C.M.R. 10, 144, ch. 101, ch. III, 144-101-III-50, subsec. 144-101-III-50-3000

Current through 2024-46, November 13, 2024

Subsection 144-101-III-50-3000 - FIXED COST COMPONENT

3005 The fixed cost per diem rate is determined from the sum of the following costs:

3005.1 depreciation on land improvements, buildings, fixed and movable equipment, vehicles, and amortization of leasehold improvements;

3005.2 amortization of finance costs for new construction and/or renovations;

3005.3 amortization of start-up costs;

3005.4 real estate and personal property taxes;

3005.5 liability insurance, (not including insurance for directors and officers), fire insurance, bond, and vehicle insurance. Reasonable and necessary costs of insurance involved in operating a facility are considered allowable costs. Premiums paid on property not used for patient care are not allowed;

3005.6 interest on long term debt;

3005.7 rental expenses;

3005.8 8medical supplies that are supplied as part of the regular rate of reimbursement. These supplies are listed in the MaineCare Benefits Manual, Chapter II, Section 60. Excluded are costs that are an integral part of another cost center.

3005.9ICF-MR Health Care Provider Tax. ICFs-MR subject to the Health Care Provider Tax defined in State law 36 M.R.S.A., Chapter 373, will have the tax treated as an allowable fixed cost. If CMS approves, effective January 1, 2012, the tax imposed is six percent (6%) of the facility's annual gross patient services revenue. This expense is allowed based on a cash basis instead of accrual basis.

3005.10 mandated direct care staff training program costs as required by State and Federal regulations.

3005.11 mandated accreditation costs.

3005.12 approved administrator in training expense.

3010Depreciation. Allowance for depreciation based on asset costs.

3011 Principle. An appropriate allowance for depreciation on buildings and equipment is an allowable cost. The depreciation must be:

3011.1 Identified and recorded in the provider's accounting records.

3011.2 Based on historical cost and prorated over the estimated useful life of the asset using the straight-line method. If the estimated life of an asset is less than the term of the note used to purchase it, then the term of the note will be used for the life of that asset.

3011.21 The total historical costs of a building as constructed or purchased becomes the basis for the straight line depreciation method. Component depreciation is not allowed except on those items listed below with their minimum useful lives:

Electronic Components	20 year life
Plumbing and Heating Components	25 year life
Central Air Conditioning Unit	15 year life
Elevator	20 year life
Escalator	20 year life
Central Vacuum Cleaning System	15 year life
Generator	20 year life

3011.22 Any provider using the component depreciation that has been audited and accepted for cost reporting purposes prior to April 1, 1980, will be allowed to continue using this depreciation mechanism.

3011.3 Where an asset that has been used or depreciated under the program is donated to a provider, or where a provider acquires such assets through testate or intestate distribution (e.g., a widow inherits a skilled nursing facility upon the death of her husband and becomes a newly certified provider), the basis of depreciation for the asset is the lesser of the fair market value, or the net book value of the asset in the hands of the owner last participating in the program. The basis for depreciation shall be determined as of the date of donation or the date of death, whichever is applicable.

3011.4Special Reimbursement Provisions for Energy Efficient Improvements

For the Energy Efficient Improvements listed below which are made to existing facilities on or after September 1, 1981, reimbursement will be allowed based on the length of the loan received with the limitations listed below:

CAPITAL EXPENDITURE

Up to $5,000.00 Minimum depreciable Period 3 years

From $5,001.00 to $10,000.00 Minimum depreciable period 5 years

$10,001.00 and over Minimum depreciable period 7 years

The above limitations are minimum and if a loan is obtained for a period time in excess of these minimum the depreciable period then becomes the length of the loan provided that, in no case shall the depreciable period exceed the useful life as spelled out in the Chart of Accounts published by the American Hospital Association.

The reimbursement for the Energy Efficient Improvements that are 100% financed will consist of reimbursement of the principal and interest payments, based on the length of the loan or the above listed minimum. If no loans are obtained, then the depreciable lives will be based on the above minimum. If only partially financed, then the interest and the principal payments will be reimbursed with the additional amounts reimbursed on a depreciable basis limited to the minimum lives as spelled out above.

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

The reasonable energy efficient improvements are listed below:

1. Insulation (fiberglass, cellulose, etc.)

2. Energy efficient windows or doors for the outside of the facility including insulating shades and shutters.

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

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

5. Wood and coal burning furnaces, stove, or boilers (not fireplaces).

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

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

8. A device or capital expenditures for modifying an existing furnace that reduces the consumption of fuel.

9. Solar active systems for water and space heating.

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

11. Any other energy saving devices that might qualify as energy efficient other than those listed above must be prior approved by the Department for this special reimbursement provision. A request for prior approval will be evaluated to determine that the energy savings device is a reliable product and would decrease the energy costs of the facility making the expenditure reasonable in nature.

