Subchapter B. MANUAL FOR ALLOWABLE COST
REIMBURSEMENT FOR SKILLED NURSING
AND INTERMEDIATE CARE FACILITIES

§ 1181.201. Scope.

 (a)  This subchapter, under applicable Federal and State statutes and regulations, sets forth principles for determining the allowable costs of general and county skilled and intermediate care facilities. This subchapter governs MA payments to general and county skilled nursing and intermediate care facilities on the basis of the Commonwealth’s approved State Plan for reimbursement.

 (b)  The Medicare Provider Reimbursement Manual (HIM-15) and the Federal regulations appropriate to the reimbursement of nursing facility care under the Medicare program are a supplement to this subchapter. If a cost is included in this subchapter as allowable, then the HIM-15 and applicable Federal regulations will be used as a source of more detailed information on that cost. The HIM-15 and applicable Federal regulations will not be used for any cost that is determined to be nonallowable either by a statement to that effect in this subchapter or by virtue of the fact that the cost is not being addressed in this subchapter, nor will the HIM-15 or applicable Federal regulations be used to alter the treatment of any cost provided for in this subchapter.

 (c)  This subchapter is adopted under section 443.1(2) and (3) of the Public Welfare Code (62 P. S. §  443.1(2) and (3)) and supplements Subchapter A (relating to nursing facility care). To the extent that this subchapter is inconsistent with the definitions and provisions of Subchapter A, the provisions and definitions of this subchapter will control. No section of this subchapter may be applied or interpreted out of context.

   The provisions of this §  1181.201 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

   

Underpayments

 The following words and terms, when used in this subchapter, have the following meanings, unless the context clearly indicates otherwise:

   Accrual basis—An accounting method by which revenue is recorded in the period when it is earned, regardless of when it is collected, and expenses are recorded in the period when they are incurred, regardless of when they are paid.

   Actual time method—An accounting method used for determining depreciation which counts the number of months an asset is owned in both the year of acquisition and the year of disposal.

   Allowable cost—Costs which are necessary and reasonable to the proper care of Medical Assistance patients and which are identified in this subchapter.

   Annual adjustment notice—The notice from the Department comptroller of underpayment or overpayment stating the difference between the total of the interim payments to a facility and the total certified costs for the facility’s audit year.

   Average per diem cost—The facility’s total allowable costs for a level of care divided by the total actual patient days for the same level of care for a reporting period.

   Bad debts—Amounts considered to be uncollectable from accounts and notes receivable that were created or acquired in providing services.

   Cash basis—An accounting method by which cash is recorded when it is received, regardless of when it is earned and expenses are recorded when they are paid, regardless of when they are incurred.

   Certified cost—The amount of reimbursement due after the application of group ceilings and other adjustments due a facility for an audit period as certified to the Department comptroller by the Department auditors or their agents.

   Common ownership—A business arrangement wherein an individual, partnership, association or corporation has equity and, thereby, an association or affiliation in both the nursing facility and an organization which does business with the facility.

   Facility—A county or general nursing facility that is enrolled in the Medical Assistance Program.

   Fair market value—The value at which an asset could be sold in the open market in a transaction between unrelated parties.

   Final per diem rate—The rate established by the Department after completion of an audit of the facility’s year-end cost report, comprised of the facility’s allowable net operating per diem rate and an efficiency incentive, if appropriate, which are subject to the limitation of the applicable group ceiling, plus rates for allowable depreciation and interest.

   Group ceiling—The maximum per diem cost, excluding depreciation and interest on capital indebtedness, that may be reimbursed by the Medical Assistance Program for a facility in a specified group.

   Half-year method—An accounting method used for determining depreciation which counts 1/2 year’s depreciation in the year in which an asset is acquired, plus 1/2 year’s depreciation in the year in which the asset is disposed of, regardless of when the asset was acquired or disposed of during the year.

   Interest—The direct actual cost incurred for the use of borrowed funds.

   Interest on capital indebtedness—The direct cost incurred for funds borrowed for capital purposes. Examples are acquisition of facilities, equipment and capital improvements. Generally, loans for capital purposes are long term loans.

   Interest on current indebtedness—The direct cost incurred for funds borrowed for current operating expenses or working capital.

   Interim payment—Reimbursement for MA patients by the Department to the facility based on the interim per diem rate.

   Investment income—Actual or imputed income available to or accrued by a facility from funds which the facility invest or lends or which are held by others for the benefit of the facility.

   Leasehold improvement—The improvements made by the owners of a facility to the leased land, buildings or equipment, with amortization taken over the useful life of the asset.

   Medicare Part B service—A service for which reimbursement may be made to a facility under this subchapter and Medicare Part B.

   Medicare Part B type service—A service for which reimbursement may be made to a facility under this subchapter and would be made under Medicare Part B if the service were rendered to a Medicare Part B eligible beneficiary.

   Net operating cost—The total allowable cost less depreciation and interest on capital indebtedness.

   Patient day—Care of one patient during a day of service. In maintaining statistics, the day of admission is counted as a day of patient care but the day of discharge is not counted as a day of patient care.

   Per diem rate—A comprehensive rate of payment for the costs of covered services for a patient day.

   Private pay patient—An individual for whom payment for services is made with his own resources, private insurance or funds from liable third parties but not by the MA Program.

   Private pay rate—The lowest rate for a semiprivate room charged by a facility to a private pay patient for a day of care, consisting of either a comprehensive charge or the sum of a flat rate of routine services plus the result of the total annual allowable cost for ancillary services for private pay patients which would be recognized as allowable by the MA Program for MA patients divided by the total annual private pay patient days.

   Prudent buyer concept—An accounting term used to refer to the price paid for items by a prudent buyer in the open market under competitive conditions.

   Related party—An individual or organization that is associated or affiliated with, or has control of or is controlled by, the provider. ‘‘Control,’’ as used in this definition, means the power to influence or direct the actions or policies of another.

   The provisions of this §  1181.202 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402; amended March 10, 1989, effective immediately and applies retroactively to January 1, 1989, 19 Pa.B. 1005. Immediately preceding text appears at serial pages (131064) to (131067).

   

Interest Income

   Income from a charitable trust paid by a trustee bank to a religious organization for the maintenance of a particular nursing home under the direction of the settlor fell within the definition of investment income as defined by this regulation. Sycamore Manor Health Ctr. v. Department of Public Welfare, No. 1625, C. D. 1994, No. 2460 C. D. 1994, 1995 Pa. Cmwlth. LEXIS 349 (July 27, 1995).

   Interest income earned by a skilled nursing facility on an Endowment Fund and an Annuity Fund was investment income. Messiah Village v. Department of Public Welfare, 545 A.2d 956 (Pa. Cmwlth. 1988).

   Definitions of ‘‘final per diem rate’’ and ‘‘group ceiling,’’ when considered with other Department of Public Welfare regulations, demonstrated a consistent policy of treating depreciation and interest separate from net operating costs. Twining Village v. Department of Public Welfare, 523 A.2d 1199 (Pa. Cmwlth. 1987).

   Although unrestricted gifts to a home of income from funds held for that purpose are ‘‘investment income’’ of the home office under this regulation, to be allocated on the same basis as home office costs, gifts restricted to use for components of that home that did not claim Medicaid reimbursement were not investment income of a provider or part of the home office investment income that was available for offset. Sycamore Manor Health Ctr. v. Department of Public Welfare, No. 1625 C. D. 1994, No. 2460 C. D. 1994, 1995 Pa. Cmwlth. LEXIS 349 (July 27, 1995).

   

Net Operating Costs

   A nursing home’s investment income from a trust was ‘‘income available to the nursing home held by others for the benefit of the facility’’ and therefore was properly used to offset its interest expense. Spang Crest Home v. Department of Public Welfare, 538 A.2d 87 (Pa. Cmwlth. 1988).

REIMBURSEMENT PRINCIPLES

§ 1181.211. Cost reimbursement principles and method.

 (a)  Subject to the limitations and sanctions specified in Subchapter A (relating to nursing facility care), a facility will be reimbursed its allowable net operating costs, plus allowable depreciation and interest on capital indebtedness.

