Ala. Admin. Code r. 560-X-22-.11

Current through Register Vol. 43, No. 1, October 31, 2024

Section 560-X-22-.11 - Interest Expense

(1) Necessary and reasonable interest expense is an allowable cost. In order to be considered necessary, the interest must be incurred on a loan made to satisfy a financial need directly related to patient care. Loans which result in excess funds or which are not related to patient care are not considered necessary. In order to be considered reasonable, the interest rate cannot be in excess of that which a prudent borrower would agree to pay, and the lender must not be related to the borrower. The provisions of HIM-15 shall be applicable in determining whether a loan is between related parties. Interest paid by the provider to owners, partners, stockholders, or other persons related to the provider is not an allowable cost.

(2)

(a) Bond discounts or premiums and loan costs will be amortized over the life of the bond issue using the straight line method and such amortization will be treated as interest. Amortization will be added to interest expense in the case of discounts and loan costs and deducted from interest expense in the case of premiums.

(b)

(1) For purposes of Medicaid reimbursement, the term "discount," as applied to debt, means any front-end payment to a lender or any reduction of principal received from a lender as a condition of obtaining the loan. It encompasses the generic terms of discount, loan points, and commitment fees.

(b)

(2) Allowable loan costs will be limited to expenditures required by the lender, such as title searches, recording fees, etc.; however, fees for project development, feasibility studies, or financial advisors will not be allowed.

(c) Only the portion of the discount or premium and loan cost that is related to the allowable basis of the facility, as determined by Medicaid, can be amortized and claimed for reimbursement. Allowable portion will be computed as follows: Current Asset Value x Current Unamortized Disc./Premium = Allowable Discount/Premium Balance Due on Note. Should the result be more than 100%, the full discount/premium will be allowed.

(d) Interest expense will be allowed for debt, discount and/ or premium, and loan costs that are related to the allowable Medicaid basis. The computation of the allowed loan cost will be the same as for allowable discounts as described in 560-X-22-.11(2)(c).

(e) Example:

1. Outstanding Debt at 9/1/91 $2,500,000

2. Remaining Term of Debt 25 years

3. Interest Rate 10%

4. Current Asset Value at 9/1/91 1,826,000

5. Discount 125,000

6. Escrows 150,000

7. Loan Costs (Subject to the provisions of 560-X-22-.11(2)(b)(2)560 -X-22-.22(3)(e)(f)) 120,000

8. Allowable Interest Computation:

(i) Allowable Discount

1,826,000 x 125,000 = $91,300

2,500,000

(ii) Allowable Loan Cost

1,826,000 x 120,000 = $87,648

2,500,000

(iii)

Medicaid Basis	$1,826,000
Discount	91,300
Loan Cost	87,648
Total Int. Basis	2,004,948

(iv) Interest & Debt Allowable

2,004,948 = 80.2% of Annual Interest Incurred

2,500,000 on Notes Outstanding

(v)

First year Interest	$250,000
Medicaid Allowable	802
Allowable Interest	200,500
Allowable Amortization:
Discount	91,300
	253,652
Loan Cost	87,648
	253,506
Total Reimbursable Int. and Amortization	$207,658

(vi) Once percentages of allowability have been established, they will remain in effect until there is a change in ownership. Sale of stock or corporate reorganization does not constitute a change of ownership. A revaluation of assets will be permitted where the purchase of stock of a corporate provider is followed within three (3) months by the liquidation of the provider. Any revaluation of the assets of a provider as the result of such liquidation shall be subject to the same prior approval and basis limitations as though an outright sale of the assets has been made.

(3) Interest incurred during the period of construction on funds borrowed to construct, improve, or enlarge existing facilities must be capitalized as a part of the cost of the facility. The period of construction is considered to extend to the date the facility, improvement, or renovation is put into use for patient care. Where a bond issue is involved, any bond discount and expense, or bond premium amortized during the period of construction must be capitalized and included in the cost of the facility constructed.

(4)

(a) If a debt which was incurred to finance the construction, expansion, renovation, or acquisition of a nursing facility is refinanced, allowable interest on the new loan will be limited to that portion of the loan that represents the unpaid allowable balance of the previous loan subject to the methodology outlined in (2)(e) above. Interest expense, plus applicable amortization cannot exceed the amount that would have been allowable under the terms of the previous loan agreement.