In the event of a sale of the facility the principal payments as listed above will be recaptured in lieu of depreciation.

3012Definitions

3012.1Historical cost. Historical cost is the cost incurred by the present owner in acquiring the asset. The historical cost shall not exceed the lower of:

3012.11 current reproduction cost adjusted for straight-line depreciation over the life of the asset to the time of the purchase;

3012.12 fair market value at the time of the purchase;

3012.13 the allowable historical cost of the first owner of record on or after July 18, 1984.

3013Recording of depreciation. Appropriate recording of depreciation encompasses the identification of the depreciable assets in use, the assets historical costs, the method of depreciation, estimated useful lives, and the assets accumulated depreciation. The Chart of Accounts published by the American Hospital Association and publications of the Internal Revenue Service are to be used as a guide for the estimation of the useful life of assets.

3013.1 For new buildings constructed after April 1, 1980 the minimum useful life to be assigned is listed below:

Wood Frame, Wood Exterior 30 years

Wood Frame, Masonry Exterior 35 years

Steel Frame or Reinforced Concrete Masonry Exterior 40 years

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

3014Depreciation method. Proration of the cost of an asset over its useful life is allowed on the straight-line method. If the estimated life of an asset is less than the term of the note used to purchase it, then the term of the note will be used for the life of that asset.

3015 Although funding of depreciation is not required, it is strongly recommended that providers use this mechanism as a means of conserving funds for replacement of depreciable assets, and coordinate their planning of fixed expenditures with areawide planning activities of community and State agencies. As an incentive for funding, investment income on funded depreciation will not be treated as a reduction of allowable interest expense.

3015.1Replacement reserves. Some lending institutions require funds to be set aside periodically for replacement of fixed assets. The periodic amounts set aside for this purpose are not allowable costs in the period expended, but will be allowed when withdrawn and utilized either through depreciation or expense after considering the usage of these funds. Since the replacement reserves are essentially the same as funded depreciation, the same regulations regarding interest and equity will apply.

3015.2 If a facility is leased from an unrelated party and the ownership of the reserve rests with the lessor, then the replacement reserve payment becomes part of the lease payment and is considered an allowable cost in the year extended. If for any reason the lessee is allowed to use this replacement reserve for the replacement of the lessee's assets, then during that year the allowable lessee will be allowed to depreciate the assets purchased in this situation.

3015.3 If a rebate of a replacement reserve is returned to the lessee for any reason, it will be treated as a reduction of the allowable lease expense in the year reviewed.

3016Gains and losses on disposal of assets. Gains and losses realized from the disposal of depreciable assets are to be included in the determination of allowable costs. The extent to which such gains and losses are includable is calculated on a proration basis recognizing the amount of depreciation charged or assumed in a period prior to the provider's participation in the program when the sale takes place within one (1) year after termination.

The recapture will be made in cash from the seller. During the first eight (8) years of operation, all depreciation allowed on buildings and fixed equipment by the Department will be recaptured from the seller in cash at the time of the sale. From the ninth (9^th) to the fifteenth (15^th) year, all but three percent (3%) per year will be recaptured, and from the sixteenth (16^th) to the twenty-fifth (25^th) year, all but eight percent (8%) per year will be recaptured not to exceed one hundred percent (100%.) Accumulated depreciation is recapturable to the extent of the gain on the sale.

3017Limitation on the participation of fixed expenditures. Depreciation is not allowable with respect to any fixed expenditure in plant, property, and equipment related to resident care that has not been submitted to the designated planning agency as required, or has been determined to be inconsistent with health facility planning requirements, or as deemed necessary by the Department.

3020Purchase, Rental, Donation, and Lease of Fixed Assets

3021Purchase of facilities from related individuals and/or organizations

3021.1 Where a facility is purchased from an individual or organization related to the purchaser by common control and/or ownership; or

3021.2 Where a facility is purchased after April 1, 1980 by an individual related to the seller as:

3021.21 a child,

3021.22 a grandchild,

3021.23 a brother or sister,

3021.24 a spouse of a child, grandchild, or brother or sister, or

3021.25 an entity controlled by a child, grandchild, brother, sister, or spouse of child, grandchild or combination brother or sister thereof;

3021.3 Where a facility, through purchase, converts from a proprietary to a nonprofit status and the buyer and seller are entities related by common control and/or ownership; then the purchaser's basis for depreciation shall not exceed the seller's basis under the program, less accumulated depreciation recognized under the program.