 (b)  The amount of MA reimbursement for allowable operating costs, excluding depreciation and interest, will not exceed the level of net operating costs the Department determines to be reasonable and adequate to meet the costs that an efficiently and economically operated facility incurs in meeting applicable State and Federal laws and quality and safety standards.

 (c)  Costs that are not recognized as allowable costs in a fiscal year may not be carried forward or backward to other fiscal years for inclusion in allowable costs.

 (d)  Long-term care disproportionate share allowance payments are made according to a formula established by the Department to general nongovernmental long-term care facilities in which skilled and intermediate Medicaid funded patient days account for at least 90% of total patient days. Payment of the long-term care disproportionate share allowance is contingent upon the express appropriation by the General Assembly, of funds designated to make payments of this allowance.

 (e)  County nursing facility disproportionate share payments are made according to a formula established by the Department to county nursing facilities, in which Medicaid funded resident days account for at least 80% of the facility’s total resident days and the number of certified MA beds is greater than 270 beds. Payment of the county nursing facility disproportionate share payment for the period July 1, 1995, through December 31, 1995, is contingent upon the determination by the Department that there are sufficient State and Federal funds appropriated to make these allowance payments. County nursing facility disproportionate share payments will not be limited to or affected by any ceilings or net operating costs, charges to private pay residents, peer group or facility-specific payment limits under the MA Program.

 (f)  For the period July 1, 1995, through December 31, 1995, the Department will make program enhancement payments to general and county nursing facilities participating in the MA Program as follows. The Department will increase the interim per diem rate for the nursing facility to reflect inflation by 2% up to the ceilings on allowable net operating costs and subject to the upper limits on payments in accordance with §  1181.68 (relating to upper limits of payment).

   The provisions of this §  1181.211 amended under sections 201, 403 and 443.1(2) and (3) of the Public Welfare Code (62 P. S. § §  201, 403 and 443.1(2) and (3)).

   The provisions of this §  1181.211 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402; amended March 10, 1989, effective immediately and applies retroactively to January 1, 1989, 19 Pa.B. 1005; amended May 4, 1990, effective May 5, 1990 and apply retroactively to June 30, 1989; amended July 21, 1995, effective immediately and apply retroactively to July 1, 1992, and sunsetted June 30, 1995, 25 Pa.B. 2893; amended August 23, 1996, effective immediately and apply to the time period from July 1, 1995, to December 31, 1995, 26 Pa.B. 4086. Immediately preceding text appears at serial pages (201433) to (201434). (Editor’s Note: See 22 Pa.B. 3749 (July 18, 1992) for nursing home pulling provisions.)

 (a)  A facility’s direct or indirect allowable costs related to patient care will be considered in the finding and allocation of costs to the MA Program for its eligible recipients.

 (b)  Total allowable costs of a facility will be apportioned between third-party payors and other patients so that, within the limits of this subchapter, the share borne by MA under Title XIX of the Public Health Service Act, 42 U.S.C. Chapter 6A, Subchapter XIX is based upon those actual services and costs related to MA recipients.

 (c)  Within the limits of this subchapter, allowable costs include those costs necessary to provide skilled or intermediate care. These may include costs related to all of the following:

   (1)   Dietary and food.

   (2)   Laundry.

   (3)   Housekeeping.

   (4)   Plant operation and maintenance.

   (5)   Nursing.

   (6)   Director of nursing.

   (7)   Related clerical staff.

   (8)   Practitioners.

   (9)   Medical director.

   (10)   Utilization and medical review.

   (11)   Social services.

   (12)   Patient activities.

   (13)   Volunteer services.

   (14)   Over-the-counter drugs.

   (15)   Medical supplies.

   (16)   Physical, occupational and speech therapy.

   (17)   Oxygen.

   (18)   Rent.

   (19)   Amortization.

   (20)   Other interest.

   (21)   Insurance.

   (22)   Real estate taxes.

   (23)   Equipment rental.

   (24)   Depreciation.

   (25)   Interest on capital indebtedness.

 (d)  In certain cases under MA principles, there may be more than one method for handling a cost item. In these cases the method initially elected by the provider shall be followed consistently in subsequent reporting periods except as provided in this subchapter.

   The provisions of this §  1181.212 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

 (a)  The facility shall identify for cost finding allowable direct, indirect, ancillary and related organization costs that apply to patient care for each certified level of care.

 (b)  The facility shall submit a cost report (Financial and Statistical Report, MA-11) to the Department in accordance with Departmental requirements. The cost report shall be based on financial and statistical records maintained by the facility. The cost information contained in the cost report and in the facility’s records shall be current, accurate, and in sufficient detail to support the claim for cost reimbursement. The Financial and Statistical Report (MA-11) outlines the expenses and revenues to be included in the cost report for MA.

 (c)  The facility shall maintain adequate financial records and statistical data for proper determination of costs payable under the MA Program. The financial records shall include all ledgers, books, records, and original evidence of cost (purchase requisitions, purchase orders, vouchers, vendor invoices, requisitions for supplies, inventories, time cards, payrolls, bases for apportioning costs, and the like) which pertain to the determination of reasonable costs and are auditable. The facility is required to maintain the records pertaining to each cost report for a period of not less than 4 years following the date the facility submits the cost report to the Department. No cost will be allowed unless it is adequately documented to the extent that it is capable of being audited.

   Auditability

 The allowable costs for skilled nursing and intermediate care will be apportioned to the Medical Assistance Program by multiplying the average per diem cost for each level of care by the number of Medical Assistance patient days for that level of care.

 Subject to the sanctions specified in § §  1181.91—1181.96 (relating to administrative sanctions), an efficiency incentive will be allowable for a nonpublic facility if the facility’s audited net operating per diem costs are less than the applicable group ceiling. In determining the efficiency incentive, the following limitations apply:

   (1)  Proprietary facilities may receive an efficiency incentive of up to 8.5% of the Statewide average net operating per diem cost of general nursing facilities excluding hospital-based and special rehabilitation facilities for each level of care for the prior fiscal year.

   (2)  Nonprofit facilities may receive an efficiency incentive of up to 6% of the Statewide average net operating per diem cost of general nursing facilities excluding hospital-based and special rehabilitation facilities for each level of care for the prior fiscal year.

   (3)  In no event may the total of a facility’s audited net operating per diem rate and the efficiency incentive exceed the applicable group ceiling for the facility.

 Except as provided otherwise in § §  1181.91—1181.96 (relating to administrative sanctions) and in this subchapter allowable depreciation and interest on capital indebtedness, within the limitations specified in this subchapter, will be recognized as separate cost items and will be excluded from the limitation of the applicable ceiling on net operating costs.

 (a)  The Department will establish annual ceilings on allowable net operating costs for each level of care.

 (b)  For ceiling setting purposes, the following apply:

   (1)  Certain facilities will be grouped together as follows:

     (i)   Hospital-based skilled nursing and intermediate care facilities and special rehabilitation facilities separately on a Statewide basis.

     (ii)   General skilled nursing and intermediate care facilities according to Metropolitan Statistical Areas (MSA) groups. For general skilled nursing and intermediate care facilities the MSA classifications will be grouped, based along geographic and economic lines, into levels as announced by the Federal Office of Management and Budget. For county facilities, Level A will be combined with Level B and Level C will be combined with the non-MSA level. The resulting two levels will be the county nursing facility groups for ceiling setting purposes.

   (2)  The MSA groupings used by the Department will reflect the latest MSA groupings announced no later than 90 days prior to the implementation date of the new ceilings by the Federal Office of Management and Budget. The MSA groupings will be published by notice in the Pennsylvania Bulletin.

 (c)  The cost data base for each group ceiling is the allowable net operating costs of each facility within each group. The cost information will be taken from each facility’s most recent annual cost report. The Department will use only those year-end cost reports that cover a period of at least 180 days, are acceptable and are received no later than 90 days prior to the implementation date of the new ceilings. Cost reports that meet the requirements of §  1181.66(a)(1) (relating to setting ceilings on allowable net operating costs) are acceptable.

 (d)  The Department will establish ceilings as described in §  1181.66(a)—(c).

   The provisions of this §  1181.217 amended under sections 201 and 443.1(2) of the Public Welfare Code (62 P. S. § §  201 and 443.1(2)).

