Appeal from the Order of the Office of Hearings and Appeals of the Department of Public Welfare in the case of Appeal of: Wallingford Enterprises, Inc., File Nos. 23-82-28 and 23-82-99, dated April 5, 1985.
Christina M. Kane, for petitioner.
Diane J. Bartels, Assistant Counsel, for respondent.
Judges Rogers and Doyle, and Senior Judge Kalish, sitting as a panel of three. Opinion by Senior Judge Kalish.
[ 101 Pa. Commw. Page 611]
Wallingford Enterprises, Inc. (Wallingford) petitions for review of that portion of a final order of the Director of the Office of Hearings and Appeals of the Department of Public Welfare (Department) which denied its appeal of the Department's disallowance of Medical Assistance reimbursement for certain interest on capital indebtedness. We affirm.
[ 101 Pa. Commw. Page 612]
Wallingford is a provider of services in connection with nursing, convalescence, and rehabilitation. It sought final audit reimbursement for allowable costs in connection with interest payments on a loan of $450,000 from Southeast National Bank (bank), for capital improvements. Wallingford took this loan as a second mortgage at an interest rate of two points above the bank's prime lending rate. Previously, Wallingford had obtained a first mortgage from Provident Mutual Life with a principal amount of $2,300,000 for twenty years at a fixed rate of 9 1/2 percent.
In August, 1978, at the time of the second loan, the bank's prime rate was 9 percent. However, the second loan provided for a variable interest rate, so that it was necessary to adjust the interest rate periodically during the cost reporting period, based on the fluctuation of the bank's prime rate. In 1980, the bank's prime rate was 15.12 percent, therefore the interest rate for the loan was 17.12 percent. In the audit of the cost report filed by Wallingford for the fiscal year ending December 31, 1980, the Department disallowed reimbursement for 5.12 percent of excess interest. There was no disallowance of excess capital interest on the first loan because the interest rate (9 1/2 percent) on this fixed rate mortgage was within three points over the bank's prime rate at the time of the loan.
The Department based this calculation on a Department of Public Welfare regulation in effect at that time, published at section IV(d)(10)(a) of the Cost Manual, 8 Pa. B. 2836 (1978). That section provided:
(a) Necessary and proper interest on both current and capital indebtedness is an allowable cost. However, there will be an upper limit on capital interest of 3 points above the interest rate at ...