Section 39.05 - Determination of Inpatient Rate(1)General. The Division will determine an Inpatient Rate for each chronic/rehabilitation hospital. Except for new hospitals and hospitals which have closed the facility and now provide some services at a new location under new management, the methodology for determining the Inpatient Rate for non-Administrative Day Patients is set forth in 114. 1 CMR 39.05(2). The methodology for determination of Inpatient Rate for new hospitals and hospitals which have closed the facility and now provide some services at a new location under new management is set forth in 114. 1 CMR 39.05(3). The rates for Administrative Day Patients are set forth in 114. 1 CMR 39.05(4).(2)Determination of the Inpatient Rate.(a)Data Sources.1. The base year for Allowable Inpatient Costs will be FY 1993, and the Division will utilize the costs reported in the FY 1993 RSC-403 cost report. For hospitals which converted a majority of beds to long-term care beds during FY 1993, the base year for Allowable Inpatient Costs will be FY 1994 deflated to FY 1993, and the Division will utilize the costs reported in the FY 1994 RSC-403, deflated to FY 1993 using a FY 1993 - FY 1994 inflation factor calculated pursuant to the methodology set forth in 114. 1 CMR 39.05(2)(c)2.2. Allowable Inpatient Costs include only costs incurred or to be incurred in the provision of hospital care and services, supplies and accommodations and determined in accordance with the Principles of Reimbursement for Provider Costs under 42 U.S.C. §§ 1395 et seq. as set forth in 42 CFR 413et seq. and the Provider Reimbursement Manual, the HURM Manual, and Generally Accepted Accounting Principles. Except where noted, all references to specific Schedules, Columns and Lines of the RSC-403 are to the FY 1993 version of the RSC-403.3. The Division may adjust reported costs used to determine Allowable Inpatient Costs upon audit of the hospital's RSC-403. The Division may also request additional information, data and documentation from the hospital as necessary to calculate rates. Failure to submit the requested information in a timely manner will result in the application of penalties as determined by 114. 1 CMR 39.03(2).4. If the specified data source is unavailable or inadequate, the Division will determine and use the best alternative data source and/or shall perform a statistical analysis to ensure comparability of data.(b)Determination of Allowable Base Year Inpatient Operating Costs. Allowable Base Year Inpatient Operating Costs are the sum of Allowable Total Inpatient Direct Routine Costs, Allowable Total Inpatient Direct Ancillary Costs, Allowable Total Inpatient Overhead Costs as defined below. 1.Allowable Inpatient Direct Routine Costs. Allowable Total Inpatient Direct Routine Costs are the hospital's Total Inpatient Routine Costs (Sch. XIV, Col. 2, L. 78).2.Allowable Inpatient Direct Ancillary Costs. The Division will calculate Allowable Total Inpatient Direct Ancillary Costs as follows:a. Determine the Inpatient Direct Ancillary Cost for each ancillary cost center by multiplying the total cost for each cost center (Sch. XIV, Col. 2) times the ratio of Inpatient Patient Service Statistics (Sch. XVI, L. 22) to Total Patient Service Statistics (Sch. XVI, L. 42). The otherwise total inpatient direct ancillary costs for the Drug and Medical Supplies cost centers shall be calculated using the following methodology.i. The total cost for the Drug cost center shall be the reported Drug cost (Sch. XIV, Col. 2, L. 28) plus the Total Direct Overhead Cost (Sch. XIV. Col. 2, L. 16) related to Pharmacy. Determine the Inpatient Direct Ancillary Drug cost by multiplying the total cost for the drug cost center times the ratio of the inpatient drug patient service statistics (Sch. XVI, Col. 11, L. 22) to the total drug patient service statistics (Sch. XVI, Col. 11, L. 42).ii. The total cost for the Medical Supplies cost center shall be the reported Medical Supplies cost (Sch. XIV, Col. 2, L. 27) plus the Total Direct Overhead cost related to Central Service/Supplies (Sch. XIV, Col. 2, L. 15). Determine the Inpatient Direct Ancillary Medical Supplies cost by multipying the total cost for the medical supplies cost center times the ratio of the inpatient medical supplies patient service statistics (Sch. XVI, Col. 10, L. 22) to the total medical supplies patient service statistics (Sch. XVI, Col, 10, L. 42).b. Base year costs for the Laboratory, Radiology, Physical Therapy, Speech Therapy, Respiratory Therapy and Occupational Therapy cost centers will be adjusted to incorporate efficiency standards.c. Separate efficiency standards will be determined for chronic hospitals and rehabilitation hospitals. Hospitals will be classified as chronic or rehabilitation based on whether they provide primarily chronic (longer stay) or rehabilitation as described in their FY 1994 RSC-420 submissions and in the 1989 American Hospital Association Guide, and based