Also, accumulated depreciation of the seller under the program shall be considered as incurred by the purchaser for purposes of computing gains and applying the depreciation recapture rules (Section 3016) to subsequent sales by the buyer. There will be no recapture of depreciation from the seller on a sale between stipulated related parties since no step-up in the basis of depreciable assets is permitted to the buyer.

3021.4One-time exception to Section 3021.2. At the election of the seller, Section 3021.3 will not apply to a sale made to a buyer defined in Section 3021.2 if:

3021.41 the seller is an individual or any entity owned or controlled by an individual or related individuals who were selling assets to a "related party" as defined in Section 3021.1 or 3021.2;

3021.42 the seller has attained the age of fifty-five (55) before the date of such sale or exchange; and

3021.43 during the twenty (20) year period ending on the day of the sale, the seller has owned and operated the facility for periods aggregating ten (10) years or more; or

3021.44 the seller has inherited the facility as property of a deceased spouse to satisfy the holding requirements under Section 3021.43

3021.45 if the seller makes a valid election to be exempted from the application of Section 3021.3, the allowable basis of depreciable assets for reimbursement of interest and depreciation expense to the buyer will be determined in accordance with Section 3012 as though the parties were not related.

3021.5 The one time exception to Section 3021.2 applies to individual owners and not to each facility. If an individual owns more than one (1) facility, he must make the election as to which facility he wishes to apply this exception to.

3021.6Limitation in the application of Section 3021.4

3021.61 Section 3021.4 shall not apply to any sale or exchange by the seller if an election by the seller under Section 3021.4 with respect to any other sale or exchange has taken place.

3021.62 Section 3021.4 shall not apply to any sale or exchange by the seller unless the seller:

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

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

C. agrees to file an agreement with the Department of Health and Human Services to notify the Department that any acquisition as defined by the Section 3021.62(B) has occurred.

If Section 3021.62 is satisfied, Section 3021.1 and Section 3021.3 will also be satisfied.

If the seller acquires any interest defined by Section 3021.62 (B), then pursuant to the agreement the basis will revert to what the seller's basis would be if the seller had continued to own the facility, the amounts paid by the Title XIX program for depreciation, interest and return of owner's equity from the increase in basis will be immediately recaptured, and an interest rate of nine percent (9%) per annum on recaptured monies will be paid to the Department for seller's use of the Title XIX monies. A credit against this, of the original amount of depreciation recapture from the seller, will be allowed with any remaining amount of the original depreciation recapture becoming the property of the Department.

3022 Basis of assets used under the program and donated to a provider. Where an asset that has been used or depreciated under the program is donated to a provider, the basis of depreciation for the asset shall be the lesser of the fair market value or the net book value of the asset in the hands of the owner last participating in the program. The net book value of the asset is defined as the depreciable basis used under the program by the asset's last participating owner less the depreciation recognized under the program.

3023 Allowances for depreciation on assets financed with Federal or Public Funds. Depreciation is allowed on assets financed with Hill Burton or other Federal or Public Funds.

3024Leases

3024.1Information and Agreements Required for Leases

If a provider wishes to have costs associated with leases included in reimbursement:

3024.11 A copy of the signed lease agreement is required.

3024.12 An annual copy of the federal income tax return of the lessee will be made available to representatives of the State of Maine Department of Health and Human Services or the U.S. Department of Health and Human Services in accordance with Section 2050. Lease agreements for office or day program space between unrelated parties are exempt from this requirement.

3024.13 If the lease is for the use of a building and/or fixed equipment, the articles and bylaws of the corporation, trust indenture, partnership agreement, or limited partnership agreement of the lessor is required.

3024.14 A copy of the mortgage or other debt instrument of the lessor will be made available to representatives of the Department.

The lessor will furnish the Department a copy of the bank computer printout sheet on the lessor's mortgage showing the monthly principle and interest payments.

3024.2Lease Arrangements Between Individuals or Organizations Related by Common Control and/or Ownership. A provider may lease a facility from a related organization within the meaning of the Principles of Reimbursement. In such case, the rent paid to the lessor by the provider is not allowed as a cost. The provider, however, would include in its costs the costs of ownership of the facility. Generally, these would be costs such as depreciation, interest on the mortgage, real estate taxes, and other expenses attributable to the leased facility. The effect is to treat the facility as though it were owned by the provider.

