5724-S

AN ACT Relating to nursing home auditing and reimbursement; amending RCW 74.46.020, 74.46.050, 74.46.105, 74.46.230, 74.46.280, 74.46.380, 74.46.410, 74.46.420, 74.46.430, 74.46.450, 74.46.460, 74.46.470, 74.46.475, 74.46.481, 74.46.490, 74.46.500, 74.46.510, 74.46.530, 74.46.770, and 74.46.780; reenacting and amending RCW 74.46.180; adding a new section to chapter 74.46 RCW; repealing RCW 74.46.260 and 74.46.495; providing an effective date; and declaring an emergency.

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

Sec. 1. RCW 74.46.020 and 1991 sp.s. c 8 s 11 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) "Entity" means an individual, partnership, corporation, or any other association of individuals capable of entering enforceable contracts.

(15) "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) "Facility" means a nursing home licensed in accordance with chapter 18.51 RCW, excepting nursing homes certified as institutions for mental diseases, or that portion of a hospital licensed in accordance with chapter 70.41 RCW which operates as a nursing home.

(17) "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) "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) ((~~"Gain on sale" means the difference between the total net book value of nursing home assets, including but not limited to land, building and equipment, and the total sales price of all such assets.~~

~~(20)~~)) "Generally accepted accounting principles" means accounting principles approved by the financial accounting standards board (FASB).

((~~(21)~~)) (20) "Generally accepted auditing standards" means auditing standards approved by the American institute of certified public accountants (AICPA).

((~~(22)~~)) (21) "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.

((~~(23)~~)) (22) "Historical cost" means the actual cost incurred in acquiring and preparing an asset for use, including feasibility studies, architect's fees, and engineering studies.

((~~(24)~~)) (23) "Imprest fund" means a fund which is regularly replenished in exactly the amount expended from it.

((~~(25)~~)) (24) "Joint facility costs" means any costs which represent resources which benefit more than one facility, or one facility and any other entity.

((~~(26)~~)) (25) "Lease agreement" means a contract between two parties for the possession and use of real or personal property or assets for a specified period of time in exchange for specified periodic payments. Elimination (due to any cause other than death or divorce) or addition of any party to the contract, expiration, or modification of any lease term in effect on January 1, 1980, or termination of the lease by either party by any means shall constitute a termination of the lease agreement. An extension or renewal of a lease agreement, whether or not pursuant to a renewal provision in the lease agreement, shall be considered a new lease agreement. A strictly formal change in the lease agreement which modifies the method, frequency, or manner in which the lease payments are made, but does not increase the total lease payment obligation of the lessee, shall not be considered modification of a lease term.

((~~(27)~~)) (26) "Medical care program" means medical assistance provided under RCW 74.09.500 or authorized state medical care services.

((~~(28)~~)) (27) "Medical care recipient" or "recipient" means an individual determined eligible by the department for the services provided in chapter 74.09 RCW.

((~~(29)~~)) (28) "Net book value" means the historical cost of an asset less accumulated depreciation.

((~~(30)~~)) (29) "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~~)) product of the per patient day rate multiplied by the prior calendar year reported total patient days of each contractor ((~~for the previous calendar year~~)).

((~~(31)~~)) (30) "Operating lease" means a lease under which rental or lease expenses are included in current expenses in accordance with generally accepted accounting principles.

((~~(32)~~)) (31) "Owner" means a sole proprietor, general or limited partners, and beneficial interest holders of five percent or more of a corporation's outstanding stock.

((~~(33)~~)) (32) "Ownership interest" means all interests beneficially owned by a person, calculated in the aggregate, regardless of the form which such beneficial ownership takes.

((~~(34)~~)) (33) "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.

((~~(35)~~)) (34) "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.

((~~(36)~~)) (35) "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; and

(i) A respiratory care practitioner certified under chapter 18.89 RCW.

((~~(37)~~)) (36) "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.

((~~(38)~~)) (37) "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.

((~~(39)~~)) (38) "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.

((~~(40)~~)) (39) "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.

((~~(41)~~)) (40) "Secretary" means the secretary of the department of social and health services.

((~~(42)~~)) (41) "Title XIX" or "Medicaid" means the 1965 amendments to the social security act, P.L. 89‑07, as amended.

((~~(43)~~)) (42) "Physical plant capital improvement" means a capitalized improvement that is limited to an improvement to the building or the related physical plant.

Sec. 2. RCW 74.46.050 and 1985 c 361 s 5 are each amended to read as follows:

If the cost report is not properly completed or if it is not received by the due date, all or part of any payments due under the contract may be withheld by the department until such time as the required cost report is properly completed and received. Misreporting affecting cost limits promulgated under this chapter are subject to civil fines or other sanctions adopted by the department in rule. Beginning with audits for cost report year 1994, the department may adopt rules authorizing fines for costs reported that cannot be sustained at audit. The department shall issue special cost reporting instructions to accommodate changes in cost centers effective July 1, 1993.

Sec. 3. RCW 74.46.180 and 1987 c 476 s 1 and 1987 c 283 s 9 are each reenacted and amended to read as follows:

(1) The state shall make payment of any underpayments within thirty days after the date the preliminary or final settlement report is submitted to the contractor.

(2) A contractor found to have received either overpayments or erroneous payments under a preliminary or final settlement shall refund such payments to the state within thirty days after the date the preliminary or final settlement report is submitted to the contractor, subject to the provisions of subsections (3), (4), and (7) of this section.

(3) Within the cost centers of nursing services and food, all savings resulting from the respective allowable costs being lower than the respective reimbursement rate paid to the contractor during the report period shall be refunded to the department. However, in computing a preliminary or final settlement, savings in a cost center may be shifted to cover a deficit in another cost center up to the amount of any savings((~~: PROVIDED, That~~)). Not more than twenty percent of the rate in a cost center may be shifted into that cost center and no shifting may be made into the property cost center((~~: PROVIDED FURTHER, That~~)). There shall be no shifting out of nursing services, and savings in food shall be shifted only to cover deficits in the nursing services cost center. There shall be no shifting from the operational to the administrative cost center.

