§ 6211.81. Interest.
(a) Necessary and proper interest on capital and current indebtedness is allowable. 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 both of the following apply.
(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.
(ii) The facility substantially implements the project as defined at 28 Pa. Code § 401.5(j)(2) (relating to certificate of need) within the effective period of the original Section 1122 approval or the original certificate of need.
(2) Interest on replacement beds shall be 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) Facilities that participated in the MA Program prior to July 1, 1984, that are not part of a related organization and that are not the recorded holder of legal title to the facility are considered to meet the recorded holder of legal title requirement and will be reimbursed for allowable interest on a particular project, if, at the time services were rendered, all of the following existed:
(1) The particular project was primarily funded through an Industrial Development Authority bond issue, or tax exempt funding sources established under State statute.
(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 that participated in the MA Program prior to July 1, 1984, that are part of a related organization and that are not the recorded holder of legal title to the facility, are considered to meet the recorded holder of legal title requirement and 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 primarily funded through an Industrial Development Authority bond issue, or tax exempt funding sources established under State statute.
(2) The facility was a related organization to a corporation, person, or company which, if it operated the facility, could quality for reimbursement for allowable interest costs under subsection (c).
(3) All of the documentation necessary to substantiate that the facility meets the requirements of subsection (c) and documentation and a 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 any overpayment that the Department is unable to collect directly from the facility.
(e) Allowable interest on capital indebtedness shall not exceed the amount that a prudent borrower would pay. Interest on capital indebtedness will not be considered prudent if the provider cannot demonstrate that the rate does not exceed the rate available from lenders in this Commonwealth to similar borrowers at the time that the funds were 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 client 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 as set forth at § 6211.79(m)—(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, donations and grants that are not restricted by the donor for payment of allowable costs.
(2) Funded depreciation if the interest earned remains in the funds.
(3) The facility’s qualified pension fund if the interest earned remains in the fund.
(4) Interest income from gifts, if the funds on which the interest is derived are not comingled with funds that offset allowable costs.
(5) Fund raising efforts.
(i) Investment income that reduces allowable costs, including income on operating capital, shall be used to reduce interest expense on capital indebtedness first, then used to reduce noncapital indebtedness.
(j) Interest income on unused debt proceed funds or bond debt reserve funds shall be used first to reduce interest payable on those funds, shall be used second to reduce interest on capital indebtedness, and shall be used last to reduce noncapital indebtedness.
(k) 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 prime interest rate charged at the time funds are borrowed.
(l) Interest on capital indebtedness will be recognized on debt services incurred to finance a maximum cost per bed as defined in § 6211.79(m) and (s). If the cost exceeds the per bed limit, the interest on the portion of the cost that exceeds the limit is not allowable.
(m) Moneys borrowed for the purchase or redemption of capital stock will be considered as a loan for investment purposes, and the interest paid on those borrowed funds is not an allowable cost.
(n) Interest expense on funds borrowed for capital purchases will not be allowed until all funds in the facility’s funded depreciation account are fully expended.
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