ANALYSIS OF HOUSE BILL 1484

     Modifying property valuation methods for reimbursing nursing facilities.

Health Care Committee                          February 3, 1999

Washington State House of Representatives

SPONSORS:  Representatives Parlette and Cody.

BASIC BACKGROUND:

In 1995, the Legislature repealed much of the payment system to develop the current case mix payment system.  However, it chose not to make any changes in the property component.  Rather, they mandated that the DSHS study the payment system and report to the Legislature.  In 1998 the current property system was extended for one more year pending the results of this study.  If no legislation is passed the DSHS would be responsible for developing a system in rule that would establish property rates.

WHAT THE BILL WILL DO

1)For the return on investment financing allowance a floor on net book value is set at 50% of the undepreciated value of assets used in the delivery of care.

2)The financing allowance is modified for the cost of new construction over $5 million reducing it from ten percent to nine percent of book value.

3)The department must use a resident occupancy level of 85 percent rather than the anticipated resident days occupancy level to adjust the property and financing allowable rate for banking beds or returning the beds to use.

4)Deprecation for fixed equipment is tied to the life of the building for new or replacement building construction after 7/1/99.

BACKGROUND:

The Capital reimbursement rate refers to the cost of capital, building, and equipment for each nursing home facility.  It is a unique cost-based rate for each nursing facility paid through three components of the overall nursing home rate;

! Property;

! Financing Allowance; and

! Variable Return. 

These three components make up 11 percent of the total average daily Medicaid payment to a nursing home facility.  This amounts to $13 of the average daily nursing home rate of $114.74.

Property Cost: The property cost rate covers the allowable cost of depreciation on assets.  Payment for property is calculated as depreciation from the prior year divided by total resident days, or resident days at minimum occupancy, which is 85 percent of beds increased beds.

Financing Allowance: A financing allowance provides for interest expense on debt used to finance capital purchases as well as working capital.  It funds nursing home expenses that are of a nature that warrants financing of the purchases over some period of time.  Payment for interest and other financing expenses is not based on actual interest expense; instead, a financing allowance is computed.  The financing allowance pays for the financing of improvements to facilities and equipment purchases.  The financing allowance is calculated as ten percent of fixed assets minus depreciation divided by total resident days or 85% occupancy, whichever is greater.

Variable Return:  The variable return component of the capital payment rewards facilities that provide services to residents efficiently and allows for some profit or to cover other expenses not covered by the reimbursement.  This payment is determined by comparing a home=s costs to those of other homes.  Homes are then divided into four different categories, or quartiles, according to their level of costs. Each facility is eligible to receive an additional one-four percent of their rate, based on its comparative efficiency.  Efficiency is defined as the lowest cost per resident day:

!One percent for facilities in the highest cost quartile.

!Two to three percent for facilities with costs that fall between the highest and lowest cost facilities.

!Four percent for facilities in the lowest cost quartile.

(Attached is a discussion of the advantages and disadvantages of the current capital payment system.)

Last year the Legislature mandated that the Department of Social and Health Services study and recommend options for the payment of nursing facility capital and property related expenses.  The department contracted with an independent consulting company, Myers and Stauffer LC to conduct the study.  The study compared the advantages and disadvantages of the systems used in other states and identified an alternative system that might be used in the State of Washington.

SUMMARY:

Establishing Depreciation:  The depreciation rate for fixed equipment in nursing home facilities, which is used to establish the property rate component reimbursement amount, is prospectively extended to be the same as the depreciation rate established for the life of the building for all new or replacement building construction or for major renovations receiving certificate of need approval or exemption approval from the Department of Health beyond July 1, 1999.  Fixed equipment includes elevators, electrical wiring and fixtures, plumbing, the heating and air conditioning system, and other equipment that is affixed to the building and not subject to transfer.

Annual Rebasing:  A system for determining the property rate value of a nursing home facility is established.  Under this system, the property and return on investment component rates must be rebased annually beginning July 1, 1999, and is based on the costs incurred by the nursing home facility during the previous year.  In determining the rate, the Department of Social and Health Service is required to use a resident occupancy level of 85 percent.

Valuation Criteria:  The Department of Social and Health Service is directed to use a the Marshall and Swift valuation service in determining the value of land and building costs used in the rate formula and the base construction costs limits for new construction, remodeling, or expansion.  Criteria is established for how to determination the valuation of allowable land and common-use areas situated in basements.

Bed Banking:  Requires that the Department of Social and Health Services use a residency level of 85 percent in determining the property component rate for nursing home facilities that choose to bank beds or converts banked beds to actual use.

Return on Investment:  The Department of Social and Health Services is required to establish  a return on investment (ROI) rate component existing of two parts:  A financing allowance and a variable return on investment.  The financing allowance pays the contractor for the interest and risk associated with the construction of a nursing facility at a rate of ten percent and is rebased annually. The financing allowance rate for assets used in the delivery of resident care (ie. the building, building improvements, leasehold improvements, land, land improvements, and fixed and moveable equipment) in the nursing facility is based on the allowable net book value, or 50 percent of the undepreciated asset value, or the asset value determined for contractor=s who have grandfathered leases.

Beginning on July 1, 1999, any costs for a construction or renovation project in excess of $5 million will receive a nine percent capital financing rate.  Costs less than $5 million receives a ten percent rate.

A variable return rate is established for each July 1 rebase period that rewards facilities for efficiency.  The variable return portion of the return on investment component combines for each facility the direct care, support services, therapy care, and operations per patient day adjusted and allowable costs and then rates them from highest to lowest.  Each combined rate is divided into quartiles.  Nursing home facilities that have a combined rate in the lowest (first) quartile must have their combined rate multiplied by a factor of four percent  the highest percentage possible (most efficient).  Those facilities in the next lowest (second) quartile will have their combined rate multiplied by a factor of three percent, facilities in the next lowest tier (third) quartile must have their combined rate multiplied by a factor of two percent, and finally, those facilities in the highest (forth) quartile will have their combined rate multiplied by a factor of one percent, which is the lowest efficiency adjustment rate.

The sum of the financing allowance and the amount of variable return for each nursing home facility become the return on investment amount.

The department is required to allow a proportional adjustment for both the property component and the return on investment component if the department determines that weighted average rates will exceed the average total rates specified in the state biennial budget.