Current through Register Vol. 42, No. 11, August 30, 2024
This rule does not apply to state owned and operated facilities
who are paid a use allowance in lieu of depreciation, for building and
improvements. The annual use allowance for buildings and improvements shall be
two percent of acquisition cost. Major movable equipment for State owned and
operated facilities will be depreciated as in paragraph (10) of the
Rule.
(1) Medicaid Approval. The
construction, sale or lease of any ICF/IID facility must be approved by
Medicaid for purposes of Medicaid reimbursement. Medicaid may, at its option,
elect not to approve any new construction, sale or lease of a facility entered
into without its prior approval; in which case, Medicaid will not reimburse any
property costs. Capital expenditures must be approved under applicable
Certificate of Need regulations by appropriate state and/or federal agencies.
When construction is accomplished without such approval, Medicaid will be able
to pay only operating costs; capital expenditures will not be an allowable cost
in these cases, as further explained in Rule
560-X-42-.04(3).
(2) New Construction. Construction costs [as
defined in Rule (9)] will be reimbursed on actual cost up to a maximum of
$16,600.00 per bed. This limitation is intended to discourage construction of
lavish facilities.
(3) Land. The
maximum allowable cost assigned to land upon which a newly constructed facility
is built, or upon which a purchased facility is located, shall use as a
guideline an amount not to exceed 5% of the construction costs (with respect to
a newly constructed facility) or of the allowable basis determined pursuant to
Rule 560-X-42-.11(4)
(with respect to a purchased facility) absent a showing by the provider that
the 5% is not a reasonable amount. Each such construction or purchase situation
shall be subject to the "prudent buyer" concept with each case to be considered
on its own merits.
(4) Sale of
Existing Facilities. Effective for sales closed on or after October 1, 1988,
the allowable basis to the purchaser of a facility participating in the
Medicaid program of those assets which would be includable as construction
costs pursuant to Rule
560-X-42-.11(9)
if the facility were being constructed rather than purchased, shall be the
lower of:
(a) The actual sales price
negotiated for the purchase of the facility. For purposes of this Rule,
including but not limited to this Section (a) and Section (7)(a) of this Rule,
sales price shall mean the total price agreed upon by the seller and purchaser
as evidenced by a signed copy of a final sales agreement. The stated sales
price agreed to by the seller and the buyer shall not be reduced by any
discount involved with issuance, by the purchaser of notes, mortgages, bonds,
or securities, and the acceptance of such debt instruments as part of the
agreed upon purchase price by the seller; or
(b) The current replacement cost of the
facility (based upon the current Alabama Medicaid ceiling on Construction Costs
of new facilities under Rule
560-X-42-.11(2)
reduced as follows:
Age of Facility
|
Write Down
|
1-10 yrs.
|
2.5% per year for each year of age up to 10
years
|
11 - 15 yrs.
|
25% plus 2.0% per year over 10 years
|
16 - 25 yrs.
|
35% plus 1.5% per year over 15 years
|
26 or older
|
50% plus 1.0% per year over 25 years
|
For purposes of this subsection (b), fractional years shall not
be counted. Also, the maximum allowable basis of a facility, portions of which
have been constructed at different times, will be calculated by considering
separately each area of the building constructed at different times.
Example: Valuation of a 100 bed facility held 15
years
|
100 beds x $16,600 = Less: Depreciation
|
$1,660,000
|
($1,660,000 x 35% (25%) + (2% x 5)=35%)
|
(581,000)
|
Maximum allowable depreciable basis
|
$1,079,000
|
Land (limited to 5% of depreciable basis) (prior to
write down, if applicable)
|
83,000
|
Total Allowable Basis
|
$1,162,000
|
or;
|
(c) A
purchase price which would represent an increase over the sales price paid by
the seller of one-half of the percentage increase, from the date of acquisition
by the seller to the date of sale by seller, in the Dodge Construction Systems
Costs for Nursing Homes; or
(d) A
purchase price which would represent an increase over the sales price paid by
the seller of one-half of the percentage increase, from the date of acquisition
by the seller to the date of sale by seller, in the Consumer Price Index for
all Urban Consumers (United States city average).
