016.06.8-3-2. List of Allowable Costs
AR ADC 016.06.8-3-2Arkansas Administrative CodeEffective: August 14, 2022
Effective: August 14, 2022
Ark. Admin. Code 016.06.8-3-2
016.06.8-3-2. List of Allowable Costs
The following list of allowable costs is not all inclusive but serves as a general guide and clarifies certain key expense areas. The absence of a particular cost does not necessarily mean that it is not an allowable cost. As discussed further in Section 3-4, certain income items will reduce allowable costs and be offset against the appropriate line items for salaries and wages or other service expenses. Except where specific exceptions are noted, the allowability of all costs is subject to the amounts being reasonable and to the other general principles specified in section 3-1 of this chapter.
A. Compensation of facility employees. This includes compensation for only those employees who provide services directly to the recipients or staff of individual facilities in the normal conduct of operations relating to recipient care: certified nurse aides; nurse aides in training; medication assistants; licensed practical nurses; graduate practical nurses; registered nurses; graduate nurses; other salaried direct care staff; occupational therapists; physical therapists; speech therapists; other therapists; activities personnel; assistant director of nursing; director of nursing; pharmacy personnel; social services personnel; administrator; assistant administrator; food service personnel; housekeeping, laundry, and maintenance staff; medical records personnel; other administrative staff; accounting staff; and data processing personnel. Compensation for employees related to the owners, partners, or stockholders of the facility are subject to the limitation established in Section 3-2 B. following. Compensation includes:
2. the employer's portion of payroll taxes and other mandatory insurance payments. Federal Insurance Contributions Act (FICA or Social Security), Unemployment Compensation Insurance, Workers' Compensation Insurance premiums and other payments mandated by Workers' Compensation laws, including self insurance payments, and payments direct to hospitals or physicians for treating minor injuries.
3. employee benefits. Employer-paid health, life, accident, and disability insurance for employees; uniform allowance and meals provided to employees as part of an employment contract; contributions to an employee retirement fund; and deferred compensation. The allowable portion of deferred compensation is limited to the dollar amount that an employer contributes during a cost reporting period. The expenses:
c) must be offered to all full-time non-probationary employees on a equal basis in accordance with an employee benefit policy established in writing. Employers may offer different fringe benefits to different employee classes. Fringe benefits offered to only certain employees within the same employee class of the facility are considered discriminatory fringe benefits and are not allowable. Employee classes must be reasonably related to employee job duties and may not distinguish between persons similarly situated. Reasonable uniform allowances, and life insurance policies on key personnel as required to obtain a loan from an unrelated party, are exempt from this rule.
B. Compensation of owners, partners, or stockholders. NOTE: These provisions do not apply to corporations whose stock is publicly traded. Compensation will be included as an allowable cost to the extent that it represents reasonable remuneration for managerial, professional, and administrative services related to the operation of the facility and rendered in connection with resident care. Services rendered in connection with resident care include both direct and indirect activities in the provision and supervision of resident care, such as administration, management, and supervision of the overall institution.
To be included as allowable cost, the compensation shall not exceed 150% of the median wage (excluding non-wage compensation) for comparable positions in facilities that do not have owner operators. Cost Reports from the previous reporting period will be used for setting the ceiling. The HCFA Market Basket projection of inflation will be used to adjust ceilings calculated from the cost reporting period to the rate setting period. Three peer groups will be established for this purpose: 1) Less than 75 licensed beds; 2) 75 to 149 licensed beds; and 3) 150 licensed beds or more. This ceiling is established based on a 40-hour workweek. Owner administrators working less than 40 hours per week must adjust allowable compensation accordingly.
E. Management fees paid to related party organizations and other home office overhead expenses. These fees and expenses paid to a related organization may not exceed the actual cost of materials, supplies, or services provided to an individual facility. A facility that is owned, operated, or controlled by other individual(s) or organization(s) may report the allowable portion of costs for materials, supplies, and services provided to that facility. The allowable portion of such costs to a given facility is limited to those expenses that can be attributed to the individual establishment.
1. In multi-facility organizations where the clear separation of costs to individual facilities is not always possible, the allowable portion of actual costs for materials, supplies, and services may be allocated to individual facilities on a pro rata basis. The required allocation method for these costs is a bed day's basis. Providers who wish to use an alternative allocation methodology may do so by obtaining prior written approval from the Director of the Department of Human Services, or the Director's designee, before implementation. Once a provider has chosen an alternative allocation method, and it has been approved, it must be consistently used in preparing subsequent cost reports.
2. In organizations with multiple levels of management, costs incurred at levels above the individual facility in Arkansas are allowable only if the costs were incurred in the provision of materials, supplies or services used by the facility staff in the conduct of normal operations relating to recipient care. In addition, the facility will make available immediately upon request adequate documentation to demonstrate that the costs satisfy the following criteria:
If at the time of the request, records are in active use or are located in a place which makes immediate access impossible or impractical, the facility must certify that fact in writing and deliver the records within 72 hours of the request.
