AN ACT Relating to adjusting nursing home prospective rates for energy retrofitting; amending RCW 74.46.020, 74.46.450, 74.46.460, 74.46.500, 74.46.510, and 74.46.530; and adding a new section to chapter 74.46 RCW.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

Sec. 1. Section 2, chapter 177, Laws of 1980 as amended by section 1, chapter 117, Laws of 1982 and RCW 74.46.020 are each amended to read as follows:

Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter.

(1) "Accrual method of accounting" means a method of accounting in which revenues are reported in the period when they are earned, regardless of when they are collected, and expenses are reported in the period in which they are incurred, regardless of when they are paid.

(2) "Ancillary care" means those services required by the individual, comprehensive plan of care provided by qualified therapists.

(3) "Appraisal" means the process of estimating the fair market value or reconstructing the historical cost of an asset acquired in a past period as performed by a professionally designated real estate appraiser with no pecuniary interest in the property to be appraised. It includes a systematic, analytic determination and the recording and analyzing of property facts, rights, investments, and values based on a personal inspection and inventory of the property.

(4) "Arm's-length transaction" means a transaction resulting from good-faith bargaining between a buyer and seller who are not related organizations and have adverse positions in the market place. Sales or exchanges of nursing home facilities among two or more parties in which all parties subsequently continue to own one or more of the facilities involved in the transactions shall not be considered as arm's-length transactions for purposes of this chapter. Sale of a nursing home facility which is subsequently leased back to the seller within five years of the date of sale shall not be considered as an arm's-length transaction for purposes of this chapter.

(5) "Assets" means economic resources of the contractor, recognized and measured in conformity with generally accepted accounting principles.

(6) "Bad debts" means amounts considered to be uncollectable from accounts and notes receivable.

(7) "Beds" means the number of set-up beds in the facility, not to exceed the number of licensed beds.

(8) "Beneficial owner" means:

(a) Any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:

(i) Voting power which includes the power to vote, or to direct the voting of such ownership interest; and/or

(ii) Investment power which includes the power to dispose, or to direct the disposition of such ownership interest;

(b) Any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement, or any other contract, arrangement, or device with the purpose or effect of divesting himself of beneficial ownership of an ownership interest or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the reporting requirements of this chapter;

(c) Any person who, subject to subparagraph (b) of this subsection, has the right to acquire beneficial ownership of such ownership interest within sixty days, including but not limited to any right to acquire:

(i) Through the exercise of any option, warrant, or right;

(ii) Through the conversion of an ownership interest;

(iii) Pursuant to the power to revoke a trust, discretionary account, or similar arrangement; or

(iv) Pursuant to the automatic termination of a trust, discretionary account, or similar arrangement;

except that, any person who acquires an ownership interest or power specified in subparagraphs (i), (ii), or (iii) of this subparagraph (c) with the purpose or effect of changing or influencing the control of the contractor, or in connection with or as a participant in any transaction having such purpose or effect, immediately upon such acquisition shall be deemed to be the beneficial owner of the ownership interest which may be acquired through the exercise or conversion of such ownership interest or power;

(d) Any person who in the ordinary course of business is a pledgee of ownership interest under a written pledge agreement shall not be deemed to be the beneficial owner of such pledged ownership interest until the pledgee has taken all formal steps necessary which are required to declare a default and determines that the power to vote or to direct the vote or to dispose or to direct the disposition of such pledged ownership interest will be exercised; except that:

(i) The pledgee agreement is bona fide and was not entered into with the purpose nor with the effect of changing or influencing the control of the contractor, nor in connection with any transaction having such purpose or effect, including persons meeting the conditions set forth in subparagraph (b) of this subsection; and

(ii) The pledgee agreement, prior to default, does not grant to the pledgee:

(A) The power to vote or to direct the vote of the pledged ownership interest; or

(B) The power to dispose or direct the disposition of the pledged ownership interest, other than the grant of such power(s) pursuant to a pledge agreement under which credit is extended and in which the pledgee is a broker or dealer.

(9) "Capitalization" means the recording of an expenditure as an asset.

(10) "Contractor" means an entity which contracts with the department to provide services to medical care recipients in a facility and which entity is responsible for operational decisions.

