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decided: July 19, 1988.


Appeal from the Order of the Department of Public Welfare, in the case of Appeal of: Messiah Village, No. 23-85-266.


J. Jay Cooper, Goldberg, Katzman & Shipman, P.C., for petitioner.

Mary Frances Grabowski, Assistant Counsel, for respondent.

Judges Craig and Colins, and Senior Judge Kalish, sitting as a panel of three. opinion by Judge Colins.

Author: Colins

[ 118 Pa. Commw. Page 31]

Messiah Village (petitioner) appeals from an order of the Department of Public Welfare, Office of Hearings and Appeals (DPW), which denied petitioner's appeal from audit adjustments made to the Medicaid Cost Report filed by petitioner for the year ending June 30, 1984, for its skilled nursing facility.

Petitioner's appeal challenged the propriety of DPW's offset of interest income earned by petitioner's Endowment Fund, Residential Liability Reserve Fund (Reserve Fund), and Charitable Gifts Annuity Fund (Annuity Fund), against interest expense reported by the petitioner for its nursing facility. A hearing on petitioner's appeal was held on November 12, 1986 before Mark S. Fenice, Hearing Attorney. Petitioner's sole contention was that the investment income and the funds from which this income was generated were donor restricted, and, therefore, exempt from offset pursuant to Section 1181.260(h)(1) of the regulations governing nursing care facilities, found at 55 Pa. Code ยง 1181.260(h)(1).

The evidence presented at petitioner's hearing indicated that DPW offset $64,910 of investment income which was generated by three funds held by the petitioner: the Endowment Fund, the Annuity Fund and the Reserve Fund. This investment income was comprised of only the interest which was earned on the

[ 118 Pa. Commw. Page 32]

    funds during the reported period and not the principal balance of the funds.*fn1 Because the issues in this matter center on the characterization of these funds, we feel it necessary to discuss each fund separately as set forth below.

The Reserve Fund

Petitioner's Reserve Fund consists of funds held by petitioner to meet its financial obligations under its cluster housing agreements. Under these agreements, persons purchase the right to occupy residential housing owned by petitioner for a period of time until they die or permanently change their status, for instance becoming a patient in a nursing facility. Under the agreement, the individual pays the petitioner an acquisition cost.*fn2 During the first year of occupancy, ten percent (10%) of the acquisition cost accrues to the petitioner. Thereafter, during the second through the ninth years, an additional five percent (5%) accrues to the petitioner each year. We note that at least one-half of the acquisition cost always remains as equity to the resident or his estate, that equity being refunded to the resident should he leave petitioner's facility or to his estate upon his death. In 1984, had all residents of the cluster arrangement either died or changed their status, petitioner would have had a liability of $3.4 million, although the monies contained in the Reserve Fund totaled only

[ 118 Pa. Commw. Page 33]

$215,000. The Reserve Fund is maintained to pay the expected return equity due the residents of petitioner's cluster housing units.

It is petitioner's contention that this fund exists solely to meet its obligations unrelated to the operation of its nursing facility. In addition, petitioner maintains that this fund is restricted by the cluster agreement itself, the surrounding circumstances, and the donors, such that it is exempt from offset, even if it generates income. DPW maintains that petitioner does not consider the acquisition cost of the cluster unit to be a gift to the nursing facility. Moreover, there is no language contained in the cluster housing agreement executed between the parties which restricts either the proceeds paid to the petitioner at acquisition or any interest income earned thereon for use in the Reserve Fund for any other specified purpose. Petitioner's nursing home and cluster housing units are maintained by the same corporate entity. For all of these reasons, DPW contends that the principal balance of this fund does not consist of gifts or donations and that any restrictions on the principal or any income generated thereon were established not by the residents of the cluster housing units, but by petitioner.

The Annuity Fund

Petitioner's Annuity Fund consists of monies donated by individuals, not necessarily residents of petitioner's facility, who, in consideration of their donation, receive an annual payment for the remainder of their lives. These cash donations are considered as tax deductible gifts at the time of giving and the money is maintained in the Annuity Fund during the donor's lifetime. Upon the death of the donor, the petitioner's obligation to pay the annuity ceases and the donor's contribution is transferred to the Endowment Fund or put to

[ 118 Pa. Commw. Page 34]

    use according to the discretion of the petitioner's Board. The annuity payments made to the donors are derived from the interest income generated by the Annuity Fund. Any expense income generated in the Annuity Fund remains therein. We note that in 1984 the Annuity Fund had growth income of $15,465.00 and the amount paid out by the fund was $9,640.00. Since that time, because of interest rate changes, payments have exceeded income earned on the fund.

Petitioner alleges that DPW committed error in offsetting the gross income earned on the total amount funded against interest expense reported for petitioner's facility without subtracting the amount paid out to the donors. Petitioner notes that although the funds are held by the facility, the funds are not available for use by the facility or any other purpose of petitioner during that time. In response, DPW points out that the Charitable Gift Annuity Agreement (Annuity Agreement) signed by a donor contains no language which would restrict the income generated by the donor's gift to payment of annuities or which would restrict excess interest income accruing to the Annuity Fund. The Annuity Agreement which was offered into evidence by petitioner indicates that the principal of the gift is designated for the Endowment Fund and not the Annuity Fund. Therefore, DPW alleges that ...

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