   The provisions of this §  1181.217 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402; amended September 6, 1985, effective September 7, 1985, except groups and ceilings shall be effective and apply at audit to costs of services rendered from July 1, 1984 through December 31, 1984, 15 Pa.B. 3181; amended March 10, 1989, effective immediately and applies retroactively to January 1, 1989, 19 Pa.B. 1005. Immediately preceding text appears at serial pages (124145) to (124146).

RATE DETERMINATIONS

§ 1181.221. Determining the interim per diem rate.

 (a)  An interim per diem rate will be established based on the facility’s most recently filed cost report as adjusted for nonallowable costs by desk review. The cost report shall cover at least a 180 day period in order to qualify as a basis for interim per diem rate setting.

 (b)  Interim per diem rates will remain in effect for no less than 6 months.

 (c)  Interim per diem rates will be established under §  1181.68 (relating to upper limits of payment).

   The provisions of this §  1181.221 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

   The ‘‘grandfather clause’’ providing that ‘‘in no case will the per diem payment . . . be less than the interim rates that were in effect prior to July 1, 1978 . . .,’’ 55 Pa. Code section 9424.713. See 8 Pa.B. 2826-38 (1978), applied only to interim payments and not to final audited per diem payments. Westmoreland Manor v. Department of Public Welfare, 496 A.2d 1282 (Pa. Cmwlth. 1985).

 (a)  As an alternative to having a current interim per diem rate that is subject to annual adjustment to allowable costs under this subchapter, an in-State facility with a monthly average of ten Medical Assistance patients or less may request that the Department determine a prospective per diem rate for the facility. County and hospital-based nursing facilities, special rehabilitation facilities and intermediate care facilities for the mentally retarded may not elect to have a prospective rate.

 (b)  The prospective rate shall be determined prior to the beginning of the Department’s fiscal year and will be based on the facility’s projected MA-11 cost report, historical financial statements, and other third-party payor audit reports. The established per diem rate will be effective July 1 and will remain in effect through June 30 of the current fiscal year.

 (c)  Payments made under a prospective rate may not be subject to annual cost reporting by the facility or to year-end adjustment by the Medical Assistance Program. However, facilities with a prospective rate which render more than 3,650 Medical Assistance patient days may not meet the conditions specified in subsection (a) and will be required to submit a year-end cost report and will be subject to an audit and year-end adjustment by the Department.

 (d)  The prospective rate, excluding depreciation and interest, may not exceed the applicable group ceiling for the facility. The prospective rate, including depreciation and interest, may not exceed the facility’s private payor rate or the facility’s Medicare interim rate.

 (e)  Facilities that request a prospective rate will not be eligible to receive an efficiency incentive.

 (f)  The costs of facilities with prospective rates will not be included in the costs used to establish ceilings.

 The final per diem rate may not exceed the upper limits of payment specified in §  1181.68 (relating to upper limits of payment) and is subject to the sanctions in § §  1181.91—1181.96 (relating to administrative sanctions).

   The provisions of this §  1181.224 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402; amended March 10, 1989, effective immediately and applies retroactively to January 1, 1989, 19 Pa.B. 1005. Immediately preceding text appears at serial page (125808).

ALLOWABLE COSTS

§ 1181.231. Standards for general and selected costs.

 The Department will determine providers’ allowable costs in accordance with all of the following:

   (1)  Chapter 1101 (relating to general provisions), Subchapter A (relating to nursing facility care), and this subchapter.

   (2)  The Medicare Provider Reimbursement Manual (HIM-15), except that where this part and the HIM-15 differ with respect to the treatment of a cost allowable in both, this part will govern.

   (3)  Section 1181.68 (relating to upper limits of payment).

 (a)  Occasionally a provider may wish to use an allocation basis for a particular cost center which is different than that required by the MA-11 because the provider believes the change will result in more appropriate and more accurate allocation. In these cases the provider shall submit a written request to the Department for approval of the change and provide reasonable justification for the change prior to the beginning of the cost reporting period for which the change is to apply.

 (b)  The Department’s approval or denial of a provider’s request will be furnished to the provider in writing. If the Department approves the provider’s request, the change shall be applied to the cost reporting period for which the request was made and to all subsequent cost reporting periods unless the Department approves a subsequent request for change by the provider. If the request is denied, the facility shall continue to use the most current of either the allocation basis established by the Department or the facility’s most current revised allocation basis that was approved by the Department. The acknowledgement by the Department’s auditors that a particular cost-allocation methodology exists may neither be construed as nor used as a substitute for written Departmental approval of the facility’s request for a change in the basis for allocating costs.

 (c)  The effective date of an approved request for a change in the allocation basis will be the beginning of the cost-reporting period for which the request was made.

   The provisions of this §  1181.232 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

   

Procedure

 (a)  Interim rate level. The Department will accept the required or previously approved allocation bases and use the bed complement on the final day of the reported period as the basis for setting the interim rate. Allocation bases accepted at interim rate will be subject to verification at audit.

 (b)  Audit level. The provider is required by regulation to keep adequate documentation of the cost by the level of care.

   (1)  For cost reporting periods ending before June 30, 1988, the provider may use multiple Schedule C’s or actual statistics. The preferred method for documenting this is to submit supplemental Schedule C’s which identify costs being allocated by proper statistics for each period of change. These supplemental Schedule C’s will then be combined on a summary Schedule C which would become the required Schedule C to be included in the MA-11 Cost Report. The supplemental Schedule C’s should be submitted with the MA-11 Cost Report. For periods ending after June 30, 1988, the provider shall use multiple Schedule C’s.

   (2)  For either time period, the absence of required documentation will result in zero cost. The absence of required documentation or the use of other methods which do not properly reflect use of the Department’s required allocation bases or approved change in bases will result in zero cost being allowed for that line item.

 (a)  A facility shall maintain an average annual rate of occupancy of a minimum of 90% of its available bed capacity on a facility-wide basis.

 (b)  For a facility with less than 90% occupancy facility-wide, the number of total patient days shall be adjusted so that the 90% factor can be achieved. If occupancy for each level of care is below 90%, the patient days for each shall be adjusted to bring each to the 90% level.

 (c)  The occupancy level adjustment will be applicable to fixed costs such as depreciation, rent, interest, insurance and taxes. It will not apply to variable costs, such as staffing and food, since these costs should decrease as the occupancy level decreases.

 (d)  The average per diem rate determined at the end of the facility’s fiscal year will be calculated in accordance with this section.

 (e)  A bed reserved for a recipient who is hospitalized will not be counted as an occupied bed unless the reserved bed is filled with another patient while the Medical Assistance recipient is hospitalized. A bed reserved for a recipient who is on therapeutic leave will be counted as an occupied bed.

 (f)  A waiver to the minimum bed occupancy allowance will be made for a new facility, at the time of the audit, relating to the facility’s first 12 months of operation. If the facility has been in operation for at least 12 months prior to coming into the Medical Assistance Program, this waiver does not apply. This subsection does not apply to new additions to existing facilities or to the replacement of existing facilities.

   The provisions of this §  1181.233 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402; amended March 10, 1989, effective immediately and applies retroactively to January 1, 1989, 19 Pa.B. 1005; corrected October 1, 1993, effective January 1, 1989, 23 Pa.B. 4645. Immediately preceding text appears at serial pages (135950) to (135951).

 (a)  The allowable cost of general administration will be limited. The allowable cost of general administration for each level of care will be determined so that all other allowable costs, excluding depreciation and interest on capital indebtedness, equal no less than 88% of the allowable net operating costs, except as provided in this section.

 (b)  General administration expenses may include, but are not limited to: administrative salaries, including fringe benefits and payroll taxes; home office expenses; compensation of owners, officers or persons other than facility employes; personnel; procurement; accounting; auditing; management consultants; office services and supplies; telephone; licenses; travel; association dues; and legal costs, including attorney’s fees.

 (c)  Home office allocations and management fees are subject to the following conditions and limitations:

   (1)  Home office allocations and management fees between related parties shall be reported without any markup by the provider.

   (2)  Costs, such as those related to nonworking officers or officers’ life insurance, which are not allowable, may not be included in home office allocations or management fees.

   (3)  Components of the home office and management costs shall be documented through work time records. If documentation of these costs is not provided to the Department’s auditors upon request, the total home office and management costs will be disallowed.

