Capital and Other Fixed Costs

(1) Allowable Fixed Costs. (a) Allowable fixed costs include the allowable portion of depreciation, long-term interest, real estate taxes, personal property taxes on resident care facility equipment, the non-income portion of the Massachusetts corporate excise tax, building insurance, and rental of equipment located at the facility, less any recoverable fixed cost income. (b) EOHHS will calculate the provider’s capital and other fixed costs per diem by dividing allowable fixed costs by the constructed bed capacity times the days in the rate year times the greater of 90% or the actual utilization rate in the base year. (2) Allowable Basis of Fixed Assets. (a) Fixed Assets. Fixed assets include land, building, improvements, equipment, and limited life assets/software. (b) Allowable Basis. 1. If there has been no change of ownership, the allowable basis of fixed assets equals the reasonable construction costs. 2. For a newly constructed facility opening for resident care on or after January 1, 1984, the basis of such assets will be limited to reasonable, audited construction and equipment costs based upon the minimum standards and requirements of the Massachusetts Department of Public Safety. Once operations commence, interest and acquisition fees will be treated as a cost of borrowing and treated as interest expense. In no case will the allowable basis exceed the cost of construction approved in accordance with M.G.L. c. 111, § 25C. The basis of fixed assets will be limited to construction and equipment costs based upon the minimum standards and requirements of the Massachusetts Public Health Council. EOHHS will reimburse only those costs associated with meeting the above- mentioned standards. 3. If there has been a change of ownership, the allowable basis for fixed assets will be determined as follows. a. Land. EOHHS will include the lower of the acquisition cost or the basis allowed the immediate prior owner. b. Equipment. EOHHS will include the lower of the acquisition cost or the basis allowed the immediate prior owner, reduced by the amount of actual depreciation allowed to the prior owner of the facility in calculating rates of payment for publicly aided residents. c. Building and Building Improvements. EOHHS will include the lower of the acquisition cost or the basis allowed the immediate prior owner, reduced by the amount of actual depreciation allowed to the prior owner of the facility for publicly aided residents for the years from 1968 to the date of change of ownership. The seller’s allowable building improvements will become part of the new owner’s allowable basis of building. d. If the amount of actual depreciation allowed in a prior year is not known, the buyer must furnish the information to the Center. If this information is not available, EOHHS will calculate the amount using the best available information. (c) Other Provisions. 1. Allowable Additions. EOHHS will recognize fixed asset additions made by the provider if the additions are related to the care of publicly aided residents. 2. Forgiveness of Debt. Where, subsequent to a change of ownership, the transferor forgives or reduces the debt of the transferee, such forgiveness or reduction of debt will be retroactively applied to reduce the acquisition cost to the transferee. 3. Repossession by Transferor. The basis of fixed assets will be recomputed if the transferor repossesses a facility to satisfy in whole or in part the transferee’s purchase obligations, becomes a direct or indirect owner, or receives an interest in the transferee’s facility or company. The recomputed basis will not exceed the transferor’s original allowable basis under EOHHS regulations applicable at the date of change of ownership increased by any allowable capital improvements made by the transferee since acquisition and reduced by depreciation since acquisition. 4. Rental and Leasehold Expense. EOHHS will allow reasonable rental and leasehold expenses for land, building, and equipment, but reimbursement is limited to the lower of the average rental or ownership costs of comparable providers, or the reasonable and necessary costs of the provider and lessor including interest, depreciation, real property taxes, and property insurance. EOHHS will not allow rent and leasehold expense, unless a realty company cost report is filed. (3) Depreciation (a) Depreciation Allowed. EOHHS will allow depreciation of building, building improvements, and equipment based on accepted accounting principles using as a basis the lower of the original acquisition cost of the facility, an amount based on a cost per bed for the year of construction of the facility set forth in the regulation governing the rate year of the original acquisition, or the principles set forth in 101 CMR 204.05 if a change of ownership occurred on or after January 1, 1984. (b) Depreciation Methodology. EOHHS will use the straight-line method to calculate allowable depreciation. EOHHS will exclude depreciation on an asset upon expiration of the useful life. (c) Useful Life. EOHHS will use the schedule in 101 CMR 204.05(3)(c) to calculate depreciation on fixed assets. Asset Life Rate Building Class I or II as classified by the Dept. of Public Safety 40 years 2.5% Asset Life Rate Class III or IV as classified by the Dept. of Public Safety 33 years 3.0% Building Improvements and Leasehold Improvements Varies up to 5% Equipment, Furniture, and Fixtures ten years 10% Motor Vehicle Equipment four years 25% Limited Life Assets Acquired after December 31, 1996 three years 33.3% (d) Change of Ownership. 