Pennsylvania Code
Title 55 - HUMAN SERVICES
Part III - MEDICAL ASSISTANCE MANUAL
Chapter 1181 - NURSING FACILITY CARE
Subchapter B - MANUAL FOR ALLOWABLE COST REIMBURSEMENT FOR SKILLED NURSING AND INTERMEDIATE CARE FACILITIES
OTHER COST ITEMS
Section 1181.259 - Depreciation allowance

(a) Depreciation on capital assets used to provide compensable services to Medical Assistance recipients, including assets for normal, standby, or emergency use, is an allowable cost.

(b) Except as specified in subsections (c) and (d), a facility will be reimbursed for allowable depreciation costs only if the facility is the recorded holder of legal title.

(c) Facilities which participated in the Medical Assistance Program prior to July 1, 1983 which are not part of a related organization and which are not the recorded holder of legal title to the facility, are considered to meet the recorded holder of legal title requirement, and, therefore, will be reimbursed for allowable depreciation on a particular project, if, at the time services were rendered, the following existed:

(d) Facilities which participated in the Medical Assistance Program prior to July 1, 1983, which are part of a related organization and which are not the recorded holder of legal title to the facility, are considered to meet the recorded holder of legal title requirement, and, therefore, will be reimbursed for allowable depreciation on a particular project, if, at the time services were rendered, the following existed:

(e) The straight-line method of depreciation shall be used. Accelerated methods of depreciation shall not be acceptable. The amount of annual depreciation shall be determined by first reducing the cost of the asset by any salvage value and then dividing by the number of years of useful life of the asset. The useful life may be shorter than the physical life depending upon the usefulness of the particular asset to the provider. A useful life may not be less than the relevant useful life published by the Internal Revenue Service or the Uniform Chart of Accounts and Definitions for Hospitals published by the American Hospital Association for the particular asset on which the depreciation is claimed. However, the accelerated cost recovery system under section 168(c) of the Internal Revenue Code (26 U.S.C.A. § 168(c)) and any other accelerated lifing systems shall not be permitted.

(f) Depreciation expense for the year of acquisition and the year of disposal can be computed by using either the half-year or actual time method of accounting. In no instance may the number of months of depreciation expense exceed the number of months that the asset was in service. If the first year of operation is less than 12 months, depreciation is allowed only for the actual number of months in the first year of operation.

(g) The method and procedure, including the assigned useful lives, for computing depreciation shall be applied from year-to-year on a consistent basis from the date of the facility's first filed cost report after July 1, 1975, and may not be changed, even if the facility is purchased as an ongoing operation.

(h) All assets shall be recorded at cost. Donated assets shall be recorded at the current appraisal value or the lower of the following if available: the construction cost, the original purchase price or the donor's original purchase price. Costs incurred during the construction of an asset, such as architectural, consulting and legal fees, interest, and fund raising, shall be capitalized as a part of the cost of the asset. When an asset is acquired by a trade-in, the cost of the new asset is the sum of the book value of the old asset and any cash or issuance of debt as consideration paid.

(i) Facilities that previously did not maintain fixed asset records and did not record depreciation in prior years shall be entitled to any straight-line depreciation of the remaining useful life of the asset. The depreciation shall be based on the cost of the asset at the time of original purchase or construction. No depreciation may be taken on an asset that would have been fully depreciated if it had been properly recorded at the time of acquisition.

(j) Depreciation on facilities that have no fixed asset records and are sold will be recognized to the extent to which the prior owner would have been entitled to depreciation.

(k) Leasehold improvements shall be depreciated over the useful life of the asset.

(l) Gains on the sale of fixed or movable assets are considered to be equal to the salvage value which must be established prior to the sale of the item. All gains on the sale of fixed and movable assets will offset the facility's total depreciation expense in the year that the asset was either sold or retired from service. Losses incurred on the sale or disposal of fixed or movable assets will not be reimbursed under the Program.

(m) The cost basis for depreciable assets is determined as follows:

(n) The reasonable cost of depreciation will be recognized for the construction and renovation of buildings to meet Federal, State or local laws and building codes for skilled nursing and intermediate care facilities serving Medical Assistance recipients. These costs will be recognized as allowable if the facility has either a Certificate of Need or a letter of nonreviewability for the project from the Department of Health in accordance with subsection (r)(1) and (2). In accordance with Federal and State regulations, the facility shall submit to the Department, the Certificate of Need or letter of nonreviewability, as appropriate, or the provider will not receive reimbursement for interest on capital indebtedness, depreciation, and operating expenses.

(o) If the purchases of a facility or improvements to the facility are financed by tax exempt bonds, the acquired property, plant or equipment shall be capitalized and depreciated over the life of the assets. The acquired property, plant or equipment are the only items that may be capitalized. If the principal amount of the bond issue was expended in whole or in part on capital assets which fail to meet the requirements of the subsections (m) and (n) regarding eligibility for depreciation, the includable depreciation will be proportionately reduced.

(p) The fixed asset records shall include:

(q) Effective July 1, 1983, for SNF and ICF providers, the funding of depreciation is recommended so that funds may be available for the acquisition and future replacement of assets by the facility. To qualify for treatment as a funded depreciation account, the funds shall be clearly designated in the provider's records as funded depreciation accounts and shall be maintained in accordance with the provisions of HIM-15.

(r) The Department will recognize depreciation as an allowable cost subject to the following conditions:

(s) After July 1, 1977, allowable depreciation costs for existing, new, renovated or purchased facilities shall be limited to a maximum construction cost per bed of $22,000. The actual cost per bed will be based on the total project cost which includes the cost of land (no depreciation is recognized on land), site surveys, architectural and engineering fees, supervision, inspection and overhead, site preparation, construction, fixed equipment, contingencies, interest during construction and other related costs such as attorney's fees, recording costs, transfer taxes, mortgage insurance and service charges including finder's and placement fees. If an existing facility constructs additional beds or renovates portions of the facility which include supportive services, such as a dining room, physical therapy room, occupational therapy room, or maintenance area, the cost of construction of these supportive services is prorated among both existing and new beds of the facility. A separate $22,000 per bed limit applies to each construction or renovation project. The cost of movable equipment is not included in the $22,000 per bed limit.