SENATE BILL REPORT

SB 5802

BYSenators West, Stratton, Saling, Craswell and Madsen

Determining the depreciation base of nursing homes.

Senate Committee on Health Care & Corrections

Senate Hearing Date(s):February 21, 1989; March 1, 1989

Majority Report:  That Substitute Senate Bill No. 5802 be substituted therefor, and the substitute bill do pass and be referred to Committee on Ways & Means.

      Signed by Senators West, Chairman; Smith, Vice Chairman; Amondson, Johnson, Kreidler, Niemi, Wojahn.

Senate Staff:Scott Plack (786-7409)

                  March 6, 1989

AS REPORTED BY COMMITTEE ON HEALTH CARE & CORRECTIONS, MARCH 1, 1989

BACKGROUND:

The Medicaid nursing home cost reimbursement system provides for five reimbursable components or cost centers.  They are nursing services, food, administration and operations, property costs and return on investment.  The last two are calculated based upon the depreciation base of assets such as the nursing home building, equipment and land.

The federal Deficit Reduction Act of 1984 (DEFRA) required that the reimbursement methodologies of the state Medicaid programs not increase rates solely because of an upward reevaluation of the property due to a change in ownership.  This was done to prevent "churning over," which involves the continual resale of a home at higher prices to increase the depreciation base and Medicaid reimbursement.

Prior to DEFRA, if a facility changed ownership the depreciation base was the historical cost of the asset, less accumulated depreciation, when first put into use as a nursing home.  However, there is an exception to the general rule.  The depreciation base of an acquired facility could be updated to the facility's current fair market value if:  (1) no ownership change had occurred in the previous ten years, or (2) the ownership change was the first to occur after January 1, 1980.  In September 1985, the Department amended WAC to comply with the federal requirement.  In 1986 the Legislature amended the statutes to comply.  The amendments prohibited the upward reevaluation.

During the period between enactment of DEFRA and the legislative amendment of the statutes a number of nursing homes in the state changed ownership.  The new owners may have assumed that the depreciation base would be calculated using the methodology in existing law at that time.  However, the department calculated the base using the new WAC.  The actual depreciation bases was set based upon the acquisition cost or net book value of the previous owner.

These homes challenge the department's authority to implement the federal changes through WAC, and argue that the depreciation base should be based upon the law at the time of the sale.

SUMMARY:

For nursing home owners who purchased a facility not previously sold between July 1, 1966 and July 1, 1986, the depreciation base shall be determined through an appraisal by the Department of General Administration.  The value of the facility shall not exceed the fair market value.  The parties in the sale may not be related to one another.

EFFECT OF PROPOSED SUBSTITUTE:

An eligible facility must be purchased through an arms-length transaction.

Appropriation:    none

Revenue:    none

Fiscal Note:      available

Senate Committee - Testified: Mike Harrell, Sacred Heart Medical Center (pro); Dan Humphrey (pro); Carol S. Gown, Bennett & Bigelow (pro); Mike Ryherd, Caritas Services, Inc. (pro); John Gregory, Soundcare (pro); Ralph Smith, DSHS (con)