   (4)  Home office allocations, including depreciation and interest, shall be charged to the general administration line on the cost report.

 (d)  A facility providing more than one level of care shall allocate the total administrative costs to each level of care on the basis of a percentage of the costs of each level of care to the total costs.

   The provisions of this §  1181.234 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

   Where petitioner failed to establish percentage of Office of Public Information (OPI) expense attributable to newsletters distributed to facility residents and immediate family, hearing officer did not err in concluding OPI costs were not related to patient case and were not reimbursable related to patient case. Tressler Lutheran Service Associates v. Department of Public Welfare, 514 A.2d 661 (Pa. Cmwlth. 1986).

   This section cited in 55 Pa. Code §  1181.251 (relating to contracted management services).

SALARY COSTS AND STAFFING STANDARDS

§ 1181.241. General administration salaries.

 (a)  Salaries of the facility’s administrator, comptroller, purchasing agent, personnel director, pharmacy consultant and other persons performing general supervision or management duties shall be includable in the general administration allowance.

 (b)  Compensation of owners, officers or persons other than facility employes means actual payment during the cost reporting period on a current basis of salary or benefits for services rendered to the facility.

 (c)  If a person performs work customarily performed by different or several types of employes, the cost of the salary and other compensation allowable for the person shall be determined by the prorated customary salary and other compensation paid to employes for performing the same types of work in accordance with the methodology established in subsection (f). This cost will be allowable only if adequate documentation verifying the cost is supplied by the facility. Adequate documentation consists of a job description defining the responsibilities of the person and time records documenting the allocation of the person’s time for the performance of each type of work on a daily basis. The cost of salary and other compensation paid to the person for work performed shall be recorded as general administration costs.

 (d)  The salary or compensation costs of owners, operators or persons other than facility employes may be included only to the extent of their documented time and involvement in the required management of a facility.

 (e)  The allowable cost for a person performing necessary duties may not exceed the customary compensation and fringe benefits, as determined in accordance with the methodology established in subsection (f) that an employe would normally receive while performing that work.

 (f)  The cost of customary compensation and fringe benefits for employes performing necessary duties in general facilities, excluding hospital-based and special rehabilitation facilities, will be based on an average of the cost of the compensation and fringe benefits of employes performing the same work in enrolled general facilities, excluding hospital-based and special rehabilitation facilities, which are located in the county in which the facility is located and in counties within this Commonwealth which are contiguous to that county. The cost of customary compensation and fringe benefits for employes performing necessary duties in hospital-based, special rehabilitation and county facilities will be based upon separate Statewide averages of the cost of enrolled facilities of each type for the compensation and fringe benefits of employes performing the same work.

 (g)  The cost of general administrative salaries and benefits are included within the 12% overall maximum allowance, prorated between skilled nursing and intermediate care units, for general administration costs.

   The provisions of this §  1181.241 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

   Allowable Costs

   Department of Public Welfare’s regulations capping the amount of reimbursement to Medical Assistance providers for nursing care excludes salaries of unit managers and director of infection control program; even though the managers and director had nursing degrees, they did not provide direct patient care and therefore their salaries did not constitute ‘‘nursing costs.’’ St. Ignatius v. Department of Public Welfare, 918 A.2d 838, 845-846 (Pa. Cmwlth. 2007)

   Nursing home’s purchase of bereavement flowers for nursing facility employees was not an expense that was related to the proper care of nursing reimbursement facility residents; therefore, Department of Public Welfare properly excluded the expense from facility’s allowable Medical Assistance costs. St. Ignatius v. Department of Public Welfare, 918 A.2d 838, 846-847 (Pa. Cmwlth. 2007)

   In order for general administration salaries of a skilled nursing facility to be included in allowable cost reimbursement, language must be included in documenting the responsibilities of the person and time records evidencing the allocation of that person’s time to each type of work. Carbondale Nursing Home, Inc. v. Department of Public Welfare, 548 A.2d 376 (Pa. Cmwlth. 1988).

   Salary Averages

   Where proprietors of a nursing facility introduced documents to show that the salaries fell within a range of salaries paid to persons performing similar duties in facilities within the same area, the auditor was not required to base his calculations on a range of salaries, but rather on an ‘‘average.’’ Siemon’s Lakeview Manor Estate v. Department of Public Welfare, 703 A.2d 551 (Pa. Cmwlth. 1997).

 (a)  Except for special rehabilitation facilities, the allowable costs recognized for Medical Assistance may not exceed 3 nursing hours per patient per day for skilled nursing care and 2.6 nursing hours per patient per day for intermediate care.

 (b)  For special rehabilitation facilities, the allowable costs recognized for Medical Assistance may not exceed 3.75 nursing hours per patient per day for skilled nursing care and 3.2 nursing hours per patient per day for intermediate care.

 (c)  Allowable nursing hours are calculated in accordance with the instructions of the Department’s preprinted cost report.

   The provisions of this §  1181.242 amended under section 443.1(2) and (3) of the Public Welfare Code (62 P. S. §  443.1(2) and (3)).

   The provisions of this §  1181.242 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402; amended September 5, 1986, effective July 1, 1985, 16 Pa.B. 3294. Immediately preceding text appears at serial page (99421).

   Allowable Costs

   Department of Public Welfare’s regulations capping the amount of reimbursement to Medical Assistance providers for nursing care excludes salaries of unit managers and director of infection control program; even though the managers and director had nursing degrees, they did not provide direct patient care and therefore their salaries did not constitute ‘‘nursing costs.’’ St. Ignatius v. Department of Public Welfare, 918 A.2d 838, 845-846 (Pa. Cmwlth. 2007)

   Nursing home’s purchase of bereavement flowers for nursing facility employees was not an expense that was related to the proper care of nursing home facility residents; therefore, Department of Public Welfare properly excluded the expense from facility’s medical assistance reimbursement. St. Ignatius v. Department of Public Welfare, 918 A.2d 838, 846-847 (Pa. Cmwlth. 2007)

 Cost, pro rata, of up to one full-time equivalent unit of social service professional staff for each 60 patients will be allowable.

   Allowable Costs

   Department of Public Welfare’s regulations capping the amount of reimbursement to Medical Assistance providers for nursing care excludes salaries of unit managers and director of infection control program; even though the managers and director had nursing degrees, they did not provide direct patient care and therefore their salaries did not constitute ‘‘nursing costs.’’ St. Ignatius v. Department of Public Welfare, 918 A.2d 838, 845-846 (Pa. Cmwlth. 2007)

   Nursing home’s purchase of bereavement flowers for nursing facility employees was not an expense that was related to the proper care of nursing reimbursement facility residents; therefore, Department of Public Welfare properly excluded the expense from facility’s allowable Medical Assistance costs. St. Ignatius v. Department of Public Welfare, 918 A.2d 838, 846-847 (Pa. Cmwlth. 2007)

   The provisions of this §  1181.243 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

OTHER COST ITEMS

§ 1181.251. Contracted management services.

 (a)  In lieu of home office allocations and management fees, a facility may contract with a nonrelated management service. The cost of this contract shall be shown as a general administrative cost and may not be allocated among other cost centers.

 (b)  Management services contracted with a related party will be treated as home office allocations and are subject to §  1181.234(c) (relating to general administration allowance).

 (a)  The actual costs that are necessary for a facility to utilize the services of members of volunteer or religious organizations who donate their services on a regularly scheduled basis to serve in positions customarily held by full-time employes to provide normal patient care or to assist with the operation of the facility will be allowable costs. The following conditions and limitations apply:

   (1)  The costs shall be limited to the fair market value of comparable salaries of full-time personnel who perform similar services.

   (2)  The costs shall be based on regular working hours, excluding overtime.

   (3)  The actual costs for these services shall be supported by documentation substantiating all expenditures.

   (4)  The costs will be reimbursed as part of the net operating costs.

 (b)  The recognition as allowable costs for workers who are members of an organization of nonpaid workers is subject to the following conditions:

   (1)  Nonpaid workers shall be members of an organization of nonpaid workers that has arrangements with the provider for the performance of services by nonpaid workers.

   (2)  Membership in the organization shall be substantiated by adequate documentation in the files of the organization of nonpaid workers.

