Code of Maine Rules, Section 144-101-III-67, Subsection 144-101-III-67-18 - FIXED COSTS COMPONENT | Code of Maine Rules

18.1 *The base year costs for the fixed cost component shall be the costs incurred by the facility in the most recently audited fiscal year. Fixed costs include:

18.1.1 depreciation on buildings, fixed and movable equipment and motor vehicles.

18.1.2 depreciation on land improvements and amortization of leasehold improvements,

18.1.3 real estate and personal property taxes,

18.1.4 real estate insurance, including liability and fire insurance,

18.1.5 interest on long term debt,

18.1.6 rental expenses,

18.1.7 amortization of finance costs,

18.1.8 amortization of start-up costs and organizational costs,

18.1.9 motor vehicle insurance,

18.1.10 facility's liability insurance, including malpractice costs and Workers compensation,

18.1.11 administrator in training,

18.1.12 water & sewer fees necessary for the initial connection to a sewer system/water system,

18.1.13 portion of the acquisition cost for the rights to a nursing facility license,

18.1.14 nursing facility health care provider tax.

18.1.15 payment for High MaineCare Utilization as defined in Principle 18.12

For a more complete description of allowable costs in each of these cost centers, see the explanations in Principle 18.2.

18.2 Principle. An appropriate allowance for depreciation on buildings and equipment is an allowable cost.

18.2.1 Depreciation. Allowance for Depreciation Based on Asset Costs.

The depreciation must be:

18.2.1 Identified and recorded in the provider's accounting records.

18.2.2 Based on historical cost and prorated over the estimated useful life of the asset using the straight-line method.

18.2.3 The total historical cost of a building constructed or purchased becomes the basis for the straight-line depreciation method. Component depreciation is not allowed except on those items listed below with their minimum useful lives:

Electric Components	20 years
Plumbing and Heating Components	25 years
Central Air Conditioning Unit	15 years
Elevator	20 years
Escalator	20 years
Central Vacuum Cleaning System	15 years
Generator	20 years

18.2.3.1 Any provider using the component depreciation method that has been audited and accepted for cost reporting purposes prior to April 1, 1980, will be allowed to continue using this depreciation mechanism.

18.2.3.2 Where an asset that has been used or depreciated under the program is donated to a provider, or where a provider acquires such assets through testate or in testate distribution, (e.g., a widow inherits a nursing facility upon the death of her husband and becomes a newly certified provider;) the basis of depreciation for the asset is the lesser of the fair market value, or the net book value of the asset in the hands of the owner last participating in the program. The basis of depreciation shall be determined as of the date of donation or the date of death, whichever is applicable.

18.2.3.3 Special Reimbursement Provisions for Energy Efficient Improvements

(1) For the Energy Efficient Improvements listed below which are made to existing facilities, depreciation will be allowed based on a useful life equal to the higher of the term of the loan received (only if the acquisition is financed) or the period by the limitations listed below:

CAPITAL EXPENDITURE

Up to $5,000.00 - Minimum depreciable period three (3) years

From $5,001.00-$10,000.00 - Minimum depreciable period five (5) years

$10,000.00 and over - Minimum depreciable period seven (7) years

(2) The above limitations are minima and if a loan is obtained for a period of time in excess of these minima the depreciable period becomes the length of the loan, provided that in no case shall the depreciable period exceed the useful life as spelled out in the American Hospital Association's "Estimated Useful Lives of Depreciable Hospital Assets".

(3) If the total expenditures exceed $25,000.00, then prior approval for such an expenditure must be received in writing from the Department. A request for prior approval will be evaluated by the Department on the basis of whether such a large expenditure would decrease the actual energy costs to such an extent as render this expenditure reasonable. The age and condition of the facility requesting approval will also be considered in determining whether or not such an expenditure would be approvable.

(4) The reasonable Energy Efficient Improvements are listed below:

1. Insulation (fiberglass, cellulose, etc.).

2. Energy Efficient Windows or Doors for the outside of the facility, including insulating shades and shutters.

3. Caulking or Weather stripping for windows or doors for the outside of the facility.

4. Fans specially designed for circulation of heat inside the building.

5. Wood and Coal burning furnaces or boilers (not fireplaces).

6. Furnace Replacement burners that reduce the amount of fuel used.

7. Enetrol or other devices connected to furnaces to control heat usage.

8. A Device or Capital Expenditures for modifying an existing furnace that reduces the consumption of fuel.

9. Solar active systems for water and space heating.

10. Retrofitting structures for the purpose of creating or enhancing passive solar gain, if prior approved by the Department regardless of amount of expenditure. A request for prior approval will be evaluated by the Department on the basis of whether energy costs would be decreased to such an extent as to render the expenditure reasonable. The age and condition of the facility requesting approval will be also considered.