(5) Seven Year Rule. No increase in property
costs resulting from a change in ownership will be allowed for reimbursement
purposes for a period of seven (7) years after the last change in ownership
that resulted in a revaluation of depreciable basis or after the original
construction of the facility. If a change occurs, reimbursement to the new
owner will be under the same terms as under Rule
560-X-42-.11(11)
related to non bona fide sales. Medicaid will consider granting exceptions to
this seven (7) year rule, but only in cases of extreme hardship, such as death
of the owner. Requests for such exceptions should be submitted in writing to
the Commissioner of the Alabama Medicaid Agency and should be fully
documented.
(6) Leases. The maximum
lease payment which will be considered an allowable property cost will be the
lower of (a) or (b), as follows:
(a) The
actual lease payments which lessee is obligated to pay to the owner;
or
(b) For net leases, 12% of the
replacement cost of the facility [based on the current Medicaid ceiling on
construction costs of new facilities under Rule
560-X-42-.11(2)
adjusted as provided under Rule
560-X-42-.11(4)]
. In those cases in which the depreciable assets have been stepped-up within
the immediately preceding seven years, the 12% shall be applied to the net
depreciated allowed book value at the date of the lease agreement.
(c) Leases submitted to the Agency for
approval must be specific as to the responsibility for payment of fire and
casualty insurance and property taxes. The maximum allowable lease payment
calculated in (b) above includes an allowance for taxes and
insurance.
(d) Sale/Leaseback
Transactions. Reimbursement of rental or lease payments for these type
transactions will be limited to the lower of:
1. the costs (depreciation, interest) of
ownership which the facility would have been reimbursed had it retained legal
title to the assets, or
2. the
allowable Medicaid lease payment.
(7) Depreciation Recapture.
(a) Prior to Agency approval of the sale of a
facility which has previously participated in the Medicaid program, all
depreciation previously allowed and reimbursed through the per diem rate
attributable to periods subsequent to the later of October 1, 1980, or the last
recapture date will be recaptured. If the facility was sold at a price in
excess of the sellers' cost of the property as reduced by accumulated
depreciation, as computed under Medicaid depreciation guidelines, the recapture
amount will be the lesser of the sellers' actual gain on the sale or the amount
of the depreciation previously reimbursed through the per diem rate. Any gain
based on the stated sales price agreed to by the seller and the buyer shall not
be reduced by any discount involved with issuance by the purchaser of notes,
mortgages, bonds, or securities, and the acceptance of such debt instruments as
part of the agreed upon purchase price by the seller.
(b) Recapture of depreciation is not
applicable in those instances where a stepped-up basis is not allowed, whether
refused or is unallowable by the seven (7) year rule, or any other provisions
of the regulations. Any subsequent sale, which results in a purchaser assuming
a stepped-up basis, shall be subject to depreciation recapture from the later
of October 1, 1980, or the last recapture date. The amount of recapture
otherwise due to Medicaid from the seller of a facility which has been used in
the Medicaid program will be ratably reduced commencing after that seller
(regardless of that seller's method of acquisition) has owned the facility for
seven full years, at the rate of 1.04167% per month (being an annual rate of
12.5%) . This reduction will result in no recapture being due once an owner has
owned a facility for fifteen full years. Each subsequent sale or other transfer
of ownership is subject to a fifteen year holding period before the amount
subject to recapture is reduced by 100%.
(c) If the seller's allowable costs during
the seller's participation in the Medicaid program have in any year(s) exceeded
the overall ceiling, the amount of depreciation subject to recapture will be
determined as follows:
1. For any such fiscal
year between October 1, 1980, and the date of sale, the amount of depreciation
subject to recapture for each such year will be determined as follows:
(i) Reimbursement ceiling divided by average
otherwise allowable cost per day (as shown on the rate computation schedule) =
Reimbursement percentage.
(ii)
Reimbursement percentage x depreciation x Medicaid occupancy = Amount of
Recapture.
(iii) For partial fiscal
years, the computation will be prorated based upon the number of full calendar
months included in the partial year.
(d) Recapture will take the form of a lump
sum repayment by the seller to Medicaid of the amount of depreciation computed
under the depreciation recapture provisions as set out herein above. However,
when Medicaid is requested to approve the sale of a facility wherein no
arrangements are made for such a depreciation recapture payment by the seller,
Medicaid may, notwithstanding any other provision of this section, withhold all
reimbursement otherwise due to the purchaser until such recapture repayment is
fully recaptured from reimbursement otherwise payable to the
purchaser.
