Harold Chapman and Autumn Manor, Inc., DAB CR1 (1985)

Department of Health and Human Services (H.H.S.)
Departmental Appeals Board

Civil Money Penalty

HAROLD CHAPMAN AND AUTUMN MANOR, INC., RESPONDENTS
Docket No. C-5
Decision No. CR1
March 8, 1985

DECISION

DECISION AND ORDER

This is a civil money penalties and assessments case arising from a
determination by the Inspector General of the Department of Health and Human
Services that the respondents submitted false Medicaid claims for payment.
By letter dated June 1, 1984, the Deputy Inspector General for Civil Fraud
notified Harold Chapman and Autumn Manor, Inc., respondents, of the Inspector
General's (IG's) intent to impose civil money penalties of $38,000 and an
assessment of $118,136 (total:$156,136) pursuant to Sec. 1128 A of the Social
Security Act (42 U.S.C. 1320a -7a) as implemented by 45 CFR Part 101. More
specifically, the IG's notice of intent was based on a determination by the IG
that respondents presented or caused to be presented to the Kansas Department
of Social and Rehabilitation Services (Kansas, SRS), a State agency
administering the State plan for medical assistance under Title XIX of the
Social Security Act (Medicaid), claims for items or services which respondents
knew or had reason to know were not provided as claimed. The IG charged that
on or about August 5, 1982, respondents submitted four cost reports (described
below in Findings), one for each of four nursing homes owned by respondents,
which contained 19 line item entries that included costs for items and
services during the period July 1, 1981 through June 30, 1982 that were not
provided as claimed.
Under the Medicaid program, the federal government provides financial
assistance to participating States to aid them in furnishing health care to
needy persons. States are not required to participate in Medicaid, but if a
State chooses to participate, it must have a State plan approved by the
Secretary of the Department of Health and Human Services (the Department,
HHS). The State plan must provide for the designation of a single State agency
to administer the Medicaid program. In Kansas, the SRS is the single State
agency for Medicaid.
Under 42 U.S.C. 1320a - 7a and its implementing regulation, 45 CFR Part 101,
the Department may impose civil money penalties and assessments against any
person who presents or causes to be presented a claim for an item or service
under the Medicaid program that the person knew or had reason to know was not
provided as claimed, i.e., a false claim. The Department may impose a penalty
of up to $2,000 for each item or service falsely claimed and an assessment of
up to twice the amount claimed for each item or service. In addition, a person
subject to a penalty or assessment may be suspended by HHS from participation
in the Medicaid and Medicare programs.
By letter dated June 28, 1984, counsel for respondents requested a hearing
before an Administrative Law Judge as provided for in 45 CFR Part 101.
On October 15, 1984, the undersigned conducted a hearing in Kansas City,
Missouri, at which the parties were given the opportunity to present material
evidence relevant to the issues, to present it and cross-examine witnesses, to
make opening statements, and to present oral argument. Following the hearing,
after receipt of the hearing transcript, the parties were given the
opportunity to submit written briefs, proposed findings of fact, and proposed
conclusions of law.
Harold Chapman was tried by the State of Kansas and found guilty in October
1983 of unlawfully, feloniously, willfully and with intent to defraud making
or causing to be made the aforesaid four cost reports with knowledge that they
falsely stated some material matter or were not what they purported to be. Mr.
Chapman did not appeal his conviction. Pursuant to 45 CFR 101.114(c), where a
final determination that the respondent presented or caused to be presented a
claim and/or request for payment falling within the scope of 45 CFR 101.102
has been rendered in any proceeding in which the respondent was a party and
had an opportunity to be heard, the respondent shall be bound by such
determination in any proceeding under 45 CFR Part 101.