11. Any other energy saving devices that might qualify as Energy Efficient other than those listed above must be prior approved by the Department for this Special Reimbursement provision. The Department will evaluate a request for prior approval under recommendations from the Division of Energy Programs on what other items will qualify as an energy efficient device and that the energy savings device is a reliable product and the device would decrease the energy costs of the facility making the expenditure reasonable in nature.

(5) In the event of a sale of the facility the principle payments as listed above will be recaptured in lieu of depreciation.

18.2.3.4 Recording of depreciation. Appropriate recording of depreciation encompasses the identification of the depreciable assets in use, the assets' historical costs, the method of depreciation, estimated useful lives, and the assets' accumulated depreciation. The American Hospital Association's "Estimated Useful Lives of Depreciable Hospital Assets" 1983 edition is to be used as a guide for the estimation of the useful life of assets.

(1) For new buildings constructed after April 1, 1980 the minimum useful life to be assigned is listed below:

Wood Frame, Wood Exterior	30 years
Wood Frame, Masonry Exterior	35 years
Steel Frame, or Reinforced
Concrete Masonry Exterior	40 years

If a mortgage obtained on the property exceeds the minimum life as listed above, then the terms of the mortgage will be used as the minimum useful life.

(2) For facilities providing two (2) levels of care the allocation method to be used for allocating the interest, depreciation, property tax, and insurance will be based on the actual square footage utilized in each level of care. However, when new construction occurs that is added on to an existing facility the complete allocation based on square footage will not be used. Discrete costing will be used to determine the cost of the portion of the building used for each level of care and related fixed cost will be allocated on the basis of that cost.

18.2.3.5 Depreciation method. Proration of the cost of an asset over its useful life is allowed on the straight-line method.

18.2.3.6 Funding of depreciation. Although funding of depreciation is not required, it is strongly recommended that providers use this mechanism as a means of conserving funds for replacement of depreciation assets, and coordinate their planning of capital expenditures with area wide planning of activities of community and state agencies. As an incentive for funding, investment income on funded depreciation will not be treated as a reduction of allowable interest expense.

18.2.3.7 Replacement reserves. Some lending institutions require funds to be set aside periodically for replacement of fixed assets. The periodic amounts set aside for this purpose are not allowable costs in the period expended, but will be allowed when withdrawn and utilized either through depreciation or expense after considering the usage of these funds. Since the replacement reserves are essentially the same as funded depreciation the same regulations regarding interest and equity will apply.

(1) If a facility is leased from an unrelated party and the ownership of the reserve rests with the lessor, then the replacement reserve payment becomes part of the lease payment and is considered an allowable cost in the year expended. If for any reason the lessee is allowed to use this replacement reserve for the replacement of the lessee's assets then during that year the allowable lease payment will be reduced by that amount. The Lessee will be allowed to depreciate the assets purchased in this situation.

(2) If a rebate of a replacement reserve is returned to the lessee for any reason, it will be treated as a reduction of the allowable lease expense in the year review.

18.2.3.8 Gains and Losses on disposal of assets. Gains and losses realized from the disposal of depreciable assets are to be included in the determination of allowable costs. The extent to which such gains and losses are includable is calculated on a proration basis recognizing the amount of depreciation charged under the program in relation to the amount of depreciation, if any, charged or assumed in a period prior to the provider's participation in the program, and in the current period. For sales of nursing facilities that occur on or after October 1, 2009, the Department shall either:

(1) At the time of the sale, recapture depreciation paid by the Department under the MaineCare program, from the proceeds of the sale using the procedures outlined below;

(a) The recapture will be made in cash from the seller. During the first eight (8) years of operation, all depreciation allowed on buildings and fixed equipment by the Department will be recaptured from the seller in cash at the time of the sale. From the ninth (9th) to the fifteenth (15th) year all but three percent (3%) per year will be recaptured and from the sixteenth (16th) to the twenty-fifth (25th) year, all but eight percent (8%) per year will be recaptured, not to exceed one hundred percent (100%). Recaptured accumulated depreciation, in any case, shall not exceed the extent of the gain on the sale. For sales of nursing facilities that occur on or after July 1, 2014, the calculation of the credits for building and fixed equipment will be from the date the owner began operating the facility with the original license.

a. For sales of nursing facilities that occur on or after July 1, 2014, moveable equipment will accumulate credits as follows: for the first four years the asset is placed into service, all but ten percent (10%) per year will be recaptured and from the fifth (5th) and sixth (6th) year, all but thirty percent (30%) per year will be recaptured, not to exceed one hundred percent (100%). The calculation of credits for moveable equipment will be from the date the asset is placed into service by the provider.

b. The buyer must demonstrate how the purchase price is allocated between depreciable and non-depreciable assets. The cost of land, building and equipment must be clearly documented. Unless there is a sales agreement specifically detailing each piece of moveable equipment, the gain on the sale will be determined by the total selling price of all moveable equipment compared to the book value at the time of the sale.

c. In calculating the gain on the sale, the entire purchase price will be compared to net book value unless the buyer demonstrates by an independent appraisal that a specific portion of the purchase price reflects the cost of nondepreciable assets.

d. Depreciation will not be recaptured if depreciable assets are sold to a purchaser who will not use the assets for a health care service for which future Medicare, MaineCare, or State payments will be received. The purchaser must use the assets acquired within five (5) years of the purchase. The purchaser will be liable for recapture if the purchaser violates the provisions of this rule; OR

(2) At the election of the buyer and seller, waive the recapture of depreciation at the time of the sale and allow the asset to transfer at the historical cost of the seller, less depreciation allowed under the MaineCare program, to the buyer for reimbursement purposes.