3024.3Lease Arrangement Between Individuals or Organizations Not Related by Common Control or Ownership

The allowable cost between two (2) unrelated organizations is the lesser of:

3024.31 The actual costs calculated under the assumption that the lessee and the lessor are related parties; or

3024.32 The actual lease payments made by the lessee to the lessor.

If the cost as defined in Section 3024.32 are less than the costs as defined in Section 3024.31, then the difference can be deferred to a subsequent fiscal period. If in a later fiscal period, costs as defined in Section 3024.32 exceed costs as defined in Section 3024.31, the deferred costs may begin to be amortized. Amortization will increase allowable costs up to the level of the actual lease payments for any given year. These deferred costs are not assets of the provider for purposes of calculating allowable costs of interest, and except as specified, do not represent assets that a provider or creditor of a provider may claim is a monetary obligation from the Title XIX program.

This does not apply to leases for office space or day program space in facilities that are separate from an ICF-MR; for such leases, the provider must demonstrate that the costs do not exceed prevailing market rates.

3024.4 A lease payment to an unrelated party for moveable furnishings and equipment is an allowable cost. Lease payments for vehicles shall be limited to the fixed cost of the vehicle at the inception of the lease depreciated over the life of the lease.

3025Sale and Leaseback Agreements and Rental Charges. Rental costs specified in sale and leaseback agreements incurred by providers through selling physical plant facilities or equipment to a purchaser not connected with or related to the provider, and concurrently leasing back the same facilities or equipment, are includable in allowable cost if these conditions are met:

3025.1 The rental charges are reasonable based on consideration of rental charges or comparable facilities and market conditions in the area, the type, expected life, condition and value of the facilities or equipment rented, and other provisions of the rental agreements;

3025.2 Adequate alternate facilities or equipment which would serve the purposes are not or were not available at lower cost;

3025.3 The leasing was based on economic and technical consideration. If all these conditions are not met, the rental charge cannot exceed the amount that the provider would have included in reimbursable costs had s/he retained legal title to the facilities or equipment, such as interest on mortgage, taxes, depreciation, insurance, and maintenance costs.

3030Interest Expense

3031Principle. Necessary and proper interest on both current and capital indebtedness is an allowable cost.

3032Definitions

3032.1. Interest is the cost incurred for the use of borrowed funds. Interest on current indebtedness is the cost incurred for funds borrowed for a relatively short term, usually one (1) year or less, but in no event more than fifteen (15) months. This is usually for such purposes as working capital for normal operating expenses. Interest on capital indebtedness is the cost incurred for funds borrowed for capital purposes, such as acquisition of facilities and equipment, and capital improvements. Generally, loans for capital purposes are long-term loans. Except as provided in Section 3036, interest does not include interest and penalties charged for failure to pay accounts when due.

3032.2. Necessary requires that the interest:

3032.21 Be incurred on a loan made to satisfy a financial need of the provider. Loans which result in excess funds or investments would not be considered necessary.

3032.22 Be reduced by investment income except where such income is from gifts and grants, whether restricted or unrestricted, and which are held separate and not comingled with other funds. Income from funded depreciation is not used to reduce interest expense.

3032.3. Proper requires that interest:

3032.31 Be incurred at a rate not in excess of what a prudent borrower would have had to pay in the money market existing at the time the loan was made.

3032.32 Be paid to a lender not related through control or ownership, or personal relationship to the borrowing organization.

3032.33. Any refinancing of property mortgages or loans on fixed assets must be prior approved by the Department. If prior approval is not obtained any additional interest costs or finance changes will not be allowed.

3033Borrower-lender relationship

3033.1 To be allowable, interest expense must be incurred on indebtedness established with lenders or lending organizations not related through control, ownership, or personal relationship to the borrower. Presence of any of these factors could affect the "bargaining" process that usually accompanies the making of a loan, and could thus be suggestive of an agreement on higher rates of interest or of securing unnecessary loans. The loans intent of this provision is to assure that loans are legitimate and necessary, and that the interest rate is reasonable. Thus, interest paid by the provider to partners, stockholders, or related organizations of the provider would not be allowable.

3033.2 Exceptions to the general rule regarding interest on loans from controlled sources of funds are made in the following circumstances. Where the general fund of a provider borrows from a donor-restricted fund and pays interest to the restricted fund, this interest expense is an allowable cost. The same treatment is accorded interest paid by the general fund on money borrowed from the funded depreciation account of the provider. In addition, if a provider of a facility operated by members of a religious order borrows from the order, interest paid to the order is an allowable cost.