ISSUES

1. At a prehearing conference in this case, the parties agreed that the
principal issue was whether the proposed penalties and assessment were
appropriate. This included consideration of what, if any, aggravating or
mitigating circumstances there were and what affect these circumstances had on
the proposed penalties and assessment. My decision is to accept the penalties
and assessment proposed by the Inspector General.
2. At the hearing and in the posthearing briefs the parties also raised
these other issues:
a. Whether the assessment should have been limited to the $21,115.62
overpayment induced by the false claims. My decision is that here the
assessment is not limited to the amount of the overpayment. b. Whether any
assessment should be made where the amount of the overpayment was offset by a
greater amount underpaid to a fifth nursing home owned by respondents. My
decision is that an assessment may be made here even though the overpayment
was offset by an underpayment. c. Whether the cost reports containing the 19
line items were claims for payment within the meaning of 42 U.S.C. 1320a -
7a(h) and 45 CFR Part 101. My decision is that the cost reports were claims
for payment within the meaning of the regulation. d. Whether the line items
for lawn care were items or services which were not provided as claimed. My
decision is that the item lawn care was not provided as claimed.
3. The Inspector General also generally briefed the issue of whether the 19
line items were falsely claimed as alleged. Except as indicated in the issues
described above, the respondents did not address this issue. Accordingly, it
is not discussed generally in this decision.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Having considered the entire record, the arguments of the parties, and being
advised fully herein, I make the following findings of fact and conclusions of
law:
A. Each of the 19 line items is an item or service subject to a
determination under 45 CFR 101.102.
1. During the period July 1, 1981 through June 30, 1982, and at all other
times relevant to this proceeding, Harold Chapman was the president and
principal stockholder of Autumn Manor, Inc., a corporation organized under the
laws of the State of Kansas.
2. During the period July 1, 1981 through June 30, 1982, and at all other
times relevant to this proceeding, until December 9, 1983, Autumn Manor, Inc.
owned and operated five nursing homes in the State of Kansas, including Autumn
Manor No. 1 (Yates Center) Autumn Manor No. 2 (Yates Center), Autumn Manor No.
3 (Florence), and Autumn Manor No. 4 (Chanute). Autumn Manor No. 5 (Lawrence)
was not directly involved iii this proceeding.
3. On July 29, 1982, Harold Chapman signed four cost reports, one each for
Autumn Manor No. 1, Autumn Manor No. 2, Autumn Manor No. 3, and Autumn Manor
No. 4, for the period July 1, 1981 through June 30, 1982. The cost reports
were titled Financial and Statistical Report for Adult Care Homes and were
executed on Form No. MS-2004 of the Kansas Department of Social and
Rehabilitation Services.
4. Harold Chapman caused the four cost reports listed in No. 3 above to be
filed with the Kansas Department of Social and Rehabilitation Services, which
received them on or about August 5, 1982.
5. The four cost reports referred to in Nos. 3 and 4 above contained entries
which included the following amounts:
a. Autumn Manor No. 1
(1) Housekeeping Supplies................$ 5,190 (2) Nursing
Supplies........................5,000 (3)
Food...................................14,944 (4)
Linens..................................3,000 (5) Lawn
Care...............................2,100 Subtotal $30,234
b. Autumn Manor No. 2
(1) Housekeeping Supplies................$ 5,126 (2) Nursing
Supplies........................5,323 (3)
Food...................................15,942 (4) Lawn
Care...............................3,100 Subtotal $29,491
c. Autumn Manor No. 3
(1) Housekeeping Supplies................$ 4,931 (2) Nursing
Supplies........................5,562 (3)
Food...................................17,482 (4)
Linens..................................4,000 Subtotal $31,975 d. Autumn Manor
No. 4
(1) Housekeeping Supplies................$ 3,940 (2) Nursing
Supplies........................6,114 (3)
Food....................................9,082 (4) Dietary
Supplies........................2,000 (5)
Linens..................................3,500 (6) Lawn
Care...............................1,800 Subtotal $26,436
e. The items or services listed above, totalling $118,136, were the same 19
line items as set forth in the Inspector General's notice letter of June 1,
1984.
6. None of the items or services listed in 5.a. - 5.d. above were provided
as claimed.
7. The rates of reimbursement which the Kansas Department of Social and
Rehabilitation Services paid out of State and federal funds to Autumn Manor,
Inc., for Medicaid recipients provided with care and services at Autumn Manor
Nos. 1, 2, 3, and 4, during the period July 1 , 1981 through June 30, 1982,
were based on the information contained in the aforesaid cost reports,
including the amounts described in 5.a. - 5.d. above.
8. As a result of the inclusion in the aforesaid cost reports of the items
or services described in 5.a. - 5.d. above, totaling $118,136, which Autumn
Manor, Inc., did not provide as claimed, the Kansas Department of Social and
Rehabilitation Services paid Autumn Manor, Inc. $21,115.62 more than the
amount to which it was entitled for care and services to Medicaid recipients
at Autumn Manor Nos. 1, 2, 3, and 4 during the period September 1, 1982
through November 30, 1982.
9. On May 19, 1983, Harold Chapman was charged by the State of Kansas with