18.2.3.9 Limitation on the participation of capital expenditures. Depreciation, interest, and other costs are not allowable with respect to any capital expenditure in plant and property, and equipment related to resident care, which has not been submitted to the designated planning agency as required, or has been determined to be consistent with health facility planning requirements.

18.3 Purchase, Rental, Donation and Lease of Capital Assets

18.3.1 Purchase of facilities from related individuals and/or organization where a facility, through purchase, converts from a proprietary to a nonprofit status and the buyer and seller are entities related by common and/or ownership, the purchaser's basis for depreciation shall not exceed the seller's basis under the program, less accumulated depreciation if the following requirements are met:

(A) Where a facility is purchased from an individual or organization related to the purchaser by common control and/or ownership; or

(B) Where a facility is purchased after April 1, 1980 by an individual related to the seller as:

(1) a child

(2) a grandchild

(3) a brother or sister

(4) a spouse of a child, grandchild, or brother or sister, or

(5) an entity controlled by a child, grandchild, brother, sister or spouse of child, grandchild or combination brother or sister thereof; or

18.3.1.1 Accumulated depreciation of the seller under the program shall be considered as incurred by the purchaser for purposes of computing gains and applying the depreciation recapture rules in Principle 18.2.3.8 to subsequent sales by the buyer. There will be no recapture of depreciation from the seller on a sale between stipulated related parties since no set-up in the basis of depreciable assets is permitted to the buyer.

18.3.1.2 One-time exception to Principle 18.3.1.1. At the election of the seller, Principle 18.3.1 will not apply to a sale made to a buyer defined in Principle 18.3.1.1 if:

(a) the seller is an individual or any entity owned or controlled by individuals or related individuals who were selling assets to a "related party" as defined in Principle 18.3.1 or 18.3.1.1, and

(b) the seller has attained the age of fifty-five (55) before the date of such sale or exchange; and

(c) during the twenty-year period ending on the day of the sale, the seller has owned and operated the facility for periods aggregating ten (10) years or more; and

(d) the seller has inherited the facility as property of a deceased spouse to satisfy the holding requirements under Principle 18.3.1.2(c)

(e) if the seller makes a valid election to be exempted from the application of 18.3.1.1 the allowable basis of depreciable assets for reimbursement of interest and depreciation expense to the buyer will be determined in accordance with the historical cost as though the parties were not related. This transaction is subject to depreciation recapture if there is a gain on the sale.

18.3.1.3 The one (1) exception to Principle 18.3.1.1 applies to individual owners and not to each facility. If an individual owns more than one (1) facility he must make the election as to which facility he wished to apply this exception.

18.3.1.4 Limitation in the application of Principle 18.3.1.3

18.3.1.4.1 Principle 18.3.1.2 shall not apply to any sale or exchange by the seller if an election by the seller under Principle 18.3.1.2 with respect to any other sale or exchange has taken place.

18.3.1.4.2 Principle 18.3.1.2 shall not apply to any sale or exchange by the seller unless the seller:

18.3.1.4.2.1 immediately after the sale has no interest in the nursing home (including an interest as officer, director, manager or employee) other than as a creditor, and

18.3.1.4.2.2 does not acquire any such interest within ten (10) years after the sale of this or any other facility and

18.3.1.4.2.3 agrees to file an agreement with the Department of Health and Human Services to notify the Department that any acquisition as defined by the Principle 18.3.1.4.2.2 has occurred.

18.3.1.4.2.4 If Principle 18.3.1.4.2 is satisfied, Principle 18.3.1 and Principle 18.3.11 will also be satisfied.

18.3.1.4.2.5 If the seller acquires any interest defined by Principle 18.3.1.4.2.2 then pursuant to the agreement the basis will revert to what the seller's basis would be if the seller had continued to own the facility, the amounts paid by the Title XIX program for depreciation, interest and return of owner's equity from the increase in basis will be immediately recaptured, and an interest rate of nine percent (9%) per annum on recaptured moneys will be paid to the Department for sellers' use of Title XIX moneys. A credit against this, of the original amount of depreciation recapture from the seller, will be allowed, with any remaining amount of the original depreciation recapture becoming the property of the Department.

