§ 1181.260. Interest allowance.
(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.
Authority 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).
Source 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).
Notes of Decisions 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).
Cross References This section cited in 55 Pa. Code § 1181.69 (relating to annual adjustment).
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