(4) Within the administrative and property cost centers ((~~of administration and operations and property~~)), the contractor shall retain at least fifty percent, but not more than seventy-five percent, of any savings resulting from the respective audited allowable costs being lower than the respective reimbursement rates paid to the contractor during the report period multiplied by the number of authorized medical care client days in which said rates were in effect, except that no savings may be retained if reported costs in the administrative and property cost centers ((~~and the administration and operations cost center~~)) exceed audited allowable costs in these cost areas by a total of ten cents or more per patient day. The secretary, by rule ((~~and regulation~~)), shall establish the basis for the specific percentages of savings to the contractors. Such rules ((~~and regulations~~)) may provide for differences in the percentages allowed for each cost center to individual facilities based on performance measures related to administrative efficiency.

(5) All ((~~allowances~~)) return on investment rate payments provided by RCW 74.46.530 shall be retained by the contractor to the extent net invested funds are substantiated by department field audit. Any industrial insurance dividend or premium discount under RCW 51.16.035 shall be retained by the contractor to the extent that such dividend or premium discount is attributable to the contractor's private patients.

(6) In the event the contractor fails to make repayment in the time provided in subsection (2) of this section, the department shall either:

(a) Deduct the amount of refund due, plus any interest accrued under RCW 43.20B.695, from payment amounts due the contractor; or

(b) In the instance the contract has been terminated, (i) deduct the amount of refund due, plus interest assessed at the rate and in the manner provided in RCW 43.20B.695, from any payments due; or (ii) recover the amount due, plus any interest assessed under RCW 43.20B.695, from security posted with the department or by any other lawful means.

(7) Where the facility is pursuing timely-filed judicial or administrative remedies in good faith regarding settlement issues, the contractor need not refund nor shall the department withhold from the facility current payment amounts the department claims to be due from the facility but which are specifically disputed by the contractor. If the judicial or administrative remedy sought by the facility is not granted after all appeals are exhausted or mutually terminated, the facility shall make payment of such amounts due plus interest accrued from the date of filing of the appeal, as payable on judgments, within sixty days of the date such decision is made.

Sec. 4. RCW 74.46.105 and 1985 c 361 s 10 are each amended to read as follows:

Cost reports and patient trust accounts of contractors shall be field audited by the department, either by department staff or by auditors under contract to the department, in accordance with the provisions of this chapter. The department when it deems necessary to assure the accuracy of cost reports may review any underlying financial statements or other records upon which the cost reports are based. The department shall have the authority to accept or reject audits which fail to satisfy the requirements of this section or which are performed by auditors who violate any of the rules of this section. Department audits of the cost reports and patient trust accounts shall be conducted as follows:

(1) Each year the department will provide for field audit of the cost report, statistical reports, and patient trust funds, as established by RCW 74.46.700, of all or a sample of reporting facilities selected by profiles of costs, exceptions, contract terminations, upon special requests or other factors determined by the department.

(2) Beginning with audits for calendar year ((1983, up to one hundred percent of contractors cost reports and patient care trust fund accounts shall be audited: PROVIDED, That each contractor shall be audited at least once in every three-year period.

~~(3)~~)) 1992, facilities shall be selected for ((~~sample~~)) audits, within the discretion of the department for each calendar report year, within one hundred twenty days of submission of a correct and complete cost report, and shall be so informed of the department's intent to audit. Audits so scheduled shall be completed within one year of selection.

((~~(4)~~)) (3) Where an audit for a recent reporting or trust fund period discloses material discrepancies, undocumented costs or mishandling of patient trust funds, auditors may examine prior unaudited periods, for indication of similar material discrepancies, undocumented costs or mishandling of patient trust funds for not more than two reporting periods preceding the facility reporting period selected in the sample.

((~~(5)~~)) (4) The audit will result in a schedule summarizing appropriate adjustments to the contractor's cost report. These adjustments will include an explanation for the adjustment, the general ledger account or account group, and the dollar amount. Patient trust fund audits shall be reported separately and in accordance with RCW 74.46.700.

((~~(6)~~)) (5) Audits shall meet generally accepted auditing standards as promulgated by the American institute of certified public accountants and the standards for audit of governmental organizations, programs, activities and functions as published by the comptroller general of the United States. Audits shall be supervised or reviewed by a certified public accountant.

((~~(7)~~)) (6) No auditor under contract with or employed by the department to perform audits in accordance with the provisions of this chapter shall:

(a) Have had direct or indirect financial interest in the ownership, financing or operation of a nursing home in this state during the period covered by the audits;

(b) Acquire or commit to acquire any direct or indirect financial interest in the ownership, financing or operation of a nursing home in this state during said auditor's employment or contract with the department;

(c) Accept as a client or become employed by any nursing home or nursing home operator in this state during or within two years of termination of said auditor's contract or employment with the department.

((~~(8)~~)) (7) Audits shall be conducted by auditors who are otherwise independent as determined by the standards of independence established by the American institute of certified public accountants.

((~~(9)~~)) (8) All audit rules, affecting the way contractors are required to maintain various receipts, accounts, ledgers, or other documents, or affecting the way contractors are required to organize and make available cost report, statistical, resident trust fund, or other information or records of the nursing facility or organization, adopted after March 31, 1984, shall be published before the beginning of the cost report year to which they apply.

Sec. 5. RCW 74.46.230 and 1980 c 177 s 23 are each amended to read as follows:

(1) The necessary and ordinary one-time expenses directly incident to the preparation of a newly constructed or purchased building by a contractor for operation as a licensed facility shall be allowable costs. These expenses shall be limited to start-up and organizational costs incurred prior to the admission of the first patient.

(2) Start-up costs shall include, but not be limited to, administrative and nursing salaries, utility costs, taxes, insurance, repairs and maintenance, and training; except, that they shall exclude expenditures for capital assets. These costs will be allowable in the ((~~administration and operations~~)) administrative cost center if they are amortized over a period of not less than sixty months beginning with the month in which the first patient is admitted for care.