18.3.2 Basis of assets used under the program and donated to a provider. Where an asset that has been used or depreciated under the program is donated to a provider, the basis of depreciation for the asset shall be the lesser of the fair market value or the net book value of the asset in the hands of the owner last participating in the program. The net book value of the asset is defined as the depreciable basis used under the program by the asset's last participating owner less the depreciation recognized under the program.

18.3.3 Allowances for depreciation on assets financed with Federal or Public Funds. Depreciation is allowed on assets financed with Hill Burton or other Federal or Public Funds.

18.4 Leases and Operations of Limited Partnerships

18.4.1 Information and Agreements Required for Leases. If a provider wishes to have costs associated with leases included in reimbursement:

18.4.1.1 A copy of the signed lease agreement is required.

18.4.1.2 An annual copy of the federal income tax return of the lessee will be made available to Representatives of the Department and of the U.S. Department of Health and Human Services in accordance with Principle 12.

18.4.1.3 If the lease is for the use of a building and/or fixed equipment, the articles and bylaws of the corporation, trust indenture partnership agreement, or limited partnership agreement of the lessor is required.

18.4.1.4 If the lease is for the use of a building and/or fixed equipment, the annual federal income tax return of the lessor will be made available to representatives of the Department and the U.S. Department of Health and Human Services in accordance with Principle 12.

18.4.1.5 A copy of the mortgage or other debt instrument of the lessor will be made available to representatives of the Department and the U.S. Department of Health and Human Services. The lessor will furnish the Department of Health and Human Services a copy of the bank computer printout sheet on the lessor's mortgage showing the monthly principle and interest payments.

18.4.1.6 The lease must be for a minimum period of five (5) years if an unrelated organization is involved. If the lessor was to sell the property within the five (5) year period to a nursing home operator or the lessee, the historical cost for the new owner would be determined in accordance with the definition of historical costs, and the portion of the lease payment made in lieu of straight line depreciation will be recaptured in accordance with Principle 18.2.3.8. This change will become effective when and if CMS approves this new language in the state plan.

18.4.2 Lease Arrangements between Individuals or Organizations Related by Common Control and/or Ownership. A provider may lease a facility from a related organization within the meaning of the Principles of Reimbursement. In such case, the rent paid to the lessor by the provider is not allowed as a cost.

The provider, however, would include in its costs the costs of ownership of the facility. Generally, these would be costs of the lessor such as depreciation, interest on the mortgage, real estate taxes and other expenses attributable to the leased facility. The effect is to treat the facility as though it were owned by the provider.

18.4.3 Leased Arrangement Between Individuals or Organizations Not Related by Common Control or Ownership. A provider may lease a facility from an unrelated organization within the meaning of the Principles of Reimbursement. The allowable cost between two (2) unrelated organizations is the lesser of: Principles 18.4.3.1 or 18.4.3.2.

18.4.3.1 The actual costs calculated under the assumption that the lessee and the lessor are related parties; or

18.4.3.2 The actual lease payments made by the lessee to the lessor.

18.4.3.3 The above principle applies unless either of the following limitations of the general rule applies:

(a) the lessor refinances and reduces the cost of ownership below the cost of lease payments and the lessee remains legally obligated to make the same lease payment despite the refinancing. This limitation of the general rule shall not apply to any lease entered into, renewed, or renegotiated after January 1, 1990;

(b) for all fiscal periods ending after June 30, 2007, for any lease entered into previous to January 1, 1990, the landlord and tenant renegotiate the amount of the lease payments due under the lease, without extending the lease term, such that the aggregate rental amounts due through the end of the lease term (taking into account any scheduled escalators and the obligation to pay any replacement reserve) are reduced by a reasonably projected amount of at least fifteen percent (15%).

If either the limitation in (a) or the limitation in (b) applies, the allowable cost shall be the actual lease payments made by the lessee to the lessor. In applying limitation (b) above, the amount of any additional rent that is conditioned on profitability of the tenant shall be disregarded both in computing allowable cost and in determining the percentage reduction in projected, aggregate lease costs.

The determination of whether limitation (b) applies shall be made upon request of the provider based on proposed lease terms. If the applicability of limitation (b) is approved by the Department, it shall continue to apply for the remaining lease term.

18.4.3.4 If the cost as defined in Principle 18.4.3.2 are less than the costs as defined in Principle 18.4.3.1, then the difference can be deferred to a subsequent fiscal period. If in a later fiscal period, costs as defined in Principle 18.4.3.2 exceed costs as defined in Principle 18.4.3.1, the deferred costs may begin to be amortized. Amortization will increase allowable costs up to the level of the actual lease payments for any given year. These deferred costs are not assets of the provider for purposes of calculating allowable costs of interest or return of owners equity and, except as specified, do not represent assets that a provider or creditor of a provider may claim is a monetary obligation from the Title XIX program.

18.4.3.5 A lease payment to an unrelated party for moveable furnishings and equipment is an allowable cost, but it shall be limited to the cost of ownership on vehicles only.