3033.3 Where funded depreciation is used for purposes other than improvement, replacement, or expansion of facilities or equipment related to patient care, allowable interest expense is reduced to adjust for offsets not made in prior years for earnings on funded depreciation

3034Loans not reasonably related to patient care. Loans made to finance that portion of the cost of acquisition of a facility that exceeds historical cost, are not considered to be for a purpose reasonably related to patient care.

3035Interest expense of related organizations. Where a provider leases facilities from a related organization and the rental expense paid to the related organization is not allowable as a cost, costs of ownership of the leased facility are allowable costs of the provider. Therefore, in such cases, mortgage interest paid by the related organization is allowable as an interest cost to the provider.

3036Interest on Property Taxes. Interest charged by a municipality for late payment of property taxes is an allowable cost when the following conditions have been met:

3036.1 The rate of interest charged by the municipality is less than the interest that a prudent borrower would have had to pay in the money market existing at the time the loan was made;

3036.2 The payment of property taxes is deferred under an arrangement acceptable to the municipality;

3036.3 The late payment of property taxes results from the financial needs of the provider, and does not result in excess funds; and

3036.4 Approval in writing has been given by the Department prior to the time period in which the interest is incurred. Any requests for prior approval must be received by the Department at least two (2) weeks prior to the desired effective date of the approval.

3037Limitation on the participation of fixed expenditures. Interest is not allowable with respect to any fixed expenditure in plant, property, and equipment related to patient care that has not been submitted to the designated planning agency as required, or has been determined to be inconsistent with health facility planning requirements.

3038Administrator in Training. The reasonable salary of an administrator in training will be accepted as an allowable cost for an ICF-MR nursing facility for a period of one (1) year provided there is a set policy, in writing, stating the training program to be followed, position to be filled, and this individual obtains an administrator's license and serves as an administrator of a facility in the State of Maine.

Prior approval in writing must be issued by the Department in advance of the date of any salary paid to an administrator in training. A request for prior approval must be received by the Department at least two (2) weeks prior to the desired effective date of the approval.

Failure to become an administrator within one (1) year following completion of the examination to become a licensed administrator will result in the Department of Health and Human Services recovering one hundred percent (100%) of the amount allowed for the administrator in training. If the administrator in training discontinues the training program for any reason or fails to take the required examination to become a licensed administrator, the Department will recover one hundred percent (100%) of the amount allowed to the ICF-MR nursing facility.

3040[Reserved]

3050Start-up Costs

3051General

Start-up costs incurred during the period of developing a provider's ability to furnish patient care services must be capitalized as deferred charges and amortized over a number of benefiting periods.

Start-up costs include, for example; administrative and nursing salaries, heat, gas, electricity, taxes, insurance, mortgage and other interest; employee training costs; repairs, maintenance, housekeeping, and any other allowable costs incident to the start-up period. However, any costs that are properly identifiable as organization costs, or which may be capitalized as construction costs, must be appropriately classified as such and excluded from start-up costs.

3052Applicability

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

Start-up costs that are incurred immediately before a provider enters the program and that are determined to be immaterial by the Department need not be capitalized, but rather, may be charged to operations in the first cost reporting period. In the case where a provider incurs start-up costs while in the program and these costs are determined to be immaterial by the Department, these costs need not be capitalized, but may be charged to operations in the periods incurred. For program reimbursement purposes, costs of the provider's facility and building equipment should be depreciated over the lives of these assests starting with the month the first member is admitted for treatment, subject to the provider's method of determining depreciation in the year of acquisition or construction. Where portions of the provider's facility are prepared for patient care services after the initial start-up period, these asset costs applicable to each portion should be depreciated over the remaining lives of the applicable assets. If the portion of the facility is a patient care area, depreciation should start with the month the first patient is admitted for treatment. If the portion of the facility is a nonrevenue-producing patient care area or nonallowable area, depreciation should begin when the area is opened for its intended purpose. Costs of major movable equipment, however, should be depreciated over the useful life of each item starting with the month the item is placed into operation.

3060Cost Treatment for Reimbursement

3061 Where a provider prepares all portions of its facility for patient care services at the same time and has capitalized start-up costs, the start-up costs must be amortized over a period of sixty (60) consecutive months beginning with the month in which the first member is admitted for treatment.

3062 Where a provider prepares portions of its facility for patient care services on a piecemeal basis, start-up costs must be capitalized and amortized separately for the portions of the provider's facility that are prepared for patient care services during different periods of time.

C.M.R. 10, 144, ch. 101, ch. III, 144-101-III-50, subsec. 144-101-III-50-3000