Section 40.07 - Determination of Allowed Base Year Cost(1)Purpose. Except for new non-acute hospitals which have not yet been assigned a base year, the commission will determine Allowed base year Operating Cost for the purpose of establishing a hospital's RFR pursuant to 114.1 CMR 40.07.(2)Calculation of Allowed Base Year Operating Cost. (a) For DMH and DPH hospitals only the base year for operating costs shall be FY 1993, and the Division shall utilize the costs reported in audited FY 1993 RSC-403 cost report. For all other hospitals, the base year for operating costs shall be the year recognized by the Division as the base year during FY 1996. For hospitals with a later base year assigned pursuant to 114.1 CMR 40.09, the Division shall utilize the costs reported in the audited RSC-403 cost report for that year. 1. Allowable operating costs include only costs incurred or to be incurred in the provision of hospital care and services, supplies and accommodations and determined in accordance with the Principles of Reimbursement for Provider Costs under 42 U.S.C. §§ 1395et seq. as set forth in 42 CFR 413et seq. and the Provider Reimbursement Manual, the HURM Manual and Generally Accepted Accounting Principles.2. Allowable operating costs do not include costs of personnel or consultants where the primary purpose is, either directly or indirectly, to persuade or seek to persuade hospital employees to support or oppose unionization.(b) The Division will make a one time adjustment to base year costs to reflect the following: 1. Audit adjustments when the audit is complete.2. Annualization of partial year costs for which the hospital received adjustments in the RFR approved in the base year.3. Annualization of partial year reductions in costs as a result of transfers off of costs and discontinued services during the base year.(3)Calculation of Allowed Base Year Capital Cost. The base year for capital cost is the year recognized as the base year for operating costs. The base year capital cost is calculated by adjusting the hospital's actual base year capital cost for historical depreciation for buildings and fixed equipment, for reasonable interest expense, for amortization and for leases and rentals of facilities. The following limitations apply in the determination of allowable capital costs and, in addition, shall apply to any projected capital acquisitions as set forth in 114.1 CMR 40.08(6). (a) The Division shall not allow interest expense attributable to balloon payments on financed debt. Balloon payments are those in which the final payment on a partially amortized debt is scheduled to be larger than all preceding payments. Requests for interest associated with balloontype payments must be adjusted to conform to the time period for conventional regular installment loans.(b) Where there has been a change of ownership after July 18, 1984, the allowable basis of the fixed assets to be used in the determination of the depreciation and interest expense shall be the lower of the acquisition cost to the new owner or the basis allowed for reimbursement purposes to the immediate prior owner. The allowed depreciation expense shall be calculated using the full useful lives of the assets.(c) All costs (including legal fees, accounting, and administrative costs, travel costs, and the costs of feasibility studies) attributable to the negotiation or settlement of the sale or purchase of any capital asset after July 18, 1984 (by acquisition or merger), for which payment has previously been made by any payer, and which have been included in any portion of the RFR, shall be subtracted from the capital requirement.114 CMR, § 114. 40, § 40.07