18.4.3.6 For facilities entering into, renewing, or renegotiating a lease on or after September 1, 1999, where the provider/lessee leases a nursing facility from an unrelated party and subsequently the lessor sells to another unrelated party, Principles 18.4.3.6(a) and (b) shall apply.

(a) In cases where the original lessor sells, the lease payment and the terms of the original lease agreement, which have been prior approved by the Department, will be allowed. Should the lessee enter into, renew, extend, or renegotiate the original lease agreement, any terms of that lease agreement or payments related to it must be prior approved by the Department. Otherwise, the lesser of Principle 18.4.3.1 or 18.4.3.2 shall apply.

(b) For the provider/lessee entering into, renewing, or renegotiating a lease on or after September 1, 1999, the following four (4) conditions must be met:

1. Financing existing on September 1, 1999 must be through the Maine Health and Higher Educational Facilities Authority; and

2. Approval is necessary in order for the Provider to obtain favorable refinancing, as determined by the Department; and

3. In the Department's judgment, failure to approve may adversely affect resident care; and

4. In the Department's judgment, approval will further the Department's goal of ensuring that public funds are only expended for services that are necessary for the wellbeing of the citizens of Maine.

18.4.4 Sale and Leaseback Agreements-Rental Charges. Rental costs specified in sale and leaseback agreements incurred by providers through selling physical plant facilities or equipment to a purchaser not connected with or related to the provider, and concurrently leasing back the same facilities or equipment, are includable in allowable cost.

However, the rental charge cannot exceed the amount that the provider would have included in reimbursable costs had he retained legal title to the facilities or equipment, such as interest on mortgage, taxes, depreciation, insurance and maintenance costs.

*The Department shall submit to CMS and anticipates approval for a State Plan Amendment related to these provisions.

18.5 Interest Expense

18.5.1 Interest. Interest is the cost incurred for the use of borrowed funds. Interest on current indebtedness is the costs incurred for funds borrowed for a relatively short term, usually one (1) year or less, but in no event more than fifteen (15) months.

This is usually for such purposes as working capital for normal operating expenses. Interest on capital indebtedness is the cost incurred for funds borrowed for capital purposes, such as acquisition of facilities and equipment, and capital improvements. Generally, loans for capital purposes are long-term loans. Except as provided in Principle 18.5.4.6, interest does not include interest and penalties charged for failure to pay accounts when due.

*To be allowable interest expense, interest must be for a purpose related to patient care, and:

*a. Incurred on a loan made to satisfy a financial need of the provider for capital purposes, such as acquisition of facilities and equipment, and capital improvements, incurred on a loan;

b. Loans which result in excess funds or investments would be considered unnecessary; and

c. Be reduced by investment income except where such income is from gifts, whether restricted or unrestricted, and which are held separate and not commingled with other funds. Income from funded depreciation is not used to reduce interest expense.

d. Be incurred at a rate not in excess of what a prudent borrower would have had to pay in the money market existing at the time the loan was made.

e. Be paid to a lender not related through control or ownership, or personal relationship to the borrowing organization.

*f. If a borrowing or a portion of a borrowing is considered unnecessary, the interest expense on the borrowing, or the unnecessary portion of the borrowing, is not an allowable cost. The repayment of the funds borrowed is applied first to the allowable portion of the loan. The allowable interest for a year is determined by multiplying the total interest for the year by the ratio of the allowable share of the loan to the total amount of the loan outstanding. The ratio is based on the loan balance (allowable and total) at the beginning of the cost report year. (The balance at the beginning of the cost report year is used without regard to the schedule of the payments, i.e., monthly, quarterly.) Since the allowable part must be paid first, the ratio will change each year.

*18.5.2 Swap Investments. Swap investments, also known as swap loans or swaps are defined as an interest rate swap agreement between two counterparties in which one stream of future interest payments is exchanged for another based on a specific principal amount. The Department will not pay for swap investments.

*18.5.3 Refinancing. Any refinancing of property mortgages or loans on fixed assets must be prior approved in writing by the Department's Division of Licensing and Certification, prior to the closing of the loan. If written prior approval is not obtained the Department will pay the lowest of the following:

1. The actual interest paid, or

2. The amount of interest the provider would have paid in the current fiscal year, under the terms of the original loan. Original loan means the last Department approved loan.

(A) If the original loan had a variable rate, the last variable rate will be the rate that is utilized throughout the term of the refinanced loan. If the original loan had a fixed rate, that will be the rate utilized throughout the term of the refinanced loan.

(B) Interest payments are allowable only for the period of a time not to exceed the remaining useful life of the items, pursuant to 18.2.3.4 herein, to be purchased.

(C) Closing costs for a refinanced loan are not allowed.

The Department may condition refinancing approvals.