   (3)  A legally enforceable agreement between the provider and the organization of nonpaid workers shall exist and shall establish the provider’s obligation to remunerate the organization for services rendered. A legally enforceable agreement will not be considered to exist if the provider’s legal obligation to pay the organization of nonpaid workers is nullified by an offsetting legal obligation by the organization of nonpaid workers to pay or make a contribution to the provider of all or part of the salary liability. The part of the provider’s obligation required to be paid by the organization of nonpaid workers will not be allowed.

   (4)  A payment made by the organization of nonpaid workers to the provider for the nonpaid workers’ maintenance, prerequisite or fringe benefits shall be used as an offset to the total of the cost actually incurred by the providers.

 (c)  Staff services relating to the use of volunteer workers will be an includable cost.

   The provisions of this §  1181.252 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

 (a)  Salary costs will be allowed for pastoral services rendered directly to patients by professional staff employed by, or under contract with, the facility.

 (b)  Costs for a chaplaincy training program will not be allowable costs.

 (a)  Facilities shall have the option of using one of two methods of dealing with Medicare Part B services provided by nursing facility owners or operators to MA recipients:

   (1)  Option 1. The nursing facility may exclude from its cost report any operating and capital costs incurred in, and any income derived from, the provision of Medicare Part B services. The nursing facility shall attach, to the cost report the facility submits to the Department, a copy of the cost report the facility submits to Medicare for the Part B services and a copy of the Medicare final audit, including audit adjustments. If final audits are not available, the Department will exclude any operating or capital cost associated with providing the Medicare Part B service.

   (2)  Option 2. The nursing facility may elect, through advance written notification to the Department, to include in its cost report the operating and capital costs incurred in, and the income derived from, the provision of Medicare Part B services. If the nursing facility elects this option, the facility’s fiscal year must coincide with that of the Department; and the facility may not change its methodology for Medicare Part B services for the duration of the fiscal year. The Department, at the final settlement, will take the following steps in determining its reimbursement to the facility:

     (i)   The Department will identify the percentage of the total operating costs represented by the Medicare Part B services and reduce the ceiling on net operating costs for the facility by that percentage.

     (ii)   The Department will identify and deduct from the total capital costs of the facility the percentage of depreciation and interest costs associated with the provision of Medicare Part B services.

     (iii)   The Department will apply any revenue received by the facility from Medicare for providing the Part B service as an adjustment to the cost of providing these services before the Department adjusts for the ceiling on net operating costs for the facility.

   (3)  If the facility did not provide advance written notification to the Department of the facility’s election of Option 2 and the facility’s cost report contains costs associated with the provision of Medicare Part B services, the Department will credit against the total reimbursement due any revenue the facility received from Medicare for the Part B services rendered to the facility’s Medical Assistance recipients.

 (b)  The cost of providing Medicare Part B type services to non-Medicare Part B eligible recipients which are otherwise allowable costs under this part should be reported as provided elsewhere in this subchapter.

   The provisions of this §  1181.254 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

   Hearing Officer’s finding that Department of Public Welfare did not intend to use the exclusion method for Medicare Part B costs and revenue related to services provided by salaried physicians at the time the net operating costs ceiling was imposed, was supported by substantial evidence, and where only interpretation applied to regulations thus far referred to offset method, petitioner could not claim that current interpretation of exclusion method contradicted prior practice. Fair Acres Geriatric Center v. Department of Public Welfare, 528 A.2d 1008 (Pa. Cmwlth. 1987).

   This section provides two options for handling Medicare Part B Services which a facility itself provides, the exclusion method and the offset method. Fair Acres Geriatric Center v. Department of Public Welfare, 528 A.2d 1008 (Pa. Commw. 1987).

 (a)  Option 1

   (1)  To qualify for Option 1, the facility shall:

     (i)   Exclude operating and capital costs incurred to provide Medicare Part B services.

     (ii)   Attach a copy of its Medicare cost report when it submits its MA-11.

   (2)  The MA-11 should contain the adjustments excluding the incurred Medicare Part B costs and those adjustments should be included in the decreasing adjustments made on Schedule C.

   (3)  If the Medicare cost report or the Medicare audit report is not submitted with the MA-11, the facility cannot qualify for Option 1, and §  1181.254(a)(3) (relating to Medicare Part B type services) will apply at audit unless the facility has also qualified for Option 2 at §  1181.254(a)(2).

   (4)  If a facility does submit the Medicare cost report with the MA-11 and its MA-11 contains the adjustments required by Option 1, the facility can qualify for Option 1 as long as the auditors can verify and reconcile the costs on the Medicare cost report to the adjustments made on the MA-11. At audit, if the Medicare audit of the submitted Medicare cost report is available, it shall be provided for the auditors’ use.

   (5)  If there is a discrepancy between the costs on the Medicare cost report—or, if available, the Medicare audit report—and the adjustments made by the facility on the MA-11, the auditors will make reconciling adjustments if there is sufficient detail in the MA-11 and the facility’s books and records to support the reconciliation. However, if the auditors are not able to substantiate a basis for reconciliation, the auditors will not apply §  1181.254(a)(1), and will reverse the adjustments to reported costs on the MA-11 for Medicare Part B services made by the facility in the facility’s efforts to claim treatment under Option 1 and apply § §  1181.254(a)(2) or (3), as appropriate.

 (b)  Failure to claim Medicare Part B.

   (1)  If a service is covered by Medicare Part B but reimbursement is not claimed or received from Medicare Part B because of facility error or policy, a facility may not receive reimbursement from the Medical Assistance Program in excess of that which it could receive had the Medicare Part B payments been received. The facility is obligated to know whether a recipient has Medicare Part B coverage and a duty to seek payment for covered services whether or not the facility is a participating provider in the Medicare program. Those services affected by §  1181.254 and §  1181.274 (relating to direct provider payments not includable in costs) are presumed to be coverable by Medicare Part B unless Medicare Part B has determined that they are not.

   (2)  At audit, a facility shall be able to document that costs affected by § §  1181.254 and 1181.274, but claimed for reimbursement, were incurred either for services not covered by Medicare Part B or were incurred with respect to patients not covered by Medicare Part B or other insurance resources. If a facility is not able to document this basis for the inclusion of these costs, they will be adjusted at audit where §  1181.254(a)(3) applies, by a below the line offset of the costs claimed on the MA-11.

 The cost of recreational services of a facility will be allowed and will be based on an hourly or salary rate only, and not on a fee-for-service basis.

 (a)  Other practitioner services which are provided on a contract or salary basis by the facility will be allowed. Arrangements for these services, if made on a fee-for-service basis, will not be allowed.

 (b)  The direct and indirect costs associated with noncompensable cost centers, such as a pharmacy or space rented or used by an independent practitioner, will not be allowed.

 (a)  Allowable costs for drug services will be subject to the following conditions:

   (1)  A facility will be reimbursed for nonlegend drugs such as laxatives, aspirin, and antacids that are provided directly to an MA patient by a facility from its own supply.

   (2)  Detailed and itemized support documentation must be maintained for the claimed expense; otherwise, the expense will be disallowed.

 (b)  Any costs related to legend drugs for which payment would be made under the MA Program to an enrolled pharmacy or cost related to legend drugs that are noncompensable under the MA Program will not be considered as allowable costs for a facility. The Department will directly reimburse licensed pharmacies for compensable prescribed drugs furnished to eligible MA recipients.

 (c)  The provision of all nonlegend drugs furnished by a facility to its MA recipients shall be based on a physician’s written order or prescription, be administered judiciously, and be limited to those that are medically necessary for the patient.

 (d)  Medically needy MA recipients are not eligible to receive prescription drugs under the MA Program. Therefore, these recipients must use their own funds to purchase drugs. If the facility acts as an agent for its MA recipients in purchasing drugs, the facility shall act as a prudent buyer.

 (e)  Facilities may not solicit or receive a remuneration, directly or indirectly, in cash or in kind, from a person in connection with the furnishing of drugs or in connection with referring a recipient to a person for the furnishing of drugs.

 (f)  A cost related to a pharmacy consultant shall be shown under general administration expenses on the cost report and will be included under the general administration allowance.

 The cost of services mandated by Federal and State regulations for utilization review, medical review, and program audits shall be included on the cost report under ‘‘Utilization Control’’ as a separate item under ‘‘Other Costs.’’

