,197.26 in unpaid expenses; $135,833.87 in unsupported expenses;
$107,704.00 in unsupported interest expense; $64,035.02 in expenses not incurred by Health
Services Management Group but paid on behalf of other companies; $10,381.15 in prior-year
expenses; $9,511.95 in marketing expenses; $3,423.95 in excess depreciation expense; $2,043.33
in expenses that should have been directly allocated to non-Tennessee nursing facilities;
$1,543.32 in duplicate expenses; $1,475.66 in unsupported travel; $1,442.98 in late fees; $872.03
for parties; $637.91 for flower purchases; $510.00 in penalties; $322.51 in alcohol; and $249.15
in employee personal expenses.

Health Services Management Group, LLC, improperly allocated $548,962.18 of home

office expenses to its subsidiary programs for the year ended December 31, 2017. The
nonallowable amounts consisted of $399,532.87 in unsupported expenses; $72,341.99 in
expenses not incurred by Health Services Management Group but paid on behalf of other
companies; $45,904.37 in unpaid expenses; $8,222.32 in an employee’s “retirement vacation;”
$4,684.30 in marketing expenses; $4,568.00 in unsupported interest expense; $3,823.22 in prior-
year expenses; $3,317.66 in excess depreciation expense; $1,471.49 for parties; $1,124.65 in late
fees; $1,024.30 in trips abroad; $643.07 of alcohol; $618.59 in expenses that should have been
directly allocated to non-Tennessee nursing facilities; $559.91 in duplicate expenses; $550.68 for
flower purchases; $413.00 in penalties; $99.01 in employee personal expenses; and $62.75 for a
traffic violation ticket for an employee.

Of the total improperly allocated expenses, $392,058.77 will be allocated to the 11

nursing facilities that operated in the State of Tennessee during the year ended December 31,
2016. The improperly allocated expenses for the year ended December 31, 2017, will not have
an effect on the Tennessee facilities’ Medicaid reimbursement rates since it was a non-rebase
year.

Chapter 1200-13-6-.09 of the Rules of the Tennessee Department of Finance and

Administration states, “Adequate financial records, statistical data, and source documents must
be maintained for proper determination of costs under the program.”

5
 Such costs that are not allowable in computing reimbursable costs include, but are not
limited to,

 fines, penalties, or interest paid on any tax payments or interest charges on overdue
payables;
 advertising costs incurred;
 travel expenses which are personal in nature, not proper or related to patient care; and
 costs that are not necessary or related to patient care.

Home office costs or related organization costs that are not otherwise allowable costs
when incurred directly by the provider cannot be allowable costs when allocated to providers.

Part 1, Paragraph 2102.3 of the Provider Reimbursement Manual states,

Costs not related to patient care are costs which are not appropriate or necessary
and proper in developing and maintaining the operation of patient care facilities
and activities. Costs which are not necessary include costs which usually are not
common or accepted occurrences in the field of the provider’s activity.

Part 1, Paragraph 104.17 of the Manual states,

In initially selecting a proper useful life for computing depreciation . . . the

provider may use certain published useful guidelines. The guidelines used depend
on when the asset was acquired. . . . For assets acquired on or after January 1,
1981, only the AHA (American Hospital Association) guidelines may be used.

Part 1, Paragraph 2150.3 of the Manual states,

Allocation of Home Office Costs to Components in Chain. –

A. Procedure. – Starting with its total costs, including those costs paid on
behalf of providers (or other components in the chain), 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 – both providers and nonproviders – in the chain which received
services from the home office.

Where the home office incurs costs for activities not related to patient care in the
chain’s participating providers, the allocation bases used must provide for the
appropriate allocation of costs such as rent, administrative salaries, organization
costs, and other general overhead costs which are attributable to nonpatient care
activities, as well as to patient care activities. All activities and functions in the
home office must bear their allocable share of home office overhead and general
administrative costs.

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 B. Costs Directly Allocable to Components. – The initial step in the
allocation process is the direct assignment of costs to the chain components.
Allowable costs incurred for the benefit of, or directly attributable to, a specific
provider or nonprovider activity must be allocated directly to the chain entity for
which they were incurred.

C. Costs Allocable on a Functional Basis. – The allowable home office costs

that have not been directly assigned to specific chain components must be
allocated among the providers (and any nonprovider activities in which the home
office may be engaged) on a basis designed to equitably allocate the costs over the
chain components or activities receiving the benefits of the costs. This allocation
must be made in a manner reasonably related to the services received by the
entities in the chain. Chain home offices may provide certain centralized services,
such as central payroll or central purchasing, to the chain components. Where
practical and the amounts are material, these costs must be allocated on a
functional basis. . . . Any residual allowable home office costs remaining after a
functional cost allocation has been completed must be included as pooled costs
and allocated as described in subsection D below. The functions, or cost centers
used to allocate home office costs, and the unit bases used to allocate the costs,
including those for the pooled costs described in subsection D, must be used
consistently from one home office accounting period to another.

D. Pooled Costs in Home Office. – In each home office there will be a

residual amount, or “pool,” of costs incurred for general management or
administrative services which cannot be allocated on a functional basis.

Allowable routine costs will be adjusted for these nonallowable expenses. The effect of
the adjustments to the specific rates of the 11 facilities will be determined at a near-term date,
retroactive to dates of service on and after July 1, 2017.

Recommendation

Health Services Management Group, LLC, should include only allowable expenses on
the home office cost report. All reported expenses should be adequately supported, related to
patient care, and in compliance with applicable rules and regulations.

Management’s Comment

Management concurs with the finding.