four counts of making a false writing, one count each for Autumn Manor Nos. 1,
2, 3, and 4.
10. At Mr. Chapman's trial on the charges described in No. 9, above, the
jury was instructed, in effect, that to find Harold Chapman guilty of the
charge of making a false writing, the jury had to be convinced beyond a
reasonable doubt:
a. That Harold Chapman caused to be made false written instruments,
specifically Financial and Statistical Reports for Adult Care Homes -- Form
No. MS-2004. b. That Harold Chapman knew that such financial and statistical
reports falsely stated or represented some material matter. c. That Harold
Chapman intended to defraud based on such financial and statistical reports.
Intent to defraud was defined in the jury instructions as an intention to
deceive another person, and to induce such other person, in reliance upon such
deception, to assume, create, transfer, alter or terminate a right, obligation
or power with reference to property. d. That the crime with which Harold
Chapman was charged occurred on July 29, 1982. e. That Harold Chapman's
conduct was intentional. The jury instructions defined intentional as meaning
willful and purposeful and not accidental. The jury was instructed that
intent, or lack of intent, was to be determined or inferred from all of the
evidence in the case.
11. The jury at Harold Chapman's state criminal trial was also instructed
that it was a defense if by reason of ignorance or mistake Harold Chapman did
not have knowledge that the aforesaid financial and statistical reports which
were submitted to the Kansas Department of Social and Rehabilitation Services
contained information which was false. The instructions noted that Harold
Chapman claimed as a defense that he lacked knowledge of the specific contents
of the financial and statistical reports. The jury was instructed that the
State, not Harold Chapman, had the burden of proving Harold Chapman's guilt
and that the jury should find Harold Chapman not guilty if the asserted
defense caused the jury to have a reasonable doubt as to Harold Chapman's
guilt.
12. On October 7, 1983, the jury found Harold Chapman guilty on all four
counts. The District Court of Shawnee County, the trial court, fined Mr.
Chapman $20,000 ($5,000 on each of the four counts) and ordered that he pay
court costs and also additional court costs in the form of expenses incurred
by the State for witness fees. The Court suspended imposition of a sentence of
imprisonment and placed Mr. Chapman on probation with the condition, among
others, that he divest himself of operation of the nursing homes. The fines
and costs were paid by checks drawn on Autumn Manor, Inc. in January 1984.
13. The Inspector General did not dispute that neither Harold Chapman or
Autumn Manor, Inc. was any longer engaged in the ownership or operation of
nursing homes.
B. With respect to mitigating and aggravating circumstances:
1. The parties agreed that determination of the appropriateness of the
penalty and assessment is governed by 45 CFR 101.106.
2. 45 CFR 101.114(d) states that the respondent shall bear the burden of
producing and proving by a preponderance of the evidence any circumstances
described in Sec.101.106 that would justify reducing the amount of the penalty
or assessment.
With these to guide me, and upon consideration of the evidence submitted and
the arguments of the parties as described in more detail in the Discussion
below, I find as follows:
3. It is an aggravating circumstance that respondents submitted false claims
totalling $118,136.
4. It is an aggravating circumstance with respect to each and every item or
service that the respondents not only knew that the claims were false but also
that those claims would induce the State agency to pay per diem rates in
excess of the rates to which respondents were entitled.
5. Evidence presented at Harold Chapman's State trial showed that he caused
to be made false invoices in the names of various vendors covering the false
amounts in each of the 19 line items which are the subject of this proceeding.
As a result of these false invoices checks were issued by agents or employees
of respondents but were left unsigned. Mr. Chapman told the State auditors in
the Fall of 1982 that he planned to sign and send the checks to the vendors
shortly after January 1, 1983, but the checks were never sent. It is an
aggravating circumstance with respect to each of the 19 line items that
respondents not only falsely claimed the item or service but also attempted to
conceal their fraud with these other deceptions.
6. It is not a mitigating circumstance that:
a. The cost reports were prepared by agents or employees of the respondents.
b. The cost reports were prepared, signed, and submitted to the State agency
as a single stream of events, a continuous act. c. The cost reports where all
of the same type. d. The cost reports were submitted simultaneously. e. The 19
line items represented only six vendors and three types of things (food, paper
goods, and lawn mowing equipment). f. Respondents did not appeal an
administrative determination by SRS that the false claims should be
disallowed. g. It was not disputed that respondents were underpaid for
services to Medicaid recipients in a fifth nursing home owned by respondents
in an amount greater than the overpayments to the other four resulting from
the false claims. h. Respondents' income is derived from past, rather than
present, employment. i. Harold Chapman was fined $20,000 by the State court
and ordered to divest himself of his nursing homes.
7. It is not an aggravating circumstance that Harold Chapman made basically
the same defense at the hearing in this case that he had at his State trial.