 (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:

   (1)  The particular project was wholly funded through an Industrial Development Authority bond issue.

   (2)  The facility provided the Department with all documents relating to ownership and financial obligations relating to the facility.

   (3)  The facility met the standards of HIM-15, Section 110-B, with respect to virtual purchases.

 (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:

   (1)  The particular project was wholly funded through an Industrial Development Authority bond issue.

   (2)  The facility was a related organization to a corporation, person, or company which, if it operated the facility, could qualify for reimbursement for allowable depreciation costs under subsection (c).

   (3)  All of the documentation necessary to substantiate that the facility meets the requirements of subsection (c) and documentation and statement of the fact that the two entities are related organizations were supplied to the Department.

   (4)  The related organization agreed in writing as required by the Department that it and its successors will be responsible for any overpayment which the Department is unable to collect directly from the facility.

 (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:

   (1)  Except as provided otherwise in this section, the cost basis of the depreciable assets of a facility that are acquired as used, shall be computed by the following method:

     (i)   The lower of the purchase price or the fair market value shall be established at the time of sale based on the lowest of two or more bona fide appraisals at the time of sale.

     (ii)   All depreciation that was taken or could have been taken by all prior owners shall be subtracted.

     (iii)   Subsections (r) and (s) establish the Department’s extent of participation in the payment of allowable depreciation.

   (2)  The cost basis for depreciable assets of a facility transferred between related parties shall be the net book value of the seller at the date of the transfer as recognized under this subchapter.

   (3)  The cost basis for depreciable assets of a facility acquired through stock purchase will remain unchanged from the cost basis of the previous owner.

   (4)  The cost basis for depreciable assets of a facility purchased in types of transactions other than those specified in paragraphs (1), (2), (3) and (5), may not exceed the seller’s basis under this subchapter, less depreciation that was taken or could have been taken by all prior owners.

   (5)  The cost basis for depreciation on an asset the ownership of which changes on or after July 18, 1984, shall be the lesser of the remaining allowable cost basis of the asset to the owner of record on or after July 18, 1984, or, in the case of an asset not in existence as of that date, the first owner of record of the asset after that date, or the allowable cost basis to the new owner. The cost basis shall exclude costs, including legal fees, accounting and administrative costs, travel costs, or the cost of feasibility studies, attributable to the negotiation or settlement of the sale or purchase—by acquisition or merger—for which a payment was previously made under Title XVIII of the Social Security Act (42 U.S.C.A. § §  1395—1395xx), except as specified in §  1181.65(c) (relating to cost-finding).

 (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:

   (1)  The depreciation method used.

   (2)  A description of the asset.

   (3)  The date the asset was acquired.

   (4)  The cost of the asset.

   (5)  The salvage value of the asset.

   (6)  The depreciable cost.

   (7)  The estimated useful life of the asset.

   (8)  The depreciation for the year.

   (9)  The accumulated depreciation.

 (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:

   (1)  Depreciation on new or additional beds is an allowable cost only if:

     (i)   The facility was issued either a Section 1122 approval or letter of nonreviewability in accordance with 28 Pa. Code Chapter 301 (relating to limitation on Federal participation for capital expenditures) or a Certificate of Need or letter of nonreviewability in accordance with 28 Pa. Code Chapter 401 (relating to Certificate of Need Program) for the project by the Department of Health no later than August 31, 1982.

     (ii)   The facility was issued a Certificate of Need or letter of nonreviewability under 28 Pa. Code Chapter 401 for the construction of a nursing facility and there was no nursing facility, including county, private or hospital-based, located within the county.

   (2)  The Department will not recognize depreciation as an allowable cost if the facility does not substantially implement the project as defined at 28 Pa. Code §  401.5(m)(3) (relating to Certificate of Need) within the effective period of the original Section 1122 approval or the original Certificate of Need.

   (3)  Depreciation on replacement beds is an allowable cost only if the facility was issued a Certificate of Need or a letter of nonreviewability for the project by the Department of Health.

 (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.

   The provisions of this §  1181.259 issued under sections 201 and 443.1 of the Public Welfare Code (62 P. S. § §  201 and 443.1).

   The provisions of this §  1181.259 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402; amended February 17, 1984, effective July 1, 1983, 14 Pa.B. 546; amended March 1, 1986, effective March 1, 1986, 16 Pa.B. 600; amended March 10, 1989, effective immediately and applies retroactively to January 1, 1989, 19 Pa.B. 1005. Immediately preceding text appears at serial pages (99425) to (99426), (105517) to (105518) and (128286).

   The waiver by the Department of Public Welfare allowing a nursing facility to change the ‘‘useful life’’ of its depreciable fixed assets does not also allow the facility to use the common date expiration methodology as opposed to the straight line method of depreciation when it fails to follow the prescribed procedures. Oakmont Presbyterian Home v. Department of Public Welfare, 633 A.2d 1315 (Pa. Cmwlth. 1993).

   For depreciation purposes, Department of Public Welfare properly required new owner of nursing home to utilize prior owner’s asset life. Petitioner failed to meet its burden of providing proper documentation to establish depreciable cost basis of newly acquired assets. Homestead Nursing and Convalescent Home v. Department of Public Welfare, 579 A.2d 440 (Pa. Cmwlth. 1990).

   Department may not adopt a method of calculating allowable depreciation costs which is inconsistent with one it failed to refute. State College Manor, Ltd. v. Department of Public Welfare, 576 A.2d 407 (Pa. Cmwlth. 1990).

   The Department can not use a methodology for determining depreciation expenses that would result in the depreciation costs for nonallowable cost centers to be deducted twice. Meadows Nursing Center v. Department of Public Welfare, 561 A.2d 68 (Pa. Cmwlth. 1989).

   Where the seller of a building was never a participant in the MA Program, the proper allowable cost basis in the building for purposes of depreciation reimbursment, under the MA Program, is the purchase price of the building not the seller’s basis therein. Mercy Hospital of Johnstown v. Department of Public Welfare, 561 A.2d 58 (Pa. Cmwlth. 1989).

   The term ‘‘year’’ refers to the ‘‘fiscal year’’, and the Department’s attempt to apply a different definition through an interpretive policy statement was an improper attempt to substantively change the regulation in violation of the Commonwealth Documents Law. Hillcrest Home, Inc. v. Department of Public Welfare, 553 A.2d 1037 (Pa. Cmwlth. 1989).

   The fact that the nursing care facility was not the record title holder of the realty (the depreciable capital asset) meant that the asset could not be depreciated under this section. Fair Winds Manor v. Department of Public Welfare, 535 A.2d 42 (Pa. 1987); order confirms 514 A.2d 642 (Pa. Cmwlth. 1986).

   The Court concluded that the American Hospital Association’s Uniform Chart of Accounts and Definitions for Hospitals remain applicable, even though it does not differentiate between freestanding buildings and existing structures, because the Medical Provider Reimbursement Manual, to be referred to in the case of ambiguity, considers a building as including its shell and any additions thereto. The Jewish Home of Eastern Pennsylvania v. Department of Public Welfare, 480 A.2d 1316 (Pa. Cmwlth. 1984).

 (a)  The Department has abolished at 55 Pa. Code § §  1181.259(q) and 6211.79(q) (relating to depreciation allowance) the requirement that county and general nursing facilities fund the depreciation portion of their MA payment rate.

 (b)  The Department’s decision to repeal the funded depreciation requirement permits many providers, currently required to fund depreciation, to eliminate funding, to liquidate present funded depreciation accounts, if they choose to do so, and to resolve present administrative appeals. It also eliminates the need of providers that choose to liquidate their funded depreciation accounts to complete Schedule M of the MA 11 in cost reporting periods following the period in which the funded depreciation account was liquidated. Providers that choose to liquidate their funded depreciation account should document their decision to do so for MA audit purposes; the funded depreciation account should then be liquidated prior to the start of their next fiscal year. The Department will treat the offset of investment income earned on the funded depreciation account of providers that choose to liquidate the account in accordance with the principles of Medicare’s Health Insurance Manual 15 (HIM-15).

