NURSING HOME ACCOUNTING AND REPORTING MANUAL pages III-23-26 & V-3-4

A.ALLOCATED EXPENSES

Allocated expenses are costs that benefit two or more entities or cost centers. These types of expenses must be allocated in accordance with benefits received from the resources represented by the costs incurred. Each servicing organization is required to submit to the department a cost allocation plan. This plan should identify the costs to be allocated, as well as the statistical basis for the allocation. This plan should be used to apportion costs to applicable cost centers for reporting purposes.

Where costs are incurred that benefit more than one nursing home or a nursing home and another business entity, only that portion of joint costs related to patient care at the reporting nursing home is allowable.

When nursing homes conduct activities and provide services that are unallowable for reimbursement in the Medicaid cost reimbursement system, the full direct and indirect costs of conducting the unallowable activities and providing the unallowable services must be identified. In other words, all activities and functions in the nursing home, including activities not related to patient care, must bear their allocable share of overhead costs. After this allocation is made, the total direct and indirect costs of these activities and functions must be excluded in determining allowable costs.

Some of the more common allocated expenses are discussed below.

1.Home Office

A nursing home that is part of a multi-entity organization may be charged for costs incurred on its behalf by the home office. The nature of the charges will vary with each organization, depending on the type of operation and particular management philosophy. Such charges may consist of expenditures directly assignable to one or more of the facilities (for example, lease payments for the nursing home or Administrator salaries) or expenditures that benefit the entire organization rather than individual facilities (for example, the chief executive's salary or accounting services). The latter type of expenditure is normally allocated among the various entities using a statistical method selected by management. The services allocated must be necessary to the facility and nonduplicative. The costs allocated to a nursing home from the home office should be recorded in the Allocated Expense account in the appropriate cost center.

Those costs incurred by the home office that are directly assignable to a specific facility must be identified in the particular cost center that receives direct benefit from the expenditures and to the appropriate account within that cost center. For example, if the home office incurs the cost of the individual nursing home lease expense, that cost should be assigned to lease expense on the records of each facility. This type of cost is actually not an "Allocated Expense" but rather a "Direct Charge" since it benefits only one entity.

2.Combination Facility

There are situations in which nursing homes share physical space with other facilities or institutions such as a hospital or a retirement home. In such cases, it is necessary to apportion the common costs between the nursing home and the sharing institution. This requires a record-keeping capability that can adequately and accurately furnish the underlying cost and statistical data necessary to separately determine costs applicable to the portion of the physical space participating as a nursing home and the portion providing other services. The common costs related to combination facilities that require allocation consist of such items as housekeeping, maintenance, laundry, administration, depreciation, utilities, and interest.

3.Internal Allocations

Internal cost allocation may also be necessary in a nursing home facility or servicing organization to give recognition to the fact that the costs incurred in selected areas may benefit both allowable and unallowable cost centers. The accumulated costs in these areas must therefore be apportioned between the appropriate allowable and unallowable cost centers. For example, if a facility provided non-routine barber and beauty service, this cost would be appropriately categorized as unallowable. In addition to the direct cost identified to the barber and beauty services, certain indirect costs, if material, would be required to be allocated to the unallowable barber and beauty account. These may include maintenance costs, utilities, housekeeping, office staff time, telephone costs, and other costs that would be incurred in support of the barber and beauty service.

4.Support Statistics

Cost allocations rely upon the application of statistical bases. Accurate records must be kept on certain operating statistics to ensure proper apportionment of all common costs. Recommended statistical bases include the following:

Depreciation / Square Feet
Property Interest / Square Feet
Working Capital Interest / Amount of Loan Cost Allocated
Fringe Benefits and Payroll Taxes / Gross Salaries
Nursing Supplies / Cost of Supplies Used
Administrative and General / Hours of Service or Periodic Sample Time Studies
Maintenance and Repairs / Square Feet
Operation of Plant and Utilities / Square Feet
Laundry and Linen Service / Pounds of laundry
Auto/Travel / Mileage Logs
Housekeeping / Hours of Service
Dietary and Food / Meals Served
Telephones / Number of Lines
Data Processing / Machine Time
Purchasing, Receiving, Stores / Costs of Supplies Expensed
Admitting / Gross Inpatient Charges
Cashiering, Accounts Receivable, Collections / Hours of Service

The statistics that are used must be auditable and maintained on a continuing basis during the accounting period. The statistic used must ensure that costs are allocated in accordance with the benefits and services received from the specific resources represented by those costs. If the results of using a recommended statistical base do not meet these requirements, another more appropriate statistical base must be selected.