18.5.4 Borrower-lender relationship

18.5.4.1 To be allowable, interest expense must be incurred on indebtedness established with lenders or lending organizations not related through control, ownership or personal relationship to the borrower. Presence of any of these factors could affect the "bargaining" process that usually accompanies the making of a loan, and could thus be suggestive of an agreement with higher rates of interest or of unnecessary loans. Loans should be made under terms and conditions that a prudent borrower would make in arm's-length transactions with lending institutions. The Division of Licensing and Certification shall make the determination for written prior approvals. The intent of this provision is to assure that loans are legitimate and needed, and that the interest rate is reasonable. Thus, interest paid by the provider to partners, stockholders, or related organizations of the provider would not be allowed. Where the owner uses his own funds in a business, it is reasonable to treat the funds as invested funds or capital, rather than borrowed funds. Therefore, where interest on loans by partners, stockholders, or related organizations is disallowed as a cost solely because of the relationship factor, the principal of such loans shall be treated as invested funds in the computation of the provider's equity capital.

18.5.4.2 Exceptions to the general rule regarding interest on loans from controlled sources of funds. Where the general fund of a provider borrows from a donor-restricted fund and pays interest to the restricted fund, this interest expense is an allowable cost.

The same treatment is accorded interest paid by the general fund on money borrowed from the funded depreciation account of the provider. In addition, if a provider of a facility operated by members of a religious order borrows from the order, interest paid to the order is an allowable cost. Interest paid by the provider cannot exceed interest earned by the above subject funds.

18.5.4.3 Where funded depreciation is used for purposes other than improvement, replacement, or expansion of facilities or equipment related to resident care, or payment of long-term debt principle once the principle payment exceeds the straight-line depreciation allowed under the Principles of Reimbursement, allowable interest expense is reduced to adjust for offsets not made in prior years for earnings on funded depreciation.

18.5.4.4 Loans not reasonably related to resident care. Loans made to finance that portion of the cost of acquisition of a facility that exceeds historical cost are not considered to be for a purpose reasonably related to resident care.

18.5.4.5 Interest expense of related organizations. Where a provider leases facilities from a related organization and the rental expense paid to related organization is not allowable as a cost, costs of ownership of the leased facility are allowable as in interest cost to the provider. Therefore, in such cases, mortgage interest paid by the related organization is allowable as an interest cost to the provider.

18.5.4.6 Interest on Property Taxes. Interest charged by a municipality for late payment of property taxes is an allowable cost when the following conditions have been met:

18.5.4.6.1 The rate of interest charged by the municipality is less than the interest which a prudent borrower would have had to pay in the money market existing at the time the loan was made;

18.5.4.6.2 The payment of property taxes is deferred under an arrangement acceptable to the municipality;

18.5.4.6.3 The late payment of property taxes results from the financial needs of the provider and does not result in excess funds; and

18.5.4.6.4 Approval in writing has been given by the Department prior to the time period in which the interest is incurred. Any requests for prior approval must be received by the Department at least two (2) weeks prior to the desired effective date of the approval.

18.5.4.7 Limitation on the participation of capital expenditures. Interest is not allowable with respect to any capital expenditure in plant and property, and equipment related to resident care, which did not receive a required Certificate of Need Review approval.

18.5.5 Adjustments. The Department will make adjustments to the nursing facility's fixed cost component of the per diem rate to reflect the effect of refinancing which results in lower interest payments.

18.6 Insurance

Reasonable and necessary costs of insurance involved in operating a facility are considered allowable costs (real estate insurance including liability and fire insurance are included as fixed costs - see Principle 18.1.4). Premiums paid on property not used for resident care are not allowed. Life insurance's premiums related to insurance on the lives of key employees where the provider is a direct or indirect beneficiary are not allowable costs. A provider is a direct beneficiary where, upon the death of the insured officer or key employee the insurance proceeds are payable directly to the provider. An example of a provider as an indirect beneficiary is the case where insurance on the lives of officers is required as part of a mortgage loan agreement entered into for a building program, and, upon the death of an insured officer the proceeds are payable to the lending institution as a credit against the loan balance. In this case, the provider is not a direct beneficiary because it does not receive the proceeds directly, but is, nevertheless, an indirect beneficiary since its liability on the loan is reduced.

18.6.1 Workers' Compensation Insurance premiums paid to an admitted carrier; application fees, assessments and premiums paid to an authorized fully-funded trust; and premiums paid to an individual self-insured program approved by the State of Maine for facility fiscal years that began on or after October 1, 1992, and deductibles paid by facilities related to such cost are allowable fixed costs. Estimated amounts for workers compensation insurance audit premiums will not be accepted as an allowable cost. The Department will require the facility to be a prudent and cost conscious buyer of Workers' Compensation Insurance. In those instances where the Department finds that a facility pays more than the usual and customary rate or does not try to minimize costs, in the absence of clear justification, the Department may exclude excess costs in determining allowable costs under MaineCare.

Allowable costs are subject to an experience modifier of 1.4; that is, cost associated with an experience modifier of 1.4 or under are allowable. Workers' Compensation costs incurred above the experience modifier of 1.4 shall be considered unallowable and will be settled at the time of audit.