(e) As to periods
subsequent to October 1, 1980, during which a facility is leased to a Medicaid
provider, and therefore, no depreciation is claimed as such for purposes of
Medicaid reimbursement, the depreciation allowance which would have been
reimbursable to the owner of the facility during the term of the lease if the
owner had also been the provider will be computed. The amount so computed will
be treated as "imputed depreciation" and will be subject to recapture from the
seller as though such depreciation had been actually claimed and allowed for
Medicaid reimbursement during the lease period. Medicaid will not approve the
sale of a facility which has been leased until it is provided with adequate
records (such as, but not limited to, federal income tax returns) from which it
can compute the amount of "imputed depreciation."
(8) Facilities Financed by Bond Issues.
Medicaid will treat the lease of a facility which has been financed by a
Medical Clinical Board bond issue, pursuant to which the "lessee" has an option
to purchase at less than market value, as a lease purchase agreement for
reimbursement purposes. In these instances, the lessee's allowable property
costs will be limited to the amount which would be allowable if the lessee had
legal title to the facility's assets (the owner's allowable property costs)
such as straight line depreciation, insurance, property taxes, interest, and an
equity return on the investment in property, plant and equipment related to
patient care, net of depreciation, and loans. The return on equity capital is
subject to the provisions in Rule
560-X-42-.13.
(9) Definition of Construction Costs.
"Construction Costs" include the cost of:
(a)
Buildings. Buildings include, in a restrictive sense, the basic structure or
shell and additions thereto. The remainder is identified as building
equipment.
(b) Building Equipment.
Building equipment includes attachments to buildings, such as wiring,
electrical fixtures, plumbing, elevators, heating systems, air conditioning
systems, etc. The general characteristics of this equipment are that it
normally:
(1) is affixed to the building and
not subject to transfer; and
(2)
has a relatively long useful life, but the useful life is shorter than the
useful life of the building to which affixed.
(c) Major Movable Equipment. Major movable
equipment includes such items as beds, wheelchairs, desks, etc. The general
characteristics of this equipment are that it:
(1) has a relatively fixed location in the
building;
(2) is capable of being
moved, as distinguished from building equipment;
(3) has a unit cost sufficient to justify
ledger control; and
(4) has
sufficient size and identity to make control feasible by means of
identification tags.
(d)
Land (Nondepreciable). Land (nondepreciable) is excluded from Construction
Costs for purposes of the limitations on Construction Costs contained in Rule
560-X-42-.11(2).
However, allowable land costs are subject to the limitation contained in Rule
560-X-42-.11(3).
(e) Land Improvements (Depreciable).
Depreciable land improvements include paving, onsite sewer and water lines,
parking lots, shrubbery, fences, walls, etc., if replacement is the
responsibility of the provider.
(f)
Capitalized Costs. Construction period interest and other expenses which are
normally capitalized as part of the cost of the acquired property under
generally accepted accounting principles.
(g) Acquisition costs such as feasibility
studies, accounting fees, legal fees, etc., are not reimbursable costs for
sales occurring on or after October 1, 1988.
(10) General Principles Relating to Property
Costs. Property Costs include, but are not limited to, depreciation, interest
lease and rental payments, insurance on buildings and contents, and property
taxes. In addition to the limitations contained in this Rule,
560-X-42-.11, all property costs
will be subject to the "prudent buyer" concept with each case to be considered
on its own merits. Also, depreciation, interest, rent, insurance, and taxes
associated with space and equipment used for noncovered services or activities
must be eliminated from allowable property costs. Treatment of costs associated
with the operation of a laundry is dealt within detail in Rule
560-X-42-.09.
(a) Depreciation.
1. In order to be allowable as a property
cost, depreciation must be:
(a) identifiable
and recorded in the provider's accounting records,
(b) based on the allowable historical cost of
the asset, and
(c) prorated over
the estimated useful life of the asset using the straight line method. The
useful life guidelines published by the American Hospital Association must be
followed in establishing the useful life of a new asset. (See Schedule 11A at
the end of this chapter.) The Agency may allow lives different from these
guidelines, if the provider requests consideration in writing. Medicaid may
allow used assets to be depreciated over shorter estimated useful lives if
prior approval of such shorter useful lives is requested in writing by the
provider. If such prior approval is not obtained, used assets will be
depreciated over the same useful lives as established for new assets. For those
assets not appearing on Schedule 11A at the end of this chapter, Medicaid will
establish the appropriate useful life on a case-by-case basis.
