Title 7 . Health and Social Services

Chapter 43 . Hearings

Section 686. Allowable reasonable operating costs

7 AAC 43.686. Allowable reasonable operating costs

(a) Allowable costs for prospective rates are the costs from the appropriate base year's Medicare cost report, in accordance with Medicare requirements and regulations, as audited or adjusted in accordance with this section. The department will consider only costs that are consistent with efficient, cost-effective management and operations. Only operating costs that are directly related to the delivery of health care services to Medicaid patients will be allowed for the purpose of rate setting.

(b) Operating costs are the costs of providing health care services to Medicaid patients that are necessary and reasonable and that are not excluded by this section. The following costs are excluded or otherwise limited as set out in this subsection:

(1) Advertising cost. The cost of advertising, which includes marketing, is allowable only to the extent that the advertising is directly related to the care of patients at the facility. The reasonable cost of only the following types of advertising and marketing is allowable:

(A) announcing the opening of or change of name of a facility;

(B) recruiting for personnel;

(C) advertising for the procurement or sale of items;

(D) obtaining bids for construction or renovation;

(E) advertising for a bond issue;

(F) informational listing of the provider in a telephone directory;

(G) listing a facility's hours of operation;

(H) advertising specifically required as part of a facility's accreditation process;

(2) Nursing cost. The cost of nursing staff in a long-term care facility is allowable as a routine cost only. The cost of nursing personnel is not an allowable ancillary cost even if the nursing personnel are working under the supervision of a licensed patient care provider;

(3) Physician cost. Physician compensation costs and charges associated with providing care to patients are not allowable for purposes of calculating a prospective payment rate;

(4) Medical service costs. Medical services, including those services described in 7 AAC 43.255(e) , that a long-term care unit or facility is not licensed to provide, are not an allowable long-term care unit or facility ancillary cost;

(5) Management fees. A facility must file with its year-end report, as described in 7 AAC 43.679, any management agreement, or change to a management agreement with a firm that, or an individual other than an employee who, will manage the facility during the period the prospective rate is effective; management fees paid to a firm or to an individual who is not an employee of the facility or of the facility's home office are allowable costs only if the

(A) fees are paid according to the terms of a written management agreement that creates a principal/agent relationship between the facility and the manager, and sets out the items, services, and activities to be provided by the manager;

(B) facility documents the actual delivery of management services;

(C) services do not duplicate management services otherwise provided to the facility; and

(D) management fees are reasonably attributable to the management of the local facility;

(6) Costs authorized by a certificate of need. Costs authorized by a certificate of need are allowable as follows:

(A) interest, depreciation, and other capital costs will not be recognized on the entire basis of assets purchased after January 18, 1990, if a certificate of need was required and the facility did not secure one; recognition of interest, depreciation, and other capital costs for which a certificate of need was required will be no greater than the amounts described and approved in the certificate of need application and other information the applicant provided as a basis for approval of the certificate of need;

(B) prospective payment rates for facilities that are calculated and paid on a per diem rate basis will be no greater than the per diem rates proposed in the certificate of need application and other information the applicant provided as a basis for approval of the certificate of need for the first year during which the following listed items are available for use and for the two years immediately following that first year:

(i) opening of the new or modified health care facility;

(ii) alteration of the bed capacity; or

(iii) the implementation date of a change in offered categories of health service or bed capacity;

(C) in determining whether interest, depreciation, and other capital costs exceed those amounts approved under a certificate of need, and for determining the maximum prospective per diem rate approved under a certificate of need, the department will consider the

(i) terms of issuance describing the nature and extent of the activities authorized by the certificate; and

(ii) facts and assertions presented by the facility in the application and certificate of need review record, including purchase or contract prices, the rate of interest identified or assumed for any borrowed capital, lease costs, donations, development costs, staffing and administration costs, and other information the facility provided as a basis for approval of the certificate of need;

(D) if a certificate is issued authorizing only part of the activities proposed in a certificate of need application, the limitation of rates will be based upon the factors noted under (C) of this paragraph;

(7) Pharmaceutical supplies and materials. Pharmaceutical supplies and materials for recipients who are residents of a long-term care facility, or an intermediate care facility for the mentally retarded, are reimbursed in accordance with 7 AAC 43.255(b) and 7 AAC 43.312(a) ; these costs and charges, with the exception of the costs of nonprescription drugs dispensed as ordered by a physician, are excluded from facility prospective payment rates; all costs associated with the administration and delivery of prescription pharmacy supplies and material costs are not ancillary;

(8) Intergovernmental transfers. An intergovernmental transfer of money is not an allowable cost for purposes of calculating a prospective payment rate;

(9) Costs of certified registered nurse anesthetists. Costs of certified registered nurse anesthetists are allowable costs under this section if those costs are not covered under a separate provider payment program;

(10) Swing-bed costs. Swing-bed costs, determined by multiplying the base year total swing-bed days by the swing-bed rate in effect for that period, are not allowable costs under this section;

(11) Ancillary costs. Ancillary costs covered under a separate provider agreement or alternate resources are not allowable costs under this section;

(12) Allowable home office costs. Allowable home office costs may not exceed the most recent Medicare-audited Medicare home office cost statement available in the department's files 60 days before the beginning of a re-based prospective rate year; if the Medicare-audited Medicare home office cost statement is not from the same year as the facility's base year, the costs will be inflated to the facility's base year using the methodology described in 7 AAC 43.683;

(13) Provider-based clinic costs. The department will not allow provider-based clinic costs; for purposes of this paragraph, provider-based clinic costs include

(A) capital costs for a clinic, administrative costs for a clinic, general health care or nursing services in a clinic, and any other allocated overhead costs for a clinic; and

(B) items reported under a "clinic" component or a "clinic" cost center of a hospital; for purposes of this subparagraph, the department will consider a component or cost center to be a "clinic" component or "clinic" cost center if that component or cost center is established primarily for the provision of outpatient physicians' or nurse practitioners' services;

(14) Advocacy and lobbying activity expenses. Advocacy expenses, lobbying activity costs and special assessments to fund the preparation of advocacy and position papers are not allowable costs; for dues, meetings, conference fees, and memberships in trade organizations and associations, a facility may claim up to 75 percent as allowable costs; health care training expenses will not be considered unallowable solely because a trade organization or association sponsors the training;

(15) Nonallowable costs related to a court or administrative proceeding initiated by a facility. Costs incurred by a facility related to a court or administrative proceeding originally initiated by a facility are not allowable under this section, except that costs incurred on an issue in a court or administrative proceeding originally initiated by a facility are allowable operating costs under this section if the facility is the prevailing party on the issue under a final order, and the rules governing the proceeding make no provision for award of fees and costs to a prevailing party; allowable operating costs under this paragraph related to a court or administrative proceeding originally initiated by the facility are limited to expenses incurred in the base year.

History: Eff. 8/9/86, Register 99; am 7/20/88, Register 107; am 1/18/90, Register 113; am 4/12/90, Register 114; am 9/21/90, Register 116; am 8/6/92, Register 123; readopt 8/7/96, Register 139; am 12/27/96, Register 140; readopt 5/31/98, Register 146; am 4/26/2000, Register 154; am 7/30/2000, Register 155; am 12/30/2000, Register 156; am 1/1/2004, Register 168; am 7/1/2004, Register 170; am 3/18/2006, Register 177

Authority: AS 47.05.010

AS 47.07.070

AS 47.07.071

AS 47.07.073

Editor's note: The commissioner readopted 7 AAC 43.686 in its entirety without change to affirm the validity of the provisions following statutory amendments made in ch. 95, SLA 1997.