(11) "Department" means the department of social and health services (DSHS) and its employees.

(12) "Depreciation" means the systematic distribution of the cost or other basis of tangible assets, less salvage, over the estimated useful life of the assets.

(13) "Direct care supplies" means medical, pharmaceutical, and other supplies required for the direct nursing and ancillary care of medical care recipients.

(14) "Energy cost savings" means the reduction in anticipated energy consumption multiplied by the current per unit cost of that energy.

(15) "Energy retrofit improvement" means a capital improvement which decreases the amount of energy a nursing home uses and shall be determined by an independent licensed contractor which installs energy efficient equipment or a licensed engineer or licensed architect.

(16) "Entity" means an individual, partnership, corporation, or any other association of individuals capable of entering enforceable contracts.

((~~(15)~~)) (17) "Equity" means the net book value of all tangible and intangible assets less the recorded value of all liabilities, as recognized and measured in conformity with generally accepted accounting principles.

((~~(16)~~)) (18) "Facility" means a nursing home licensed in accordance with chapter 18.51 RCW, or that portion of a hospital licensed in accordance with chapter 70.41 RCW which operates as a nursing home.

((~~(17)~~)) (19) "Fair market value" means the replacement cost of an asset less observed physical depreciation on the date for which the market value is being determined.

((~~(18)~~)) (20) "Financial statements" means statements prepared and presented in conformity with generally accepted accounting principles including, but not limited to, balance sheet, statement of operations, statement of changes in financial position, and related notes.

((~~(19)~~)) (21) "Generally accepted accounting principles" means accounting principles approved by the financial accounting standards board (FASB).

((~~(20)~~)) (22) "Generally accepted auditing standards" means auditing standards approved by the American institute of certified public accountants (AICPA).

((~~(21)~~)) (23) "Goodwill" means the excess of the price paid for a business over the fair market value of all other identifiable, tangible, and intangible assets acquired.

((~~(22)~~)) (24) "Historical cost" means the actual cost incurred in acquiring and preparing an asset for use, including feasibility studies, architect's fees, and engineering studies.

((~~(23)~~)) (25) "Imprest fund" means a fund which is regularly replenished in exactly the amount expended from it.

((~~(24)~~)) (26) "Joint facility costs" means any costs which represent resources which benefit more than one facility, or one facility and any other entity.

((~~(25)~~)) (27) "Medical care program" means medical assistance provided under RCW 74.09.500 or authorized state medical care services.

((~~(26)~~)) (28) "Medical care recipient" or "recipient" means an individual determined eligible by the department for the services provided in chapter 74.09 RCW.

((~~(27)~~)) (29) "Net book value" means the historical cost of an asset less accumulated depreciation.

((~~(28)~~)) (30) "Net invested funds" means the net book value of tangible fixed assets employed by a contractor to provide services under the medical care program, including land, buildings, and equipment as recognized and measured in conformity with generally accepted accounting principles, plus an allowance for working capital which shall be five percent of the allowable costs of each contractor for the previous calendar year.

((~~(29)~~)) (31) "Operating lease" means a lease under which rental or lease expenses are included in current expenses in accordance with generally accepted accounting principles.

((~~(30)~~)) (32) "Owner" means a sole proprietor, general or limited partners, and beneficial interest holders of five percent or more of a corporation's outstanding stock.

((~~(31)~~)) (33) "Ownership interest" means all interests beneficially owned by a person, calculated in the aggregate, regardless of the form which such beneficial ownership takes.

((~~(32)~~)) (34) "Patient day" or "client day" means a calendar day of care which will include the day of admission and exclude the day of discharge; except that, when admission and discharge occur on the same day, one day of care shall be deemed to exist.

((~~(33)~~)) (35) "Professionally designated real estate appraiser" means an individual who is regularly engaged in the business of providing real estate valuation services for a fee, and who is deemed qualified by a nationally recognized real estate appraisal educational organization on the basis of extensive practical appraisal experience, including the writing of real estate valuation reports as well as the passing of written examinations on valuation practice and theory, and who by virtue of membership in such organization is required to subscribe and adhere to certain standards of professional practice as such organization prescribes.