on their average length of stay. In classifying hospitals for the efficiency standards, respiratory and other longer-stay specialty services shall be considered chronic rather than rehabilitation, and lengths of stay over 30 days shall indicate longer-stay services. The efficiency standards shall be calculated using the following classifications:i. The chronic hospital group shall consist of Boston Specialty Hospital, Cranberry Specialty Hospital, Franciscan Children's Hospital, Jewish Memorial Hospital, Massachusetts Respiratory Hospital, Middle sex County Hospital, New England Sinai Hospital, Shaughnessy Chronic Disease and Rehabilitation Hospital, Springfield Municipal Hospital, St. John of God Hospital, and Youville Hospital.ii. The rehabilitation hospital group shall consist of Braintree Hospital, Fairlawn Hospital, Mediplex Hospital of Bristol, New England Rehabilitation Hospital, Rehab West, Spaulding Rehabilitation Hospital, and Whittier Rehabilitation Hospital.d. The efficiency standards will be determined as follows:i. Calculate each hospital's FY 1994 unit cost for each cost center by dividing the Inpatient Direct Ancillary Cost as calculated pursuant to 114. 1 CMR 39.05(2)(b)2.a. by the corresponding statistics for each cost center (Sch. XVI, Cols. 12, 17, 21, 25, 26 and 27).ii. The Division will rank the unit cost for each hospital in the chronic group and determine the median. The median will be the efficiency standard for the chronic hospital group.iii. The Division will rank the unit cost for each hospital in the rehabilitation group and determine the median. The median will be the efficiency standard for the rehabilitation hospital group.iv. If a hospital's FY 1994 unit cost does not exceed the applicable efficiency standard, its FY 1993 Inpatient Direct Ancillary Costs as calculated pursuant to 114. 1 CMR 39.05(2)(b)2.a will be its allowable cost for that cost center.v. If a hospital's FY 1994 unit cost exceeds the applicable efficiency standard, the Division will adjust the FY 1993 Inpatient Direct Ancillary Cost for that cost center, as follows: a. Divide the difference between the FY 1994 unit cost and the efficiency standard by the FY 1994 unit cost.b. Reduce the FY 1993 Direct Ancillary Costs for that cost center by the resulting percentage.e. For all other ancillary cost centers, the allowable cost will be the FY 1993 Inpatient Direct Ancillary Cost for that cost center as calculated pursuant to 114. 1 CMR 39.05(2)(b)2.a.f. The sum of the allowed costs for each cost center will be the Allowable Total Inpatient Direct Ancillary Costs.3.Allowable Total Inpatient Overhead. The Division will calculate Allowable Total Inpatient Overhead by comparing Actual Total Inpatient Overhead to an efficiency standard as defined below. a. The Division will determine the FY 1993 Actual Inpatient Overhead Per Diem Rate for each hospital as follows: i. Calculate Inpatient Routine Overhead cost by subtracting Direct Inpatient Routine Cost (Sch. XIV, Col. 2, L. 78) from Inpatient Routine Cost after step down of overhead (Sch. XIV, Col. 25, L. 78).ii. Calculate Inpatient Ancillary Overhead Cost by:a. determining the total overhead cost allocated to each ancillary department (Sch. XIV, Col. 25 minus Sch. XIV, Col. 2),b. extracting the inpatient portion of the total ancillary overhead cost by multiplying the total overhead cost allocated to each ancillary department by the ratio of Inpatient Patient Service Statistics (Sch. XVI, L. 22) to Total Patient Service Statistics (Sch. XVI, L.42), andc. summing the inpatient portions of the total ancillary overhead cost in each department to obtain the Inpatient Ancillary Overhead Cost. iii. Divide the sum of Inpatient Routine Overhead and Inpatient Ancillary Overhead by FY 1993 Patient Days. For hospitals that reported costs in Schedule XIV, Column 2, Line 15 (Central Service/Supplies) and/or Column 2, Line 16 (Pharmacy), those costs will be removed from the overhead costs and reclassified to Ancillary costs pursuant to 114. 1 CMR 39.05(2)(b)2.a..b. Separate efficiency standards will be determined for chronic hospitals and rehabilitation hospitals, as defined in 114. 1 CMR 39.05(2)(b)2.c.c. The Division will rank the Inpatient Overhead Per Diem Cost for each chronic hospital and determine the median. The median will be the efficiency standard for chronic hospitals.d. The Division will rank the Inpatient Overhead Per Diem Cost for each rehabilitation hospital and determine the median. The median will be the efficiency standard for rehabilitation hospitals.e. If a hospital's Inpatient Total Overhead Per Diem Cost does not exceed the appropriate efficiency standard, its Allowable Total Inpatient Overhead Costs will be its Actual Total Inpatient Overhead Cost as calculated pursuant to 114. 1 CMR 39.05(2)(b)3.a.f. If a hospital's Inpatient Overhead Per Diem Cost exceeds the appropriate efficiency standard, the hospital's Allowable Inpatient Overhead Costs will be the efficiency standard multiplied by FY 1993 Patient Days.