632 A.2d 964 | Pa. Commw. Ct. | 1993
Health Care and Retirement Corporation (HCR) petitions for review of the January 15, 1992 order of the Director of the Office of Hearings and Appeals (OHA), Department of Public Welfare (DPW), adopting the recommendation of the hearing examiner to deny HCR’s appeal from Medicaid cost disallowances made after audits conducted by DPW. The issues HCR raises for review are whether, in calculating Medicaid
I.
(A)
HCR owns and operates a number of nursing homes in Pennsylvania
In 1985, HCR purchased the assets of the various facilities in question from Health Group Care Centers, Inc. (HGCC). Prior to HCR’s purchase of the facilities, HGCC had owned the facilities as ongoing operations participating in the MA program and had obtained reimbursement for depreciation
HCR’s facilities ultimately suffered cost disallowances when DPW audited their MA cost reports. HCR and its facilities appealed these disallowances, raising numerous issues that covered various fiscal periods. These appeals were consolidated for hearing in January 1991 at which the parties informed the hearing examiner that they had settled most of the issues in these appeals, but there remained a dispute over whether DPW improperly adjusted certain depreciation and capital interest expenses when it computed the Medicaid depreciable bases of HCR’s facilities. A second issue in dispute was whether DPW erred in disallowing capital interest on certain facility additions, but HCR has not raised this issue on appeal to this Court.
In a November 21, 1991 recommendation and adjudication, the hearing examiner concluded that DPW’s adjustment allocation methodology was correct, and that DPW did not improperly adjust depreciation expenses. The hearing examiner rioted that 55 Pa.Code § 1181.259(g) provides that the assigned useful lives used in computing the depreciation may not be changed, even if the facility is purchased as an ongoing operation; and that to allow a step-up on fully depreciated assets would require a “relifing” of those assets and would be in violation of the regulations. After addressing several issues which are not directly addressed in this appeal, the hearing examiner also concluded that HCR was barred from challenging the failure to step-up for depreciated assets “because no appeal was filed by the facility on [these] issues during the year in question ... [and] ... [t]he facility must appeal the Department’s treatment of a transaction in the year in which the transaction occurred.” Hearing Examiner Opinion, pp. 9-10. HCR appealed to OHA, which adopted the hearing examiner’s recommendation.
(B)
As a threshold issue, this Court must first address DPW’s contention that HCR is barred from its challenge by the failure of the prior owner, HGCC, to appeal DPW’s allocation methodology.
Moreover, it appears that DPW withdrew this issue as part of the parties’ stipulation of partial settlement and did not
II.
HCR’s primary argument is that DPW’s methodology for allocating an acquired facility’s depreciable basis among its assets is inconsistent with DPW regulations, reaches an unreasonable result, and conflicts with applicable case law. Pursuant to 55 Pa.Code § 1181.259(a), depreciation on capital assets used to provide compensable services to MA recipients is an allowable cost. The amount of annual depreciation shall be determined by the “straight-line method” by first reducing the costs of the assets by any salvage value and then dividing by the number of years of useful life of the asset. 55 Pa.Code § 1181.259(e). The method and procedure used, including the assigned useful lives, for computing depreciation shall be applied from year-to-year on a consistent basis and may not be changed, even if the facility is purchased as an ongoing operation. 55 Pa.Code § 1181.259(g).
Whereas Homestead and Grandview dealt with DPW’s authority to calculate the cost basis of depreciable assets, the present matter presents a unique situation because DPW allocated sizable portions of the depreciable bases of the facilities to assets in the nature of fixed and movable equipment, still being used, that were already fully depreciated from a Medicaid standpoint. This approach presents problems in that it ignores the question of whether a particular asset has any remaining useful life at the time of the acquisition. Once an asset’s useful life is established by a previous owner, it cannot be changed by that owner or by subsequent owners; thus an asset cannot be “relifed”. Suburban Manor; Homestead. If asset lives were permitted to be changed, the method and procedure of calculating depreciation would not be consistent. Suburban Manor. Although DPW may apportion Medicaid depreciable cost bases to each asset based upon a ratio established by the prior owner, Homestead, the question becomes whether it is reasonable to do so with respect to assets whose useful lives have been extinguished and which have been fully depreciated.