(3) Organizational costs are those necessary, ordinary, and directly incident to the creation of a corporation or other form of business of the contractor including, but not limited to, legal fees incurred in establishing the corporation or other organization and fees paid to states for incorporation; except, that they do not include costs relating to the issuance and sale of shares of capital stock or other securities. Such organizational costs will be allowable in the ((~~administration and operations~~)) administrative cost center if they are amortized over a period of not less than sixty months beginning with the month in which the first patient is admitted for care.

Sec. 6. RCW 74.46.280 and 1980 c 177 s 28 are each amended to read as follows:

(1) Management fees will be allowed only if:

(a) A written management agreement both creates a principal/agent relationship between the contractor and the manager, and sets forth the items, services, and activities to be provided by the manager; and

(b) Documentation demonstrates that the services contracted for were actually delivered.

(2) To be allowable, fees must be for necessary, nonduplicative services. ((~~Allowable fees for general management services, including the portion of a management fee which is not allocated to specific services such as accounting, are limited to~~

~~(a) the maximum allowable compensation under RCW 74.46.260 of the licensed administrator and, if the facility has at least eighty beds, of an assistant administrator, less~~

~~(b) actual compensation received by the licensed administrator and by the assistant administrator and administrator-in-training, if any.~~

In computing maximum allowable compensation under RCW 74.46.260 for a facility with at least eighty beds, include the maximum compensation of an assistant administrator even if an assistant administrator is not employed.))

(3) A management fee paid to or for the benefit of a related organization will be allowable to the extent it does not exceed the lower of((:

~~(a) The limits set out in subsection (2) of this section; or~~

~~(b) The lower of~~)) the actual cost to the related organization of providing necessary services related to patient care under the agreement((,)) or the cost of comparable services purchased elsewhere. Where costs to the related organization represent joint facility costs, the measurement of such costs shall comply with RCW 74.46.270.

(4) A copy of the agreement must be received by the department at least sixty days before it is to become effective. A copy of any amendment to a management agreement must also be received by the department at least thirty days in advance of the date it is to become effective.

(((5) Central office costs for general management services, including the portion of a management expense which is not allocated to specific services, such as accounting, shall be subject to the management fee limits determined in subsections (2) and (3) of this section.))

Sec. 7. RCW 74.46.380 and 1991 sp.s. c 8 s 12 are each amended to read as follows:

(1) Where depreciable assets are disposed of through sale, trade-in, scrapping, exchange, theft, wrecking, or fire or other casualty, depreciation shall no longer be taken on the assets. No further depreciation shall be taken on permanently abandoned assets.

(2) Where an asset has been retired from active use but is being held for stand-by or emergency service, and the department has determined that it is needed and can be effectively used in the future, depreciation may be taken.

(((3) If there is a sale of a nursing facility on or after July 1, 1991, that results in a gain on sale, the actual reimbursement for depreciation paid to the selling contractor through the medicaid reimbursement program shall be recovered by the department to the extent of any gain on sale. The purchaser is obligated to reimburse the department, whether or not the purchaser is a medicaid contractor. If the department is unable to collect from the purchaser, then the seller is responsible for reimbursing the department. The department may establish an appropriate repayment schedule to recover depreciation. If the purchaser is a medicaid contractor and the contractor does not comply with the repayment schedule established by the department, the department may deduct the recovery from the contractor's monthly medicaid payments. The department may adopt rules, as appropriate, to insure that the principles of this section are implemented with respect to leased assets, or with respect to sales of intangibles or specific assets only.))

Sec. 8. RCW 74.46.410 and 1991 sp.s. c 8 s 15 are each amended to read as follows:

(1) Costs will be unallowable if they are not documented, necessary, ordinary, and related to the provision of care services to authorized patients.

(2) Unallowable costs include, but are not limited to, the following:

(a) Costs of items or services not covered by the medical care program. Costs of such items or services will be unallowable even if they are indirectly reimbursed by the department as the result of an authorized reduction in patient contribution;

(b) Costs of services and items provided to recipients which are covered by the department's medical care program but not included in care services established by the department under this chapter;

(c) Costs associated with a capital expenditure subject to section 1122 approval (part 100, Title 42 C.F.R.) if the department found it was not consistent with applicable standards, criteria, or plans. If the department was not given timely notice of a proposed capital expenditure, all associated costs will be unallowable up to the date they are determined to be reimbursable under applicable federal regulations;

(d) Costs associated with a construction or acquisition project requiring certificate of need approval pursuant to chapter 70.38 RCW if such approval was not obtained;

(e) Interest costs other than those provided by RCW 74.46.290 on and after the effective date of RCW 74.46.530;

(f) Salaries or other compensation of owners, officers, directors, stockholders, and others associated with the contractor or home office, except compensation paid for service related to patient care;

(g) Costs in excess of limits or in violation of principles set forth in this chapter;

(h) Costs resulting from transactions or the application of accounting methods which circumvent the principles of the cost-related reimbursement system set forth in this chapter;

(i) Costs applicable to services, facilities, and supplies furnished by a related organization in excess of the lower of the cost to the related organization or the price of comparable services, facilities, or supplies purchased elsewhere;

(j) Bad debts of non-Title XIX recipients. Bad debts of Title XIX recipients are allowable if the debt is related to covered services, it arises from the recipient's required contribution toward the cost of care, the provider can establish that reasonable collection efforts were made, the debt was actually uncollectible when claimed as worthless, and sound business judgment established that there was no likelihood of recovery at any time in the future;

(k) Charity and courtesy allowances;

(l) Cash, assessments, or other contributions, excluding dues, to charitable organizations, professional organizations, trade associations, or political parties, and costs incurred to improve community or public relations;

(m) Vending machine expenses;

(n) Expenses for barber or beautician services not included in routine care;

(o) Funeral and burial expenses;

(p) Costs of gift shop operations and inventory;

(q) Personal items such as cosmetics, smoking materials, newspapers and magazines, and clothing, except those used in patient activity programs;

(r) Fund-raising expenses, except those directly related to the patient activity program;

(s) Penalties and fines;

(t) Expenses related to telephones, televisions, radios, and similar appliances in patients' private accommodations;

(u) Federal, state, and other income taxes;