((~~(34)~~)) (36) "Qualified therapist" means:

(a) An activities specialist who has specialized education, training, or experience as specified by the department;

(b) An audiologist who is eligible for a certificate of clinical competence in audiology or who has the equivalent education and clinical experience;

(d) A mental retardation professional who is either a qualified therapist or a therapist approved by the department who has had specialized training or one year's experience in treating or working with the mentally retarded or developmentally disabled;

(e) A social worker who is a graduate of a school of social work;

(f) A speech pathologist who is eligible for a certificate of clinical competence in speech pathology or who has the equivalent education and clinical experience;

(g) A physical therapist as defined by chapter 18.74 RCW; and

(h) An occupational therapist who is a graduate of a program in occupational therapy, or who has the equivalent of such education or training.

((~~(35)~~)) (37) "Questioned costs" means those costs which have been determined in accordance with generally accepted accounting principles but which may constitute disallowed costs or departures from the provisions of this chapter or rules and regulations adopted by the department.

((~~(36)~~)) 38) "Records" means those data supporting all financial statements and cost reports including, but not limited to, all general and subsidiary ledgers, books of original entry, and transaction documentation, however such data are maintained.

((~~(37)~~)) (39) "Related organization" means an entity which is under common ownership and/or control with, or has control of, or is controlled by, the contractor.

(a) "Common ownership" exists when an entity is the beneficial owner of five percent or more ownership interest in the contractor and any other entity.

(b) "Control" exists where an entity has the power, directly or indirectly, significantly to influence or direct the actions or policies of an organization or institution, whether or not it is legally enforceable and however it is exercisable or exercised.

((~~(38)~~)) (40) "Restricted fund" means those funds the principal and/or income of which is limited by agreement with or direction of the donor to a specific purpose.

((~~(39)~~)) (41) "Secretary" means the secretary of the department of social and health services.

((~~(40)~~)) (42) "Title XIX" or "Medicaid" means the 1965 amendments to the social security act, P.L. 89-07, as amended.

NEW SECTION. Sec. 2. A new section is added to chapter 74.46 RCW to be codified between RCW 74.46.420 and 74.46.430 to read as follows:

(1) The legislature hereby finds that many of the nursing homes in the state are of older construction and are energy inefficient. The legislature further finds that it is desirable to encourage energy retrofit improvements in those nursing homes in order to achieve energy cost savings. Therefore, it is the intent of the legislature to create an alternative reimbursement methodology for energy retrofitting which meets the criteria of this section. This alternative reimbursement methodology shall be available to contractors who apply for the alternative reimbursement methodology; contractors who do not apply for the alternative reimbursement methodology shall be reimbursed under the other provisions of this chapter for energy retrofit improvements.

(2) Any energy retrofit improvement shall be required to repay the department's proportionate share of the cost of such improvement within a five-year period. The department shall reimburse contractors for eligible energy retrofit improvements by applying the resulting energy cost savings in the administration and operations cost center against the capital expense for the improvement. The nursing home contractor shall provide the department with a technical assistance study which demonstrates the anticipated energy savings and documents the cost of the retrofit including any interest. The increase in the contractor's return on investment rate shall be limited to the documented costs for the energy retrofit. At the end of first year that the retrofit is in place, the contractor shall furnish documentation to the department indicating the actual reduction in energy consumption. If the reduction in the energy consumption is less than anticipated, the contractor's return on investment rate will be reduced accordingly.

(3) If a nursing home installs an energy retrofit improvement which meets the requirements contained in subsection (2) of this section, the department shall decrease the nursing home's administration and operations cost center reimbursement rate under RCW 74.46.500 by an amount equivalent to the energy cost savings or the documented costs of the energy retrofitting, whichever is less, for the first year, and shall increase the nursing home's return on investment allowance established in RCW 74.46.530 by an amount equivalent to the energy cost savings until the investment is paid for.

(4) The department shall adopt such rules as are necessary to carry out the policies and purposes of this section.

