Current through Register Vol. 43, No. 02, November 27, 2024
(1) 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, all property costs will be subject to the "prudent
buyer" concept with each case to be considered on its own merit. Also,
depreciation, interest, rent, insurance, and taxes associated with space and
equipment used for non-covered services or activities must be eliminated from
allowable property costs.
(2)
Depreciation
(a) Depreciation is that amount
which represents a portion of the depreciable asset's cost or other basis which
is allocable to a period or operation. The amount of depreciation is determined
by using the straight line method.
(b) The principles of reimbursement for
facility costs provide that payment for services should include depreciation on
all depreciable type assets that are used to provide covered services to
beneficiaries. This includes assets that may have been fully (or partially)
depreciated on the books for the facility but are in use at the time the
facility enters the program. The useful lives of such assets are considered not
to have ended and depreciation calculated on a revised extended useful life is
allowable. Likewise, a depreciation allowance is permitted on assets that are
used in a normal standby or emergency capacity. An appropriate allowance for
depreciation on buildings and equipment is an allowable cost. The depreciation
must be:
(1) identifiable and recorded in the
facility's accounting records;
(2)
based on the historical cost of the asset or fair market value at the time of
donation or inheritance, in the case of donated or inherited assets; and
(3) prorated over the estimated
useful life of the asset using the straight line method of
depreciation.
(c)
Depreciable Assets. Assets that a facility has an economic interest in through
ownership regardless of the manner in which they were acquired, are subject to
depreciation. Generally, depreciation is allowable on the assets described
below when required in the regular course of providing patient care. Assets
which a facility is using under a regular lease arrangement would not be
subject to depreciation by the facility.
(d) Buildings. Buildings include, in a
restrictive sense, the basic structure or shell and additions thereto. The
remainder is identified as building equipment.
(e) Building Equipment. Building equipment
includes attachments to buildings, such as wiring, electrical fixtures,
plumbing, elevators, heating system, air conditioning system, etc. The general
characteristics of this equipment are:
(1)
affixed to the building, and not subject to transfer; and
(2) a fairly long life, but shorter than the
life of the building to which affixed. Since the useful lives of such equipment
are shorter than those of the buildings, the equipment may be separated from
building cost and depreciated over this shorter useful life.
(f) Major Moveable Equipment.
Major moveable equipment includes such items as accounting machines, beds,
wheelchairs, desks, vehicles, X-ray machines, etc. The general characteristics
of this equipment are:
(1) a relatively fixed
location in the building;
(2)
capable of being moved as distinguished from building equipment;
(3) a unit cost sufficient to justify ledger
control;
(4) sufficient size and
identity to make control feasible by means of identification tags; and
(5) a minimum life of
approximately three years.
(g) Minor Equipment. Minor equipment must be
expensed as of the date of purchase. Minor equipment includes such items as
waste baskets, syringes, catheters, mops, buckets, etc. The general
characteristics of this equipment are:
(1) in
general, no fixed location and subject to use by various departments of the
facility;
(2) comparatively small
in size and unit cost;
(3) subject
to inventory control;
(4) fairly
large quantity in use; and
(5)
generally, a useful life of approximately three years or less.
(h) Land (Non-depreciable). Land
(non-depreciable) includes the land owned and used in facility operations.
Included in the cost of land are the costs of such items as off-site sewer and
water lines, public utility charges necessary to service the land, governmental
assessments for street paving and sewers, the cost of permanent roadways and
grading of a non-depreciable nature, the cost of curbs and sidewalks whose
replacement is not the responsibility of the facility, and other land
expenditures of a non-depreciable nature.
(i) Land Improvements (Depreciable).
Depreciable land improvements include paving, tunnels, underpasses, on-site
sewer and water lines, parking lots, shrubbery, fences, walls, etc. (if
replacement is the responsibility of the facility).
(j) Lease Hold Improvements. Lease hold
improvements include betterments and additions made by the lessee to the leased
property. Such improvements become the property of the lessor after the
expiration of the lease.
(k)
Accounting Records. The depreciation allowance, to be acceptable, must be
adequately supported by the facility's accounting records. Appropriate
recording of depreciation requires the identification of the depreciable assets
in use, the assets' historical cost (or fair market value at the time of
donation in case of donated assets), the method of depreciation, and the
assets' accumulated depreciation.
(l) Useful Life of Depreciable Assets. The
depreciable life of an asset is its expected useful life to the facility; not
necessarily the inherent useful or physical life. The useful life is determined
in light of the facilities experience and the general nature of the asset and
other pertinent data. Some factors for consideration are:
(1) normal wear and tear,
(2) obsolescence due to normal economic and
technological advances,
(3)
climatic and other local conditions, and
(4) facility's policy for repairs and
replacement. In projecting a useful life, facility's are to follow the useful
life guidelines published by the American Hospital Association (See Schedule at
end of Chapter). The agency may allow lives different from these guidelines, if
the provider requests consideration in writing. However, the deviation must be
based on convincing reasons supported by adequate documentation, generally
describing the realization of some unexpected event. Factors such as an
expected earlier sale, retirement or demolition of an asset may not enter into
a determination of the expected useful life of an asset.