2. The costs of improvements,
including major leasehold improvements such as building additions, will be
depreciated over the useful life of the improvements, regardless of the
remaining term of any lease agreement.
3. Any gain attributable to periods during
which a provider has participated in the Medicaid program, resulting from the
disposal of equipment will be used to offset depreciation expenses for the year
in which the gain is realized. Any loss attributable to periods during which a
provider has participated in the Medicaid program and resulting from such a
disposal will be added to allowable costs for the year during which the loss is
realized. In determining the gain or loss, such gains or losses will be treated
as having accrued ratably over the entire period during which the provider has
owned the asset. The allowable aggregate amount of such gains and losses will
be limited to 10% of the provider's total allowable depreciation for the year
during which such gain or losses are realized. Any amounts in excess of this
10% will be carried forward to subsequent years, with the same 10% limitation
applying until the total gain or loss is absorbed into an allowable cost year.
No gain or loss will be recognized for purposes of this section from a trade-in
of a depreciable asset. Refer to Rule
560-X-42-.11(10)
(a)4 for an explanation of the basis to be
utilized whenever an asset is traded in.
4. Trade-ins. When an asset is acquired by
trading in an asset that was depreciated under the program, the basis for
purposes of depreciation of the new asset will be the sum of the undepreciated
balance of the old asset and the cash paid or to be paid.
(b) Interest. Subject to the provisions of
Section (10) of the Rule, necessary and reasonable interest incurred to finance
the purchase or construction of a facility, to purchase equipment, and to
finance the cost of major repairs and renovations, is an allowable property
cost. Interest on the portion of a loan which exceeds the construction or
purchase price approved by Medicaid for the financed asset will not be included
in property costs, but will be subject to the other interest provisions of Rule
560-X-42-.08. If an asset is
refinanced by a current owner at a higher rate of interest, allowable interest
on the refinanced portion of the original loan will, unless the entire interest
expense meets the necessary and reasonableness tests of Rule
560-X-42-.08, be limited to the
interest which would have been allowed under the original financing
arrangement. The excess interest on the refinanced portion will be an
unallowable cost.
(c) Leases and
Rental Payments. All major lease and rental agreements must be in writing and
must be approved by Medicaid for Medicaid reimbursement purposes prior to the
signing by the provider. Medicaid will, in all cases, exclude from the
provider's allowable costs all lease payments made or accrued prior to Medicaid
approval of the lease agreement. Medicaid may, however, at its option, elect
not to reimburse any lease payments under, or any other property costs incurred
in connection with, any lease entered without its prior approval.
1. Facility Leases. Leases will be subject to
the "prudent buyer" concept with each case to be considered on its own merits.
Factors considered by Medicaid in its review will include, but not be limited
to, the age of the facility, current costs versus proposed costs, length of
lease, existing debt service, and fair return to lessor. No lease will be
approved which contains a "percentage of the gross" or "escalator" clause. The
fact that a lease is being renegotiated will not be grounds for increasing the
amount of the lease payment. Medicaid reserves the right to require an
independent appraisal of the leased facility at the expense of the provider by
an appraiser selected by Medicaid. For Medicaid reimbursement purposes,
allowable rental payments between related parties cannot exceed the lessor's
allowable property costs. Subleases which include payment in excess of that
being made by sublessors will not be honored as to the additional payments. No
increase in a lease payment will be recognized if an increase in lease payment
or an increase in property costs due to the sale of the facility has occurred
during the immediately preceding seven (7) year period. Medicaid will consider
granting exceptions to the seven (7) year rule, but only in cases of extreme
hardship, such as the death of the owner. Requests for exceptions should be
submitted in writing to the Commissioner of Medicaid and should be fully
documented.
2. Equipment Rental.
Reasonable costs of such rental equipment as is normally and traditionally
rented by health care institutions and which is rented from a nonrelated
organization, are allowable provided the arrangement does not constitute a
lease-purchase agreement. All items leased under a lease-purchase agreement
must be capitalized and depreciated over the useful life of the
asset.
(d) Insurance on
Building and Contents. The reasonable costs of insurance on buildings and their
contents used in the rendition of covered services purchased from a commercial
carrier and not from a limited purpose insurer [Ref. HIM-15, Section 2162(2)]
will be considered as allowable costs.
(e) Property Taxes. Ad valorem and personal
property taxes on property used in the rendition of covered services are
allowable under this section. Fines, penalties or interest related to those
taxes are not allowable.