(v) Costs of special care services except where authorized by the department;

(w) Expenses of key-man insurance and other insurance or retirement plans not made available to all employees;

(x) Expenses of profit-sharing plans;

(y) Expenses related to the purchase and/or use of private or commercial airplanes which are in excess of what a prudent contractor would expend for the ordinary and economic provision of such a transportation need related to patient care;

(z) Personal expenses and allowances of owners or relatives;

(aa) All expenses of maintaining professional licenses or membership in professional organizations;

(bb) Costs related to agreements not to compete;

(cc) Amortization of goodwill;

(dd) Expenses related to vehicles which are in excess of what a prudent contractor would expend for the ordinary and economic provision of transportation needs related to patient care;

(ee) Legal and consultant fees in connection with a fair hearing against the department where a decision is rendered in favor of the department or where otherwise the determination of the department stands;

(ff) Legal and consultant fees of a contractor or contractors in connection with a lawsuit against the department;

(gg) Lease acquisition costs and other intangibles not related to patient care;

(hh) All rental or lease costs other than those provided in RCW 74.46.300 on and after the effective date of RCW 74.46.510 and 74.46.530;

(ii) Postsurvey charges incurred by the facility as a result of subsequent inspections under RCW 18.51.050 which occur beyond the first postsurvey visit during the certification survey calendar year;

(jj) ((Costs and fees otherwise allowable for legal services, whether purchased, allocated by a home office, regional office or management company, or performed by the contractor or employees of the contractor, in excess of the eighty-fifth percentile of such costs reported by all contractors for the most recent cost report period: PROVIDED, That this limit shall not apply if a contractor has not exceeded this percentile in any of the preceding three annual cost report periods;

(kk) Costs and fees otherwise allowable for accounting and bookkeeping services, whether purchased, allocated by a home office, regional office or management company, or performed by the contractor or employees of the contractor, in excess of the eighty-fifth percentile of such costs reported by all contractors for the most recent cost report period: PROVIDED, That this limit shall not apply if a contractor has not exceeded this percentile in any of the preceding three annual cost report periods;

~~(ll)~~)) Compensation paid for any purchased nursing care services, including registered nurse, licensed practical nurse, and nurse assistant services, obtained through service contract arrangement in excess of the amount of compensation paid for such hours of nursing care service had they been paid at the average hourly wage, including related taxes and benefits, for in-house nursing care staff of like classification at the same nursing facility, as reported in the most recent cost report period;

((~~(mm)~~)) (kk) For all partial or whole rate periods after July 17, 1984, costs of land and depreciable assets that cannot be reimbursed under the Deficit Reduction Act of 1984 and implementing state statutory and regulatory provisions.

Sec. 9. RCW 74.46.420 and 1985 c 361 s 18 are each amended to read as follows:

The following principles are inherent in RCW 74.46.430 through 74.46.590:

(1) Reimbursement rates will be set prospectively on a per patient day basis on a two-year cycle corresponding to each state biennium; and

(2) The rates ((~~so established will~~)), in the nursing services, food, administrative, and operational cost centers, shall be adjusted downward or upward when set effective July 1 of the first fiscal year of the two-year rate-setting cycle and adjusted again downward or upward effective July 1 of the second fiscal year of the rate-setting cycle for economic ((~~conditions and~~)) trends ((~~in accordance with appropriations made by the legislature as consistent with federal requirements for the period to be covered by such rates~~)) and conditions.

(3) The July 1 rates for the first year of each biennium shall be adjusted by the change in the implicit price deflator for personal consumption expenditures index published by the bureau of labor statistics of the United States department of labor. The period used to measure the increase or decrease to be applied to these first year biennial rates shall be the calendar year preceding the July 1 commencement of the state biennium.

(4) The July 1 rates for the second year of each biennium shall be adjusted by the change in the nursing home input price index without capital costs published by the health care financing administration of the department of health and human services. The period used to measure the increase or decrease to be applied to these second year biennial rates shall also be the calendar year preceding the July 1 commencement of the state biennium. In the event the change in the health care financing administration index measured over the following calendar year, the one terminating six months after the start of the state biennium, is twenty-five percent greater or less than the change in the health care financing administration index measured over the calendar year preceding commencement of the state biennium, the department may use the health care financing administration index increase or decrease in the following calendar year to inflate or decrease nursing facilities' nursing services, food, administrative, and operational rates for July 1 of the second biennial year.

(5) If either the implicit price deflator index or the health care financing administration index ceases to be published in the future, the department shall select in rule and use in their place one or more measures of change from an alternate source or sources for the same or comparable time periods.

Sec. 10. RCW 74.46.430 and 1987 2nd ex.s. c 1 s 2 are each amended to read as follows:

(1) The department, as provided by this chapter, will determine prospective cost-related reimbursement rates for services provided to medical care recipients. Each rate so determined shall represent the contractor's maximum compensation within each cost center for each patient day for such medical care recipient.

(2) As required, the department may modify such maximum per patient day rates pursuant to the administrative review provisions of RCW 74.46.780.

(3) ((Until the effective date of RCW 74.46.510 and 74.46.530, the maximum prospective reimbursement rates for the administration and operations and the property cost centers shall be established based upon a minimum facility occupancy level of eighty-five percent.

~~(4) On and after the effective date of RCW 74.46.510 and 74.46.530,~~)) The maximum prospective reimbursement rates for the ((~~administration and operations~~)) administrative, operational, and ((~~the~~)) property cost centers, and the return on investment ((~~allowance~~)) rate shall be established based upon a minimum facility occupancy level of eighty-five percent.

((~~(5)~~)) (4) All contractors shall be required to adjust and maintain wages for all employees to a minimum hourly wage ((established by the legislature in the biennial appropriations act, if the legislature appropriates moneys to fund prospectively the portion of the minimum wage attributable to services to medicaid patients. Prospective rate revisions to fund any minimum wage increases shall be made only on the dates authorized in the appropriation act. The department shall by regulation limit reimbursement to the amount appropriated for legislatively authorized enhancement for nonadministrative wages and benefits above the moneys necessary to fund minimum wages specified in this section. The department in considering reimbursement for legislatively authorized wage enhancements will take into consideration facility wage history over the past three cost report periods)) of four dollars and seventy-six cents per hour beginning January 1, 1988, and five dollars and fifteen cents per hour beginning January 1, 1989.

