§ 1181.259. Depreciation allowance.
(a) Depreciation on capital assets used to provide compensable services to Medical Assistance recipients, including assets for normal, standby, or emergency use, is an allowable cost.
(b) Except as specified in subsections (c) and (d), a facility will be reimbursed for allowable depreciation costs only if the facility is the recorded holder of legal title.
(c) Facilities which participated in the Medical Assistance Program prior to July 1, 1983 which are not part of a related organization and which are not the recorded holder of legal title to the facility, are considered to meet the recorded holder of legal title requirement, and, therefore, will be reimbursed for allowable depreciation on a particular project, if, at the time services were rendered, the following existed:
(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.
Authority 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).
Source 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).
Notes of Decisions 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).
Cross References This section cited in 55 Pa. Code § 1181.69 (relating to annual adjustment); 55 Pa. Code § 1181.259a (relating to elimination of funded depreciation—statement of policy); 55 Pa. Code § 1181.260 (relating to interest allowance); 55 Pa. Code § 1181.262 (relating to fund raising expenses); and 55 Pa. Code § 1181.264 (relating to rental property and plant).
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