DISCUSSION

1) The nature and circumstances of the claims and the circumstances under
which they were presented are more of an aggravating than a mitigating
circumstance.
Respondents contended that certain circumstances surrounding the preparation
and submission of the cost reports were mitigating circumstances (see Findings
B.6b--6e, supra.). Under the guidelines set forth in 45 CFR 101.106(b)(1), it
would be a mitigating circumstance if all of the items or services were the
same type and occurred within a short period of time, there were few such
items or services, and the total amount claimed for the items or services was
less than $1,000.
Here, the total claimed, $118,136, was not insubstantial and the number of
items (19) was more than a few. Respondents did not explain why the number of
vendors or the number of types of items (where they were admittedly not all
the same) should be mitigating circumstances, and I am not persuaded that they
are. Similarly, respondents did not explain why the fact that the cost reports
were prepared by their agents and that the preparation, signing, and
submission were a continuous act should be, and I did not find them to be,
mitigating circumstances. The simultaneous or one-time submission of the cost
reports was not a mitigating circumstance because those reports were the basis
of daily rates of reimbursement which were intended to be used for the
succeeding 12 months.
The Inspector General argued that not only the magnitude of the claim
($118,136) but also the fraudulent circumstances under which the claim was
made should be considered aggravating. The guidelines do make it an
aggravating circumstance if the amount claimed was substantial. In this case,
$118,136 is substantial.
The guidelines do not list fraudulent conduct under nature and
circumstances. Although the guidelines are not binding, I followed them here
but considered the respondents' fraudulent conduct under the degree of
culpability, discussed infra.
2. The degree of culpability was an aggravating factor.
Respondents pointed out that they did not appeal an administrative
determination by the State agency that the 19 line items involved here should
be disallowed; [FN1] that a fifth nursing home then owned by respondents was
underpaid for the same period at issue here in an amount greater than the
overpayments disallowed the other four; [FN2] and that as a result the State
agency was able to recoup the overpayments immediately. Respondent concluded
that Harold Chapman's "knowing waiver of his right to appeal" the disallowance
was a prompt corrective step and, as such, a mitigating circumstance.
The guidelines state that it should be considered a mitigating circumstance
if (1) the claim for an item or service was the result of an unintentional and
unrecognized error in the process respondent followed in presenting claims and
(2) corrective steps were taken promptly after the error was discovered. 45
CFR 10.106(b)(2).
Far from meeting this standard, respondents' actions here were aggravating,
not mitigating. The guidelines state that it should be considered an
aggravating circumstance if the respondents knew the item or service was not
provided as claimed. Thus, the culpability of the respondents was an
aggravating factor.
The State court trial jury found that Harold Chapman submitted cost reports
which he knew had not been provided as claimed. In the present proceeding, the
respondents were precluded by Mr. Chapman's conviction from contesting the
jury findings on the cost reports, but respondents could have contested the
falsity of any of the 19 line items. They did not. [FN3] Respondents knew that
each item or service was not provided as claimed and their culpability as to
each was an aggravating circumstance.
I also am not persuaded that respondents acted promptly to correct their
deliberate "error." The failure to appeal may have been an admission of error,
as Mr. Chapman indicated in his testimony, but it was not a "correction."
There is ample evidence in the trial testimony and exhibits that the
"corrective" action that Mr. Chapman took when he became aware that he would
be audited by the State agency and thus the "error" would be discovered was to
issue false invoices to cover the "error" and to purport to pay these false
invoices by check. [FN4]
Thus, respondents' efforts at "correction" as to each of the 19 items were
aggravating, not mitigating, circumstances.
3. The respondents' lack of prior offenses was not a mitigating
circumstance.
Both parties agree that respondents had not been held liable for criminal,
civil, or administrative sanctions in connection with a program of
reimbursement for medical services prior to the submission of the false claims
at issue here. Respondents argue that the lack of prior offenses was a
mitigating factor. The guidelines provide that such prior offenses are an
aggravating circumstance, but do not suggest that the lack of prior offenses
should be mitigating. I am not persuaded that respondents' penalty and
assessment should be mitigated solely because there were no prior offenses.
4. The respondents' financial condition was not a mitigating circumstance.
The guidelines state that the resources available to the respondent will be