(f) Life
and Rental Insurance. Premium payments for life insurance required by a lender
or otherwise required pursuant to a financing arrangement will not be an
allowable cost. Loss of rental insurance will also be considered an unallowable
cost.
(g) Minor Equipment is not
subject to the provisions of this section. Minor equipment must be expensed as
of the date of purchase. Minor equipment includes such items as waste baskets,
bed pans, catheters, silverware, mops, buckets, sheets, towels, etc. The
general characteristics of this equipment are:
(1) no fixed location and subject to use by
various departments of the provider's facility,
(2) comparatively small in size and unit
cost,
(3) subject to inventory
control,
(4) fairly large quantity
in use, and
(5) a useful life of
approximately three years or less.
(h) Capitalization Level. Any asset with a
per unit cost of $500 or more with an expected useful life of three years or
more must be capitalized. Any group purchase of assets (i.e., 10 mattresses, 4
beds, etc.) with an aggregate cost of $1,000 or more with an aggregate expected
useful life of three years or more must be capitalized.
(11) Non Bona Fide and Related Party Sales.
(a) Non Bona Fide Sales. If a facility
changes ownership and a purchaser cannot justify that the sale was bona fide,
the seller's book value shall be used by the purchaser as the basis for the
depreciation of the purchased assets. In such cases, the purchaser shall record
the historical cost and accumulated depreciation of the seller recognizable
under the program, and these shall be considered as incurred by the purchaser
for program reimbursement purposes. No additional interest expense or return on
equity resulting from such a non bona fide sale will be reimbursable.
(b) Related Party Sales. Any sale between a
provider and a "related party" will not be deemed a bona fide sale. The
purchaser's cost basis in depreciable assets and the remaining depreciable life
of assets purchased will be the same as that of the seller. The portion of the
purchase price reasonably allocated to assets which is in excess of the
seller's book value shall be entered as a separate item on the books of the
purchaser and eliminated from the computation of allowable interest expense,
allowable depreciation and return on equity capital for the purposes of
Medicaid reimbursement. The provisions of HIM-15 shall be applicable in
determining whether a sale is between related parties.
(12) Rate Computation. The allowable property
costs (as defined in this section) will be added to the allowable other costs
and return on equity capital for determination of the 90th
percentile.
(13) Transactions
Involving Corporate Stock. The purchase of the stock of a corporate provider
will generally not be considered as a purchase of the provider's assets;
therefore, such a stock purchase will not result in a revaluation of the assets
of the provider. However, such a revaluation will be permitted upon the
statutory merger or consolidation of the corporation provider with another
corporation under the same circumstances wherein such a revaluation would be
permitted by
42
CFR Section 413.134(k).
Additionally, a revaluation of assets will be permitted where the purchase of
stock of a corporate provider is followed within three (3) months by the
liquidation of the provider. Any revaluation of the assets of a provider as the
result of such a statutory merger, consolidation, or liquidation shall be
subject to the same prior approval and basis limitations as though an outright
sale of the assets has been made.
(14) Changes in Ownership. In a transfer
which constitutes a change of ownership, the old and new providers shall reach
an agreement between themselves concerning trade accounts payable, accounts
receivable and bank deposits. Medicaid will pay the new provider for unpaid
claims for services rendered both prior to and after the change of ownership.
The new provider shall be liable to Medicaid for unpaid amounts due or which
become due Medicaid from the old provider.
(15) Bed Additions or Replacement Beds. It is
anticipated that bed additions to existing facilities will cost less than new
facilities since these additions generally do not require additional
administrative, dietary, and plant operation areas. Bed additions or
replacement bed construction costs built at the same location as the core
facility will be reimbursed on an actual cost basis using $12,000 per bed as a
reasonable guideline. This limitation is intended to discourage construction of
lavish facilities. Appropriate adjustments to this $12,000 per bed cost
limitation may be made based on the availability of service areas in the
existing facility.
(16)
Renovations. Renovations to the existing facility will be reported as a
separate cost breakdown.
(17) In
those instances wherein a facility that is being leased is sold, the purchaser
of the facility must furnish the Agency with documentation of the seller's
actual facility acquisition cost prior to Medicaid computation of an allowable
depreciable basis.
Author: Robin Arrington, Associate Director, LTC
Provider/Recipient Services Unit
Statutory Authority: State Plan; Title XIX,
Social Security Act;
42 C.F.R. §§
447.250 - .255, et
seq.