1. Building and Building Improvements. EOHHS will add building and building improvements to determine the buyer’s allowable basis for building. The buyer’s allowable basis will be depreciated over the remaining useful life of the building. 2. Equipment and Limited Life Assets. Equipment and limited life assets will be depreciated in accordance with 101 CMR 204.05(3)(c). 3. Depreciation on Assets. EOHHS will limit the annual amount of depreciation on transferred assets to the seller’s annual allowed depreciation. (4) Interest. A facility’s rate will include reasonable and necessary interest expense determined as follows. (a) Interest on Long-term Debt. EOHHS will include reasonable and necessary interest on allowable long-term debt, supported by depreciable fixed assets subject to 101 CMR 204.05(2). EOHHS will not reimburse long-term interest expense on debt that exceeds the allowable basis of fixed assets. 1. Long-term Loans. Long-term interest will be limited to an annually determined percentage of simple interest on all outstanding long-term loans, weighted by the dollar amount of the funds borrowed. For allowable long-term loans secured prior to January 1, 1984, the annually determined percentage will be the rate as stated in the debt instrument at the time of borrowing. For allowable long-term loans secured on or after January 1, 1984, the annually determined percentage will be the lower of the rate as stated in the debt instrument at the time of borrowing or the percentage equal to the monthly rate of interest on special issues of public debt obligations issued to the federal Hospital Insurance Trust Fund for the third month prior to the month in which the financing occurred, plus 3%. EOHHS will limit the allowable interest rate to 15%. 2. Refinancing. a. EOHHS will recognize the refinancing of an existing allowable debt under the following circumstances. i. Crossover. When the accumulated principal payments on the existing allowable debt exceeds the accumulated depreciation allowed by EOHHS on the allowable fixed assets financed by that debt; ii. Demand Note. When an existing, allowable debt becomes payable on demand; iii. Lowered Expense. When the long-term interest expense over the life of the refinanced debt is lower than it would have been under the remainder of the existing, allowable debt. The provider must submit comparative schedules showing total long-term interest expense under the existing allowable debt and the refinanced debt; or iv. Allowable Additions. When a provider refinances for an amount greater than the existing allowable debt, and the purpose of the additional indebtedness is to finance a significant addition of allowable fixed assets. EOHHS will not reimburse long-term interest expense for additional refinancing that exceeds the amount of allowable fixed assets. b. Allowable Interest Rate. The allowable interest rate for an allowable or partially allowable refinancing will be determined in accordance with 101 CMR 204.05(4)(b)1. c. When a refinancing, or a portion of a refinancing, is not allowable under 101 CMR 204.05(4)(b)2., EOHHS will calculate allowable long-term interest as though the non-allowable refinancing did not occur. (b) Other Provisions. 1. Interest. Interest related to the financing of newly acquired fixed assets will be allowed only if the asset acquisition and financing occur concurrently. If the provider presents documentation sufficient to demonstrate that all reasonable attempts were made to finance the asset at the time of acquisition, EOHHS will recognize financing obtained no more than 90 days after the date of acquisition of the assets. 2. Loans from Owner, Officer, or Related Party. Interest expense does not include interest on loans to the facility from an owner, officer, or related party. 3. Mortgage Acquisition Costs. Mortgage acquisition costs must be amortized over the life of the mortgage. Amortized mortgage acquisition costs are treated as long-term interest expense. For allowable long-term debts secured on or after January 1, 1984, mortgage acquisition costs are subject to the ceiling on maximum interest rates in accordance with 101 CMR 204.05(4)(b). (101 CMR 204.06 Reserved)