 (c)  Providers are not required to liquidate their funded depreciation accounts. They may choose to continue to maintain the funded depreciation accounts as a prudent fiscal management practice and in order to immunize income earned on the fund from offset against interest expense. To immunize the investment income earned on the funded depreciation account from offset, the account should be maintained in accordance with the principles of HIM-15. Income earned in an account maintained under the Department’s guidelines between July 1, 1983, and the start of the provider’s next fiscal year, will not be subject to offset as a result of an inconsistency between the Department’s guidelines and the guidelines for funded depreciation accounts in HIM-15, as long as the income is retained in the account and the account itself is thereafter maintained according to HIM-15 guidelines. Providers who retain the funded depreciation account but have not maintained it in accordance with the HIM-15 principles, will have until the start of their next fiscal year to reorganize their account in order to maintain it in accordance with HIM-15 guidelines.

 (d)  The Office of Medical Assistance Programs will cease making disallowances based on the funding requirement.

   The provisions of this §  1181.259a adopted July 14, 1989, effective immediately and applies retroactively to January 1, 1989, 19 Pa.B. 3052.

 (a)  Necessary and proper interest on capital and current indebtedness is an allowable cost. The Department will recognize interest as an allowable cost subject to the following conditions:

   (1)  Interest on new or additional beds is an allowable cost only if one of the following applies:

     (i)   The facility was issued either a Section 1122 approval or letter of nonreviewability under 28 Pa. Code Chapter 301 (relating to limitation on Federal participation for capital expenditures) or a Certificate of Need or letter of nonreviewability under 28 Pa. Code Chapter 401 (relating to Certificate of Need program) for the project by the Department of Health no later than August 31, 1982.

     (ii)   The facility was issued a Certificate of Need or letter of nonreviewability under 28 Pa. Code Chapter 401 for the construction of a nursing facility, and there was no nursing facility, including county, private or hospital-based, located within the county.

   (2)  The Department will not recognize interest as an allowable cost if the facility does not substantially implement the project as defined at 28 Pa. Code §  401.5(m)(3) (relating to Certificate of Need) within the effective period of the original Section 1122 approval or the original Certificate of Need.

   (3)  Interest on replacement beds is an allowable cost only if the facility was issued a Certificate of Need or a letter of nonreviewability by the Department of Health.

 (b)  Except as specified in subsections (c) and (d), a facility will be reimbursed for allowable interest on capital indebtedness with respect to assets only if the facility is the recorded holder of legal title of the assets involved.

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

   (1)  The particular project was wholly funded through an Industrial Development Authority bond issue.

   (2)  The facility provided the Department with documents relating to ownership and financial obligations relating to the facility.

   (3)  The facility met the standards of HIM-15, Section 110-B, with respect to virtual purchases.

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

   (1)  The particular project was wholly funded through an Industrial Development Authority bond issue.

   (2)  The facility was a related organization to a corporation, person or company which, if it operated the facility, could qualify for reimbursement for allowable interest costs under subsection (c).

   (3)  The documentation necessary to substantiate that the facility meets the requirements of subsection (c) and documentation and statement of the fact that the two entities are related organizations was supplied to the Department.

   (4)  The related organization agreed in writing as required by the Department that it and its successors will be responsible for an overpayment which the Department is unable to collect directly from the facility.

 (e)  Allowable interest on capital indebtedness may not exceed that amount which a prudent borrower would pay. Interest on capital indebtedness may not be considered prudent if the provider cannot demonstrate that the rate does not exceed the rate available from lenders in this Commonwealth to nursing home borrowers at the time that the funds were borrowed. In no event will the upper limit on interest on capital indebtedness exceed the prime interest rate charged by the lending institution at the time funds are borrowed. For the purpose of this section, the time that the funds were borrowed is the date of the loan commitment.

 (f)  To be considered allowable, necessary and proper, the interest expense shall be incurred and paid within 90 days of the close of the cost reporting period on a loan made to satisfy a financial need of the facility and for a purpose reasonably related to patient care.

 (g)  Necessary interest on capital indebtedness applying to mortgages, bonds, notes or other securities on the property and plant of the facility will be recognized subject to the limitation of the amount recognized for depreciation purposes. The total value of mortgages, bonds, notes or other securities on which interest on capital indebtedness is allowed may not exceed the depreciation basis of the assets at §  1181.259(m), (n) and (o) (relating to depreciation allowance).

 (h)  Investment income shall be used to reduce allowable interest expense on capital and current indebtedness unless the investment income is from one of the following:

   (1)  Gifts or grants, of which the corpus and interest are restricted by the donor.

   (2)  Funded depreciation, if the interest earned remains in the fund.

   (3)  The facility’s qualified pension fund, if the interest earned remains in the fund.

 (i)  Investment income including income on operating capital, shall be used to reduce interest expense on capital indebtedness first, then used to reduce interest on noncapital indebtedness.

 (j)  Interest expense shall be allowable if paid on loans from the facility’s donor-restricted funds, the funded depreciation account or the facility’s qualified pension fund. The upper limit on allowable interest may not exceed the limitations specified in subsection (e).

 (k)  Interest on capital indebtedness will be recognized on debt services incurred to finance a maximum construction cost per bed of $22,000 as defined in §  1181.259(m) and (s). If the construction cost exceeds the $22,000 per bed limit, the interest on the portion of the construction cost which exceeds the $22,000 limit is not allowable.

 (l)  Moneys borrowed for the purchase or redemption of capital stock will be considered as a loan for investment purposes and the interest paid on these borrowed funds is not an allowable cost.

 (m)  Income earned from funds included in a trust agreement, including those funds deemed to be funded depreciation, shall be offset against allowable interest on capital indebtedness.

 (n)  Interest expense on funds borrowed for capital purchases may not be allowed until the funds in the facility’s funded depreciation account are fully expended.

   The provisions of this §  1181.260 issued under sections 201 and 443.1 of the Public Welfare Code (62 P. S. § §  201 and 443.1).

   The provisions of this §  1181.260 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402; amended February 17, 1984, effective July 1, 1983, 14 Pa.B. 546; amended February 28, 1986, effective March 1, 1986, 16 Pa.B. 600; amended March 10, 1989, effective immediately and applies retroactively to January 1, 1989, 19 Pa.B. 1005. Immediately preceding text appears at serial pages (128286) to (128289).

   Capital Indebtedness

   Where a nursing facility offered evidence explaining how interest costs were reported, but failed to explain how the loan proceeds were used, the facility failed to show that interest costs were allowable ‘‘noncapital’’ interest. Siemon’s Lakeview Manor Estate v. Department of Public Welfare, 703 A.2d 551 (Pa. Cmwlth. 1997).

   This section indicated that necessary interest on capital indebtedness was an allowable cost for Medicaid reimbursement but allowed the Department of Public Welfare to disallow reimbursement for excess interest when the facility’s purchase price exceeded the cost basis adjusted for depreciation taken by the prior owner. Nottinghoam Village v. Department of Public Welfare, 616 A.2d 204 (Pa. Cmwlth. 1992).

   The income earned by a debt service reserve fund was properly classified as investment income and, therefore, offset against allowable interest expense on capital indebtedness. Atlas Development Association, Inc. v. Department of Public Welfare, 587 A.2d 817 (Pa. Cmwlth. 1991).

   The Department did not err in its decision to reduce petitioner’s interest expense on capital indebtedness by the income generated by an endowment fund because there was no showing that a direct and express donor restriction existed on the interest income earned on the fund. Messiah Village v. Department of Public Welfare, 545 A.2d 956 (Pa. Cmwlth. 1988).

   

Interest Income

   Commonwealth Court was correct when it found reasonable Department of Public Welfare’s interpretation of this section, requiring that interest income first be offset against interest expense on capital indebtedness with remaining balance offset against interest expense on current indebtedness. Fair Winds Manor v. Department of Public Welfare, 535 A.2d 42 (Pa. 1987); order confirms 514 A.2d 642 (Pa. Cmwlth. 1986).

   The Department of Public Welfare, in carrying out the Medical Assistance Program, was empowered to decide what constituted a reimburseable expense when it reviewed necessary ‘‘interest expenses.’’ Harston Hall Nursing and Convalescent Home, Inc. v. Department of Public Welfare, 513 A.2d 1097 (Pa. Cmwlth. 1986).