3. Adequate documentation consists of all materials necessary to demonstrate the relationship of personnel, supplies, and services to the provision of recipient care. These materials may include, but are not limited to, accounting records, invoices, organizational charts, functional job descriptions, other written statements, and direct interviews with staff, as deemed necessary by DHS auditors to perform required tests of allowability.
4. A ceiling is established for compensation of owners, partners or stockholders or employees related to owners, partners, or stockholders, employed by a company managing multiple facilities. That ceiling is calculated as follows: For the first two nursing facilities, the ceiling is set at 150 percent of the median wage for non-related administrators for nursing facilities having 150 or more certified beds as provided in Section 3-2 B. For the third facility, the allowable cost is raised by 20 percent of the ceiling for two facilities. For each of the fourth and fifth facilities, the allowable cost is raised by 10 percent of the ceiling for two facilities. Thereafter, for each additional facility, the allowable cost is raised by 5 percent of the ceiling for two facilities. The total allowable cost for an employee must not exceed 200 percent of the ceiling for two facilities.
F. Cost to Provide routine services. Includes cost that will be incurred in all cost reporting categories. This section of the manual identifies items that are generally considered allowable cost and therefore must by furnished by the facility and does not address the proper category for cost reporting purposes. Please refer to the instructions for completing cost reports and the chart of accounts to assist in determining the classification of these items. (Items appearing in this listing that are required to be capitalized and depreciated as described in other sections of this Cost Manual should be treated accordingly. The cost of items that are rented or leased must be reported on the cost report as equipment rental). Cost includes but is not limited to:
14. Comb, brush, toothbrush, toothpaste, toothettes, lemon glycerin swabs, denture cream, razor, razor blades, soaps and breath fresheners, mouthwashes, deodorants, disposable facial tissues, sanitary napkins, and similar personal hygiene items. Residents who choose not to use the brand furnished by the facility must purchase their own items, and the costs of the items are not allowable costs.
18. Equipment required by the Arkansas Department of Human Services for licensure which is available for use by all residents. Includes trapeze bars and overhead frames, foot boards, bed rails, cradles, wheelchairs, geriatric chairs, foot stools, adjustable crutches, canes, walkers, bedside commode chairs, hot water bottles or heating pads, ice bags, sand bags, traction equipment.
2. Over-the-counter drugs (PRN or routine) not covered by the prescription drug program are allowable cost items. These include but are not limited to simple pain relievers, antacids, mouthwashes, simple laxatives and suppositories, simple cough syrups, antidiarrheal medications, insulin and insulin needles (regardless of frequency).
H. Cost of specialized rehabilitative services including physical, speech, occupational and mental health, in facilities provided by licensed therapist when such treatment is ordered by a physician. However, these costs will not include the direct cost of services reimbursed by Medicare Part A, Medicare Part B, or other third party payer.”
J. Property and Equipment Expenses. Note: Effective January 12, 2001 the reimbursement methodology for nursing facilities changed to a cost based facility specific rate which included a fair market rental component to reimburse for property and equipment cost in lieu of actual cost and/or lease payments. Allowability (or unallowability) of costs as described below will not affect nursing facility reimbursement rates. Nevertheless, nursing facilities must continue to report costs in the manner described below in order to continue to maintain historic cost records. Actual reimbursement to providers will be made in accordance with the rules established in Section 2-4 A. of this Manual of Cost Reimbursement Rules.
1. Amortization Expense Costs associated with the origination of a loan allowable under this section will be allowable if amortized over the life of the loan. Costs associated with early retirement of a loan allowable under this section may be allowable. If the amount of the interest plus any unamortized origination fees or prepayment penalties do not exceed the maximum amount of allowable capital interest that would have been allowed had the debt not been paid off, then all of the interest and unamortized costs and other prepayment penalties can be claimed as part of the interest expense for the year. If the unamortized fees and prepayment penalties plus interest exceed the amount that would have been allowed then any excess can be carried forward and claimed for a period of up to five years so long as total interest expense and unamortized fees and prepayment penalties do not exceed the interest amount that would have been allowable under the previous financing arrangement.
Depreciation on capital assets, including assets for normal standby or emergency use in which the facility is the record title holder and which assets are used to provide covered services to Medical Assistance Recipients, will be allowable subject to the following conditions:
a) Generally accepted accounting principles incorporating the straight-line method of depreciation must be used. Accelerated methods of depreciation are not acceptable. Facilities must follow American Hospital Association Guidelines for Depreciation as the basis for calculation of straight-line depreciation. Capitalization is not required for minor equipment costing less than two thousand five hundred dollars ($2,500) per item. Minor equipment purchases are to be expensed in the cost area in which the equipment is normally used (i.e., direct care cost component or indirect, administrative, and operating component). It is not required to deduct salvage value from the cost of the asset for the purpose of calculating depreciation. Component depreciation for physical structures is not acceptable.