(m) Acquisitions. If a depreciable asset has
at the time of its acquisition an estimated useful life of at least two (2)
years and a historical cost of at least $300, or, if it is acquired in quantity
and the cost of the quantity is at least $500, its cost must be capitalized,
and written off ratably over the estimated useful life of the asset. If a
depreciable asset has a historical cost of less than $300 or, if it is acquired
in quantity and the cost of the quantity is less than $500 or if the asset has
a useful life less than two (2) years, its cost is allowable in the year it is
acquired. The facility may, if it desires, establish a capitalization policy
with lower minimum criteria, but under no circumstances may the above criteria
be exceeded.
(n) Determining
Depreciation in Year of Acquisition and Disposal. The amount of depreciation
recorded during the year of acquisition and year of disposal varies among
centers. The following methods are acceptable for computing first and last year
depreciation amounts. Any other method for computing first and last year
depreciation must be approved by the Medicaid Agency. Whatever method is
adopted, it must be applied to all assets subsequently acquired.
1. Time Lag Alternatives. These result in
delayed recording of depreciation after the actual date of acquisition.
However, they provide the convenience of updating detailed, supportive
accounting records at the end of certain time intervals.
(i) Up to Six Months Lag. Assets acquired
during the first six months of the reporting year are subject to depreciation
beginning with the first day of the seventh month of the reporting year. Assets
acquired during the second six months of the reporting year are subject to
depreciation beginning with the first day of the subsequent reporting year.
Depreciation on disposal is based on the portion of the year in which the asset
is disposed. If the asset is disposed of in the first half of the reporting
year, one-half year's depreciation is taken. If the asset is disposed of in the
second half of the year, a full year's depreciation is taken.
(ii) Up to One Year Time Lag. Assets acquired
during the reporting year become effective for depreciation on the first day of
the subsequent reporting year. In the year of disposal a full year's
depreciation is taken.
2. Half Year Depreciation. One-half year
depreciation is taken in the year of acquisition regardless of acquisition date
and one-half year depreciation is taken on disposition regardless of
disposition date.
3. Actual Time
Depreciation. Depreciation for the first reporting period is based on the
length of time from the date of acquisition to the end of the reporting year.
Depreciation on disposal is based on the length of time from the beginning of
the reporting year in which the asset was disposed to the date of
disposal.
(o) Disposal
of Assets. Depreciable assets may be disposed of through sale, trade-in,
scrapping, exchange, theft, wrecking, fire or other casualty. In such cases,
depreciation can no longer be taken on the asset, and gain or loss on the
disposition must be computed. Where an asset has been retired from active
service, but is being held for standby or emergency services, depreciation may
continue to be taken on such assets. However, where asset has been permanently
retired, or there is little or no likelihood that it can be effectively used in
the future, no further depreciation can be taken on the asset. In such case,
gain or loss on the retirement must be computed.
(3) Interest
(a) Necessary and reasonable interest expense
on both current and capital indebtedness is an allowable cost. Interest is the
cost incurred for the use of borrowed funds, generally paid at fixed intervals
by the user. Interest on current indebtedness is the cost incurred for funds
borrowed for a relatively short term, usually for one (1) year or less. Current
borrowing is usually for purposes such as working capital for normal operating
expenses. Interest on capital indebtedness is the cost incurred for funds
borrowed for capital purposes, such as the acquisition of facilities,
(equipment, and capital improvements.) Generally, loans for capital purposes
are long-term loans. Interest is usually expressed as a percentage of the
principal. Sometimes, it is identified as a separate item of cost in a loan
agreement. Interest may be included in "finance charges" imposed by some
lending institutions or it may be a prepaid cost or "discount" in transactions
with those lenders who collect the full interest charges when funds are
borrowed. Reasonable finance charges and service charges together with interest
on indebtedness are includable in allowable cost. To be allowable, interest
must be:
(1) supported by evidence of an
agreement that funds were borrowed and that payment of interest and repayment
of the funds are required;
(2)
identifiable in the facilities accounting records;
(3) related to the reporting period in which
the costs are incurred; and
(4)
necessary and proper for the operation, maintenance, or acquisition of the
center's facilities. To support the existence of a loan, the facility should
have available a signed copy of the loan contract which should contain the
pertinent terms of the loan such as amount, rate of interest, method of
payment, due date, etc. Where the lender does not customarily furnish a copy of
the loan contract, correspondence from the lender stating the pertinent terms
of the loan such as amount, rate of interest, method of payment, due date,
etc., will be acceptable. Various methods of identifying and accounting for
interest costs are used. These include periodic cash payments of interest with
or without repayment of all or part of the loan; prepayment of interest when
the liability is incurred with charges to interest expense recorded in relation
to the accounting period; and accrual of interest with no cash payment with a
corresponding record of the unpaid liability reflected in the accounting
records. The method actually used depends on the type of loan and the terms of
the loan agreement. Where interest expense has been determined to be allowable
and the interest expense records are maintained physically away from the
facility premises such as in a county treasurer's office, such records will be
deemed to be those of the facility. This would be applicable where bond issues
have been specifically designated for the construction or acquisition of the
centers facilities and the financial records relative to the bond issue are
maintained by some governmental body other than the facility.