18.6.2 The costs of Loss-Prevention and Safety Services are allowable costs to a maximum of $40.00 per covered employee per year for nursing facilities with an experience modifier greater than .9. The costs of Loss-Prevention and Safety Services are allowable costs to a maximum of $70.00 per covered employee per year for nursing facilities with an experience modifier equal to or less than .9. Allowable costs shall include the cost of educational programs and training classes, transportation to and from those classes, lodging when necessary to attend the classes, materials needed in the preparation and presentation of the classes (when held at the nursing facility), and equipment (e.g.: lifts) which lead towards accomplishing the established goals and objectives of the facility's safety program. Non-allowable costs include salaries paid to individuals attending the safety classes and personal gifts such as bonuses, free passes to events or meals, and gift baskets.

18.6.3 The wages and fringes paid to workers engaged in formal Modified or Light-Duty Early-Return-To-Work Programs are allowable costs only to the extent that they cause a nursing facility to exceed its staffing pattern. Rehabilitation eligibility assessments are a cost to a limit of $300.00 per indemnity claimant.

(Rehabilitation services provided to eligible injured workers are to be paid for by their employers insurer.)

18.7 Administrator in Training. The reasonable salary of an administrator in training will be accepted as an allowable cost for a period of six (6) months provided there is a set policy, in writing, stating the training program to be followed, position to be filled, and provided that this individual obtain an administrator's license and serve as an administrator of a facility in the State of Maine. Prior approval in writing, from the Department, must be issued in advance of the date of any salary paid to an administrator in training. A request for prior approval must be received by the Department at least two (2) weeks prior to the desired effective start date of the administrator in training program.

Failure to receive approval from the Department for the Administrator in Training salary will deem that salary an unallowable cost at time of audit. Failure to become an administrator within one (1) year following completion of the examination to become a licensed administrator will result in the Department recovering one hundred percent (100%) of the amount allowed of the administrator in training. If the administrator in training discontinues the training program for any reason or fails to take the required examination to become a licensed administrator, one hundred percent (100%) of the amount allowed will be recovered by the Department.

18.8 Acquisition Costs. Fifty percent (50%) of the acquisition cost of the rights to a nursing facility license shall be approved as a fixed cost in those situations where the purchaser acquires the entire existing nursing facility license of a provider and delicenses all or a significant portion {at least fifty percent (50%)} of the beds associated with that license. This amount will be amortized over a ten (10) year period, beginning with the subsequent fiscal year after completion of the acquisition and delicensing. If any beds will be replaced as part of a Certificate of Need project, the amortization will begin as approved in the applicable Certificate of Need. This acquisition cost will not include any fees (e.g.: accounting, legal) associated with the acquisition.

18.9 Occupancy Adjustment

Facilities with Greater than Sixty (60) Beds. To the extent that fixed costs are allowable, such cost will be adjusted for providers whose annual level of occupancy is less than seventy percent (70%) for the state fiscal years ending June 30, 2019, June 30, 2020, and June 30, 2021. The adjustment to the fixed cost component shall be based upon a theoretical level of occupancy of seventy percent (70%). For all new providers coming into the program, the seventy percent (70%) occupancy adjustment will not apply for the first ninety (90) days of operation. It will, however, apply to the remaining months of their initial operating period. The occupancy rate adjustment will be applied to fixed costs and shall be cost settled at the time of audit. For state fiscal years ending June 30, 2022 and thereafter, the reduction in allowable costs applies only for an annual level of occupancy less than eighty-five percent (85%).

Facilities with Sixty (60) or Fewer Beds. To the extent that fixed costs are allowable, such cost will be adjusted for providers whose annual level of occupancy is less than seventy percent (70%) for state fiscal years ending June 30, 2019, June 30, 2020, and June 30, 2021. The adjustment to the fixed cost component shall be based upon a theoretical level of occupancy of seventy percent (70%). For all new providers of sixty (60) or fewer beds coming into the program, the seventy percent (70%) occupancy adjustment will not apply for the first ninety (90) days of operation. It will, however, apply to the remaining months of their initial operating period. The occupancy rate adjustment will be applied to fixed costs and shall be cost settled at the time of audit. For state fiscal years ending June 30, 2022 and thereafter, the reduction in allowable costs applies only for an annual level of occupancy less than eighty percent (80%).

This occupancy adjustment does not apply to High MaineCare Utilization or the Nursing Facility Health Care Provider Tax.