Sec. 11. RCW 74.46.450 and 1983 1st ex.s. c 67 s 20 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~~)) adjusted or reset as provided in this chapter.

(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.

(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~~)) adjusted or reset as provided in this chapter.

(4) The department is authorized to develop policies and procedures in rule to address the computation of rates for the first and second fiscal years of each biennium, including steps necessary to prorate rate adjustments for economic trends and conditions as authorized in RCW 74.46.420, for contractors having less than twelve months of cost report data for the prior calendar year.

Sec. 12. RCW 74.46.460 and 1987 c 476 s 3 are each amended to read as follows:

(1) Each contractor's reimbursement rates will be determined or adjusted prospectively at least once each calendar year, as provided in this chapter, to be effective July 1st. Provided, that a contractor's rate for the first fiscal year of each biennium must be established upon its own prior calendar period report of at least six months of cost data.

(2) Rates may be adjusted as determined by the department to take into account variations in the distribution of patient classifications or changes in patient characteristics from the prior reporting year, program changes required by the department, or changes in staffing levels at a facility required by the department. ((~~Rates shall be adjusted by the amount of legislatively authorized enhancements in accordance with RCW 74.46.430(5) and 74.46.470(2).~~)) Rates may also be adjusted to cover costs associated with placing a nursing home in receivership which costs are not covered by the rate of the former contractor, including: Compensation of the receiver, reasonable expenses of receivership and transition of control, and costs incurred by the receiver in carrying out court instructions or rectifying deficiencies found. Rates shall be adjusted for any capitalized additions or replacements made as a condition for licensure or certification. Rates shall be adjusted for capitalized improvements done under RCW 74.46.465.

(((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. 13. RCW 74.46.470 and 1987 c 476 s 4 are each amended to read as follows:

(1) A contractor's reimbursement rates for medical care recipients will be determined utilizing net invested funds and desk-reviewed cost report data within the following cost centers:

(a) Nursing services;

(b) Food;

(d) Operational; and

(e) Property.

(2) There shall be for the time period January 1988 through June 1990 only an enhancement cost center established to reimburse contractors for specific legislatively authorized enhancements for nonadministrative wages and benefits to ensure that such enhancements are used exclusively for the legislatively authorized purposes. For purposes of settlement, funds appropriated to this cost center shall only be used for expenditures for which the legislative authorization is granted. Such funds may be used only in the following circumstances:

(a) The contractor has increased expenditures for which legislative authorization is granted to at least the highest level paid in any of the last three cost years, plus, beginning July 1, 1987, any percentage inflation adjustment as was granted each year under RCW 74.46.495; and

(b) All funds shifted from the enhancement cost center are shown to have been expended for legislatively authorized enhancements.

(3) If the contractor does not spend the amount appropriated to this cost center in the legislatively authorized manner, then the amounts not appropriately spent shall be recouped at preliminary or final settlement pursuant to RCW 74.46.160.

(4) For purposes of this section, "nonadministrative wages and benefits" means wages and payroll taxes paid with respect to, and the employer share of the cost of benefits provided to, employees in job classes specified in an appropriation, which may not include administrators, assistant administrators, or administrators in training.

(5) Amounts expended in the enhancement cost center in excess of the minimum wage established under RCW 74.46.430 are subject to all provisions contained in this chapter.

Sec. 14. RCW 74.46.475 and 1985 c 361 s 13 are each amended to read as follows:

(1) The department shall analyze the submitted cost report of each contractor to determine if the information is correct, complete, and reported in conformance with generally accepted accounting principles, the requirements of this chapter and such rules ((~~and regulations~~)) as the ((~~secretary~~)) department may adopt. If the analysis finds that the cost report is incorrect or incomplete or that some costs reported are unallowable, the department may make adjustments to the reported information for purposes of establishing reimbursement rates. A schedule of such adjustments shall be provided to contractors and shall include an explanation for the adjustment and the dollar amount of the adjustment. Adjustments shall be subject to review and appeal as provided in this chapter.

(2) The department shall accumulate data, determined by the department to be needed, from properly completed cost reports for use in:

(a) Exception profiling; ((~~and~~))

(b) Establishing rates; or

(3) The department may further utilize such accumulated data for analytical, statistical, or informational purposes as necessary.

Sec. 15. RCW 74.46.481 and 1991 sp.s. c 8 s 16 are each amended to read as follows:

(1) The nursing services cost center shall include for reporting and audit purposes all costs related to the direct provision of nursing and related care, including fringe benefits and payroll taxes for the nursing and related care personnel, and the cost of nursing supplies. ((~~For rates effective for state fiscal year 1984,~~)) The department shall adopt by administrative rule a definition of "related care" ((~~which shall incorporate, but not exceed services reimbursable as of June 30, 1983. For rates effective for state fiscal year 1985, the definition of related care shall include ancillary care~~)). For rates effective after June 30, 1991, nursing services costs, as reimbursed within this chapter ((~~and as tested for reasonableness within this section~~)), shall not include costs of any purchased nursing care services, including registered nurse, licensed practical nurse, and nurse assistant services, obtained through service contract arrangement in excess of the amount of compensation paid for such hours of nursing care service had they been paid at the average hourly wage, including related taxes and benefits, for in-house nursing care staff of like classification at the same nursing facility, as reported in the most recent cost report period.

(2) The department shall adopt ((by)) through administrative rules a method for establishing a nursing services cost center rate consistent with the principles stated in this section.

(3) Utilizing regression or other statistical technique, the department shall determine a reasonable limit on facility nursing staff taking into account facility patient characteristics. For purposes of this section, facility nursing staff refers to registered nurses, licensed practical nurses and nursing assistants employed by the facility or obtained through temporary labor contract arrangements. Effective January 1, 1988, the hours associated with the training of nursing assistants and the supervision of that training for nursing assistants shall not be included in the calculation of facility nursing staff. In selecting a measure of patient characteristics, the department shall take into account:

(a) The correlation between alternative measures and facility nursing staff; and

(b) The cost of collecting information for and computation of a measure.