(c)Adjustments to Base Year Costs. 1.Substantial Program Change. For hospitals which converted beds to long term care use or discontinued major services between the base year and the rate year, the Division shall adjust base year costs to remove the costs of the services no longer provided.2.Inflation. The Division will adjust Total Inpatient Routine Direct Costs, Allowable Total Inpatient Ancillary Direct Costs, and Allowable Total Inpatient Overhead Costs for inflation prospectively. The Division will adjust these costs from 1993 through fiscal year 1997 using a composite index comprised of two cost categories: labor and non-labor. These categories shall be weighted according to the weights used by the Health Care Financing Administration for PPS-exempt hospitals. The inflation proxy for the labor cost category shall be the Massachusetts Consumer Price Index. The inflation proxy for the non-labor cost category shall be the non-labor portion of the HCFA market basket for hospitals. a. The composite inflation index as calculated in accordance with the preceding paragraph will be increased by .02 pursuant.b. The Commission will recover the additional costs for which hospitals were reimbursed according to the provisions of 114. 1 CMR 39.06(2)(c)2.a., but were not expended on the compensation of technicians, nurses, nursing aides, orderlies and attendants, and occupational, speech, recreational, physical, and respiratory therapists.(d)Capital. 1. The following limitations apply in the determination of the allowable capital cost: a. The Division shall not allow interest expense attributable to balloon payments on financed debt. Balloon payments are those in which the final payment on a partially amortized debt is scheduled to be larger than all preceding payments. Requests for interest associated with balloon-type payments must be adjusted to conform to the time period for conventional regular installment loans.b. Where there has been a change of ownership after July 18, 1984, the allowable basis of the fixed assets to be used in the determination of the depreciation and interest expense shall be the lower of the acquisition cost to the new owner or the basis allowed for reimbursement purposes to the immediate prior owner. The allowed depreciation expense shall be calculated using the full useful lives of the assets.c. All costs (including legal fees, accounting, and administrative costs, travel costs, and the costs of feasibility studies) attributable to the negotiation or settlement of the sale or purchase of any capital asset after July 18, 1984 (by acquisition or merger), for which payment has previously been made by any payer, and which have been included in any portion of prior years' rates, shall be subtracted from allowable capital costs.2. The hospital's allowable base year capital costs consist of the hospital's actual FY 1993 patient care capital requirement for historical depreciation for building and fixed equipment, for reasonable interest expenses, for amortization, and for leases and rental of facilities. For hospitals which converted a majority of their beds to long-term care beds during FY 1993, allowable base year capital costs consist of the hospital's actual FY 1994 patient care capital requirement deflated to FY 1993 using a FY 1993 - FY 1994 inflation factor calculated pursuant to the methodology set forth in 114. 1 CMR 39.05(2)(c)2.3. The Division will calculate each hospital's FY 1996 Allowed Inpatient Unit Capital Cost according to the following formula: a. Base Year Recognized Capital Cost is the hospital's actual capital costs (Sch. IX) subject to the limitations set forth in 114. 1 CMR 39.05(2)(d)1.b. Base Year Inpatient Capital Cost is the base year actual total inpatient cost including capital (Sch. XVIII, Col. 2, L. 22) less the base year actual total inpatient cost excluding capital (Sch. XVII, Col. 2, L. 22).c. Base Year Routine Patient Days (Sch. III)d. Base Year Inpatient Unit Capital Cost is the Base Year Inpatient Unit Capital Cost divided by the Base Year Routine Patient Days.e. FY 1996 Inpatient Unit Capital Cost is the Base Year Inpatient Unit Capital Cost multiplied by a FY 1993 to FY 1996 inflation factor using a composite index comprised of two cost categories: labor and non-labor. These categories are weighted according to the weights used by the Health Care Financing Administration for PPS-exempt hospitals. The inflation proxy for the labor cost category is the Massachusetts Consumer Price Index. The inflation proxy for the non-labor cost category is the non-labor portion of the HCFA market basket for hospitals..f. The FY 1996 Inpatient Unit Capital Cost shall be ranked and an efficiency standard, the median, shall be determined.g. If the hospital's FY 1996 Inpatient Unit Capital Cost exceeds the efficiency standard, the Allowed Inpatient Unit Capital Cost shall be the sum of the efficiency standard plus 