Appeal from the Order of the Department of Public Welfare in the case of Appeal of: Doctor's Convalescent Center, Inc., File No. 23-81-222 (FYE 1979) and No. 23-82-183 (FYE 1980), dated August 19, 1985.
Suzanne Rauer, Charles O. Barto, Jr. and Associates, for petitioner.
Bruce G. Baron, Assistant Counsel, for respondent.
Judges MacPhail and Palladino, and Senior Judge Barbieri, sitting as a panel of three. Opinion by Senior Judge Barbieri.
[ 103 Pa. Commw. Page 640]
Doctor's Convalescent Center, Inc. (Provider) appeals to this Court the final order of the Department of Public Welfare (DPW) disallowing, upon the recommendation of the Hearing Attorney for the Office of Hearings and Appeals, certain depreciation and interest costs which were submitted for the purpose of calculating medical assistance reimbursements for the fiscal years 1979 and 1980.
Title XIX of the Federal Social Security Act, 42 U.S.C. §§ 1396-1396q, establishes the Medical Assistance
[ 103 Pa. Commw. Page 641]
Program which, through participating states, including Pennsylvania,*fn1 provides reimbursement for nursing care services to individuals qualifying for medical assistance. Provider submitted for reimbursement depreciation and interest costs of the partnership Susquehanna Nursing Home Associates (SNHA or partnership) which leases the 200-bed skilled nursing facility to the Provider.*fn2 SNHA was formed for the purpose of obtaining financing for and building a 120-bed addition to an existing 80-bed skilled nursing facility owned by Susquehanna Nursing Home, Inc. (SNHI), the majority stockholders of which were Dr. Robert R. Grubb and his wife, Romaine Grubb. The partners who joined to form SNHA included SNHI, represented by Dr. Grubb who had obtained a Certificate of Need for the 120-bed facility, James A. Dildine, James T. Dildine, and Daniel Clement, owners of the land on which the facility was to be built, and Marvin J. Rudnitsky, Esquire. A partnership agreement signed on or about June 1, 1976 witnessed the partners' agreement to buy and the Grubbs' agreement to sell all of their stock in SNHI for a purchase price of $1.2 million. The sale was owner-financed, payment to be made in 180 equal monthly installments with interest at six per cent per annum, with
[ 103 Pa. Commw. Page 642]
the first payment due three years from the date of the delivery of the stock. On October 1, 1976, the shareholders of SNHI, the partners of SNHA, met and resolved to dissolve the corporation. Thus, on October 25, 1976, the corporate assets held by SNHI were transferred to SNHA in exchange for the newly acquired stock.
In submitting its costs reports for fiscal years 1979 and 1980 to DPW for reimbursement, Provider claimed depreciation expense using as a cost basis the $1.2 million purchase price of the stock which was exchanged for the corporate assets. Provider also claimed capital interest expense incurred by SNHA on the purchase-money loans from Dr. Grubb and his wife.
Pennsylvania's guidelines and procedures for cost-related reimbursement are detailed in the Manual for Allowable Cost Reimbursement for Skilled Nursing and Intermediate Care Facilities (Manual).*fn3 The regulations comprising the Manual were published in their final form in the Pennsylvania Bulletin, dated November 8, 1975, together with an order by the Department of Public Welfare dated September 23, 1975, indicating that the regulations would be adopted effective October 24, 1975.*fn4 The text preceding the order indicated, however, that the Manual was being adopted in anticipation of the July 1, 1976 implementation of federally-mandated cost-related reimbursement for all private and county skilled nursing and intermediate care facilities, and ...