If regression is used, the limit shall be set at predicted nursing staff plus 1.75 regression standard errors. If another statistical method is utilized, the limit shall be set at a level corresponding to 1.75 standard errors above predicted staffing computed according to a regression procedure. A regression calculated shall be effective for the entire biennium.

(4) No facility shall receive reimbursement for nursing staff levels in excess of the limit((, except that, if a facility was reimbursed for a nursing staff level in excess of the limit as of June 30, 1983, the facility may chose [choose] to continue to receive its June, 1983 nursing services rate plus any adjustments in rates, such as adjustments for economic trends, made available to all facilities)). However, nursing staff levels established under subsection (3) of this section shall not apply to the nursing services cost center reimbursement rate only for the pilot facility especially designed to meet the needs of persons living with AIDS as defined by RCW 70.24.017 and specifically authorized for this purpose under the 1989 amendment to the Washington state health plan. ((The reasonableness limit established pursuant to this subsection shall remain in effect for the period July 1, 1983 through June 30, 1985. At that time the department may revise the measure of patient characteristics or method used to establish the limit.))

(5) ((The department shall select an index of cost increase relevant to the nursing and related services cost area. In the absence of a more representative index, the department shall use the medical care component index as maintained by the United States bureau of labor statistics.)) Every two years when rates are set at the beginning of each new biennium, the department shall divide into two peer groups nursing facilities located in the state of Washington providing services to medicaid residents: (a) Those facilities located within a metropolitan statistical area as defined and determined by the United States office of management and budget or other applicable federal office and (b) those not located in such an area. The facilities in each peer group shall then be arrayed from lowest to highest by magnitude of per patient day adjusted nursing services cost from the prior report year, regardless of whether any such adjustments are contested by the nursing facility, and the median or fiftieth percentile cost for each peer group shall be determined. Nursing services rates for facilities within each peer group for the first year of the biennium shall be set at the lower of the facility's adjusted per patient day nursing services cost from the prior report period or the median cost for the facility's peer group plus twenty-five percent. This rate shall be reduced or inflated as authorized by RCW 74.46.420. However, the per patient day peer group median cost plus twenty-five percent limit shall not apply to the nursing services cost center reimbursement rate only for the pilot facility especially designed to meet the needs of persons living with AIDS as defined by RCW 70.24.017 and specifically authorized for this purpose under the 1989 amendment to the Washington state health plan.

(6) ((If a facility's nursing staff level is below the limit specified in subsection (3) of this section, the department shall determine the percentage increase for all items included in the nursing services cost center between the facility's most recent cost reporting period and the next prior cost reporting period.

(a) If the percentage cost increase for a facility is below the increase in the selected index for the same time period, the facility's reimbursement rate in the nursing services cost center shall equal the facility's cost from the most recent cost reporting period plus any allowance for inflation provided by legislative appropriation.

(b) If the percentage cost increase for a facility exceeds the increase in the selected index, the department shall limit the cost used for setting the facility's rate in the nursing services cost area to a level reflecting the increase in the selected index.)) A nursing facility's rate in nursing services for the second year of each biennium shall be that facility's rate as of July 1 of the first year of that biennium reduced or inflated as authorized by RCW 74.46.420. The alternating procedures prescribed in this section for a facility's two July 1 nursing services rates occurring within each biennium shall be followed in the same order for each succeeding biennium.

(7) ((If the facility's nursing staff level exceeds the reasonableness limit established in subsection (3) of this section, the department shall determine the increase for all items included in the nursing services cost center between the facility's most recent cost reporting period and the next prior cost reporting period.

(a) If the percentage cost increase for a facility is below the increase in the index selected pursuant to subsection (5) of this section, the facility's reimbursement rate in the nursing cost center shall equal the facility's cost from the most recent cost reporting period adjusted downward to reflect the limit on nursing staff, plus any allowance for inflation provided by legislative appropriation subject to the provisions of subsection (4) of this section.

(b) If the percentage cost increase for a facility exceeds the increase in the selected index, the department shall limit the cost used for setting the facility's rate in the nursing services cost center to a level reflecting the nursing staff limit and the cost increase limit, subject to the provisions of subsection (4) of this section, plus any allowance for inflation provided by legislative appropriation.

(8) Prospective rates for the nursing services cost center, for state fiscal year 1992 only, shall not be subject to the cost growth index lid in subsections (5), (6), and (7) of this section. The lid shall apply for state fiscal year 1991 rate setting and all state fiscal years subsequent to fiscal year 1992.

~~(9)~~)) Median costs for peer groups shall be calculated as provided in this chapter on the basis of the most recent adjusted cost information available to the department prior to the calculation of the new rate for July 1 of each biennium, regardless of whether the adjustments are contested or subject to pending administrative or judicial review. Median costs shall not be adjusted to reflect future administrative or judicial rulings, whether final or not.

(8) The department is authorized to determine on a systematic basis facilities with unmet patient care service needs. The department may increase the nursing services cost center prospective rate for a facility beyond the level determined in accordance with subsection (6) of this section if the facility's actual and reported nursing staffing is one standard error or more below predicted staffing as determined according to the method selected pursuant to subsection (3) of this section and the facility has unmet patient care service needs: PROVIDED, That prospective rate increases authorized by this subsection shall be funded only from legislative appropriations made for this purpose during the periods authorized by such appropriations or other laws and the increases shall be conditioned on specified improvements in patient care at such facilities.

((~~(10)~~)) (9) The department shall establish a method for identifying patients with exceptional care requirements and a method for establishing or negotiating on a consistent basis rates for such patients.