18.10 Start Up Costs Applicability

Start-up costs are incurred from the time preparation begins on a newly constructed or purchased building, wing, floor, unit, or expansion thereof, to the time the first resident is admitted for treatment. In the case where the start-up costs apply only to nonrevenue producing resident care functions or unallowable functions, the startup costs are applicable only to the time the areas are used for their intended purposes. Start-up costs are charged to operations. If a provider intends to prepare all portions of its entire facility at the same time, start-up costs for all portions of the facility will be accumulated in a single deferred charge account and will be amortized when the first resident is admitted for treatment. If a provider intends to prepare portions of its facility on a piecemeal basis (e.g., preparation of a floor or wing of a provider's facility is delayed), start-up costs would be capitalized and amortized separately for the portion(s) of the provider's facility prepared during different time periods. Moreover, if a provider expands its facility by constructing or purchasing additional buildings or wings, start-up costs should be capitalized and amortized separately for these areas.

Start-up costs that are incurred immediately before a provider enters the program and that are determined to be immaterial by the Department need not be capitalized, but rather will be charges to operations in the first cost reporting period. In the case where a provider incurs start-up costs while in the program and these costs are determined to be immaterial by the Department, these costs need not be capitalized, but will be charged to operations in the periods incurred. For program reimbursement purposes, costs of the provider's facility and building equipment should be depreciated over the lives of these assets starting with the month the first resident is admitted for treatment, subject to the provider's method of determining depreciation in the year of acquisition or construction. Where portions of the provider's facility are prepared for resident care services after the initial start-up period, these asset costs applicable to each portion should be depreciated over the remaining lives of the applicable assets. If the portion of the facility is a resident care area, depreciation should start with the month the first resident is admitted for treatment. If the portion of the facility is a non-revenue-producing resident care area or unallowable area, depreciation should begin when the area is opened for its intended purpose. Costs of major movable equipment, however, should be depreciated over the useful life or each item starting with the month the item is placed into operation. Where a provider prepares all portions of its facility for resident care services at the same time and has capitalized start-up costs, the start-up costs must be amortized ratable over a period of sixty (60) consecutive months beginning with the month in which the first resident is admitted for treatment. Where a provider prorates portions of its facility for resident care services on a piecemeal basis, start-up costs must be capitalized and amortized separately for the portions of the provider's facility that are prepared for resident care services during different periods of time.

18.11 Nursing Facility Health Care Provider Tax. Nursing facilities subject to the Health Care Provider Tax defined in state law 36 MRSA, Chapter 373 will have the tax treated as an allowable fixed cost. Only taxes actually collected by the Maine Revenue Services will be considered allowable.

18.12 Payment for High MaineCare Utilization. Nursing Facilities that have MaineCare utilization greater than seventy percent (70%) of their annual total days of care will receive a payment of $.40 per reimbursed MaineCare day for each one (1) percent over seventy percent (70%), subject to the limitations set forth below.

Prospective Per Diem Rate

The payment for High MaineCare Utilization shall be calculated as total annual MaineCare days divided by total days of care in the facility's prior year fiscal year cost report (MaineCare days/total days of care * $.40 * per each percent over seventy percent (70%) and will be cost settled at audit. Days waiting placement (DWP) are excluded from this calculation. The payment for High MaineCare Utilization is included as part of the per diem rate.

*Beginning July 1, 2019, the High MaineCare utilization payment, for any nursing facility whose MaineCare residents constitute more than eighty percent (80%) of the nursing facility's total number of resident days and whose base year direct and routine aggregate costs per day are less than the median aggregate direct and routine allowable costs for the facility's peer group, increases to .60 cents per resident per day for each one percentage (1%) of MaineCare residents is above eighty percent (80%), is not subject to cost settlement and must be retained by the facility in its entirety.

*Beginning July 1, 2021, the High MaineCare utilization payment, for any nursing facility whose MaineCare resident days constitute more than eighty percent (80%) of the nursing facility's total number of resident days, will be $.60 (60 cents) per resident day for each one percentage (1%) of MaineCare resident days above eighty percent (80%), and is not subject to cost settlement and must be retained by the facility in its entirety.

The High MaineCare utilization payment is calculated as described above.

The High MaineCare utilization for nursing facilities above seventy percent (70%), but below eighty percent (80%) shall remain paid as described in the first paragraph above.

Audit Cost Settlement

At the time of audit, the allowable Payment for High MaineCare Utilization shall be calculated. Days waiting placement (DWP) are excluded from this calculation.

Nursing Facilities that have MaineCare utilization greater than seventy percent (70%) of their annual total days of care, and that have MaineCare allowable costs for the routine and direct care components, in excess of MaineCare reimbursement for the routine and direct care components (excess MaineCare allowable costs) will receive a Payment for High MaineCare Utilization, for no more than the excess MaineCare allowable costs. Any over or under payments will be included as part of the audit settlement.

For the first cost settlement after July 1, 2014, if a Nursing Facility has a fiscal year that begins prior to July 1, 2014, the calculation of the Payment for High MaineCare Utilization will use only days of care after July 1, 2014, and rather than using the facility's total annual MaineCare days and total annual days of care, the Department will calculate the total number of days of care beginning on July 1, 2014. Intensive Rehabilitation NF Services for individuals with Acquired Brain Injury are not eligible for the High MaineCare Utilization payment.