Depreciation expense for the year of acquisition and the year of disposal can be computed by using: (1) the half-year method; or (2) the actual time method.
c) The assets shall be recorded at cost. Cost during the construction of an asset, such as architectural, consulting, and legal fees, interest, etc., must be capitalized as a part of the cost of the assets. When an asset is acquired by trade in, the cost of the new asset is the sum of the book value of the old asset and any cash or issuance of debt as consideration paid.
f) As a basis for reporting depreciation on capital building construction or renovation costs exceeding $500,000, prior approval of the Arkansas Health Services Agency must be secured to meet the requirements of Section 1122 of Federal Social Security Act. If the prior approval is not obtained, no depreciation cost will be allowed for expenditures for such capital building construction or renovation, unless such approval is subsequently received, although operational costs will be considered as a regular expense.
g) Where purchase of a facility or improvements thereto are financed by tax exempt bonds, the acquired property, plant or equipment must be capitalized and depreciated over the life of the asset. The depreciation and not the installment payment is considered an allowable cost. The amortization of interest in accordance with the terms of the bond issue is an allowable cost. Where the principal amount of the bond issue was expended in whole or in part on capital assets which fail to meet the requirements above regarding eligibility for depreciation, the includable depreciation shall be proportionately reduced.
3. Interest expense includes interest paid or accrued on notes, mortgages and other loans, the proceeds of which were used to purchase the facility's land, buildings and/or furniture and equipment. Intra/Inter Company transactions should be handled according to Generally Accepted Accounting Principles.
a) To be allowable under the Medicaid Program, interest must be supported by evidence of an agreement that funds were borrowed and that payment of interest and repayment of funds are required, identifiable in the provider's accounting records, related to the reporting period in which costs are incurred, necessary to the operation, maintenance, or acquisition of the provider's facilities, and be incurred for a purpose related to resident care.
c) Interest applying to mortgages on the property and plant of the facility will be included in allowable costs. Where a provider leases facilities from a related organization and the rental expense paid to the related organization is not allowable as cost, the mortgage interest paid by the related organization is allowable to the provider as cost, as are the other costs of ownership of the leased facility such as property insurance, depreciation, and real estate taxes.
d) Interest incurred at a rate not in excess of what a prudent borrower would have had to pay in the open market existing at the time the loan was made will be recognized. Allowable costs for interest may not exceed limitations set by any state or federal law or the law of the state in which the loan originated. Allowable costs for interest may not include penalties or late charges.
6. Cost of leasing the facility's real property. The lease must classify as a true operating lease. (Any lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee in accordance with generally accepted accounting principles.)
1. The per mile deduction for business travel fixed by the Internal Revenue Service may be claimed for each facility vehicle mile traveled for resident transportation or business use related to resident care, as established by mileage records. The cost of a vehicle provided to a key staff person for his or her use shall be included in the compensation for that individual.
2. If the facility acquires and maintains one or more vehicles designed and equipped to carry more than seven passengers, one or more vehicles equipped to transport residents that require wheelchairs for mobility, or the cost of a vehicle used exclusively for maintenance of the facility for which it is claimed, the facility may opt not to claim the Internal Revenue Service's rate per mile and instead claim reimbursement of the actual vehicle costs to provide resident transportation in that vehicle or vehicles to the extent such costs conform to Internal Revenue Service rules for vehicle business use.
N. Costs incurred by members of the facility governing body to attend meetings at the facility or, if the governing body is responsible for more than one facility, at a location central to such facilities. Allowable costs are limited to a maximum of four meetings per calendar or facility fiscal year, are limited to meetings during which facility management and operations related to resident care constitute the majority of business discussed, and may not exceed the amounts payable to members of state boards pursuant to Ark. Code Ann. § 25-16-901 and Ark. Code Ann. § 25-16-902 for travel to and attendance at state board meetings.
O. Interest expense on working capital loans: Working capital is defined as funds borrowed to meet the expenses of daily operations. Working capital interest expense is not allowable on loan amounts up to and including the amount of equity withdrawn from the facility during the six months preceding the working capital loan or during the term of the working capital loan. For purposes of this paragraph, equity withdrawals do not include withdrawals necessary to pay allowable facility salaries or withdrawals necessary to make federal and state tax payments. The allowance for federal and state taxes will be limited to no more than 30 percent of the net income reported on the most recent Form 5.
Amounts paid in excess of allowable salaries will be considered a withdrawal of equity. Net income must be adjusted for salaries in excess of allowable.
No working capital interest will be allowed when the facility has cash on hand equal to or greater than two months' operating expenses.
P. Costs determined by the DHS audit staff to have been claimed under circumstances identical in all material respects to costs that have been allowed by final appeal decision. An appeal decision is final if no additional appeal is provided for by law, or if the time to file an additional appeal has expired.
Credits
Amended Jan. 6, 2017; Aug. 14, 2022.
Current with amendments received through February 15, 2024. Some sections may be more current, see credit for details.
Ark. Admin. Code 016.06.8-3-2, AR ADC 016.06.8-3-2
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