Sec. 3. Section 45, chapter 177, Laws of 1980 as amended by section 20, chapter 67, Laws of 1983 1st ex. sess. and RCW 74.46.450 are each amended to read as follows:

(1) Prospective reimbursement rates for a new contractor will be established within sixty days following receipt by the department of the properly completed projected budget required by RCW 74.46.670. Such reimbursement rates will become effective as of the effective date of the contract and shall remain in effect until rates can be established under RCW 74.46.460 based on a contractor's cost report including at least six months of cost data.

(2) Such reimbursement rates will be based on the contractor's projected cost of operations and on costs and payment rates of the prior contractor, if any, or of other contractors in comparable circumstances, except that the special reimbursement provisions for energy retrofitting in section 2 of this 1985 act shall not apply to any energy retrofit improvements installed by previous contractors.

(3) If a properly completed budget is not received at least sixty days prior to the effective date of the contract, the department will establish preliminary rates based on the other factors specified in subsection (2) of this section. These preliminary rates will remain in effect until a determination is made pursuant to RCW 74.46.460.

Sec. 4. Section 46, chapter 177, Laws of 1980 as last amended by section 21, chapter 67, Laws of 1983 1st ex. sess. and RCW 74.46.460 are each amended to read as follows:

(1) Each contractor's reimbursement rates will be determined prospectively at least once each calendar year, to be effective July 1st.

(2) Rates may be adjusted as determined by the department to take into account variations of more than ten percent in the distribution of patient classifications or changes in patient characteristics from the prior reporting year, program changes, changes in staffing levels at a facility required by the department, or capital improvements for energy retrofittings as provided for in section 2 of this act, economic trends and conditions, and/or administrative review provided by RCW 74.46.780 and shall be adjusted for any capitalized additions or replacements made as a condition for licensure or certification.

(3) Where the contractor participated in the provisions of prospective cost-related reimbursement in effect prior to July 1, 1983, such contractor's prospective rate effective July 1, 1983, will be determined utilizing the contractor's desk-reviewed allowable costs for calendar year 1982.

(4) All prospective reimbursement rates for 1984 and thereafter shall be determined utilizing the prior year's desk-reviewed cost reports.

Sec. 5. Section 50, chapter 177, Laws of 1980 and RCW 74.46.500 are each amended to read as follows:

(1) The administration and operations cost center shall include all items not included in the cost centers of nursing services, food, and property, except as otherwise provided in section 2 of this 1985 act.

(2) The administration and operations cost center reimbursement rate for each facility shall be based on the computation in this subsection and shall not exceed the eighty-fifth percentile of (a) the rates of all reporting facilities derived from the computation below, or (b) reporting facilities grouped in accordance with subsection (3) of this section:

AR = TAC/TPD, where

!ixAR!sc ,1=!sc ,1!ih*the administration and operations cost center reimbursement rate for a facility;

!ixTAC!sc ,1=!sc ,1!ih*the total costs of the administration and operations cost center plus the retained savings from such cost center as provided in RCW 74.46.180 of a facility; and

!ixTPD!sc ,1=!sc ,1!ih*the total patient days for a facility for the prior year.

(3) The secretary may group facilities based on factors which could reasonably influence cost requirements of this cost center, other than ownership or legal organization characteristics.

Sec. 6. Section 51, chapter 177, Laws of 1980 and RCW 74.46.510 are each amended to read as follows:

(1) The property cost center rate for each facility shall be determined by dividing the sum of the reported allowable prior period actual depreciation costs, subject to RCW 74.46.310 through 74.46.380, adjusted for any capitalized additions or replacements approved by the department, and the retained savings from such cost center, as provided in RCW 74.46.180, by the total patient days for the facility in the prior period. If a capitalized addition or retirement of an asset will result in a different licensed bed capacity during the ensuing period, the prior period total patient days used in computing the property cost center rate shall be adjusted to anticipated patient day level.

When a certificate of need for a new facility is requested, the department, in reaching its decision, shall take into consideration per-bed land and building construction costs for the facility which shall not exceed a maximum to be established by the secretary.

(2) An energy retrofit improvement installed by a contractor under section 2 of this 1985 act shall not be included in the computation for the property cost center described in this section.

Sec. 7. Section 53, chapter 177, Laws of 1980 as last amended by section 28, chapter 67, Laws of 1983 1st ex. sess. and RCW 74.46.530 are each amended to read as follows:

(1) The department shall establish for individual facilities return on investment allowances composed of two parts: A financing allowance and a variable return allowance, except that this section shall not apply to energy retrofit improvements funded under section 2 of this 1985 act.

