AN ACT Relating to the medicaid related payment of property costs in licensed nursing facilities; amending RCW 74.46.330, 74.46.350, and 74.46.370; amending 1998 c 322 s 30 (uncodified); adding new sections to chapter 70.38 RCW; adding new sections to chapter 74.46 RCW; repealing 1998 c 322 s 54 (uncodified); providing an expiration date; and declaring an emergency.

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

Sec. 1. 1998 c 322 s 30 (uncodified) is amended to read as follows:

(1) The department shall establish for each medicaid nursing facility a return on investment component rate allocation composed of two parts: A financing allowance and a variable return allowance. The financing allowance part of a facility's return on investment component rate shall be rebased annually, effective July 1st, in accordance with the provisions of this section and this chapter.

(a) The financing allowance shall be determined by multiplying the net invested funds of each facility by .10, and dividing by the greater of a nursing facility's total resident days from the most recent cost report period or resident days calculated on eighty-five percent facility occupancy. However, assets acquired on or after the effective date of this section, shall be grouped in a separate net invested funds calculation that shall be multiplied by .085. The financing allowance factor of .085 shall not be applied to the net invested funds pertaining to new construction or major renovations receiving certificate of need approval or an exemption from certificate of need requirements under chapter 70.38 RCW, or to working drawings that have been submitted to the department of health for construction review approval prior to the effective date of this section. 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 resident days used in computing the financing and variable return allowances shall be adjusted to the anticipated resident 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 resident 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) The variable return array and percentage assigned at the October 1, 1998, rate setting shall remain in effect until June 30, 2001.

(ii) For the ((~~October 1, 1998,~~)) July 1, 2001, rate setting, the department, without utilizing peer groups, shall first rank all facilities in numerical order from highest to lowest according to their per resident day adjusted or audited, or both, allowable costs for ((~~nursing services, food, administration, and operational costs~~)) direct care, therapy care, support services, and operations combined for the ((~~1996~~)) 1999 calendar year cost report period.

((~~(ii)~~)) (iii) 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 sum of the facility's ((~~nursing services, food, administrative, and operational~~)) direct care, therapy care, support services, and operations rate components. The percentage amounts will be based on groupings of facilities according to the rankings prescribed in (c)(i) or (ii) of this subsection, as applicable. 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 sections 19 through 29 of this act~~)).

(e) In the case of a facility that 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 resident days, minus the property component rate allocation ((~~determined according to section 29 of this act~~)), is more than the return on investment rate determined according to (d) of this subsection, 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 a determination is shown to be arbitrary and capricious.

(ii) The sum of the financing allowance computed under (e)(i) of this subsection and the variable allowance shall be compared to the annualized lease payment, plus any interest and depreciation associated with contractor-owned assets, for the period covered by the prospective rates, divided by the contractor's total resident days, minus the property component rate ((~~determined according to section 29 of this act~~)). The lesser of the two amounts shall be called the alternate return on investment rate.

(iii) The return on investment rate determined according to (d) of this subsection or the alternate return on investment rate, whichever is greater, shall be the return on investment rate for the facility and shall be added to the prospective rates of the contractor ((~~as determined in sections 19 through 29 of this act~~)).

(f) In the case of a facility that was leased by the contractor as of January 1, 1980, in an arm's-length agreement, if the lease is renewed or extended under a provision of the lease, the treatment provided in (e) of this subsection 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) For the purpose of calculating a nursing facility's return on investment component rate, if a contractor elects to bank beds or to convert banked beds to active service, under chapter 70.38 RCW, the department shall use the facility's anticipated resident occupancy level subsequent to the decrease or increase in licensed bed capacity. However, in no case shall the department use less than eighty-five percent occupancy of the facility's licensed bed capacity after banking or conversion.

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

(4) The return or investment component rate allocations calculated in accordance with this section shall be adjusted to the extent necessary to comply with ((~~section 18 of this act~~)) RCW 74.46.421. If the department determines that the weighted average rate allocations for all rate components for all facilities is likely to exceed the weighted average total rate specified in the state biennial appropriations act, the department shall adjust the rate allocations calculated in this section proportional to the amount by which the total weighted average rate allocations would otherwise exceed the budgeted level. Such adjustments shall only be made prospectively, not retrospectively.

Sec. 2. RCW 74.46.330 and 1980 c 177 s 33 are each amended to read as follows:

Tangible assets of the following types in which a contractor has an interest through ownership or leasing are subject to depreciation:

(1) Building - the basic structure or shell and additions thereto;

(2) Building fixed equipment - attachments to buildings, including, but not limited to, wiring, electrical fixtures, plumbing, elevators, heating system, and air conditioning system. The general characteristics of this equipment are:

(a) Affixed to the building and not subject to transfer; and

(b) A fairly long life, but shorter than the life of the building to which affixed;

(3) For new or replacement building construction or for major renovations, receiving certificate of need approval or certificate of need exemption under chapter 70.38 RCW on or after the effective date of this section, the number of years used to depreciate fixed equipment shall be the same number of years as the life of the building to which it is affixed;

(4) Major movable equipment including, but not limited to, beds, wheelchairs, desks, and x-ray machines. The general characteristics of this equipment are:

(a) A relatively fixed location in the building;

(b) Capable of being moved as distinguished from building equipment;

(d) Sufficient size and identity to make control feasible by means of identification tags; and

(e) A minimum life greater than one year;

((~~(4)~~)) (5) Minor equipment including, but not limited to, waste baskets, bed pans, syringes, catheters, silverware, mops, and buckets which are properly capitalized. No depreciation shall be taken on items which are not properly capitalized as directed in RCW 74.46.310. The general characteristics of minor equipment are:

(a) In general, no fixed location and subject to use by various departments;

(b) Small in size and unit cost;

(d) Large number in use; and

(e) Generally, a useful life of one to three years;

((~~(5)~~)) (6) Land improvements including, but not limited to, paving, tunnels, underpasses, on-site sewer and water lines, parking lots, shrubbery, fences, and walls where replacement is the responsibility of the contractor; and

((~~(6)~~)) (7) Leasehold improvements - betterments and additions made by the lessee to the leased property, which become the property of the lessor after the expiration of the lease.

Sec. 3. RCW 74.46.350 and 1980 c 177 s 35 are each amended to read as follows:

(1) Buildings, land improvements, and fixed equipment shall be depreciated using the straight-line method of depreciation. For new or replacement building construction or for major renovations, receiving certificate of need approval or certificate of need exemption under chapter 70.38 RCW on or after the effective date of this section, the number of years used to depreciate fixed equipment shall be the same number of years as the life of the building to which it is affixed. Major-minor equipment shall be depreciated using either the straight-line method, the sum-of-the-years' digits method, or declining balance method not to exceed one hundred fifty percent of the straight line rate. Contractors who have elected to take either the sum-of-the-years' digits method or the declining balance method of depreciation on major-minor equipment may change to the straight-line method without permission of the department.

(2) The annual provision for depreciation shall be reduced by the portion allocable to use of the asset for purposes which are neither necessary nor related to patient care.

(3) No further depreciation shall be claimed after an asset has been fully depreciated unless a new depreciation base is established pursuant to RCW 74.46.360.

Sec. 4. RCW 74.46.370 and 1997 c 277 s 2 are each amended to read as follows:

(1) Except for new buildings, major remodels, and major repair projects, as defined in subsection (2) of this section, the contractor shall use lives which reflect the estimated actual useful life of the asset and which shall be no shorter than guideline lives as established by the department. Lives shall be measured from the date on which the assets were first used in the medical care program or from the date of the most recent arm's-length acquisition of the asset, whichever is more recent. In cases where RCW 74.46.360(6)(a) does apply, the shortest life that may be used for buildings is the remaining useful life under the prior contract. In all cases, lives shall be extended to reflect periods, if any, when assets were not used in or as a facility.

(2) Effective July 1, 1997, for asset acquisitions and new facilities, major remodels, and major repair projects that begin operations on or after July 1, 1997, the department shall use the most current edition of Estimated Useful Lives of Depreciable Hospital Assets, or as it may be renamed, published by the American Hospital Publishing, Inc., an American hospital association company, for determining the useful life of new buildings, major remodels, and major repair projects, however, the shortest life that may be used for new buildings is thirty years. New buildings, major remodels, and major repair projects include those projects that meet or exceed the expenditure minimum established by the department of health pursuant to chapter 70.38 RCW.

(3) Building improvements, other than major remodels and major repairs, shall be depreciated over the remaining useful life of the building, as modified by the improvement.

(4) Improvements to leased property which are the responsibility of the contractor under the terms of the lease shall be depreciated over the useful life of the improvement.

(5) A contractor may change the estimate of an asset's useful life to a longer life for purposes of depreciation.

(6) For new or replacement building construction or for major renovations, receiving certificate of need approval or certificate of need exemption under chapter 70.38 RCW on or after the effective date of this section, the number of years used to depreciate fixed equipment shall be the same number of years as the life of the building to which it is affixed.

NEW SECTION. Sec. 5. Beginning July 1, 1999, if a contractor experiences an increase in property taxes relating to construction qualifying under RCW 74.46.360(2), the department shall adjust rates to cover state and county increases in real estate taxes, effective the first day on which the increased tax payment is due, related to construction qualifying for payment under RCW 74.46.360(2). Rate adjustments made under this section shall be consistent with applicable cost limitations contained in this chapter.

NEW SECTION. Sec. 6. (1) In determining the need for nursing home beds on a state-wide basis and a planning area specific basis, the department shall calculate the need for nursing home beds based on the bed-to-population ratio of forty beds per one thousand persons age sixty-five and older. The department shall find no need for additional nursing home beds if the state is at or above the state-wide estimated bed need, unless the department finds that additional beds are needed in order to be located reasonably close to the people they serve, and the department explains such approval in writing.

(2) The department may put under review and subsequently approve or deny an application that proposes to redistribute nursing home bed capacity to a planning area that has a bed-to-population ratio that is under the established ratio.

(3) The department may put under review and subsequently approve or deny an application that proposes to add beds in a planning area that has a bed-to-population ratio that is under the established ratio using beds banked under the provisions of RCW 70.38.115(13).

(4) The department may not consider applications that would redistribute existing nursing home capacity within a planning area that is above the established bed-to-population ratio.

(5) This section expires June 30, 2004.

NEW SECTION. Sec. 7. (1) The need for projects identified in section 6 of this act shall be determined using the individual planning area's estimated nursing home bed need ratio and includes but is not limited to the following criteria:

(a) The current capacity of nursing homes and other long-term care services;

(b) The occupancy rates of nursing homes and other long-term care services over the previous two-year period; and

(2) For the purposes of this section, nursing home beds include long-term care units or distinct part long-term care units located in a hospital that is licensed under chapter 70.41 RCW.

NEW SECTION. Sec. 8. Section 5 of this act is added to chapter 74.46 RCW.

NEW SECTION. Sec. 9. Sections 6 and 7 of this act are each added to chapter 70.38 RCW.

NEW SECTION. Sec. 10. Section 1 of this act shall be codified as a section in chapter 74.46 RCW.

NEW SECTION. Sec. 11. 1998 c 322 s 54 (uncodified) is repealed, effective June 29, 1999.

NEW SECTION. Sec. 12. 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 takes effect immediately.