considered when determining the amount of the penalty and assessment. [FN5]
Respondents conceded in their brief that their income, derived from the sale
of the nursing homes, was "significant." At the hearing, Harold Chapman
estimated the net worth of Autumn Manor, Inc., to be almost $2 million and
counsel for respondents acknowledged that they were financially able to
respond. Tr. 149, 116. Despite those concessions, respondents argue in
mitigation that all of their income is the fruit of many years of "past and
unstinting labors" and not derived from present employment.
In addressing another point, respondents noted that they had been in the
business of operating nursing homes for twelve years. During that time Harold
Chapman's labors yielded a net worth of approximately $2 million (for Autumn
Manor Inc. alone). It does not seem inappropriate that respondents' penalty
and assessment ($156,318) should be approximately eight percent of that net
worth. The false claims were part of the cost reports for one year. A ratio of
one year to 12 is approximately eight percent (8.3%).
5. There are no other circumstances of an aggravating or mitigating nature
which need be taken into account to assure the achievement of the purposes of
the civil money penalties regulations.
Under this factor, respondent noted that Harold Chapman had paid a $20,000
fine and had divested himself of all of his nursing homes as a result of his
State court conviction. Although the fine was the maximum allowed by State
law, it was not a large enough amount be a mitigating circumstance. The sale
of the nursing homes was not in and of itself a mitigating factor; the
economic effect on the respondents was an aspect of their financial condition,
discussed above.
The Inspector General contended that it was an aggravating circumstance that
Mr. Chapman, in exercising his right to a hearing, used that forum to
reiterate explanations of his conduct which he had given at his trial. The
Inspector General saw this as a failure of Mr. Chapman to recognize any
wrongdoing on his part, or to have remorse for it. Indeed, Mr. Chapman's
version of what occurred was not any more credible to me than it was to the
State court jury. However, I believe it is more appropriate to consider the
expense of what may have been an unnecessary or misdirected administrative
proceeding resulting from Mr. Chapman's intransigence on this matter as a
factor in measuring the assessment in lieu of damages. See the discussion
below on this point.
6. The aggregate penalty and assessment of $156,136 is reasonable in this
case.
There are both maximum and minimum levels for the aggregate amount of the
penalty and assessment. The maximum in this case is a penalty of $38,000 and
assessment of $236,272, for an aggregate of $274,272. 45 CFR 101.103, 101.104.
The minimum is double the approximate amount of damages sustained unless there
are extraordinary mitigating circumstances by the State agency, or $42,231.24.
The guidelines state that if there are substantial or several mitigating
circumstances, the amount of the penalty and assessment should be set
sufficiently below the maximum to reflect that; and if there are substantial
or several aggravating circumstances, the aggregate amount of the penalty and
assessment should be set at an amount sufficiently close to the maximum to
reflect that. As discussed in detail above, there are few mitigating
circumstances and several aggravating circumstances. For those reasons, I
conclude that it is reasonable to set the aggregate amount of the penalty and
assessment at $156,136, which is approximately 57 percent of the maximum
($274,272). [FN6] As requested by the Inspector General and as permitted by
the regulation, this amount is imposed against each of the respondents. The
allocation of that total between the respondents is left to the discretion of
the United States, but the total amount collected may not exceed $156,136.
7. An assessment is not limited to damages, nor is it inappropriate because
damages were recouped immediately.
Respondents contended in their brief that an assessment here was not
warranted because 1) damages were limited to $21,115.62 and were recouped
immediately in an offset. The civil money penalties regulation states that an
assessment is in lieu of damages sustained by the United States and the State
because of the false claim. 45 CFR 101.104. Both parties agree that the State
suffered damages here of $21,115.62, the amount of the overpayment resulting
from respondents' false claims. [FN7] It was not disputed that the overpayment
was offset by an amount which the State agency underpaid a fifth nursing home
owned by respondents and thus was recouped immediately by the State.
Although the amount of damages suffered by the State in the form of the
overpayment of $21,116 may have been one element in the assessment, it was not
the only one. As discussed at some length in the analysis of mitigating and
aggravating factors, supra, the aggregate of the penalty and assessment
ordinarily should be not less than double the amount of damages and the
assessment alone may not be more than double the amount claimed. 45 CFR
101.106, 101.104. The preamble notes that the regulation follows the statute