5.Management Agreements, Management Fees, and Central Office Services

Management fees are allowable only if the following conditions are met:

A written management agreement creates a principal/agent relationship between the provider and the manager and sets forth the items, services, and activities to be provided by the manager.

Documentation demonstrates that the contracted services were actually delivered.

The fees must be for necessary, nonduplicative services that are of the nature and magnitude that prudent and cost conscious management would pay.

General management fees paid to or for the benefit of a related organization are allowable only to the extent of the following:

The lower of the actual cost to the related organization of providing necessary services related to patient care under the management agreement or the cost of comparable services purchased elsewhere.

Not more than any cost center limit established by RCW.

The related organization has received approval of its Joint Cost Allocation Disclosure method. For cost reimbursement purposes, related organization management agreements frequently are viewed as substantially the same as home office operations, and should receive the same basic accounting treatment. Affected providers should review the "Home Office Costs" section below.

A copy of a management agreement must be received by DSHS at least 60 days before it is to become effective. A copy of any amendment to a management agreement must be received by DSHS at least 30 days in advance of the date it is to become effective. Management fees for periods prior to the time the department receives a copy of the applicable agreement are not allowable.

6.Home Office Costs

Home Office costs or services performed for individual providers that relate to patient care along with an appropriate share of indirect costs are allowable Home Office costs to the extent they are reasonable and within the limits specified by state law and regulation. Where costs are incurred that benefit more than one nursing home or a nursing home and another business entity, only that portion of joint costs related to patient care at the reporting nursing home are allowable.

There are four basic types of Home Office costs. Each type of cost is identified below along with a discussion of the cost reimbursement treatment of each type.

Cost of Specific Services - These expenses are related to specific nursing home services (such as accounting, bookkeeping, medical records, dietary consulting, etc.), excluding costs related to general management services. These costs are allowable if they are necessary, ordinary, reasonable, and related to patient care.

General Management Services Costs - General management services costs are those costs associated with general or managerial personnel. These costs include salaries and wages, director's fees, fringe benefits and other benefits, such as housing, meals, and automobiles given in lieu of salaries or wages. Fringe benefits not made available to all employees or not given in lieu of salaries or wages are unallowable. The portion of General Management Services that are allocated to the nursing home on a reasonable statistical basis are allowable to the extent they do not exceed the limits for management fees discussed in the previous section.

Unallowable Costs and Services - Costs that are directly associated with activities and enterprises other than the nursing home or that are specifically disallowed by state law and regulation are considered unallowable costs and should not be allocated to the nursing home.

Overhead Costs - All other costs that cannot be identified to general management services, specific services, or unallowable services are considered overhead costs. Overhead costs should be allocated to all allowable and unallowable activities and entities that benefit from operation of the Home Office. The allocation basis should equitably allocate overhead costs to the services, activities, and entities receiving the benefits. The allocation should be done in a manner that results in the cost being allocated related to the benefits received.

1

RCW 74.46.270
Disclosure and approval or rejection of cost allocation.

(1) The contractor shall disclose to the department:
(a) The nature and purpose of all costs which represent allocations of joint facility costs; and
(b) The methodology of the allocation utilized.
(2) Such disclosure shall demonstrate that:
(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) Such disclosure shall be made not later than September 30th for the following calendar year; except that a new contractor shall submit the first year's disclosure at least sixty days prior to the date the new contract becomes effective.
(4) The department shall by December 31st, for all disclosures that are complete and timely submitted, either approve or reject the disclosure. The department may request additional information or clarification.
(5) Acceptance of a disclosure or approval of a joint cost methodology by the department may not be construed as a determination that the allocated costs are allowable in whole or in part. However, joint facility costs not disclosed, allocated, and reported in conformity with this section and department rules are unallowable.
(6) An approved methodology may be revised or amended subject to approval as provided in rules and regulations adopted by the department.

[1998 c 322 § 14; 1983 1st ex.s. c 67 § 13; 1980 c 177 § 27.]