((~~(11)~~)) (10) The department, in consultation with interested parties, shall adopt rules to establish the criteria the department will use in reviewing any requests by a contractor for a prospective rate adjustment to be used to increase the number of nursing staff. These rules shall also specify the time period for submission and review of staffing requests: PROVIDED, That a decision on a staffing request shall not take longer than sixty days from the date the department receives such a complete request. In establishing the criteria, the department may consider, but is not limited to, the following:

(a) Increases in ((~~acuity~~)) debility levels of contractors' residents determined in accordance with the department's assessment and reporting procedures and requirements utilizing the minimum data set;

(b) Staffing patterns for similar facilities in the same peer group;

(d) Survey, inspection of care, and department consultation results.

Sec. 16. RCW 74.46.490 and 1983 1st ex.s. c 67 s 25 are each amended to read as follows:

(1) The food cost center shall include for reporting purposes all costs for bulk and raw food and beverages purchased for the dietary needs of medical care recipients.

(2) ((~~Reimbursement for the food cost center shall be at the January 1, 1983, reimbursement rate, adjusted annually for inflation.~~)) Every two years when rates are set at the beginning of each new biennium, the department shall divide into two peer groups nursing facilities located in the state of Washington providing services to medicaid residents: (a) Those facilities located within a metropolitan statistical area as defined and determined by the United States office of management and budget or other applicable federal office and (b) those not located in such an area. The facilities in each peer group shall then be arrayed from lowest to highest by magnitude of per patient day adjusted food cost from the prior report year, regardless of whether any such adjustments are contested by the nursing facility, and the median or fiftieth percentile cost for each peer group shall be determined. Food rates for facilities within each peer group for the first year of the biennium shall be set at the lower of the facility's adjusted per patient day food cost from the prior report period or the median cost for the facility's peer group plus twenty-five percent. This rate shall be reduced or inflated as authorized by RCW 74.46.420.

(3) A nursing facility's food rate for the second year of each biennium shall be that facility's rate as of July 1 of the first year of that biennium reduced or inflated as authorized by RCW 74.46.420. The alternating procedures prescribed in this section for a facility's two July 1 food rates occurring within each biennium shall be followed in the same order for each succeeding biennium.

(4) Median costs for peer groups shall be calculated as provided in this chapter on the basis of the most recent adjusted cost information available to the department prior to the calculation of the new rate for July 1 of each biennium, regardless of whether the adjustments are contested or subject to pending administrative or judicial review. Median costs shall not be adjusted to reflect future administrative or judicial rulings, whether final or not.

Sec. 17. RCW 74.46.500 and 1992 c 182 s 1 are each amended to read as follows:

(1) The ((~~administration and operations~~)) administrative cost center shall include ((~~all items not included in the cost centers of nursing services, food, and property.~~

(2) Subject to subsection (4) of this section, 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~~

~~AR = the administration and operations cost center reimbursement rate for a facility;~~

~~TAC = 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~~

~~TPD = 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.~~

(4) In applying the eighty-fifth percentile reimbursement limit authorized by subsection (2) of this section to the pilot facility specially designed to meet the needs of persons living with AIDS as defined by RCW 70.24.017, and specifically authorized for this purpose under the 1989 amendment to the Washington state health plan, the department shall exempt the cost of nursing supplies reported by the pilot facility in excess of the average of nursing supplies cost for medicaid nursing facilities state-wide)) for cost reporting purposes all administrative, oversight, and management costs whether facility on-site or allocated in accordance with a department-approved joint-cost allocation methodology. Such costs shall be identical to the cost report line item costs categorized under "general and administrative" in the "administration and operations" combined cost center existing prior to January 1, 1993, except for nursing supplies and purchased medical records.

(2) Every two years when rates are set at the beginning of each new biennium, the department shall divide into two peer groups nursing facilities located in the state of Washington providing services to medicaid residents: (a) Those facilities located within a metropolitan statistical area as defined and determined by the United States office of management and budget or other applicable federal office and (b) those not located in such an area. The facilities in each peer group shall then be arrayed from lowest to highest by magnitude of per patient day adjusted administrative cost from the prior report year, regardless of whether any such adjustments are contested by the nursing facility, and the median or fiftieth percentile cost for each peer group shall be determined. Administrative rates for facilities within each peer group for the first year of the biennium shall be set at the lower of the facility's adjusted per patient day administrative cost from the prior report period or the median cost for the facility's peer group plus ten percent. This rate shall be reduced or inflated as authorized by RCW 74.46.420.

(3) A nursing facility's administrative rate for the second year of each biennium shall be that facility's rate as of July 1 of the first year of that biennium reduced or inflated as authorized by RCW 74.46.420. The alternating procedures prescribed in this section for a facility's two July 1 administrative rates occurring within each biennium shall be followed in the same order for each succeeding biennium.

NEW SECTION. Sec. 18. A new section is added to chapter 74.46 RCW to read as follows:

(1) The operational cost center shall include for cost reporting purposes all allowable costs of the daily operation of the facility not included in nursing services and related care, food, administrative, or property costs, whether such costs are facility on-site or allocated in accordance with a department-approved joint-cost allocation methodology.

(2) Every two years when rates are set at the beginning of each new biennium, the department shall divide into two peer groups nursing facilities located in the state of Washington providing services to medicaid residents: (a) Those facilities located within a metropolitan statistical area as defined and determined by the United States office of management and budget or other applicable federal office and (b) those not located in such an area. The facilities in each peer group shall then be arrayed from lowest to highest by magnitude of per patient day adjusted operational cost from the prior report year, regardless of whether any such adjustments are contested by the nursing facility, and the median or fiftieth percentile cost for each peer group shall be determined. Operational rates for facilities within each peer group for the first year of the biennium shall be set at the lower of the facility's adjusted per patient day operational cost from the prior report period or the median cost for the facility's peer group plus twenty-five percent. This rate shall be reduced or inflated as authorized by RCW 74.46.420.

(3) A nursing facility's operational rate for the second year of each biennium shall be that facility's rate as of July 1 of the first year of that biennium reduced or inflated as authorized by RCW 74.46.420. The alternating procedures prescribed in this section for a facility's two July 1 operational rates occurring within each biennium shall be followed in the same order for each succeeding biennium.

Sec. 19. RCW 74.46.510 and 1980 c 177 s 51 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.

(2) A nursing facility's property rate shall be rebased annually, effective July 1, in accordance with this section regardless of whether the rate is for the first or second year of the biennium.