(section 1128A of the Social Security Act), which has an identical assessment
provision:
In enacting the latter provision, Congress clearly intended to obviate the
need for the government to prove the amount of damages in order to make an
assessment. Because the costs of investigating the false claim and of pursuing
administrative sanctions are not separately recoverable, it is reasonable for
Congress to have concluded that twice the amount claimed for such items or
services would fully compensate the government for all losses incurred as a
result of the claim.
48 Fed. Reg. 38830 (August 26, 1983).
Thus, even if one disregarded the amount of the overpayment, because it had
already been recouped, there remained the cost of the investigation by the
federal agency, the cost of pursuing administrative sanctions, and the cost of
providing a hearing. The Inspector General was not required to account for
these costs in defending the assessment, but it is not unreasonable to assume
that they exceeded $118,136.
8. The amount falsely claimed is the total of the false items or services on
the cost reports.
Respondents argued that the amounts of the false items or services on the
cost reports could not be the basis of the assessment under 45 CFR 101.104
because cost reports are not claims. Respondents contended that although the
cost reports provided data on which to formulate a rate, the cost reports
themselves were not requests for payment. Respondents also asserted that the
rate formulated on the basis of the cost reports is paid only upon submission
of the monthly listing of the number of patients and the number of days each
was in a facility. According to respondents, this listing, called a
turn-around sheet, constituted a request for payment, citing the testimony of
two state officials from the transcript of Mr. Chapman's trial. Tr. 144-145.
The Inspector General contended that the turn-around sheet did not by itself
generate a payment. According to the Inspector General, a turn-around sheet
operated as a demand for a sum certain (number of patient days multiplied by
the per diem rate) only after the per diem rates had been calculated on the
basis of the cost reports. [FN8] Respondents did not use the opportunity of
filing a reply brief to rebut this assertion.
I am impressed that the Inspector General's description of the payment
scheme is corroborated by Mr. Chapman's testimony at the hearing, under
questioning by his own counsel. Tr. 87-88. In fact, Mr. Chapman testified in
response to two separate questions that the cost reports created
reimbursements, i.e., payments, to him. Id. Mr. Chapman's understanding of the
payment scheme was consistent with the testimony of the State officials (later
relied on by respondents' counsel during closing arguments), although it was
not consistent with or supportive of the position taken by respondents'
counsel during closing argument and in the posthearing brief, as noted above.
The civil money penalty regulations define an item or service "in the case
of a claim based on costs" as any entry in a cost report. 45 CFR 101.101. A
claim is defined as an application for payment of an item or service. Id.
Respondents admittedly knew that the false cost reports they submitted were an
essential part of the mechanism for claiming reimbursement. Harold Chapman's
conviction was based on a finding of intent to defraud -- i.e., to induce the
State agency to create an obligation by filing the cost reports. I.G. Ex. 5
(Instructions to Jury). Indeed, if the cost report could not have been used to
induce the State to create a payment obligation, the jury should not and
likely would not have found Harold Chapman guilty of fraud. Harold Chapman did
not appeal his conviction and I am guided, if not bound, by that conviction to
the logical conclusion that in this case each of the 19 false items in the
cost reports was a "claim" within the meaning of the civil money penalty
regulations.
9. The claims for lawn care were false.
The cost reports for three of the four nursing homes contained items for
"lawn care" totalling $7,000. Harold Chapman testified that he did not order
lawn care, but he did purchase a garden tractor from the same vendor for
$7,000. Mr. Chapman also testified that the vendor in question delivered a
tractor to respondents in March 1983. Respondents paid a balance of $7,000 on
the tractor at the time of delivery. [FN9]
The tractor purchase could not have been the "lawn care" item. The purchase
of the tractor was not effected until March 1983. Even if the purchase had
occurred prior to July 29, 1982, respondents would not have been entitled to
claim the full purchase price in the cost reports for 1982. Mr. Chapman
acknowledged that he knew that a tractor was a capital asset and that
respondents had to depreciate the cost over the life of the tractor. He also
knew that lawn care was not a capital cost and thus the cost of lawn care,
unlike a tractor, could be recovered in the year it was incurred. From this I
conclude that the items claimed as "lawn care" were not provided at all. They
admittedly were not provided as claimed; and respondents knew or had reason to
know this at the time the cost reports were submitted.