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 JCADs 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 at least thirty days prior to the implementation date of the amendment or revision. For amendments or revisions received less than thirty days before the implementation date, the effective date of approval will be thirty days from the date the JCAD is received by the department.
(6) When a contractor, who is not currently incurring joint facility costs, begins to incur joint facility costs 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. If the JCAD is not received ninety days before the implementation date, the effective date of the approval will be ninety days from the date the 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 subsections (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 74.46.270. 97-17-040, § 388-96-534, filed 8/14/97, effective 9/14/97. 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.]

WAC 388-96-535 Management agreements, management fees, and central office services.(1) The contractor shall disclose to the department the nature and purpose of the management agreement, including an organizational chart showing the relationship between the contractor, management company and all related organizations. The department may request additional information or clarification.
(2) Acceptance of a management agreement may not be construed as a determination that all management fees or costs are allowable in whole or in part. Management fees or costs not disclosed or approved in conformity with chapter 74.46 RCW and this section are unallowable. When necessary for the health and safety of medical care recipients, the department may waive the sixty-day or thirty-day advance notice requirement of RCW 74.46.280 in writing.
(3) Management fees are allowable only for necessary, nonduplicative services that are of the nature and magnitude that prudent and cost-conscious management would pay. Costs of services, facilities, supplies and employees furnished by the management company are subject to RCW 74.46.220.
(4) Allowable fees for all general management services of any kind referenced in this section, including corporate or business entity management and management fees not allocated to specific services, are subject to any applicable cost center limit established in chapter 74.46 RCW.
(5) Central office costs, owner's compensation, and other fees or compensation, including joint facility costs, for general administrative and management services, including management expense not allocated to specific services, shall be subject to any cost center limit established by chapter 74.46 RCW.
(6) Necessary travel and housing expenses of nonresident staff working at a contractor's nursing facility shall be considered allowable costs if the visit does not exceed three weeks.
(7) Bonuses paid to employees at a contractor's nursing facility or management company shall be considered compensation.
[Statutory Authority: RCW 74.46.800. 98-20-023, § 388-96-535, filed 9/25/98, effective 10/1/98. Statutory Authority: RCW 74.46.800 and 74.09.120. 93-19-074 (Order 3634), § 388-96-535, filed 9/14/93, effective 10/15/93. Statutory Authority: 1987 c 476. 88-01-126 (Order 2573), § 388-96-535, filed 12/23/87. Statutory Authority: RCW 74.46.800. 86-10-055 (Order 2372), § 388-96-535, filed 5/7/86, effective 7/1/86. Statutory Authority: RCW 74.09.120. 83-19-047 (Order 2025), § 388-96-535, filed 9/16/83; 81-22-081 (Order 1712), § 388-96-535, filed 11/4/81. Statutory Authority: RCW 74.09.120 and 74.46.800. 81-06-024 (Order 1613), § 388-96-535, filed 2/25/81. Statutory Authority: RCW 74.09.120. 80-09-083 (Order 1527), § 388-96-535, filed 7/22/80; 79-03-020 (Order 1371), § 388-96-535, filed 2/21/79; Order 1262, § 388-96-535, filed 12/30/77.]

WAC 388-96-542 Home office or central office.(1) The department shall audit the home office or central office whenever a nursing facility receiving such services is audited.
(2)(a) Assets used in the provision of services by or to a nursing facility, but not located on the premises of the nursing facility, shall not be included in net invested funds or in the calculation of property payment for the nursing facility.
(b) The nursing facility may allocate depreciation, interest expense, and operating lease expense for the home office, central office, and other off-premises assets to the cost of the services provided to or by the nursing facility on a reasonable statistical basis approved by the department.
(c) The allocated costs of (b) of this subsection may be included in the cost of services in such cost centers where such services and related costs are appropriately reported.
(3) Home office or central office costs must be allocated and reported in conformity with the department-approved JCAD methodology as required by WAC 388-96-534.
(4) Home office or central office costs are subject to the limitation specified in RCW 74.46.410.
[Statutory Authority: Chapter 74.46 RCW as amended by 1998 c 322 § 19(11), RCW 74.46.270 and 74.46.800. 98-20-023, § 388-96-542, filed 9/25/98, effective 10/1/98.]