(a) The financing allowance shall be determined by multiplying the net invested funds of each facility by .11, and dividing by the contractor's total patient days. If a capitalized addition or retirement of an asset will result in a different licensed bed capacity during the ensuing period, the prior period total patient days used in computing the financing and variable return allowances shall be adjusted to the anticipated patient day level.

(b) In computing the portion of net invested funds representing the net book value of tangible fixed assets, the same assets, depreciation bases, lives, and methods referred to in RCW 74.46.330, 74.46.350, 74.46.360, and 74.46.370, including owned and leased assets, shall be utilized, except that the capitalized cost of land upon which the facility is located and such other contiguous land which is reasonable and necessary for use in the regular course of providing patient care shall also be included. In the case of leased facilities where the net invested funds are unknown or the contractor is unable to provide necessary information to determine net invested funds, the secretary shall have the authority to determine an amount for net invested funds based on an appraisal conducted according to RCW 74.46.360(1).

(i) The department will first rank all facilities in numerical order from highest to lowest according to their average per diem allowable costs for the sum of the administration and operations and property cost centers for the previous cost report period.

(ii) The department shall then compute the variable return allowance by multiplying the appropriate percentage amounts, which shall not be less than one percent and not greater than four percent, by the total prospective rate for each facility, as determined in RCW 74.46.450 through 74.46.510. The percentage amounts will be based on groupings of facilities according to the rankings as established in subparagraph ((~~(2)~~))(1)(b)(i) of this section. Those groups of facilities with lower per diem costs shall receive higher percentage amounts than those with higher per diem costs.

(d) The sum of the financing allowance and the variable return allowance shall be the return on investment for each facility, and shall be added to the prospective rates of each contractor as determined in RCW 74.46.450 through 74.46.510.

(e) In the case of a facility which was leased by the contractor as of January 1, 1980, in an arm's-length agreement, which continues to be leased under the same lease agreement, and for which the annualized lease payment, plus any interest and depreciation expenses associated with contractor-owned assets, for the period covered by the prospective rates, divided by the contractor's total patient days, minus the property cost center determined according to RCW 74.46.510, is more than the return on investment allowance determined according to subsection (1)(d) of this section, the following shall apply:

(i) The financing allowance shall be recomputed substituting the fair market value of the assets as of January 1, 1982, as determined by the department of general administration through an appraisal procedure, for the net book value of the assets in determining net invested funds for the facility. A determination by the department of general administration of fair market value shall be final unless the procedure used to make such determination is shown to be arbitrary and capricious.

(ii) The sum of the financing allowance computed under subsection (1)(e)(i) of this section and the variable allowance shall be compared to the annualized lease payment, plus any interest and depreciation expenses associated with contractor-owned assets, for the period covered by the prospective rates, divided by the contractor's total patient days, minus the property cost center rate determined according to RCW 74.46.510. The lesser of the two amounts shall be called the alternate return on investment allowance.

(iii) The return on investment allowance determined according to subsection (1)(d) of this section or the alternate return on investment allowance, whichever is greater, shall be the return on investment allowance for the facility and shall be added to the prospective rates of the contractor as determined in RCW 74.46.450 through 74.46.510.

(2) An energy retrofit improvement installed by a contractor under section 2 of this 1985 act shall not be included in the computation for financing allowance under this section, except as provided in section 2 of this 1985 act.

(3) In the event that the department of health and human services disallows the application of the return on investment allowances to nonprofit facilities, the department shall modify the measurements of net invested funds used for computing individual facility return on investment allowances as follows: Net invested funds for each nonprofit facility shall be multiplied by one minus the ratio of equity funds to the net invested funds of all nonprofit facilities.

((~~(3)~~)) (4) Each biennium, beginning in 1985, the secretary shall review the adequacy of return on investment allowances in relation to anticipated requirements for maintaining, reducing, or expanding nursing care capacity. The secretary shall report the results of such review to the legislature and make recommendations for adjustments in the return on investment rates utilized in this section, if appropriate.