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decided: December 27, 1988.


Appeal from the Order of the Department of Public Welfare in the case of Appeal of: Grandview Health Homes, Inc., Gold Star Nursing Homes, Inc., File Nos. 23-82-024, 23-82-316, 23-82-318, 23-83-128, 23-83-299, 23-83-300 and 23-83-301.


Barbara G. Graybill, with her, Suzanne Rauer, Charles O. Barto, Jr. and Associates, for petitioner.

Bruce G. Baron, Assistant Counsel, for respondent.

Judges Craig and Palladino, and Senior Judge Barbieri, sitting as a panel of three. Opinion by Judge Palladino.

Author: Palladino

[ 122 Pa. Commw. Page 358]

Grandview Health Homes, Inc. (Petitioner) appeals from a decision of the Department of Public Welfare, Office of Hearings and Appeals (DPW) denying Petitioner's exceptions to disallowances of certain costs, for Medical Assistance (MA) reimbursement purposes, at its Milton, Danville and Grandview Facilities (Facilities) in the cost reporting periods ending June 30, 1980, 1981, and 1982.

Reimbursement for skilled nursing and intermediate care services provided to MA patients for the time periods involved in this case is pursuant to the regulations in DPW's Medical Assistance Manual for Allowable Cost Reimbursement for Skilled Nursing and Intermediate Care Facilities (Manual) found at 8 Pa. B. 2826-2838 (1978) and 10 Pa. B. 3106 (1980).*fn1 The allowable reimbursement is composed of three components -- operating costs, depreciation on capital assets, and interest on capital indebtedness. Manual section III.E., 8 Pa. B. 2833 (1978). The instant appeal involves the depreciation on capital assets and interest on capital indebtedness components.

[ 122 Pa. Commw. Page 359]

Petitioner purchased the Facilities from Gold Star Nursing Homes, Inc. (Gold Star) on December 20, 1979 for $4,000,000 plus $60,000 for an additional 22 acres of land. To obtain the funds for this purchase, Petitioner floated a $4,950,000 bond issue at 9% interest. The bonds were issued with an original bond discount (prepaid financing) of 6%. While Gold Star owned the Facilities, it took $764,113 in straight line depreciation, which was comprised of $308,210 for Danville, $157,938 for Milton, and $297,965 for Grandview. The Grandview facility included a 50 bed residential unit (the Pavilion) that, at the time of acquisition by Petitioner, was not certified for MA participation. Certification for the Pavilion's 50 beds was obtained in March 1981.

The issues before us in this appeal*fn2 concern: (1) the disallowance of interest on capital indebtedness offset by Gold Star's depreciation; (2) the offset of Gold Star's depreciation of the Pavilion against the purchase price allotted to the Pavilion to determine the Pavilion's cost basis for depreciation purposes; (3) the disallowance of depreciation resulting from DPW's use of Gold Star's assigned asset lives and use of compiled cost bases for groups of assets in calculating allowable depreciation; and (4) the disallowance of interest expense offset by income on bond redemption. Petitioner contends that DPW's interpretation of the Manual regulations and/or DPW's methods of calculating the allowable reimbursements resulting in these disallowances were improper. We will address each issue separately.

[ 122 Pa. Commw. Page 360]

B. 3107 (1980).*fn5 Petitioner asks that we reconsider our decision in Grand Oak in light of the facts in the instant case. However, Petitioner points to no factual differences, and we decline to reconsider the legal analysis. DPW did not err in offsetting Gold Star's depreciation against Petitioner's interest expense.

Petitioner then contends that even if the offset of Gold Star's depreciation against the Facilities' interest expense was proper, DPW's computation of that offset was improper. Petitioner redeems the bonds issued to finance the purchase of the facilities according to a set schedule. Each time there is a bond redemption, Petitioner must pay the interest due. In calculating what portion of this interest is attributable to Gold Star's depreciation, Petitioner asserts that DPW multiplied the

[ 122 Pa. Commw. Page 362]

    interest paid at each bond redemption by a percentage obtained from dividing Gold Star's depreciation by the amount of the bond issue outstanding at the time of that particular redemption. N.T. at 41. Petitioner contends that because of the continuing reduction of the denominator, the percentage of interest expense disallowed gets larger at each redemption and results in a disallowance greater than that attributable to prior owner depreciation. We need not determine whether such a method of calculating prior owner depreciation offset against interest on capital indebtedness is proper because that is not the method DPW testified it used.*fn6

DPW's auditor testified that the prior owner depreciation offset against Petitioner's interest expense was calculated by multiplying the interest paid on each bond redemption by a set percentage. This percentage was obtained by dividing Gold Star's depreciation by the total purchase price. N.T. at 18. Clearly this method reflects a constant disallowance of that amount of the purchase price attributable to the prior owner's depreciation at each bond redemption and is not improper.

II. Pavilion

Petitioner contends that the Pavilion is not subject to the prior owner depreciation offset to purchase price in determining cost basis, required by Manual section IV.D.9.f., because the Pavilion was not certified for participation at the time Petitioner purchased the Facilities and because Gold Star had never been reimbursed for depreciation on the Pavilion. Petitioner asserts that as of March, 1981, when the Pavilion's beds were certified ...

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