40% of the amount that exceeds the efficiency standard.h. If the hospital's FY 1996 Inpatient Unit Capital Cost is below the efficiency standard, the Allowed Inpatient Unit Capital Cost will be the sum of its Inpatient Unit Capital Cost and 60% of the amount that is below the efficiency standard.4. The Division will calculate each hospital's FY 1997 Allowed Inpatient unit Capital Cost according to the following formula:a. The FY 1997 Inpatient Unit Capital Cost is the FY 1996 Hospital Unit Capital Cost multiplied by the HCFA capital update factor for FY 1996 to FY 1997.b. The FY 1997 Inpatient Unit Capital Cost shall be ranked and an efficiency standard, the median, shall be determined.c. If the hospital's FY 1997 Inpatient Unit Capital Cost exceeds the efficiency standard, the Allowed Inpatient Unit Capital Cost shall be the sum of the efficiency standard plus 20% of the amount that exceeds the efficiency standard.d. If the hospital's FY 1997 Inpatient Unit Capital Cost is below the efficiency standard, the Allowed Inpatient Unit Capital Cost will be the sum of its Inpatient Unit Capital Cost and 80% of the amount that is below the efficiency standard.(e)Calculation of Inpatient Per Diem Rate. The Inpatient Rate shall be determined by dividing the sum of Allowable Base year Inpatient Operating Cost, as determined pursuant to 114. 1 CMR 39.05(2)(b), as adjusted pursuant to 114. 1 CMR 39.05(2)(c), plus the Allowable Inpatient Capital Cost determined pursuant to 114. 1 CMR 39.05(2)(d), by the base year patient days . The Inpatient Rate shall not exceed the hospital's average charge per day.(3)Inpatient Rate for New Hospitals and Hospitals which Closed a Majority of Beds and Now Provide Some Services in a New Location under New Management. (a)Base Year. For new hospitals which were not licensed and/or operated as chronic/rehabilitation hospitals in FY 1993, or which did not report a full year of actual costs in FY 1993, the base year for operating and capital costs shall be the first cost reporting period of at least 12 months after the hospital is licensed and/or operated as a chronic/ rehabilitation hospital. For hospitals licensed and/or operated as chronic/rehabilitation hospitals in FY 1993 but which eliminated a majority of beds and closed the facility and which in subsequent years continued to provide some services in a new location and under a new management, the base year is the first cost reporting period of at least (12) twelve months after the hospital started to provide the services at the new location. If the Division determines that the data source is inadequate or not representative of the hospital's ongoing costs, the Division may consider alternative data sources to determine Base Year costs.(b) The Division will determine the Inpatient Rate using the methodology set forth in 114. 1 CMR 39.05(2), substituting the hospital's base year for FY 1993. 1. Each efficiency standard defined in 114. 1 CMR 39.05(2)(b) will be inflated to the hospital's base year using an inflation factor calculated pursuant to the methodology in 114. 1 CMR 39.05(2)(c)2..2. Base year operating costs which are not subject to efficiency standards will be evaluated for reasonableness. Criteria for such review will include, but will not be limited to, peer group analysis of costs incurred by comparable facilities.(c) For each new hospital, or hospital which has closed a majority of beds and now provides some services in a new location under new management, for which no base year has yet been determined pursuant to 114. 1 CMR 39.05(3)(a), the Division shall evaluate the hospital's projected operating and capital costs for reasonableness. Criteria for such review will include, but will not be limited to, peer group analysis of costs incurred by and the determination of approved rates for comparable facilities.(4)Rates for Administrative Day Patients. The rate for inpatient services provided to Administrative Day Patients shall be the lesser of the following or the Inpatient Rate.(a) For FY 1996, the rate for Administrative Day Patients shall not exceed $111 per patient day.(b) For FY 1997, the rate for Administrative Day Patients shall not exceed $113.27 per patient day (FY 1996 Administrative Day Patient Rate adjusted by a inflation factor for FY 1997 calculated pursuant to methodology in 114. 1 CMR 39.05(2)(c)2.(5)Inpatient Rate for Publicly Assisted Patients. For all eligible services provided to publicly assisted patients, other than those cited in 114. 1 CMR 39.05(4), the initial rate of payment shall be equal to the Inpatient Rate. In addition to the initial rate of payment, a supplementary payment shall be made for all eligible services supplied by chronic/rehabilitation hospitals to publicly assisted patients who are not given Administrative Day status. This supplementary payment shall equal the Inpatient Per Diem minus the Rate for Administrative Day Patients pursuant to 114. 1 CMR 39.05(4).114 CMR, § 114. 39, § 39.05