Instead, HCR is clear in its assertion that DPW may not allocate a portion of the facilities’ Medicaid depreciable basis, which is necessarily lower than the purchase price, to fully depreciated assets where the depreciation taken on those assets has already been subtracted when the Medicaid depreciable basis was computed. Furthermore, HCR clearly argues that, despite DPWs assertions to the contrary, DPW is unlawfully deducting the same costs twice by deducting the prior owner’s depreciation when it calculates the facility’s Medicaid depreciable basis and then allocates part of that depreciable basis to fully depreciated assets, but refuses to recognize the depreciation on that portion of the allocation because those assets were completely depreciated by the prior owner, a factor that was already taken into account when the depreciable basis was set.
As support, HCR relies upon Meadows, in which this Court held that DPW’s interpretation of the pertinent regulations was totally unreasonable. Meadows involved a facility which had been constructed for an amount in excess DPW’s limitation of $22,000 per bed on depreciable assets, resulting in a Medicaid depreciable basis capped below the actual construction cost of the facility. After making this adjustment, DPW further disallowed an additional 1.45% of the depreciable basis on the grounds that some of the costs were attributable to non-allowable cost centers. As here, the facility contended
The instant case presents a situation logically similar and more troubling than that presented in Meadows. DPW has effectively rewritten the provision in 55 Pa.Code § 1181.-259(m)(l) to mean that the Medicaid depreciable basis may be further reduced by allocating portions of the basis to fully depreciated assets. Pared to its essence, DPW’s methodology automatically applies the percentages originally assigned among buildings, land, and equipment of the prior owner to the new owner in such a manner that the equipment, which had been fully depreciated under the prior owner, once again has a value, but these percentages fail to take into account the prior owner’s depreciation. By so doing, DPW has effectively “relifed” the equipment assets, but then refuses to allow depreciation on those assets.
Under such a scheme, the facility is thus denied depreciation for the building and the land since the Medicaid depreciable basis is correspondingly lower. As this Court found in Meadows, such an interpretation of the pertinent regulations is unreasonable. As HCR notes in its brief, it is not consistent to assume, as DPW’s allocation methodology does, that an asset has no value and no remaining useful life in one year, and yet has value, but no useful life in the next year. It is equally inconsistent to assume that a depleted asset representing zero percent of the total depreciable basis in one year gains value in the next year.
ORDER
AND NOW, this 8th day of October, 1993, the order of the Director of the Office of Hearings and Appeals adopting the hearing examiner’s recommendations as to the Department of Public Welfare’s depreciation allocation methodology is reversed and this case is remanded to the Department for recomputation of reimbursement due Health Care and Retirement Corporation in accordance with this opinion.
Jurisdiction relinquished.
. These homes include Twinbrook Medical Center, Sky Vue Terrace, Hampton House, Negley House, Shadyside Manor Nursing Home, and Wallingford Nursing and Rehabilitation Center.
. Reimbursement for skilled nursing and intermediate care services provided to MA patients at HCR’s facilities were made pursuant to the regulations in DPW’s Medical Assistance Manual For Allowable Cost Reimbursement For Skilled Nursing And Intermediate Care Facilities (Manual) found at 8 Pa.B. 2826-2838 (1978) and 10 Pa.B. 3106 (1980). However, the Manual was codified on July 1, 1983 at 55 Pa.Code § 1181.201-1181.274, with the provisions remaining substantially the same. Because this appeal involves periods both before and after July 1, 1983, reference will be made to the Pa.Code provisions for both periods.
. The record reflects that four of the facilities challenged DPW's depreciation methodology as to the initial years of HGCC’s purchase of those facilities.
. In Suburban Manor/Highland Hall Care Center v. Department of Public Welfare, 146 Pa.Commonwealth Ct. 129, 604 A.2d 1185 (1992), this Court noted that the clear intent of this section is to ensure continuity in the determination and reimbursement of depreciation costs.
. HCR also argues that the hearing examiner and OHA decisions must be vacated to the extent that they ruled on issues settled by the parties. DPW has not responded to this issue in its brief. A review of the hearing examiner's decision and the parties' partial settlement reveals that the hearing examiner did indeed address issues beyond the pur