(b) Necessary Interest. Necessary
means that the interest be incurred in a loan made to satisfy a financial need
of the facility and for a purpose reasonably related to patient care. For
example, where funds are borrowed for purposes of investing in other than the
facility's operations, interest expense is not allowable, such a loan is not
considered "necessary." Likewise, when borrowed funds create excess working
capital, interest expense on such borrowed funds is not an allowable cost.
Necessary also requires that the interest be reduced by investment income.
There is an exception to this general rule where the investment income is from
grants and gifts, whether restricted or unrestricted, and which are not
commingled with other funds. "Not commingled" means that the funds are kept
physically apart in a separate bank account and not simply recorded separately
in the facility's accounting records.
(c) Proper Interest. Proper means that the
interest be incurred at a rate not in excess of what a prudent borrower would
have had to pay in an arms-length transaction in the money market when the loan
was made. In addition, the interest must be paid to a lender not related to the
facility through common ownership or control.
(d) Mortgage Interest. A mortgage is a lien
on assets given by a borrower to a lender as security for borrowed funds for
which payment will be made over an extended period of time. Mortgage interest
refers to the interest expense incurred by the borrower on a loan which is
secured by a mortgage. Usually such loans are long-term loans for the
acquisition of land, buildings, equipment, or other fixed assets. Mortgage
loans are customarily liquidated by means of periodic payments, usually
monthly, over the term of the mortgage. The periodic payments usually cover
both interest and principal. That portion which is for the payment of interest
for the period is allowable as a cost of the reporting period to which it is
applicable. In addition to interest expense, other expenses are incurred in
connection with mortgage transactions. These may include attorney's fees,
recording costs, transfer taxes and service charges which include finder's fees
and placement fees. These costs, to the extent that they are reasonable, should
be amortized over the life of the mortgage in the same manner as bond expenses.
The portion applicable to the reporting year is an allowable cost.
(e) Interest During Period of Construction.
Frequently, centers may borrow funds to construct facilities or to enlarge
existing facilities. Usually, construction of facilities will extend over a
long period of time, during which interest costs on the loan are incurred.
Interest costs incurred during the period of construction must be capitalized
as a part of the cost of the facility. The period of construction is considered
to extend to the date the facility is put into use for patient care. If the
construction is an addition to an existing facility, interest incurred during
the construction period on funds borrowed to construct the addition must be
capitalized as a cost of the addition. After the construction period, interest
on the loan is allowable as an operating cost.
(f) Interest on Notes. A note is the
contractual evidence given by a borrower to a lender that funds have been
borrowed and which states the terms for repayment. Interest on notes is
allowable as a cost in accordance with the terms of the note. Frequently, a
note is issued as an instrument evidencing a loan which may have a term running
several years. The interest on such a loan is incurred over the period of the
loan. Under the accrual method of accounting, the interest cost incurred in
each reporting period is an allowable cost in the applicable reporting period.
If, under the terms of the loan, the interest is deducted when the loan is made
(discounted), the interest deducted should be recorded as prepaid interest. A
proportionate part of the prepaid interest is allowable as cost in the periods
over which the loan extends.
(4) Sale and Lease back and Lease-Purchase
Agreements.
(a) Sale and Lease back Agreements
- Rental Charges. Where a facility enters into a sale and lease back agreement
with a non-related purchaser involving plant facilities or equipment, the
incurred rental specified in the agreement is includable in allowable cost if
the following conditions are met:
1. The
rental charges are reasonable based on consideration of rental charges of
comparable facilities and market conditions in the area; the type, expected
life, condition and value of the facilities or equipment rented and other
provisions of the rental agreements;
2. Adequate alternate facilities or equipment
which would serve the purpose are not or were not available at lower cost;
and
3. The leasing was based on
economic and technical considerations.
If all these conditions were not met, the rental charge cannot
exceed the amount which the provider would have included in reimbursable costs
had be retained legal title to the facilities or equipment, such as interest or
mortgage, taxes, depreciation, insurance and maintenance costs.