(3) 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.

Sec. 20. RCW 74.46.530 and 1991 sp.s. c 8 s 17 are each amended to read as follows:

(1) The department shall establish for ((~~individual facilities~~)) each medicaid nursing facility a return on investment ((~~allowances~~)) rate composed of two parts: A financing allowance and a variable return allowance. A facility's return on investment rate shall be rebased annually, effective July 1, in accordance with this section, regardless of whether the rate is for the first or second year of the biennium.

(a) The financing allowance shall be determined by multiplying the net invested funds of each facility by .10, and dividing by the contractor's total patient days from the most recent cost report 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 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, 74.46.370, and 74.46.380, 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. Subject to provisions and limitations contained in this chapter, for land purchased by owners or lessors before July 18, 1984, capitalized cost of land shall be the buyer's capitalized cost. For all partial or whole rate periods after July 17, 1984, if the land is purchased after July 17, 1984, capitalized cost shall be that of the owner of record on July 17, 1984, or buyer's capitalized cost, whichever is lower. 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) Every two years at the start of each new biennium, the department, without utilizing peer groups, will first rank all facilities in numerical order from highest to lowest according to their ((~~average per diem~~)) per patient day adjusted allowable costs for ((~~the sum of the administration and operations and property cost centers~~)) nursing services, food, administrative, and operational costs combined 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~~)) sum of the facility's nursing services, food, administrative, and operational rate components. The percentage amounts will be based on groupings of facilities according to the rankings ((~~as established~~)) prescribed in (i) of this subsection (1)(c). The percentages calculated and assigned will remain the same for the next variable return allowance paid in the second year of the biennium. 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 rate 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~~)) rate 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, less accumulated depreciation on the lessor's assets since January 1, 1982, 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~~)) rate.

(iii) The return on investment ((~~allowance~~)) rate determined according to subsection (1)(d) of this section or the alternate return on investment ((~~allowance~~)) rate, whichever is greater, shall be the return on investment ((~~allowance~~)) rate 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.

(f) In the case of a facility which was leased by the contractor as of January 1, 1980, in an arm's-length agreement, if the lease is renewed or extended pursuant to a provision of the lease, the treatment provided in subsection (1)(e) of this section shall be applied except that in the case of renewals or extensions made subsequent to April 1, 1985, reimbursement for the annualized lease payment shall be no greater than the reimbursement for the annualized lease payment for the last year prior to the renewal or extension of the lease.

(2) ((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)~~)) Each biennium, beginning in 1985, the secretary shall review the adequacy of return on investment ((~~allowances~~)) rates 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.

Sec. 21. RCW 74.46.770 and 1983 1st ex.s. c 67 s 39 are each amended to read as follows:

(1) Beginning with all medicaid rates, audits, and settlements effective on or after July 1, 1993, or issued on or after this date, if a contractor wishes to contest the way in which a rule ((~~or contract provision~~)) relating to the prospective cost-related reimbursement system was applied to the contractor by the department, it shall ((~~first~~)) pursue the ((~~administrative review process set forth in RCW 74.46.780~~)) appeals or exception procedure established by the department in rule as required by RCW 74.46.780.

(2) ((~~The administrative review and fair hearing process in RCW 74.46.780 need not be exhausted if a contractor wishes to challenge the legal validity of a statute, rule, or contract provision~~)) If a contractor wishes to challenge the legal validity of a statute, rule, or contract provision or wishes to bring a challenge based in whole or in part on federal law, including but not limited to issues of procedural or substantive compliance with the federal Boren amendment payment standard for medicaid nursing facilities found at 42 U.S.C. 1396a(a)(13)(A), the appeals or exception procedure established by the department in rule may not be used for these purposes.

(3) If a contractor wishes to challenge the legal validity of a medicaid statute, rule, or contract provision or bring a challenge based in whole or in part on federal law, it must bring such an action in a court of proper jurisdiction as may be provided by law.

Sec. 22. RCW 74.46.780 and 1989 c 175 s 159 are each amended to read as follows:

(((1) Within twenty-eight days after a contractor is notified of an action or determination it wishes to challenge, the contractor shall request in writing that the secretary review such determination. The request shall be signed by the contractor or the licensed administrator of the facility, shall identify the challenged determination and the date thereof, and shall state as specifically as practicable the grounds for its contention that the determination was erroneous. Copies of any documentation on which the contractor intends to rely to support its position shall be included with the request.

(2) After receiving a request meeting the above criteria, the secretary or his designee will contact the contractor to schedule a conference for the earliest mutually convenient time. The conference shall be scheduled for no later than ninety days after a properly completed request is received unless both parties agree in writing to a specified later date.

(3) The contractor and appropriate representatives of the department shall attend the conference. In addition, representatives selected by the contractor may attend and participate. The contractor shall provide to the department in advance of the conference any documentation on which it intends to rely to support its contentions. The parties shall clarify and attempt to resolve the issues at the conference. If additional documentation is needed to resolve the issues, a second session of the conference shall be scheduled for not later than twenty-eight days after the initial session unless both parties agree in writing to a specific later date.

~~(4) A written decision by the secretary will be furnished to the contractor within sixty days after the conclusion of the conference.~~

(5) If the contractor desires review of an adverse decision of the secretary, it shall within twenty-eight days following receipt of such decision file a written application for an adjudicative proceeding. The proceeding is governed by chapter 34.05 RCW, the Administrative Procedure Act.)) For all rates, audits, and settlements effective on or after July 1, 1993, or issued on or after this date, the department shall establish in rule, consistent with federal requirements for nursing facilities participating in the medicaid program, an appeals or exception procedure that allows individual nursing care providers an opportunity to submit additional evidence and receive prompt administrative review of payment rates with respect to such issues as the department deems appropriate.

NEW SECTION. Sec. 23. The following acts or parts of acts are each repealed:

(1) RCW 74.46.260 and 1980 c 177 s 26; and

(2) RCW 74.46.495 and 1983 1st ex.s. c 67 s 26.

NEW SECTION. Sec. 24. This act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and shall take effect July 1, 1993.