[Federal Register Volume 63, Number 6 (Friday, January 9, 1998)]
[Rules and Regulations]
[Pages 1379-1383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-268]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[HCFA-1004-FC]
RIN 0938-AI34


Medicare Program; Limit on the Valuation of a Depreciable Asset 
Recognized as an Allowance for Depreciation and Interest on Capital 
Indebtedness After a Change of Ownership

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule with comment period.

-----------------------------------------------------------------------

SUMMARY: This final rule with comment period revises the Medicare 
provider reimbursement regulations relative to allowable costs and sets 
a limit on the valuation of a depreciable asset that may be recognized 
in establishing an appropriate allowance for depreciation and for 
interest on capital indebtedness after a change of ownership that 
occurs on or after December 1, 1997. These provisions apply to 
providers that are reimbursed on the basis of reasonable costs. This 
change implements the mandate in section 4404 of the Balanced Budget 
Act of 1997 (Pub. L. 105-33).

DATES: Effective Date: This final rule is effective January 9, 1998.
    Applicability: Pursuant to 5 U.S.C. 808(2), as well as section 
1861(v)(1)(O) of the Social Security Act (as amended by section 4404 of 
Pub. L. 105-33), this rule applies to changes of ownership that occur 
on or after December 1, 1997.
    Comment Period: Written comments will be considered if we receive 
them at the appropriate address, as provided below, no later than 5:00 
p.m. on March 10, 1998.

ADDRESSES: Mail written comments (one original and three copies) to the 
following address: Department of Health and Human Services, Health Care 
Financing Administration, Attention: HCFA-1004-FC, P.O. Box 7517, 
Baltimore, Maryland 21207-0517.
    If you prefer, you may deliver your written comments (one original 
and three copies) to one of the following addresses:


[[Page 1380]]


Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW, 
Washington, D.C. 20201, or
Room C5-11-17, Central Building, 7500 Security Boulevard, Baltimore, 
Maryland 21244-1850.

    Comments may also be submitted electronically to the following e-
mail address: [email protected]. E-mail comments must include the 
full name and address of the sender and must be submitted to the 
referenced address in order to be considered. All comments must be 
incorporated in the e-mail message because we may not be able to access 
attachments. Electronically submitted comments will also be available 
for public inspection at the Independence Avenue address below.
    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1004-FC. Comments received timely will be available 
for public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 309-G of 
the Department's offices at 200 Independence Avenue, SW, Washington, 
DC, on Monday through Friday of each week from 8:30 a.m. to 5:00 p.m. 
(Phone: (202) 690-7890).
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 37194, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $8. As an alternative, you can view and 
photocopy the Federal Register document at most libraries designated as 
Federal Deposit Libraries and at many other public and academic 
libraries throughout the country that receive the Federal Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web; the Superintendent of Documents home page address 
is http://www.access.gpo.gov/su__docs/, by using local WAIS client 
software, or by telnet to swais.access.gpo.gov, then login as guest (no 
password required). Dial-in users should use communications software 
and modem to call (202) 512-1661; type swais, then login as guest (no 
password required).

FOR FURTHER INFORMATION CONTACT: Ann Pash, (410) 786-4516

SUPPLEMENTARY INFORMATION:

I. Background

    Under Medicare's reasonable cost reimbursement system, appropriate 
allowance for depreciation and for interest on capital indebtedness on 
buildings and equipment used in the provision of patient care is based 
in part on the historical cost of the asset. Prior to the enactment of 
the Balanced Budget Act of 1997 (Pub. L. 105-33), when a Medicare 
certified provider's capital asset is disposed of through sale, 
scrapping, trade-in, exchange, demolition, abandonment, condemnation, 
fire, theft, or other casualty, Medicare recognized a gain or a loss 
from the transaction. Currently, under regulations at Sec. 413.134, if 
the facility is purchased as an ongoing operation, the cost basis for 
the assets of the facility is limited, based on when the transaction 
occurred and by the type of provider involved.
    Section 1861(v)(1) of the Social Security Act (the Act) provides 
the general statutory authority for reimbursement on the basis of 
reasonable costs. Section 1861(v)(1)(O) of the Act addresses 
specifically the appropriate allowance for depreciation and interest 
for a capital asset of a hospital or a skilled nursing facility that 
has undergone a change of ownership. The regulations governing the 
allowance for depreciation based on asset costs are set forth in 
Sec. 413.134. They are applicable to all providers reimbursed on the 
basis of reasonable costs.
    Under Sec. 413.134(f), if the disposal of a depreciable asset 
results in a gain or a loss, an adjustment is necessary in the 
provider's allowable costs. The treatment of the gain or loss depends 
upon the manner of disposition of the asset and its net book value as 
determined under the regulations. Generally when a provider sells its 
depreciable assets at more than the net book value, Medicare shares in 
the gain. If the provider sells its depreciable assets at less than the 
net book value, Medicare shares in the loss. The amount of a gain is 
limited to the amount of depreciation previously included in Medicare 
allowable costs. The amount of a loss is limited to the undepreciated 
basis of the asset permitted under the program.
    Recent increases in the number of hospital sales have raised 
concerns about Medicare's liability for depreciation adjustments. In 
fact, the Office of the Inspector General (OIG) of the Department of 
Health and Human Services, conducted a study and issued a report in 
June 1997, Medicare Losses on Hospital Sales (OEI-03-96-00170), that 
quantifies the financial impact of hospital sales on the Medicare 
program. The scope of its study was acute care hospital changes of 
ownership (except bankruptcies) that met Medicare requirements for a 
depreciation adjustment during fiscal Years 1990 through 1996. The OIG 
found that for 229 hospitals sold between 1990 and 1996, there were 
$453 million in losses and $56 million in gains, for a net loss of $397 
million. The OIG also noted that during the period of the study, 
another $174 million net loss had been reported by hospitals but not 
yet settled by Medicare. Also, another 88 hospital sales had occurred 
but financial data were not available.
    Additionally, the study also showed that net losses reported to the 
program increased 322 percent from $29 million in 1990 to $122 million 
in 1996. While Medicare shared in the loss for 161 hospitals, it shared 
in the gain for only 33 hospitals. The OIG report recommended that the 
depreciation adjustments on hospital sales be discontinued in that it 
is an unnecessary holdover from the cost-based reimbursement system. 
The provisions of section 4404 of Public Law 105-33 address the 
concerns raised by the OIG report.

II. Provisions of the Final Regulation With Comment Period

    This final rule with comment period revises Sec. 413.134 to 
implement the provisions of section 4404 of Public Law 105-33. Section 
4404 sets a limit on the valuation of a depreciable asset that may be 
recognized in establishing an allowance for depreciation and for 
interest on capital indebtedness after a change of ownership that 
occurs on or after December 1, 1997. The statute specifies that these 
provisions apply to ``changes of ownership that occur after the third 
month beginning after the date of enactment of this section.'' This 
language is ambiguous because it is unclear whether the reference to 
``month'' means a calendar month or a period of approximately 30 days. 
Thus, the language could be interpreted to mean that the effective date 
is either December 1, 1997 or November 5, 1997. Because there has been 
some confusion

[[Page 1381]]

in the provider community on this issue, we have decided to adopt the 
less restrictive reading, that is, an effective date of December 1, 
1997. The provisions of this section apply to providers paid on a 
reasonable cost basis.
    Under these provisions, when a depreciable asset of a provider 
undergoes a change of ownership, the valuation of the asset, for 
purposes of establishing a Medicare allowance for depreciation and 
interest, will be the historical cost of the asset to the owner of 
record, less depreciation allowed. Thus, when a depreciable asset is 
sold, the value of the asset to the seller will be the historical cost 
(as recognized under Medicare) to the owner of record as of August 5, 
1997, less depreciation allowed. In this case, there will be no 
adjustment for gain or loss on the sale. For the buyer, the value of 
the asset will also be the historical cost (as recognized under 
Medicare) to the owner of record as of August 5, 1997, less 
depreciation allowed. Accordingly, the new owner's allowance for 
depreciation and interest will be based on this value. Stated simply, 
the asset moves from the hands of the seller to the hands of the buyer 
at the asset's net book value defined in Sec. 413.134(b)(9). In light 
of section 4404 of Public Law 105-33, we are making conforming changes 
to Sec. 413.134(b)(1)(i) to add an expanded description of the 
historical cost of a depreciable asset acquired on or after December 1, 
1997.

III. Other Required Information

A. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking to provide a 
period for public comment on substantive changes to our regulations. 
However, section 1871(b) of the Social Security Act provides that 
publication of a notice of proposed rulemaking is not required before a 
rule takes effect where ``a statute establishes a specific deadline for 
the implementation of the provision and the deadline is less than 150 
days after the date of the enactment of the statute in which the 
deadline is contained.'' In addition, we may waive a notice of proposed 
rulemaking if we find, for good cause that prior notice and comment are 
impracticable, unnecessary, or contrary to the public interest. The 
changes in this final rule conform the regulations to section 
1861(v)(1)(O) of the Act, as amended by section 4404 of Public Law 105-
33. For good cause, we find that prior notice is unnecessary, and also 
impracticable because of the limited time frame between the enactment 
of section 4404 and the effective date of section 4404 of Public Law 
105-33. However, we are furnishing a subsequent public comment period 
for public response to this final rule with comment period.

B. Effect of the Contract With America Advancement Act, Public Law 104-
121

    Normally, under 5 U.S.C. 801, as added by section 251 of Public Law 
104-121, the effective date of a major rule is delayed 60 days for 
Congressional review. This has been determined to be a major rule under 
title 5, United States Code, section 804(2). However, as indicated in 
section III.A. of the preamble to this final rule with comment period, 
for good cause, we find that prior notice and comment procedures are 
unnecessary and impracticable. Pursuant to 5 U.S.C. 808(2), a rule 
shall take effect at such time as the Federal agency promulgating the 
rule determines if it finds, for good cause, that prior notice and 
comment procedures are unnecessary or impracticable. Accordingly, under 
the exemption provided in 5 U.S.C. 808(2), this final rule with comment 
period is effective for changes of ownership that occur on or after 
December 1, 1997.

IV. Regulatory Impact Statement

    We have examined the impact of this final rule with comment period 
as required by Executive Order 12866 and the Regulatory Flexibility Act 
(RFA) (Public Law 96-354). Executive Order 12866 directs agencies to 
assess all costs and benefits of available regulatory alternatives and, 
when regulation is necessary, to select regulatory approaches that 
maximize net benefits (including potential economic, environmental, 
public health, and safety effects; distributive impacts; and equity). 
The RFA requires agencies to analyze options for regulatory relief for 
small businesses. For purposes of the RFA, most hospitals, and most 
other providers, physicians, and health care suppliers are small 
entities, either by nonprofit status or by having revenues of $5 
million or less annually.
    Also, section 1102(b) of the Social Security Act requires us to 
prepare a regulatory impact analysis for any final rule that may have a 
significant impact on the operations of a substantial number of small 
rural hospitals. Such an analysis must conform to the provisions of 
section 604 of the RFA. For purposes of section 1102(b) of the Act, we 
define a small rural hospital as a hospital that is located outside a 
Metropolitan Statistical Area and has fewer than 50 beds.
    This final rule with comment period revises the Medicare 
regulations that are affected by section 4404 of Public Law 105-33 that 
was enacted on August 5, 1997. This rule describes the new limitation 
on the valuation of assets that undergo a change of ownership on or 
after December 1, 1997. These statutory changes will affect providers 
with depreciable assets that are paid on a reasonable cost basis and 
that undergo a change of ownership.
Background
    Since the beginning of the Medicare program, providers increasingly 
have been involved in acquisitions through purchase, merger, and/or 
consolidation. These transactions have involved both chain provider 
organizations and independent providers. Under current payment rules 
for providers other than hospitals and skilled nursing facilities, 
acquisitions frequently result in increased levels of Medicare 
payments. This occurs because the acquiring entity usually pays more 
for the acquired assets than the amount at which they are carried on 
the records of the prior owner. Generally, the amount at which the 
asset is acquired is the basis upon which Medicare payments are 
determined. For hospitals and skilled nursing facilities, this upward 
revaluation was limited for transactions occurring on or after July 18, 
1984 by section 2314 of Public Law 98-369. However, for all providers, 
if the disposal of a depreciable asset results in a gain or loss, an 
adjustment is made in the provider's allowable costs. There is 
justified concern with the financial impact of this adjustment on the 
Medicare program.
Impact on Providers
    Under section 4404 of Public Law 105-33, Congress eliminated 
Medicare's participation in the gains and losses that result from a 
change of ownership. Yet, we do not believe that this rule will have an 
impact on the current level of acquisitions. There are a number of 
factors other than gain or loss on a capital asset that affect a 
provider's decision regarding acquisitions. These factors include 
excess bed capacity, new technologies, changes in the service area, 
increased buying power, market entry initiatives, and other economic 
factors. These factors will not be affected by this final rule with 
comment period.
    However, as a result of the enactment of section 4404 of Public Law 
105-33, there will be a financial impact on those providers that 
undergo a change of ownership. For providers other than hospitals and 
skilled nursing facilities, Medicare payment will be reduced for 
capital expenses. For all providers, Medicare will no longer share in 
the

[[Page 1382]]

loss, or gain, that results from a change of ownership. We are not able 
to estimate with certainty the effect this provision will have on 
Medicare payments because we do not know how many changes of ownership 
will occur nor, of the changes that do occur, how many will result in a 
gain and how many will result in a loss.
    As a step in the overall pricing of Public Law 105-33, HCFA 
actuaries estimated the impact of the provisions of section 4404 as a 
5-year savings of $300 million. The preliminary estimate was released 
through the FY 1998 Mid-Session Review of the President's Budget. The 
following table shows the preliminary annual savings estimates:

------------------------------------------------------------------------
                                                                Savings 
                              FY                               (million)
------------------------------------------------------------------------
1998.........................................................        $50
1999.........................................................         60
2000.........................................................         60
2001.........................................................         60
2002.........................................................         70
------------------------------------------------------------------------

    In a subsequent evaluation based on additional data HCFA actuaries 
revised estimates of the savings to the program for the 5-year period 
1998 through 2002. The revised 5-year estimate of $409 million assumes 
a lag of one year between the sale of a facility and the Medicare 
payment. Under this assumption, there are no savings calculated for FY 
1998. The following table shows the revised annual savings estimates:

------------------------------------------------------------------------
                                                                Savings 
                              FY                               (million)
------------------------------------------------------------------------
1998.........................................................           
1999.........................................................         91
2000.........................................................         98
2001.........................................................        106
2002.........................................................        114
------------------------------------------------------------------------

    While this estimate represents a significant impact on providers, 
this effect arises directly from the provisions of section 4404 of 
Public Law 105-33. The relevant changes to the regulations merely 
conform the regulations text to the statute. The statute mandates that 
we implement this limitation.
    In accordance with the provisions of Executive Order 12866, this 
final rule with comment period was reviewed by the Office of Management 
and Budget.

V. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, when we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

List of Subjects in 42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Puerto Rico, 
Reporting and recordkeeping requirements.
    42 CFR Part 413 is amended as set forth below:

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED 
PAYMENT RATES FOR SKILLED NURSING FACILITIES

    1. The authority citation for part 413 continues to read as 
follows:

    Authority: Secs. 1102, 1861(v)(1)(A), and 1871 of the Social 
Security Act (42 U.S.C. 1302, 1395x(v)(1)(A), and 1395hh).

    2. In Sec. 413.134 the introductory text of paragraph (b)(1) is 
republished and paragraphs (b)(1)(i), (b)(1)(ii)(A), (f)(1), and (f)(2) 
paragraph heading are revised, new introductory text is added to 
paragraph (f)(2), the heading of paragraph (g) is republished, 
paragraph (g)(4) is redesignated as paragraph (g)(5), and a new 
paragraph (g)(4) is added to read as follows:


Sec. 413.134  Depreciation: Allowance for depreciation based on asset 
costs.

* * * * *
    (b) General rules--(1) Historical cost. Historical cost is the cost 
incurred by the present owner in acquiring the asset.
    (i) All providers--(A) Depreciable assets acquired after July 31, 
1970 and before December 1, 1997. For depreciable assets acquired after 
July 31, 1970 and before December 1, 1997, and for a hospital or an 
SNF, acquired before July 18, 1984, the historical cost may not exceed 
the lower of current reproduction cost adjusted for straight-line 
depreciation over the life of the asset to the time of the purchase or 
the fair market value of the asset at the time of its purchase.
    (B) Depreciable assets acquired on or after December 1, 1997. For 
depreciable assets acquired on or after December 1, 1997, the 
historical cost of the asset that will be recognized under this program 
must not exceed the historical cost less depreciation allowed to the 
owner of record as of August 5, 1997 (or if an asset did not exist as 
of August 5, 1997, the first owner of record after August 5, 1997). For 
this paragraph (b)(1)(i)(B), the following apply:
    (1) An asset that was not in existence as of August 5, 1997 
includes an asset that physically existed but was not owned by a 
provider participating in the Medicare program as of that date.
    (2) The acquisition cost to the owner of record is subject to the 
limitation on historical costs described in paragraphs (g) (1), (2), 
and (3) of this section, and is reduced by any depreciation taken by 
the owner of record. The limitation on historical cost is also applied 
to the purchase of land, which is a capital asset that is neither 
depreciable nor amortizable under any circumstances. (See 
Secs. 413.153(d) and 413.157(b) for application of the limitation to 
the cost of land for purposes of determining the allowable interest 
expense.)
    (3) Acquisition cost to the owner of record includes the costs of 
betterment or improvements that extend the estimated useful life of an 
asset at least 2 years beyond its original estimated useful life or 
that increase the productivity of an asset significantly over its 
original productivity.
    (4) For assets acquired prior to a provider's entrance into the 
Medicare program, the acquisition cost to the owner of record is the 
historical cost when acquired, rather than when the provider entered 
the program.
    (5) For assets subject to the optional depreciation allowance as 
described in Sec. 413.139, the acquisition cost to the owner of record 
is the historical cost established for those assets when the provider 
changed to actual depreciation as described in Sec. 413.139(e). If the 
provider did not change to actual depreciation, as described in 
Sec. 413.139(e), for optional allowance assets, the acquisition cost to 
the owner of record is based on the provider's recorded historical cost 
of the asset when acquired. If the provider has no historical cost 
records for optional allowance assets, the acquisition cost to the 
owner of record is established by appraisal.
    (6) The historical cost of an asset acquired on or after July 18, 
1984 may not include costs attributable to the negotiation or 
settlement of the sale or purchase (by acquisition, merger, or 
consolidation) of any capital asset for which any payment was 
previously made under the Medicare program. The costs to be excluded 
include, but are not limited to, appraisal costs (except those incurred 
at the request of the intermediary under paragraph (f)(2)(iv) of this 
section), legal fees, accounting and administrative costs, travel 
costs, and the costs of feasibility studies.
    (ii) Hospitals and SNFs only. (A) For assets acquired on or after 
July 18, 1984 and before December 1, 1997 and not

[[Page 1383]]

subject to an enforceable agreement entered into before July 18, 1984, 
historical cost may not exceed the lowest of the following:
* * * * *
    (f) Gains and losses on disposal of assets--(1) General. 
Depreciable assets may be disposed of through sale, scrapping, trade-
in, exchange, demolition, abandonment, condemnation, fire, theft, or 
other casualty. If disposal of a depreciable asset, including the sale 
or scrapping of an asset before December 1, 1997, results in a gain or 
loss, an adjustment is necessary in the provider's allowable cost. (No 
gain or loss is recognized on either the sale or the scrapping of an 
asset that occurs on or after December 1, 1997.) The amount of a gain 
included in the determination of allowable cost is limited to the 
amount of depreciation previously included in Medicare allowable costs. 
The amount of a loss to be included is limited to the undepreciated 
basis of the asset permitted under the program. The treatment of the 
gain or loss depends upon the manner of disposition of the asset, as 
specified in paragraphs (f)(2) through (6) of this section. The gain or 
loss on the disposition of depreciable assets has no retroactive effect 
on a proprietary provider's equity capital for years prior to the year 
of disposition.
    (2) Bona fide sale or scrapping before December 1, 1997. For the 
bona fide sale or scrapping of depreciable assets before December 1, 
1997, the following apply:
* * * * *
    (g) Establishment of cost basis on purchase of facility as an 
ongoing operation.
* * * * *
    (4) Assets acquired by all providers on or after December 1, 1997. 
Subject to the provisions of paragraph (b)(1)(i)(A) of this section, 
the historical cost may not exceed the historical cost of the asset, as 
recognized under the Medicare program, less depreciation allowed, to 
the owner of record as of August 5, 1997 (or for an asset not in 
existence as of August 5, 1997, the first owner of record after August 
5, 1997).
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: December 9, 1997.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Approved: December 31, 1997.
Donna E. Shalala,
Secretary.
[FR Doc. 98-268 Filed 1-8-98; 8:45 am]
BILLING CODE 4120-01-P