CONCLUSIONS OF LAW

1. Based on the State court conviction of Harold Chapman, the stipulations
agreed to by both parties, and the evidence presented or elicited at the
hearing in this case, the Inspector General has proved by a preponderance of
the evidence that respondents presented or caused to be presented the 19
claims for payment knowing that the claims were for items or services which
had not been provided as claimed.
2. Respondents did not meet their burden of producing and proving by a
preponderance of the evidence that there were any circumstances that would
justify reducing the amount of the penalties or assessment.

ORDER

The penalty of $38,000 and assessment of $118,136 (total: $156,136) proposed
by the Inspector General is approved and the respondents are hereby ordered to
pay this amount. Each of the respondents is liable for the entire amount or
such part of it as directed by the Inspector General; except that the
Inspector General may not collect more than $156,136.

William E. Zleit

FN1. The State agency audited respondents and as a result of that audit
disallowed $118,136 in costs that had not been incurred and lowered that daily
rates paid to respondents for the four nursing homes, starting December 1,
1982.

FN2. The fifth nursing home was in its first year of operation by respondents
and was underpaid on a prospective daily rate.

FN3. Harold Chapman did testify, as he had at his trial, that the item "lawn
care" was actually to cover the purchase of a garden tractor which he acquired
in March 1983. Despite this testimony, I found that the respondents knew all
19 line items were false claims. For a discussion of the lawn care item, see
pp. 15-16, infra.

FN4. Shortly before the State audit, Mr. Chapman instructed his employees to
prepare the false invoices, using letterhead bearing the supplier's names as
though the suppliers had issued the invoices. The suppliers had not issued
these invoices. Mr. Chapman offered the explanation that these invoices were
"projections." Tr. 58, 62. The false invoices led the bookkeeper to issue
checks, which Mr. Chapman did not send but kept, unsigned. Tr. 67. ("Tr."
refers to the transcript of the October 1984 hearing).

FN5. The guidelines also state that it should be a mitigating circumstance if
the amount of the penalty or assessment without reduction would jeopardize the
ability of the respondent to continue as a health care provider. Respondents
have divested themselves of their nursing homes and state in their brief that
Harold Chapman will never be able to resume operation of any health care
facility "for reasons of age, health, legal and other disability, and spirit."
Thus, this factor was not considered. The Inspector General conceded that
financial condition may be a mitigating circumstance even where a respondent's
ability to continue as a provider is not at issue.

FN6. Respondents argued that there be no assessment (see discussion infra) and
that the penalty be lowered to $1,000 per line item. This would have made the
total $19,000, or only seven (7) percent of the maximum.

FN7. Neither the Inspector General nor the respondent briefed in any detail
the issue of whether the assessment was limited specifically to the $21,116
overpayment damages suffered by the State. Nor did the parties brief the more
basic issue of what defines the term "damages" in 45 CFR 101.104 .
Consequently, I do not decide here what that term means.

FN8. The Inspector General defined the per diem rate as "what it cost (a
nursing home) to provide a day of service to a resident during the preceding
year adjusted for inflation."

FN9. Both Mr. Chapman and the vendor, who described himself as a friend and
business associate, testified that the tractor was ordered in the summer of
1982 (prior to July 29 and probably in June ) and at the time of the order
respondents delivered to the vendor a trade-in tractor valued at approximately
$1800, as part of the purchase price. The order could have been cancelled up
to 60 days from the date of delivery.
END OF DOCUMENT