(b) Lease Purchase
Agreement - Rental Charges.
1. Definition of
Virtual Purchase. Some lease agreements are essentially the same as installment
purchases of facilities or equipment. The existence of the following conditions
will generally establish that a lease is a virtual purchase:
(i) The rental charge exceeds rental charges
of comparable facilities or equipment in the area;
(ii) The term of the lease is less than the
useful life of the facilities or equipment; and
(iii) The center has the option to renew the
lease at a significantly reduced rental, or the center has the right to
purchase the facilities or equipment at a price which appears to be
significantly less than what the fair market value of the facilities or
equipment should be at the time acquisition by the center is
permitted.
2. Treatment
of Rental Charges. If the lease is a virtual purchase, the rental charge is
includable in allowable costs only to the extent that it does not exceed the
amount which the facility would have included in allowable costs if it had
legal title to the asset (the cost of ownership), such as straight-line
depreciation, insurance, and interest. The difference between the amount of
rent paid and the amount of rent allowed as rental expense is considered a
deferred charge and is capitalized as part of the historical cost of the asset
when the asset is purchased. If the asset is returned to the owner, instead of
being purchased, the deferred charge may be expensed in the year the asset is
returned. Where the term of the lease is extended for an additional period of
time, at a reduced lease cost, and the option to purchase still exists, the
deferred charge may be expensed to the extent of increasing the reduced rental
to an amount not in excess of the cost of ownership. On the other hand, if the
term of the lease is extended for an additional period of time at a reduced
lease cost and the option to purchase no longer exists, the deferred charge may
be expensed to the extent of increasing the reduced rental to a fair rental
value.
(5)
Allowance for Depreciation on Facilities Leased for a Nominal Amount.
(a) Some centers might lease their facilities
from municipalities at nominal rental (usually for $1.00 per year) and the
lease generally covers the useful life of the facility. Under most lease
arrangements the tenant (lessee) maintains the property and pays the cost of
any improvement or addition to the facility. When such improvement or addition
is made the lessee may properly amortize its cost. The amortization allowance
is includable in allowable cost. At the end of the lease, improvements and
additions made by the lessee become the property of the lessor. However, in
some instances the lease agreement provides that title to any additions or
improvements is to revert to the owner in the first year they are used. In such
cases, the cost of any addition or improvement would be similarly amortized and
the amortization allowance would also be includable in allowable cost. It is
the general practice of the center to include its charges (and cost) an amount
to cover depreciation on the leased facilities as distinguished from capital
improvements made by the lessee. In recognition of this practice, most third
parties that reimburse centers on the basis of cost allowed depreciation (but
not interest) on facilities that have been leased for a nominal rental. In view
of this and since this type lease arrangement in such cases generally
contemplates the occupancy by the lessee for the period of the useful life of
the facility, depreciation on the leased facility may be included in allowable
cost under the conditions described below.
(b) Analysis of Lease Arrangement. Each case
must be decided on its own merit for depreciation to be allowed. The lease must
contemplate that the lessee will make any necessary improvements and will
properly maintain the facility. The lease may and frequently does cover the
useful life of the asset; if not, however, as in the case of the year to year
lease, such lease should be examined closely to determine whether the renewal
and other provisions of the lease contemplate that the center will use the
facility to the extent of its useful life. Where the intent and provisions of
the year to year lease permit the center to have the benefit of the useful life
of the facility, such lease should be treated, for depreciation purposes, in
the same manner as a long-term lease that covers the useful life of the asset.
The actions of the lessee and lessor in such cases should indicate that the
intent of both parties is to continue the lease arrangements for the useful
life of the asset, Of course, other facts should be considered together with
the past actions of the lessee and lessor in order to determine whether or not
the asset will and can be used by the lessee for the asset's full useful life.
The lease should have no restrictions on the free use of the facility by the
lessee. In addition, the lease should not provide for any indirect benefits to
the lessor or to those connected with the lessor. For example, if the lease
requires that the lessee furnish free clinic services to the employees of the
lessor, then depreciation should not be allowed. In such cases, the cost of the
services furnished to the lessor's employees would be appropriately included
when determining allowable costs.
(6) Equipment Rental. Reasonable costs of
such rental equipment as is normally and traditionally rented by health care
institutions and which is rented from a non-related 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.
(7) Insurance on Building and Contents. The
reasonable costs of insurance on buildings and their contents used in 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.
(8) 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.
(9) 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.
(10) Donation of the use of space. An FQHC
may receive a donation of the use of space by another organization. In such
case, the FQHC may NOT impute a cost for the value of the use of space and
include the imputed cost in allowable costs. The FQHC can include in the
allowable cost: of the FQHC, items such as costs of janitorial services,
maintenance, repairs, etc., if used full time by the FQHC for patient related
care and paid for by the FQHC.
Author: