WSR 97-12-082

PROPOSED RULES

DEPARTMENT OF

SOCIAL AND HEALTH SERVICES

(Public Assistance)

[Filed June 4, 1997, 10:35 a.m.]

Original Notice.

Preproposal statement of inquiry was filed as WSR 97-06-072.

Title of Rule: WAC 388-96-010, 388-96-224, 388-96-505, 388-96-534, 388-96-553, 388-96-554, 388-96-559, 388-96-565, 388-96-585, 388-96-709, 388-96-719, 388-96-735, 388-96-745(7), 388-96-754, 388-96-774, and 388-96-776.

Purpose: WAC 388-96-010, define intangible assets. Removes numbering system and makes other editorial changes to specific definitions.

WAC 388-96-224, in nonaudit years, clarifies desk reviewed allowable costs are used to compute the final statement.

WAC 388-96-505, add refunds of any allowable cost as an example of financial benefit that must be offset against allowable costs in year of receipt.

WAC 388-96-534, clarifies effective dates of a JCADs and reduces the time for a revision from ninety days to thirty days.

WAC 388-96-553, raises limit on depreciable assets to $750; deletes subsections (3), (4) and (5); and moves (6) to WAC 388-96-565.

WAC 388-96-554, changes limit to $750 and removes subsections (3) and (4).

WAC 388-96-559, implement 1997 legislation on establishing land value; define depreciable assets and land value when builder sells new nursing facility before operating it.

WAC 388-96-565, adds subsection (6) from WAC 388-96-553 and implements 1997 legislative changes.

WAC 388-96-585, revises subsection (2)(j) Bad debts, limits the time to request compensation from date the bad debt occurred. Revises subsection (2)(w), removes "in terms of costs to employees and benefits commensurate to such costs." Revises subsection (2)(gg), lists bed rights as an example of intangible assets that are not used in patient care.

WAC 388-96-709, 388-96-719 and 388-96-735, implements 1997 amendment to RCW on method for determining anticipated days. Implements 1997 amendment to RCW on occupancy level for new facilities. Edit changes.

WAC 388-96-745(7), removes actual tables from Marshall Swift and makes a reference to the latest published Marshall Swift. Implements 1997 amendment to RCW on anticipated days when beds are reduced or increased.

WAC 388-96-754, implements 1997 amendment to RCW on anticipated days when beds are reduced or increased.

WAC 388-96-774, implements 1995 legislative limit on current funding.

WAC 388-96-776, implements 1997 amendment to RCW that allows current funding of real estate taxes that result from renovations.

Statutory Authority for Adoption: For WAC 388-96-010 and 388-96-735 is RCW 74.46.800; for WAC 388-96-224 is RCW 74.46.150, [74.46.]160, [74.46.]170 and [74.46.]800; for WAC 388-96-505 is RCW 74.46.200 and 74.46.800; for WAC 388-96-534 is RCW 74.46.270 and [74.46.]800; for WAC 388-96-553, 388-96-554 and 388-96-565 is RCW 74.46.310, [74.46.]320, [74.46.]330 and [74.46.]800; for WAC 388-96-559 is RCW 74.46.360 and [74.46.]800; for WAC 388-96-585 is RCW 74.46.190, [74.46.]460 and [74.46.]800; for WAC 388-96-709 is RCW 74.46.510 and [74.46.]800; for WAC 388-96-719 is RCW 74.46.430 and [74.46.]800; for WAC 388-96-745(7) is RCW 74.46.800 and 74.46.530; for WAC 388-96-754 is RCW 74.46.530 and [74.46.]800; for WAC 388-96-774 is RCW 74.46.460 and [74.46.]800; and for WAC 388-96-776 is RCW 74.46.465 and [74.46.]800.

Statute Being Implemented: Chapter 74.46 RCW.

Summary: See Purpose above.

Reasons Supporting Proposal: See Purpose above.

Name of Agency Personnel Responsible for Drafting: Patricia Hague, P.O. Box 45600, Lacey, WA 98503, (360) 493-2969; Implementation: Paul Montgomery, P.O. Box 45600, Lacey, WA 98503, (360) 493-2587; and Enforcement: Denise Gaither, P.O. Box 45600, Lacey, WA 98503, (360) 493-2525.

Name of Proponent: The Department of Social and Health Services, Aging and Adult Services Administration, Management Services, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: See Purpose above.

Proposal Changes the Following Existing Rules: See Purpose above.

No small business economic impact statement has been prepared under chapter 19.85 RCW. No small businesses will be impacted by the revisions to chapter 388-96 WAC.

Section 201, chapter 403, Laws of 1995, does not apply to this rule adoption. The Department of Social and Health Services is not a named agency within RCW 34.05.328 (5)(a)(i).

Hearing Location: Lacey Government Center (behind Tokyo Bento restaurant), 1009 College Street S.E., Room 104-A, Lacey, WA 98503, on August 5, 1997, at 10:00 a.m.

Assistance for Persons with Disabilities: Contact Leslie Baldwin by July 27, 1997, TDD (360) 902-8324, or (360) 902-7540.

Submit Written Comments to: Leslie Baldwin, Department of Social and Health Services, Rules Coordinator, P.O. Box 45800, Olympia, WA 98504, FAX (360) 902-8292, by August 5, 1997.

Date of Intended Adoption: No sooner than August 6, 1997.

June 3, 1997

Merry A. Kogut, Manager

Rules and Policies Assistance Unit

AMENDATORY SECTION (Amending Order 3896, filed 9/12/95, effective 10/13/95)

WAC 388-96-010 Terms. Unless the context ((clearly requires)) indicates otherwise, the following ((terms shall have the meaning set forth in this section when used)) definitions apply in this chapter.

(((1))) "Accounting" means activities providing information, usually quantitative and often expressed in monetary units, for:

(((a))) (1) Decision-making;

(((b))) (2) Planning;

(((c))) (3) Evaluating performance;

(((d))) (4) Controlling resources and operations; and

(((e))) (5) External financial reporting to investors, creditors, regulatory authorities, and the public.

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

(((3))) "Administration and management" means activities ((employed)) used to maintain, control, and evaluate the efforts and resources of an organization for the accomplishment of the objectives and policies of that organization.

(((4))) "Allowable costs" - See WAC 388-96-501.

(((5))) "Ancillary care" means services ((required by the individual, comprehensive plan of care)) provided by qualified therapists or by support personnel under their supervision that are required by the individual, comprehensive plan of care.

(((6))) "Arm's-length transaction" means a transaction resulting from good-faith bargaining between a buyer and seller who have adverse bargaining positions in the marketplace. (((a))) The following are not arms's-length transactions:

(1) The sale((s)) or exchange((s)) of nursing home facilities ((among)) between two or more parties in which all parties subsequently continue to own one or more of the facilities involved in the transaction((s shall not be considered as arm's-length transactions for purposes of this chapter. ((b))); and

(2) Sale of a nursing home facility ((which)) that 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)).

(((7))) "Assets" means economic resources and certain deferred charges of the contractor, recognized and measured ((in conformity with)) according to generally accepted accounting principles. (("Assets" also include certain deferred charges that are not resources but are recognized and measured in accordance with generally accepted accounting principles.

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

(((9))) "Beds" means, unless otherwise specified, the number of set-up beds in the nursing home, not to exceed the number of licensed beds.

(((10))) "Beneficial owner" means any person who:

(((a))) (1) Directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:

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

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

(2) 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 or herself 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))) (3) Subject to subsection (((4))) (2) of ((this section,)) "beneficial owner," has the right to acquire beneficial ownership of such ownership interest within sixty days, including but not limited to any right to acquire:

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

(((ii))) (b) Through the conversion of an ownership interest;

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

(((iv))) (d) 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 (a), (b), or (c) of this subsection (((10)(c)(i), (ii), or (iii) of this section)) 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)));

(4) In the ordinary course of business, is a pledgee of ownership interest under a written pledge agreement ((and)), shall not be deemed the beneficial owner of such pledged ownership interest until the pledgee ((takes)):

(((i))) (a) Takes all formal steps necessary required to declare a default; and

(((ii))) (b) Determines 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; provided that, the pledge agreement: (((A)))

(i) 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 subsection (((10)(b))) (2) of this ((section)) definition; and

(((B))) (ii) Prior to default, does not grant the pledgee the power to:

(((I))) (A) Vote or direct the vote of the pledged ownership interest; or

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

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

(((12))) "Capitalized lease" means a lease required to be recorded as an asset and associated liability in accordance with generally accepted accounting principles.

(((13))) "Cash method of accounting" means a method of accounting in which revenues are ((recognized only)) recorded when cash is received, and expenditures for expense and asset items are not recorded until cash is disbursed for those expenditures and assets.

(((14))) "Change of ownership" means a substitution of the individual operator or operating entity contracting with the department to deliver care services to medical care recipients in a nursing facility and ultimately responsible for the daily operational decisions of the nursing facility((; or a substitution of control of such operating entity)).

(((a))) (1) Events which constitute a change of ownership include, but are not limited to, the following:

(((i))) (a) The form of legal organization of the contractor is changed (e.g., a sole proprietor forms a partnership or corporation);

(((ii))) (b) Ownership of the nursing home business enterprise is transferred by the contractor to another party, regardless of whether ownership of some or all of the real property and/or personal property assets of the facility is also transferred;

(((iii))) (c) If the contractor is a partnership, any event ((occurs which)) that dissolves the partnership;

(((iv))) (d) If the contractor is a corporation, and the corporation is dissolved, merges with another corporation which is the survivor, or consolidates with one or more other corporations to form a new corporation;

(((v))) (e) If the operator is a corporation and, whether by a single transaction or multiple transactions within any continuous twenty-four-month period, fifty percent or more of the stock is transferred to one or more:

(((A))) (i) New or former stockholders; or

(((B))) (ii) Present stockholders each having held less than five percent of the stock before the initial transaction; or

(((vi))) (f) Any other event or combination of events which results in a substitution or substitution of control of the individual operator or the operating entity contracting with the department to deliver care services.

(((b))) (2) Ownership does not change when the following, without more, occur:

(((i))) (a) A party contracts with the contractor to manage the nursing facility enterprise as the contractor's agent, i.e., subject to the contractor's general approval of daily operating and management decisions; or

(((ii))) (b) The real property or personal property assets of the nursing facility change ownership or are leased, or a lease of them is terminated, without a substitution of individual operator or operating entity and without a substitution of control of the operating entity contracting with the department to deliver care services.

(((15))) "Charity allowance((s))" means a reduction((s)) in charges made by the contractor because of the indigence or medical indigence of a patient.

(((16))) "Contract" means a contract between the department and a contractor for the delivery of nursing facility services to medical care recipients.

(((17))) "Contractor" means an entity ((which)) that contracts with the department to deliver ((nursing facility)) services to medical care recipients in a nursing facility. The entity is responsible for operational decisions.

(((18))) "Courtesy allowances" mean((s)) reductions in charges in the form of an allowance to physicians, clergy, and others, for services received from the contractor. Employee fringe benefits are not considered courtesy allowances.

(((19))) "CSO" means the local community services office of the department.

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

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

(((22))) "Donated asset" means an asset the contractor acquired without making any payment for the asset either in ((the form of)) cash, property, or services. (((a))) An asset is not a donated asset if the contractor:

(1) Made even a nominal payment in acquiring the asset((. (b) An asset purchased using)); or

(2) Used donated funds ((is not a donated)) to purchase the asset.

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

(((24))) "Equity capital" means total tangible and other assets which are necessary, ordinary, and related to patient care from the most recent provider cost report minus related total long-term debt from the most recent provider cost report plus working capital as defined in this section.

(((25))) "Exceptional care recipient" means a medical care recipient determined by the department to require exceptionally heavy care.

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

(((27))) "Fair market value" means:

(((a))) (1) Prior to January 1, 1985, the price for which an asset would have been purchased on the date of acquisition in an arm's-length transaction between a well-informed buyer and seller, neither being under any compulsion to buy or sell; or

(((b))) (2) Beginning January 1, 1985, the replacement cost of an asset, less observed physical depreciation, on the date the fair market value is determined.

(((28))) "Financial statements" mean((s)) statements prepared and presented ((in conformity with)) according to generally accepted accounting principles and the provisions of chapter 74.46 RCW and this chapter including, but not limited to:

(((a))) (1) Balance sheet;

(((b))) (2) Statement of operations;

(((c))) (3) Statement of changes in financial position; and

(((d))) (4) Related notes.

(((29))) "Fiscal year" means the operating or business year of a contractor. All contractors report on the basis of a twelve-month fiscal year, but provision is made in this chapter for reports covering abbreviated fiscal periods. As determined by context or otherwise, "fiscal year" may also refer to a state fiscal year extending from July 1 through June 30 of the following year and comprising the first or second half of a state fiscal biennium.

(((30))) "Gain on sale" means the actual total sales price of all tangible and intangible nursing home assets including, but not limited to, land, building, equipment, supplies, goodwill, and beds authorized by certificate of need, minus the net book value of such assets immediately prior to the time of sale.

(((31))) "Generally accepted accounting principles (GAAP)" means accounting principles approved by the financial accounting standards Board (FASB).

(((32))) "Generally accepted auditing standards (GAAS)" means auditing standards approved by the American institute of certified public accountants (AICPA).

(((33))) "Goodwill" means the excess of the price paid for:

(((a))) (1) A business over the fair market value of all other identifiable, tangible, and intangible assets acquired; and

(((b))) (2) An asset over the fair market value of the asset.

(((34))) "Historical cost" means the actual cost incurred in acquiring and preparing an asset for use, including feasibility studies, architects' fees, and engineering studies.

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

(((36))) "Intangible asset" is an asset that lacks physical substance but possesses economic value.

"Interest" means the cost incurred for the use of borrowed funds, generally paid at fixed intervals by the user.

(((37))) "Joint facility costs" means any costs representing expenses incurred which benefit more than one facility, or one facility and any other entity.

(((38))) "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 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.

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

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

(((41))) "Multiservice facility" means a facility at which two or more types of health or related care are delivered, e.g., a hospital and nursing facility, or a boarding home and nursing facility.

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

(((43))) "Net invested funds" means the net book value of tangible fixed assets, excluding assets associated with central or home offices or otherwise not on the nursing facility premises, 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 and not in excess of any lids or reimbursement limits set forth in this chapter, plus an allowance for working capital as provided in this chapter.

(((44))) "Nonadministrative wages and benefits" means wages, benefits, and corresponding payroll taxes paid for nonadministrative personnel, not to include administrator, assistant administrator, or administrator-in-training.

(((45))) "Nonallowable costs" means the same as "unallowable costs."

(((46))) "Nonrestricted funds" means funds which are not restricted to a specific use by the donor, e.g., general operating funds.

(((47))) "Nursing facility" means a home, place, or institution, licensed under chapter 18.51 or 70.41 RCW, where nursing care services are delivered.

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

(((49))) "Owner" means a sole proprietor, general or limited partner, or beneficial interest holder of five percent or more of a corporation's outstanding stock.

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

(((51))) "Patient day" or "resident day" means a calendar day of care provided to a nursing facility resident((. In computing calendar days of care,)) that will include the day of admission ((is always counted.)) and exclude the day of discharge ((is counted only when the patient was admitted)); except that, when admission and discharge occur on the same day, one day of care shall be deemed to exist. A patient is admitted for purposes of this definition when the patient is assigned a bed and a patient medical record is opened. A "client day" or "recipient day" means a calendar day of care provided to a medical care recipient determined eligible by the department for services provided under chapter 74.09 RCW, subject to the same conditions regarding admission and discharge applicable to a patient day or resident day of care.

(((52))) "Per diem (per patient day or per resident day) costs" means total allowable costs for a fiscal period divided by total patient or resident days for the same period.

(((53))) "Professionally designated real estate appraiser" means an individual:

(((a))) (1) Regularly engaged in the business of providing real estate valuation services for a fee;

(((b))) (2) Qualified by a nationally recognized real estate appraisal educational organization on the basis of extensive practical appraisal experience, including ((the)):

(((i))) (a) Writing of real estate valuation reports;

(((ii))) (b) Passing of written examinations on valuation practice and theory; and

(((iii) Requirement to subscribe and adhere))

(c) Subscribing and adhering to ((certain)) the standards of professional practice ((as)) required by the organization ((prescribes)).

(((54))) "Prospective daily payment rate" means the rate assigned by the department to a contractor for providing service to medical care recipients. The rate is used to compute the maximum participation of the department in the contractor's costs.

(((55))) "Qualified therapist":

(((a))) (1) An activities specialist having specialized education, training, or at least one year's experience in organizing and conducting structured or group activities;

(((b))) (2) An audiologist eligible for a certificate of clinical competence in audiology or having the equivalent education and clinical experience;

(((c))) (3) A mental health professional as defined by chapter 71.05 RCW;

(((d))) (4) A mental retardation professional((,)) who is either a qualified therapist or a therapist((,)) approved by the department ((having)) who has specialized training or one year's experience in treating or working with the mentally retarded or developmentally disabled;

(((e))) (5) A social worker graduated from a school of social work;

(((f))) (6) A speech pathologist eligible for a certificate of clinical competence in speech pathology or having the equivalent education and clinical experience;

(((g))) (7) A physical therapist as defined by chapter 18.74 RCW;

(((h))) (8) An occupational therapist ((graduated from a program in occupational therapy, or having the equivalent of education or training, and meeting all requirements of state law)) licensed under chapter 18.59 RCW and chapter 246-847 WAC; or

(((i))) (9) A respiratory care practitioner certified under chapter 18.89 RCW.

(((56))) "Rebased rate" or "cost rebased rate" means a facility-specific rate assigned to a nursing facility for a particular rate period established on desk-reviewed, adjusted costs reported for that facility covering at least six months of a prior calendar year.

(((57))) "Recipient" means a medical care recipient.

(((58))) "Records" means data supporting all financial statements and cost reports including, but not limited to:

(((a))) (1) All general and subsidiary ledgers;

(((b))) (2) Books of original entry;

(((c))) (3) Invoices;

(((d))) (4) Schedules;

(((e))) (5) Summaries; and

(((f))) (6) Transaction documentation, however maintained.

(((59))) "Regression analysis" means a statistical technique through which one can analyze the relationship between a dependent or criterion variable and a set of independent or predictor variables.

(((60))) "Related care" includes:

(((a))) (1) The director of nursing services;

(((b))) (2) Activities and social services programs;

(((c))) (3) Medical and medical records specialists; and

(((d))) (4) Consultation provided by:

(((i))) (a) Medical directors;

(((ii))) (b) Pharmacists;

(((iii))) (c) Occupational therapists;

(((iv))) (d) Physical therapists;

(((v))) (e) Speech therapists; ((and))

(((vi))) (f) Other therapists; and

(((vii))) (g) Mental health professionals as defined in law and regulation.

(((61))) "Related organization" means an entity under common ownership and/or control, or which has control of or is controlled by, the contractor. Common ownership exists if an entity has a five percent or greater beneficial ownership interest in the contractor and any other entity. Control exists if an entity has the power, directly or indirectly, to significantly influence or direct the actions or policies of an organization or institution, whether or not the power is legally enforceable and however exercisable or exercised.

(((62))) "Relative" includes:

(((a))) (1) Spouse;

(((b))) (2) Natural parent, child, or sibling;

(((c))) (3) Adopted child or adoptive parent;

(((d))) (4) Stepparent, stepchild, stepbrother, stepsister;

(((e))) (5) Father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law;

(((f))) (6) Grandparent or grandchild; and

(((g))) (7) Uncle, aunt, nephew, niece, or cousin.

(((63))) "Restricted fund" means a fund for which the use of the principal and/or income is restricted by agreement with or direction of the donor to a specific purpose, in contrast to a fund over which the contractor has complete control. Restricted funds generally fall into three categories:

(((a))) (1) Funds restricted by the donor to specific operating purposes;

(((b))) (2) Funds restricted by the donor for additions to property, plant, and equipment; and

(((c))) (3) Endowment funds.

(((64))) "Secretary" means the secretary of the department of social and health services (DSHS).

(((65))) "Start-up costs" means the one-time preopening costs incurred from the time preparation begins on a newly constructed or purchased building until the first patient is admitted. Start-up costs include:

(((a))) (1) Administrative and nursing salaries;

(((b))) (2) Utility costs;

(((c))) (3) Taxes;

(((d))) (4) Insurance;

(((e))) (5) Repairs and maintenance; and

(((f))) (6) Training costs.

Start-up costs do not include expenditures for capital assets.

(((66))) "Title XIX" means the 1965 amendments to the Social Security Act, P.L. 89-07, as amended.

(((67))) "Unallowable costs" means costs which do not meet every test of an allowable cost.

(((68))) "Uniform chart of accounts" means a list of account titles identified by code numbers established by the department for contractors to use in reporting costs.

(((69))) "Vendor number" means a number assigned to each contractor delivering care services to medical care recipients.

(((70))) "Working capital" means total current assets necessary, ordinary, and related to patient care from the most recent cost report minus total current liabilities necessary, ordinary, and related to patient care from the most recent cost report.

[Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-010, filed 9/12/95, effective 10/13/95. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-010, filed 5/26/94, effective 6/26/94. Statutory Authority: RCW 74.46.800 and 74.09.120. 93-19-074 (Order 3634), 388-96-010, filed 9/14/93, effective 10/15/93. Statutory Authority: RCW 74.09.120. 91-22-025 (Order 3270), 388-96-010, filed 10/29/91, effective 11/29/91. Statutory Authority: RCW 79.09.120 [74.09.120] and 74.46.800. 90-09-061 (Order 2970), 388-96-010, filed 4/17/90, effective 5/18/90. Statutory Authority: 1987 c 476. 88-01-126 (Order 2573), 388-96-010, filed 12/23/87. Statutory Authority: RCW 74.09.120 and 74.46.800. 85-13-060 (Order 2240), 388-96-010, filed 6/18/85. Statutory Authority: RCW 74.09.120. 84-24-050 (Order 2172), 388-96-010, filed 12/4/84. Statutory Authority: RCW 74.46.800. 84-12-039 (Order 2105), 388-96-010, filed 5/30/84. Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), 388-96-010, filed 9/16/83; 82-21-025 (Order 1892), 388-96-010, filed 10/13/82; 81-22-081 (Order 1712), 388-96-010, filed 11/4/81. Statutory Authority: RCW 74.09.120 and 74.46.800. 81-06-024 (Order 1613), 388-96-010, filed 2/25/81. Statutory Authority: RCW 74.09.120. 80-09-083 (Order 1527), 388-96-010, filed 7/22/80; 79-04-061 (Order 1381), 388-96-010, filed 3/28/79. Statutory Authority: RCW 74.08.090 and 74.09.120. 78-06-080 (Order 1300), 388-96-010, filed 6/1/78; Order 1262, 388-96-010, filed 12/30/77.]

AMENDATORY SECTION (Amending Order 3896, filed 9/12/95, effective 10/13/95)

WAC 388-96-224 Final settlement. (1) If an audit is conducted, the department shall issue a final settlement report to the contractor after completion of the audit process, including exhaustion or termination of any administrative review and appeal of audit findings or determinations requested by the contractor, but not including judicial review as may be available to and commenced by the contractor.

(2) The department shall prepare ((the)) a final settlement by cost center and shall fully substantiate disallowed costs, refunds, underpayments, or adjustments to the cost report and financial statements, reports, and schedules submitted by the contractor. The department shall take into account all authorized shifting, cost savings, and upper limits to rates on a cost center basis. For the final settlement report, the department shall compare:

(a) The prospective rate the contractor was paid for the facility in question during the report period, weighted by the number of allowable resident days reported for the period each rate was in effect ((as verified by audit,)) to

(b) The contractor's audited allowable costs for the reporting period((.

The department shall take into account all authorized shifting, cost savings, and upper limits to rates on a cost center basis.

(2))); or

(c) For nonaudited reporting periods, the contractor's desk reviewed allowable costs for the reporting period.

(3) A contractor shall have twenty-eight days after receipt of a final settlement report to contest such report pursuant to WAC 388-96-901 and 388-96-904. Upon expiration of the twenty-eight-day period, the department shall not review a final settlement report. Any administrative review of a final settlement shall be limited to calculation of the settlement or the application of settlement principles and rules, or both, and shall not examine or reexamine rate or audit issues.

(((3))) (4) The department shall reopen a final settlement if it is necessary to make adjustments based upon findings resulting from an audit performed pursuant to RCW 74.46.105. The department may also reopen a final settlement to recover an industrial insurance dividend or premium discount under RCW 51.16.035 in proportion to a contractor's medical care recipients, pursuant to RCW 74.46.180(5).

[Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-224, filed 9/12/95, effective 10/13/95. Statutory Authority: 1987 c 476. 88-01-126 (Order 2573), 388-96-224, filed 12/23/87. Statutory Authority: RCW 74.09.120 and 74.46.800. 85-13-060 (Order 2240), 388-96-224, filed 6/18/85. Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), 388-96-224, filed 9/16/83.]

AMENDATORY SECTION (Amending Order 3634, filed 9/14/93, effective 10/15/93)

WAC 388-96-505 Offset of miscellaneous revenues. (1) The contractor shall reduce allowable costs whenever the item, service, or activity covered by such costs generates revenue or financial benefits (e.g., purchase discounts, refunds of allowable costs or rebates) other than through the contractor's normal billing for care services; except, the department shall not deduct from the allowable costs of a nonprofit facility unrestricted grants, gifts, and endowments, and interest therefrom.

(2) The contractor shall reduce allowable costs for hold-bed revenue in the property, administrative, and operational cost areas only. In the property cost area, the amount of reduction will be determined by dividing a facility's allowable property costs by total patient days and multiplying the result by total hold-room days. In the administrative cost area, the amount of the bed hold revenue shall be determined by dividing a facility's allowable administrative costs by total patient days and multiplying the result by total hold-room days. In the operational cost area, the amount of reduction will be determined by dividing allowable operational costs minus dietary and laundry costs by the total patient days and multiplying the result by total hold-room days.

(3) Where goods or services are sold, the amount of the reduction shall be the actual cost relating to the item, service, or activity. In the absence of adequate documentation of cost, it shall be the full amount of the revenue received. Where financial benefits such as purchase discounts, refunds of allowable costs or rebates are received, the amount of the reduction shall be the amount of the discount or rebate. Financial benefits such as purchase discounts, refunds of allowable costs and rebates, including industrial insurance rebates, shall be offset against allowable costs in the year the contractor actually receives the benefits.

(4) Only allowable costs shall be recovered under this section. Costs allocable to activities or services not included in nursing facility services (e.g., costs of vending machines and services specified in chapter 388-86 WAC not included in nursing facility services) are nonallowable costs.

[Statutory Authority: RCW 74.46.800 and 74.09.120. 93-19-074 (Order 3634), 388-96-505, filed 9/14/93, effective 10/15/93. Statutory Authority: RCW 74.46.800. 92-16-013 (Order 3424), 388-96-505, filed 7/23/92, effective 8/23/92. Statutory Authority: 1987 c 476. 88-01-126 (Order 2573), 388-96-505, filed 12/23/87. Statutory Authority: RCW 74.09.120. 84-24-050 (Order 2172), 388-96-505, filed 12/4/84; 82-21-025 (Order 1892), 388-96-505, filed 10/13/82. Statutory Authority: RCW 74.09.120 and 74.46.800. 81-06-024 (Order 1613), 388-96-505, filed 2/25/81. Statutory Authority: RCW 74.08.090 and 74.09.120. 78-06-080 (Order 1300), 388-96-505, filed 6/1/78; Order 1262, 388-96-505, filed 12/30/77.]

AMENDATORY SECTION (Amending WSR 96-15-056, filed 7/16/96, effective 8/16/96)

WAC 388-96-534 Joint cost allocation disclosure (JCAD). (1) The contractor shall disclose to the department:

(a) The nature and purpose of all costs representing allocations of joint facility costs; and

(b) The methodology of the allocation utilized.

(2) The contractor shall demonstrate in such disclosure:

(a) The services involved are necessary and nonduplicative; and

(b) Costs are allocated in accordance with benefits received from the resources represented by those costs.

(3) The contractor shall make such disclosure not later than September 30th for the following year; except, a new contractor shall submit the first year's disclosure together with the submissions required by WAC 388-96-026. Within this section, the meaning of the:

(a) "Effective date" is the date the department will recognize allocation per an approved JCAD; and

(b) "Implementation date" is the date the facility will begin or began incurring joint facility costs.

(4) The department shall determine the acceptability of the JCAD methodology not later than December 31((,)) of each year for all ((timely received)) JCADs((. Costs disclosed, allocated, and reported in conformity with a department-approved JCAD methodology must undergo review and be determined allowable costs for the purposes of rate setting and audit)) received by September 30th.

(a) The effective date of an acceptable JCAD that was received by September 30th is January 1st.

(b) The effective date of an acceptable JCAD that was received after September 30th shall be ninety days from the date the JCAD was received by the department.

(5) The contractor shall submit to the department for approval an amendment or revision to an approved JCAD methodology ((shall be submitted to the department for approval)) at least ((ninety)) thirty days prior to the ((effective)) implementation date of the amendment or revision. For amendments or revisions received less than ((ninety)) thirty days before the ((proposed effective)) implementation date, the effective date of approval will be ((ninety)) thirty days from the date the ((amendment or revision)) JCAD is received by the department.

(6) ((Where)) When a contractor ((will)), who is not currently incurring joint facility costs, begins to incur joint facility costs ((at some time other than the beginning of)) during the calendar year, the contractor shall provide the information required in subsections (1) and (2) of this section at least ninety days prior to the implementation date ((the cost will first be incurred)). If the JCAD is not received ninety days before the ((proposed effective)) implementation date, the effective date of the approval will be ninety days from the date the ((amendment or revision)) JCAD is received by the department.

(7) Joint facility costs not disclosed, allocated, and reported in conformity with this section are nonallowable costs. Joint facility costs incurred before the effective dates of subsection (((3))) (4), (5), and (6) of this section are unallowable. Costs disclosed, allocated, and reported in conformity with a department-approved JCAD methodology must undergo review and be determined allowable costs for the purposes of rate setting and audit.

[Statutory Authority: RCW 74.46.800. 96-15-056, 388-96-534, filed 7/16/96, effective 8/16/96. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-534, filed 5/26/94, effective 6/26/94. Statutory Authority: 1987 c 476. 88-01-126 (Order 2573), 388-96-534, filed 12/23/87. Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), 388-96-534, filed 9/16/83; 80-09-083 (Order 1527), 388-96-534, filed 7/22/80.]

AMENDATORY SECTION (Amending Order 2025, filed 9/16/83)

WAC 388-96-553 Capitalization. The following costs shall be capitalized:

(1) Expenditures for ((and costs of equipment, including furniture and furnishings,)) depreciable assets with historical cost in excess of ((one)) seven hundred fifty dollars per unit and a useful life of more than one year from the date of purchase;

(2) Expenditures and costs for ((equipment, including furniture and furnishings,)) depreciable assets with historical cost of ((one)) seven hundred fifty dollars or less per unit if either:

(a) The ((item of equipment)) depreciable asset was acquired in a group purchase where the total cost exceeded ((one)) seven hundred fifty dollars; or

(b) The ((item of equipment)) depreciable asset was part of the initial equipment or stock of the nursing home((.)); and

(3) ((Effective January 1, 1981, for settlement purposes for periods subsequent to that date, and for purposes of setting rates for periods beginning July 1, 1982, and subsequently, subsections (1) and (2) of this section shall be applied with the sum of five hundred dollars replacing the sum of one hundred fifty dollars.

(4) Effective January 1, 1983, for settlement purposes for periods subsequent to that date, and for purposes of setting rates for periods beginning July 1, 1984, and subsequently subsections (1) and (2) of this section shall be applied with the sum of seven hundred fifty dollars replacing the sum of one hundred fifty dollars.

(5))) Expenditures for ((and costs of building, and other real property items, components, and improvements, whether for leased or owner-operated facilities, in excess of five hundred dollars and involving one or more of the following:

(a) Increase of the interior floor space of the structure;

(b) Increase or renewal of paved areas outside the structure;

(c) Exterior or interior remodeling of the structure;

(d) Installation of additional heating, cooling, electrical, water-related, or similar fixed equipment;

(e) Landscaping or redecorating;

(f))) any change, including repairs((, which)) with a cost in excess of seven hundred fifty dollars that increases the useful life of the ((structure or item if not a part of the structure)) depreciable asset by two years or more((;

(g) Any replacement or renewal of a real property item, component or improvement, whether structural or nonstructural.

(6) For a leasehold improvement, the asset shall be amortized over the asset's useful life in accordance with Internal Revenue Service class life ADR system guidelines or in accordance with American Hospital Association guidelines)).

[Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), 388-96-553, filed 9/16/83; 83-05-007 (Order 1944), 388-96-553, filed 2/4/83; 82-11-065 (Order 1808), 388-96-553, filed 5/14/82. Statutory Authority: RCW 74.09.120 and 74.46.800. 81-06-024 (Order 1613), 388-96-553, filed 2/25/81; Order 1262, 388-96-553, filed 12/30/77.]

AMENDATORY SECTION (Amending Order 2025, filed 9/16/83)

WAC 388-96-554 Expensing. The following costs shall be expensed:

(1) Expenditures for ((and costs of equipment, including furniture and furnishings,)) depreciable assets with historical cost of ((one)) seven hundred fifty dollars or less per unit or a useful life of one year or less from the date of purchase.

(2) Subsection (1) of this section shall not apply if:

(a) The ((item of equipment)) depreciable asset was acquired in a group purchase where the total cost exceeded ((one)) seven hundred fifty dollars; or

(b) The ((item of equipment)) depreciable asset was part of the initial equipment or stock of the nursing home.

(3) ((Effective January 1, 1981, for settlement purposes for periods subsequent to that date, and for purposes of setting rates for periods beginning July 1, 1982, and subsequently, subsections (1) and (2) of this section shall be applied with the sum of five hundred dollars replacing the sum of one hundred fifty dollars.

(4) Effective January 1, 1983, for settlement purposes for periods subsequent to that date, and for purposes of setting rates for periods beginning July 1, 1984, and subsequently subsections (1) and (2) of this section shall be applied with the sum of seven hundred fifty dollars replacing the sum of one hundred fifty dollars.

(5))) Expenditures for and costs of building and other real property items, components and improvements, whether for leased or owner-operated facilities, of ((five)) seven hundred and fifty dollars or less.

(((6))) (4) Expenditures for and costs of repairs necessary to maintain the useful life of equipment, including furniture and furnishings, and real property items, components or improvements which do not increase the useful life of the asset by two years or more. If a repair is to the interior or exterior of the structure, the term "asset" shall refer to the structure.

(((7))) (5) Remaining undepreciated cost of equipment, including furniture or furnishings or real property items, components, or improvements which are retired and not replaced, provided such cost shall be offset by any proceeds or compensations received for such assets, and such cost shall be expensed only if the contractor has made a reasonable effort to recover at least the outstanding book value of such assets. If a retired asset is replaced, WAC 388-96-572(3) shall apply and the replacement or renewal shall be capitalized if required by WAC 388-96-553.

[Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), 388-96-554, filed 9/16/83; 83-05-007 (Order 1944), 388-96-554, filed 2/4/83.]

AMENDATORY SECTION (Amending Order 3737, filed 5/26/94, effective 6/26/94 WAC 388-96-559 Cost basis of land and depreciation base. (1) For all partial or whole rate periods after December 31, 1984 unless otherwise provided or limited by this chapter or by this section, chapter 388-96 WAC or chapter 74.46 RCW, the total depreciation base of depreciable assets and the cost basis of land shall be the lowest of:

(a) The contractor's appraisal, if any;

(b) The department's appraisal obtained through the department of general administration of the state of Washington, if any; or

(c) The historical purchase cost of the contractor, or lessor if the assets are leased by the contractor, in acquiring ownership of the asset in an arm's-length transaction, and preparing the asset for use, less goodwill, and less accumulated depreciation, if applicable, incurred during periods the assets have been used in or as a facility by any and all contractors. Such accumulated depreciation is to be measured in accordance with subsection (5) of this section and WAC 388-96-561, 388-96-565, and 388-96-567. Where the straight-line or sum-of-the-years digits method of depreciation is used the contractor:

(i) May deduct salvage values from historical costs for each cloth based item, e.g., mattresses, linen, and draperies; and

(ii) Shall deduct salvage values from historical costs of at least:

(A) Five percent of the historical value for each noncloth item included in moveable equipment; and

(B) Twenty-five percent of the historical value for each vehicle.

(2) Unless otherwise provided or limited by this chapter or by chapter 74.46 RCW, the department shall, in determining the total depreciation base of a depreciable real or personal asset owned or leased by the contractor, deduct depreciation relating to all periods subsequent to the more recent of:

(a) The date such asset was first used in the medical care program; or

(b) The most recent date such asset was acquired in an arm's-length purchase transaction which the department is required to recognize for Medicaid cost reimbursement purposes.

No depreciation shall be deducted for periods such asset was not used in the medical care program or was not used to provide nursing care.

(3) The department may have the fair market value of the asset at the time of purchase established by appraisal through the department of general administration of the state of Washington if:

(a) The department challenges the historical cost of an asset; or

(b) The contractor cannot or will not provide the historical cost of a leased asset and the department is unable to determine such historical cost from its own records or from any other source.

The contractor may allocate or reallocate values among land, building, improvements, and equipment in accordance with the department's appraisal.

If an appraisal is conducted, the depreciation base of the asset and cost basis of land will not exceed the fair market value of the asset. An appraisal conducted by or through the department of general administration shall be final unless the appraisal is shown to be arbitrary and capricious.

(4) If the land and depreciable assets of a newly constructed nursing facility were never used in or as a nursing facility before being purchased from the builder, the cost basis and the depreciation base shall be the lesser of:

(a) Documented actual cost of the builder; or

(b) The approved amount of the certificate of need issued to the builder.

When the builder is unable or unwilling to document its costs, the cost basis and the depreciation base shall be the approved amount of the certificate of need.

(5) For leased assets, the department may examine documentation in its files or otherwise obtainable from any source to determine:

(a) The lessor's purchase acquisition date; or

(b) The lessor's historical cost at the time of the last arm's-length purchase transaction.

If the department is unable to determine the lessor's acquisition date by review of its records or other records, the department, in determining fair market value as of such date, may use the construction date of the facility, as found in the state fire marshal's records or other records, as the lessor's purchase acquisition date of leased assets.

(((5))) (6) For all rate periods past or future, where depreciable assets or land are acquired from a related organization, the contractor's depreciation base and land cost basis shall not exceed the base and basis the related organization had or would have had under a contract with the department.

(((6))) (7) If a contractor cannot or will not provide the lessor's purchase acquisition cost of assets leased by the contractor and the department is unable to determine historical purchase cost from another source, the appraised asset value of land, building, or equipment, determined by or through the department of general administration shall be adjusted, if necessary, by the department using the Marshall and Swift Valuation Guide to reflect the value at the lessor's acquisition date. If an appraisal has been prepared for leased assets and the assets subsequently sell in the first arm's-length transaction since January 1, 1980, under subsection (((8))) (9) of this section, the Marshall and Swift Valuation Guide will be used to adjust, if necessary, the asset value determined by the appraisal to the sale date. If the assets are located in a city for which the Marshall and Swift Valuation Guide publishes a specific index, or if the assets are located in a county containing that city, the city-specific index shall be used to adjust the appraised value of the asset. If the assets are located in a city or county for which a specific index is not calculated, the Western District Index calculated by Marshall and Swift shall be used.

(((7))) (8) For new or replacement building construction or for substantial building additions requiring the acquisition of land and which commenced to operate on or after July 1, 1997, the department shall determine allowable land costs of the additional land acquired for the new or replacement construction or for substantial building additions to be the lesser of:

(a) The contractor's or lessor's actual cost per square foot; or

(b) The square foot land value as established by an appraisal that meets the latest publication of the Uniform Standards of Professional Appraisal Practice (USPAP) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The department shall obtain a USPAP appraisal that meets FIRREA first from:

(i) An arms'-length lender that has accepted the ordered appraisal; or

(ii) If the department is unable to obtain from the arms'-length lender a lender-approved appraisal meeting USPAP and FIRREA standards or if the contractor or lessor is unable or unwilling to provide or cause to be provided a lender-approved appraisal meeting USPAP and FIRREA standards, then:

(A) The department shall order such an appraisal; and

(B) The contractor shall immediately reimburse the department for the costs incurred in obtaining the USPAP and FIRREA appraisal.

(9) For all rates effective on or after January 1, 1985, if depreciable assets or land are acquired by purchase which were used in the medical care program on or after January 1, 1980, the depreciation base or cost basis of such assets shall not exceed the net book value existing at the time of such acquisition or which would have existed had the assets continued in use under the previous Medicaid contract with the department; except that depreciation shall not be accumulated for periods during which such assets were not used in the medical care program or were not in use in or as a nursing care facility.

(((8))) (10)(a) Subsection (((7))) (9) of this section shall not apply to the most recent arm's-length purchase acquisition if it occurs ten years or more after the previous arm's-length transfer of ownership nor shall subsection (((7))) (9) of this section apply to the first arm's-length purchase acquisition of assets occurring on or after January 1, 1980, for facilities participating in the Medicaid program before January 1, 1980. The depreciation base or cost basis for such acquisitions shall not exceed the lesser of the fair market value as of the date of purchase of the assets determined by an appraisal conducted by or through the department of general administration or the owner's acquisition cost of each asset, land, building, or equipment. An appraisal conducted by or through the department of general administration shall be final unless the appraisal is shown to be arbitrary and capricious. Should a contractor request a revaluation of an asset, the contractor must document ten years have passed since the most recent arm's-length transfer of ownership. As mandated by Section 2314 of the Deficit Reduction Act of 1984 (P.L. 98-369) and state statutory amendments, and under RCW 74.46.840, for all partial or whole rate periods after July 17, 1984, this subsection is inoperative for any transfer of ownership of any asset, including land and all depreciable or nondepreciable assets, occurring on or after July 18, 1984, leaving subsection (((7))) (9) of this section to apply without exception to acquisitions occurring on or after July 18, 1984, except as provided in subsections (((8))) (10)(b) and (((9))) (11) of this section.

(b) For all rates after July 17, 1984, subsection (8)(a) shall apply, however, to transfers of ownership of assets:

(i) Occurring before January 1, 1985, if the costs of such assets have never been reimbursed under Medicaid cost reimbursement on an owner-operated basis or as a related party lease; or

(ii) Under written and enforceable purchase and sale agreements dated before July 18, 1984, which are documented and submitted to the department before January 1, 1988.

(c) For purposes of Medicaid cost reimbursement under this chapter, an otherwise enforceable agreement to purchase a nursing home dated before July 18, 1984, shall be considered enforceable even though the agreement contains:

(i) No legal description of the real property involved; or

(ii) An inaccurate legal description, notwithstanding the statute of frauds or any other provision of law.

(((9))) (11)(a) In the case of land or depreciable assets leased by the same contractor since January 1, 1980, in an arm's-length lease, and purchased by the lessee/contractor, the lessee/contractor shall have the option to have the:

(i) Provisions of subsection (((8))) (10) of this section apply to the purchase; or

(ii) Reimbursement for property and return on investment continue to be calculated under the provisions contained in RCW 74.46.530 (1)(e) and (f) and WAC 388-96-754(5). Reimbursement shall be based upon provisions of the lease in existence on the date of the purchase.

(b) The lessee/contractor may select the option in subsection (((9))) (11)(a)(ii) of this section only when the purchase date meets one of the following criteria. The purchase date is:

(i) After the lessor has declared bankruptcy or has defaulted in any loan or mortgage held against the leased property;

(ii) Within one year of the lease expiration or renewal date contained in the lease;

(iii) After a rate setting for the facility in which the reimbursement rate set, under this chapter and under chapter 74.46 RCW, no longer is equal to or greater than the actual cost of the lease; or

(iv) Within one year of any purchase option in existence on January 1, 1988.

(((10))) (12) For purposes of establishing the property and return on investment component rates, the value of leased equipment, if unknown by the contractor, may be estimated by the department using previous department of general administration appraisals as a data base. The estimated value may be adjusted using the Marshall and Swift Valuation Guide to reflect the value of the asset at the lessor's purchase acquisition date.

[Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-559, filed 5/26/94, effective 6/26/94. Statutory Authority: RCW 74.09.120. 91-22-025 (Order 3270), 388-96-559, filed 10/29/91, effective 11/29/91. Statutory Authority: RCW 79.09.120 [74.09.120] and 74.46.800. 90-09-061 (Order 2970), 388-96-559, filed 4/17/90, effective 5/18/90. Statutory Authority: RCW 74.46.800. 88-16-079 (Order 2660), 388-96-559, filed 8/2/88; 86-10-055 (Order 2372), 388-96-559, filed 5/7/86, effective 7/1/86. Statutory Authority: RCW 74.09.120, 74.46.840 and 74.46.800. 85-17-052 (Order 2270), 388-96-559, filed 8/19/85. Statutory Authority: RCW 74.09.120. 84-24-050 (Order 2172), 388-96-559, filed 12/4/84; 81-22-081 (Order 1712), 388-96-559, filed 11/4/81. Statutory Authority: RCW 74.09.120 and 74.46.800. 81-06-024 (Order 1613), 388-96-559, filed 2/25/81; Order 1262, 388-96-559, filed 12/30/77.]

Reviser's note: The typographical error in the above section occurred in the copy filed by the agency and appears in the Register pursuant to the requirements of RCW 34.08.040.

AMENDATORY SECTION (Amending Order 3737, filed 5/26/94, effective 6/26/94 WAC 388-96-565 Lives. (1) Except for new buildings, major remodels and major repair projects as defined in subsection (3) of this section, the contractor shall use lives reflecting the estimated actual useful life of assets, for example, land improvements, buildings, equipment, leasehold improvements, and other assets. Lives shall not be shorter than guideline lives published by the American Hospital Association in computing allowable depreciation. ((The shortest building life a contractor may use is thirty years; provided that,)) In cases of newly constructed buildings containing newly licensed nursing home beds, the shortest lives shall be the most recently published lives for construction classes as defined and described in the Marshall Valuation Service published by the Marshall Swift Publication Company.

(2) The contractor shall measure lives 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 by purchase of the asset, whichever is more recent. The contractor shall extend lives to reflect periods, if any, during which assets were not used to provide nursing care or were not used in the medical care program.

(3) Effective July 1, 1997, for depreciable assets acquired on or after July 1, 1997 including new facilities, major remodels, and major repair projects that begin operating on or after July 1, 1997, the department shall use the most current edition of Estimated Useful Lives of Depreciable Hospital Assets published by the American Hospital Publishing, Inc., to determine the useful life of depreciable assets, new building, major remodels, and major repair projects; provided that, the shortest life that may be used for new buildings is thirty years. New building, major remodels, and major repair projects are those projects that meet or exceed the expenditure minimum established by the department of health pursuant to chapter 70.38 RCW.

(4) Contractors shall depreciate building improvements other than major remodels and major repairs defined in subsection (3) of this section over the remaining useful life of the building, as modified by the improvement, but not less than fifteen years.

(((4))) (5) 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 in accordance with American Hospital Association guidelines.

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

[Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-565, filed 5/26/94, effective 6/26/94. Statutory Authority: RCW 74.09.180 and 74.46.800. 89-01-095 (Order 2742), 388-96-565, filed 12/21/88. Statutory Authority: RCW 74.46.800. 87-09-058 (Order 2485), 388-96-565, filed 4/20/87; 86-10-055 (Order 2372), 388-96-565, filed 5/7/86, effective 7/1/86. Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), 388-96-565, filed 9/16/83; 81-22-081 (Order 1712), 388-96-565, filed 11/4/81. Statutory Authority: RCW 74.09.120 and 74.46.800. 81-06-024 (Order 1613), 388-96-565, filed 2/25/81; Order 1262, 388-96-565, filed 12/30/77.]

AMENDATORY SECTION (Amending WSR 96-15-056, filed 7/16/96, effective 8/16/96)

WAC 388-96-585 Unallowable costs. (1) The department shall not allow costs if not documented, necessary, ordinary, and related to the provision of care services to authorized patients.

(2) The department shall include, but not limit unallowable costs to the following:

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

(b) Costs of services and items covered by the Medicaid program but not included in the Medicaid nursing facility daily payment rate. Items and services covered by the Medicaid nursing facility daily payment rate are listed in chapters 388-86 and 388-97 WAC;

(c) Costs associated with a capital expenditure subject to Section 1122 approval (Part 100, Title 42 C.F.R.) if the department found the capital expenditure inconsistent with applicable standards, criteria, or plans. If the contractor did not give the department timely notice of a proposed capital expenditure, all associated costs shall be nonallowable as of the date the costs are determined not to be reimbursable under applicable federal regulations;

(d) Costs associated with a construction or acquisition project requiring certificate of need approval or exemption from the requirements for certificate of need for the replacement of existing nursing home beds pursuant to RCW 70.38.115 (13)(a) if such approval or exemption was not obtained;

(e) Costs of outside activities (e.g., costs allocable to the use of a vehicle for personal purposes or related to the part of a facility leased out for office space);

(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 violating principles set forth in this chapter;

(h) Costs resulting from transactions or the application of accounting methods circumventing the principles of the prospective cost-related reimbursement system;

(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. Beginning July 1, 1983, the department shall allow bad debts of Title XIX recipients ((only if:)) through the final settlement process when the bad debt is reported in the cost report period in which it began or the cost report period immediately following the cost report period in which the bad debt began; provided that,

(i) The debt is related to covered services;

(ii) It arises from the recipient's required contribution toward the cost of care;

(iii) The provider can establish reasonable collection efforts were made. For the purposes of this section, reasonable collection efforts:

(A) Are equal to the collection efforts for non-Title XIX recipients;

(B) Are designed to result in collection; and

(C) Do not result in the increase of the debt. All amounts accumulated after sixty days from the initial nonpayment by the Title XIX recipients are deemed increases as a result of unreasonable collection efforts;

(iv) The debt was actually uncollectible when claimed as worthless; and

(v) Sound business judgment established there was no likelihood of recovery at any time in the future((.

Reasonable collection efforts shall consist of three documented attempts by the contractor to obtain payment. Such documentation shall demonstrate the effort devoted to collect the bad debts of Title XIX recipients is at the same level as the effort normally devoted by the contractor to collect the bad debts of non-Title XIX patients. Should a contractor collect on a bad debt, in whole or in part, after filing a cost report, reimbursement for the debt by the department shall be refunded to the department to the extent of recovery. The department shall compensate a contractor for bad debts of Title XIX recipients at final settlement through the final settlement process only)) If a contractor collects on an allowed bad debt, within sixty days of the date of collection, the contractor shall refund to the department the amount collected.

(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. Any portion of trade association dues attributable to legal and consultant fees and costs in connection with lawsuits or other legal action against the department shall be unallowable;

(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 items used in patient activity programs where clothing is a part of routine care;

(r) Fund-raising expenses, except expenses 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 any employee benefit not in fact made available to all employees on an equal or fair basis ((in terms of costs to employees and benefits commensurate to such costs)), e.g., key-man insurance, other insurance, or retirement plans;

(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 for membership in professional organizations and all expenses of maintaining professional licenses, e.g., nursing home administrator's license;

(bb) Costs related to agreements not to compete;

(cc) Goodwill and amortization of goodwill;

(dd) Expense 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 relating to those issues where:

(i) A final administrative decision is rendered in favor of the department or where otherwise the determination of the department stands at the termination of administrative review; or

(ii) In connection with a fair hearing, a final administrative decision has not been rendered; or

(iii) In connection with a fair hearing, related costs are not reported as unallowable and identified by fair hearing docket number in the period they are incurred if no final administrative decision has been rendered at the end of the report period; or

(iv) In connection with a fair hearing, related costs are not reported as allowable, identified by docket number, and prorated by the number of issues decided favorably to a contractor in the period a final administrative decision is rendered.

(ff) Legal and consultant fees in connection with a lawsuit against the department, including suits which are appeals of administrative decisions;

(gg) Lease acquisition costs, bed rights and other intangible((s)) assets not related to patient care;

(hh) Interest charges assessed by the state of Washington for failure to make timely refund of overpayments and interest expenses incurred for loans obtained to make such refunds;

(ii) Beginning January 1, 1985, lease costs, including operating and capital leases, except for office equipment operating lease costs;

(jj) Beginning January 1, 1985, interest costs;

(kk) Travel expenses outside the states of Idaho, Oregon, and Washington, and the Province of British Columbia. However, travel to or from the home or central office of a chain organization operating a nursing home will be allowed whether inside or outside these areas if such travel is necessary, ordinary, and related to patient care;

(ll) Board of director fees for services in excess of one hundred dollars per board member, per meeting, not to exceed twelve meetings per year;

(mm) Moving expenses of employees in the absence of a demonstrated, good-faith effort to recruit within the states of Idaho, Oregon, and Washington, and the Province of British Columbia;

(nn) For rates effective after June 30, 1993, depreciation expense in excess of four thousand dollars per year for each passenger car or other vehicles primarily used for the administrator, facility staff, or central office staff;

(oo) Any costs associated with the use of temporary health care personnel from any nursing pool not registered with the director of the department of health at the time of such pool personnel use;

(pp) Costs of payroll taxes associated with compensation in excess of allowable compensation for owners, relatives, and administrative personnel;

(qq) Department-imposed postsurvey charges incurred by the facility as a result of subsequent inspections which occur beyond the first postsurvey visit during the certification survey calendar year;

(rr) For all partial or whole rate periods after July 17, 1984, costs of assets, including all depreciable assets and land, which cannot be reimbursed under the provisions of the Deficit Reduction Act of 1984 (DEFRA) and state statutes and regulations implementing DEFRA;

(ss) Effective for July 1, 1991, and all following rates, 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 compensations which would have been paid for such hours of nursing care services had they been paid at the combined regular and overtime average hourly wage, including related taxes and benefits, for in-house nursing care staff of like classification of registered nurse, licensed practical nurse, or nursing assistant at the same nursing facility, as reported on the facility's filed cost report for the most recent cost report period;

(tt) Outside consultation expenses required pursuant to WAC 388-97-275;

(uu) Fees associated with filing a bankruptcy petition under chapters VII, XI, and XIII, pursuant to the Bankruptcy Reform Act of 1978, Public Law 95-598;

(vv) All advertising or promotional costs of any kind, except reasonable costs of classified advertising in trade journals, local newspapers, or similar publications for employment of necessary staff;

(ww) Costs reported by the contractor for a prior period to the extent such costs, due to statutory exemption, will not be incurred by the contractor in the period to be covered by the rate.

[Statutory Authority: RCW 74.46.800. 96-15-056, 388-96-585, filed 7/16/96, effective 8/16/96. Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-585, filed 9/12/95, effective 10/13/95. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-585, filed 5/26/94, effective 6/26/94; 93-17-033 (Order 3615), 388-96-585, filed 8/11/93, effective 9/11/93. Statutory Authority: RCW 74.46.800, 74.46.450 and 74.09.120. 93-12-051 (Order 3555), 388-96-585, filed 5/26/93, effective 6/26/93. Statutory Authority: RCW 74.09.120. 91-22-025 (Order 3270), 388-96-585, filed 10/29/91, effective 11/29/91. Statutory Authority: RCW 74.09.120 and 74.46.800. 90-09-061 (Order 2970), 388-96-585, filed 4/17/90, effective 5/18/90. Statutory Authority: RCW 74.46.800. 89-17-030 (Order 2847), 388-96-585, filed 8/8/89, effective 9/8/89. Statutory Authority: RCW 74.09.180 and 74.46.800. 89-01-095 (Order 2742), 388-96-585, filed 12/21/88. Statutory Authority: RCW 74.46.800. 87-09-058 (Order 2485), 388-96-585, filed 4/20/87; 86-10-055 (Order 2372), 388-96-585, filed 5/7/86, effective 7/1/86; 84-12-039 (Order 2105), 388-96-585, filed 5/30/84. Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), 388-96-585, filed 9/16/83; 82-21-025 (Order 1892), 388-96-585, filed 10/13/82; 82-11-065 (Order 1808), 388-96-585, filed 5/14/82; 81-22-081 (Order 1712), 388-96-585, filed 11/4/81. Statutory Authority: RCW 74.09.120 and 74.46.800. 81-06-024 (Order 1613), 388-96-585, filed 2/25/81. Statutory Authority: RCW 74.09.120. 79-04-102 (Order 1387), 388-96-585, filed 4/4/79. Statutory Authority: RCW 74.08.090 and 74.09.120. 78-06-080 (Order 1300), 388-96-585, filed 6/1/78; Order 1262, 388-96-585, filed 12/30/77.]

AMENDATORY SECTION (Amending Order 3896, filed 9/12/95, effective 10/13/95)

WAC 388-96-709 Prospective rate revisions--Reduction in licensed beds. (1) The department will revise a contractor's prospective rate when the contractor reduces the number of its licensed beds and:

(a) Notifies the department in writing thirty days before the licensed bed reduction; and

(b) Supplies a copy of the new bed license and documentation of the number of beds sold, exchanged or otherwise placed out of service, along with the name of the contractor that received the beds, if any; and

(c) Requests a rate revision.

(2) The revised prospective rate shall comply with all the provisions of rate setting contained in this chapter including all lids and maximums unless otherwise specified in this section and shall remain in effect until an adjustment can be made for economic trends and conditions as authorized by chapter 74.46 RCW and this chapter.

(3) The revised prospective rate shall be effective the first of a month determined by where in the month the effective date of the licensed bed reduction occurs or the date the contractor complied with subsections 1(a), (b), and (c) of this section as follows:

(a) If the contractor complied with subsection (1)(a), (b), and (c) of this section and the effective date of the reduction falls:

(i) Between the first and the fifteenth of the month, then the revised prospective rate is effective the first of the month in which the reduction occurs; or

(ii) Between the sixteenth and the end of the month, then the revised prospective rate is effective the first of the month following the month in which the reduction occurs; or

(b) When the contractor fails to comply with subsection 1(a) of this section, then the date the department receives from the contractor the documentation that is required by subsection (1)(b) and (c) of this section shall become the effective date of the reduction for the purpose of applying subsection (3)(a)(i) and (ii) of this section.

(4) For all prospective Medicaid payment rates from July 1, 1995 through June 30, 1998, the department shall revise a nursing facility's prospective rate to reflect a reduction in licensed beds as follows:

(a) The department shall use the reduced total number of licensed beds to determine occupancy used to calculate the nursing services, food, administrative and operational rate components per WAC 388-96-719. If actual occupancy from the 1994 cost report was:

(i) At or over ninety percent before the reduction and remains at or above ninety percent, there will be no change to the components;

(ii) Less than ninety percent before the reduction and changes to at or above ninety percent, then recompute the components using actual 1994 resident days;

(iii) Less than ninety percent before the reduction and remains below ninety percent, then recompute the components using the change in resident days from the 1994 cost report resulting from the reduced number of licensed beds used to calculate the ninety percent.

(b) ((The department shall use the reduced number of licensed beds)) To determine occupancy used to calculate the property and return on investment (ROI) components per WAC 388-96-719, the department shall use the facility's anticipated resident occupancy level subsequent to the decrease in licensed bed capacity as long as the occupancy for the reduced number of beds is at or above ninety percent. ((If actual occupancy from the cost report from the calendar year immediately prior to the bed reduction was:

(i) At or over ninety percent before the reduction and remains at or above ninety percent, then recompute property and ROI to reflect the new asset basis using actual days from the cost report for the prior calendar year;

(ii) Less than ninety percent before the reduction and changes to at or above ninety percent, then recompute property and ROI to reflect the new asset basis using actual days from the cost report for the prior calendar year;

(iii) Less than ninety percent before the reduction and remains below ninety percent, then recompute property and ROI to reflect the new asset basis using the change in resident days from the cost report for the prior calendar year resulting from the reduced number of licensed beds used to calculate the ninety percent.

(c) Reported occupancy must represent at least six months of data.

(d) The department will utilize a minimum of eighty-five percent occupancy in subsections (4)(a), (b), and (c) of this section for those facilities authorized in chapter 74.46 RCW and this chapter)) Subject to the provisions of chapter 388-96 WAC and chapter 74.46 RCW, in no case shall the department use less than ninety percent occupancy of the facility's reduced licensed bed capacity.

[Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-709, filed 9/12/95, effective 10/13/95. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-709, filed 5/26/94, effective 6/26/94. Statutory Authority: RCW 74.46.800, 74.46.450 and 74.09.120. 93-12-051 (Order 3555), 388-96-709, filed 5/26/93, effective 6/26/93.]

AMENDATORY SECTION (Amending Order 3896, filed 9/12/95, effective 10/13/95)

WAC 388-96-719 Method of rate determination. (1) Effective July 1, 1995 through June 30, 1998, nursing facility Medicaid payment rates shall be rebased or adjusted for economic trends and conditions annually and prospectively, on a per resident day basis, in accordance with the principles and methods set forth in chapter 74.46 RCW and this chapter, to take effect July 1st of each year. Unless the operator qualifies as a "new contractor" under the provisions of this chapter, a nursing facility's rate for July 1, 1995 must be established upon its own calendar year cost report data for 1994 covering at least six months.

(2) July 1, 1995 component rates in the nursing services, food, administrative and operational cost centers shall be cost-rebased utilizing desk-reviewed and adjusted costs reported for calendar year 1994, for all nursing facilities submitting at least six months of cost data. Such component rates for July 1, 1995 shall also be adjusted upward or downward for economic trends and conditions as provided in RCW 74.46.420 and in this section. Component rates in property and return on investment (ROI) shall be reset annually as provided in chapter 74.46 RCW and in this chapter.

(3) July 1, 1995 component rates in the nursing services, food, administrative and operational cost centers shall be adjusted by the change in the Implicit Price Deflator for Personal Consumption Expenditures Index ("IPD index"). The period used to measure the IPD increase or decease to be applied to these July 1, 1995 rate components shall be calendar year 1994.

(4) July 1, 1996 component rates in the nursing services, food, administrative and operational cost centers shall not be cost-rebased, but shall be the component rates in these cost centers assigned to each nursing facility in effect on June 30, 1996, adjusted downward or upward for economic trends and conditions by the change in the nursing home input price index without capital costs published by the Health Care Financial Administration of the United States Department of Health and Human Services (HCFA index). The period to be used to measure the HCFA index increase or decrease to be applied to these June 30, 1996 component rates for July 1, 1996 rate setting shall be calendar year 1994.

(5) July 1, 1997 component rates in the nursing services, food, administrative and operational cost centers shall not be cost-rebased, but shall be the component rates in these cost centers assigned to each nursing facility in effect on June 30, 1997, adjusted downward or upward for economic trends and conditions by the change in the nursing home input price index without capital costs published by the Health Care Financing Administration of the United States Department of Health and Human Services (HCFA index), multiplied by a factor of 1.25. The period to be used to measure the HCFA index increase or decrease to be applied to these June 30, 1997 component rates for July 1, 1997 rate setting shall be calendar year 1996.

(6) The 1994 change in the IPD index to be applied to July 1, 1995 component rates in the nursing services, food, administrative and operational costs centers, as provided in subsection (3) of this section, shall be calculated by:

(a) Consulting the latest quarterly IPD index available to the department no later than February 28, 1995 to determine, as nearly as possible, applicable expenditure levels as of December 31, 1994;

(b) Subtracting from expenditure levels taken from the quarterly IPD index described in subsection (6)(a) of this section expenditure levels taken from the IPD index for the quarter occurring one year prior to it; and

(c) Dividing the difference by the level of expenditures from the quarterly IPD index occurring one year prior to the quarterly IPD index described in subsection (6)(a) of this section.

(7) In applying the change in the IPD index to establish July 1, 1995 component rates in the nursing services, food, administrative and operational cost centers for a contractor having at least six months, but less than twelve months, of cost report data from calendar year 1994, the department shall prorate the downward or upward adjustment by a factor obtained by dividing the contractor's actual calendar days from 1994 cost report data by two, adding three hundred sixty-five, and dividing the resulting figure by five hundred forty-eight.

(8) The change in the HCFA index to be applied to each nursing facility's June 30, 1996 and June 30, 1997 component rates in nursing services, food, administrative and operational cost centers, as provided in subsections (4) and (5) of this section, shall be calculated by:

(a) Consulting the latest quarterly HCFA index available to the department no later than February 28 following the applicable calendar year to be used to measure the change to determine, as nearly as possible, the applicable price levels as of December 31 of the applicable calendar year;

(b) Subtracting from the price levels taken from the quarterly HCFA index described in subsection (8)(a) of this section the price levels taken from the HCFA index for the quarter occurring one year prior to it; and

(c) Dividing the difference by the price levels from the quarterly HCFA index occurring one year prior to the quarterly HCFA index described in subsection (8)(a).

(9) If either the Implicit Price Deflator for Personal Consumption Expenditures (IDP) index or the Health Care Financing Administration (HCFA) index specified in this section ceases to be available, the department shall select and use in its place or their place one or more measures of change utilizing the same or comparable time periods specified in this section.

(10) For July 1, 1995, July 1, 1996, and July 1, 1997, the department shall ((compute the occupancy level for each facility)) establish the per resident day nursing services, food, administrative and operations prospective component rates and limits using resident days at the higher of ninety percent occupancy or actual facility occupancy computed by dividing the actual number of resident days by the product of the number of licensed beds and calendar days in the 1994 cost report period; except that, new facilities as defined in WAC 388-96-026 (1)(a) commencing operation between January 1, 1994 and June 30, 1994 that had their occupancy for nursing services, food, administrative and operational component rates based on the higher of ninety percent or actual occupancy level shall have these component rates revised effective May 1, 1997 based on eighty-five percent occupancy. ((If a facility's occupancy is below ninety percent, the department shall compute per resident day nursing services, food, administrative and operational prospective component rates and limits utilizing resident days at the ninety percent occupancy level. The department shall use actual occupancy level for facilities at or above ninety percent occupancy for 1994. The higher of ninety percent occupancy or actual facility occupancy for 1994 shall be used in establishing these component rates))

(11) For July 1, 1995, July 1, 1996, and July 1, 1997((.)), the department shall compute per resident day property and return on investment prospective component rates ((utilizing)) using resident days at the higher of ninety percent occupancy or actual facility occupancy ((for the prior calendar year for July 1, 1995, July 1, 1996, and July 1, 1997)) computed by dividing the actual number of resident days by the product of the number of licensed beds and calendar days in the prior calendar year cost report period.

(((11))) (12) If a nursing facility has full-time residents other than those receiving nursing facility care:

(a) The facility may request in writing, and

(b) The department may grant in writing an exception to include the ((requirements)) resident days for the nonnursing facility care residents in the occupancy calculations of subsections (10) and (11) of this section ((by including such other full-time residents in computing occupancy)). Exceptions granted shall be revocable effective ninety days after written notice of revocation is received from the department. The department shall not grant an exception unless the contractor submits with the annual cost report a certified statement of occupancy including all residents of the facility and their status or level of care.

[Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-719, filed 9/12/95, effective 10/13/95. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-719, filed 5/26/94, effective 6/26/94. Statutory Authority: RCW 74.46.800 and 74.09.120. 93-19-074 (Order 3634), 388-96-719, filed 9/14/93, effective 10/15/93; 90-09-061 (Order 2970), 388-96-719, filed 4/17/90, effective 5/18/90. Statutory Authority: 1987 c 476. 88-01-126 (Order 2573), 388-96-719, filed 12/23/87. Statutory Authority: RCW 74.09.120, 74.46.840 and 74.46.800. 85-17-052 (Order 2270), 388-96-719, filed 8/19/85. Statutory Authority: RCW 74.46.800. 84-12-039 (Order 2105), 388-96-719, filed 5/30/84. Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), 388-96-719, filed 9/16/83; 82-17-071 (Order 1867), 388-96-719, filed 8/18/82; 82-12-068 (Order 1820), 388-96-719, filed 6/2/82; 82-04-073 (Order 1756), 388-96-719, filed 2/3/82; 81-15-049 (Order 1669), 388-96-719, filed 7/15/81; 80-06-122 (Order 1510), 388-96-719, filed 5/30/80, effective 7/1/80; 79-12-085 (Order 1461), 388-96-719, filed 11/30/79; 78-11-043 (Order 1353), 388-96-719, filed 10/20/78. Statutory Authority: RCW 74.08.090 and 74.09.120. 78-06-080 (Order 1300), 388-96-719, filed 6/1/78. Statutory Authority: RCW 74.09.120. 78-02-013 (Order 1264), 388-96-719, filed 1/9/78.]

Reviser's note: The typographical error in the above section occurred in the copy filed by the agency and appears in the Register pursuant to the requirements of RCW 34.08.040.

AMENDATORY SECTION (Amending WSR 96-15-056, filed 7/16/96, effective 8/16/96)

WAC 388-96-735 Administrative cost area rate. (1) The administrative cost center shall include for cost reporting purposes all administrative, oversight, and management costs, whether incurred at the facility or allocated in accordance with a department-approved joint cost allocation methodology.

(2) For July 1, 1995 rate setting only, the department shall determine peer group median cost plus limits for the administrative cost center in accordance with this section.

(a) The department shall divide into two peer groups nursing facilities located in the state of Washington providing services to Medicaid residents. These two peer groups shall be:

(i) Those nursing facilities located within a Metropolitan Statistical Area (MSA) as defined and determined by the United States Office of Management and Budget or other applicable federal office (MSA facilities); and

(ii) Those not located within such an area (non-MSA facilities).

(b) Prior to any adjustment for economic trends and conditions under WAC 388-96-719, the facilities in each peer group shall be arrayed from lowest to highest by magnitude of per resident day adjusted administrative cost from the 1994 cost report year, regardless of whether any such adjustments are contested by the nursing facility. All available cost reports from the 1994 cost report year having at least six months of cost report data shall be used, including all closing cost reports covering at least six months. The department shall include costs current-funded by means of rate add-ons, granted under the authority of WAC 388-96-777 and commencing in the 1994 cost report year in costs arrayed. The department shall exclude costs current-funded by rate add-ons granted under the authority of WAC 388-96-777 and commencing January 1 through June 30, 1995 from costs arrayed.

(c) The median or fiftieth percentile nursing facility administrative cost for each peer group shall then be determined. In the event there are an even number of facilities within a peer group, the adjusted administrative cost of the lowest cost facility in the upper half shall be used as the median cost for that peer group. Facilities at the fiftieth percentile in each peer group and those immediately above and below it shall be subject to field audit in the administrative cost area prior to issuing new July 1 rates.

(3) For July 1, 1995 rate setting only, administrative component rates for facilities within each peer group shall be set ((for the)) at the lower of:

(a) The facility's adjusted per patient day administrative cost from the 1994 report period, reduced or increased by the change in the IPD Index as authorized by WAC 388-96-719; or

(b) The median nursing facility administrative cost for the facility's peer group using the 1994 calendar year report data plus ten percent of that cost, reduced or increased by the change in the IPD Index as authorized by WAC 388-96-719.

(4) Rate add-ons made to current fund administrative costs, pursuant to WAC 388-96-777 and commencing in the 1994 cost report year, shall be reflected in July 1, 1995 prospective rates only by their inclusion in the costs arrayed. A facility shall not receive, based on the calculation or consideration of any such 1994 report year adjustment, a July 1, 1995 administrative rate higher than that provided in subsection (3) of this section.

(5) For all rate setting beginning July 1, 1995 and following, the department shall add administrative rate add-ons, granted under authority of WAC 388-96-533 and 388-96-777 to a facility's administrative rate, but only up to the facility's peer group median cost plus ten percent limit as follows:

(a) For July 1, 1995, add-ons commencing in the preceding six months;

(b) For July 1, 1996, add-ons commencing in the preceding eighteen months; and

(c) For July 1, 1997, add-ons commencing in the preceding thirty months.

(6) Subsequent to issuing July 1, 1995 rates, the department shall recalculate the median costs of each peer group based on the most recent adjusted administrative cost report information in departmental records as of October 31, 1995. For any facility which would have received a higher or lower July 1, 1995 administrative component rate based upon the recalculation of that facility's peer group median costs, the department shall reissue that facility's administrative rate reflecting the recalculation, retroactive to July 1, 1995.

(7) For both the initial calculation of peer group median costs and the recalculation based on adjusted administrative cost information as of October 31, 1995 the department shall use adjusted information regardless of whether the adjustments may be contested or the subject of pending administrative or judicial review. Median costs, once calculated utilizing October 31, 1995 adjusted cost information, shall not be adjusted to reflect subsequent administrative or judicial rulings, whether final or not.

(8) For rates effective July 1, 1996, a nursing facility's noncost-rebased administrative component rate shall be that facility's administrative component rate existing on June 30, 1996, reduced or inflated as authorized by RCW 74.46.420 and WAC 388-96-719. The July 1, 1996, administrative component rate used to calculate the return on investment (ROI) component rate shall be the inflated prospective administrative component rate as of June 30, 1996, excluding any rate increases granted from January 1, 1996 to June 30, 1996 pursuant to RCW 74.46.460 and WAC 388-96-777.

(9) For rates effective July 1, 1997, a nursing facility's noncost-rebased administrative component rate shall be that facility's administrative component rate existing on June 30, 1997, reduced or inflated as authorized by RCW 74.46.420 and WAC 388-96-719. The July 1, 1997, administrative component rate used to calculate the return on investment (ROI) component rate shall be the inflated prospective administrative component rate as of June 30, 1997, excluding any rate increases granted from January 1, 1997 to June 30, 1997 pursuant to RCW 74.46.460 and WAC 388-96-777.

[Statutory Authority: RCW 74.46.800. 96-15-056, 388-96-735, filed 7/16/96, effective 8/16/96. Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-735, filed 9/12/95, effective 10/13/95. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-735, filed 5/26/94, effective 6/26/94. Statutory Authority: RCW 74.46.800 and 74.09.120. 93-19-074 (Order 3634), 388-96-735, filed 9/14/93, effective 10/15/93. Statutory Authority: RCW 74.09.120. 84-24-050 (Order 2172), 388-96-735, filed 12/4/84; 83-19-047 (Order 2025), 388-96-735, filed 9/16/83; 82-11-065 (Order 1808), 388-96-735, filed 5/14/82; 81-15-049 (Order 1669), 388-96-735, filed 7/15/81; 80-06-122 (Order 1510), 388-96-735, filed 5/30/80, effective 7/1/80; 79-12-085 (Order 1461), 388-96-735, filed 11/30/79; 78-02-013 (Order 1264), 388-96-735, filed 1/9/78.]

AMENDATORY SECTION (Amending WSR 96-15-056, filed 7/16/96, effective 8/16/96)

WAC 388-96-745 Property cost area reimbursement rate. (1) The department shall determine the property cost area component rate for each facility annually, to be effective July 1, 1995, 1996, and 1997 in accordance with this section and any other applicable provisions of this chapter. For July 1, 1995, July 1, 1996, and July 1, 1997 rates, funding granted under the authority of WAC 388-96-776 shall be annualized and subsumed in each of these July 1 prospective rates.

(2) The department shall divide the allowable prior period depreciation costs subject to the provisions of this chapter, adjusted for any capitalized addition or replacements approved by the department, plus

(a) The retained savings from the property cost center as provided in WAC 388-96-228, by

(b) The greater of:

(i) Total resident days for the facility in the calendar year cost report period ending six months prior to each July 1, property component rate commencement date; or

(ii) Resident days for the facility as calculated on eighty-five or ninety ((or eight-five)) percent facility occupancy, as applicable in accordance with the provisions of this chapter and chapter 74.46 RCW.

(3) Allowable depreciation costs are defined as the costs of depreciation of tangible assets meeting the criteria specified in WAC 388-96-557, regardless of whether owned or leased by the contractor. The department shall not reimburse depreciation of leased office equipment.

(4) If a capitalized addition or retirement of an asset will result in ((a different)) an increased licensed bed capacity during the calendar year following the capitalized addition or replacement, ((resident days from the cost report for the calendar year immediately prior to the capitalized addition or replacement that were used in computing the property component rate will be adjusted to the product of the occupancy level derived from the cost report used to compute the property component rate at the time of the increased licensed bed capacity multiplied by the number of calendar days in the calendar year following the increased licensed bed capacity multiplied by the number of licensed beds on the new license. For rate computation purposes the minimum occupancy for the initial property component rate period following the increase in licensed bed capacity shall be eighty-five percent; and for each rate period thereafter that will be rebased, commencing July 1, it shall be ninety percent)) the department shall use the facility's anticipated resident occupancy level subsequent to the increase in licensed bed capacity as long as the occupancy for the increased number of beds is at or above ninety percent. Subject to the provisions of chapter 388-96 WAC and chapter 74.46 RCW, in no case shall the department use less than ninety percent occupancy of the facility's increased licensed bed capacity. If a capitalized addition, replacement, or retirement results in a decreased licensed bed capacity, WAC 388-96-709 will apply.

(5) When a facility is constructed, remodeled, or expanded after obtaining a certificate of need or exemption from the requirements for certificate of need for the replacement of existing nursing home beds pursuant to RCW 70.38.115 (13)(a), the department shall determine actual and allocated allowable land cost and building construction cost. Reimbursement for such allowable costs, determined pursuant to the provisions of this chapter, shall not exceed the maximums set forth in this subsection and in subsections (4)((, (5),)) and (6) of this section. The department shall determine construction class and types through examination of building plans submitted to the department and/or on-site inspections. The department shall use definitions and criteria contained in the Marshall and Swift Valuation Service published by the Marshall and Swift Publication Company. Buildings of excellent quality construction shall be considered to be of good quality, without adjustment, for the purpose of applying these maximums.

(6) Construction costs shall be final labor, material, and service costs to the owner or owners and shall include:

(a) Architect's fees;

(b) Engineers' fees (including plans, plan check and building permit, and survey to establish building lines and grades);

(c) Interest on building funds during period of construction and processing fee or service charge;

(d) Sales tax on labor and materials;

(e) Site preparation (including excavation for foundation and backfill);

(f) Utilities from structure to lot line;

(g) Contractors' overhead and profit (including job supervision, workmen's compensation, fire and liability insurance, unemployment insurance, etc.);

(h) Allocations of costs which increase the net book value of the project for purposes of Medicaid reimbursement;

(i) Other items included by the Marshall and Swift Valuation Service when deriving the calculator method costs.

(7) The department shall allow such construction costs, at the lower of actual costs or the maximums derived from ((one of the three tables which follow. The department shall derive the limit from the accompanying table which corresponds to the number of total nursing home beds for the proposed new construction, remodel or expansion. The limit will be)) the sum of the basic construction cost limit plus the common use area limit which corresponds to the type ((and)), class ((of)) and number of total nursing home beds for the new construction, remodel or expansion. The maximum limits shall be calculated using the ((tables)) most current cost criteria contained in the Marshall and Swift Valuation Service and shall be adjusted forward ((from September 1990 to the average date of construction, to reflect the change in average construction costs. The department shall base the adjustment on the change shown by relevant cost indexes published by Marshall and Swift Publication Company. The average date of construction shall be)) to the midpoint date between award of the construction contract and completion of construction.

((BASE CONSTRUCTION COMMON-USE AREA

COST LIMITS COST LIMITS

74 BEDS & UNDER

Building Base per Base

Class Bed Limit Limit

A-Good $50,433 $278,847

A-Avg $41,141 $227,469

B-Good $48,421 $267,718

B-Avg $40,042 $221,392

C-Good $35,887 $198,421

C-Avg $27,698 $153,143

C-Low $21,750 $120,258

D-Good $33,237 $183,765

D-Avg $25,716 $142,182

D-Low $20,298 $112,227

BASE CONSTRUCTION COMMON-USE AREA

COST LIMITS COST LIMITS

75 TO 120 BEDS

Building Base Add per Base Add per

Class Limit Bed Over Limit Bed Over

74 74

A-Good $3,732,076 $48,210 $278,847 $2,808

A-Avg $3,044,442 $39,327 $227,469 $2,291

B-Good $3,583,131 $46,286 $267,718 $2,696

B-Avg $2,963,112 $38,277 $221,392 $2,230

C-Good $2,655,654 $34,305 $198,421 $1,998

C-Avg $2,049,668 $26,477 $153,143 $1,542

C-Low $1,609,531 $20,792 $120,258 $1,211

D-Good $2,459,506 $31,771 $183,765 $1,851

D-Avg $1,902,956 $24,582 $142,182 $1,442

D-Low $1,502,048 $19,403 $112,227 $1,130

BASE CONSTRUCTION COMMON-USE AREA

COST LIMITS COST LIMITS

121 BEDS AND OVER

Building Base Add per Base Add per

Class Limit Bed Over Limit Bed Over

120 120

A-Good $5,949,745 $42,359 $408,015 $2,106

A-Avg $4,853,505 $34,555 $332,855 $1,718

B-Good $5,712,287 $40,669 $391,734 $2,022

B-Avg $4,723,848 $30,142 $323,972 $1,672

C-Good $4,233,692 $23,264 $290,329 $1,499

C-Avg $3,267,618 $18,268 $224,092 $1,157

C-Low $2,565,943 $27,916 $175,971 $ 908

D-Good $3,920,989 $21,599 $268,911 $1,388

D-Avg $3,033,727 $17,048 $208,493 $1,081

D-Low $2,394,592 $19,403 $164,220 $ 848))

(8) When some or all of a nursing home's common-use areas are situated in a basement, the department shall exclude some or all of the per-bed allowance ((shown in the attached tables)) for common-use areas to derive the construction cost lid for the facility. The amount excluded will be equal to the ratio of basement common-use areas to all common-use areas in the facility times the common-use area ((limit in the table)) limits determined in accordance with subsection (7) of this section. In lieu of the excluded amount, the department shall add an amount calculated using the calculator method guidelines for basements in nursing homes ((from)) published in the Marshall and Swift ((Publication)) Valuation Service.

(9) Subject to provisions regarding allowable land contained in this chapter, allowable costs for land shall be the lesser of:

(a) Actual cost per square foot, including allocations; ((or))

(b) The average per square foot land value of the ten nearest urban or rural nursing facilities at the time of purchase of the land in question. The average land value sample shall reflect either all urban or all rural facilities depending upon the classification of urban or rural for the facility in question. The values used to derive the average shall be the assessed land values which have been calculated for the purpose of county tax assessments; or

(c) For new or replacement building construction or for substantial building additions requiring the acquisition of land which commenced to operate on or after July 1, 1997, WAC 388-96-559(8) shall apply.

(10) If allowable costs for construction or land are determined to be less than actual costs pursuant to subsection (3), (4), and (5) of this section, the department may increase the amount if the owner or contractor is able to show unusual or unique circumstances having substantially impacted the costs of construction or land. Actual costs shall be allowed to the extent they resulted from such circumstances up to a maximum of ten percent above levels determined under subsections (3), (4), and (5) of this section for construction or land. An adjustment under this subsection shall be granted only if requested by the contractor. The contractor shall submit documentation of the unusual circumstances and an analysis of their financial impact with the request.

[Statutory Authority: RCW 74.46.800. 96-15-056, 388-96-745, filed 7/16/96, effective 8/16/96. Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-745, filed 9/12/95, effective 10/13/95. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-745, filed 5/26/94, effective 6/26/94. Statutory Authority: RCW 74.46.800 and 74.09.120. 93-19-074 (Order 3634), 388-96-745, filed 9/14/93, effective 10/15/93. Statutory Authority: RCW 74.46.800. 92-16-013 (Order 3424), 388-96-745, filed 7/23/92, effective 8/23/92. Statutory Authority: RCW 79.09.120 [74.09.120] and 74.46.800. 90-09-061 (Order 2970), 388-96-745, filed 4/17/90, effective 5/18/90. Statutory Authority: 1987 c 476. 88-01-126 (Order 2573), 388-96-745, filed 12/23/87. Statutory Authority: RCW 74.46.800. 87-09-058 (Order 2485), 388-96-745, filed 4/20/87. Statutory Authority: RCW 74.09.120. 84-24-050 (Order 2172), 388-96-745, filed 12/4/84.]

AMENDATORY SECTION (Amending Order 3896, filed 9/12/95, effective 10/13/95)

WAC 388-96-754 A contractor's return on investment. (1) The department shall establish for each Medicaid nursing facility a return on investment (ROI) component rate composed of a financing allowance and a variable return allowance. The department shall determine a facility's ROI rate annually in accordance with this section, to be effective July 1, 1995, July 1, 1996, and July 1, 1997.

(2) The department shall rebase a nursing facility's financing allowance annually and shall determine the financing allowance by:

(a) Multiplying the net invested funds of each facility by ten percent and dividing by the greater of:

(i) A nursing facility's total resident days from the most recent cost report period, to which the provisions of WAC 388-96-719 and RCW 74.46.420 shall apply; or

(ii) Resident days calculated on eighty-five percent or ninety percent ((or eighty-five percent)) resident occupancy at the facility, as determined by the provisions of this chapter. Resident day calculations from the most recent cost report shall correspond to the following:

(A) If the nursing facility cost report covers twelve months, annual resident days from the contractor's most recent twelve month cost report period; or

(B) If the nursing facility cost report covers less than twelve months but more than six months, annualized resident days and working capital costs based upon data in the cost report((; or

(C))) .

(b) If a capitalized addition or replacement results in an increased licensed bed capacity during the calendar year following the capitalized addition or replacement, the ((total resident days from the cost report immediately prior to the capitalized addition or replacement that were used in computing the financing and variable return allowances will be adjusted to the product of the occupancy level derived from the cost report used to compute the financing and variable return allowances at the time of the increased licensed bed capacity multiplied by the number of calendar days in the calendar year following the increased licensed bed capacity multiplied by the number of licensed beds on the new license; or

(D))) department shall multiply the net invested funds of each facility by ten percent and divide by the facility's anticipated resident occupancy level subsequent to the increase in licensed bed capacity as long as the occupancy for the increased number of beds is at or above ninety percent. Subject to the provisions of chapter 388-96 WAC and chapter 74.46 RCW, in no case shall the department use less than ninety percent occupancy of the facility's increased licensed bed capacity.

If a capitalized addition or retirement of an asset results in a decreased licensed bed capacity, WAC 388-96-709 will apply.

(((b))) (c) For July 1, 1995 rate setting, the working capital portion of net invested funds at a nursing facility shall be five percent of the sum of a contractor's costs from the cost report year used to establish the contractor's prospective component rates in the nursing services, food, administrative, and operational cost centers that have been adjusted for economic trends and conditions under authority of WAC 388-96-719 and RCW 74.46.420 and five percent of allowable property cost.

(((c))) (d) For July 1, 1996 rate setting, the working capital portion of net invested funds shall be five percent of the sum of the July 1, 1996 prospective component rates, excluding any rate increases granted from January 1, 1996 to June 30, 1996 pursuant to RCW 74.46.460, WAC 388-96-774 and 388-96-777, for the nursing services, food, administrative, and operational cost centers multiplied by resident days as defined in subsection (2)(a)(ii)(A)((,)) and (B), (((C), and (D))) or if a capitalized addition or replacement, subsection (2)(b) of this section from calendar year 1995, adjusted for economic trends and conditions granted under authority of WAC 388-96-719 plus the desk reviewed property costs from the cost report for calendar year 1995;

(((d))) (e) For July 1, 1997 rate setting, the working capital portion of net invested funds shall be five percent of the sum of the July 1, 1997 prospective component rates, excluding any rate increases granted from January 1, 1997 to June 30, 1997 pursuant to RCW 74.46.460, WAC 388-96-774 and 388-96-777, for the nursing services, food, administrative and operational cost centers multiplied by resident days as defined in subsection (2)(a)(ii)(A)((,)) and (B)((, (C),)) and (((D))) (b) of this section from calendar year 1996, adjusted for economic trends and conditions granted under authority of WAC 388-96-719 plus the desk reviewed property costs from the cost report for calendar year 1996;

(((e))) (f) For July 1, 1995, July 1, 1996, and July 1, 1997 rate setting, 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 this chapter, including owned and leased assets, shall be used, except the capitalized cost of land upon which a facility is located and other such contiguous land which is reasonable and necessary for use in the regular course of providing resident care shall also be included. As such, subject to provisions contained in this chapter, capitalized cost of leased land, regardless of the type of lease, shall be the lessor's historical capitalized cost. Subject to provisions contained in this chapter, for land purchases before July 18, 1984 (the enactment date of the Deficit Reduction Act of 1984 (DEFRA)), 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 on or after July 18, 1984, capitalized cost of land 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 or unwilling to provide necessary information to determine net invested funds, the department may determine an amount to be used for net invested funds based upon an appraisal conducted by the department of general administration per this chapter; and

(((f))) (g) A contractor shall retain that portion of ROI rate payments at settlement representing the contractor's financing allowance only to the extent reported net invested funds, upon which the financing allowance is based, are substantiated by the department.

(3) The department shall determine the variable return allowance according to the following procedure:

(a) For July 1, 1995 rate setting only, the department shall, without utilizing the MSA and Non-MSA peer groups used to calculate other Medicaid component rates, rank all facilities in numerical order from highest to lowest based upon the combined average resident day allowable costs, as adjusted by desk review and audit, for the nursing services, food, administrative, and operational cost centers taken from the 1994 cost report period. The department shall use adjusted costs taken from 1994 cost reports having at least six months of data, shall not include adjustments for economic trends and conditions granted under authority of WAC 388-96-719 and RCW 74.46.420, and shall include costs current-funded under authority of WAC 388-96-774 and 388-96-777 and commencing in the 1994 cost report year. The adjusted costs of each facility shall be calculated based upon a minimum facility occupancy of ninety percent. In the case of a new contractor, nursing services, food, administrative, and operational cost levels actually used to set the initial rate shall be used for the purpose of ranking the new contractor.

(b) The department shall compute the variable return allowance by multiplying the sum of the July 1, 1995 nursing services, food, administrative and operational rate components for each nursing facility by the appropriate percentage which shall not be less than one percent nor greater than four percent. The department shall divide the facilities ranked according to subsection (3)(a) of this section into four groups, from highest to lowest, with an equal number of facilities in each group or nearly equal as is possible. The department shall assign facilities in the highest quarter a percentage of one, in the second highest quarter a percentage of two, in the third highest quarter a percentage of three, and in the lowest quarter a percentage of four. The per patient day variable return allowance in the initial rate of a new contractor shall be the same as that in the rate of the preceding contractor, if any.

(c) The percentages so determined and assigned to each facility for July 1, 1995 rate setting, shall continue to be assigned without modification for July 1, 1996 and July 1, 1997 rate setting. Neither the break points separating the four groups nor facility ranking shall be adjusted to reflect future rate add-ons granted to contractors for any purpose under WAC 388-96-774 and 388-96-777. These principles shall apply, as well, to new contractors as defined in WAC 388-96-026 (1)(a) and (b).

(d) For an initial rate established for a nursing facility on or after July 1, 1995 under WAC 388-96-710(1), the variable return allowance shall be computed as provided in subsection (3)(b) of this section, using the identical variable return percentage breakpoints calculated for July 1, 1995 rate setting. The variable return breakpoints shall not be modified based upon the consideration of any rate adjustment, nor shall the variable return breakpoints be adjusted for economic trends and conditions. The percentage so determined and assigned for the initial rate shall continue until the facility's return on investment component rate can be rebased from cost report data of the new contractor covering at least six months from the prior calendar year.

(e) For a new contractor's nursing facility rate rebased as of July 1, 1996 determined under WAC 388-96-710, the variable return allowance shall be computed as provided in subsection (3)(b) of this section, using the identical variable return breakpoints calculated for July 1, 1995 rate setting. The variable return breakpoints shall not be modified based upon the consideration of any rate adjustment, nor shall the variable return breakpoints be adjusted for economic trends and conditions. The percentage so determined and assigned for the rebased rate at this time shall continue without modification for July 1, 1997 rate setting.

(f) For a new contractor's nursing facility rate rebased as of July 1, 1997 determined under WAC 388-96-710, the variable return allowance shall be computed as provided in subsection (3)(b) of this section, using the identical variable return breakpoints calculated for July 1, 1995 rate setting. The variable return breakpoints shall not be modified based upon consideration of any rate adjustment, nor shall the variable return breakpoints be adjusted for economic trends and conditions. The percentage so determined and assigned for the rebased rate at this time shall continue without modification until June 30, 1998.

(4) The sum of the financing allowance and the variable return allowance shall be the return on investment rate for each facility and shall be a component of the prospective rate for each facility.

(5) If a facility is leased by a contractor as of January 1, 1980, in an arm's-length agreement, which continues to be leased under the same lease agreement as defined in this chapter, and for which the annualized lease payment, plus any interest and depreciation expenses of 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 this chapter, is more than the return on investment allowance determined according to this section, the following shall apply:

(a) The financing allowance shall be recomputed substituting the fair market value of the assets, as of January 1, 1982, determined by department of general administration appraisal 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. Said appraisal shall be final unless shown to be arbitrary and capricious.

(b) The sum of the financing allowance computed under this subsection and the variable return allowance shall be compared to the annualized lease payment, plus any interest and depreciation expenses of 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 this chapter. The lesser of the two amounts shall be called the alternate return on investment allowances.

(c) The return on investment allowance determined in accordance with subsections (1), (2), (3), and (4) of this section or the alternate return on investment allowance, whichever is greater, shall be the return on investment allowance for the facility and shall be a component of the prospective rate of the facility.

(d) In the case of a facility 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 agreement existing on January 1, 1980, the treatment provided in subsection (5)(a) of this section shall be applied except that in the case of renewals or extensions made on or subsequent to April 1, 1985, per a provision of the lease agreement existing on January 1, 1980, 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.

(6) The information from the two prior reporting periods used to set the two prospective return on investment rates in effect during the settlement year is subject to field audit. If the financing allowances which can be documented and calculated at audit of the prior periods are different than the prospective financing allowances previously determined by desk-reviewed, reported information, and other relevant information, the prospective financing allowances shall be adjusted to the audited level at final settlement of the year the rates were in effect, except the adjustments shall reflect a minimum bed occupancy level of eighty-five percent. Any adjustments to the financing allowances pursuant to this subsection shall be for settlement purposes only. However, the variable return allowances shall be the prospective allowances determined by desk-reviewed, reported information, and other relevant information and shall not be adjusted to reflect prior-period audit findings.

[Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-754, filed 9/12/95, effective 10/13/95. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-754, filed 5/26/94, effective 6/26/94. Statutory Authority: RCW 74.46.800 and 74.09.120. 93-19-074 (Order 3634), 388-96-754, filed 9/14/93, effective 10/15/93; 91-22-025 (Order 3270), 388-96-754, filed 10/29/91, effective 11/29/91; 90-09-061 (Order 2970), 388-96-754, filed 4/17/90, effective 5/18/90. Statutory Authority: RCW 74.09.180 and 74.46.800. 89-01-095 (Order 2742), 388-96-754, filed 12/21/88. Statutory Authority: RCW 74.46.800. 87-09-058 (Order 2485), 388-96-754, filed 4/20/87; 86-10-055 (Order 2372), 388-96-754, filed 5/7/86, effective 7/1/86. Statutory Authority: RCW 74.09.120, 74.46.840 and 74.46.800. 85-17-052 (Order 2270), 388-96-754, filed 8/19/85. Statutory Authority: RCW 74.09.120. 84-24-050 (Order 2172), 388-96-754, filed 12/4/84.]

AMENDATORY SECTION (Amending WSR 96-15-056, filed 7/16/96, effective 8/16/96)

WAC 388-96-774 Add-ons to the prospective rate--Staffing. (1) The department shall determine each contractor's reimbursement rates prospectively at least once each calendar year, to be effective July 1st.

(a) The department may grant a rate add-on to a nursing service (NS) or operational (OP) prospective reimbursement rate; provided that, for the current fiscal year, the total amount of the current legislative appropriation, if any, to fund the Medicaid share of such rate add-on has not been exceeded. The NS and OP rate add-ons shall be for:

(i) Variations in the distribution of patient classifications for the total resident population or changes in patient characteristics for the total resident population from:

(A) The Medicaid cost report for the calendar year immediately prior to the first fiscal year of a state biennium; or

(B) Those used to set the rate for a new contractor; or

(ii) Changes in staffing levels at a facility required by the department as evidenced by a written directive from the director of nursing home services, aging and adult services administration.

(b) The department shall not grant and the contractor shall not use rate add-ons for:

(i) Compensation increases for existing, newly hired or promoted staff;

(ii) The use of temporary employment services providing direct patient care;

(iii) Any purpose if the nursing facility has a pending bankruptcy; unless, it is under chapter 11 and the nursing facility can provide a written evaluation from the trustee in bankruptcy stating the reorganization will be approved and implemented;

(iv) Correction of survey citations; or

(v) Staffing increases to resolve complaints.

(c) The department shall not grant a rate add-on to a cost center if that cost center is at or above the median cost limit for the facility's peer group reduced or increased under WAC 388-96-719.

(2) Per state fiscal year, the contractor may submit no more than two requests under this section. If a request has been previously submitted and denied because it was not complete, then it will not count as a request for this subsection; provided, the resubmitted request is complete and exactly the same as the previous request, e.g., type of request, positions and full-time equivalencies.

(3) Contractors requesting a rate add-on shall submit a written request to the office of rates management, aging and adult services administration, separate from all other requests and inquiries of the department, e.g., WAC 388-96-904 (1) and (5). The written request shall only be submitted after the hire date of the new staff and shall include the following:

(a) A financial analysis showing:

(i) The increased cost; and

(ii) An estimate of the rate increase, computed according to allowable methods, necessary to fund the cost.

(b) A written justification for granting the rate increase;

(c) A certification and supporting documentation showing the changes in staffing have commenced;

(d) Two proofs of hire, e.g., payroll document, W-4, and appointment letter;

(e) A written narrative describing the contractor's efforts to provide alternative solutions prior to submitting a request under this section; and

(f) A written plan specifying:

(i) Additional staff to be added;

(ii) Changes in all patient characteristics requiring the additional staff; and

(iii) The predicted improvements in patient care services that will result.

(4) Contractors receiving rate add-ons per this section shall submit quarterly reports. The quarterly reports shall cover the first day the rate add-on is effective and show how the additional rate funds and hours were utilized. The contractor shall submit quarterly reports as long as it receives the rate add-on. If the contractor does not use the funds for the purpose for which they were granted, the department shall immediately recoup the misspent or unused funds.

(5) In reviewing a request made under subsection (3) of this section, the department shall consider but is not limited to one or more of the following:

(a) Whether additional staff requested by a contractor is necessary to meet patient care needs;

(b) Comparisons of staffing patterns of nursing facilities from either the latest statewide metropolitan statistical area (MSA) peer group or non-MSA peer group to which the nursing facility belongs and calculated on a per patient day basis. The department shall use the latest MSA and non-MSA designations received from the office of management and budget or the appropriate federal agency;

(c) The physical layout of the facility;

(d) Nursing service planning and management for maximum efficiency;

(e) Historic trends in underspending of a facility's nursing services and operational component rates;

(f) Numbers, positions, and scheduling of existing staff;

(g) Increases in acuity (debility) levels of all residents in the facility;

(h) Survey, complaint resolution reports, and quality assurance data; and

(i) The facility's ability to fund its staffing request through the facility's existing total Medicaid reimbursement rate.

(6) The department may also adjust rates to cover costs associated with placing a nursing home in receivership for costs not covered by the rate of the former contractor, including:

(a) Compensation of the receiver;

(b) Reasonable expenses of receivership and transition of control; and

(c) Costs incurred by the receiver in carrying out court instructions or rectifying deficiencies found.

(7) The department shall not grant a rate add-on effective earlier than sixty days prior to receipt of the initial written request by the office of rates management subject to the requirements of subsection (3) of this section, the department shall grant a rate add-on for an approved request as follows:

(a) If the request is received between the first day and fifteenth day of the month, then the rate will be effective on the first day of that month; or

(b) If the request is received between the sixteenth day and the last day of the month, the rate will be effective on the first day of the following month.

(8) If the initial written request is incomplete, the department will notify the contractor of the documentation and information required. The contractor must submit the requested information within fifteen days from the date the contractor receives the notice to provide the information. If the contractor fails to complete the rate add-on request by providing all the requested documentation and information within the fifteen days from the date of receipt of notification, the department will deny the request for failure to complete.

(9) If, after the denial for failure to complete the request, the contractor submits a written request for the same need, the date of receipt for the purposes of applying subsection (7) will depend upon whether the subsequent request for the same need is complete, i.e., the department does not have to request additional documentation and information in order to make a determination. If a subsequent request for funding of the same need is:

(a) Complete, then the date of the initial incomplete request may be used when applying subsection (7) of this section; or

(b) Incomplete, then the date of the subsequent request must be used when applying subsection (7) of this section.

(10) The department shall respond, in writing, not later than sixty days after receipt of a complete request.

[Statutory Authority: RCW 74.46.800. 96-15-056, 388-96-774, filed 7/16/96, effective 8/16/96; 94-12-043 and 94-14-016 (Order 3737 and 3737A), 388-96-774, filed 5/26/94 and 6/23/94, effective 6/26/94 and 7/24/94; 93-17-033 (Order 3615), 388-96-774, filed 8/11/93, effective 9/11/93. Statutory Authority: RCW 74.46.800, 74.46.450 and 74.09.120. 93-12-051 (Order 3555), 388-96-774, filed 5/26/93, effective 6/26/93. Statutory Authority: RCW 74.09.120 and 74.46.800. 90-09-061 (Order 2970), 388-96-774, filed 4/17/90, effective 5/18/90. Statutory Authority: RCW 74.09.180 and 74.46.800. 89-01-095 (Order 2742), 388-96-774, filed 12/21/88. Statutory Authority: 1987 c 476. 88-01-126 (Order 2573), 388-96-774, filed 12/23/87. Statutory Authority: RCW 74.46.800. 87-09-058 (Order 2485), 388-96-774, filed 4/20/87. Statutory Authority: RCW 74.09.120, 74.46.840 and 74.46.800. 85-17-052 (Order 2270), 388-96-774, filed 8/19/85.]

AMENDATORY SECTION (Amending WSR 96-15-056, filed 7/16/96, effective 8/16/96)

WAC 388-96-776 Add-ons to the prospective rate--Capital improvements. (1) The department shall grant an add-on to a prospective rate for any capitalized additions or replacements made as a condition for licensure or certification; provided, the net rate effect is ten cents per patient day or greater.

(2) The department shall grant an add-on to a prospective rate for capitalized improvements done under RCW 74.46.465; provided, the legislature specifically appropriates funds for capital improvements for the biennium in which the request is made and the net rate effect is ten cents per patient day or greater. Physical plant capital improvements include, but are not limited to, capitalized additions, replacements or renovations made as a result of an approved certificate of need or exemption from the requirements for certificate of need for the replacement of existing nursing home beds pursuant to RCW 70.38.115 (13)(a) or capitalized additions or renovations for the removal of physical plant waivers.

(3) Rate add-ons granted pursuant to subsection (1), (2) or (16) of this section shall be limited in total amount each fiscal year to the total current legislative appropriation, if any, specifically made to fund the Medicaid share of such rate add-ons for the fiscal year.

(4) When physical plant improvements made under subsection (1) or (2) are completed in phases, the department shall not grant a rate add-on for any addition, replacement or improvement until each phase is completed and fully utilized for which it was intended. The department shall limit rate add-on to only the actual cost of the depreciable tangible assets meeting the criteria of WAC 388-96-557 and as applicable to that specific completed and fully utilized phase.

(((4))) (5) When the construction class of any portion of a newly constructed building will improve as the result of any addition, replacement or improvement occurring in a later, but not yet completed and fully utilized phase of the project, the most appropriate construction class, as applicable to that completed and fully utilized phase, will be assigned for purposes of calculating the rate add-on. The department shall not revise the rate add-on retroactively after completion of the portion of the project that provides the improved construction class. Rather, the department shall calculate a new rate add-on when the improved construction class phase is completed and fully utilized and the rate add-on will be effective in accordance with subsection (((8))) (9) of this section using the date the class was improved.

(((5))) (6) The department shall not add on construction fees as defined in WAC 388-96-745(6) and other capitalized allowable fees and costs as related to the completion of all phases of the project to the rate until all phases of the entire project are completed and fully utilized for the purpose it was made. At that time, the department shall add on these fees and costs to the rate, effective no earlier than the earliest date a rate add-on was established specifically for any phase of this project. If the fees and costs are incurred in a later phase of the project, the add-on to the rate will be effective on the same date as the rate add-on for the actual cost of the tangible assets for that phase.

(((6))) (7) The contractor requesting an adjustment under subsection (1) or (2) shall submit a written request to the office of rates management separate from all other requests and inquiries of the department, e.g., WAC 388-96-904 (1) and (5). A complete written request shall include the following:

(a) A copy of documentation requiring completion of the addition or replacements to maintain licensure or certification for adjustments requested under subsection (1) of this section;

(b) A copy of the new bed license, whether the number of licensed beds increases or decreases, if applicable;

(c) All documentation, e.g., copies of paid invoices showing actual final cost of assets and/or service, e.g., labor purchased as part of the capitalized addition or replacements;

(d) Certification showing the completion date of the capitalized additions or replacements and the date the assets were placed in service per WAC 388-96-559(2);

(e) A properly completed depreciation schedule for the capitalized additions or replacement as provided in this chapter;

(f) A written justification for granting the rate increase; and

(g) For capitalized additions or replacements requiring certificate of need approval, a copy of the approval and description of the project.

(((7))) (8) The department's criteria used to evaluate the request may include, but is not limited to:

(a) The remaining functional life of the facility and the length of time since the facility's last significant improvement;

(b) The amount and scope of the renovation or remodel to the facility and whether the facility will be better able to serve the needs of its residents;

(c) Whether the improvement improves the quality of living conditions of the residents;

(d) Whether the improvement might eliminate life safety, building code, or construction standard waivers;

(e) Prior survey results; and

(f) A review of the copy of the approval and description of the project.

(((8))) (9) The department shall not grant a rate add-on effective earlier than sixty days prior to the receipt of the initial written request by the office of rates management and not earlier than the date the physical plant improvements are completed and fully utilized. The department shall grant a rate add-on for an approved request as follows:

(a) If the physical plant improvements are completed and fully utilized during the period from the first day to the fifteenth day of the month, then the rate will be effective on the first day of that month; or

(b) If the physical plant improvements are completed and fully utilized during the period from the sixteenth day and the last day of the month, the rate will be effective on the first day of the following month.

(((9))) (10) If the initial written request is incomplete, the department will notify the contractor of the documentation and information required. The contractor shall submit the requested information within fifteen days from the date the contractor receives the notice to provide the information. If the contractor fails to complete the add-on request by providing all the requested documentation and information within the fifteen days from the date of receipt of notification, the department shall deny the request for failure to complete.

(((10))) (11) If, after the denial for failure to complete, the contractor submits a written request for the same project, the date of receipt for the purpose of applying subsection (((8))) (9) will depend upon whether the subsequent request for the same project is complete, i.e., the department does not have to request additional documentation and information in order to make a determination. If a subsequent request for funding of the same project is:

(a) Complete, then the date of the first request may be used when applying subsection (((8))) (9); or

(b) Incomplete, then the date of the subsequent request must be used when applying subsection (((8))) (9) even though the physical plant improvements may be completed and fully utilized prior to that date.

(((11))) (12) The department shall respond, in writing, not later than sixty days after receipt of a complete request.

(((12))) (13) If the contractor does not use the funds for the purpose for which they were granted, the department shall immediately recoup the misspent or unused funds.

(((13))) (14) When any physical plant improvements made under subsection (1) or (2) results in a change in licensed beds, any rate add-on granted will be subject to the provisions regarding the number of licensed beds, patient days, occupancy, etc., included in this chapter.

(((14))) (15) All rate components to fund the Medicaid share of nursing facility new construction or refurbishing projects costing in excess of one million two hundred thousand dollars, or projects requiring state or federal certificate of need approval, shall be based upon a minimum facility occupancy of ((eight)) eighty-five percent for the nursing services, food, administrative, operational and property cost centers, and the return on investment (ROI) rate component, during the initial rate period in which the adjustment is granted. These same component rates shall be based upon a minimum facility occupancy of ninety percent for all rate periods after the initial rate period.

(16) If a rate add-on granted under the authority of this section for a capitalized addition or replacement results in an increase in property taxes, the department may grant an additional rate add-on to fund the Medicaid share of any increase in property taxes. A rate add-on granted under this subsection shall be effective the first day of the month the tax increase is effective.

[Statutory Authority: RCW 74.46.800. 96-15-056, 388-96-776, filed 7/16/96, effective 8/16/96. Statutory Authority: RCW 74.46.800 and 1995 1st sp.s. c 18. 95-19-037 (Order 3896), 388-96-776, filed 9/12/95, effective 10/13/95. Statutory Authority: RCW 74.46.800. 94-12-043 (Order 3737), 388-96-776, filed 5/26/94, effective 6/26/94.]

© Washington State Code Reviser's Office