(b) When a loan is refinanced, any allowable unamortized discounts/premiums and loan costs will be written off the provider's books. Such written-off amounts will be treated as a prepayment penalty subject to the provisions of paragraph (5) below.

(5) If the provider incurs a prepayment penalty on the early extinguishment of an interest bearing debt, such penalty may be an allowable cost subject to the following guidelines:

(a) If the allowable interest incurred, plus the penalty (prorated for the allowable portion of the debt) does not exceed the interest that would have been allowed had the debt not been paid off, then all of the interest and penalty can be claimed.

(b) If the allowable interest incurred, plus the penalty (prorated for the allowable portion of the debt) exceeds the interest that would have been allowed had the debt not been paid off, claim may be made for the amount that would have been allowed had the debt not been paid off. The excess penalty may then be carried forward and claimed in subsequent years in a manner such that actual interest incurred, plus penalty does not exceed the interest that would have been allowable under the previous financing agreement.

(c) In no instance will the provision of (5)(b) be carried forward in excess of five years.

(6) The payment of a lease payment to a medical clinic board, under a lease agreement containing a purchase option at a price below the fair market value, is generally not allowable as a true lease payment. It will generally be treated as a lease purchase which must be capitalized. Payments of bond interest will be subject to the above outlined provisions.

(7) Financing that provides for no scheduled periodic reduction of the principle amount of the loan will not be recognized by Medicaid. The provider will, instead, submit to the Chief Auditor, Provider Audit, such information as necessary in order to generate an appropriate amortization schedule for the loan amount. This schedule will be used to compute allowable interest as outlined in paragraph (2)(e) above.

(8)

(a) Interest must be reported on the cost report in two distinct areas: working capital interest in the administrative cost center (subject to the operating cost center ceiling), and other interest reported in the Fixed Cost Center.

(b) Working capital interest is limited to short term loans (normal term of less than six months) taken out to meet immediate needs of daily operations. To be allowable, there must be a genuine effort by the provider to repay these notes. If no evidence of repayment is apparent and these notes are merely renewed throughout the year, Medicaid will not consider these to be bona fide working capital notes; and the interest incurred on them will not be allowable if no justification can be made for nonpayment of the note. Allowable interest on working capital notes will be limited to no more than 90 days interest on two months of the provider's average allowable cost net of property cost. The rate used for this computation will be the average rate charged by the lender during the year, as reported on schedule L of the cost report.

(9) Only interest expenses incurred and payable to a lender, as evidenced by a signed loan agreement, will be considered for reimbursement. Additional interest expense created by restatement of loan agreements, under generally accepted accounting principles, or created by imputing a different rate from the one stated in the loan agreement, will not be allowable. For example, an imputed interest expense resulting from the application of Accounting Principles Board Opinion No. 16 or No. 21, or any similar accounting principle, and any other imputed interest expense shall not be recognized as a valid interest cost for purposes of computing the provider's allowable Medicaid reimbursement.

(10) If financing obtained to purchase a facility is a combination of assumed debt and new financing, allowable interest will be prorated among all debt interest; i.e., if the total debtis determined to be 90% allowable, then 90% of the total interest will be allowable.

(11) If loans are made by the facility to related parties during the reporting period and working capital loans are taken out or remain outstanding during any period in which the related party loans are outstanding, then the interest on the portion of the principal amount of such working capital loans equal to the principal amount of such related party loans is not reimbursable.

(12) Providers are required to maintain adequate records to allow for audit verification by Medicaid auditors. Minimum records required are:

(a) Loan/Mortgage Agreements which state the purpose of loan.

(b) Repayment Schedule/Amortization Schedule.

(c) If a loan is refinanced, the above records must also be kept for the prior loan.

Ala. Admin. Code r. 560-X-22-.11

Rule effective 10/1/1982. Amended effective 3/11/1986; October 1, 1990. Emergency rule effective 9/12/1991. Amended effective 12/12/1991.

Author: Susan Mims

Statutory Authority: State Plan, Title XIX, Social Security Act, 42 C.F.R. §§ 447.200 - .272, et seq.