   The Department of Public Welfare, through its medical assistance program, will reimburse for interest expenses and properly concluded that imputation of interest was necessary in reviewing an interest free loan made by a nursing care facility to its president. Harston Hall Nursing and Convalescent Home, Inc. v. Department of Public Welfare, 513 A.2d 1097 (Pa. Cmwlth. 1986).

   

Refinanced Loans

   The Department of Public Welfare interprets this provision as not permitting reimbursement for interest expense after refinancing beyond that which the facility received before refinancing. Also, if a variable rate after refinancing drops below the original rate, the lower rate will be applied. Therefore, where a loan was refinanced with a variable rate after the first 3 years, the attorney examiner could conclude that it was impossible for the agency to prove that the ultimate effect of the refinancing would be a savings on total interest cost. Sycamore Manor Health Ctr. v. Department of Public Welfare, No. 1625 C. D. 1994, No. 2460 C. D. 1994, 1995 Pa. Cmwlth. LEXIS 349 (July 27, 1995).

 Bad debts and all associated collection expenses related to the bad debts are not allowable costs.

 (a)  Costs pertaining to raising funds for operating expenses and cash flow will be allowed up to 10% of the amount raised.

 (b)  Fund raising expenses for capital and replacement items up to 5% of the amount raised will be allowed to be capitalized as a part of the cost of the asset under §  1181.259(h) (relating to depreciation allowance).

 (a)  Related parties that provide services to the general public may furnish services and supplies to a facility under the prudent buyer concept, provided the costs of the services and supplies are consistent with costs of these items furnished by independent third party providers in the same geographic area.

 (b)  The Department will not recognize as allowable the cost of services provided by related parties if related parties do not provide services to the general public in addition to the facility.

 (a)  Rental expense shall be an allowable net operating cost for the leasing of facilities from related or nonrelated parties. The amount of rental expense allowed during a fiscal year may not exceed the equivalent annual depreciation, computed on the historical cost basis, with depreciation being calculated over the facility’s useful life. Historical cost will be established on the basis of either the original construction cost or original purchase price as shown on the lessor’s books and records. A maximum of 25% of the equivalent annual depreciation will be allowed if the lessor pays the related costs of ownership. This additional allowance is established upon the documented amount of actual incurred related costs.

 (b)  Allowable costs for lease purchase agreements and installment sales agreements in which title does not transfer to the lessee will be accounted for in accordance with subsection (a) except as provided otherwise in this subchapter.

 (c)  For those lease purchase agreements and installment sales agreements in which title transfers to the lessee, Medical Assistance reimbursement for the period of time prior to the date of transfer will be based upon subsection (a). Subsequent to the transfer date, providers shall follow §  1181.259 (relating to depreciation allowance).

 The purchase or rental by a facility of a property, plant, equipment, service, supply and the like, may not exceed the cost that a prudent buyer would pay in the open market to obtain these items.

   The provisions of this §  1181.265 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

EXPENSES AND REVENUE ITEMS NOT ALLOWABLE IN
DETERMINING NET OPERATING COSTS

§ 1181.271. Excluded expenses and revenues.

 In determining the net operating costs of a facility, the Department will not allow expenses or revenues relating to:

   (1)  Nonworking officers’ salaries.

   (2)  Fund raising expenses for capital and replacement items exceeding 5% of the amount raised, and, for operating expenses and cash flow, fund raising expenses exceeding 10% of the amount raised.

   (3)  Free care or discounted services.

   (4)  Parties and social activities not related to patient care.

   (5)  Organizational memberships not necessary to patient care.

   (6)  Personal telephone service.

   (7)  Personal radio and television service.

   (8)  The direct and indirect costs related to nonallowable cost centers including gift, barber, beauty, flower and coffee shops, homes for administrators or pastors, convent areas, and nurses’ quarters, except as provided in §  1181.252 (relating to volunteer and donated services of individuals).

   (9)  Vending machines.

   (10)  Charitable contributions.

   (11)  Employe and guest meals.

   (12)  Pennsylvania Capital Stock and Franchise Tax.

   (13)  Income tax.

   (14)  Ambulance costs.

   (15)  Promotional advertising, including a yellow page listing that is greater than a minimum insert.

   (16)  Late payment penalties.

   (17)  Taxes based upon receivables, revenues or net income.

   (18)  Officers’ and directors’ life insurance, including life insurance premiums necessary to obtain mortgages and other loans.

   (19)  Bad debts or contractual adjustments.

   (20)  Collection expenses associated with bad debts.

   (21)  Losses on the sale of fixed and movable assets.

   (22)  Remuneration of any kind for any purpose including travel expenses for members of the Board of Directors.

   (23)  Personal laundry services.

   (24)  Depreciation and interest on capital indebtedness for costs in excess of the per bed limitation.

   (25)  Expenses or revenues not necessary to patient care.

   (26)  Net operating or capital cost, including legal fees, accounting and administration costs, travel costs, and the costs of feasibility studies, attributable to the negotiation or settlement of the sale or purchase of a capital asset—by acquisition or merger—for which payment has previously been made under Title XVIII of the Social Security Act (42 U.S.C.A. § §  1395—1395xx) if the sale or purchase was made on or after July 18, 1984.

   The provisions of this §  1181.271 issued under sections 201 and 443.1 of the Public Welfare Code (62 P. S. § §  201 and 443.1).

   The provisions of this §  1181.271 adopted August 5, 1989, effective July 1, 1989, 13 Pa.B. 2402; amended February 28, 1986, effective March 1, 1986, 16 Pa.B. 600. Immediately preceding text appears at serial pages (99433) to (99434).

 In determining the operating costs of a facility, the Department will not allow costs related to:

   (1)  The sale of laundry and linen service.

   (2)  The sale of drugs to nonpatients.

   (3)  The sale of medical and surgical supplies to nonpatients.

   (4)  The sale of medical records and abstracts.

   (5)  The rental of quarters to employes and others.

   (6)  The rental of space.

   (7)  Payments received from specialists.

   (8)  Trade, quantity, time and other discounts on purchases.

   (9)  Rebates and refunds of expenses.

 (a)  Any form of investment income from the use of unrestricted funds will be used to reduce the allowable interest on capital indebtedness first, then other interest. Any form of investment income from the use of restricted funds found to be used for purposes other than their designated purpose, will be used to reduce the allowable interest on capital indebtedness first, then other interest. If restricted and unrestricted funds are commingled, all income to the common fund will reduce capital indebtedness first, then other interest.

 (b)  Grants, gifts and income designated by the donor for specific operating expenses will be used to reduce the allowable costs relating to the specific operating expense.

 (c)  Recovery of insured loss will be used to reduce the allowable costs relating to the insured loss.

   The provisions of this §  1181.273 adopted August 5, 1989, effective July 1, 1989, 13 Pa.B. 2402.

   The income earned by debt service reserve fund was properly classified as investment income and, therefore, offset against allowable interest expense on capital indebtedness. Atlas Development Association, Inc. v. Department of Public Welfare, 587 A.2d 817 (Pa. Cmwlth. 1991).

   In case applying prior regulation found at Section IV(D)(10)(e)(5) of Medical Assistance Program Manual for Allowable Cost Reimbursement of Skilled Nursing and Intermediate Care Facilities, 8 Pa.B. 2837, fact that funds invested by central corporate Cash Management Office were not generated by any of the five corporation-owned facilities, but rather by other corporate operations, did not preclude offset of investment income against interest on the facilities’ capital indebtedness; further, there is nothing in the regulations to authorize deduction of expenses incurred in generating the investment income. Tressler Lutheran Service Associates v. Department of Public Welfare, 514 A.2d 661 (Pa. Cmwlth. 1986).

 Costs for prescription drugs, physicians’, dental, dentures, podiatry, eyeglasses, appliances, X-rays, laboratory and any other materials or services covered by payments made directly to providers other than facilities under Medical Assistance and Medicare including Part B, Champus, Blue Cross, Blue Shield or other insurers or third parties shall not be allowable in determining net operating costs.

   The provisions of this §  1181.274 adopted August 5, 1983, effective July 1, 1983, 13 Pa.B. 2402.

   This section cited in 55 Pa. Code §  1181.254a (relating to Medicare Part B adjustments—statement of policy).